k93010.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
[X] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Fiscal Year Ended September
30, 2010
or
|
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 001-33795
HOME FEDERAL BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
Maryland |
68-0666697 |
(State or other
jurisdiction of incorporation |
(I.R.S.
Employer |
or
organization) |
Identification
No.) |
|
|
500 12th Avenue
South, Nampa, Idaho |
83651
|
(Address of
principal executive offices) |
(Zip
Code) |
|
|
Registrant’s
telephone number, including area
code:
|
(208)
466-4634 |
|
|
Securities
registered pursuant to Section 12(b) of the Act: |
|
|
|
Common Stock, par value $.01 per
share |
Nasdaq
Global Select Market
|
(Title of
Each Class) |
(Name of Each
Exchange on Which Registered) |
|
|
Securities
registered pursuant to Section 12(g) of the Act: |
None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes [ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer [ ] |
Accelerated filer
[X] |
Non-accelerated
filer [ ] |
Smaller reporting
company [ ] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
As of
December 6, 2010, there were 16,687,165 shares of the registrant’s common stock
outstanding. The aggregate market value of the voting stock held by
nonaffiliates of the registrant based on the closing sales price of the
registrant's common stock as quoted on The Nasdaq Global Select Market on March
31, 2010, was approximately $234,556,000(16,165,101
shares at $14.51 per share).
DOCUMENTS
INCORPORATED BY REFERENCE
Part II
and Part III - Portions of the Registrant’s definitive Proxy Statement for its
2011 Annual Meeting of Stockholders.
HOME
FEDERAL BANCORP, INC.
2010
ANNUAL REPORT ON FORM 10-K
TABLE
OF CONTENTS
|
Page |
PART
I.
|
|
|
|
|
Item 1
- |
Business |
2
|
|
|
|
Item 1A
- |
Risk
Factors |
43 |
|
|
|
Item 1B
- |
Unresolved Staff
Comments |
54 |
|
|
|
Item 2
- |
Properties |
54 |
|
|
|
Item 3
- |
Legal
Proceedings |
57 |
|
|
|
Item 4
- |
Removed and
reserved |
57 |
|
|
|
PART
II.
|
|
|
|
|
Item 5
- |
Market
for Registrant’s Common Equity, Related Stockholder Matters
and
Issuer Purchases of Equity Securities
|
57 |
|
|
|
Item 6
- |
Selected Financial
Data |
60 |
|
|
|
Item 7
- |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
62 |
|
|
|
Item 7A
- |
Quantitative and
Qualitative Disclosures About Market Risk |
90 |
|
|
|
Item 8
- |
Financial Statements
and Supplementary Data |
91 |
|
|
|
Item 9
- |
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure |
135 |
|
|
|
Item
9A- |
Controls and
Procedures |
135 |
|
|
|
Item 9B
- |
Other
Information |
135 |
|
|
|
PART III. |
|
|
|
|
Item 10
- |
Directors, Executive
Officers and Corporate Governance |
136 |
|
|
|
Item 11
- |
Executive
Compensation |
136 |
|
|
|
Item 12
- |
Security
Ownership of Certain Beneficial Owners and Management and
Related
Stockholder Matters
|
137 |
|
|
|
Item 13
- |
Certain
Relationships and Related Transactions, and Director
Independence |
137 |
|
|
|
Item 14
- |
Principal Accounting
Fees and Services |
137 |
|
|
|
PART
IV.
|
|
|
|
|
Item 15
– |
Exhibits, Financial
Statement Schedules |
137
|
Forward-Looking
Statements and “Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995
This
annual report on Form 10-K 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;
|
·
|
risks
related to acquiring assets in or entering markets in which we have not
previously operated and may not be
familiar;
|
·
|
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 changes in regulatory policies and
principles and the recently enacted Dodd-Frank Act and regulations that
have been or will be promulgated thereunder; and interpretation
of regulatory capital or other
rules;
|
·
|
our
ability to attract and retain
deposits;
|
·
|
further
increases in premiums for deposit
insurance;
|
·
|
our
ability to realize the residual values of our
leases;
|
·
|
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 have acquired, including the
Community First Bank and LibertyBank transactions described in this
report, or may in the future 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, or at all, and any goodwill charges
related thereto thereto and
costs or difficulties relating to integration matters, including but not
limited to customer and employee retention, which might be greater than
expected;
|
·
|
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 this 2010 Form 10-K and subsequently filed Quarterly Reports on
Form 10-Q. Such developments could have an adverse impact on
|
Some of
these and other factors are discussed in this Annual Report on Form 10-K under
the caption “Risk Factors” and elsewhere in this document and in the documents
incorporated by reference herein. Such developments could have an adverse impact
on our financial position and our results of operations.
Any of
the forward-looking statements that we make in this annual report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements. We undertake 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 2011 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect our financial condition, liquidity and
operating and stock price performance.
As used
throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
Home Federal Bancorp and its consolidated subsidiaries, unless the context
otherwise requires.
PART
I
Item 1.
Business
Organization
The
Company, a Maryland corporation, was organized by Home Federal MHC (“MHC”), Home
Federal Bancorp, Inc. (a federally chartered stock corporation) and Home Federal
Bank to facilitate the “second-step” conversion of Home Federal Bank (“Bank”)
from the mutual holding company structure to the stock holding company structure
(“Conversion”). Upon consummation of the Conversion, which occurred on December
19, 2007, the Company became the holding company for Home Federal Bank and now
owns all of the issued and outstanding shares of Home Federal Bank’s common
stock. As part of the Conversion, shares of the Company’s common stock were
issued and sold in an offering to certain depositors of Home Federal Bank and
others. Concurrent with the offering, each share of Home Federal Bancorp, Inc.’s
common stock owned by public shareholders was exchanged for 1.136 shares of the
Company’s common stock, which resulted in a 853,133 increase in outstanding
shares, with cash being paid in lieu of issuing any fractional
shares.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold in
the offering at $10 per share. Proceeds from the offering totaled $87.8 million,
net of offering costs of approximately $5.9 million. The Company contributed
$48.0 million or approximately 50% of the net proceeds to the Bank in the form
of a capital contribution. The Company loaned $8.2 million to the Bank’s
Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to
acquire 816,000 shares of the Company’s common stock at $10 per
share.
The
Conversion was accounted for as reorganization in corporate form with no change
in the historical basis of the Company’s assets, liabilities or stockholders’
equity. All references to the number of shares outstanding, including
references
for purposes of calculating per share amounts, are restated to give retroactive
recognition to the exchange ratio applied in the Conversion.
Acquisition
of assets and liabilities of Community First Bank
On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
sharing agreements with the Federal Deposit Insurance Corporation (“FDIC”) to
assume all of the deposits (excluding brokered deposits) and certain assets of
Community First Bank, a full service commercial bank, headquartered in
Prineville, Oregon (the “CFB Acquisition”). Community First Bank operated eight
locations in central Oregon. Home Federal Bank assumed approximately
$142.8 million of the deposits of Community First Bank. Additionally,
Home Federal Bank purchased approximately $142.3 million in loans and $12.9
million of real estate and other repossessed assets (“REO”). The
loans and REO purchased are covered by loss sharing agreements between the FDIC
and Home Federal Bank which affords the Bank significant
protection. Under the loss sharing agreements, Home Federal Bank will
share in the losses on assets covered under the agreement (referred to as
covered assets). The FDIC has agreed to reimburse Home Federal Bank
for 80% of losses up to $34.0 million, and 95% of losses that exceed that
amount. In addition, Home Federal Bank also purchased cash and cash
equivalents and investment securities of Community First Bank valued at $37.7
million at the date of the Acquisition, and assumed $18.3 million in Federal
Home Loan Bank advances and other borrowings. This acquisition was accounted for
as a purchase under Financial Accounting Standard (“FAS”) No. 141, “Business
Combinations,” with the assets acquired and liabilities assumed recorded at
their respective fair values.
Acquisition
of assets and liabilities of LibertyBank
On July
30, 2010, the Bank entered into a purchase and assumption agreement with loss
sharing agreements with the FDIC to assume all of the deposits and certain
assets of LibertyBank, a full service commercial bank headquartered in Eugene,
Oregon (the “LibertyBank Acquisition”). LibertyBank operated fifteen locations
in central and western Oregon. The LibertyBank Acquisition consisted
of assets with a preliminary fair value estimate of approximately $690.6
million, including $373.1 million of cash and cash equivalents, $197.6 million
of loans and leases and $34.7 million of securities. Liabilities with a
preliminary fair value estimate of $688.6 million were also assumed, including
$682.6 million of deposits.
Included
in the LibertyBank Acquisition were three subsidiaries of LibertyBank, which
have become subsidiaries of Home Federal Bank. Two of the subsidiaries, Liberty
Funding, Inc., and Liberty Investment Services, Inc., are inactive with no
business activities. The third subsidiary, Commercial Equipment Lease
Corporation (“CELC”) finances and leases equipment under equipment finance
agreements and lease contracts, typically for terms of less than 5 years. The
book value of the stock of CELC was $10.3 million. CELC conducts business in all
fifty states, with a primary focus on Oregon, California and Washington state.
Home Federal Bank intends to wind down the operations of CELC and the accounts
of CELC have been consolidated in the accompanying financial
statements.
Home
Federal Bank also entered into loss sharing agreements with the FDIC in the
LibertyBank Acquisition. Under the loss sharing agreements, the FDIC has agreed
to reimburse Home Federal for 80% of losses on purchased REO, nearly all of the
loans and leases of LibertyBank and CELC and certain related expenses. Total
losses on the loans and leases of CELC are limited to the sum of the book value
of the Bank's investment in CELC and the Bank's outstanding balance on a line of
credit balance to CELC as of the acquisition date. These amounts totaled $57.0
million at July 30, 2010, and are eliminated upon consolidation.
In
September 2020, approximately ten years following the LibertyBank Acquisition
date, the Bank is required to make a payment to the FDIC in the event that
losses on covered assets under the loss share agreements have been less than the
intrinsic loss estimate, which was determined by the FDIC prior to the
LibertyBank Acquisition. The payment amount will be 50% of the excess, if any,
of (i) 20% of the Total Intrinsic Loss Estimate of $60.0 million, which equals
$12.0 million, less the sum of the following:
A.
|
20%
of the Net Loss Amount, which is the sum of all loss amounts on covered
assets less the sum of all recovery amounts realized. This amount is not
yet known;
|
B.
|
25%
of the asset premium (discount). This amount is ($7.5) million;
and
|
C.
|
3.5%
of the total covered assets under the loss share agreements. This amount
is $10.1 million.
|
The
Company has estimated the minimum level of losses to avoid a true-up provision
payment to the FDIC to be $46.7 million. The maximum amount of the true-up
provision is $4.7 million, if there are no losses in the covered loan portfolio.
Due to the estimated level of losses at the LibertyBank Acquisition date,
management has determined a true-up provision payment is unlikely. As such, no
liability has been recorded.
Business
Activities
Home
Federal Bancorp’s primary business activity is the ownership of the outstanding
capital stock of Home Federal Bank. Home Federal Bancorp neither owns nor leases
any property but instead uses the premises, equipment and other property of Home
Federal Bank with the payment of appropriate management fees, as required by
applicable law and regulations. At September 30, 2010, Home Federal Bancorp has
no significant assets, other than $36.2 million of cash and cash equivalents,
$17.0 million of mortgage-backed securities and all of the outstanding shares of
Home Federal Bank, and no significant liabilities.
Home
Federal Bank was founded in 1920 as a building and loan association and
reorganized as a federal mutual savings and loan association in 1936. Home
Federal Bank’s deposits are insured by the FDIC up to applicable legal limits
under the Deposit Insurance Fund. The Bank has been a member of the Federal Home
Loan Bank ("FHLB") System since 1937. Home Federal Bank’s primary regulator is
the Office of Thrift Supervision (“OTS”).
We are in
the business of attracting deposits from consumers and businesses in our market
areas and utilizing those deposits to originate loans. We offer a wide range of
loan products to meet the credit needs of our customers. Historically, lending
activities have been primarily directed toward the origination of residential
and commercial real estate loans. Residential real estate lending activities
have been primarily focused on first mortgages on owner occupied, one-to-four
family residential properties. The Bank now originates nearly all of its
one-to-four family residential loans for sale in the secondary
market.
The Board
of Directors and the management team have undertaken efforts to change the
Company’s strategy from that of a traditional thrift to a full-service community
bank. This transition includes a reduced reliance on one-to-four family loans
originated for the Bank’s portfolio. As a result, the Bank’s lending activities
have expanded in recent years to include commercial business lending, including
commercial real estate and builder finance. While continuing our commitment to
residential lending through our secondary market program, management expects
commercial lending to become increasingly important for the Company. The CFB
Acquisition and the LibertyBank Acquisition significantly increased the Bank’s
commercial loan concentration.
At
September 30, 2010, the Company had total assets of $1.5 billion, net loans of
$620.5 million, deposit accounts of $1.2 billion and stockholders’ equity of
$205.1 million.
Operating
Lines
Home
Federal Bancorp’s sole subsidiary is Home Federal Bank. Management has
determined that the Bank, as a whole, is the sole reporting unit and that no
reportable operating segments exist other than Home Federal Bank.
Market
Area
Home
Federal Bank currently has operations in three distinct market
areas. The Bank’s primary market area is the Boise, Idaho,
metropolitan statistical area (“MSA”) and surrounding communities, together
known as the Treasure Valley region of southwestern Idaho, including Ada,
Canyon, Elmore and Gem counties. The CFB Acquisition resulted in the Bank’s
entrance to the Tri-County Region of Central Oregon, including the counties of
Crook, Deschutes and Jefferson. Through the LibertyBank Acquisition, Home
Federal Bank expanded its markets into Lane, Josephine, Jackson, and Multnomah
counties in Western Oregon, including the communities of Eugene, Grants Pass and
Medford, Oregon, in addition to deepening its presence in Central Oregon. The
Bank also has a commercial loan production office in Portland,
Oregon.
The bank
operates through 37 full-service banking offices, automated teller machines and
Internet banking services. Included in our 37 full-service banking offices were
two Wal-Mart in-store branches located in our Idaho Region. For more
information, see "Item 2. Properties."
The
following table summarizes key economic and demographic information about these
market areas:
|
|
Median
Household
Income
|
|
|
Population
Change
|
|
|
Unemployment
Rate(1)
|
|
|
Total
FDIC Deposits
By
County(2)
|
|
|
Home
Federal
Bank’s
Deposit
Market
Share
|
|
|
|
2010
|
|
|
2000-2010 |
|
|
Sept 2010
|
|
|
Sept 2009
|
|
|
June 2010
|
|
|
June 2009
|
|
|
June 2010
|
|
Idaho
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canyon
|
|
$ |
48,455 |
|
|
|
44.8 |
% |
|
|
10.4 |
% |
|
|
10.2 |
% |
|
$ |
1,479 |
|
|
$ |
1,379 |
|
|
|
12.6 |
% |
Ada
|
|
|
63,046 |
|
|
|
32.5 |
|
|
|
8.5 |
|
|
|
8.7 |
|
|
|
6,148 |
|
|
|
5,967 |
|
|
|
2.9 |
|
Gem
|
|
|
43,367 |
|
|
|
15.2 |
|
|
|
10.2 |
|
|
|
10.4 |
|
|
|
134 |
|
|
|
138 |
|
|
|
23.5 |
|
Elmore
|
|
|
45,068 |
|
|
|
2.9 |
|
|
|
8.4 |
|
|
|
7.7 |
|
|
|
140 |
|
|
|
140 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oregon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deschutes
|
|
$ |
53,137 |
|
|
|
46.2 |
% |
|
|
13.1 |
% |
|
|
13.2 |
% |
|
$ |
2,635 |
|
|
$ |
2,716 |
|
|
|
10.0 |
% |
Lane
|
|
|
47,548 |
|
|
|
8.3 |
|
|
|
10.1 |
|
|
|
11.2 |
|
|
|
4,149 |
|
|
|
4,103 |
|
|
|
6.0 |
|
Josephine
|
|
|
38,770 |
|
|
|
10.7 |
|
|
|
12.9 |
|
|
|
12.7 |
|
|
|
1,292 |
|
|
|
1,277 |
|
|
|
10.9 |
|
Jackson
|
|
|
47,042 |
|
|
|
15.1 |
|
|
|
11.4 |
|
|
|
11.2 |
|
|
|
2,797 |
|
|
|
2,875 |
|
|
|
4.8 |
|
Crook
|
|
|
43,070 |
|
|
|
30.8 |
|
|
|
15.4 |
|
|
|
15.3 |
|
|
|
213 |
|
|
|
259 |
|
|
|
23.8 |
|
Jefferson
|
|
|
45,122 |
|
|
|
14.8 |
|
|
|
12.6 |
|
|
|
12.3 |
|
|
|
133 |
|
|
|
136 |
|
|
|
11.7 |
|
Multnomah
|
|
|
55,707 |
|
|
|
10.9 |
|
|
|
9.6 |
|
|
|
10.4 |
|
|
|
17,266 |
|
|
|
16,221 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
$ |
54,442 |
|
|
|
10.6 |
% |
|
|
9.6 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Not seasonally adjusted. September 2010 is preliminary
|
|
(2)
In millions. Excludes deposits in credit unions
|
|
Source:
FDIC, SNL Financial, Bureau of Labor Statistics
|
|
Idaho
Region. The local economy is primarily urban with Boise, the state
capital of Idaho, being the most populous city in Idaho, followed by Nampa, the
state's second largest city. Nearly 40% of the state’s population lives and
works in the four counties of Ada, Canyon, Elmore and Gem that are served by
Home Federal Bank.
The
regional economy is well diversified with government, healthcare, manufacturing,
high technology, call centers and construction providing sources of employment.
In addition, agriculture and related industries continue to be key components of
the economy in southwestern Idaho. Generally, sources of employment are
concentrated in Ada and Canyon counties and include the headquarters of Micron
Technology, J.R. Simplot Company and Boise Cascade, LLC. Other major employers
include Hewlett-Packard, Supervalu, two regional medical centers and Idaho state
government agencies. Boise is also home to Boise State University, the state's
largest university.
The
Treasure Valley has enjoyed strong population growth over the last five years,
which led to an increase in residential community developments. Historically,
the unemployment rate has been lower than the national rate. The current
economic slowdown, which has been led by significant deterioration in
residential home sales, has caused acceleration in unemployment in the Treasure
Valley. This slowdown has created an over-supply of speculative construction and
land development projects. During the build-up of residential construction,
commercial real estate construction accelerated and many speculative
construction commercial projects, as well as existing commercial buildings, are
now vacant, contributing to falling property values. Continued deterioration in
the local economy may result in additional losses in the Bank’s loan portfolio,
restrict management’s ability to execute the Company’s growth plans or impact
the Bank’s liquidity due to a shrinking deposit base. See “Risk
Factors” under Item 1A of this Annual Report on Form 10-K.
Central Oregon
Region. Within Central Oregon, Home Federal Bank operates in Deschutes,
Crook and Jefferson Counties. Central Oregon has become a year-round
destination resort for visitors and tourists worldwide offering premiere skiing,
golfing, fishing, hiking, museums, biking, kayaking, festivals and world-class
destination resorts. The largest communities in the Central Oregon Region are
Bend, Redmond and Prineville.
While
much smaller than the Idaho Region, Central Oregon’s economy is primarily driven
by healthcare, government, tourism and other service industries. St. Charles
Medical Center in Bend is the largest private employer
with Les
Schwab Tires Centers, which is headquartered in Central Oregon, call centers and
resorts also within the top ten employers in the region.
Central
Oregon has experienced rapid population growth and significant new construction
has occurred over the last five years as the region’s natural beauty and resorts
gained greater renown. Commercial and residential real estate values increased
rapidly as construction of retail centers and new residential developments
maintained pace with population growth. The median home price in Bend and
Redmond rose 70% between April 2005 and April 2007 when values peaked. However,
the economic slowdown nationally has reduced spending on vacations and tourism
traffic in the region, resulting in very high unemployment. Additionally,
commercial real estate vacancies in the region rose quickly and the median home
prices in September 2010 have fallen approximately 50% from their
peak.
Western Oregon
Region. A benefit from the LibertyBank Acquisition was the expansion of
the Bank’s markets into the communities of Eugene, Springfield, Medford and
Grants Pass, Oregon. The Bank also entered the Portland market through a
commercial loan center that also operates as a limited service branch. Eugene is
Oregon’s second largest city with a population of more than 150,000 people,.
Manufacturing, retail trade and healthcare and social assistance make up nearly
40% of total employment in Lane County. Since the University of Oregon and a
Federal courthouse are located there, government employment helps add stability
to Lane County’s economy. While unemployment in Lane County has not been as
severe as in Central Oregon, it has trended above national unemployment
rates.
Medford,
a city of approximately 75,000 people in the southern Oregon county of Jackson,
has healthcare as the largest employment industry, along with Lithia Motors and
specialty food retailer Harry & David. Nearby Grants Pass, Oregon in
Josephine County, is a city of approximately 33,000 people. The Rogue River
serves as a primary source for tourism in both of these counties.
Operating
Strategy
Management’s
operating strategy centers on the continued development into a full service,
community-oriented bank from a traditional savings and loan business model. Our
goal is to continue to enhance our franchise value and earnings through growth
in our banking operations, especially lending to small to medium-sized
businesses, while maintaining the community-oriented customer service and sales
focus that has characterized our success to date. In order to be successful in
this objective and increase stockholder value, we are committed to the following
strategies:
Continue
Growing in Our Existing Markets. We believe there is a large customer
base in our markets that are dissatisfied with the service received from larger
regional banks. By offering quicker decision making in the delivery of banking
products and services, offering customized products where appropriate, and
providing customer access to our senior managers, we hope to distinguish
ourselves from larger, regional banks operating in our market areas.
Actively Search for Appropriate
Acquisitions. In order to enhance our ability to deliver products and
services in our existing markets and to expand into surrounding markets, we
intend to search for acquisition opportunities, focusing on failed bank
transactions facilitated by the FDIC. We consummated FDIC-assisted transactions
in August 2009 and July 2010 that increased our assets by $881 million, based on
the fair value of assets purchased on the acquisition dates. These acquisitions
were consummated with loss sharing agreements with the FDIC that provide
significant protection against credit loss. However, the long-term success of
such transactions is dependent upon our ability to integrate the operations of
the acquired businesses. We believe that consolidation across the community bank
landscape will continue to take place and further believe that, with our capital
and liquidity positions, approach to credit management and acquisition
experience, we are well positioned to take advantage of FDIC acquisitions. To a
lesser extent, we will also consider whole bank acquisitions through market
transactions that provide the potential for significant earnings growth and
franchise value enhancement.
Expand
Our Product Offerings. We intend to continue our emphasis on originating
commercial lending products that diversify our loan portfolio by increasing the
percentage of assets consisting of higher-yielding commercial real estate and
commercial business loans with higher risk adjusted returns, shorter maturities
and less sensitivity to interest rate fluctuations, while still providing high
quality loan products for single-family residential borrowers through our
secondary market activities. We also intend to selectively add products to
provide diversification of revenue sources and to capture our customers’ full
relationship by cross selling our loan and deposit products and
services
to our customers. We recently completed a conversion of our core processing
system, which we believe will permit us to significantly enhance and expand our
commercial banking applications and products.
Increase
Our Core Deposits. A fundamental part of our overall strategy is to
improve both the level and the mix of deposits that serve as a funding base for
asset growth. By growing demand deposit accounts and other savings and
transaction accounts, we intend to reduce our reliance on higher-cost
certificates of deposit and borrowings such as advances from the Federal Home
Loan Bank of Seattle. In order to expand our core deposit franchise, commercial
deposits are being pursued by the introduction of cash management products and
by specific targeting of small business customers.
Competition
We face
intense competition in originating loans and in attracting deposits within our
targeted geographic markets. We compete by leveraging our full service delivery
capability comprised of 37 convenient branch locations, including two branches
located inside Wal-Mart Superstores offering extended banking hours, call center
and Internet banking, and consistently delivering high-quality, individualized
service to our customers that result in a high level of customer satisfaction.
Our key competitors are U.S. Bank, Wells Fargo, Key Bank and Umpqua Bank. These
competitors control approximately 47% of the deposit market with $9.0 billion of
the $19.1 billion in FDIC-insured deposits in our market areas, excluding
Multnomah County where we have a very small deposit presence, as of June 30,
2010. Aside from these traditional competitors, credit unions, insurance
companies and brokerage firms are an increasingly competing challenge for
consumer deposit relationships.
Our
competition for loans comes principally from mortgage bankers, commercial banks,
credit unions and finance companies. Several other financial institutions,
including those previously mentioned, have greater resources than us and compete
with us for lending business in our targeted market areas. Among the advantages
of some of these institutions are their ability to make larger loans, finance
extensive advertising campaigns, access lower cost funding sources and allocate
their investment assets to regions of highest yield and demand. This competition
for the origination of loans may limit our future growth and earnings
prospects.
Subsidiaries
and Other Activities
Home
Federal Bank is the only subsidiary of Home Federal Bancorp, Inc. Home Federal
Bank has one active wholly-owned subsidiary of its own, Commercial Equipment
Lease Corporation, which the Bank acquired through the LibertyBank Acquisition.
The Bank also acquired a subsidiary through the CFB Acquisition, Community First
Real Estate LLC, which owned three of our banking offices in Central Oregon and
has no significant business activity. The Bank also has three inactive
subsidiaries, Idaho Home Service Corporation, Liberty Funding Inc., and Liberty
Insurance Services Inc. These inactive subsidiaries have no business activities
and the latter two were purchased in the LibertyBank Acquisition.
Personnel
At
September 30, 2010, we had 430 full-time equivalent employees. Our employees are
not represented by any collective bargaining group. We believe our relationship
with our employees is good.
Corporate
Information
Our
principal executive offices are located at 500 12th Avenue South, Nampa, Idaho,
83651. Our telephone number is (208) 466-4634. We maintain
a website with the address www.myhomefed.com/ir. The information contained on
our website is not included as a part of, or incorporated by reference into,
this Annual Report on Form 10-K. Other than an investor’s own Internet access
charges, we make available free of charge through our website our Annual Report
on Form 10-K, Proxy Statements, quarterly reports on Form 10-Q and current
reports on Form 8-K, and amendments to these reports, as soon as reasonably
practicable after we have electronically filed such material with, or furnished
such material to, the Securities and Exchange Commission. We have also posted
our code of ethics and board committee charters on this site.
Lending Activities
General. Historically, our
principal lending activity has consisted of the origination of loans secured by
first mortgages on owner-occupied, one-to-four family residences and loans for
the construction of one-to-four family residences. We also originate consumer
loans, with an emphasis on home equity loans and lines of credit. While we
intend to increase our commercial and small business loans, a substantial
portion of our loan portfolio is currently secured by real estate, either as
primary or secondary collateral.
At
September 30, 2010, the maximum amount of credit that we could have extended to
any one borrower and the borrower's related entities under applicable
regulations was $23.5 million. Our largest single borrower relationship at
September 30, 2010, included two commercial real estate loans and an operating
line of credit totaling $11.9 million. The second largest lending
relationship included seven loans primarily for commercial real estate and
commercial lots totaling $9.7 million. Our third largest borrower
relationship totals $7.9 million consisting of three loans including a term
equipment note, operating line of credit and personal business line of
credit. The fourth largest lending relationship was four Executive
Lines of Credit, three term working capital loans, two revolving lines of credit
and a performance bond totaling $7.9 million. The fifth largest
lending relationship included twenty nine loans to a residential real estate
developer on speculative loans which have been converted to rentals totaling
$7.1 million. All of these loans, including those made to
corporations, have personal guarantees in place as an additional source of
repayment, are substantially secured by property or assets in our primary market
area, and 80% of losses are covered by the FDIC under a purchase and assumption
agreement with loss sharing. $9.4 million of these loans were
considered as classified at September 30, 2010, but were not in
default.
At
September 30, 2010, the largest lending relationship not covered by the loss
sharing agreements totaled $6.1 million and consisted of two notes representing
a commercial real estate loan and an operating line of credit. The second
largest noncovered lending relationship of $5.4 million consists of 15 loans for
residential construction and land and lots. The third largest noncovered lending
relationship was $5.0 million includes four commercial real estate
loans.
One-to-four Family Residential Real
Estate Lending. We originate both fixed-rate loans and adjustable-rate
loans in our residential lending program. Generally, these loans are originated
to meet the requirements of Fannie Mae and Freddie Mac for sale in the secondary
market to investors. We generally underwrite our one-to-four family loans based
on the applicant's employment, debt to income levels, credit history and the
appraised value of the subject property. Generally, we lend up to 80% of the
lesser of the appraised value or purchase price for one-to-four family
residential loans. In situations where we grant a loan with a loan-to-value
ratio in excess of 80%, we generally require private mortgage insurance in order
to reduce our exposure to 80% or less. Properties securing our one-to-four
family loans are generally appraised by independent fee appraisers who have been
approved by us. We require our borrowers to obtain title and hazard insurance,
and flood insurance, if necessary, in an amount equal to the regulatory
maximum.
Real Estate Construction. Most
construction loans originated by us are written with maturities of up to one
year, have interest rates that are tied to The Wall Street Journal Prime
rate plus a margin, and are subject to periodic rate adjustments tied to the
movement of the prime rate. All builder/borrower loans are underwritten to the
same standards as other commercial loan credits, requiring minimum debt service
coverage ratios and established cash reserves to carry projects through
construction completion and sale of the project. The maximum loan-to-value ratio
on both pre-sold and speculative projects originated by us is 80%.
We
originate construction and site development loans to contractors and builders
primarily to finance the construction of single-family homes and subdivisions,
which homes typically have an average price ranging from $150,000 to $400,000.
Loans to finance the construction of single-family homes and subdivisions are
generally offered to experienced builders in our primary market areas. The
maximum loan-to-value limit applicable to construction and site development
loans is 80% and 70%, respectively, of the appraised market value upon
completion of the project. Maturity dates for residential construction loans are
largely a function of the estimated construction period of the project, and
generally do not exceed 36 months for residential subdivision development loans.
Substantially all of our residential construction loans have adjustable rates of
interest based on the Wall
Street Journal prime rate and during the term of construction, the
accumulated interest is added to the principal of the loan through an interest
reserve.
We
originate land loans to local contractors and developers for the purpose of
holding the land for future development. These loans are secured by a first lien
on the property, are limited to 50% of the lower of the acquisition price or the
appraised value of the land, and generally have a term of up to two years with
an interest rate based on the
Wall Street Journal prime rate. Our land loans are generally
secured by property in our primary market areas. We require title insurance and,
if applicable, a hazardous waste survey reporting that the land is free of
hazardous or toxic waste.
Our
construction and land development loans are based upon estimates of costs and
value associated with the completed project. These estimates may be inaccurate.
Construction and land development lending involves additional risks when
compared with permanent residential lending because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion.
Because of the uncertainties inherent in estimating construction costs, as well
as the market value of the completed project and the effects of governmental
regulation of real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value
ratio. This type of lending also typically involves higher loan principal
amounts and is often concentrated with a small number of builders. These loans
often involve the disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project and the ability of the borrower
to sell or lease the property or obtain permanent take-out financing, rather
than the ability of the borrower or guarantor to repay principal and interest.
If our appraisal of the value of a completed project proves to be overstated, we
generally require cash curtailments or additional collateral to support the
shortfall.
Commercial and Multi-Family Real
Estate Lending. Multi-family and commercial real estate loans generally
are priced at a higher rate of interest than one-to-four family residential
loans. Typically, these loans have higher loan balances, are more difficult to
evaluate and monitor, and involve a greater degree of risk than one-to-four
family residential loans. Often payments on loans secured by multi-family or
commercial properties are dependent on the successful operation and management
of the property; therefore, repayment of these loans may be affected by adverse
conditions in the real estate market or the economy. We generally require and
obtain loan guarantees from financially capable parties based upon the review of
personal financial statements. If the borrower is a corporation, we generally
require and obtain personal guarantees from the corporate principals based upon
a review of their personal financial statements and individual credit
reports.
We target
individual multi-family and commercial real estate loans to small and mid-size
owner occupants and investors between $500,000 and $2.0 million; however, we can
by policy originate loans to one borrower up to 80% of our regulatory limit. As
of September 30, 2010, the maximum we could lend to any one borrower based on
this limit was $18.7 million. Commercial real estate loans are primarily secured
by office and warehouse space, professional buildings, retail sites, multifamily
residential buildings, industrial facilities and restaurants located in our
primary market areas.
We have
offered both fixed and adjustable-rate loans on multi-family and commercial real
estate loans, although most of these loans are now originated with adjustable
rates with amortization terms up to 25 years and maturities of up to 10 years.
Commercial and multi-family real estate loans are originated with rates that
generally adjust after an initial period ranging from three to five years and
are generally priced utilizing the applicable FHLB borrowing rate plus an
acceptable margin. Prepayment penalty structures are applied for each rate lock
period.
The
maximum loan-to-value ratio for commercial and multi-family real estate loans is
generally 75% on purchases and refinances. We require appraisals of all
properties securing commercial and multi-family real estate loans. Appraisals
are performed by independent appraisers designated by us or by our staff
appraiser. We require our commercial and multi-family real estate loan borrowers
with outstanding balances in excess of $500,000 to submit annual financial
statements and rent rolls on the subject property. We also inspect the subject
property at least every three to five years if the loan balance exceeds
$250,000. We generally require a minimum pro forma debt coverage ratio of 1.25
times for loans secured by commercial and multi-family properties.
Approximately
$106.0 million, or 28.9%, of our noncovered loan portfolio is comprised of loans
secured by nonowner-occupied commercial real estate. These loans typically
involve higher principal amounts than other types of loans, and repayment is
dependent upon income generated, or expected to be generated, by the property
securing the loan in amounts sufficient to cover operating expenses and debt
service, which may be adversely affected by changes in the economy or local
market conditions. For example, if the cash flow from the borrower’s project is
reduced as a result of leases not being obtained or renewed, the borrower’s
ability to repay the loan may be
impaired.
Commercial and multi-family mortgage loans also expose a lender to greater
credit risk than loans secured by residential real estate because the collateral
securing these loans typically cannot be sold as easily as residential real
estate. In addition, many of our commercial and multifamily real estate loans
are not fully amortizing and contain large balloon payments upon maturity. Such
balloon payments may require the borrower to either sell or refinance the
underlying property in order to make the payment, which may increase the risk of
default or non-payment. If we foreclose on a commercial or multi-family real
estate loan, our holding period for the collateral typically is longer than for
one-to-four family residential mortgage loans because there are fewer potential
purchasers of the collateral. Additionally, commercial and multi-family real
estate loans generally have relatively large balances to single borrowers or
related groups of borrowers. Accordingly, if we make any errors in judgment in
the collectability of our commercial and multi-family real estate loans, any
resulting charge-offs may be larger on a per loan basis than those incurred with
our residential or consumer loan portfolios.
Consumer Lending. To a much
lesser degree than commercial and residential loans, we offer a variety of
consumer loans to our customers, including home equity loans and lines of
credit, savings account loans, automobile loans, recreational vehicle loans and
personal unsecured loans. Generally, consumer loans have shorter terms to
maturity and higher interest rates than mortgage loans.
At
September 30, 2010, the largest component of the consumer loan portfolio
consisted of home equity loans and lines of credit. Home equity loans are made
for, among other purposes, the improvement of residential properties, debt
consolidation and education expenses. The majority of these loans are secured by
a first or second mortgage on residential property. The maximum loan-to-value
ratio is 80%, when taking into account both the balance of the home equity loan
and the first mortgage loan. Home equity lines of credit allow for a ten-year
draw period, plus an additional ten year repayment period, and the interest rate
is tied to the Prime rate as published in The Wall Street Journal, and
may include a margin.
Consumer
loans entail greater risk than do residential first-lien mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles, and in second-lien loans such
as home equity lines of credit in markets where residential property values have
declined significantly since fiscal year 2007. In these cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment when allowed by law. In addition, consumer loan collections
are dependent on the borrower's continuing financial stability, and are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans. These risks are not as prevalent with respect to our
consumer loan portfolio because a large percentage of the portfolio consists of
home equity loans and lines of credit that are underwritten in a manner such
that they result in credit risk that is substantially similar to one-to-four
family residential mortgage loans. Nevertheless, home equity loans and lines of
credit have greater credit risk than one-to-four family residential mortgage
loans because they are secured by mortgages subordinated to the existing first
mortgage on the property, which we may or may not hold. In addition, we do not
have private mortgage insurance coverage for these loans. We do not actively
participate in wholesale or brokered home equity loan origination.
Commercial Business Lending.
As part of our strategic plan, we are focusing on increasing the
commercial business loans that we originate, including lines of credit, term
loans and letters of credit. These loans are typically secured by collateral and
are used for general business purposes, including working capital financing,
equipment financing, capital investment and general investment. Loan terms vary
from one to seven years. The interest rates on such loans are generally floating
rates indexed to the Wall
Street Journal Prime rate plus a margin.
Commercial
business loans typically have shorter maturity terms and higher interest spreads
than real estate loans, but generally involve more credit risk because of the
type and nature of the collateral. We are focusing our efforts on small to
medium-sized, privately-held companies with local or regional businesses that
operate in our market area. Our commercial business lending policy includes
credit file documentation and analysis of the borrower’s background, capacity to
repay the loan, the adequacy of the borrower’s capital and collateral, as well
as an evaluation of other conditions affecting the borrower. Analysis of the
borrower’s past, present and future cash flows is also an important aspect of
our credit analysis. We generally obtain personal guarantees on our commercial
business loans.
Repayment
of our commercial business loans is generally dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans
may fluctuate in value. Our commercial business loans are originated primarily
based on the identified cash flow of the borrower and secondarily on the general
liquidity and secondary cash flow support of the borrower. Advance ratios
against collateral provide additional support to repay the loan. Most often,
this collateral consists of accounts receivable, inventory or equipment. Credit
support provided by the borrower for most of these loans and the probability of
repayment is based on the liquidation of the pledged collateral and enforcement
of a personal guarantee, if any. As a result, in the case of loans secured by
accounts receivable, the availability of funds for the repayment of these loans
may be substantially dependent on the ability of the borrower to collect amounts
due from its customers. The collateral securing other loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Nearly
all of our commercial business loans (approximately $98.5 million at September
30, 2010) were purchased from the FDIC in connection with the CFB Acquisition
and the LibertyBank acquisition. All of the purchased commercial business loans
in these acquisitions are covered under loss sharing agreements with the
FDIC.
Commercial
business loans include equipment finance agreements for the purchase
of personal property, business equipment and titled vehicles and construction
equipment. Generally these agreements have terms of 60 months or less and
the lessee is granted title of the collateral at the end of the term. All of
these financing agreements were assets of CELC, the operations of
which were assumed by the Bank in the LibertyBank Acquisition, and nearly all of
them are covered under a loss share agreement with the FDIC. Equipment
finance agreements included in commercial business loans totaled $43.2
million at September 30, 2010, net of purchase accounting adjustments. CELC also
originated leases on personal property and business assets under terms similar
to those collateralized by the financing agreements described above.
However, at the end of the lease term, the collateral is returned to CELC and
the Bank, at which point the collateral is sold through a nationwide network of
brokers. Leases totaled $7.0 million at September 30, 2010, net of purchase
accounting adjustments. Nearly all of the leases outstanding at September 30,
2010, were covered under a loss sharing agreement with the FDIC. Currently, no
new leases or commercial loans are being originated by CELC as we have decided
to wind down the operations of CELC over the next several years.
Our
leases entail many of the same types of risks as our commercial business loans.
As with commercial business loans, the collateral securing our lease loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.
We rely on the lessee's continuing financial stability, rather than the value of
the leased equipment, for the repayment of all required amounts under lease
loans. In the event of a default on a lease, it is unlikely that the proceeds
from the sale of the leased equipment will be sufficient to satisfy the
outstanding unpaid amounts under the terms of the loan.
Lease
residual value represents the present value of the estimated fair value of the
leased equipment at the termination date of the lease. Realization of these
residual values depends on many factors, including management’s use of
estimates, assumptions, and judgment to determine such values. Several other
factors outside of our control may reduce the residual values realized,
including general market conditions at the time of expiration of the lease,
whether there has been technological or economic obsolescence or unusual wear
and tear on, or use of, the equipment and the cost of comparable
equipment. If, upon the expiration of a lease, we sell the equipment
and the amount realized is less than the recorded value of the residual interest
in the equipment, we will recognize a loss reflecting the
difference. We review the lease residuals for potential impairment
monthly.
Loan Portfolio Analysis. We
refer to loans and leases subject to the loss sharing agreements with the FDIC
as “covered loans.” All loans purchased in the CFB Acquisition were covered
loans. Consumer loans not secured by real estate that were purchased in the
LibertyBank Acquisition are not subject to the loss sharing agreements. These
loans totaled $5.2 million at September 30, 2010. All other loans and leases
purchased in the LibertyBank Acquisition are covered loans. Within this Annual
Report on Form 10-K, we segregate covered loans from our noncovered loan
portfolio, since we are afforded significant protection from credit losses on
covered loans due to the loss sharing agreements. The following table summarizes
covered loans at September 30, 2010 and 2009:
Dollars
in thousands
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
20,445 |
|
|
|
7.58 |
% |
|
$ |
8,537 |
|
|
|
6.76 |
% |
Multi-family
residential
|
|
|
10,286 |
|
|
|
3.82 |
|
|
|
6,270 |
|
|
|
4.96 |
|
Commercial
|
|
|
83,794 |
|
|
|
31.09 |
|
|
|
61,601 |
|
|
|
48.75 |
|
Total real
estate
|
|
|
114,525 |
|
|
|
42.49 |
|
|
|
76,408 |
|
|
|
60.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
|
|
16,884 |
|
|
|
6.26 |
|
|
|
3,128 |
|
|
|
2.48 |
|
Multi-family
residential
|
|
|
1,018 |
|
|
|
0.38 |
|
|
|
1,521 |
|
|
|
1.20 |
|
Commercial and land
development
|
|
|
13,246 |
|
|
|
4.91 |
|
|
|
17,230 |
|
|
|
13.64 |
|
Total real estate
construction
|
|
|
31,148 |
|
|
|
11.55 |
|
|
|
21,879 |
|
|
|
17.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
16,124 |
|
|
|
5.98 |
|
|
|
6,728 |
|
|
|
5.32 |
|
Automobile
|
|
|
683 |
|
|
|
0.25 |
|
|
|
1,188 |
|
|
|
0.94 |
|
Other consumer
|
|
|
1,434 |
|
|
|
0.53 |
|
|
|
1,850 |
|
|
|
1.46 |
|
Total consumer
|
|
|
18,241 |
|
|
|
6.76 |
|
|
|
9,766 |
|
|
|
7.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
99,045 |
|
|
|
36.75 |
|
|
|
18,312 |
|
|
|
14.49 |
|
Leases
|
|
|
6,592 |
|
|
|
2.45 |
|
|
|
|
|
|
|
-- |
|
Gross covered loans and
leases
|
|
|
269,551 |
|
|
|
100.00 |
% |
|
|
126,365 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, covered loans
|
|
|
(3,527 |
) |
|
|
|
|
|
|
(16,812 |
) |
|
|
|
|
Covered loans receivable,
net
|
|
$ |
266,024 |
|
|
|
|
|
|
$ |
109,553 |
|
|
|
|
|
The
following table sets forth the composition of the Company’s loan portfolio,
including covered and noncovered loans, by type of loan at the dates
indicated:
|
|
At
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
|
$ |
157,574 |
|
|
|
24.75 |
% |
|
$ |
178,311 |
|
|
|
33.01 |
% |
|
$ |
210,501 |
|
|
|
45.23 |
% |
|
$ |
249,545 |
|
|
|
51.55 |
% |
|
$ |
293,640 |
|
|
|
57.88 |
% |
Multi-family
residential
|
|
|
20,759 |
|
|
|
3.26 |
|
|
|
16,286 |
|
|
|
3.01 |
|
|
|
8,477 |
|
|
|
1.82 |
|
|
|
6,864 |
|
|
|
1.42 |
|
|
|
7,049 |
|
|
|
1.39 |
|
Commercial
|
|
|
228,643 |
|
|
|
35.93 |
|
|
|
213,471 |
|
|
|
39.52 |
|
|
|
151,733 |
|
|
|
32.61 |
|
|
|
133,823 |
|
|
|
27.64 |
|
|
|
125,401 |
|
|
|
24.72 |
|
Total real
estate
|
|
|
406,976 |
|
|
|
63.94 |
|
|
|
408,068 |
|
|
|
75.54 |
|
|
|
370,711 |
|
|
|
79.66 |
|
|
|
390,232 |
|
|
|
80.61 |
|
|
|
426,090 |
|
|
|
83.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
|
|
24,707 |
|
|
|
3.88 |
|
|
|
10,871 |
|
|
|
2.01 |
|
|
|
13,448 |
|
|
|
2.89 |
|
|
|
20,545 |
|
|
|
4.24 |
|
|
|
23,678 |
|
|
|
4.67 |
|
Multi-family
residential
|
|
|
2,657 |
|
|
|
0.42 |
|
|
|
10,417 |
|
|
|
1.93 |
|
|
|
920 |
|
|
|
0.20 |
|
|
|
1,770 |
|
|
|
0.37 |
|
|
|
-- |
|
|
|
-- |
|
Commercial and land
development
|
|
21,190 |
|
|
|
3.33 |
|
|
|
27,144 |
|
|
|
5.02 |
|
|
|
18,674 |
|
|
|
4.01 |
|
|
|
21,899 |
|
|
|
4.52 |
|
|
|
16,344 |
|
|
|
3.22 |
|
Total real estate
construction
|
|
|
48,554 |
|
|
|
7.63 |
|
|
|
48,432 |
|
|
|
8.96 |
|
|
|
33,042 |
|
|
|
7.10 |
|
|
|
44,214 |
|
|
|
9.13 |
|
|
|
40,022 |
|
|
|
7.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
56,745 |
|
|
|
8.91 |
|
|
|
53,368 |
|
|
|
9.88 |
|
|
|
52,954 |
|
|
|
11.38 |
|
|
|
42,990 |
|
|
|
8.88 |
|
|
|
34,143 |
|
|
|
6.73 |
|
Automobile
|
|
|
1,466 |
|
|
|
0.23 |
|
|
|
2,364 |
|
|
|
0.44 |
|
|
|
1,903 |
|
|
|
0.41 |
|
|
|
2,173 |
|
|
|
0.45 |
|
|
|
3,245 |
|
|
|
0.64 |
|
Other
consumer
|
|
|
7,762 |
|
|
|
1.22 |
|
|
|
3,734 |
|
|
|
0.69 |
|
|
|
1,370 |
|
|
|
0.29 |
|
|
|
1,405 |
|
|
|
0.29 |
|
|
|
1,300 |
|
|
|
0.26 |
|
Total
consumer
|
|
|
65,973 |
|
|
|
10.36 |
|
|
|
59,466 |
|
|
|
11.01 |
|
|
|
56,227 |
|
|
|
12.08 |
|
|
|
46,568 |
|
|
|
9.62 |
|
|
|
38,688 |
|
|
|
7.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
108,051 |
|
|
|
16.97 |
|
|
|
24,256 |
|
|
|
4.49 |
|
|
|
5,385 |
|
|
|
1.16 |
|
|
|
3,122 |
|
|
|
0.64 |
|
|
|
2,480 |
|
|
|
0.49 |
|
Leases
|
|
|
6,999 |
|
|
|
1.10 |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
Gross
loans
|
|
|
636,553 |
|
|
|
100.00 |
% |
|
|
540,222 |
|
|
|
100.00 |
% |
|
|
465,365 |
|
|
|
100.00 |
% |
|
|
484,136 |
|
|
|
100.00 |
% |
|
|
507,280 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan
fees
|
|
|
628 |
|
|
|
|
|
|
|
858 |
|
|
|
|
|
|
|
973 |
|
|
|
|
|
|
|
1,030 |
|
|
|
|
|
|
|
1,241 |
|
|
|
|
|
Allowance for loan
losses
|
|
|
15,432 |
|
|
|
|
|
|
|
28,735 |
|
|
|
|
|
|
|
4,579 |
|
|
|
|
|
|
|
2,988 |
|
|
|
|
|
|
|
2,974 |
|
|
|
|
|
Loans receivable,
net
|
|
$ |
620,493 |
|
|
|
|
|
|
$ |
510,629 |
|
|
|
|
|
|
$ |
459,813 |
|
|
|
|
|
|
$ |
480,118 |
|
|
|
|
|
|
$ |
503,065 |
|
|
|
|
|
Loan Maturity and Repricing.
The following table sets forth certain information at September 30, 2010,
regarding the dollar amount of loans maturing based on their contractual terms
to maturity, but does not include scheduled payments or potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
|
|
Within
1
Year
|
|
|
After
1
Year
Through
3
Years
|
|
|
After
3
Years
Through
5
Years
|
|
|
After
5
Years
Through
10
Years
|
|
|
Beyond
10
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
|
$ |
4,366 |
|
|
$ |
8,375 |
|
|
$ |
5,852 |
|
|
$ |
36,862 |
|
|
$ |
102,119 |
|
|
$ |
157,574 |
|
Multi-family
residential
|
|
|
3,394 |
|
|
|
1,830 |
|
|
|
2,935 |
|
|
|
5,074 |
|
|
|
7,526 |
|
|
|
20,759 |
|
Commercial
|
|
|
12,252 |
|
|
|
21,550 |
|
|
|
15,579 |
|
|
|
68,142 |
|
|
|
111,120 |
|
|
|
228,643 |
|
Total real
estate
|
|
|
20,012 |
|
|
|
31,755 |
|
|
|
24,366 |
|
|
|
110,078 |
|
|
|
220,765 |
|
|
|
406,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
|
|
17,813 |
|
|
|
5,413 |
|
|
|
1,075 |
|
|
|
96 |
|
|
|
310 |
|
|
|
24,707 |
|
Multi-family
residential
|
|
|
2,399 |
|
|
|
258 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,657 |
|
Commercial and land
development
|
|
|
17,769 |
|
|
|
2,623 |
|
|
|
267 |
|
|
|
372 |
|
|
|
159 |
|
|
|
21,190 |
|
Total real estate
construction
|
|
|
37,981 |
|
|
|
8,294 |
|
|
|
1,342 |
|
|
|
468 |
|
|
|
469 |
|
|
|
48,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
428 |
|
|
|
2,905 |
|
|
|
5,270 |
|
|
|
32,953 |
|
|
|
15,189 |
|
|
|
56,745 |
|
Automobile
|
|
|
59 |
|
|
|
488 |
|
|
|
399 |
|
|
|
208 |
|
|
|
312 |
|
|
|
1,466 |
|
Other consumer
|
|
|
3,276 |
|
|
|
1,180 |
|
|
|
752 |
|
|
|
1,036 |
|
|
|
1,518 |
|
|
|
7,762 |
|
Total consumer
|
|
|
3,763 |
|
|
|
4,573 |
|
|
|
6,421 |
|
|
|
34,197 |
|
|
|
17,019 |
|
|
|
65,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
32,054 |
|
|
|
43,833 |
|
|
|
23,720 |
|
|
|
7,781 |
|
|
|
663 |
|
|
|
108,051 |
|
Leases
|
|
|
1,049 |
|
|
|
4,616 |
|
|
|
1,334 |
|
|
|
- |
|
|
|
- |
|
|
|
6,999 |
|
Gross loans
|
|
$ |
94,859 |
|
|
$ |
93,071 |
|
|
$ |
57,183 |
|
|
$ |
152,524 |
|
|
$ |
238,916 |
|
|
$ |
636,553 |
|
The
following table sets forth the dollar amount of all loans maturing more than one
year after September 30, 2010, which have fixed interest rates and have floating
or adjustable interest rates:
|
|
Floating
or
Adjustable
Rate
|
|
|
Fixed
Rates
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
63,006 |
|
|
$ |
90,202 |
|
|
$ |
153,208 |
|
Multi-family
residential
|
|
|
15,224 |
|
|
|
2,141 |
|
|
|
17,365 |
|
Commercial
|
|
|
178,192 |
|
|
|
38,199 |
|
|
|
216,391 |
|
Total
real estate
|
|
|
256,422 |
|
|
|
130,542 |
|
|
|
386,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
3,632 |
|
|
|
3,262 |
|
|
|
6,894 |
|
Multi-family
residential
|
|
|
- |
|
|
|
258 |
|
|
|
258 |
|
Commercial
and land development
|
|
|
2,748 |
|
|
|
673 |
|
|
|
3,421 |
|
Total
real estate construction
|
|
|
6,380 |
|
|
|
4,193 |
|
|
|
10,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
43,125 |
|
|
|
13,192 |
|
|
|
56,317 |
|
Automobile
|
|
|
47 |
|
|
|
1,360 |
|
|
|
1,407 |
|
Other
consumer
|
|
|
1,034 |
|
|
|
3,452 |
|
|
|
4,486 |
|
Total
consumer
|
|
|
44,206 |
|
|
|
18,004 |
|
|
|
62,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
12,363 |
|
|
|
63,634 |
|
|
|
75,997 |
|
Leases
|
|
|
- |
|
|
|
5,950 |
|
|
|
5,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable
|
|
$ |
319,371 |
|
|
$ |
222,323 |
|
|
$ |
541,694 |
|
Loan Solicitation and Processing.
As part of our commercial banking strategy, we are focusing our efforts
in increasing the amount of direct originations of commercial business loans,
followed by commercial and multi-family real estate loans and to a lesser extent
construction loans to builders and developers. Residential real estate loans are
solicited through media advertising, direct mail to existing customers and by
realtor referrals. Loan originations are further supported by lending services
offered through our internet website, advertising, cross-selling and through our
employees' community service.
Upon
receipt of a loan application from a prospective borrower, we obtain a credit
report and other data to verify specific information relating to the applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral is undertaken by a licensed appraiser we have retained and
approved.
Mortgage
loan applications are initiated by loan officers and are required to be approved
by our underwriting staff who has appropriately delegated lending authority.
Loans that exceed the underwriter’s lending authority must be approved by a
Credit Officer with adequate lending authority. We require title insurance on
real estate loans as well as fire and casualty insurance on all secured loans
and on home equity loans and lines of credit where the property serves as
collateral.
Loan Originations, Servicing,
Purchases and Sales. During the year ended September 30, 2010, our total
loan originations were $146.5 million. Nearly all first lien residential
mortgages are sold to the secondary market at the time of origination. During
the year ended September 30, 2010, we sold $26.9 million of single family
residential loans into the secondary market including $6.9 million in loans
originated in fiscal year 2009. Our secondary market relationships have been
major correspondent banks.
One-to-four
family home loans are generally originated in accordance with the guidelines
established by Freddie Mac and Fannie Mae, with the exception of our special
community development loans under the Community Reinvestment Act. We utilize the
Freddie Mac Loan Prospector and Fannie Mae Desktop Underwriter automated
loan
systems to underwrite the majority of our residential first mortgage loans
(excluding community development loans). The remaining loans are underwritten by
designated real estate loan underwriters internally in accordance with standards
as provided by our Board-approved loan policy. The underwriting criteria we use
on loans that are not sold to investors and retained in our portfolio are at
least as stringent as those we use for the loans we sell.
All of
our one-to-four family residential loans are sold into the secondary market with
servicing released. Loans are generally sold on a non-recourse basis. In
December 2008, we sold our servicing rights on loans we had previously sold to
Freddie Mac, Fannie Mae and the FHLB. At September 30, 2010, we serviced $291.8
million of commercial and multifamily residential real estate loans for the FDIC
that were not sold to us in the LibertyBank Acquisition pursuant to an interim
servicing agreement that was included in the purchase and assumption agreement
with the FDIC in the LibertyBank Acquisition. We currently anticipate the FDIC
will convert these loans from our core system prior to December 31, 2010, and we
will no longer service these loans for the FDIC once they have been
converted.
The
following table shows total loans originated, purchased, sold and repaid during
the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Loans
originated:
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential (1)
|
|
$ |
31,209 |
|
|
$ |
67,701 |
|
|
$ |
48,114 |
|
Multi-family
residential
|
|
|
52 |
|
|
|
74 |
|
|
|
1,819 |
|
Commercial
|
|
|
12,429 |
|
|
|
32,477 |
|
|
|
47,662 |
|
Total
real estate
|
|
|
43,690 |
|
|
|
100,252 |
|
|
|
97,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
36,927 |
|
|
|
12,530 |
|
|
|
17,853 |
|
Multi-family
residential
|
|
|
3,617 |
|
|
|
-- |
|
|
|
-- |
|
Commercial
and land development
|
|
|
4,497 |
|
|
|
12,266 |
|
|
|
14,152 |
|
Total
real estate construction
|
|
|
45,041 |
|
|
|
24,796 |
|
|
|
32,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
12,067 |
|
|
|
15,265 |
|
|
|
35,339 |
|
Automobile
|
|
|
411 |
|
|
|
192 |
|
|
|
894 |
|
Other
consumer
|
|
|
3,023 |
|
|
|
2,643 |
|
|
|
3,104 |
|
Total
consumer
|
|
|
15,501 |
|
|
|
18,100 |
|
|
|
39,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business, including advances
on lines of credit
|
|
|
42,286 |
|
|
|
20,106 |
|
|
|
21,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans originated
|
|
|
146,518 |
|
|
|
163,254 |
|
|
|
190,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans purchased in Acquisition
|
|
|
197,596 |
|
|
|
129,162 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
(26,937 |
) |
|
|
(68,801 |
) |
|
|
(47,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments
|
|
|
(175,099 |
) |
|
|
(130,669 |
) |
|
|
(161,575 |
) |
Transfer
to real estate owned
|
|
|
(24,659 |
) |
|
|
(19,513 |
) |
|
|
(1,394 |
) |
Increase
(decrease) in allowance for loan
losses and other items, net
|
|
|
(3,282 |
) |
|
|
(24,586 |
) |
|
|
(1,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in loans receivable
and loans held for sale
|
|
$ |
114,137 |
|
|
$ |
48,847 |
|
|
$ |
(22,378 |
) |
________________
(1)
|
Includes
originations of loans held for sale of $31.2 million, $66.8 million, and
$45.9 million for the years ended September 30, 2010, 2009, and 2008,
respectively.
|
Loan Origination and Other Fees.
In some instances, we receive loan origination fees on real estate
related products. Loan fees generally represent a percentage of the principal
amount of the loan, and are paid by the borrower. Accounting standards require
that certain fees received, net of certain origination costs, be deferred and
amortized over the contractual life of the loan. Net deferred fees or costs
associated with loans that are prepaid or sold are recognized as income at the
time of prepayment.
Asset
Quality
The
objective of our loan review process is to determine risk levels and exposure to
loss. The depth of review varies by asset types, depending on the nature of
those assets. While certain assets may represent a substantial investment and
warrant individual reviews, other assets may have less risk because the asset
size is small, the risk is spread over a large number of obligors or the
obligations are well collateralized and further analysis of individual assets
would expand the review process without measurable advantage to risk assessment.
Asset types with these characteristics may be reviewed as a total portfolio on
the basis of risk indicators such as delinquency (consumer and residential real
estate loans) or credit rating. A formal review process is conducted on
individual assets that represent greater potential risk.
A formal
review process is a total reevaluation of the risks associated with the asset
and is documented by completing an asset review report. Certain real
estate-related assets must be evaluated in terms of their fair market value or
net realizable value in order to determine the likelihood of loss exposure and,
consequently, the adequacy of valuation allowances. 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.
The
lending production and credit administration and approval departments are
segregated to maintain objectivity. Once booked, commercial loans are
subject to periodic review through our quarterly loan review process, annual
loan officer reviews, an annual credit review by an independent third party, and
by our annual safety and soundness examinations by our primary
regulator.
We
generally assess late fees or penalty charges on delinquent loans of five
percent of the monthly principal and interest amount. The borrower is given a 10
to 15-day grace period to make the loan payment depending on loan type. When a
borrower fails to make a required payment when it is due, we institute
collection procedures. The first notice is mailed to the borrower on the day
following the expiration of the grace period requesting payment and assessing a
late charge. Attempts to contact the borrower by telephone generally begin upon
the 15th day of delinquency. If a satisfactory response is not obtained,
continual follow-up contacts are attempted until the loan has been brought
current. Before the 60th day of delinquency, attempts to interview the borrower
are made to establish the cause of the delinquency, whether the cause is
temporary, the attitude of the borrower toward the debt and a mutually
satisfactory arrangement for curing the default.
The Board
of Directors is informed monthly as to the number and dollar amount of loans
that are delinquent by more than 30 days, and is given information regarding
classified assets.
If a
borrower is chronically delinquent and all reasonable means of obtaining
payments have been exercised, we will seek to recover any collateral securing
the loan according to the terms of the security instrument and applicable law.
In the event of an unsecured loan, we will either seek legal action against the
borrower or refer the loan to an outside collection agency.
Delinquent Loans. The
following table shows our delinquent loans by the type of loan and number of
days delinquent as of September 30, 2010, that were still accruing
interest:
|
|
Noncovered
Loans Delinquent For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered
|
|
|
|
30-89
Days
|
|
|
Over
90 Days
|
|
|
Delinquent Loans(1)
|
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
Number
of
Loans
|
|
|
Principal
Balance
Loans
|
|
|
|
(dollars
in thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
40 |
|
|
$ |
4,679 |
|
|
|
1 |
|
|
$ |
60 |
|
|
|
- |
|
|
$ |
-- |
|
Multi-family
residential
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Commercial
|
|
|
3 |
|
|
|
2,328 |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Total
real estate
|
|
|
43 |
|
|
|
7,007 |
|
|
|
1 |
|
|
|
60 |
|
|
|
- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Multi-family
residential
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Commercial
and land development
|
|
|
1 |
|
|
|
695 |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
Total
real estate construction
|
|
|
1 |
|
|
|
695 |
|
|
|
- |
|
|
|
-- |
|
|
|
- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
9 |
|
|
|
300 |
|
|
|
1 |
|
|
|
56 |
|
|
|
1 |
|
|
|
23 |
|
Automobile
|
|
|
3 |
|
|
|
17 |
|
|
|
- |
|
|
|
-- |
|
|
|
1 |
|
|
|
2 |
|
Other
consumer
|
|
|
7 |
|
|
|
22 |
|
|
|
- |
|
|
|
-- |
|
|
|
1 |
|
|
|
9 |
|
Total
consumer
|
|
|
19 |
|
|
|
339 |
|
|
|
1 |
|
|
|
56 |
|
|
|
3 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
5 |
|
|
|
421 |
|
|
|
- |
|
|
|
-- |
|
|
|
4 |
|
|
|
401 |
|
Total
|
|
|
68 |
|
|
$ |
8,462 |
|
|
|
2 |
|
|
$ |
116 |
|
|
|
7 |
|
|
$ |
435 |
|
_______________________
(1)
|
Does
not include covered loans purchased in the LibertyBank Acquisition that
have been aggregated into pools and accounted for under ASC
310-30
|
Impaired and purchased credit
impaired loans. A loan is considered impaired when, based upon currently
known information, it is deemed probable that we 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
the fair value of collateral, if the loan is collateral dependent. Estimated
probable losses on non-homogenous loans (generally commercial real estate and
acquisition and land development loans) in the organic loan portfolio are
allocated specific allowances. Therefore, impaired loans in our organic
portfolio that are reported without a specific allowance are reported as such
due to collateral or cash flow sufficiency, as applicable. Large groups of
smaller balance homogenous loans such as consumer secured loans, residential
mortgage loans and consumer unsecured loans are collectively evaluated for
potential loss. All other loans are evaluated for impairment on an individual
basis. Acquisition, development and construction loans that have interest-only
or interest reserve structures are reviewed at least quarterly and are reported
as nonperforming or impaired loans prior to their maturity date if doubt exists
as to the collectability of contractual principal or interest prior to that
time. Evidence of impairment on such loans could include construction cost
overruns, deterioration of guarantor strength and slowdown in sales
activity.
The
FDIC-assisted acquisitions have increased the complexity in reporting
nonperforming loans and the allowance for loan and lease losses. For example,
purchased credit impaired loans are not included in the tables of impaired loans
within this report unless we have recorded additional specific reserves on those
loans subsequent to their acquisition. Loans in the Company’s organic portfolio
have general and specific reserves allocated when management has determined it
is probable a loss has been incurred. Loans in the Community First Bank
portfolio were recorded and are currently accounted for under the business
combination rules of Statement of Financial Accounting Standards No. 141 and
Accounting Standards Codification Topic (“ASC”) 310-30. Loans in the Community
First Bank portfolio that were not credit impaired on the date of purchase are
allocated a general loss reserve. Loans that were credit impaired in
the Community First Bank portfolio on the date of acquisition are reported at
the present value of expected cash flows. No allowance for loan losses is
reported on these loans as
impairments
in excess of the acquisition-date fair value discount result in a partial
charge-off of the loan’s remaining unpaid principal balance.
The loans
purchased in the LibertyBank Acquisition are accounted for under the business
combination rules of ASC 805, which requires all loans acquired in the
LibertyBank portfolio to be reported initially at estimated fair value.
Accordingly, an allowance for loan losses is not carried over or recorded as of
the date of the LibertyBank Acquisition. The Company elected to apply the
accounting methodology of ASC 310-30 to all loans purchased in the LibertyBank
Acquisition. As such, all acquired loans have been aggregated into pools and the
portion of the fair value discount not related to credit impairment is accreted
over the life of the loan into interest income. A pool is accounted for as a
single asset with a single interest rate, cumulative loss rate and cash flow
expectation; therefore, loans purchased in the LibertyBank Acquisition are not
individually identified as nonperforming loans. Loans purchased in the CFB
Acquisition were not pooled; therefore, loans that are on nonaccrual status, or
are 90 days past due and still accruing are reported as nonperforming
loans.
In
situations where loans purchased in the LibertyBank Acquisition had similar risk
characteristics, loans were aggregated into pools to estimate cash flows under
ASC 310-30. The Company aggregated all of the loans acquired in the LibertyBank
Acquisition into 22 different pools based on common risk characteristics
including collateral and borrower credit ratings. The cash flows expected over
the life of the pools are estimated using an internal cash flow model that
projects cash flows and calculates the carrying values of the pools, book
yields, effective interest income and impairment, if any, based on pool level
events. Assumptions as to cumulative loss rates, loss curves and prepayment
speeds are utilized to calculate the expected cash flows.
Our
determination of the initial fair value of loans purchased in the FDIC-assisted
acquisitions involved a high degree of judgment and complexity. The carrying
value of the acquired loans reflects management’s best estimate of the amount to
be realized from the acquired loan and lease portfolios. However, the
amounts we actually realize on these loans could differ materially from the
carrying value reflected in these financial statements, based upon the timing of
collections on the acquired loans in future periods, underlying collateral
values and the ability of borrowers to continue to make payments.
Because
of the loss sharing agreement with the FDIC on these assets and related FDIC
indemnification receivable asset, we do not expect that we will incur excessive
losses on the acquired loans, based on our current estimates. The indemnified
portion of partial charge-offs and provisions for general loan loss reserves in
the acquired portfolios is recorded in noninterest income and results in an
increase in the FDIC indemnification asset. Under the loss sharing agreements
with the FDIC in the CFB Acquisition, our share of the first $34.0 million of
losses and reimbursable expenses on the covered assets (defined as loans, leases
and other real estate owned) is 20%. Any loss on covered assets in excess of the
$34.0 million tranche is limited to 5%. Under the loss sharing agreements in the
LibertyBank Acquisition, our share of all losses and reimbursable expenses on
covered assets is 20%.
Troubled Debt Restructurings.
According to generally accepted accounting principles, we are required to
account for certain loan modifications or restructurings as a "troubled debt
restructuring." In general, the modification or restructuring of a
debt is considered a troubled debt restructuring if we, for economic or legal
reasons related to a borrower's financial difficulties, grant a concession to
the borrower that we would not otherwise consider.
The
internal process used to assess whether a modification should be reported and
accounted for as a troubled debt restructuring includes an assessment of the
borrower's payment history, considering whether the borrower is in financial
difficulty, whether a concession has been granted, and whether it is likely the
borrower will be able to perform under the modified terms. Rate reductions below
market rate, extensions of the loan maturity date that would not otherwise be
considered, and deferrals or forgiveness of principal or interest are examples
of modifications that are concessions.
Troubled
debt restructurings totaled $10.1 million and $4.7 million at September 30, 2010
and September 30, 2009, respectively, with noncovered loans representing $5.4
million and $4.7 million of those amounts, respectively. Modifications to loans
not accounted for as troubled debt restructurings totaled $9.9 million at
September 30, 2010. Approximately $5.5 million of those modifications resided in
the noncovered loan portfolio. These loans were not considered to be troubled
debt restructurings because the borrower was not under financial difficulty at
the time of the modification or extension. Extensions are made at market rates
as evidenced by comparison to newly originated loans of generally comparable
credit quality and structure.
Classified Assets. Federal
regulations provide for the classification of lower quality loans and other
assets, such as debt and equity securities, as substandard, doubtful or loss. An
asset is considered substandard if it is inadequately protected by the current
net worth, liquidity and paying capacity of the borrower or any collateral
pledged. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When we
classify problem assets as either substandard or doubtful, we may establish a
specific allowance in an amount we deem prudent. Specific allowance amounts are
approved by Senior Management and reviewed by the Bank’s Classified Asset
Committee to address the risk specifically or we may allow the loss to be
addressed in the general allowance. The doubtful category is generally a
short-term interim step prior to charge off. Members of the Classified Asset
Committee include the Bank’s Chief Credit Officer and Commercial Banking Team
Leaders, as well as the Bank’s internal loan review director and other members
of management in our Credit Administration department. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been specifically allocated to particular problem assets. When an
insured institution classifies problem assets as a loss, it is required to
charge off such assets in the period in which they are deemed uncollectible.
Assets that do not currently expose us to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated as special mention. Our determination as to the
classification of our assets and the amount of our valuation allowances is
subject to review by the OTS, which can order the establishment of additional
loss allowances.
In
connection with the filing of periodic reports with the OTS and in accordance
with our classification of assets policy, we regularly review the problem assets
in our portfolio to determine whether any assets require classification in
accordance with applicable regulations. On the basis of our review of our loans,
as of September 30, 2010, we had classified loans of $107.7 million, net of
purchase accounting adjustments, with $38.0 million in the noncovered loan
portfolio. The total amount of noncovered classified assets represented 18.51%
of total stockholders’ equity and 2.56% of total assets as of September 30,
2010. The aggregate amounts of classified assets at the dates indicated were as
follows:
|
|
September
30, 2010
|
|
|
September
30, 2009
|
|
|
|
Covered
|
|
|
Noncovered
|
|
|
Covered
|
|
|
Noncovered
|
|
|
|
(in
thousands)
|
|
Classified
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
43 |
|
Substandard
|
|
|
69,751 |
|
|
|
37,966 |
|
|
|
22,030 |
|
|
|
27,515 |
|
Total
|
|
$ |
69,751 |
|
|
$ |
37,966 |
|
|
$ |
49,588 |
|
|
$ |
27,558 |
|
Potential Problem Loans.
Potential problem loans are loans that do not yet meet the criteria for
placement on non-accrual status, but known information about possible credit
problems of the borrowers causes management to have doubts as to the ability of
the borrowers to comply with present loan repayment terms. This may result in
the future inclusion of such loans in the non-accrual loan category. As of
September 30, 2010, the aggregate amount of potential problem loans was $49.9
million, which includes loans that were rated “Substandard” under the Bank’s
risk grading process that are included in the classified loan table above but
were not on non-accrual status. Noncovered loans included in that amount was
$28.9 million at September 30, 2010. The $28.9 million balance of noncovered
potential problem loans includes $22.5 million in loans secured by commercial
real estate, $3.2 million real estate construction and land development loans,
and $1.7 million of loans secured by one-to-four family residential real
estate.
Real Estate Owned and Other
Repossessed Assets. Real estate we acquire as a result of foreclosure or
by deed-in-lieu of foreclosure is classified as real estate owned until it is
sold. When the property is acquired, it is recorded at the lower of its cost,
which is the unpaid principal balance of the related loan plus foreclosure
costs, or the fair market value of the property less selling costs. Other
repossessed collateral, including autos, are also recorded at the lower of cost
(i.e., the unpaid principal balance plus repossession costs) or fair market
value. As of September 30,
2010, we
had $30.5 million in real estate owned and other repossessed assets with $20.5
million, after fair value purchase adjustments, subject to the loss share
agreement with the FDIC.
Nonperforming Assets.
Nonperforming assets include nonaccrual loans, loans delinquent 90 days
or more and still accruing, real estate acquired through foreclosure,
repossessed assets and loans that are not delinquent but exhibit weaknesses that
have evidenced doubt as to our ability to collect all contractual principal and
interest and have been classified as impaired under ASC Topic 310-10-35. When a
loan becomes 90 days delinquent, we typically place the loan on nonaccrual
status. However, as noted earlier, loans purchased in the LibertyBank
Acquisition were pooled and a pool is accounted for as a single asset with a
single interest rate, cumulative loss rate and cash flow expectation; therefore,
loans purchased in the LibertyBank Acquisition are not individually identified
as nonperforming loans. Loans purchased in the CFB Acquisition were not pooled;
therefore, loans that are on nonaccrual status, or are 90 days past due and
still accruing are reported as nonperforming loans.
The
following table bifurcates our nonperforming assets as of September 30, 2010 and
2009:
|
|
September 30,
2010
|
|
|
September 30,
2009
|
|
|
|
Covered
Assets(1)
|
|
|
Noncovered
Assets
|
|
|
Total
|
|
|
Covered
Assets(1)
|
|
|
Noncovered
Assets
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate construction
|
|
$ |
8,430 |
|
|
$ |
399 |
|
|
$ |
8,829 |
|
|
$ |
7,466 |
|
|
$ |
2,906 |
|
|
$ |
10,372 |
|
Commercial
and multi-family
residential real estate
|
|
|
15,584 |
|
|
|
3,307 |
|
|
|
18,891 |
|
|
|
11,016 |
|
|
|
2,725 |
|
|
|
13,741 |
|
One-to-four
family residential
|
|
|
359 |
|
|
|
4,028 |
|
|
|
4,388 |
|
|
|
5,020 |
|
|
|
6,100 |
|
|
|
11,120 |
|
Other
|
|
|
950 |
|
|
|
1,965 |
|
|
|
2,915 |
|
|
|
3,206 |
|
|
|
53 |
|
|
|
3,259 |
|
Total nonperforming
loans
|
|
|
25,323 |
|
|
|
9,699 |
|
|
|
35,023 |
|
|
|
26,708 |
|
|
|
11,784 |
|
|
|
38,492 |
|
Real
estate owned and other
repossessed assets
|
|
|
20,513 |
|
|
|
9,968 |
|
|
|
30,481 |
|
|
|
7,516 |
|
|
|
10,875 |
|
|
|
18,391 |
|
Total
nonperforming assets
|
|
$ |
45,836 |
|
|
$ |
19,667 |
|
|
$ |
65,504 |
|
|
$ |
34,224 |
|
|
$ |
22,659 |
|
|
$ |
56,883 |
|
________________________
(1)
|
Covered
assets include loans purchased in the CFB Acquisition and all covered REO
and repossessed assets, including those purchased in the LibertyBank
Acquisition. Loans acquired in the LibertyBank Acquisition have been
pooled and are not separately reported as nonperforming
loans.
|
The
following table sets forth information with respect to our nonperforming assets
and troubled debt restructurings within the meaning of ASC 310-10-35 for the
periods indicated.
|
|
At
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(dollars
in thousands)
|
|
Loans
accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
4,328 |
|
|
$ |
10,617 |
|
|
$ |
1,518 |
|
|
$ |
588 |
|
|
$ |
358 |
|
Multi-family
residential
|
|
|
3,052 |
|
|
|
1,753 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
|
|
|
15,839 |
|
|
|
10,750 |
|
|
|
100 |
|
|
|
407 |
|
|
|
-- |
|
Total
real estate
|
|
|
23,219 |
|
|
|
23,120 |
|
|
|
1,618 |
|
|
|
995 |
|
|
|
358 |
|
Real
estate construction
|
|
|
8,829 |
|
|
|
11,611 |
|
|
|
7,991 |
|
|
|
436 |
|
|
|
-- |
|
Consumer
|
|
|
1,371 |
|
|
|
544 |
|
|
|
316 |
|
|
|
100 |
|
|
|
30 |
|
Commercial
business
|
|
|
1,260 |
|
|
|
3,217 |
|
|
|
20 |
|
|
|
-- |
|
|
|
-- |
|
Total
loans
|
|
|
34,679 |
|
|
|
38,492 |
|
|
|
9,945 |
|
|
|
1,531 |
|
|
|
388 |
|
Accruing
loans which are contractually past due 90
days
or more
|
|
|
344 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
of nonaccrual and 90 days past due loans
|
|
|
35,023 |
|
|
|
38,492 |
|
|
|
9,945 |
|
|
|
1,531 |
|
|
|
388 |
|
Repossessed
assets
|
|
|
382 |
|
|
|
412 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Real
estate owned
|
|
|
30,099 |
|
|
|
17,979 |
|
|
|
650 |
|
|
|
549 |
|
|
|
-- |
|
Total
nonperforming assets
|
|
$ |
65,504 |
|
|
$ |
56,883 |
|
|
$ |
10,595 |
|
|
$ |
2,080 |
|
|
$ |
388 |
|
Nonperforming
covered assets included above
|
|
$ |
45,836 |
|
|
$ |
34,224 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
Nonperforming
noncovered assets included above
|
|
|
19,667 |
|
|
|
22,659 |
|
|
|
10,595 |
|
|
|
2,080 |
|
|
|
388 |
|
Nonperforming
noncovered loans as a percent of
noncovered
loans
|
|
|
2.64 |
% |
|
|
2.93 |
% |
|
|
2.14 |
% |
|
|
0.32 |
% |
|
|
0.08 |
% |
Troubled
debt restructurings
|
|
$ |
10,110 |
|
|
$ |
4,700 |
|
|
$ |
812 |
|
|
$ |
35 |
|
|
$ |
11 |
|
Interest
foregone on nonaccrual loans(1)
|
|
|
2,820 |
|
|
|
1,366 |
|
|
|
182 |
|
|
|
36 |
|
|
|
11 |
|
(1)
|
If
interest on the loans classified as nonaccrual had been accrued, interest
income in these amounts would have been recorded on nonaccrual
loans.
|
Allowance for loan losses. We
review the loan losses on a monthly basis and record a provision for loan losses
based on the risk composition of the loan portfolio, delinquency levels, loss
experience, economic conditions, bank regulatory examination results, seasoning
of the loan portfolios and other factors related to the collectability of the
loan portfolio. The allowance is increased by the provision for loan losses,
which is charged against current period operating results and decreased by the
amount of actual loan charge-offs, net of recoveries.
In
estimating our allowance for loan losses, we consider our historical loss ratios
as a basis for our general loss reserve. We then adjust those historical loss
rates after consideration of current internal and external environmental
factors. We consider economic indicators that may correlate to higher, or lower,
loss ratios in the current environment compared to our historical loss
experience. These external factors include trends in unemployment, levels of
foreclosures and bankruptcy filings, vacancy rates and peer bank delinquency
levels, as well as several other economic factors in our market area. Internal
factors include changes in underwriting criteria or policies, management
turnover and the results of our internal loan review processes and audits.
Further, we estimate a range of losses in each loan portfolio. We then
subjectively select a level of allowance for loan loss within those ranges that
best reflects our estimate of the Bank’s loss exposure. Classified assets that
are not impaired are assigned an estimated loss percentage at a higher rate than
nonclassified assets as these loans, by their nature, represent a higher
likelihood of incurred loss. If management determines the repayment of an
impaired loan is dependent upon the liquidation of collateral, an updated
appraisal is requested. Management in some situations may use the appraiser’s
“quick sale” value rather than the full appraised value, with each further
reduced by estimated costs to sell.
At the
time of the CFB Acquisition, we applied SFAS No. 141, “Business Combinations,”
which was superseded by ASC 805 (formerly SFAS No. 141-R). We were not permitted
to apply ASC 805 to the CFB Acquisition as the
acquisition
occurred prior to the accounting standard’s effective date for the Company. As
such, we established an allowance for loan losses in accordance with industry
practice under FAS No. 141. Conversely, no allowance for loan losses was
established on loans purchased in the LibertyBank Acquisition as we applied ASC
805 to the LibertyBank Acquisition and the purchased loans were accounted for
under ASC 310-30. An allowance for loan losses may be established in the future
if the net present value of cash flows expected to be received from loans in the
pool becomes impaired compared to the original estimated cash flows for each
pool.
During
fiscal year 2010, we obtained information that evidenced credit impairment on
certain loans that were not previously identified as purchased credit impaired
loans at the time of the CFB Acquisition. Additionally, we updated the fair
values of loans purchased in the CFB Acquisition that were previously identified
as purchased credit impaired loans on the date of acquisition. These adjustments
reduced the preliminary estimated fair values of purchased impaired loans from
the CFB Acquisition. Lastly, management updated preliminary estimated loss rates
for covered loans in the CFB Acquisition that were not accounted for under ASC
310-30. These adjustments and reclassifications were made during the quarter
ended June 30, 2010, and resulted in a reduction in the allowance for loan
losses on covered loans of $9.2 million with $3.7 million of that adjustment
reclassified against purchased credit impaired loans.
Management
believes the allowance for loan losses as of September 30, 2010, and the fair
value adjustments under ASC 310-30 represent our best estimate of probable
incurred losses inherent in our loan portfolio at that date. While we believe
the estimates and assumptions used in our determination of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provision that may be required will not adversely impact our financial condition
and results of operations. In addition, the determination of the amount of Home
Federal Bank’s allowance for loan losses is subject to review by bank
regulators, as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination. The preliminary estimated
fair values of loans purchased in the LibertyBank Acquisition were highly
subjective. The amount that we ultimately realize on these assets could differ
materially from the carrying value reflected in our financial statements, based
upon the timing and amount of collections on the acquired loans in future
periods. Changes to the preliminary estimated fair values of assets purchased in
the LibertyBank Acquisition may occur in subsequent periods up to one year from
the date of acquisition.
The
following table summarizes the distribution of the allowance for loan losses by
loan category. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management’s judgment,
should be charged-off. However, the allowance for loan losses on covered loans
may be used for losses in the covered loan portfolio and the allowance for
noncovered loans may only be used for losses on noncovered loans.
|
At
September 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2005
|
|
|
(dollars
in thousands)
|
|
|
Loan
Balance
|
Amount by Loan Category
|
Percent of Loans in Loan Category to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Loan Balance
|
Amount
by Loan Category
|
Percent
of
Loans
in
Loan Category
to Total Loans
|
|
Noncovered
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family
residential
|
$137,128
|
$3,165
|
37.36
|
%
|
$169,774
|
$ 2,364
|
41.02
|
%
|
$210,501
|
$ 849
|
45.23
|
%
|
$249,545
|
$ 840
|
51.55
|
%
|
$293,640
|
$ 873
|
57.88
|
% |
Commercial and
multifamily
|
155,322
|
5,188
|
42.32
|
|
161,886
|
5,511
|
39.12
|
|
160,210
|
1,415
|
34.43
|
|
140,687
|
1265
|
29.06
|
|
132450
|
1418
|
26.11
|
|
Total real estate
|
292,450
|
8,353
|
79.68
|
|
331,660
|
7,875
|
80.14
|
|
370,711
|
2,264
|
79.66
|
|
390,232
|
2,105
|
80.61
|
|
426,090
|
2,021
|
83.99
|
|
Real
estate construction
|
17,406
|
1,427
|
4.74
|
|
26,553
|
1,609
|
6.42
|
|
33,042
|
1,650
|
7.10
|
|
44,214
|
455
|
9.13
|
|
40,022
|
584
|
7.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
47,732
|
1,655
|
13.01
|
|
49,700
|
2,212
|
12.01
|
|
56,227
|
586
|
12.08
|
|
46,568
|
383
|
9.62
|
|
38,688
|
333
|
7.63
|
|
Commercial
business
|
9,007
|
470
|
2.45
|
|
5,943
|
227
|
1.44
|
|
5,385
|
79
|
1.16
|
|
3,122
|
45
|
0.64
|
|
2,480
|
36
|
0.49
|
|
Leases
|
408
|
--
|
0.11
|
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noncovered loans
|
$367,003
|
11,905
|
100.00
|
%
|
$413,856
|
$11,923
|
100.00
|
%
|
$465,365
|
$4,579
|
100.00
|
%
|
$484,136
|
$2,988
|
100.00
|
%
|
$507,280
|
$2,974
|
100.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered loans
(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate
|
41,284
|
2,311
|
|
|
60,414
|
8,212
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Total
construction
|
6,940
|
448
|
|
|
14,413
|
7,108
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Total
consumer
|
8,311
|
248
|
|
|
9,766
|
995
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Commercial
business
|
9,910
|
520
|
|
|
15,550
|
497
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Covered loans with
allowance
|
66,445
|
3,527
|
|
|
100,143
|
16,812
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Covered loans, no
allowance(2)
|
203,106
|
-
|
|
|
26,223
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Total covered loans
|
269,551
|
3,527
|
|
|
126,366
|
16,812
|
|
|
-
|
-
|
|
|
-
|
-
|
|
|
-
|
-
|
-
|
|
Total gross loans
|
$636,554
|
$15,432
|
|
|
$540,222
|
$28,735
|
|
|
$465,365
|
$4,579
|
|
|
$484,136
|
$2,988
|
|
|
$507,280
|
$2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans
covered by loss sharing agreements with the FDIC. Loan balances and
allowance for loan losses are reported separately from indemnifiable loss
amounts estimated to be receivable from the
FDIC.
|
(2)
|
No
allowance was recorded on covered loans purchased in the LibertyBank
Acquisition or on loans purchased in the CFB Acquisition that were
individually accounted for under ASC 310-30 at September 30, 2010 or 2009,
as loan balances are reported at the net present value of estimated cash
flows and no impairment subsequent to the acquisition date has been
incurred in excess of original estimated cash flows as of those
dates.
|
The
following table sets forth an analysis of our allowance for loan losses on
noncovered loans at the dates and for the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Noncovered loans:
|
|
(in
thousands)
|
|
Allowance
at beginning of period
|
|
$ |
11,923 |
|
|
$ |
4,579 |
|
|
$ |
2,988 |
|
|
$ |
2,974 |
|
|
$ |
2,882 |
|
Provisions
for loan losses
|
|
|
9,250 |
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
|
|
138 |
|
Transfer
to unfunded commitments
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(192 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
38 |
|
|
|
122 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Commercial
and multifamily residential
|
|
|
26 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
real estate
|
|
|
64 |
|
|
|
122 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction
|
|
|
104 |
|
|
|
15 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Consumer
|
|
|
17 |
|
|
|
100 |
|
|
|
24 |
|
|
|
16 |
|
|
|
24 |
|
Commercial
business
|
|
|
113 |
|
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
recoveries
|
|
|
298 |
|
|
|
238 |
|
|
|
24 |
|
|
|
16 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
(1,979 |
) |
|
|
(1,571 |
) |
|
|
(665 |
) |
|
|
(73 |
) |
|
|
-- |
|
Commercial
and multifamily residential
|
|
|
(5,515 |
) |
|
|
(919 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
real estate
|
|
|
(7,494 |
) |
|
|
(2,490 |
) |
|
|
(665 |
) |
|
|
(73 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction
|
|
|
(653 |
) |
|
|
(4,451 |
) |
|
|
-- |
|
|
|
(91 |
) |
|
|
-- |
|
Consumer
|
|
|
(1,216 |
) |
|
|
(1,843 |
) |
|
|
(199 |
) |
|
|
(36 |
) |
|
|
(39 |
) |
Commercial
business
|
|
|
(203)
|
|
|
(194)
|
|
|
-- |
|
|
(19)
|
|
|
(31)
|
Total
charge-offs
|
|
|
(9,566)
|
|
|
(8,978)
|
|
|
(864)
|
|
|
(219)
|
|
|
(70)
|
Net
charge-offs
|
|
|
(9,268)
|
|
|
(8,740)
|
|
|
(840)
|
|
|
(203)
|
|
|
(46)
|
Balance
at end of period
|
|
$ |
11,905
|
|
$ |
11,923
|
|
$ |
4,579
|
|
$ |
2,988
|
|
$ |
2,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses on noncovered
loans as a percentage of noncovered loans
|
|
|
3.24 |
% |
|
|
2.88 |
% |
|
|
0.98 |
% |
|
|
0.62 |
% |
|
|
0.59 |
% |
Allowance
for loan losses on noncovered
loans as a percentage of nonperforming
noncovered loans
|
|
|
122.74 |
% |
|
|
101.19 |
% |
|
|
46.04 |
% |
|
|
195.17 |
% |
|
|
766.49 |
% |
Net
charge-offs on noncovered loans as a
percentage of average noncovered loans
outstanding during the period
|
|
|
2.51 |
% |
|
|
1.82 |
% |
|
|
0.18 |
% |
|
|
0.04 |
% |
|
|
0.01 |
% |
The
following table details activity in the allowance for loan losses on covered
loans purchased in the CFB Acquisition that are not accounted for under ASC
310-30 at the dates
and for the periods indicated:
|
|
Year
Ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
Covered loans:
|
|
(in
thousands)
|
|
Allowance
at beginning of period
|
|
$ |
16,812 |
|
|
$ |
-- |
|
Addition
to allowance due to acquisition
|
|
|
-- |
|
|
|
16,812 |
|
Adjustment
in preliminary estimated losses
|
|
|
(9,210 |
) |
|
|
|
|
Provision
for loan losses
|
|
|
1,050 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
-- |
|
|
|
-- |
|
Commercial
and multifamily residential
|
|
|
16 |
|
|
|
-- |
|
Total
real estate
|
|
|
16 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Real
estate construction
|
|
|
-- |
|
|
|
-- |
|
Consumer
|
|
|
-- |
|
|
|
-- |
|
Commercial
business
|
|
|
-- |
|
|
|
-- |
|
Total
recoveries
|
|
|
16 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
(832 |
) |
|
|
-- |
|
Commercial
and multifamily residential
|
|
|
(1,033 |
) |
|
|
-- |
|
Total
real estate
|
|
|
(1,865 |
) |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
Real
estate construction
|
|
|
(2,117 |
) |
|
|
-- |
|
Consumer
|
|
|
(312 |
) |
|
|
-- |
|
Commercial
business
|
|
|
(847 |
) |
|
|
-- |
|
Total
charge-offs
|
|
|
(5,141 |
) |
|
|
-- |
|
Net
charge-offs
|
|
|
(5,125 |
) |
|
|
-- |
|
Balance
at end of period
|
|
$ |
3,527 |
|
|
$ |
16,812 |
|
|
|
|
|
|
|
|
|
|
Investment
Activities
General. OTS regulations
permit the Bank and the Company to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of U.S. Government-sponsored
enterprises, certificates of deposit of federally-insured banks and savings
associations, banker's acceptances, repurchase agreements and federal funds.
Subject to various restrictions, we also may invest a portion of our assets in
commercial paper and corporate debt securities.
Our
investment policies are designed to provide and maintain adequate liquidity and
to generate favorable rates of return without incurring undue interest rate or
credit risk. The investment policies generally limit investments to Treasury
notes, mortgage-backed securities, obligations of U.S. government sponsored
enterprises, municipal bonds, certificates of deposit and marketable corporate
debt obligations. Investment in mortgage-backed securities includes those issued
or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. We also have purchased
investments issued or guaranteed by the Federal Home Loan Bank System and the
U.S. Small Business Administration.
From time
to time, investment levels may be increased or decreased depending upon yields
available on investment alternatives and management's projections as to the
demand for funds to be used in loan originations, deposits and other
activities.
The
following table sets forth the composition of our investment securities
portfolios at the dates indicated:
|
|
At
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government Sponsored Enterprises
(“GSE”)
|
|
$ |
51,844 |
|
|
$ |
52,022 |
|
|
$ |
4,089 |
|
|
$ |
4,127 |
|
|
$ |
-- |
|
|
$ |
-- |
|
Obligations
of states and
political subdivisions
|
|
|
6,786 |
|
|
|
6,789 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Corporate
note, FDIC guaranteed
|
|
|
1,022 |
|
|
|
1,025 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
|
93,481 |
|
|
|
96,417 |
|
|
|
70,888 |
|
|
|
73,769 |
|
|
|
101,626 |
|
|
|
100,602 |
|
Freddie
Mac
|
|
|
104,823 |
|
|
|
108,264 |
|
|
|
85,131 |
|
|
|
88,742 |
|
|
|
86,104 |
|
|
|
85,128 |
|
Ginnie
Mae
|
|
|
8,763 |
|
|
|
8,814 |
|
|
|
2,046 |
|
|
|
2,083 |
|
|
|
-- |
|
|
|
-- |
|
FHLB
|
|
|
1,425 |
|
|
|
1,425 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Private
label
|
|
|
449 |
|
|
|
424 |
|
|
|
612 |
|
|
|
599 |
|
|
|
3,390 |
|
|
|
3,057 |
|
Total
available for sale
|
|
$ |
268,593 |
|
|
$ |
275,180 |
|
|
$ |
162,766 |
|
|
$ |
169,320 |
|
|
$ |
191,120 |
|
|
$ |
188,787 |
|
At
September 30, 2010, we believe that it is more likely than not that the Company
has the ability and intent to hold the securities with a fair value less than
amortized cost until their value has recovered to amortized cost.
Securities
purchased in the LibertyBank Acquisition during fiscal year 2010 had an
estimated fair value of $34.7 million on the date of the acquisition. We also
received a significant balance of cash due to liabilities assumed in the
LibertyBank Acquisition exceeding the book value of assets purchased. We expect
to purchase a significant level of investment securities over the twelve months
following September 30, 2010, to invest this excess liquidity. We anticipate
that nearly all of these securities will be issued or guaranteed by U.S.
Government Sponsored Enterprises with an average duration (estimated average
life after considering cash flow adjustments) of 2.5 years.
The table
below sets forth information regarding the amortized cost, weighted average
yields and maturities or periods to repricing of our investment portfolio at
September 30, 2010:
|
|
Amount
Due or Repricing within:
|
|
|
|
1
Year or Less
|
|
|
Over
1 to 5 Years
|
|
|
Over
5 to 10 Years
|
|
|
Over
10 Years
|
|
|
Totals
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
(1)
|
|
|
|
(dollars
in thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government Sponsored Enterprises
|
|
$ |
2,022 |
|
|
|
0.36 |
% |
|
$ |
27,937 |
|
|
|
0.86 |
% |
|
$ |
13,261 |
|
|
|
1.86 |
% |
|
$ |
8,624 |
|
|
|
1.66 |
% |
|
$ |
51,844 |
|
|
|
1.23 |
% |
Obligation
of states and political subdivisions
|
|
|
1,032 |
|
|
|
0.71 |
|
|
|
-- |
|
|
|
-- |
|
|
|
767 |
|
|
|
2.85 |
|
|
|
4,987 |
|
|
|
3.67 |
|
|
|
6,786 |
|
|
|
3.13 |
|
Corporate
note, FDIC-
guaranteed
|
|
|
-- |
|
|
|
-- |
|
|
|
1,022 |
|
|
|
0.66 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,022 |
|
|
|
0.66 |
|
Mortgage-backed
securities private label
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
449 |
|
|
|
2.50 |
|
|
|
449 |
|
|
|
2.50 |
|
Mortgage-backed
securities
GSE-issued
|
|
|
88 |
|
|
|
(0.37 |
) |
|
|
6,332 |
|
|
|
3.72 |
|
|
|
42,565 |
|
|
|
2.40 |
|
|
|
159,507 |
|
|
|
2.37 |
|
|
|
208,492 |
|
|
|
2.42 |
|
Total
available for sale
|
|
$ |
3,142 |
|
|
|
0.22 |
% |
|
$ |
35,291 |
|
|
|
1.35 |
% |
|
$ |
56,593 |
|
|
|
2.24 |
% |
|
$ |
173,567 |
|
|
|
2.26 |
% |
|
$ |
268,593 |
|
|
|
2.20 |
% |
_________________________
(1)
|
Interest
and dividends are reported on a tax-equivalent basis. For available for
sale securities carried at fair value, the weighted average yield is
computed using amortized cost.
|
The
following table sets forth certain information with respect to each category
which had an aggregate book value in excess of 10% of our total equity at the
date indicated.
|
|
At
September 30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
Available
for sale:
|
|
|
|
|
|
|
Obligations
of US Government
sponsored enterprises
|
|
$ |
51,844 |
|
|
$ |
52,022 |
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
Fannie
Mae
|
|
|
93,481 |
|
|
|
96,417 |
|
Freddie
Mac
|
|
|
104,823 |
|
|
|
108,264 |
|
Federal Home Loan Bank Stock.
As a member of the FHLB of Seattle, the Bank is required to own its
capital stock. The amount of stock the Bank holds is based on percentages
specified by the FHLB of Seattle on outstanding advances. The redemption of any
excess stock the Bank holds is at the discretion of the FHLB of Seattle. At
September 30, 2010, the carrying value of FHLB stock was $17.7
million.
The FHLB
of Seattle has reported a risk-based capital deficiency under the regulations of
the Federal Housing Finance Agency (“FHFA”), its primary regulator. As a result,
the FHLB has stopped paying a dividend and stated that it would suspend the
repurchase and redemption of outstanding common stock until its retained
earnings deficiency was reclaimed. The Bank is continually monitoring this
issue. The FHLB has communicated to its members, including us, that it believes
the calculation of risk-based capital under the current rules of the FHFA
significantly overstates the market and credit risk of the FHLB’s private label
mortgage backed securities in the current market environment and that it has
enough capital to cover the risks reflected in the FHLB’s balance sheet. As a
result, the Bank has not recorded an other-than-temporary impairment on its
investment in FHLB stock. However, continued deterioration in the FHLB’s
financial position may result in impairment in the value of those securities, or
the requirement that the Bank contribute additional funds to recapitalize the
FHLB, or reduce the Bank’s ability to borrow funds from the FHLB, which may
impair the Bank’s ability to meet liquidity demands.
Bank-Owned Life Insurance. We
have purchased bank-owned life insurance policies ("BOLI") to offset employee
benefit costs. At September 30, 2010, we had a $12.4 million investment in
“general account” life insurance contracts. The potential death benefits as of
September 30, 2010 were $23.4 million. All of the insurance companies that
issued the policies in the Bank’s BOLI portfolio had investment grade ratings by
Standard & Poor’s and A.M Best at September 30, 2010.
Deposit
Activities and Other Sources of Funds
General. Deposits
are the major source of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings from the FHLB of
Seattle are used to supplement the availability of funds from other sources and
also as a source of term funds to assist in the management of interest rate
risk.
Changes
in our deposit composition reflect our strategy to reduce reliance on
certificates of deposit. The increase in the mix of certificates of deposit,
which accounted for 48.4% of the deposit portfolio at September 30, 2010,
compared to 44.5% at September 30, 2009, was due to the LibertyBank Acquisition.
Interest-bearing and noninterest-bearing checking, savings and money market
accounts comprise the balance of total deposits, which we believe have greater
stability and higher profitability than certificates of deposit. We rely on
marketing activities, convenience, customer service and the availability of a
broad range of competitively priced deposit products and services to attract and
retain customer deposits.
Deposits. With the exception
of our Health Savings Accounts, which totaled $22.2 million at September 30,
2010, substantially all of our depositors are residents and businesses located
in the states of Idaho and Oregon. Deposits are attracted from within our market
areas through the offering of a broad selection of deposit instruments,
including
checking
accounts, money market deposit accounts, savings accounts and certificates of
deposit with a variety of rates and terms to maturity. Deposit account terms
vary according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors.
Deposit Activities. The
following table sets forth the total deposit activities of Home Federal Bank for
the periods indicated:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
514,858 |
|
|
$ |
372,925 |
|
|
$ |
404,609 |
|
Deposits
assumed in the Acquisition,
at fair value
|
|
|
682,569 |
|
|
|
143,459 |
|
|
|
-- |
|
Net
change in deposits before interest
credited
|
|
|
(14,350 |
) |
|
|
(8,309 |
) |
|
|
(42,230 |
) |
Interest
credited
|
|
|
6,585 |
|
|
|
6,783 |
|
|
|
10,546 |
|
Net
increase (decrease) in deposits
|
|
|
674,804 |
|
|
|
141,933 |
|
|
|
(31,684 |
) |
Ending
balance
|
|
$ |
1,189,662 |
|
|
$ |
514,858 |
|
|
$ |
372,925 |
|
Time Deposits by Rate. The
following table sets forth the time deposits in Home Federal Bank classified by
contractual rate as of the dates indicated:
|
At
September 30,
|
|
2010
|
|
2009
|
|
2008
|
|
(in
thousands)
|
|
|
|
|
|
|
0.00
- 0.99%
|
$
59,356
|
|
$ 9,906
|
|
$ 11
|
1.00
- 1.99
|
280,261
|
|
71,921
|
|
--
|
2.00
- 2.99
|
168,664
|
|
68,327
|
|
49,598
|
3.00
- 3.99
|
47,631
|
|
42,898
|
|
54,669
|
4.00
- 4.99
|
15,259
|
|
27,389
|
|
55,050
|
5.00
- 5.99
|
4,506
|
|
7,544
|
|
16,234
|
6.00
- 8.99
|
358
|
|
912
|
|
1,842
|
Total
|
$576,035
|
|
$228,897
|
|
$177,404
|
Time Deposits by Maturity. The
following table sets forth the amount and maturities of time deposits at
September 30, 2010:
|
|
|
|
|
1-2
|
|
|
|
3-4
|
|
|
|
After
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00 – 0.99%
|
$
42,237
|
|
$
15,773
|
|
$ 1,247
|
|
$ 99
|
|
$ -
|
|
$ -
|
|
$
59,356
|
1.00
– 1.99
|
228,930
|
|
43,663
|
|
4,389
|
|
1,153
|
|
1,082
|
|
1,044
|
|
280,261
|
2.00
- 2.99
|
79,945
|
|
50,911
|
|
17,078
|
|
3,249
|
|
17,131
|
|
350
|
|
168,664
|
3.00
- 3.99
|
8,753
|
|
5,414
|
|
2,724
|
|
6,733
|
|
23,999
|
|
8
|
|
47,631
|
4.00
- 4.99
|
7,066
|
|
4,777
|
|
1,977
|
|
1,170
|
|
210
|
|
59
|
|
15,259
|
5.00
- 5.99
|
2,822
|
|
1,655
|
|
11
|
|
17
|
|
-
|
|
1
|
|
4,506
|
6.00
- 8.99
|
17
|
|
113
|
|
-
|
|
228
|
|
-
|
|
-
|
|
358
|
Total
|
$369,770
|
|
$122,306
|
|
$27,426
|
|
$12,649
|
|
$42,422
|
|
$ 1,462
|
|
$576,035
|
The
following table sets forth information concerning our time deposits and other
deposits at September 30, 2010:
Weighted
Average
Interest
Rate
|
|
Original
Term
|
|
Category
|
|
Amount
|
|
Percentage
of
Total
Deposits
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
-- %
|
|
N/A
|
|
Noninterest-bearing
demand deposits
|
|
$
138,300
|
|
11.63%
|
0.26
|
|
N/A
|
|
Interest-bearing
demand deposits
|
|
203,554
|
|
17.11
|
0.48
|
|
N/A
|
|
Money
market accounts
|
|
180,454
|
|
15.17
|
0.52
|
|
N/A
|
|
Health
savings accounts
|
|
22,240
|
|
1.87
|
0.42
|
|
N/A
|
|
Savings
deposits
|
|
69,079
|
|
5.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
|
|
1.77
|
|
1-11
months
|
|
Fixed
term, fixed rate
|
|
369,770
|
|
31.07
|
2.00
|
|
12-23
months
|
|
Fixed
term, fixed rate
|
|
122,306
|
|
10.28
|
2.41
|
|
24-35
months
|
|
Fixed
term, fixed rate
|
|
27,426
|
|
2.31
|
3.18
|
|
36-47
months
|
|
Fixed
term, fixed rate
|
|
12,650
|
|
1.06
|
3.00
|
|
48-60
months
|
|
Fixed
term, fixed rate
|
|
42,422
|
|
3.57
|
2.06
|
|
Over
60 months
|
|
Fixed
term, fixed rate
|
|
1,461
|
|
0.12
|
|
|
|
|
Total
certificates of deposit
|
|
576,035
|
|
48.41
|
|
|
|
|
Total
deposits
|
|
$
1,189,662
|
|
100.00%
|
Jumbo
certificates of deposit are certificates in amounts of $100,000 or more. The
$144.5 million increase in jumbo certificates during fiscal year 2010 was
primarily due to the LibertyBank Acquisition as the assumed deposit portfolio
had a higher concentration of certificates of deposit than our organic
portfolio. The following table indicates the amount of jumbo certificates of
deposit by time remaining until maturity as of September 30, 2010:
Maturity
Period
|
|
Certificates
of
Deposit
of
$100,000
or
More
|
|
|
(in
thousands)
|
|
|
|
Three
months or less
|
|
$ 60,122
|
Over
three through six months
|
|
27,872
|
Over
six through twelve months
|
|
66,884
|
Over
twelve months
|
|
73,208
|
Total
|
|
$ 228,086
|
|
|
|
Deposit Flow. The following
table sets forth the balances of deposits in the various types of accounts
offered by Home Federal Bank at the dates indicated:
|
At
September 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
Amount
|
|
Percent
Of
Total
|
|
Increase/
(Decrease)
|
|
|
(dollars
in thousands)
|
|
Savings
deposits
|
$69,079
|
|
5.81
|
% |
$27,323
|
|
$41,757
|
|
8.11
|
% |
$15,348
|
|
$26,409
|
|
7.08
|
% |
$ 3,293
|
|
Demand
deposits
|
341,854
|
|
28.74
|
|
195,306
|
|
146,548
|
|
28.47
|
|
49,700
|
|
96,848
|
|
25.98
|
|
(281
|
)
|
Money
market accounts
|
180,454
|
|
15.17
|
|
104,045
|
|
76,408
|
|
14.84
|
|
25,266
|
|
51,142
|
|
13.71
|
|
5,441
|
|
Health
savings accounts
|
22,240
|
|
1.87
|
|
992
|
|
21,248
|
|
4.13
|
|
126
|
|
21,122
|
|
5.66
|
|
(2,350
|
)
|
Fixed
rate certificates
that
mature in the year
ending:
Within
1 year
|
369,770
|
|
31.08
|
|
207,801
|
|
161,969
|
|
31.46
|
|
28,646
|
|
133,323
|
|
35.75
|
|
(39,261
|
)
|
After
1 year, but
within 2 years
|
122,306
|
|
10.28
|
|
87,485
|
|
34,821
|
|
6.76
|
|
9,127
|
|
25,694
|
|
6.89
|
|
647
|
|
After
2 years, but
within 5 years
|
82,498
|
|
6.93
|
|
50,608
|
|
31,890
|
|
6.19
|
|
13,678
|
|
18,212
|
|
4.88
|
|
847
|
|
After
5 years
|
1,461
|
|
0.12
|
|
1,244
|
|
217
|
|
0.04
|
|
42
|
|
175
|
|
0.05
|
|
(20
|
)
|
Total
|
$1,189,662
|
|
100.00
|
% |
$674,804
|
|
$514,858
|
|
100.00
|
% |
$141,933
|
|
$372,925
|
|
100.00
|
% |
$(31,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings. We use
advances from the FHLB of Seattle to meet short-term deposit withdrawal
requirements and also to provide longer term funding to better match the
duration of selected loan and investment maturities. As one of our capital
management strategies, we have and may use borrowings from the FHLB to fund the
purchase of investment securities and origination of loans in order to increase
our net interest income when attractive opportunities exist.
As a
member of the FHLB, we are required to own its capital stock. Advances are made
individually under various terms pursuant to several different credit programs,
each with its own interest rate and range of maturities. We maintain a committed
credit facility with the FHLB that provides for immediately available advances
up to an aggregate of 40% of the Bank’s total assets. At September 30, 2010, our
outstanding advances from the FHLB totaled $58.9 million, with additional
borrowing capacity of $117.5 million. Our advances with the FHLB are
collateralized by our FHLB stock and through a blanket pledge on our first lien
one-to-four family residential real estate loan portfolio and our securities
portfolio.
As noted
earlier, the FHLB of Seattle has reported a risk-based capital deficiency which
may reduce our ability to borrow funds from the FHLB in the future, which may
impair the Bank’s ability to meet liquidity demands.
Other
borrowings include securities sold under obligations to repurchase, also known
as repurchase agreements. We originate repurchase agreements directly with our
commercial and retail customers and collateralize these borrowings with
securities issued by U.S. Government sponsored enterprises. Other
borrowings were $8.8 million at September 30, 2010.
The
following table sets forth information regarding our borrowings at the end of
and during the periods indicated. The table includes both long- and short-term
borrowings:
|
Year
Ended September 30,
|
|
2010
|
|
2009
|
|
2008
|
|
(dollars
in thousands)
|
Maximum
amount of FHLB advances and other borrowings outstanding at any month
end
|
$ 85,000
|
|
$ 137,000
|
|
$ 181,000
|
|
|
|
|
|
|
Approximate
average FHLB advances and other borrowings outstanding
|
79,000
|
|
112,000
|
|
158,000
|
Approximate
weighted average rate paid on FHLB advances and other
borrowings
|
3.98%
|
|
4.39%
|
|
4.60%
|
|
At
September 30,
|
|
2010
|
|
2009
|
|
2008
|
|
(dollars
in thousands)
|
Balance
outstanding at end of period:
FHLB
advances and other borrowings
|
$ 67,622
|
|
$ 84,737
|
|
$ 136,972
|
Weighted
average rate at end of period on:
FHLB
advances and other borrowings
|
3.95%
|
|
4.00%
|
|
4.68%
|
At
September 30, 2010, we also had access to the Federal Reserve Bank of San
Francisco’s discount window. No funds were drawn on this facility at September
30, 2010.
HOW
WE ARE REGULATED
The
following is a brief description of certain laws and regulations which are
applicable to Home Federal Bancorp and Home Federal Bank. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere in this annual report, does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations. Legislation is introduced from time to time in the United States
Congress that may affect our operations. In addition, the regulations governing
us may be amended from time to time by the respective regulators. Any such
legislation or regulatory changes in the future could adversely affect us. We
cannot predict whether any such changes may occur.
Regulation
and Supervision of Home Federal Bank
General.
Home Federal Bank, as a federally chartered savings association, is
subject to extensive regulation, examination and supervision by the OTS, as its
primary federal regulator, and the Federal Deposit Insurance Corporation as its
deposit insurer. Home Federal Bank is a member of the Federal Home Loan Bank
System and its deposit accounts are insured up to applicable limits by the
Deposit Insurance Fund (“DIF”) administered by the FDIC. Home Federal Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and, under certain
circumstances, the FDIC to evaluate Home Federal Bank’s safety and soundness and
compliance with various regulatory requirements. This regulatory structure establishes a
comprehensive framework of activities in which a thrift can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have a
material adverse impact on Home Federal Bancorp and Home Federal Bank and their
operations.
On July
21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act will likely
result in dramatic changes across the financial regulatory system, some of which
become effective immediately and some of which will not become effective until
various future dates. Implementation of the Dodd-Frank Act will
require many new rules to be made by various federal regulatory agencies over
the next several years. Uncertainty remains until final rulemaking is
complete as to the ultimate impact of the Dodd-Frank Act, which could have a
material adverse impact either on the financial services industry as a whole or
on Home Federal Bancorp’s business, results of operations, and financial
condition. Provisions in the legislation that affect deposit
insurance assessments, payment of interest on demand deposits, and interchange
fees could increase the costs associated with deposits and place limitations on
certain revenues those deposits may generate. The Dodd-Frank Act
includes provisions that, among other things, will:
§
|
Centralize
responsibility for consumer financial protection by creating a new agency,
the Consumer Financial Protection Bureau, responsible for implementing,
examining, and enforcing compliance with federal consumer financial
laws.
|
§
|
Create
the Financial Stability Oversight Council that will recommend to the
Federal Reserve increasingly strict rules for capital, leverage,
liquidity, risk management and other requirements as companies grow in
size and complexity.
|
§
|
Provide
mortgage reform provisions regarding a customer’s ability to repay,
restricting variable-rate lending by requiring that the ability to repay
variable-rate loans be determined by using the maximum rate that will
apply during the first five years of a variable-rate loan term, and making
more loans subject to provisions for higher cost loans, new disclosures,
and certain other revisions.
|
§
|
Change
the assessment base for federal deposit insurance from the amount of
insured deposits to consolidated assets less tangible capital, eliminate
the ceiling on the size of the DIF, and increase the floor on the size of
the DIF, which generally will require an increase in the level of
assessments for institutions with assets in excess of $10
billion.
|
§
|
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.
|
§
|
Implement
corporate governance revisions, including with regard to executive
compensation and proxy access by shareholders, that apply to all public
companies, not just financial
institutions.
|
§
|
Repeal
the federal prohibitions on the payment of interest on demand deposits,
thereby permitting depository institutions to pay interest on business
transactions and other accounts. Amend the Electronic Fund Transfer Act
(“EFTA”) to, among other things, give the Federal Reserve the authority to
establish rules regarding interchange fees charged for electronic debit
transactions by payment card issuers having assets over $10 billion and to
enforce a new statutory requirement that such fees be reasonable and
proportional to the actual cost of a transaction to the issuer.
|
§
|
Eliminate
the OTS one year from the date of the new law’s enactment and the Office
of the Comptroller of the Currency, which is currently the primary federal
regulator for national banks, will become the primary federal regulator
for federal thrifts, including Home Federal Bank. In addition,
The Board of Governors of the Federal Reserve System will supervise and
regulate all savings and loan holding companies that were formerly
regulated by the OTS, including the
Company.
|
Office
of Thrift Supervision. The OTS also has extensive
enforcement authority over all savings associations and their holding companies,
including Home Federal Bank and Home Federal Bancorp. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, issue cease-and-desist or removal orders and initiate injunctive
actions. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In
addition, the investment, lending and branching authority of Home Federal Bank
is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For example, no savings
association may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by
federal institutions in loans secured by non-residential real estate property
may not exceed 400% of total capital, except with the approval of the OTS.
Federal savings associations are also generally authorized to branch
nationwide. Home Federal Bank is in compliance with these
restrictions.
All
savings associations are required to pay assessments to the OTS to fund the
agency’s operations. The general assessments, paid on a semi-annual basis, are
determined based on the savings association’s total assets, including
consolidated subsidiaries and other factors.
Home
Federal Bank’s general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 2010, Home Federal Bank’s lending limit under this restriction was
$23.5 million and, at that date, Home Federal Bank’s largest aggregate of loans
to one borrower was $11.9 million, which were performing according to their
original terms.
The OTS,
as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution that fails to comply with these standards must submit
a compliance plan.
Federal
Home Loan Bank System. Home Federal Bank is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans or advances to members in accordance with policies and
procedures, established by the board of directors of the FHLB, which are subject
to the oversight of the Federal Housing Finance Board. All advances from the
FHLB are required to be fully secured by sufficient collateral as determined by
the FHLB. In addition, all long-term advances are required to provide funds for
residential home financing. At September 30, 2010, Home Federal Bank had $58.9
million of outstanding advances from the FHLB of Seattle under an available
credit facility of $176.4 million, which is limited to available collateral. See
Business – Deposit Activities and Other Sources of Funds –
Borrowings.
As a
member, Home Federal Bank is required to purchase and maintain stock in the FHLB
of Seattle. At September 30, 2010, Home Federal Bank had $17.7 million in FHLB
stock, which was in compliance with this requirement.
Under
federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low-to-moderate income housing projects. These contributions have affected
adversely the level of FHLB dividends paid and could continue to do so in the
future. These contributions could also have an adverse effect on the value of
FHLB stock in the future. A reduction in value of Home Federal Bank’s FHLB stock
may result in a corresponding reduction in Home Federal Bank’s
capital.
Federal
Deposit Insurance Corporation. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the insurance fund. The
FDIC also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
Home Federal Bank is
a member of DIF, which is administered by the FDIC.
Deposits
are insured up to the applicable limits by the FDIC, backed by the full faith
and credit of the United States Government. Under new legislation,
the basic deposit insurance limit was increased to $250,000, from the $100,000
limit in effect previously.
As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the insurance fund. The FDIC also has the authority
to initiate enforcement actions against savings institutions, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound practices
or is in an unsafe or unsound condition.
The FDIC
estimates that the reserve ratio will reach the designated reserve ratio of
1.15% by 2017 as required by statute.
The FDIC
may terminate the deposit insurance of any insured depository institution,
including Home Federal Bank, if it determines after a hearing that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. It also may
suspend deposit insurance temporarily during the hearing process for the
permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management of Home Federal Bank is not aware of any
practice, condition or violation that might lead to termination of its deposit
insurance.
Capital
Requirements.
The OTS’s capital regulations require federal savings associations to
meet three minimum capital standards, which are ratios of capital to assets: a
1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS examination rating system) and an 8% total
risk-based capital ratio. The leverage ratio is the ratio of Tier 1 (core)
capital to assets. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS system), a 4% Tier 1 risk-based capital standard, and an 8%
total risk-based capital ratio. The OTS regulations also require that, in
meeting the tangible, leverage and risk-based capital standards, institutions
must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national bank. The OTS
also has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or
may become inadequate in light of the particular circumstances.
For the
purposes of risk-based capital standards, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct
credit substitutes, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the OTS capital regulation based on the risks believed inherent in
the type of asset. Assets covered under a loss share agreement with the FDIC and
the FDIC indemnification asset are assigned a 20% risk-weight factor. Tier 1
(core) capital is defined as common stockholders’ equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and credit card
relationships. Total risk-based capital is the sum of Tier 1 capital and
supplementary capital. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of Tier 1 capital. At September 30, 2010,
Home Federal Bank exceeded each of these capital requirements.
Prompt
Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution’s degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier 1capital to risk-weighted assets of less than 4%, or a
ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“undercapitalized.” An institution that has a total risk-based capital ratio
less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be “significantly undercapitalized” and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be “critically undercapitalized.” OTS regulations also require that
a capital restoration plan be filed with the OTS within 45 days of the date a
savings association receives notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan
must be guaranteed by any parent holding company in an amount of up to the
lesser of 5% of the institution’s assets when it became
undercapitalized or the
amount which would bring the institution to the adequately capitalized level
when it fails to comply with its plan. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The OTS also
could take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors. Further, the OTS has the
authority under certain circumstances to reclassify a well capitalized
institution as adequately capitalized or subject an adequately capitalized
institution or an undercapitalized institution to supervisory actions applicable
to the next lower capital category.
At September 30, 2010,
Home Federal Bank was categorized as “well capitalized” under the prompt
corrective action regulations of the OTS with a Tier 1 capital ratio of 10.12%,
a total risk-based capital ratio of 28.88%, and a
Tier 1 risk-based capital ratio of 27.61%.
The OTS defines “well capitalized” to mean that an institution has a Tier
1 capital ratio of at least 5.0%, a total risk-based capital ratio of at least
10.0% and a Tier 1 risk-based capital ratio of at least 6.0%, and is not subject
to a written agreement, order or directive requiring it to maintain any specific
capital measure. An “adequately capitalized” institution is one that
does not meet the definition of “well capitalized” and has a Tier 1 capital
ratio of at least 4.0%, a total risk-based capital ratio of at least 8.0% and
Tier 1 risk-based capital ratio of at least 4.0%. The OTS may
reclassify an institution to a lower capital category based on various
supervisory criteria. An “adequately capitalized” institution is
subject to restrictions on deposit rates under the FDIC’s brokered deposit rule
which covers, in some circumstances, deposits solicited directly by the
institution.
Standards for Safety and Soundness.
The federal banking regulatory agencies have prescribed, by regulation,
guidelines for all insured depository institutions relating to: (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees
to directors and benefits. The guidelines set forth safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. If the OTS determines that Home Federal Bank fails to meet
any standard prescribed by the guidelines, the OTS may require Home Federal Bank
to submit to it an acceptable plan to achieve compliance with the
standard. The OTS regulations establish deadlines for the submission
and review of such safety and soundness compliance plans. We are not
aware of any conditions relating to these safety and soundness standards that
would require us to submit a plan of compliance to the OTS.
Qualified
Thrift Lender Test. All savings associations, including Home Federal
Bank, are required to meet a qualified thrift lender (“QTL”) test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its total assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Internal Revenue Code. Under either test, such assets primarily consist of
residential housing related loans and investments.
A savings
association that fails to meet the QTL is subject to certain operating
restrictions and may be required to convert to a bank charter. The holding company of
such an institution may be required to register as, and become subject to the
capital requirement and activities restrictions applicable to, a bank holding
company. As of September 30, 2010, Home Federal Bank maintained 67.45% of
its portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
Limitations
on Capital Distributions. OTS regulations impose various restrictions on
savings associations with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. Generally,
savings associations, such as Home Federal Bank, that before and after the
proposed distribution are well-capitalized, may make capital distributions
during any calendar year equal to up to 100% of net income for the calendar
year-to-date plus retained net income for the two preceding years. If Home
Federal Bank, however, proposes to make a capital distribution when it does not
meet the requirements to be adequately capitalized (or will not following the
proposed capital distribution) or that will exceed these net income limitations,
it must obtain OTS approval prior to making such distribution. The OTS may
object to any distribution based on safety and soundness concerns.
Home
Federal Bancorp is not subject to OTS regulatory restrictions on the payment of
dividends. Dividends from Home Federal Bancorp, however, may depend, in part,
upon its receipt of dividends from Home Federal Bank.
Temporary Liquidity Guarantee
Program. Following a systemic risk determination, the FDIC
established its Temporary Liquidity Guarantee Program (“TLGP”) in October
2008. The TLGP includes two programs: the Transaction
Account Guarantee Program (“TAGP”) and the Debt Guarantee Program
(“DGP”). The TAGP and DGP are in effect for all eligible entities,
unless the entity opted out on or before December 5, 2008. Home
Federal Bancorp and Home Federal Bank opted out of the DGP, but did not opt out
of the TAGP.
The TAGP
provides unlimited deposit insurance coverage through December 31, 2010 for
noninterest-bearing transaction accounts (typically business checking accounts)
and certain funds swept into noninterest-bearing savings
accounts. Other NOW accounts and money market deposit accounts are
not covered. TAGP coverage on NOW accounts last until December 31,
2010, and until December 31, 2013 for noninterest-bearing transaction
accounts.
For the
DGP, eligible entities are generally U.S. bank holding companies, savings and
loan holding companies, and FDIC-insured institutions. Under the DGP,
the FDIC guaranteed new senior unsecured debt certain convertible debt of an
eligible entity issued not later than October 31, 2009. Home Federal Bancorp and
Home Federal Bank opted out of the DGP.
Activities
of Savings Associations and their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings association must
notify the FDIC and the OTS 30 days in advance and provide the information each
agency may, by regulation, require. Savings associations also must conduct the
activities of subsidiaries in accordance with existing regulations and
orders.
The OTS
may determine that the continuation by a savings association of its ownership
control of, or its relationship to, the subsidiary constitutes a serious risk to
the safety, soundness or stability of the institution or is inconsistent with
sound banking practices or with the purposes of the Federal Deposit Insurance
Act. Based upon that determination, the FDIC or the OTS has the authority to
order the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity poses
a serious threat to the Depositors Insurance Fund. If so, it may require that no
member of the Depositors Insurance Fund engage in that activity
directly.
Transactions
with Affiliates and Insiders. Home Federal Bank’s authority to engage in
transactions with “affiliates” (i.e., any company that controls or is under
common control with Home Federal Bank, including Home Federal Bancorp and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of a savings
institution’s capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies, and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The
Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to
its executive officers and directors. However, there is a specific exception for
loans by a depository institution to its executive officers and directors in
compliance with federal banking laws. Under such laws, Home Federal Bank’s
authority to extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities such persons control, is limited. The law
generally restricts both the individual and aggregate amount of loans Home
Federal Bank may make to insiders based, in part, on Home Federal Bank’s capital
position and requires certain board approval procedures to be followed. Such
loans must be made on terms substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
There is an exception for loans made pursuant to a benefit or compensation
program that is widely available to all employees of the institution and does
not give preference to insiders over other employees. There are additional
restrictions applicable to loans to executive officers.
Community
Reinvestment Act. Home Federal Bank is subject to the Community
Reinvestment Act (“CRA”). The CRA and the regulations issued thereunder are
intended to encourage financial institutions to help meet the credit needs of
their service areas, including low and moderate income neighborhoods, consistent
with the safe and sound
operations
of the financial institutions. These regulations also provide for regulatory
assessment of an institution’s record in meeting the needs of its service area
when considering applications to establish branches, merger applications,
applications to engage in new activities and applications to acquire the assets
and assume the liabilities of another institution. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) requires federal banking
agencies to make public a rating of an institution’s performance under the CRA.
In the case of a holding company involved in a proposed transaction, the CRA
performance records of the banks involved are reviewed by federal banking
agencies in connection with the filing of an application to acquire ownership or
control of shares or assets of a bank or thrift or to merge with any other bank
holding company. An unsatisfactory record can substantially delay or block the
transaction. Home Federal Bank was examined for Community Reinvestment Act
compliance and received a rating of “Outstanding” in its latest
examination.
Environmental
Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), a federal
statute, generally imposes strict liability on all prior and present “owners and
operators” of sites containing hazardous waste. However, Congress asked to
protect secured creditors by providing that the term “owner and operator”
excludes a person whose ownership is limited to protecting its security interest
in the site. Since the enactment of the CERCLA, this “secured creditor
exemption” has been the subject of judicial interpretations which have left open
the possibility that lenders could be liable for cleanup costs on contaminated
property that they hold as collateral for a loan. To the extent that legal
uncertainty exists in this area, all creditors, including Home Federal Bank,
that have made loans secured by properties with potential hazardous waste
contamination (such as petroleum contamination) could be subject to liability
for cleanup costs, which costs often substantially exceed the value of the
collateral property.
Privacy
Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of
1999 (“GLBA”), modernized the financial services industry by establishing a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms and other financial service providers. Home Federal
Bank is subject to OTS regulations implementing the privacy protection
provisions of the GLBA. These regulations require Home Federal Bank to disclose
its privacy policy, including informing consumers of its information sharing
practices and informing consumers of their rights to opt out of certain
practices.
Other Consumer Protection Laws and
Regulations. Home Federal Bank is subject to a broad array of
federal and state consumer protection laws and regulations that govern almost
every aspect of its business relationships with consumers. While the
list set forth below is not exhaustive, these include the Truth-in-Lending Act,
the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the
Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to
Financial Privacy Act, the Home Ownership and Equity Protection Act, the
Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection
Act, the Check Clearing for the 21st Century Act, laws governing flood
insurance, laws governing consumer protections in connection with the sale of
insurance, federal and state laws prohibiting unfair and deceptive business
practices, and various regulations that implement some or all of the
foregoing. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits, making loans, collecting loans, and
providing other services. Failure to comply with these laws and
regulations can subject Home Federal Bank to various penalties, including but
not limited to, enforcement actions, injunctions, fines, civil liability,
criminal penalties, punitive damages, and the loss of certain contractual
rights.
In
addition, Home Federal Bank is also subject to the Americans with Disabilities
Act, which requires employers with 15 or more employees and all businesses
operating “commercial facilities” or “public accommodations” to accommodate
disabled employees and customers. The Americans with Disabilities Act
has two major objectives: (i) to prevent discrimination against disabled job
applicants, job candidates and employees, and (ii) to provide disabled persons
with ready access to commercial facilities and public
accommodations. Commercial facilities, such as Home Federal Bank,
must ensure that all new facilities are accessible to disabled persons, and in
some instances may be required to adapt existing facilities to make them
accessible.
Regulation
and Supervision of Home Federal Bancorp
General.
Home Federal
Bancorp, Inc., is a Maryland corporation and the sole shareholder of Home
Federal Bank. Under federal law, Home Federal Bancorp is a nondiversified
unitary savings and loan holding company and is
registered with the
OTS. Generally, companies like Home Federal Bancorp that
become savings and loan holding companies following the May 4, 1999 grandfather
date in the Gramm-Leach-Bliley Act of 1999 may engage only in the activities
permitted for financial institution holding companies and certain activities
previously permittedunder the law for multiple savings and loan holding
companies.
As a registered savings
and loan holding company, Home Federal Bancorp is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has examination and enforcement authority over the Company and
any of its non-savings association subsidiaries. This regulatory authority
permits the OTS to restrict or prohibit activities that it determines to be a
serious risk to Home Federal Bank and provides protection of the depositors of
Home Federal Bank rather than benefitting the stockholders of Home Federal
Bancorp. Home Federal Bancorp is also subject to the rules and regulations of
the Securities and Exchange Commission under the federal securities
laws.
Acquisition
of Control. Under the federal Change in Bank Control Act and the Savings
and Loan Holding Company Act, a notice or application must be submitted to the
OTS if any person (including a company), or group acting in concert, seeks to
acquire “control” of a savings and loan holding company or savings association.
An acquisition of control can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or savings association or as
otherwise defined by the OTS. In connection with a
proposed acquisition of control, the OTS takes into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that acquires control
will then be subject to regulation as a savings and loan holding
company.
Restrictions
on Acquisitions. Except under limited circumstances, savings and loan
holding companies are prohibited from acquiring, without prior approval of the
Director of the OTS, (1) control of any other savings association or savings and
loan holding company or substantially all the assets thereof or (2) more than 5%
of the voting shares of a savings association or holding company thereof which
is not a subsidiary. Except with the prior approval of the Director, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company’s stock, may acquire control
of any savings association, other than a subsidiary savings association, subsidiary of such holding
company or of any other savings and loan holding company.
The
Director of the OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings associations in
more than one state if: (1) the multiple savings and loan holding company
involved controls a savings association which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (2)
the acquirer is authorized to acquire control of the savings association or to operate
a home or branch office in the relevant additional state or states
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act; or (3) the statutes of the state in which the institution to be
acquired is located specifically permits a savings
association chartered by such state to be acquired by a savings association
chartered by the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings
associations).
Federal
Securities Laws. Home Federal Bancorp’s common stock is registered with
the Securities and Exchange Commission under Section 12(b) of the Securities
Exchange Act of 1934, as amended, and is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
Sarbanes-Oxley
Act of 2002. Home Federal Bancorp, as a public company, is subject to the
Sarbanes-Oxley Act of 2002. Sarbanes Oxley implements a broad range of corporate
governance and accounting measures for public companies designed to promote
honesty and transparency in corporate America and better protect investors from
corporate wrongdoing. The Sarbanes-Oxley Act of 2002 was signed into law by
President Bush on July 30, 2002, in response to public concerns regarding
corporate accountability in connection with several accounting scandals. The
stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws.
TAXATION
Federal
Taxation
General. The Company is
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Company.
Because
the Company owns 100% of the issued and outstanding capital stock of the Bank,
the Company and the Bank are members of an affiliated group within the meaning
of Section 1504(a) of the Internal Revenue Code, of which group the Company is
the common parent corporation. As a result of this affiliation, the Bank is
included in the filing of a consolidated federal income tax return with the
Company. The parties agree to compensate each other for their individual share
of the consolidated tax liability and/or any tax benefits provided by them in
the filing of the consolidated federal income tax return.
Method
of Accounting. For federal income tax purposes, the Company currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending on September 30 for filing its federal income tax
return.
Minimum
Tax. The Internal Revenue Code imposes an alternative minimum tax at a
rate of 20% on a base of regular taxable income plus certain tax preferences,
called alternative minimum taxable income. The alternative minimum tax is
payable to the extent such alternative minimum taxable income is in excess of an
exemption amount. Net operating losses can offset no more than 90% of
alternative minimum taxable income. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. Home
Federal Bank has not been subject to the alternative minimum tax, nor does it
have any such amounts available as credits for carryover.
Net
Operating Loss Carryovers. At September 30, 2010, Home Federal Bank had
no net operating loss carryforwards or carrybacks for federal income tax
purposes.
Corporate
Dividends-Received Deduction. Home Federal Bancorp may eliminate from its
income dividends received from Home Federal Bank as a wholly-owned subsidiary of
new Home Federal Bancorp if it elects to file a consolidated return with Home
Federal Bank. The corporate dividends-received deduction is 100%, or 80%, in the
case of dividends received from corporations with which a corporate recipient
does not file a consolidated tax return, depending on the level of stock
ownership of the payer of the dividend. Corporations which own less than 20% of
the stock of a corporation distributing a dividend may deduct 70% of dividends
received or accrued on their behalf.
State
Taxation
Home
Federal Bancorp and Home Federal Bank are subject to the general corporate tax
provisions of the states of Oregon and Idaho. State corporate income taxes are
generally determined under federal tax law with some modifications. Taxable
income is taxed at a rate of 7.6% and 6.6% in Idaho and Oregon, respectively.
These taxes are reduced by certain credits, primarily the Idaho investment tax
credit in the case of Home Federal Bank.
Home
Federal Bancorp also is subject to the corporate tax provisions of the state of
Maryland.
CELC is subject to property and income taxes in approximately
forty states where it conducts business.
EXECUTIVE OFFICERS OF THE
REGISTRANT
The
following table sets forth certain information with respect to the executive
officers of the Company and the Bank.
Name
|
Age
as of
September
30, 2010
|
Position
|
Company
|
Bank
|
|
|
|
|
Len
E. Williams
|
51
|
Director,
President and Chief Executive Officer
|
Director,
President and Chief Executive Officer
|
|
|
|
|
Eric
S. Nadeau
|
39
|
Executive
Vice President, Treasurer, Secretary, and Chief Financial
Officer
|
Executive
Vice President, Treasurer, Secretary, and Chief Financial
Officer
|
|
|
|
|
R.
Shane Correa
|
44
|
--
|
Executive
Vice President, Chief Banking Officer
|
|
|
|
|
Steven
E. Emerson
|
40
|
--
|
Executive
Vice President, Commercial Banking Team Lead – Idaho
Region
|
|
|
|
|
Cindy
L. Bateman
|
49
|
--
|
Executive
Vice President, Chief Credit
Officer
|
The
business experience of each executive officer for at least the past five years
is set forth below.
Len E. Williams joined Home
Federal Bank as President in September 2006 and was appointed as a director of
Home Federal Bank and Home Federal Bancorp in April 2007. Mr.
Williams was appointed Chief Executive Officer of the bank and President and
Chief Executive Officer of the Company in January 2008. Mr. Williams
has over 30 years of commercial banking experience serving in many regional and
national leadership roles. Prior to joining Home Federal Bank, Mr. Williams was
Senior Vice President and Head of Business Banking with Fifth Third Bank. He was
charged with creating and growing the business line and providing leadership
over the company’s business banking personnel, processes and products. From 1987
to 2005, he held several management positions with Key Bank, including President
of Business Banking from 2003 to 2005 and President of the Colorado District
from 1999 to 2003. His prior experience includes regional corporate and
commercial banking leadership responsibility. Mr. Williams is a member of the
Board of Directors of the Boise Metro Chamber of Commerce and has served as
chairman of Junior Achievement and Boys and Girls Clubs. Mr. Williams holds an
M.B.A. from the University of Washington and is a graduate of the Pacific Coast
Banking School.
Eric S. Nadeau joined the
Company in June 2008 as Executive Vice President, Treasurer, Corporate Secretary
and Chief Financial Officer of Home Federal Bancorp, Inc., and Home Federal
Bank. He was most recently employed by Camco Financial Corporation in Cambridge,
Ohio, as its Chief Financial Officer. From January 2003 until February 2006 he
was the Chief Financial Officer of Ohio Legacy Corp, and its subsidiary, Ohio
Legacy Bank, N.A. His previous experience includes financial management
positions with telecommunications and construction equipment companies. Mr.
Nadeau was employed by Crowe Horwath from 1993 to 1998 where he provided audit,
tax and consulting services to financial institutions in the Midwest. Mr. Nadeau
is a certified public accountant and received his Bachelor of Science in
Business Administration from the Richard T. Farmer School of Business at Miami
University in Oxford, Ohio.
Steven
D. Emerson is Executive Vice President and Commercial Banking Team Lead
for the Idaho Region of Home Federal Bank. Mr. Emerson joined Home Federal Bank
as Senior Vice President and Chief Lending Officer on December 1, 2006. He has
over 18 years of experience in commercial banking primarily in the Treasure
Valley. He previously served as Vice President and Senior Commercial
Lender for Farmers and Merchants Bank, a former local community bank, during
2006. Prior to his employment with Farmers and Merchants Bank, Mr. Emerson
served in several positions with Key Bank from 2000 to 2006, including President
of the Cincinnati, Ohio market.
Mr.
Emerson holds an M.B.A. from Northwest Nazarene University. Mr.
Emerson has been active with the Better Business Bureau, Certified Development
Company, Boise Kiwanis and the March of Dimes.
R. Shane Correa is the Chief
Banking Officer for Home Federal Bank. Mr. Correa was President of
the Central Oregon Region of Home Federal Bank until his appointment in
September 2010. Mr. Correa previously served as Executive Vice
President and Chief Banking Officer of Columbia River Bank ("CRB") from
September 2004 until he joined Home Federal in March 2010. He joined CRB in July
1998, and served in various leadership positions throughout Central and North
Central Oregon prior to his appointment as Chief Banking Officer. Prior to CRB,
Mr. Correa spent 10 years with U.S. Bank in various management positions. Mr.
Correa holds a B.S. degree in Agricultural Business Management from Oregon State
University and is a graduate of Western School of Bank Management. He has 21
years of banking experience. Mr. Correa's professional affiliations have
included the Bend Rotary Club, Deschutes County United Way Board and Greater
Eastern Oregon Development Corporation.
Cindy
L. Bateman is Executive Vice President and Chief Credit Officer of Home
Federal Bank. Ms. Bateman joined Home Federal Bank in March 2007. Ms Bateman was
previously employed by Key Bank from 2002 until 2007 having served as Senior
Vice President and District Business Leader. Having started her career with
First Security Bank of Idaho in 1983 in the Management Training program, she has
held various positions in Credit Administration and Commercial and Business
Banking. Ms. Bateman holds a B.B.A. in Finance from Idaho State University and
an M.B.A. from the University of Washington. She currently serves as President
for the Idaho Shakespeare Festival and formerly served as a director of
Financial Women International.
Item 1A. Risk
Factors
Our
business, and an investment in our common stock, involves risks. Summarized
below are the risk factors which we believe are material to our business and
could negatively affect our operating results, financial condition and the
trading value of our common stock. Other risks factors, not currently known to
us, or that we currently deem to be immaterial or unlikely, also could adversely
affect our business. In assessing the following risk factors, you should also
refer to the other information contained in this Annual Report on Form 10-K and
our other filings with the Securities and Exchange Commission.
The
current economic conditions in the market areas we serve may continue to
adversely impact our earnings and could increase the credit risk associated with
our loan portfolio.
Substantially
all of our loans are to businesses and individuals in the states of Idaho and
Oregon. A continuing decline in the economies of the markets in which we
operate, could have a material adverse effect on our business, financial
condition, results of operations and prospects. In particular, Idaho
and Oregon have experienced substantial home price declines and increased
foreclosures and have experienced above average unemployment rates.
A further
deterioration in economic conditions in the market areas we serve could result
in the following consequences, any of which could have a materially adverse
impact on our business, financial condition and results of
operations:
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loan
delinquencies, problem assets and foreclosures may
increase;
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we
may increase our allowance for loan
losses;
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demand
for our products and services may
decline;
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collateral
for loans made may decline further in value, in turn reducing customers’
borrowing power, reducing the value of assets and collateral associated
with existing loans; and
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the
amount of our low-cost or non-interest bearing deposits may
decrease.
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A decline
in local economic conditions may have a greater effect on our earnings and
capital than on the earnings and capital of larger financial institutions whose
real estate loan portfolios are geographically diverse. If we are
required
to liquidate a significant amount of collateral during a period of reduced real
estate values to satisfy the debt, our financial condition and profitability
could be adversely affected.
Our
business strategy includes significant growth plans, and our financial condition
and results of operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
We intend
to pursue a significant growth strategy for our business. We
regularly evaluate potential acquisitions and expansion
opportunities. If appropriate opportunities present themselves, we
expect to engage in selected acquisitions of financial institutions in the
future, including FDIC-assisted transactions, or other business growth
initiatives or undertakings. There can be no assurance that we will
successfully identify appropriate opportunities, that we will be able to
negotiate or finance such activities or that such activities, if undertaken,
will be successful.
Our
growth initiatives may require us to recruit experienced personnel to assist in
such initiatives. Accordingly, the failure to identify and retain such personnel
would place significant limitations on our ability to successfully execute our
growth strategy. In addition, to the extent we expand our lending
beyond our current market areas, we could incur additional risk related to those
new market areas. We may not be able to expand our market presence in
our existing market areas or successfully enter new markets.
If we do
not successfully execute our acquisition growth plan, it could adversely affect
our business, financial condition, results of operations, reputation and growth
prospects. In addition, if were to conclude that the value of an acquired
business had decreased and that the related goodwill or core deposit intangible
had been impaired, that conclusion would result in an impairment charge to us,
which would adversely affect our results of operations. While we believe we have
the executive management resources and internal systems in place to successfully
manage our future growth, there can be no assurance growth opportunities will be
available or that we will successfully manage our growth. 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 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:
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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;
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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;
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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 transactions; and
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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.
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We have
completed two acquisitions during the past two fiscal years 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. Although we expect our net
interest income will increase following an acquisition, we also expect our
general and administrative expenses and consequently our efficiency ratio will
also increase, as in the case of our recent acquisitions. Ultimately,
we would
expect
our efficiency ratio to improve; however if we are not successful in our
integration process, this may not occur, and our acquisitions may not be
accretive to earnings in the short or long-term.
We
may engage in additional FDIC-assisted transactions, which could present
additional risks to our business.
We may
have additional opportunities to acquire the assets and liabilities of failed
banks in FDIC-assisted transactions. Although these FDIC-assisted transactions
typically provide for FDIC assistance to an acquirer to mitigate certain risks,
such as sharing exposure to loan losses and providing indemnification against
certain liabilities of the failed institution, we are (and would be in future
transactions) subject to many of the same risks we would face in acquiring
another bank in a negotiated transaction, including risks associated with
maintaining customer relationships and failure to realize the anticipated
acquisition benefits in the amounts and within the timeframes we expect. In
addition, because these acquisitions are structured in a manner that would not
allow us the time and access to information normally associated with preparing
for and evaluating a negotiated acquisition, we may face additional risks in
FDIC-assisted transactions, including additional strain on management resources,
management of problem loans, problems related to integration of personnel and
operating systems and impact to our capital resources requiring us to raise
additional capital. We cannot give assurance that we will be successful in
overcoming these risks or any other problems encountered in connection with our
FDIC-assisted transactions. Our inability to overcome these risks could have a
material adverse effect on our business, financial condition and results of
operations.
Our
earnings may be diminished until we can invest the additional liquidity from the
acquisition of LibertyBank.
The
recent acquisition of LibertyBank resulted in a significant increase in cash as
a result of the excess of liabilities assumed over assets purchased and the
amount of LibertyBank loans retained by the FDIC. We expect that the significant
increase in cash balances will result in a decrease in our net interest margin
until these additional funds can be invested in loans and securities. This
influx of cash and the additional expense burden will keep our earnings below
optimal levels until we can generate meaningful loan growth. As a result of the
current environment, there is a lack of demand for loans, or a diminished supply
of creditworthy lending opportunities, as well as an increase in residential
loan refinancing, limits our ability to increase outstanding organic loan
balances. Alternative investments are also unattractive as investment
securities offer very low yields within management’s credit and interest rate
risk tolerances. If we are unable to invest this additional
liquidity, our earnings may be adversely affected.
We
may experience difficulties in integrating the operations of LibertyBank, which
may negatively impact our business and earnings.
The
successful integration of operations of LibertyBank and Home Federal Bank
depends primarily upon our ability to consolidate operations, systems and
procedures and to eliminate redundancies and costs. No assurance can be given
that we will be able to integrate the banking operations without encountering
difficulties including, without limitation, the loss of key employees and
customers, the disruption of on-going business or possible inconsistencies in
standards, controls, procedures and policies. Estimated cost savings and revenue
enhancements are projected to come from various areas that our management has
identified through the integration planning process. The elimination and
consolidation of duplicate tasks at these banks are projected to result in
annual cost savings. If we experience difficulty with the integration, we may
not achieve all the economic benefits we expect to result from the acquisition,
and this may hurt our business and earnings. In addition, we may experience
greater than expected costs or difficulties relating to the integration of the
business of LibertyBank and/or may not realize expected cost savings from the
acquisition within the anticipated time frames.
We
are highly dependent on key individuals and a number of the members of executive
and senior management have been with the Company for less than five
years.
Consistent
with our policy of focusing on select growth initiatives we are highly dependent
on the continued services of a limited number of our executive officers and key
management personnel. The loss of services of any of these individuals may have
a material adverse impact on our operations because other officers may not have
the experience and expertise to readily replace these individuals.
We
believe we have in place qualified individuals and have provided for an orderly
transition. Additional changes in key personnel and their responsibilities may
be disruptive to our business and could have a material adverse effect on our
business, financial condition and profitability. Moreover, our anticipated
growth is expected to place increased demands on our human resources and will
require the recruitment of additional middle management personnel. The
competition to hire experienced banking professionals is also intense. If we are
unable to attract qualified banking professionals, our expansion plans could be
delayed or curtailed and our business, financial condition, and profitability
may be adversely affected.
The
price of our common stock may be volatile or may
decline.
The
trading price of our common stock may fluctuate widely as a result of a number
of factors, many of which are outside our control. In addition, the stock market
is subject to fluctuations in the share prices and trading volumes that affect
the market prices of the shares of many companies. These broad market
fluctuations could adversely affect the market price of our common stock. Among
the factors that could affect our stock price are:
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actual
or anticipated quarterly fluctuations in our operating results and
financial condition;
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changes
in revenue or earnings estimates or publication of research reports and
recommendations by financial analysts;
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failure
to meet analysts' revenue or earnings estimates;
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speculation
in the press or investment community;
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strategic
actions by us or our competitors, such as acquisitions or restructurings;
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actions
by institutional shareholders;
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fluctuations
in the stock price and operating results of our competitors;
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general
market conditions and, in particular, developments related to market
conditions for the financial services industry;
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proposed
or adopted regulatory changes or developments;
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anticipated
or pending investigations, proceedings or litigation that involve or
affect us; or
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domestic
economic factors unrelated to our performance.
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The stock
market and, in particular, the market for financial institution stocks, has
experienced significant volatility during the year. As a result, the market
price of our common stock may be volatile. In addition, the trading volume in
our common stock may fluctuate more than usual and cause significant price
variations to occur. The trading price of the shares of our common stock and the
value of our other securities will depend on many factors, which may change from
time to time, including, without limitation, our financial condition,
performance, creditworthiness and prospects, future sales of our equity or
equity related securities, or other factors. Market volatility during the past
couple of years is unprecedented. The capital and credit markets have been
experiencing volatility and disruption for more than a year. In some cases, the
markets have produced downward pressure on stock prices and credit availability
for certain issuers without regard to those issuers' underlying financial
strength. A significant decline in our stock price could result in substantial
losses for individual shareholders and could lead to costly and disruptive
securities litigation.
Fluctuating
interest rates can adversely affect our profitability.
Like
other financial institutions, we are subject to interest rate risk. Our primary
source of income is net interest income, which is the difference between
interest earned on loans and investments and the interest paid on deposits and
borrowings. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the relationships
of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest
rates than our interest-bearing liabilities, or vice versa. In addition, the
individual market interest rates underlying our loan and deposit products (e.g.,
the Wall Street Journal Prime rate) may not change to the same degree over a
given time period. In any event, if market
interest
rates should move contrary to our position, our earnings may be negatively
affected. In addition, loan volume and quality and deposit volume and mix can be
affected by market interest rates. Changes in levels of market interest rates
could materially affect our net interest spread, asset quality, origination
volume, and overall profitability.
We
principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate environment,
we may not be able to manage this risk effectively. If we are unable to manage
interest rate risk effectively, our business, financial condition and results of
operations could be materially harmed.
Our
business is subject to various lending risks which could adversely impact our
results of operations and financial condition.
Our
business strategy centers on the continued transition to commercial banking
activities in order to expand our net interest margin. Consistent with this
strategy, we are working to further reduce the percentage of our lower-yielding
assets such as residential loans and mortgage-backed securities and to increase
the percentage of our assets consisting of construction and land development,
commercial and multi-family real estate and commercial business loans that have
higher risk-adjusted returns. Our increasing focus on these types of lending
will continue to increase our risk profile relative to traditional thrift
institutions as we continue to implement our business strategy for the following
reasons:
Our loan portfolio possesses
increased risk due to our increasing percentage of commercial real estate and
commercial business loans.
We have
been increasing, and intend to continue to increase, our origination of
commercial and multifamily real estate loans and commercial business loans in
the future. The credit risk related to these types of loans is
considered to be greater than the risk related to one-to-four family residential
loans because the repayment of commercial real estate loans and commercial
business loans typically is dependent on the successful operations and income
stream of the borrowers’ business and the real estate securing the loans as
collateral, which can be significantly affected by economic
conditions.
Several
of our borrowers have more than one commercial real estate loan outstanding with
us. Consequently, an adverse development with respect to one loan or one credit
relationship can expose us to significantly greater risk of loss compared to an
adverse development with respect to a one-to-four family residential mortgage
loan. Finally, if we foreclose on a commercial real estate loan, our
holding period for the collateral, if any, typically is longer than for
one-to-four family residential mortgage loan because there are fewer potential
purchasers of the collateral. Since we plan to continue to increase
our originations of these loans, it may be necessary to increase the level of
our allowance for loan losses due to the increased risk characteristics
associated with these types of loans. Any increase to our allowance
for loan losses would adversely affect our
earnings. In addition, these loans
generally carry larger balances to
single borrowers or related groups
of borrowers than one-to-four family loans. Any
delinquent payments or the failure to repay these loans would hurt our
earnings.
A
large percentage of our loan portfolio is secured by real estate, in particular
commercial real estate. Continued deterioration in the real estate
markets or other segments of our loan portfolio could lead to additional losses,
which could have a material negative effect on our financial condition and
results of operations.
As a
result of increased levels of residential and commercial delinquencies and
declining real estate values, which reduce the customer's borrowing power and
the value of the collateral securing the loan, we have experienced increasing
levels of charge-offs and provisions for loan losses. Continued increases in
delinquency levels or continued declines in real estate values, which cause our
loan-to-value ratios to increase, could result in additional charge-offs and
provisions for loan losses. This could have a material negative effect on our
business and results of operations.
Many of
our residential mortgage loans are secured by liens on mortgage properties in
which the borrowers have little or no equity because either we originated upon
purchase a first mortgage with an 80% loan-to-value ratio or because of the
decline in home values in our market areas. Residential loans with high
loan-to-value ratios will be more sensitive to declining property values than
those with lower combined loan-to-value ratios and, therefore, may experience a
higher incidence of default and severity of losses. In addition, if the
borrowers sell their homes, such borrowers may be unable to repay their loans in
full from the sale. As a result, these loans may experience higher rates of
delinquencies, defaults and losses.
Our loan
portfolio has a concentration of loans secured by commercial real estate, which
is primarily secured by nonowner-occupied investment properties. Continued
deterioration in the local economy may result in additional losses on loans.
Generally, deterioration in the performance and collectability of a loan secured
by owner-occupied real estate can be better monitored than a nonowner-occupied
real estate loan as we typically do not have the ability to assess the financial
performance of tenants who are leasing from borrowers on investment property
loans. We regularly review financial information of borrowers on owner-occupied
loans whereas we can typically review only vacancy and rent rolls of tenants of
borrowers on nonowner-occupied loans.
Vacancies
in office, retail and industrial real estate projects are higher than historical
levels in the Bank’s markets. Continued deterioration in the general economy may
increase vacancies further, which may result in decreased cash flow to our
borrowers and further declines in value on foreclosed commercial real estate
causing additional provisions for loan and REO losses.
Our construction loans are based upon
estimates of costs and value associated with the complete project. These
estimates may be inaccurate.
We make
land purchase, lot development and real estate construction loans to individuals
and builders, primarily for the construction of residential properties and, to a
lesser extent, commercial and multi-family real estate projects. We will
originate these loans whether or not the collateral property underlying the loan
is under contract for sale. Residential real estate construction loans include
single-family tract construction loans for the construction of entry level
residential homes.
Construction
lending can involve a higher level of risk than other types of lending because
funds are advanced partially based upon the value of the project, which is
uncertain prior to the project's completion. Because of the uncertainties
inherent in estimating construction costs as well as the market value of a
completed project and the effects of governmental regulation of real property,
our estimates with regards to the total funds required to complete a project and
the related loan-to-value ratio may vary from actual results. As a result,
construction loans often involve the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project and the
ability of the borrower to sell or lease the property or refinance the
indebtedness. This risk has been compounded by the current slowdown
in both the residential and the commercial real estate markets, which has
negatively affected real estate values and the ability of our borrowers to
liquidate properties or obtain adequate refinancing. If our estimate
of the value of a project at completion proves to be overstated, we may have
inadequate security for repayment of the loan and we may incur a loss. In
addition, speculative construction loans to a builder are often associated with
homes that are not pre-sold, and thus pose a greater potential risk than
construction loans to individuals on their personal residences.
Repayment of our commercial business
loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in
value.
Commercial
business loans include leases to finance the purchase of personal property,
business equipment and titled vehicles and construction equipment. All of these
financing leases were leases of CELC, the operations of which were assumed by
the Bank in the LibertyBank Acquisition, and nearly all of them are covered
under a loss share agreement with the FDIC. Repayment of our commercial business
loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in value.
We make our commercial loans primarily based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the borrower.
Collateral securing commercial loans may depreciate over time, be difficult to
appraise and fluctuate in value. In addition, in the case of loans secured by
accounts receivable, the
availability
of funds for the repayment of these loans may be substantially dependent on the
ability of the borrower to collect the amounts due from its customers.
Accordingly, we make our commercial loans primarily based on the historical and
expected cash flow of the borrower and secondarily on underlying collateral
provided by the borrower.
Our lease
loans entail many of the same types of risks as our commercial business loans.
As with commercial business loans, the collateral securing our lease loans may
depreciate over time, may be difficult to appraise and may fluctuate in value.
We rely on the lessee's continuing financial stability, rather than the value of
the leased equipment, for the repayment of all required amounts under lease
loans. In the event of a default on a lease loan, it is unlikely that the
proceeds from the sale of the leased equipment will be sufficient to satisfy the
outstanding unpaid amounts under the terms of the loan.
If
our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings and capital levels could be reduced.
We make
various assumptions and judgments about the collectability of our loan
portfolio, including the creditworthiness of our borrowers and the value of the
real estate and other assets serving as collateral for the repayment of many of
our loans. In determining the amount of the allowance for loan losses, we review
our loans and our loss and delinquency experience, and evaluate economic
conditions. Management recognizes that significant new growth in loan
portfolios, new loan products and the refinancing of existing loans can result
in portfolios comprised of unseasoned loans that may not perform in a historical
or projected manner. If our assumptions are incorrect, our allowance for loan
losses may not be sufficient to cover actual losses, resulting in additions to
our allowance. Material additions to our allowance could materially decrease our
net income. In addition, bank regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize additional loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities could
have a material adverse effect on our financial condition and
profitability.
Although we believe
that our underwriting criteria are appropriate for the various kinds of loans we
make, we may incur losses on loans that meet our underwriting criteria, and
these losses may exceed the amounts set aside as reserves in our allowance for
loan losses.
The
weakened housing market may result in a decline in fair value of REO.
In recent
months we have foreclosed on certain real estate development and commercial real
estate loans and have taken possession of several residential subdivision
properties as well as single family residential properties. REO is initially
recorded at its estimated fair value less costs to sell. Because of the weak
housing market and declining property values, we may incur losses to write-down
REO to new fair values or losses from the final sale of properties. Moreover,
our ability to sell REO properties is affected by public perception that banks
are inclined to accept large discounts from market value to quickly liquidate
properties. Write-downs on REO or an inability to sell REO properties will have
a material adverse effect on our results of operations and financial
condition.
We
operate in a highly regulated environment and may be adversely affected by
changes in laws and regulations.
We are
currently subject to extensive regulation, supervision and examination by the
OTS and the Federal Deposit Insurance Corporation. Such regulators govern the
activities in which we may engage, primarily for the protection of depositors
and the Deposit Insurance Fund. These regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the ability to impose restrictions on a bank’s operations,
reclassify assets, determine the adequacy of a bank’s allowance for loan losses
and determine the level of deposit insurance premiums assessed. New
financial reform legislation, entitled the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), has been enacted by Congress
that will change the banking regulatory framework, create an independent
consumer protection bureau that will assume the consumer protection
responsibilities of the various federal banking agencies, and establish more
stringent capital standards for banks and
bank
holding companies. The legislation will also result in new
regulations affecting the lending, funding, trading and investment activities of
banks and bank holding companies. Any further changes in such
regulation and oversight, whether in the form of regulatory policy, new
regulations or legislation or additional deposit insurance premiums could have a
material impact on our operations. Because our business is highly
regulated, the laws and applicable regulations are subject to frequent
change. Any new laws, rules and regulations could make compliance
more difficult or expensive or otherwise adversely affect our business,
financial condition or prospects.
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
broadens the base for Federal Deposit Insurance Corporation insurance
assessments. Assessments will now be based on the average consolidated total
assets less tangible equity capital of a financial institution. The Dodd-Frank
Act also permanently increases the maximum amount of deposit insurance for
banks, savings institutions and credit unions to $250,000 per depositor,
retroactive to January 1, 2009, and non-interest bearing transaction accounts
have unlimited deposit insurance through December 31, 2013.
The
Dodd-Frank Act will require publicly traded companies to give stockholders a
non-binding vote on executive compensation and so-called “golden parachute”
payments, and by authorizing the Securities and Exchange Commission to
promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials. The legislation also directs the Federal
Reserve Board to promulgate rules prohibiting excessive compensation paid to
bank holding company executives, regardless of whether the company is publicly
traded or not.
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.
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.
Continued
deterioration in the financial position of the Federal Home Loan Bank of Seattle
may result in future impairment losses of our investment in Federal Home Loan
Bank stock.
At
September 30, 2010, we owned $17.7 million of stock of the FHLF of Seattle. As a
condition of membership at the FHLB, we are required to purchase and hold a
certain amount of FHLB stock. Our stock purchase requirement is based, in part,
upon the outstanding principal balance of advances from the FHLB and is
calculated in accordance with the Capital Plan of the FHLB. Our FHLB stock has a
par value of $100, is carried at cost, and is subject to impairment
testing. The FHLB has announced that it had a risk-based capital
deficiency under the regulations of the Federal Housing Finance Agency (the
“FHFA”), its primary regulator, and that it would suspend future dividends and
the repurchase and redemption of outstanding common stock. As a result, the FHLB
has not paid a dividend since the fourth quarter of 2008. The FHLB has
communicated that it believes the calculation of risk-based capital under the
current rules of the FHFA significantly overstates the market risk of the FHLB’s
private-label mortgage-
backed
securities in the current market environment and that it has enough capital to
cover the risks reflected in its 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. In addition,
on October 25, 2010, the FHLB received a consent order from the
FHFA. Management is currently reviewing the redeemability of the FHLB
stock. The potential impact of the consent order is unknown at this
time. We will continue to monitor the financial condition of the FHLB as it
relates to, among other things, the recoverability of our investment.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition, growth and prospects.
Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. We rely on customer deposits and advances from
the FHLB of Seattle, the Federal Reserve Bank of San Francisco ("FRB") and other
borrowings to fund our operations. Although we have historically been able to
replace maturing deposits and advances if desired, we may not be able to replace
such funds in the future if, among other things, our financial condition, the
financial condition of the FHLB or FRB, or market conditions change. Our access
to funding sources in amounts adequate to finance our activities or the terms of
which are acceptable could be impaired by factors that affect us specifically or
the financial services industry or economy in general - such as a disruption in
the financial markets or negative views and expectations about the prospects for
the financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets. Factors that
could detrimentally impact our access to liquidity sources include a decrease in
the level of our business activity as a result of a downturn in the Idaho or
Oregon markets where our loans are concentrated or adverse regulatory action
against us.
Our
financial flexibility will be severely constrained if we are unable to maintain
our access to funding or if adequate financing is not available to accommodate
future growth at acceptable interest rates. Although we consider our sources of
funds adequate for our liquidity needs, we may seek additional debt in the
future to achieve our long-term business objectives. Additional borrowings, if
sought, may not be available to us or, if available, may not be available on
reasonable terms. If additional financing sources are unavailable, or are not
available on reasonable terms, our financial condition, results of operations,
growth and future prospects could be materially adversely
affected. Finally, if we are required to rely more heavily on more
expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs.
The
United States economy remains weak and unemployment levels are
high. A prolonged recession, especially one affecting our geographic
market area, will adversely affect our business and financial
results.
The
United States experienced a severe economic recession in 2008 and 2009, which
effects have continued into 2010. Recent growth has been slow and
unemployment remains at very high levels and is not expected to improve in the
near future. Loan portfolio quality has deteriorated at many
financial institutions reflecting, in part, the weak United States economy and
high unemployment rates. In addition, the value of real estate
collateral supporting many commercial loans and home mortgages has declined and
may continue to decline, increasing the risk that we would incur losses if
borrowers default on their loans.
Continued
negative developments in the financial services industry and the domestic and
international credit markets may significantly affect the markets in which we do
business, the market for and value of our loans and investments, and our ongoing
operations, costs and profitability. Continued declines in both the
volume of real estate sales and the sale price coupled with the current
recession and the associated increase in unemployment may result in higher than
expected loan delinquencies or problem assets, a decline in demand for our
products and services, or lack of growth or a decrease in
deposits. These potential negative events may cause us to incur
losses, adversely affect our capital, liquidity, financial condition and
business operations. These declines may have a greater affect on our
earnings and capital than on the earnings and capital of financial institutions
whose loan portfolios are more diversified. Moreover, continued
declines in the stock market in general, or stock values of financial
institutions and their holding companies specifically, could adversely affect
our stock performance.
Any
future Federal Deposit Insurance Corporation insurance premiums and/or special
assessments will adversely impact our earnings.
Due to
the costs of resolving the increasing numbers of bank failures in 2008 and 2009,
on May 22, 2009, the Federal Deposit Insurance Corporation, or FDIC, adopted a
final rule levying a five basis point special insurance premium assessment on
each insured depository institution’s assets minus Tier 1 capital as of June 30,
2009. Any further special assessments that the FDIC levies will be
recorded as an expense during the appropriate period. In addition,
the FDIC increased the general assessment rate and, therefore, our federal
deposit general insurance premium expense will increase compared to prior
periods.
The FDIC
also issued a final rule pursuant to which all insured depository institutions
were required to prepay on December 30, 2009 their estimated assessments for the
fourth quarter of 2009, and for all of 2010, 2011 and 2012. The
assessment rate for the fourth quarter of 2009 and for 2010 was based on each
institution’s total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012
would be equal to the modified third quarter assessment rate plus an additional
three basis points. In addition, each institution’s base assessment
rate for each period was calculated using its third quarter assessment base,
adjusted quarterly for an estimated 5% annual growth rate in the assessment base
through the end of 2012.
In the
event that the special assessment and the prepayment do not provide sufficient
funds for the FDIC to resolve future bank failures, the FDIC may require another
special assessment or increase assessment rates for all FDIC insured
institutions. An increase in assessments will adversely affect our
results of operations.
Our
litigation related costs might continue to increase.
The Bank
is subject to a variety of legal proceedings that have arisen in the ordinary
course of the Bank’s business. In the current economic environment the Bank’s
involvement in litigation has increased significantly, primarily as a result of
defaulted borrowers asserting claims in order to defeat or delay foreclosure
proceedings. The Bank believes that it has meritorious defenses in legal actions
where it has been named as a defendant and is vigorously defending these suits.
Although management, based on discussion with litigation counsel, believes that
such proceedings will not have a material adverse effect on the financial
condition or operations of the Bank, there can be no assurance that a resolution
of any such legal matters will not result in significant liability to the Bank
nor have a material adverse impact on its financial condition and results of
operations or the Bank’s ability to meet applicable regulatory requirements.
Moreover, the expenses of pending legal proceedings will adversely affect the
Bank’s results of operations until they are resolved. There can be no assurance
that the Bank’s loan workout and other activities will not expose the Bank to
additional legal actions, including lender liability or environmental
claims.
We
face strong competition from other financial institutions, financial service
companies and other organizations offering services similar to those offered by
us, which could limit our growth and profitability.
We face
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence, and in some cases a national presence,
in both originating loans and attracting deposits. Competition in originating
loans comes primarily from other banks, mortgage companies and consumer finance
institutions that make loans in our primary market areas. We also face
substantial competition in attracting deposits from other banking institutions,
money market and mutual funds, credit unions and other investment
vehicles.
In
addition, banks with larger capitalization and non-bank financial institutions
that are not governed by bank regulatory restrictions have large lending limits
and are better able to serve the needs of larger customers. Many of these
financial institutions are also significantly larger and have greater financial
resources than us, have been in business for a long period of time and have
established customer bases and name recognition.
We
compete for loans principally on the basis of interest rates and loan fees, the
types of loans we originate and the quality of service we provide to borrowers.
Our ability to attract and retain deposits requires that we provide customers
with competitive investment opportunities with respect to rate of return,
liquidity, risk and other factors. To effectively compete, we may have to pay
higher rates of interest to attract deposits, resulting in reduced
profitability.
If we are not able to effectively compete in our market area, our profitability
may be negatively affected, potentially limiting our ability to pay dividends.
The greater resources and deposit and loan products offered by some of our
competitors may also limit our ability to increase our interest-earning assets.
We
continually encounter technological change, and we may have fewer resources than
many of our competitors to continue to invest in technological
improvements.
The
financial services industry is undergoing rapid technological changes, with
frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success
will depend, in part, upon our ability to address the needs of our clients by
using technology to provide products and services that will satisfy client
demands for convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in
marketing these products and services to our customers.
We
undertook a conversion to a new core processing application in the fourth
quarter of fiscal year 2010. We also converted the banking platform assumed in
the CFB Acquisition. We intend to convert the banking platform assumed in the
LibertyBank Acquisition in March 2011. After the conversion, all banking offices
will operate on the same platform. Core processing conversions entail
substantial operational risk and if we fail to successfully convert customer
accounts, our liquidity may be significantly impaired due to customers closing
their deposit accounts and our earnings may be negatively impacted.
If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, and, as a result, investors and depositors could lose confidence
in our financial reporting, which could materially adversely affect our
business, the trading price of our common stock and our ability to attract
additional deposits.
In
connection with the enactment of the Sarbanes-Oxley Act of 2002 (“Act”) and the
implementation of the rules and regulations promulgated by the SEC, we document
and evaluate our internal control over financial reporting in order to satisfy
the requirements of Section 404 of the Act. This requires us to prepare an
annual management report on our internal control over financial reporting,
including among other matters, management’s assessment of the effectiveness of
internal control over financial reporting and an attestation report by our
independent auditors addressing these assessments. If we fail to identify and
correct any deficiencies in the design or operating effectiveness of our
internal control over financial reporting or fail to prevent fraud, current and
potential shareholders and depositors could lose confidence in our internal
controls and financial reporting, which could materially adversely affect our
business, financial condition and results of operations, the trading price of
our common stock and our ability to attract additional deposits.
Failure
to comply with the terms of the loss share agreement with the FDIC may result in
significant losses.
In
connection with the Community First Bank and LibertyBank Acquisitions, Home
Federal Bank entered in to loss sharing agreements with the FDIC that
significantly reduces the Bank’s credit loss exposure. Losses on covered assets
in the Community First Bank acquisition are indemnified by the FDIC at the rate
of 80% on the first $34 million of losses and at a rate of 95% after that.
Losses on covered assets in the LibertyBank acquisition are indemnified by the
FDIC at a rate of 80%.
The
purchase and assumption agreements and the loss sharing agreements for the
Community First Bank and LibertyBank Acquisitions 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 sharing 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.
Changes
in accounting standards may affect our performance.
Our
accounting policies and methods are fundamental to how we record and report our
financial condition and results of operations. From time to time there are
changes in the financial accounting and reporting standards that govern the
preparation of our financial statements. These changes can be difficult to
predict and can materially impact how we report and record our financial
condition and results of operations. In some cases, we could be required to
apply a new or revised standard retroactively, resulting in a retrospective
adjustment to prior financial statements.
Item 1B. Unresolved Staff
Comments
None.
Item 2.
Properties
At
September 30, 2010, we conducted business out of 37 full service banking offices
and one loan center. 16 of the locations are owned, four locations are leased
and one location is owned with the land being leased. At September 30, 2010,
there were 19 facilities we were leasing from the FDIC as Receiver for
LibertyBank. The lease option period ends on these properties in January 2011,
at which point we will buy or assume the leases of the properties, or close
them. At September 30, 2010, the net book value of our investment in properties
and equipment was $28.0 million. The net book value of the data processing and
computer equipment utilized by us at September 30, 2010 was $1.3
million.
The
following table sets forth certain information relating to our offices as of
September 30, 2010.
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
ADMINISTRATIVE
OFFICE
500
12th
Avenue South
Nampa,
Idaho 83651 (1)
|
|
Owned
|
|
N/A
|
|
35,514
|
|
|
|
|
|
|
|
BRANCH
OFFICES:
|
|
|
|
|
|
|
Downtown
Boise
800
West State Street
Boise,
Idaho 83703
|
|
Leased
|
|
August
2012
|
|
3,500
|
Parkcenter
871
East Parkcenter Boulevard
Boise,
Idaho 83706
|
|
Owned
|
|
N/A
|
|
5,500
|
Meridian
55
East Franklin Road
Meridian,
Idaho 83642
|
|
Owned
|
|
N/A
|
|
5,000
|
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
Caldwell
923
Dearborn
Caldwell,
Idaho 83605
|
|
Owned
|
|
N/A
|
|
5,844
|
Mountain
Home
400
North 3rd East
Mountain
Home, Idaho 83647
|
|
Owned
|
|
N/A
|
|
3,600
|
Emmett
250
South Washington Avenue
Emmett,
Idaho 83617
|
|
Owned
|
|
N/A
|
|
3,600
|
Boise (2)
8300
West Overland Road
Boise,
Idaho 83709
|
|
Leased
|
|
March
2011
|
|
695
|
Garden City (2)
7319
West State Street
Boise,
Idaho 83714
|
|
Leased
|
|
August
2012
|
|
695
|
Eagle
100
E. Riverside Dr.
Eagle,
Idaho 83616
|
|
Owned
|
|
N/A
|
|
5,500
|
Karcher
1820
Caldwell Blvd
Nampa,
Idaho 83651
|
|
Building
owned Land leased
|
|
N/A
|
|
4,900
|
Ustick
10440
W. Ustick
Boise,
ID 83706
|
|
Owned
|
|
N/A
|
|
5,000
|
Ustick
Marketplace
3630
N Eagle Rd
Boise
ID 83713
|
|
Owned
|
|
N/A
|
|
3,500
|
Silverstone
3405
E Overland Rd
Meridian,
ID 83642
|
|
Owned
|
|
N/A
|
|
20,000
|
Bend
Greenwood
671
NE Greenwood
Bend,
OR 97701
|
|
Leased
|
|
October
2012
|
|
2,600
|
Bend
Mill Quarter
606
NW Arizona Ave.
Bend,
OR 97701
|
|
Owned
|
|
N/A
|
|
6,500
|
Madras
1150
SE Hwy 97
Madras,
OR 97741
|
|
Owned
|
|
N/A
|
|
4,500
|
La
Pine
51366
South Hwy 97
La
Pine, OR 97739
|
|
Owned
|
|
N/A
|
|
3,500
|
Prineville
555
NW Third
Prineville,
OR 97754
|
|
Owned
|
|
N/A
|
|
12,860
|
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
Terrebonne
8222
N Hwy 97
Terrebonne,
OR 97760
|
|
Owned
|
|
N/A
|
|
2,800
|
Redmond
821
SW 6th
St.
Redmond,
OR 97756
|
|
Owned
|
|
N/A
|
|
7,800
|
Eugene
Administration
355
Goodpasture Island Rd Suite 200
Eugene,
OR 97401
|
|
Lease
|
|
(5)
|
|
14,455
|
Grants
Pass Downtown
660
SE 7th
Street
Grants
Pass, OR 97526
|
|
Lease
|
|
February
2013(3)
|
|
2,464
|
Medford
North
1000
Biddle Road
Medford,
OR 97504
|
|
Lease
|
|
February
2026(3)
|
|
3,950
|
Bend
Downtown
805
NW Bond Street
Bend,
OR 97701
|
|
Lease
|
|
February
2016(3)
|
|
5,128
|
Grants
Pass South
590
Union Ave
Grants
Pass, OR 97527
|
|
Lease
|
|
June
2015
(3)
|
|
3,708
|
Springfield
Gateway
1008
Harlow Road
Springfield,
OR 97501
|
|
Lease
|
|
(4)
|
|
5,191
|
Medford
South
295
East Barnett Road
Medford,
OR 97501
|
|
Lease
|
|
(4)
|
|
4,480
|
Bend
West
200
SW Century Drive
Bend,
OR 97702
|
|
Lease
|
|
(4)
|
|
3,600
|
Eugene
Santa Clara
25
Division Ave
Eugene,
OR 97404
|
|
Lease
|
|
(4)
|
|
3,993
|
Eugene
Coburg
1585
Coburg Road
Eugene,
OR 97401
|
|
Lease
|
|
(4)
|
|
4,770
|
Eugene
West
3540
West 11th
Ave
Eugene,
OR 97402
|
|
Lease
|
|
(4)
|
|
3,822
|
Bend
North
20365
Empire Ave
Bend,
OR 97702
|
|
Lease
|
|
(4)
|
|
3,815
|
Redmond
South
1438
S Hwy 97
Redmond,
OR 97756
|
|
Lease
|
|
(5)
|
|
4,975
|
Location
|
|
Leased
or
Owned
|
|
Lease
Expiration
Date
|
|
Square
Footage
|
Springfield
5880
Main Street
Springfield,
OR
|
|
Lease
|
|
(5)
|
|
4,942
|
Bend
South
61379
S Hwy 97
Bend,
OR 97701
|
|
Lease
|
|
(4)
|
|
4,394
|
Portland
Loan Center
825
NE Multnomah Suite 910
Portland,
OR 97232
|
|
Lease
|
|
September
2011(3)
|
|
3,964
|
Commercial
Equipment
2292
Oakmont Way
Eugene,
OR 97401
|
|
Lease
|
|
January
2014
(3)
|
|
7,515
|
Eugene
Downtown
899
Pearl Street
Eugene,
OR 97401
|
|
Lease
|
|
(4)
|
|
16,140
|
Commercial
Equipment II
10001
SE Sunnyside Road Suite B220
Clackamas,
OR 97015
|
|
Lease
|
|
December
2010(3)
|
|
1,520
|
_________________
(3)
|
At
September 30, 2010, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Liberty Bank. Home Federal intends to assume the
lease on this property
|
(4)
|
At
September 30, 2010, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Liberty Bank. Home Federal agreed to purchase
this property
|
(5)
|
At
September 30, 2010, Home Federal Bank was leasing the banking office from
the FDIC as Receiver for Liberty Bank. Home Federal intends to close this
location in January 2011
|
Item 3. Legal
Proceedings
From time
to time we are involved as a plaintiff or defendant in various legal actions
arising in the normal course of business. We do not anticipate incurring any
material liability as a result of such litigation, nor do we expect any material
impact on our financial position, results of operations or cash
flows.
Item 4. Removed and
Reserved
PART
II
Item 5. Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Home
Federal Bancorp’s common stock is currently listed on the NASDAQ Global Market
under the symbol “HOME,” and there is an established market for such common
stock. As of December 6, 2010, there were approximately 874 stockholders of
record, excluding persons or entities that hold stock in nominee or "street
name" accounts with brokers.
The
following table sets forth the high and low trading prices for Home Federal
Bancorp common stock, as reported by The Nasdaq Stock Market LLC, and cash
dividends paid for each quarter during the fiscal years ended September 30, 2010
and 2009:
Fiscal Year Ended September 30,
2010
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2009
|
$13.47
|
|
$
11.26
|
|
$0.055
|
Quarter
Ended March 31, 2010
|
14.51
|
|
12.65
|
|
0.055
|
Quarter
Ended June 30, 2010
|
16.03
|
|
12.63
|
|
0.055
|
Quarter
Ended September 30, 2010
|
13.44
|
|
12.01
|
|
0.055
|
Fiscal Year Ended September 30,
2009
|
High
|
|
Low
|
|
Cash
Dividends
Paid
|
Quarter
Ended December 31, 2008
|
$12.34
|
|
$
9.28
|
|
$0.055
|
Quarter
Ended March 31, 2009
|
11.10
|
|
7.01
|
|
0.055
|
Quarter
Ended June 30, 2009
|
11.48
|
|
8.87
|
|
0.055
|
Quarter
Ended September 30, 2009
|
12.00
|
|
10.06
|
|
0.055
|
Dividends
Home
Federal Bancorp has paid quarterly cash dividends since the quarter ended June
30, 2005. The dividend rate and the continued payment of dividends depends on a
number of factors, including our capital requirements, our financial condition
and results of operations, tax considerations, statutory and regulatory
limitations and general economic conditions. No assurance can be given that we
will continue to pay dividends or that they will not be reduced in the
future.
Dividend
payments by us may depend upon dividends received by the Company from the Bank.
Under federal regulations, the amount of dividends the Bank may pay is dependent
upon its capital position and recent net income. Generally, if the Bank
satisfies its regulatory capital requirements, it may make dividend payments up
to the limits prescribed in the Office of Thrift Supervision regulations.
However, institutions that have converted to a stock form of ownership may not
declare or pay a dividend on, or repurchase any of, its common stock if the
effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account.
Equity
Compensation Plan Information
The
information contained in the Company’s Proxy Statement for the 2010 Annual
Meeting under the section captioned “Equity Compensation Plan Information” is
incorporated herein by reference.
Issuer
Purchases of Equity Securities
The
following table provides information about purchases of common stock by the
Company during the quarter ended September 30, 2010:
Issuer Purchases of Equity
Securities
|
|
Period of Repurchase
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
Paid Per Share
|
|
|
Total
Number of
Shares
Purchased
as
Part of
Publicly
Announced
Plans
or
Programs
|
|
|
Maximum
Number
of Shares
that
May Yet
Be Purchased Under
the
Program
|
|
July
1 – July 31, 2010
|
|
|
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
|
-- |
|
August
1 – August 31, 2010
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
September
1 – September 30, 2010
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
On July
27, 2009 the Company announced a stock repurchase of up to 834,900 shares of its
outstanding common stock, representing approximately 5% of outstanding shares on
that date. No shares have been purchased under this stock repurchase
plan.
Performance
Graph
The
following graph compares the cumulative total stockholder return on the
Company’s common stock with the cumulative total return on the Russell 2000
Index, the SNL Thrift Index, and the SNL Bank Index. Stock prices prior to
December 19, 2007, the effective date of the Conversion, relate to old Home
Federal Bancorp. The CFB Acquisition and the LibertyBank Acquisition have
significantly changed the composition of Home Federal Bank’s assets and
liabilities and management is committed to further transformation of Home
Federal Bank to a commercial community bank. As a result, the Company believes
that SNL Bank Index best reflects the performance of Home Federal Bancorp, Inc,
compared to similarly-structured institutions and in future years will no longer
include the SNL Thrift Index in the performance graph. The graph assumes that
total return includes the reinvestment of all dividends, and that the value of
the investment in Home Federal Bancorp’s common stock and each index was $100 on
September 30, 2010. Historical stock prices are not necessarily indicative of
future stock performance.
|
Period
Ended
|
|
Index
|
09/30/05
|
09/30/06
|
09/30/07
|
09/30/08
|
09/30/09
|
09/30/10
|
Home
Federal Bancorp, Inc.
|
100.00
|
124.32
|
107.89
|
119.68
|
109.64
|
118.83
|
Russell
2000
|
100.00
|
109.92
|
123.49
|
105.60
|
95.52
|
108.27
|
SNL
Bank Index
|
100.00
|
120.13
|
116.95
|
85.32
|
59.79
|
54.29
|
SNL
Thrift Index
|
100.00
|
116.40
|
106.23
|
54.72
|
41.91
|
41.85
|
Item 6.
Selected
Financial Data
The
following table sets forth certain information concerning the consolidated
financial position and results of operations at and for the dates indicated and
has been derived from our audited consolidated financial statements. The
information below is qualified in its entirety by the detailed information
included elsewhere herein and should be read along with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Item 8. Financial Statements and Supplementary Data.”
|
|
At
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
FINANCIAL
CONDITION DATA:
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,482,861 |
|
|
$ |
827,899 |
|
|
$ |
725,070 |
|
|
$ |
709,954 |
|
|
$ |
761,292 |
|
Investment
securities, available for sale
|
|
|
275,180 |
|
|
|
169,320 |
|
|
|
188,787 |
|
|
|
162,258 |
|
|
|
12,182 |
|
Investment
securities, held to maturity
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
183,279 |
|
Loans
receivable, net (1)
|
|
|
620,493 |
|
|
|
510,629 |
|
|
|
459,813 |
|
|
|
480,118 |
|
|
|
503,065 |
|
Loans
held for sale
|
|
|
5,135 |
|
|
|
862 |
|
|
|
2,831 |
|
|
|
4,904 |
|
|
|
4,119 |
|
Total
deposits
|
|
|
1,189,662 |
|
|
|
514,858 |
|
|
|
372,925 |
|
|
|
404,609 |
|
|
|
430,281 |
|
FHLB
advances and other borrowings
|
|
|
67,622 |
|
|
|
84,737 |
|
|
|
136,972 |
|
|
|
180,730 |
|
|
|
210,759 |
|
Stockholders’
equity
|
|
|
205,088 |
|
|
|
209,665 |
|
|
|
205,187 |
|
|
|
112,637 |
|
|
|
107,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30,
|
|
|
|
|
2010 |
|
|
|
2009 |
|
|
|
2008 |
|
|
|
2007 |
|
|
|
2006 |
|
OPERATING
DATA:
|
|
(in
thousands, except share and other data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
37,534 |
|
|
$ |
35,827 |
|
|
$ |
40,583 |
|
|
$ |
42,638 |
|
|
$ |
39,913 |
|
Interest
expense
|
|
|
10,355 |
|
|
|
11,977 |
|
|
|
17,935 |
|
|
|
21,336 |
|
|
|
16,917 |
|
Net
interest income
|
|
|
27,179 |
|
|
|
23,850 |
|
|
|
22,648 |
|
|
|
21,302 |
|
|
|
22,996 |
|
Provision
for loan losses
|
|
|
10,300 |
|
|
|
16,085 |
|
|
|
2,431 |
|
|
|
409 |
|
|
|
138 |
|
Net
interest income after provision for loan losses
|
|
|
16,879 |
|
|
|
7,765 |
|
|
|
20,217 |
|
|
|
20,893 |
|
|
|
22,858 |
|
Noninterest
income
|
|
|
16,679 |
|
|
|
9,291 |
|
|
|
10,490 |
|
|
|
11,281 |
|
|
|
11,201 |
|
Noninterest
expense
|
|
|
40,843 |
|
|
|
28,971 |
|
|
|
24,439 |
|
|
|
23,636 |
|
|
|
24,037 |
|
Income
(loss) before income taxes
|
|
|
(7,285 |
) |
|
|
(11,915 |
) |
|
|
6,268 |
|
|
|
8,538 |
|
|
|
10,022 |
|
Income
tax expense (benefit)
|
|
|
(2,889 |
) |
|
|
(4,750 |
) |
|
|
2,263 |
|
|
|
3,267 |
|
|
|
3,810 |
|
Income
(loss) before extraordinary item
|
|
|
(4,396 |
) |
|
|
(7,165 |
) |
|
|
4,005 |
|
|
|
5,271 |
|
|
|
6,212 |
|
Extraordinary
item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on acquisition, net of tax
|
|
|
305 |
|
|
|
15,291 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Net
income
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
$ |
5,271 |
|
|
$ |
6,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (EPS)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS before extraordinary item
|
|
$ |
(0.28 |
) |
|
$ |
(0.45 |
) |
|
$ |
0.25 |
|
|
$ |
0.32 |
|
|
$ |
0.38 |
|
Basic
EPS of extraordinary item
|
|
|
0.02 |
|
|
|
0.96 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Basic
EPS after extraordinary item
|
|
|
(0.26 |
) |
|
|
0.51 |
|
|
|
0.25 |
|
|
|
0.32 |
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item
|
|
|
(0.28 |
) |
|
|
(0.45 |
) |
|
|
0.25 |
|
|
|
0.31 |
|
|
|
0.38 |
|
Diluted
EPS of extraordinary item
|
|
|
0.02 |
|
|
|
0.96 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Diluted
EPS after extraordinary item
|
|
|
(0.26 |
) |
|
|
0.51 |
|
|
|
0.25 |
|
|
|
0.31 |
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share(2):
|
|
|
0.22 |
|
|
|
0.22 |
|
|
|
0.21 |
|
|
|
0.19 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
DATA:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Number
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans outstanding
|
|
|
3,425 |
|
|
|
2,404 |
|
|
|
2,443 |
|
|
|
2,967 |
|
|
|
3,389 |
|
Deposit
accounts
|
|
|
107,344 |
|
|
|
97,893 |
|
|
|
66,366 |
|
|
|
68,874 |
|
|
|
70,373 |
|
Full
service offices
|
|
|
37 |
|
|
|
23 |
|
|
|
15 |
|
|
|
15 |
|
|
|
14 |
|
_________________
(1)
|
Net
of allowance for loan losses, loans in process and deferred loan
fees.
|
(2)
|
Earnings per share and dividends
declared per share have been adjusted to reflect the impact of the
second-step conversion and reorganization of the Company, which occurred
on December 19, 2007.
|
|
|
At
or For the Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
KEY
FINANCIAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets (1)
|
|
|
(0.40 |
)% |
|
|
1.12 |
% |
|
|
0.54 |
% |
|
|
0.71 |
% |
|
|
0.85 |
% |
Return
on average equity (2)
|
|
|
(1.85 |
) |
|
|
4.01 |
|
|
|
2.16 |
|
|
|
4.75 |
|
|
|
5.90 |
|
Dividend
payout ratio (3)
|
|
|
(84.33 |
) |
|
|
42.53 |
|
|
|
74.56 |
|
|
|
23.52 |
|
|
|
19.72 |
|
Equity-to-assets
ratio (4)
|
|
|
21.87 |
|
|
|
27.98 |
|
|
|
24.94 |
|
|
|
14.94 |
|
|
|
14.47 |
|
Interest
rate spread (5)
|
|
|
2.70 |
|
|
|
2.69 |
|
|
|
2.25 |
|
|
|
2.40 |
|
|
|
2.79 |
|
Net
interest margin (6)
|
|
|
3.09 |
|
|
|
3.50 |
|
|
|
3.21 |
|
|
|
3.03 |
|
|
|
3.33 |
|
Efficiency
ratio (7)
|
|
|
93.13 |
|
|
|
87.42 |
|
|
|
73.75 |
|
|
|
72.46 |
|
|
|
70.21 |
|
Noninterest
income/operating revenue (8)
|
|
|
38.03 |
|
|
|
28.03 |
|
|
|
31.70 |
|
|
|
34.40 |
|
|
|
32.60 |
|
Average
interest-earning assets to
average
interest-bearing liabilities
|
|
|
133.44 |
|
|
|
146.02 |
|
|
|
137.83 |
|
|
|
120.71 |
|
|
|
122.32 |
|
Noninterest
expense as a
percent
of average total assets
|
|
|
4.03 |
|
|
|
4.00 |
|
|
|
3.28 |
|
|
|
3.17 |
|
|
|
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 (core) capital
(to
tangible assets)
|
|
|
10.12 |
% |
|
|
19.61 |
% |
|
|
21.66 |
% |
|
|
13.56 |
% |
|
|
11.77 |
% |
Total
risk-based capital
(to
risk-weighted assets)
|
|
|
28.88 |
|
|
|
34.89 |
|
|
|
32.84 |
|
|
|
21.38 |
|
|
|
19.46 |
|
Tier
1 risk-based capital
(to
risk-weighted assets)
|
|
|
27.61 |
|
|
|
33.57 |
|
|
|
32.18 |
|
|
|
20.69 |
|
|
|
18.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
noncovered loans as a percent of
noncovered loans
|
|
|
2.64 |
% |
|
|
2.93 |
% |
|
|
2.14 |
% |
|
|
0.32 |
% |
|
|
0.08 |
% |
Nonperforming
assets as a percent of total assets,
including covered assets
|
|
|
4.42 |
|
|
|
6.87 |
|
|
|
1.46 |
|
|
|
0.29 |
|
|
|
0.05 |
|
Allowance
for loan losses on noncovered loans as a
percentage of noncovered loans
|
|
|
3.24 |
|
|
|
3.20 |
|
|
|
0.98 |
|
|
|
0.62 |
|
|
|
0.59 |
|
Allowance
for loan losses on noncovered loans as a
percentage of nonperforming noncovered loans
|
|
|
122.74 |
|
|
|
101.19 |
|
|
|
46.04 |
|
|
|
195.17 |
|
|
|
766.49 |
|
Net
charge-offs on noncovered loans as a percentage
of average noncovered loans outstanding during the
period
|
|
|
2.51 |
|
|
|
1.82 |
|
|
|
0.18 |
|
|
|
0.04 |
|
|
|
0.01 |
|
___________________
(1)
|
Net
income divided by average total
assets.
|
(2)
|
Net
income divided by average equity.
|
(3)
|
Dividends
paid to stockholders, excluding shares held by Home Federal MHC, divided
by net income.
|
(4)
|
Average
equity divided by average total
assets.
|
(5)
|
Difference
between weighted average yield on interest-earning assets and weighted
average rate on interest-bearing
liabilities.
|
(6)
|
Net
interest margin, otherwise known as net yield on interest-earning assets,
is calculated as net interest income divided by average interest-earning
assets.
|
(7)
|
Noninterest
expense divided by the sum of net interest income and noninterest
income.
|
(8)
|
Operating
revenue is defined as the sum of net interest income and noninterest
income.
|
Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements and “Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995
This
annual report on Form 10-K 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;
|
·
|
risks
related to acquiring assets in or entering markets in which we have not
previously operated and may not be
familiar;
|
·
|
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 changes in regulatory policies and
principles and the recently enacted Dodd-Frank Act and regulations that
have been or will be promulgated thereunder; and interpretation
of regulatory capital or other
rules;
|
·
|
our
ability to attract and retain
deposits;
|
·
|
further
increases in premiums for deposit
insurance;
|
·
|
our
ability to realize the residual values of our
leases;
|
·
|
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 have acquired, including the
Community First Bank and LibertyBank transactions described in this
report, or may in the future 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, or at all, and any goodwill charges
related thereto thereto and
costs or difficulties relating to integration matters, including but not
limited to customer and employee retention, which might be greater than
expected;
|
·
|
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 this 2010 Form 10-K and subsequently filed Quarterly Reports on
Form 10-Q. Such developments could have an adverse impact
|
Some of
these and other factors are discussed in this Annual Report on Form 10-K under
the caption “Risk Factors” and elsewhere in this document and in the documents
incorporated by reference herein. Such developments could have an adverse impact
on our financial position and our results of operations.
Any of
the forward-looking statements that we make in this annual report and in other
public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely on
such statements. We undertake 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 2011 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect our financial condition, liquidity and
operating and stock price performance.
GENERAL
Our
primary source of pre-tax income is net interest income. Net interest income is
the difference between interest income, which is the income that we earn on our
loans and investments, and interest expense, which is the interest that we pay
on our deposits and borrowings. Changes in levels of interest rates affect our
net interest income. We intend to diversify the mix of our assets by reducing
the percentage of our assets that are lower-yielding residential loans and
mortgage-backed securities and increasing the percentage of our assets
consisting of commercial loans that we believe have higher risk-adjusted
returns.
Our
operating expenses consist primarily of compensation and benefits, occupancy and
equipment, data processing, marketing, postage and supplies, professional
services and deposit insurance premiums. Compensation and benefits consist
primarily of the salaries and wages paid to our employees, non-cash expense
related to our employee stock ownership plan (“ESOP”), payroll taxes, expenses
for retirement and other employee benefits. Occupancy and equipment expenses,
which are the fixed and variable costs of building and equipment, consist
primarily of lease payments, taxes, depreciation charges, maintenance and costs
of utilities.
Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities. See “Item 1A. Risk
Factors" in this Annual Report on Form 10-K for additional discussion on the
risks we face related to these items.
We
entered into two purchase and assumption agreements with the FDIC to purchase
certain assets and assume certain liabilities of Community First Bank,
Prineville, Oregon, and LibertyBank, Eugene, Oregon, on August 7, 2009, and July
30, 2010, respectively. The acquisitions increased our total assets by $880
million, based on the fair value of assets purchased on the acquisition dates.
These acquisitions have been reported on a prospective basis in the accompanying
financial statements. As a result, comparability of the Company's balance sheets
and statements of operations as of and for the fiscal year ended September 30,
2010, will be difficult due to the significant impact of
the
acquisitions. Where appropriate in this discussion and analysis, we have
attempted to provide detail on the impact of the acquisitions on our financial
statements for fiscal year 2010.
Nearly
all loans, leases and real estate owned acquired in both FDIC-assisted
transactions are covered under FDIC loss-sharing agreements which significantly
reduce the Company's credit loss exposure. We refer to these assets as "covered
assets." Loans and REO in the Bank's organic operations are referred to as
"noncovered assets." We expect to recover 80% of losses and certain expenses
associated with the covered assets of Community First Bank on the first $34
million of losses. After that, we expect to recover 95% of losses and expenses
on those covered assets. We expect to recover 80% of losses and certain expenses
associated with the covered assets of LibertyBank.
OVERVIEW
Historic
change continued to be the theme for Home Federal Bancorp, Inc. in fiscal year
2009. While the local and national economies showed some signs of stabilization,
albeit at distressed levels, we searched for opportunities to prudently deploy
and leverage the capital raised in fiscal year 2008 in connection with the
second-step conversion from a mutual holding company. We were able to leverage
the Company’s capital without diluting existing shareholders by undertaking our
second FDIC-assisted acquisition in thirteen months. On July 30, 2010, we
acquired the operations of the failed LibertyBank in Eugene, Oregon (the
“LibertyBank Acquisition”). We acquired the operations of Community First Bank
in Prineville, Oregon on August 7, 2009 (the "CFB Acquisition") See “Business –
Organization” under Part I, Item 1 of this Form 10-K for additional information
regarding these acquisitions. We believe the current distressed
banking climate provides a unique opportunity to participate in FDIC-assisted
acquisitions. We continue to monitor a number of troubled institutions in our
primary market areas for additional acquisition opportunities in an effort to
enhance our franchise value and provide increasing returns to the Company’s
shareholders.
We have
been diligent and very selective in our pursuit of acquisition opportunities.
The FDIC-assisted acquisition of the assets and liabilities of LibertyBank was
attractive to us for a variety of reasons. The acquisition nearly doubled our
total assets, with the estimated fair value of assets acquired totaling $691
million at the acquisition date. It increased our deposit market share in
Central Oregon where we recently developed a presence through the CFB
Acquisition. The Bank also benefitted with new lending markets in Portland,
Eugene, Grants Pass and Medford, Oregon, which diversifies our footprint beyond
the economically stressed communities of Bend, Oregon and Boise, Idaho. Both of
these acquisitions included loss sharing agreements on nearly all of the
purchased loans, leases and other real estate owned ("REO").
While we
believe the LibertyBank Acquisition region will increase the Company’s earnings,
fiscal 2010 and 2011 expenses were and will be higher than expected over the
long-term as we incurred significant expenses to consummate the acquisition and
we will not centralize the our back office operations, particularly information
technology systems, until March 2011. Additionally, the LibertyBank Acquisition
resulted in a significant increase in cash due to the excess of liabilities
assumed over assets purchased and the retention by the FDIC of approximately
$297 million of loans in the LibertyBank portfolio. We expect the significant
increase in cash balances to result in a decrease in our net interest margin
until the cash can be invested into loans and securities. This influx of cash
and the additional expense burden will keep our earnings below optimal levels
until we can generate meaningful loan growth. In the short-term, our primary
goals related to the LibertyBank Acquisition is the successful integration of
the back-office operations, developing a strong commercial lending staff in our
Western Oregon Region, mitigating losses on purchased troubled assets, and
improving the mix of deposits assumed in the LibertyBank branches by reducing
the level of certificates of deposit and increasing core deposits.
The
following list summarizes the key internal strategic initiatives undertaken by
management and factors affecting performance of the Company during fiscal
2010:
§
|
As
noted above, we acquired LibertyBank with FDIC-assistance and recorded a
bargain purchase gain of $3.2
million;
|
§
|
We
launched two branches in Boise and Meridian, Idaho, in October and
November 2009, respectively;
|
§
|
We
completed two core system conversions in the fourth quarter of fiscal 2010
and successfully integrated the operations of Community First
Bank;
|
§
|
We
closed three Wal-Mart banking offices as we continue to revise our
branching strategy in favor of constructing full-service, free-standing
banking offices;
|
§
|
We
continued to execute our strategy to increase core deposits and reduce
reliance on high-cost certificates of deposit and
borrowings;
|
§
|
Noncovered
nonperforming loans decreased $2.1 million from September 30, 2009, and
totaled 2.70% of noncovered loans
|
§
|
Economic
conditions in our primary markets continued to be distressed as a result
of rising unemployment, bankruptcies and foreclosures and declining real
estate values, which resulted in rising levels of nonperforming assets and
the need for an additional provision for loan
losses;
|
§
|
Net
interest margin contracted due to the increase of cash and securities and
declining loan balances in our noncovered loan portfolio, but net interest
income increased due to higher balances of earning
assets;
|
§
|
Changes
in regulations reduced fee income;
|
§
|
The
Bank maintained its strong capital position with a total risk-based
capital ratio of 28.8% and the Company had a tangible capital ratio of
13.6% at September 30,
2010.
|
As noted
above, nearly all of the loans and REO purchased in the CFB Acquisition and the
LibertyBank Acquisition are covered by loss sharing agreements between the FDIC
and Home Federal Bank which affords the Bank significant
protection. Under the loss sharing agreements, Home Federal Bank will
share in the losses on assets covered under the agreement. In this discussion
and analysis, we refer to loans and REO subject to the loss sharing agreements
as "covered loans" and "covered REO" (collectively referred to as "covered
assets"). Loans that we have originated organically or are not covered under the
loss sharing agreements are referred to as "noncovered loans."
The
acquisition of two failed banks has significantly increased our nonperforming
assets and traditional asset quality metrics may not be applicable to our
financial statements without further review and scrutiny of our footnote
disclosure and our discussion and analysis that accompanies our financial
statements. Covered loans totaled $269.6 million and comprised 42.3% of our
total loan portfolio at September 30, 2010, which means a significant portion of
our loan portfolio has protection against credit losses. While nonperforming
loans totaled $35.0 million at September 30, 2010, only $9.7 million related to
noncovered loans, or 2.70% of total noncovered loans. Additionally, our
allowance for loan losses at September 30, 2010, was $15.4 million with $11.9
million allocated to noncovered loans. The ratio of the allowance for noncovered
loans to noncovered loans and to noncovered nonperforming loans totaled 3.24%
and 122.70%, respectively. While we can provide no assurance that additional
provisions for loan losses will not be necessary in the future, based on our
current estimates and when considered with the loss sharing agreements and the
loss indemnification provided under them, we believe we have significant
protection and reserves against credit losses at September 30,
2010.
Additionally,
we continue to hold excess capital, which we believe provides support against
further economic deterioration and loan losses, but also provides a solid
foundation for additional growth. The Company's tangible capital ratio (total
stockholders’ equity minus intangible assets divided by total assets minus
intangible assets) was 13.6% and the Bank's Tier 1 core and total risk-based
capital ratios were 10.1% and 28.8%, respectively, at September 30, 2010. The
current economic and interest rate environments continue to challenge our
organic growth plans. A lack of demand for loans, or more importantly a
diminished supply of creditworthy lending opportunities, as well as an increase
in residential loan refinancing, limited our ability to increase outstanding
organic loan balances. Alternative investments are also unattractive
as investment securities offer very low yields within management’s credit and
interest rate risk tolerances. Therefore, we intend to continue to seek
additional FDIC-assisted acquisitions that are within our core markets as
we believe that acquisitive growth is the best short-term alternative to
build an operational and retail structure that will allow us to thrive
profitably when the economy recovers.
Consistent
with our stated business strategy, we reduced fixed-term borrowing balances with
the Federal Home Loan Bank of Seattle (“FHLB”) and continued to focus on growing
core deposits, defined as non-maturity deposits such as checking, savings and
money market accounts, which we believe will increase the franchise value of the
Company and improve profitability by reducing interest rate sensitivity and
high-cost borrowing balances. We will conservatively offer interest rates on
certificates of deposit to facilitate a managed significant reduction in balance
of certificates of deposit during fiscal 2011, which should reduce our excess
cash position, improve net interest margin and improve
profitability.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
This
Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
as well as disclosures found elsewhere in this Annual Report on Form 10-K, are
based upon the Company’s consolidated financial statements, which are prepared
in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”). The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Several factors are considered in
determining whether or not a policy is critical in the preparation of financial
statements. These factors include, among other things, whether the estimates are
significant to the financial statements, the nature of the estimates, the
ability to readily validate the estimates with other information including third
parties or available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting methods may be utilized
under US GAAP.
Management
has identified several accounting policies that, due to the judgments, estimates
and assumptions inherent in those policies, are critical to an understanding of
our financial statements. These policies relate to the determination of the
allowance for loan losses (including the evaluation of impaired loans and the
associated provision for loan losses), accounting for acquired loans and covered
assets, the valuation of noncovered real estate owned, as well as deferred
income taxes and the associated income tax expense. Management reviews the
allowance for loan losses for adequacy on a quarterly basis and establishes a
provision for loan losses that it believes is sufficient for the loan portfolio
growth expected and the loan quality of the existing portfolio. The carrying
value of real estate owned is also assessed on a quarterly basis. Income tax
expense and deferred income taxes are calculated using an estimated tax rate and
are based on management’s and our tax advisor’s understanding of our effective
tax rate and the tax code. These estimates are reviewed by our independent
auditor on an annual basis and by our regulators when they examine Home Federal
Bank.
Allowance for Loan Losses.
Management recognizes that losses may occur over the life of a loan and
that the allowance for loan losses must be maintained at a level necessary to
absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. Management assesses the allowance for loan losses on a quarterly
basis by analyzing several factors including delinquency rates, charge-off rates
and the changing risk profile of the Bank’s loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
The
Company believes that the accounting estimate related to the allowance for loan
losses is a critical accounting estimate because it is highly susceptible to
change from period to period, requiring management to make assumptions about
probable incurred losses inherent in the loan portfolio at the balance sheet
date. The impact of a sudden large loss could deplete the allowance and require
increased provisions to replenish the allowance, which would negatively affect
earnings.
The
Company’s methodology for analyzing the allowance for loan losses consists of
specific allocations on significant individual credits and a general allowance
amount, including a range of losses. The specific allowance component is
determined when management believes that the collectability of an individually
reviewed loan has been impaired and a loss is probable. The general allowance
component relates to assets with no well-defined deficiency or weakness and
takes into consideration loss that is inherent within the portfolio but has not
been identified. The general allowance is determined by applying a historical
loss percentage to various types of loans with similar characteristics and
classified loans that are not analyzed specifically. Adjustments are made to
historical loss percentages to reflect current economic and internal
environmental factors such as changes in underwriting standards and unemployment
rates that may increase or decrease those loss factors. As a result of the
imprecision in calculating inherent and potential losses, a range is added to
the general allowance to provide an allowance for loan losses that is adequate
to cover losses that may arise as a result of changing economic conditions and
other qualitative factors that may alter historical loss
experience.
The
allowance for loan losses 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. Provisions for losses on covered
loans are recorded gross of recoverable amounts from the FDIC under the loss
sharing agreements. The recoverable portion of the provision for loan losses on
covered loans is recorded in other income.
The
Company also estimates a reserve related to unfunded loan commitments. In
assessing the adequacy of the reserve, the Company uses a similar approach used
in the development of the allowance for loan losses. The reserve for unfunded
loan commitments is included in other liabilities on the Consolidated Balance
Sheets. The provision for unfunded commitments is charged to noninterest
expense.
Acquired Loans. Loans acquired
in the CFB Acquisition were valued as of the acquisition date in accordance with
Statement of Financial Accounting Standard ("SFAS") 141. At the time of the CFB
Acquisition, the Company applied SFAS No. 141, “Business Combinations,” which
was superseded by SFAS No. 141(R). The Company was not permitted to adopt SFAS
No. 141(R) prior to its effective date, which was October 1, 2009, due to the
Company's fiscal year. Accounting Standards Codification (“ASC”)
Topic 310-30 applies to a loan with evidence of deterioration of credit quality
since origination, acquired by completion of a transfer for which it is
probable, at acquisition, that the investor will be unable to collect all
contractually required payments receivable. For loans purchased in the CFB
Acquisition that were accounted for under ASC 310-30, management determined the
value of the loan portfolio based on work provided by an
appraiser. Factors considered in the valuation were projected cash
flows for the loans, type of loan and related collateral, classification status
and current discount rates. Management also estimated the amount of
credit losses that were expected to be realized for the loan portfolio primarily
by estimating the liquidation value of collateral securing loans on non-accrual
status or classified as substandard or doubtful. At September 30, 2010, a
majority of these loans were valued based on the liquidation value of the
underlying collateral, because the expected cash flows are primarily based on
the liquidation of the underlying collateral. Loans purchased in the CFB
Acquisition accounted for under ASC 310-30 were not aggregated into pools and
are accounted for on a loan-by-loan basis. An allowance for loan losses was
established for loans purchased in the CFB Acquisition that are not accounted
for under ASC 310-30.
Loans
purchased in the LibertyBank Acquisition are valued as of acquisition date in
accordance with ASC 805 Business Combinations, formerly SFAS 141(R). Further,
the Company elected to account for all other loans purchased in the LibertyBank
Acquisition within the scope of ASC 310-30 using the same methodology. Under ASC
805 and ASC 310-30, loans purchased in the LibertyBank Acquisition were recorded
at fair value at acquisition date, factoring in credit losses expected to be
incurred over the life of the loan. Accordingly, an allowance for loan losses is
not carried over or recorded as of the acquisition date, unlike the loans
purchased in the CFB Acquisition, which are accounted for under previous
guidance as described above. In situations where loans have similar risk
characteristics, loans were aggregated into pools to estimate cash flows under
ASC 310-30. A pool is accounted for as a single asset with a single interest
rate, cumulative loss rate and cash flow expectation. The Company aggregated all
of the loans purchased in the LibertyBank Acquisition into 22 different pools,
based on common risk characteristics such as loan classification, loan
structure, nonaccrual status and collateral type.
The cash
flows expected over the life of the pools are estimated using an internal cash
flow model that projects cash flows and calculates the carrying values of the
pools, book yields, effective interest income and impairment, if any, based on
pool level events. Assumptions as to cumulative loss rates, loss curves and
prepayment speeds are utilized to calculate the expected cash flows. Under ASC
310-30, the excess of the expected cash flows at acquisition over the fair value
is considered to be the accretable yield and is recognized as interest income
over the life of the loan or pool. The excess of the contractual cash flows over
the expected cash flows is considered to be the nonaccretable difference.
Subsequent increases in cash flow over those expected at purchase date in excess
of fair value are recorded as an adjustment to accretable difference on a
prospective basis. Any subsequent decreases in cash flow over those expected at
purchase date are recognized by recording an allowance for loan losses. Any
disposals of loans, including sales of loans, payments in full or foreclosures
result in the removal of the loan from the ASC 310-30 portfolio at the carrying
amount.
Covered Assets. The
majority of the loans and leases acquired in the CFB Acquisition and the
LibertyBank Acquisition are included under various loss sharing agreements with
the FDIC and are referred to as "covered loans." Covered loans are reported
exclusive of the expected cash flow reimbursements expected from the FDIC. At
the date of acquisition, all covered loans were accounted for under ASC 805 and
ASC 310-30. Subsequent to acquisition all covered loans are accounted for under
ASC 310-30.
All REO
acquired in the CFB Acquisition and the LibertyBank Acquisition are also
included in the loss sharing agreements and are referred to as "covered REO."
Covered REO is reported exclusive of expected reimbursement cash flows from the
FDIC. Upon transferring covered loan collateral to covered other real estate
owned status, acquisition date fair value discounts on the related loan are also
transferred to covered other real estate owned. Fair
value
adjustments on covered other real estate owned result in a reduction of the
covered other real estate carrying amount and a corresponding increase in the
estimated FDIC reimbursement, with the estimated net loss to the Bank charged
against earnings.
FDIC Indemnification Asset. In
conjunction with the CFB Acquisition and the LibertyBank Acquisition, the Bank
entered into a shared-loss agreement with the FDIC for amounts receivable under
the shared-loss agreement. In some cases the FDIC indemnification agreement may
be terminated on a loan by loan basis if the Bank renews or extends individual
loans. At each acquisition date the Company elected to account for amounts
receivable under the loss sharing agreements as an indemnification asset.
Subsequent to the acquisitions the indemnification asset is tied to the loss in
the covered loans and is not being accounted for under fair value. The FDIC
indemnification asset is accounted for on the same basis as the related covered
loans and is the present value of the cash flows the Company expects to collect
from the FDIC under the shared-loss agreement. The difference between the
present value and the undiscounted cash flow the Company expects to collect from
the FDIC is accreted into noninterest income over the life of the FDIC
indemnification asset.
The FDIC
indemnification asset is adjusted for any changes in expected cash flows based
on the loan performance. Any increases in cash flow of the loans over those
expected will reduce the FDIC indemnification asset and any decreases in cash
flow of the loans over those expected will increase the FDIC indemnification
asset. The FDIC indemnification asset will be reduced as losses are recognized
on covered assets and loss sharing payments are received from the FDIC.
Increases and decreases to the FDIC indemnification asset are recorded as
adjustments to noninterest income.
Noncovered Real Estate Owned.
Real estate properties acquired through, or in lieu of, loan foreclosure
that are not covered under a loss sharing agreement with the FDIC ("noncovered
REO") are initially recorded at the fair value at the date of foreclosure minus
estimated costs to sell. Any valuation adjustments required at the time of
foreclosure are charged to the allowance for loan losses. After foreclosure, the
properties are carried at the lower of carrying value or fair value less
estimated costs to sell. Any subsequent valuation adjustments, operating
expenses or income, and gains and losses on disposition of such properties are
recognized in current operations. The valuation allowance is established based
on our historical realization of losses and adjusted for current market
trends.
Deferred Income Taxes.
Deferred income taxes are reported for temporary differences between
items of income or expense reported in the financial statements and those
reported for income tax purposes. Deferred taxes are computed using the asset
and liability approach as prescribed in ASC Topic 740, “Income Taxes.” Under
this method, a deferred tax asset or liability is determined based on the
enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution’s income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date. The primary differences between
financial statement income and taxable income result from depreciation expense,
mortgage servicing rights, loan loss reserves, deferred compensation, mark to
market adjustments on our available for sale securities, and dividends received
from the Federal Home Loan Bank of Seattle. Deferred income taxes do not include
a liability for pre-1988 bad debt deductions allowed to thrift institutions that
may be recaptured if the institution fails to qualify as a bank for income tax
purposes in the future.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2010, AND SEPTEMBER 30,
2009
Total
assets increased $655.0 million, or 79.1%, to $1.5 billion at September 30,
2010, from $827.9 million at September 30, 2009. The increase was primarily a
result of the acquisition of $690.6 million of the assets of LibertyBank on July
30, 2010, partially offset by decreases over the year in noncovered organic
loans and mortgage backed securities. Total liabilities increased
$659.5 million, or 106.7%, to $1.3 billion primarily due to the $688.6 million
in assumed liabilities via the acquisition less the reduction in FHLB and other
borrowings of $17.1 million from the year ago period.
Assets. The increases and
decreases in total assets were primarily concentrated in the following asset
categories:
|
|
|
|
|
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
September
30,
2010
|
|
|
Balance
at
September
30,
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
Cash
and amounts due from depository
institutions
|
|
$ |
416,426 |
|
|
$ |
49,953 |
|
|
$ |
366,473 |
|
|
|
733.64 |
% |
Investment
securities, available for sale
|
|
|
275,180 |
|
|
|
169,320 |
|
|
|
105,860 |
|
|
|
62.52 |
|
Loans
receivable, net of allowance for loan losses
|
|
|
620,493 |
|
|
|
510,629 |
|
|
|
109,864 |
|
|
|
21.52 |
|
Cash and amounts due from depository
institutions. The higher cash balance at September 30, 2010, is primarily
due to the LibertyBank acquisition. Total cash acquired in the
LibertyBank acquisition was $373.1 million. While efforts are
underway to deploy this cash, the current economic conditions, including the low
interest rate environment, are presenting challenges as the number of
creditworthy borrowers has decreased substantially and locating medium-term
securities that provide an attractive return has also proven difficult.
Additionally, we have conserved cash balances as liquidity support for the
possible acquisition of troubled institutions that may not have adequate
liquidity. Nearly all the amounts due from depository institutions are held at
the Federal Reserve Bank of San Francisco in order to minimize our credit
risk.
Securities. Included in assets
acquired in the LibertyBank Acquisition was $34.7 million in
investments. In addition, securities balances have also increased
from the prior year as purchases of medium-term securities have increased as
excess cash has been invested. Our purchases of securities in fiscal
2010, and going forward into 2011, have focused on purchasing high-quality
investments with an average duration, or average life, of approximately 2.75
years. We have given preference to short and medium-term securities in
anticipation of rapidly rising interest rates and increases in loan demand in
the next 18 to 24 months. Additionally, we want to mitigate price sensitivity to
protect capital if we need to sell significant amounts of securities in the
future to increase liquidity.
Most of
the Company’s mortgage-backed securities were issued by U.S.
Government-sponsored enterprises, primarily Fannie Mae and Freddie Mac. While
the U.S. Government has recently affirmed its support for government-sponsored
enterprises and the mortgage-backed securities they issued, significant
deterioration in the financial strength of Fannie Mae, Freddie Mac or
mortgage-backed security insurers may have a material effect on the valuation
and performance of the Company’s mortgage-backed securities portfolio in future
periods. At September 30, 2010, we held one private label security with a fair
value of $599,000 which carried a Moody’s rating of A1. Management has reviewed
the delinquency status, credit support and collateral coverage of the loans
pooled in this security and has concluded it was not other than temporarily
impaired at September 30, 2010.
Loans and leases. Loans and
leases receivable, net, increased $109.9 million to $620.5 million at September
30, 2010, from $510.6 million at September 30, 2009. The reported balance of
loans acquired through the LibertyBank acquisition was $188.8 million as of
September 30, 2010. The organic loan portfolio declined $78.9 million
with one-to-four family residential loans decreasing $37.0 million.
The
reduction of one-to-four family residential loans is consistent with our
strategy to reduce the portfolio’s concentration in those loans in favor of
increasing the mix of commercial and commercial real estate loans in order to
improve interest rate sensitivity and net interest margin. Additionally,
commercial lending relationships often translate to more profitable deposit
relationships. We began selling nearly all new one-to-four family loan
originations in the secondary market in 2006. The sale of one-to-four family
residential real estate loans to investors in the secondary market in connection
with our mortgage banking activities requires us to make representations and
warranties about the underlying assets conforming to specified guidelines. If
the underlying assets do not conform to the specifications, we may have an
obligation to repurchase the assets or indemnify the purchaser against loss. We
believe that the potential for significant loss under these arrangements is
remote due to our conservative underwriting standards. However, past performance
may not be representative of future performance on sold loans and we may
experience losses in the future. We recorded losses totaling $65,000 in
connection with these arrangements during fiscal year 2010. At September 30,
2010 and 2009, we had a reserve for unfunded commitments and other off balance
sheet contingencies in the amount of $592,000 and $581,000,
respectively.
As mentioned
earlier, the economic recession has significantly slowed business activity and
reduced opportunities to provide commercial lending solutions. Commercial real
estate vacancies in our markets have increased. As a result, we are concerned
that the Bank will not be able to grow the loan portfolio organically through
fiscal 2011.
The loan
portfolio purchased in the LibertyBank Acquisition totaled $188.8 million at
September 30, 2010, and was primarily comprised of commercial business loans of
$90.7 million, commercial real estate loans of $37.4 million, construction and
land development loans of $16.5 million and one-to-four family residential loans
of $16.0 million. Approximately $47.6 million of the commercial business loans
are financing leases that have remaining terms of less than five years that were
originated by CELC, the leasing subsidiary that was an asset we purchased in the
LibertyBank Acquisition. Currently we intend to wind down the operations of CELC
and anticipate these lease balances will be substantially paid off within the
next three years. Consumer loans not secured by real estate that were
purchased in the LibertyBank Acquisition that are not covered loans totaled $5.0
million at September 30, 2010.
Allowance for loan losses. The
allowance for loan losses decreased to $15.4 million at September 30, 2010, from
$28.7 million at September 30, 2009. At September 30, 2010, we had an allowance
of $11.9 million on noncovered loans and an allowance of $3.5 million on covered
loans purchased in the CFB Acquisition. No allowance was recorded on loans and
lease purchased in the LibertyBank Acquisition as they are reported at the net
present value or estimated cash flows to be collected as of September 30,
2010.
We
disclosed in our September 30, 2009, Form 10-K that the estimated fair value of
loans purchased in the CFB Acquisition were preliminary, highly subjective and
could be adjusted during an allocation period lasting up to 12 months from the
acquisition date, which was August 7, 2009. During this allocation period, we
obtained information that evidenced credit impairment on certain loans that were
not previously identified as purchased credit impaired loans. Additionally, we
updated the fair values of loans previously identified as purchased credit
impaired loans on the date of acquisition. These adjustments reduced the
preliminary estimated fair values of purchased credit impaired loans from the
CFB Acquisition. Lastly, management updated preliminary estimated loss rates for
covered loans in the CFB Acquisition that were not accounted for under ASC
310-30. These adjustments and reclassifications were made during the quarter
ended June 30, 2010, and resulted in a reduction in the allowance for loan
losses on covered loans of $9.2 million with $3.7 million of that adjustment
reclassified against purchased credit impaired loans.
The
allowance for loan losses on the noncovered loan portfolio was approximately
3.24% of noncovered loans at September 30, 2010, with only $2.5 million of the
$11.9 million allowance on noncovered loans specifically allocated to impaired
noncovered loans. Nonperforming noncovered loans totaled $9.7 million at
September 30, 2010, or 2.64% of total noncovered loans, compared to $11.8
million, or 2.85%, at September 30, 2009. At
September 30, 2010, we allocated more of our allowance for loan losses toward
our commercial and one-to-four family real estate due to continued depreciation
in property values and due to the higher loss rates incurred during fiscal year
2010.
As noted
earlier, loans accounted for under ASC 310-30 are reported at the net present
value of estimated cash flows and an allowance for loan losses is not recorded
unless impairment occurs in excess of the original estimated losses. At
September 30, 2010 and 2009, the estimated credit losses on loans under ASC
310-30 was $60.0 and $14.1 million, respectively. Because of the loss sharing
agreements with the FDIC on these loans, we do not expect to incur excessive
future losses on the acquired loan portfolio. See “Asset Quality” on page 17 of
this Form 10-K for additional discussion on the loss share agreement and our
estimate of losses under the agreement. Page 24 of this Form 10-K discloses the
allocation of the allowance for loan losses
FDIC indemnification receivable.
As part of the purchase and assumption agreements for the acquisitions,
we entered into loss sharing agreements with the FDIC. These
agreements cover realized losses on covered assets purchased from the FDIC in
the CFB Acquisition and LibertyBank Acquisition. The increase in the FDIC
indemnification receivable during fiscal year 2010 was due to the LibertyBank
Acquisition. At September 30, 2010, the FDIC indemnification receivable for
estimated losses on covered assets in the LibertyBank Acquisition totaled $57.4
million. The receivable for estimated losses on covered assets in the CFB
Acquisition was $7.1 million at September 30, 2010, compared to $30.0 million at
September 30, 2009. The reduction in the FDIC indemnification receivable for
covered assets of the CFB Acquisition was due to $22.8 million of payments from
the FDIC on
realized losses on covered loans in
the CFB Acquisition, in addition to a $5.5 million decrease due to purchase
accounting adjustments to the preliminary estimate fair values of loans
purchased in the CFB Acquisition.
Property and equipment.
Property and equipment increased $7.5 million primarily due to the CFB
Acquisition and the implementation of a new core application system during
fiscal year 2010. We purchased five branches of Community First Bank
from the FDIC for a total of $5.7 million. In August 2010 we
converted our legacy operations and the operations of Community First Bank to a
new core application system that resulted in an increase in property and
equipment of $2.5 million. During the fiscal year just
ended, we closed three branches that were in Wal-Mart supermarkets and two such
Wal-Mart branches remain as of September 30,
2010.
We did
not acquire the banking locations of LibertyBank at the same time as the closing
of the LibertyBank Acquisition. Under the purchase and assumption agreement with
the FDIC, we had a 90-day option period after the transaction date, which was
July 30, 2010, to review the banking facilities of the failed institution and
obtain appraisals of the banking office and their contents. Subsequent to
September 30, 2010, we provided the FDIC notice that we did not intend to
purchase two of the banking offices of LibertyBank or assume the lease for
LibertyBank’s operations center and that we would assume the remaining banking
offices, leases and furniture and equipment of LibertyBank. We estimate the cost
of the buildings and furniture and fixtures to be $11.4 million, which will be
settled by the end of February 2011.
We do not
intend to construct new banking offices in the near future as population growth
in our markets has slowed. Rather, we will seek acquisition opportunities to
complement and leverage the Bank’s existing footprint and will consider closing
inefficient banking offices in the future.
Mortgage servicing rights. In
August 2008, the Bank entered into an agreement to sell its mortgage servicing
rights to another financial institution since we now sell nearly all one-to-four
family loan originations in the secondary market with servicing released. The
placement of Fannie Mae and Freddie Mac into the conservatorship of the Federal
government, in addition to sweeping changes in the secondary market, caused
uncertainty about the future value of the mortgage servicing rights asset.
Lastly, the rapid deterioration of the real estate market and the increase in
foreclosures in the Treasure Valley raised concern among management that
resources would be diverted to resolving foreclosed assets for loans owned by
others and away from the mitigation of loan losses and the workout of troubled
loans in our own portfolio. The sale of the mortgage servicing rights was
completed in the first quarter of fiscal 2009.
At
September 30, 2010, we did provide limited servicing support for loans retained
by the FDIC in the LibertyBank failure, subject to an interim servicing
agreement that was included in the purchase and assumption agreement. We believe
the FDIC will convert these multifamily and commercial real estate loans from
our servicing system by December 31, 2010. Due to the short period of servicing
expected under the interim servicing agreement, we did not record servicing
rights on the balance sheet at September 30, 2010. Other than this interim
servicing agreement, we did not service loans for other institutions at
September 30, 2010.
Bank owned life insurance. The
value of bank owned life insurance increased $423,000 to $12.4 million. The
policy premiums are invested in insurance companies which each have a rating of
at least ‘A’ by Standard & Poor’s and A.M. Best. We continue to monitor the
financial performance, capital levels and financial ratings of the companies
that have issued the Bank’s “general account” life insurance
policies.
Real estate and other property owned.
Real estate and other property owned (“REO”) increased $12.1 million
during fiscal year 2010 to $30.5 million due to continued foreclosures and the
LibertyBank Acquisition. Covered REO totaled $20.5 million at September 30,
2010, with $13.7 million related to the LibertyBank acquisition and the
remaining covered REO was related to the CFB Acquisition. Noncovered REO totaled
$10.0 million and was comprised of $5.0 million of commercial real estate, $2.0
million of land, and $3.0 million of single family residences.
Deferred taxes. As of
September 30, 2010, the net deferred tax liability balance was $2.2 million
versus a net deferred tax asset of $5.6 million at September 30, 2009. The
difference is mainly due to the $7.7 million deferred tax liability that was
recorded in connection with the LibertyBank Acquisition representing the fair
value adjustments on the loans and deposits acquired, as well as the excess of
the purchase discount over the net assets
acquired, offset
partially by a $5.2 million decline in the deferred tax asset associated with
the allowance for loan losses.
Deposits. Deposits increased
$674.8 million, or 131.1%, to $1.2 billion at September 30, 2010, from $514.9
million at September 30, 2009 primarily due to the deposits assumed in the
LibertyBank acquisition. The following table details
our organic deposits versus deposits acquired as part of the LibertyBank
Acquisition as of September 30, 2010:
|
|
September
30, 2010
|
|
|
|
(in
thousands)
|
|
|
|
LibertyBank
Acquisition
|
|
|
Organic
|
|
|
Total
|
|
Noninterest-bearing
demand
|
|
$ |
60,583 |
|
|
$ |
77,717 |
|
|
$ |
138,300 |
|
Interest-bearing
demand
|
|
|
102,291 |
|
|
|
101,263 |
|
|
|
203,554 |
|
Health
savings accounts
|
|
|
-- |
|
|
|
22,240 |
|
|
|
22,240 |
|
Money
market
|
|
|
71,525 |
|
|
|
108,929 |
|
|
|
180,454 |
|
Savings
|
|
|
15,550 |
|
|
|
53,529 |
|
|
|
69,079 |
|
Certificates
of deposit
|
|
|
356,930 |
|
|
|
219,105 |
|
|
|
576,035 |
|
Total
deposit accounts
|
|
$ |
606,879 |
|
|
$ |
582,783 |
|
|
$ |
1,189,662 |
|
The
following table details the changes in total deposit accounts:
|
|
|
|
|
Increase
/ (Decrease)
|
|
|
|
Balance
at
September
30,
2010
|
|
|
Balance
at
September
30,
2009
|
|
|
Total
Deposits
|
|
|
Excluding
LibertyBank Acquisition
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
138,300 |
|
|
$ |
68,155 |
|
|
$ |
70,145 |
|
|
$ |
9,562 |
|
Interest-bearing
demand
|
|
|
203,554 |
|
|
|
78,393 |
|
|
|
125,160 |
|
|
|
22,870 |
|
Health
savings accounts
|
|
|
22,240 |
|
|
|
21,248 |
|
|
|
992 |
|
|
|
992 |
|
Money
market
|
|
|
180,454 |
|
|
|
76,408 |
|
|
|
104,046 |
|
|
|
32,521 |
|
Savings
|
|
|
69,079 |
|
|
|
41,757 |
|
|
|
27,323 |
|
|
|
11,772 |
|
Certificates
of deposit
|
|
|
576,035 |
|
|
|
228,897 |
|
|
|
347,138 |
|
|
|
(9,792 |
) |
Total
deposit accounts
|
|
$ |
1,189,662 |
|
|
$ |
514,858 |
|
|
$ |
674,804 |
|
|
$ |
67,925 |
|
Deposits
resulting from the LibertyBank Acquisition totaled $606.9 million at September
30, 2010, which represents a decrease of $67.6 million since acquisition.
Certificates of deposit assumed in the LibertyBank Acquisition have decreased
$64.9 million between July 30, 2010, and September 30, 2010. Balances of core
deposits (defined as checking, savings and money market accounts) have only
decreased slightly since the acquisition, highlighting the execution of our goal
to focus on retaining and increasing core deposits.
While the
LibertyBank Acquisition was a significant driver for the increase in deposits in
fiscal year 2010, we were successful in continuing to execute our plan to
increase core deposits organically. Excluding the LibertyBank Acquisition, core
deposits increased $77.8 million, or 27.2%, during fiscal year 2010. We believe
increasing core deposits and reducing reliance on certificates of deposits is an
important component in the strategy to transform our balance sheet toward a
commercial bank. The investment in free-standing full-service banking offices,
reduced reliance on in-store branches, and changes made in the management team
and the organizational alignment of our retail banking program will help
increase core deposit accounts, despite the significant challenges in our
markets.
Our
deposit portfolio includes a concentration of low-cost health savings accounts.
Health savings accounts totaled $22.2 million and $21.2 million at September 30,
2010 and 2009, respectively. Most of these accounts are originated through
broker relationships throughout the United States. We have limited control over
these accounts as they are not local to our operating markets. Additionally,
changes in tax law or the structure of health savings accounts could cause the
balances to be withdrawn.
Borrowings. Federal Home Loan
Bank advances and other borrowings decreased $17.1 million, or 20.2%, to $67.6
million at September 30, 2010, from $84.7 million at September 30, 2009, as we
repaid our advances as they matured during the year. FHLB borrowings with a fair
value of $1.1 million assumed in the LibertyBank acquisition were paid off prior
to September 30, 2010. We have
$12.1 million of FHLB advances maturing in fiscal 2011 and intend to reduce
outstanding advance balances as they mature as we had excess liquidity at
September 30, 2010. We had
$117.5 million of borrowing capacity available at the Federal Home Loan Bank of
Seattle at September 30, 2010.
While the
Company's cash balances are in excess of optimal levels due to deposit growth
and cash received in the LibertyBank acquisition, management has currently
decided to preserve capital and not prepay the Company's outstanding borrowings
while the Company continues to seek acquisitive growth. The estimated prepayment
penalty on the Bank's FHLB borrowings was approximately $3.8 million at
September 30, 2010.
Other
borrowings include retail repurchase agreements that are collateralized by
various investment securities. Repurchase agreements totaled $8.8 million and
$1.8 million at September 30, 2010 and 2009, respectively.
Equity. Stockholders’ equity
decreased $4.6 million, or 2.2%, to $205.1 million at September 30, 2010, from
$209.7 million at September 30, 2009. The net loss for the year as well as the
payment of dividends were the primary cause for the decrease in stockholder’s
equity. This decrease was partially offset by an increase related to
our stock based compensation.
The Board
announced another 5% repurchase plan in July 2009, which authorized management
to repurchase up to 834,900 shares of the Company's common stock. No
shares were repurchased under the July 2009 program and we do not
anticipate purchasing shares at a price higher than the Company’s tangible book
value per share. We believe the preservation of capital is critical to executing
our acquisition strategy.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2010, AND SEPTEMBER 30
2009
General. Net loss for the year
ended September 30, 2010 was $4.1 million, or $0.26 per diluted share, compared
to net income of $8.1 million, or $0.51 per diluted share, for the year ended
September 30, 2009. The net loss for the fiscal year ended September 30, 2010
included a $3.2 million bargain purchase gain related to the LibertyBank
Acquisition. Net income for the fiscal year ended September 30, 2009, included a
$15.3 million after-tax extraordinary gain related to the CFB Acquisition. The
LibertyBank Acquisition resulted in a significant increase in cash due to the
excess of liabilities assumed over assets purchased and the retention by the
FDIC of approximately $297 million of loans in the LibertyBank portfolio. We
expect the increase in cash balances to result in a decrease in our net interest
margin until the cash can be invested into loans and securities. Moreover, we
believe the weak economy will limit our ability to significantly increase loans
in the near-term.
Net Interest Income. Net
interest income increased $3.3 million, or 14.0%, to $27.2 million for the year
ended September 30, 2010, from $23.9 million for the year ended September 30,
2009. The increase in net interest income was primarily attributable to the
increase in net earning assets due to the acquisitions and lower FHLB advance
balances during fiscal year 2010. Despite the increase in net interest income,
net interest margin declined to 3.09% during fiscal year 2010 from 3.50% in
fiscal year 2009 due to the shift in the mix of interest-earning assets from
loans to interest-bearing deposits in banks and investment securities. The net
interest margin for the fourth quarter of fiscal year 2010 was
2.89%.
The
following table sets forth the results of balance sheet growth and changes in
interest rates to our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). Changes attributable to both rate and
volume, which cannot be segregated, are allocated proportionately to the changes
in rate and volume.
|
|
Year
Ended September 30, 2010
Compared
to September 30, 2009
Increase
(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
413 |
|
|
$ |
2,875 |
|
|
$ |
3,289 |
|
Loans
held for sale
|
|
|
(24 |
) |
|
|
(73 |
) |
|
|
(98 |
) |
Interest
bearing deposits in other banks
|
|
|
3 |
|
|
|
276 |
|
|
|
279 |
|
Investment
securities, available for sale
|
|
|
(3 |
) |
|
|
142 |
|
|
|
139 |
|
Mortgage-backed
securities
|
|
|
(1,039 |
) |
|
|
(896 |
) |
|
|
(1,935 |
) |
Federal
Home Loan Bank stock
|
|
|
30 |
|
|
|
3 |
|
|
|
33 |
|
Total
net change in income on interest-earning assets
|
|
$ |
(620 |
) |
|
$ |
2,327 |
|
|
$ |
1,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
3 |
|
|
$ |
67 |
|
|
$ |
70 |
|
Interest-bearing
demand deposits
|
|
|
142 |
|
|
|
304 |
|
|
|
446 |
|
Money
market accounts
|
|
|
(12 |
) |
|
|
246 |
|
|
|
234 |
|
Certificates
of deposit
|
|
|
(1,014 |
) |
|
|
389 |
|
|
|
(625 |
) |
Total
deposits
|
|
|
(881 |
) |
|
|
1,006 |
|
|
|
125 |
|
Federal
Home Loan Bank advances
|
|
|
(431 |
) |
|
|
(1,317 |
) |
|
|
(1,748 |
) |
Total
net change in expense on interest-bearing
liabilities
|
|
$ |
(1,312 |
) |
|
$ |
(311 |
) |
|
$ |
(1,623 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
3,330 |
|
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2010
increased $1.7 million, or 4.7%, to $37.5 million, from $35.8 million for the
same period of the prior year. The increase during the period was primarily
attributable to the increase in interest-earning balances purchased in the
acquisitions. The impact of the increase in balances acquired was offset
somewhat by yields on interest-earning assets which decreased to 4.27% from
5.26% in the prior year. Interest-bearing deposits in other banks was the
primary cause for the decrease in the total asset yield as the average
outstanding balances of those deposits increased from $18.4 million in fiscal
year 2009 to $156.4 million in fiscal year 2010.
Loans and
leases purchased in the LibertyBank Acquisition increased interest income by
$2.9 million in fiscal year 2010. Additionally, the amortization of fair value
adjustments on purchased loans reduced interest income by $681,000 in fiscal
year 2010.
The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income for the years
ended September 30, 2010 and 2009:
|
|
Year
Ended September 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
|
|
$ |
536,342 |
|
|
|
5.72 |
% |
|
$ |
468,205 |
|
|
|
5.85 |
% |
|
$ |
3,289 |
|
Loans
held for sale
|
|
|
1,719 |
|
|
|
4.74 |
|
|
|
3,176 |
|
|
|
5.65 |
|
|
|
(98 |
) |
Interest
bearing deposits in other banks
|
|
|
156,409 |
|
|
|
0.21 |
|
|
|
18,391 |
|
|
|
0.27 |
|
|
|
279 |
|
Investment
securities, available for sale
|
|
|
15,100 |
|
|
|
1.20 |
|
|
|
1,503 |
|
|
|
2.79 |
|
|
|
139 |
|
Mortgage-backed
securities
|
|
|
158,830 |
|
|
|
3.96 |
|
|
|
179,729 |
|
|
|
4.57 |
|
|
|
(1,935 |
) |
FHLB
stock
|
|
|
11,601 |
|
|
|
- |
|
|
|
9,760 |
|
|
|
(0.34 |
) |
|
|
33 |
|
Total
interest-earning assets
|
|
$ |
880,001 |
|
|
|
4.27 |
% |
|
$ |
680,764 |
|
|
|
5.26 |
% |
|
$ |
1,707 |
|
Interest Expense. Interest
expense decreased $1.6 million, or 13.5%, to $10.4 million for the year ended
September 30, 2010 from $12.0 million for the year ended September 30, 2009. The
decrease is primarily attributable to the decline in our cost of funds, which
decreased from 2.57% in the prior year to 1.57% in the current year and lower
FHLB balances in 2010. These effects were offset somewhat by higher balances of
deposits due to organic core deposit growth and the acquisitions. Liabilities
(primarily deposits) assumed in the LibertyBank Acquisition increased interest
expense by $331,000 in fiscal year 2010. Fair value adjustments from the CFB
Acquisition and the LibertyBank Acquisition reduced interest expense by $420,000
and $1.1 million, respectively, in fiscal year 2010. The accretion of fair value
purchase accounting adjustments is expected to reduce interest expense by $2.8
million, $353,000 and $48,000 in fiscal years 2011, 2012 and 2013,
respectively.
The
following table details average balances, cost of funds and the change in
interest expense for the year ended September 30, 2010 and 2009:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/
|
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
Average
Balance
|
|
|
Cost
|
|
|
(Decrease)
in Interest
Expense
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
49,966 |
|
|
|
0.61 |
% |
|
$ |
33,513 |
|
|
|
0.70 |
% |
|
$ |
70 |
|
Interest-bearing
demand
deposits
|
|
|
131,856 |
|
|
|
0.68 |
|
|
|
83,651 |
|
|
|
0.53 |
|
|
|
446 |
|
Money
market deposits
|
|
|
102,657 |
|
|
|
0.88 |
|
|
|
55,692 |
|
|
|
1.21 |
|
|
|
234 |
|
Certificates
of deposit
|
|
|
295,716 |
|
|
|
1.72 |
|
|
|
181,774 |
|
|
|
3.15 |
|
|
|
(625 |
) |
FHLB
advances
|
|
|
79,264 |
|
|
|
3.98 |
|
|
|
111,573 |
|
|
|
4.39 |
|
|
|
(1,748 |
) |
Total
interest-bearing liabilities
|
|
$ |
659,459 |
|
|
|
1.57 |
% |
|
$ |
466,203 |
|
|
|
2.57 |
% |
|
$ |
(1,623 |
) |
Approximately
$369.8 million and $12.1 million of certificates of deposit and FHLB advances,
respectively, are scheduled to mature during fiscal year 2011.
Provision for Loan Losses. A
provision for loan losses of $10.3 million, including a provision of $1.1
million on covered loans, was recorded in connection with our analysis of losses
in the loan portfolio for the year ended September 30, 2010, compared to a
provision for loan losses of $16.1 million for the same period of 2009. The
provision takes into account the increase in classified assets, nonperforming
loans and loan losses during fiscal 2010 as well as the current downturn in the
real estate market, internal changes in our lending and underwriting policies
and the general economy. The estimated indemnifiable portion (95%) of the $1.1
million provision for loan losses on covered loans is recorded as an increase to
the FDIC indemnification assets and an increase in other income, which totaled
$998,000 in fiscal 2010.
We
consider the allowance for loans losses at September 30, 2010, to be our best
estimate of probable incurred losses inherent in the loan portfolio as of that
date based on the assessment of the above-mentioned factors affecting the loan
portfolio. While we believe the estimates and assumptions used in the
determination of the allowance are reasonable, there can be no assurance that
such estimates and assumptions will not be proven incorrect in the future, or
that the actual amount of future provisions will not exceed the amount of past
provisions or that any increased provision that may be required will not
adversely impact our financial condition and results of operations. In addition,
the determination of the amount of our allowance for loan losses is subject to
review by bank regulators, as part of the routine examination process, which may
result in the establishment of additional reserves based upon their judgment of
information available to them at the time of their examination.
Noninterest Income.
Noninterest income increased $7.4 million, or 79.5%, to $16.7 million for the
year ended September 30, 2010 from $9.3 million for the year ended September 30,
2009. The following table provides a detailed analysis of the changes in
components of noninterest income:
|
|
Year
Ended September 30,
|
|
|
Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
|
$ |
9,157 |
|
|
$ |
8,302 |
|
|
$ |
855 |
|
Bargain
purchase gain
|
|
|
3,209 |
|
|
|
-- |
|
|
|
3,209 |
|
Accretable
income
|
|
|
1,428 |
|
|
|
-- |
|
|
|
1,428 |
|
FDIC
indemnification recovery
|
|
|
998 |
|
|
|
-- |
|
|
|
998 |
|
Gain
on sale of loans
|
|
|
648 |
|
|
|
1,218 |
|
|
|
(570 |
) |
Increase
in cash surrender value
|
|
|
422 |
|
|
|
424 |
|
|
|
(2 |
) |
Prepayment
of FHLB borrowings
|
|
|
8 |
|
|
|
(498 |
) |
|
|
506 |
|
Gain
(Loss), net, on sale of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(149 |
) |
|
|
(5 |
) |
|
|
(144 |
) |
REO and repossessed assets
|
|
|
(265 |
) |
|
|
(172 |
) |
|
|
(93 |
) |
Securities
|
|
|
98 |
|
|
|
(271 |
) |
|
|
369 |
|
Other
|
|
|
1,125 |
|
|
|
293 |
|
|
|
832 |
|
Total
noninterest income
|
|
$ |
16,679 |
|
|
$ |
9,291 |
|
|
$ |
7,388 |
|
During
fiscal 2010, service fees and charges increased $855,000 to $9.2 million with
$761,000 of the increase attributable to the LibertyBank Acquisition. Checking
fee income represents a larger percentage of our total revenues than many of our
peers due to a deposit strategy implemented many years ago that we no longer
pursue. Historically, the Bank focused on high-transaction, low-balance “free
checking” accounts that would result in high overdraft fee income. We changed
our strategy on deposit aggregation in 2006 to focus on building deeper
relationships with our depositors that may result in fewer accounts with higher,
more stable balances because we believe relationship-based customers improve the
Company’s franchise value and provide a stable, low-cost funding source for
loans, which results in higher net interest income. While we began this
strategic initiative several years ago, we have retained a significant number of
those low-balance, high overdraft free checking accounts. We anticipate that
recent regulatory changes regarding overdraft fees will accelerate the natural
decline in overdraft fee income.
These new
overdraft fee regulations that became effective in the fourth quarter of fiscal
2010 began, and will continue, to have a significant impact on overdraft fee
income. In addition to changes in operational processing, customers are now
explicitly required to “opt-in” to use our overdraft services on debit card and
ATM transactions. We continue to monitor the impact of these changes. While
total organic checking account balances were higher in the fourth quarter of
fiscal 2010, fees from overdrafts, excluding the LibertyBank acquisition,
declined $591,000, or 37%, in the fourth quarter of 2010, compared to the fourth
quarter of 2009.
A bargain
purchase gain of $3.2 million was recorded in connection with the LibertyBank
acquisition. Due to a change in the applicable accounting guidance,
the gain on the LibertyBank Acquisition was recorded as an item in noninterest
income whereas the gain recognized on the CFB Acquisition in prior fiscal 2009
was classified as an extraordinary gain, net of tax. A bargain purchase gain
occurs when the fair value of assets acquired exceeds the fair value of
liabilities assumed. The preliminary estimated fair value of assets acquired in
the LibertyBank Acquisition totaled $690.6 million and the preliminary estimated
fair value of liabilities assumed was $687.4 million, excluding the impact of
income taxes. The determination of the preliminary estimated fair values of
assets acquired and liabilities assumed required significant estimates and
assumptions about the assets and liabilities acquired. Changes
to the
preliminary estimated fair values may occur in subsequent periods up to one year
from the date of acquisition. The amount that we ultimately realize on these
assets could differ materially from the carrying value reflected in our
financial statements, based upon the timing and amount of collections on the
acquired loans in future periods.
Accretable
income of $1.4 million and $0 was realized in fiscal years 2010 and 2009,
respectively, related to the accretion of discount applied to the FDIC
indemnification assets from the acquisitions. This accretable income may
continue in future quarters but may be highly volatile as our estimates of
credit losses and the timing of such losses requires significant judgment and
actual results could be material different than our original
estimates.
A FDIC
indemnification recovery of $998,000 was recorded in fiscal year 2010
representing the increase in the FDIC indemnification asset due to a $1.1
million provision for loan losses recorded in the current year on covered loans
purchased in the CFB Acquisition. Additionally, as noted earlier, in the third
fiscal quarter of 2010 we made adjustments to the original estimated fair values
of loans purchased in the CFB Acquisition, which resulted in an FDIC
indemnification recovery of $278,000.
While
mortgage rates fell to historic lows during most of fiscal year 2010, the gain
on sale of loans declined 46.8% to $648,000 from $1.2 million in fiscal year
2009 due to a reduction in the volume of loans originated for sale. We have
reorganized our mortgage banking team and hired new leadership to improve the
volume and profitability per transaction. However, continuing declines in
residential real estate values and persistently high unemployment reduced the
volume of residential real estate transactions in our Idaho and Central Oregon
markets and limited the number of applicants who could qualify for refinancing.
LibertyBank did not have any meaningful one-to-four family residential loan
origination programs before its failure. We intend to expand our secondary
market activities into the Western Oregon region, including the Communities of
Eugene, Springfield, Grants Pass and Medford, and believe this should increase
our mortgage banking volumes and net revenue from secondary market activities in
the future.
In fiscal
year 2009, we repaid FHLB advances assumed in the CFB Acquisition shortly after
the transaction was consummated. However, rates fell precipitously in the days
following the acquisition which resulted in a prepayment penalty of $498,000 in
excess of the fair value adjustments recorded on the date of the CFB
Acquisition. We also extinguished the FHLB advances assumed in the LibertyBank
Acquisition. We recorded a gain of approximately $8,000 in fiscal year 2010 on
that repayment as rates had increased slightly after the LibertyBank acquisition
date.
Other
income includes rent on REO and the $278,000 fair value adjustment noted above.
Additionally, other income in fiscal year 2010 includes a recovery of $198,000
on loans that were charged off by LibertyBank prior to our acquisition. These
charged-off loans were not included in the loss sharing agreements of the
LibertyBank Acquisition; therefore the recovery does not need to be shared with
the FDIC and were not recorded as purchase adjustments since the loans were not
on the book of LibertyBank on the acquisition date.
Noninterest Expense.
Noninterest expense increased $11.9 million, or 41.0%, to $40.8 million for the
year ended September 30, 2010 from $29.0 million for the year ended September
30, 2009. Operating expenses of LibertyBank comprised $3.4 million of the
increase. Operating expenses were $4.6 million higher in 2010 as a result of the
CFB Acquisition, which occurred in August 2009. Provision for REO was $1.3
million higher in 2010 and direct expenses related to the LibertyBank
Acquisition totaled $800,000 in fiscal year 2010. We anticipate that
compensation and benefits and data processing expense will continue to be above
optimal levels through the second quarter of fiscal year 2011 as we will carry
the operational burden of two back office systems until the integration of
LibertyBank occurs in March 2011.
The following table provides a detailed analysis of the changes in
components of noninterest expense:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
20,562 |
|
|
$ |
15,918 |
|
|
$ |
4,644 |
|
|
|
29.2 |
% |
Occupancy
and equipment
|
|
|
4,693 |
|
|
|
3,214 |
|
|
|
1,479 |
|
|
|
46.0 |
|
Data
processing
|
|
|
3,742 |
|
|
|
2,483 |
|
|
|
1,259 |
|
|
|
50.7 |
|
Advertising
|
|
|
1,223 |
|
|
|
913 |
|
|
|
310 |
|
|
|
34.0 |
|
Professional
services
|
|
|
2,411 |
|
|
|
1,460 |
|
|
|
951 |
|
|
|
65.1 |
|
Insurance
and taxes
|
|
|
2,213 |
|
|
|
1,541 |
|
|
|
672 |
|
|
|
43.6 |
|
Provision
for REO
|
|
|
3,195 |
|
|
|
1,129 |
|
|
|
2,066 |
|
|
|
183.0 |
|
Other
|
|
|
2,804 |
|
|
|
2,313 |
|
|
|
491 |
|
|
|
21.2 |
|
Total
noninterest expense
|
|
$ |
40,843 |
|
|
$ |
28,971 |
|
|
$ |
11,872 |
|
|
|
41.0 |
% |
Compensation
and benefits increased $4.6 million or 29.2% to $20.6 million for the year ended
September 30, 2010 from $15.9 million for the same period a year ago. The
largest factor in the increase was compensation which increased $3.3 million or
33.5% due primarily to the increase in employees after the LibertyBank and
Community First Bank acquisitions. Payroll taxes also increased $459,000, or
50.9%, from the prior year. A large component of the increase in
payroll taxes was unemployment expense which increased $169,000, or
198.0%. ESOP expense increased $516,000 or 53.3% due to a higher
price of the Company’s common stock, on average, in fiscal 2010 compared to
fiscal 2009. These increases were offset by a decrease in incentive
expense of $663,000 or 91% as bonuses paid for fiscal 2010 were significantly
lower than in the prior year. No bonuses were paid to the executive officers of
the Company in fiscal year 2010.
Occupancy
and equipment, data processing, professional services, and insurance and taxes
all increased primarily due to the Community First Bank and LibertyBank
acquisitions. Parallel back offices were maintained for both the
Idaho and the Central Oregon regions until the core conversion and integration
of the operations of the CFB Acquisition was completed in August
2010. In addition, we incurred two months of similar expenses related
to the LibertyBank Acquisition that occurred on July 30, 2010.
The
increase in provision for REO was primarily due to the significant increase in
REO balances from the prior year and the continuing decline in real estate
values. The REO balance increased from $18.4 million as of September
30, 2009 to $30.5 million as of September 30, 2010. On a quarterly
basis, all REO is evaluated and the respective carrying balances are adjusted
downward if warranted. The $3.2 million of provision for REO expense
represents additional adjustments downward in the carrying value of REO
subsequent to foreclosure.
Other
noninterest expense for fiscal year 2010 includes postage and supplies expense
of $848,000, which increased $274,000 from 2009 due to the acquisitions,
expenses to maintain REO of $209,000 and losses on debit card disputes and fraud
of $214,000.
Income Tax Benefit. Income tax
benefit from continuing operations was $2.9 million based on a pre-tax loss from
operations of $7.3 million. This compares to income tax benefit from
continuing operations in the prior year of $4.8 million based on $11.9 million
in pre-tax loss. The extraordinary gain realized in fiscal 2010 was
$305,000, net of $195,000 in taxes, and was the result of a purchase price
adjustment by the FDIC on the CFB Acquisition.
COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2009, AND SEPTEMBER 30
2008
General. Net income for the
year ended September 30, 2009 was $8.1 million, or $0.52 per diluted share,
compared to net income of $4.0 million, or $0.25 per diluted share, for the year
ended September 30, 2008. Net income for the fiscal year ended
September 30, 2009 included a $15.3 million after-tax extraordinary gain related
to the CFB Acquisition.
Net Interest Income. Net
interest income increased $1.2 million, or 5.3%, to $23.9 million for the year
ended September 30, 2009, from $22.6 million for the year ended September 30,
2008. The increase in net interest income was primarily attributable to a lower
interest expense on deposits due to aggressive reductions in interest rates
initiated by the Federal Reserve during the early part of fiscal
2009. Our net interest margin increased 29 basis points to 3.50% for
the year ended September 30, 2009, from 3.21% for the same period last
year. The improvement in the net interest margin was primarily
attributable to the decrease in interest expense as rates have decreased
significantly from the prior year.
Interest and Dividend Income.
Total interest and dividend income for the year ended September 30, 2009
decreased $4.8 million, or 11.7%, to $35.8 million, from $40.6 million for the
same period of the prior year. The decrease during the period was primarily
attributable to the decrease in yield on interest-earning assets to 5.26% from
5.75% in the prior year. This decrease in interest and dividend income was the
result of lower overall interest rates during the current year compared to prior
year. In addition, nonaccrual loans are significantly higher than in the prior
year, which resulted in foregone interest income of approximately $1.3
million. The yield on our loan portfolio declined to 5.85% in the
fiscal year 2009 compared to 6.40% in the fiscal year 2008.
Interest Expense. Interest
expense decreased $6.0 million, or 33.2%, to $12.0 million for the year ended
September 30, 2009 from $17.9 million for the year ended September 30, 2008. The
decrease was due to both declines in the average balance of total
interest-bearing liabilities and cost of funds to $466.2 million and 2.57% from
$512.1 million and 3.50% for the years ended September 30, 2009 and September
30, 2008, respectively. The decline in interest-bearing liabilities
was concentrated in certificates of deposit and borrowings. Capitalized interest
expense related to the construction of banking offices for the year ended
September 30, 2009, was $56,000.
Provision for Loan Losses. A
provision for loan losses of $16.1 million was recorded in connection with our
analysis of losses in the loan portfolio for the year ended September 30, 2009,
compared to a provision for loan losses of $2.4 million for the same period of
2008. The increase in the provision takes into account the increase in
classified assets, nonperforming loans and loan losses during fiscal year 2009
as well as the current downturn in the real estate market, internal changes in
our lending and underwriting policies and the general economy.
Noninterest Income.
Noninterest income decreased $1.4 million, or 12.9%, to $9.3 million for the
year ended September 30, 2009 from $10.7 million for the year ended September
30, 2008.
The
following table provides a detailed analysis of the changes in components of
noninterest income:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees and charges
|
|
$ |
8,302 |
|
|
$ |
9,077 |
|
|
$ |
(775 |
) |
|
|
(8.5 |
)% |
Gain
on sale of loans
|
|
|
1,218 |
|
|
|
764 |
|
|
|
454 |
|
|
|
59.4 |
|
Increase
in cash surrender value of
bank owned life insurance
|
|
|
424 |
|
|
|
421 |
|
|
|
3 |
|
|
|
0.7 |
|
Loan
servicing fees
|
|
|
68 |
|
|
|
484 |
|
|
|
(416 |
) |
|
|
(86.0 |
) |
Mortgage
servicing rights, net
|
|
|
(31 |
) |
|
|
(340 |
) |
|
|
309 |
|
|
|
(90.9 |
) |
Prepayment
on FHLB borrowings, net
|
|
|
(498 |
) |
|
|
-- |
|
|
|
(498 |
) |
|
|
-- |
|
Loss
on sale of securities, net
|
|
|
(203 |
) |
|
|
-- |
|
|
|
(203 |
) |
|
|
-- |
|
Other
|
|
|
11 |
|
|
|
256 |
|
|
|
(245 |
) |
|
|
(95.7 |
) |
Total
noninterest income
|
|
$ |
9,291 |
|
|
$ |
10,662 |
|
|
$ |
(1,371 |
) |
|
|
(12.9 |
)% |
The
increase in the gain on sale of loans was a reflection of the low interest rate
environment that has persisted for the majority of fiscal 2009. The low interest
rate environment attributed to the increase in residential mortgage refinancings
completed during fiscal 2009 as mortgage rates fe1l below 5.00% for most of the
year. Loans originated for sale in the secondary market increased $20.9 million,
or 45.5%, in 2009 compared to fiscal 2008.
During
fiscal 2009, service fees and charges decreased 8.5% to $8.3 million. Overdraft
fee income decreased $814,000 or 12.0% from the year ago period. However this
decline in overdraft income was partially offset by a
$336,000
decline in check losses. We launched a checking account that is structured to
improve interchange fee income as a result of higher debit card
usage.
We
incurred a $498,000 prepayment penalty on the early extinguishment of $19.0
million in FHLB borrowings assumed in the CFB Acquisition. In addition, a
$203,000 loss on the sale of securities was incurred during the year, which
included an $184,000 loss on the sale of a private label collateralized mortgage
obligation that was sold in order to reduce credit risk exposure. A portion of
the securities sold included securities obtained in the CFB Acquisition that
were not consistent with our investment policy.
Noninterest Expense.
Noninterest expense increased $4.4 million, or 17.7%, to $29.0 million for the
year ended September 30, 2009 from $24.6 million for the year ended September
30, 2008. The efficiency ratio, which is the percentage of noninterest expense
to net interest income plus noninterest income, increased to 87.4% for the year
ended September 30, 2009, compared to 73.9% for the year ended September 30,
2008. The increase in the efficiency ratio is primarily due to the combination
of increased expenses associated with troubled assets as well as events related
to the CFB Acquisition. Noninterest expenses related to the CFB Acquisition
totaled $197,000 and general operating expenses in the Central Oregon region
totaled $762,000, together comprising $959,000 of the increase in overall
noninterest expense in fiscal year 2009.
The
following table provides a detailed analysis of the changes in components of
noninterest expense:
|
|
Year
Ended
September
30,
|
|
|
Increase
/ (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
$ |
15,918 |
|
|
$ |
15,211 |
|
|
$ |
707 |
|
|
|
4.6 |
% |
Occupancy
and equipment
|
|
|
3,214 |
|
|
|
3,007 |
|
|
|
207 |
|
|
|
6.9 |
|
Data
processing
|
|
|
2,483 |
|
|
|
2,198 |
|
|
|
285 |
|
|
|
13.0 |
|
Advertising
|
|
|
913 |
|
|
|
1,043 |
|
|
|
(130 |
) |
|
|
(12.5 |
) |
Professional
services
|
|
|
1,460 |
|
|
|
788 |
|
|
|
672 |
|
|
|
85.3 |
|
Insurance
and taxes
|
|
|
1,541 |
|
|
|
533 |
|
|
|
1,008 |
|
|
|
189.1 |
|
Provision
for REO
|
|
|
1,129 |
|
|
|
172 |
|
|
|
957 |
|
|
|
556.4 |
|
Other
|
|
|
2,313 |
|
|
|
1,659 |
|
|
|
654 |
|
|
|
39.4 |
|
Total
noninterest expense
|
|
$ |
28,971 |
|
|
$ |
24,611 |
|
|
$ |
4,360 |
|
|
|
17.7 |
% |
Compensation and benefits.
Compensation and benefits increased $707,000 or 4.7% to $15.9 million for the
year ended September 30, 2009 from $15.2 million for the same period a year ago.
The largest factor in the increase was compensation which increased $504,000 or
5% due to the combination of annual merit increases as well as the additional
compensation expenses incurred related to the CFB Acquisition totaling $498,000.
We plan to operate a separate operation and information technology system for
the Central Oregon region until we consolidate to a new technology platform in
the fourth quarter of fiscal 2010. Incentive expense increased $369,000 due to
bonuses related to the CFB Acquisition in fiscal 2009. These increases were
offset by ESOP expenses which decreased $260,000 or 21% due to lower stock
prices on average in fiscal 2009 than in fiscal 2008.
Professional services. A
$279,000 increase in legal expenses from the prior year was due to both the CFB
Acquisition and the significant increase in noncovered troubled assets in fiscal
year 2009. External audit expenses increased $274,000 as a change in accounting
methodology related to the timing of the recording of external audit expenses
caused a one-time reduction in such expenses in fiscal 2008.
Insurance and taxes. The
additional expense incurred for insurance and taxes is directly correlated to
the current economic climate. Property taxes increased $333,000 mainly due to
the payment of overdue property taxes on foreclosed property. The Bank’s FDIC
deposit insurance assessment increased $651,000 as the FDIC dramatically
increased assessment rates and levied a one-time special assessment during
fiscal 2009.
Provision for REO. The
increase in provision for REO is directly related to the significant increase in
noncovered REO balances from the prior year. The REO balance increased from
$650,000 as of September 30, 2008 to $18.4 million as of September 30, 2009. On
a quarterly basis, all REO is evaluated and their respective carrying balances
are
adjusted downward if warranted. The $1.1 million of provision for REO expense
represents additional adjustments downward in the carrying value of noncovered
REO subsequent to foreclosure.
Income Tax Expense (Benefit).
Income tax benefit from continuing operations was $4.8 million based on a
pre-tax loss from operations of $11.9 million. This compares to income tax
expense in the prior year of $2.3 million based on $6.3 million in pre-tax
income. The extraordinary gain realized on the CFB Acquisition in fiscal 2009
was $15.3 million, net of $9.8 million in taxes.
AVERAGE
BALANCES, INTEREST AND AVERAGE YIELDS/COST
The
following table sets forth for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and the ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances have been calculated using the
average of daily balances during the period. Interest and dividends are reported
on a tax-equivalent basis.
|
Year
Ended September 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Average
Balance
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
Average
Balance
|
Interest
And
Dividends
|
|
Yield/
Cost
|
|
|
(dollars
in thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net (1)
|
$536,342
|
$30,658
|
|
5.72
|
%
|
$468,205
|
$27,369
|
|
5.85
|
%
|
$477,053
|
$30,510
|
|
6.40
|
%
|
Loans
held for sale
|
1,719
|
81
|
|
4.74
|
|
3,176
|
179
|
|
5.65
|
|
2,811
|
176
|
|
6.27
|
|
Interest
bearing deposits in
other banks
|
156,409
|
328
|
|
0.21
|
|
18,391
|
49
|
|
0.27
|
|
30,753
|
977
|
|
3.18
|
|
Investment
securities,
available for sale
|
15,100
|
181
|
|
1.20
|
|
1,503
|
42
|
|
2.79
|
|
1,243
|
35
|
|
2.82
|
|
Mortgage-backed
securities
|
158,830
|
6,286
|
|
3.96
|
|
179,729
|
8,221
|
|
4.57
|
|
184,343
|
8,742
|
|
4.74
|
|
FHLB
stock
|
11,601
|
--
|
|
0.00
|
|
9,760
|
(33
|
) |
(0.34
|
)
|
9,591
|
143
|
|
1.49
|
|
Total
interest-earning
assets
|
880,001
|
$37,534
|
|
4.27
|
%
|
680,764
|
$35,827
|
|
5.26
|
%
|
705,794
|
$40,583
|
|
5.75%
|
|
Noninterest
earning assets
|
132,829
|
|
|
|
|
43,982
|
|
|
|
|
38,627
|
|
|
|
|
Total
assets
|
$1,012,830
|
|
|
|
|
$724,746
|
|
|
|
|
$744,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
$
49,966
|
$ 306
|
|
0.61
|
%
|
$33,513
|
$ 236
|
|
0.70
|
%
|
$24,194
|
$
177
|
|
0.73
|
%
|
Interest-bearing
demand
deposits
|
131,856
|
891
|
|
0.68
|
|
83,651
|
445
|
|
0.53
|
|
78,618
|
482
|
|
0.61
|
|
Money
market accounts
|
102,657
|
906
|
|
0.88
|
|
55,692
|
672
|
|
1.21
|
|
58,698
|
1,430
|
|
2.44
|
|
Certificates
of deposit
|
295,716
|
5,098
|
|
1.72
|
|
181,774
|
5,723
|
|
3.15
|
|
193,002
|
8,596
|
|
4.45
|
|
Total
deposits
|
580,195
|
7,202
|
|
1.24
|
|
354,630
|
7,076
|
|
2.00
|
|
354,512
|
10,685
|
|
3.01
|
|
FHLB
advances
|
79,264
|
3,153
|
|
3.98
|
|
111,573
|
4,901
|
|
4.39
|
|
157,549
|
7,250
|
|
4.60
|
|
Total
interest-bearing
liabilities
|
659,459
|
$10,355
|
|
1.57
|
%
|
466,203
|
$11,977
|
|
2.57
|
%
|
512,061
|
$17,935
|
|
3.50
|
%
|
Noninterest-bearing
liabilities
|
131,892
|
|
|
|
|
55,779
|
|
|
|
|
46,725
|
|
|
|
|
Total
liabilities
|
791,351
|
|
|
|
|
521,982
|
|
|
|
|
558,786
|
|
|
|
|
Stockholders’
equity
|
221,479
|
|
|
|
|
202,764
|
|
|
|
|
185,635
|
|
|
|
|
Total
liabilities and equity
|
$1,012,830
|
|
|
|
|
$724,746
|
|
|
|
|
$744,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$27,179
|
|
|
|
|
$23,850
|
|
|
|
|
$22,648
|
|
|
|
Interest
rate spread
|
|
2.70
|
% |
|
|
|
2.69
|
% |
|
|
|
2.25
|
% |
|
|
Net
interest margin (2)
|
|
3.09
|
|
|
|
|
3.50
|
|
|
|
|
3.21
|
|
|
|
Ratio
of average interest-
earning assets to average
interest-bearing
liabilities
|
|
133.44
|
|
|
|
|
146.02
|
|
|
|
|
137.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-accrual
loans are included in the average balance. Loan fees are included in
interest income on loans and are
insignificant.
|
(2)
|
Net
interest margin, otherwise known as yield on interest earning assets, is
calculated as net interest income divided by average interest-earning
assets.
|
The
following table sets forth (on a consolidated basis) for the periods and at the
dates indicated, the weighted average yields earned on our assets, the weighted
average interest rates paid on our liabilities, together with the net yield on
interest-earning assets:
|
|
At
September
30,
|
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average yield on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
6.99 |
% |
|
|
5.72 |
% |
|
|
5.85 |
% |
|
|
6.40 |
% |
Loans
held for sale
|
|
|
4.33 |
|
|
|
4.74 |
|
|
|
5.65 |
|
|
|
6.26 |
|
Interest
bearing deposits in other banks
|
|
|
0.20 |
|
|
|
0.21 |
|
|
|
0.27 |
|
|
|
3.18 |
|
Investment
securities, available for sale
|
|
|
1.45 |
|
|
|
1.20 |
|
|
|
2.79 |
|
|
|
2.82 |
|
Mortgage-backed
securities
|
|
|
3.26 |
|
|
|
3.96 |
|
|
|
4.57 |
|
|
|
4.74 |
|
Federal
Home Loan Bank stock
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.34 |
) |
|
|
1.49 |
|
Total
interest-earning assets
|
|
|
4.03 |
|
|
|
4.27 |
|
|
|
5.26 |
|
|
|
5.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average rate paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
|
0.42 |
|
|
|
0.61 |
|
|
|
0.70 |
|
|
|
0.73 |
|
Interest-bearing
demand deposits
|
|
|
0.29 |
|
|
|
0.68 |
|
|
|
0.53 |
|
|
|
0.61 |
|
Money
market accounts
|
|
|
0.48 |
|
|
|
0.88 |
|
|
|
1.21 |
|
|
|
2.44 |
|
Certificates
of deposit
|
|
|
1.97 |
|
|
|
1.72 |
|
|
|
3.15 |
|
|
|
4.45 |
|
Total
interest-bearing deposits
|
|
|
1.25 |
|
|
|
1.24 |
|
|
|
2.00 |
|
|
|
3.01 |
|
Federal
Home Loan Bank advances
|
|
|
4.32 |
|
|
|
3.98 |
|
|
|
4.39 |
|
|
|
4.60 |
|
Repurchase
agreements
|
|
|
1.45 |
|
|
|
1.65 |
|
|
|
1.58 |
|
|
|
-- |
|
Total
interest-bearing liabilities
|
|
|
1.41 |
|
|
|
1.57 |
|
|
|
2.57 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread (spread between
weighted
average rate on all interest-
earning assets and all interest-bearing
liabilities)
|
|
|
2.62 |
|
|
|
2.70 |
|
|
|
2.69 |
|
|
|
2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (net interest income
as a percentage of average interest-
earning assets)
|
|
|
N/A |
|
|
|
3.09 |
|
|
|
3.50 |
|
|
|
3.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATE/VOLUME
ANALYSIS
The
following table sets forth the effects of changing rates and volumes on our net
interest income. Information is provided with respect to: (1) effects on
interest income attributable to changes in volume (changes in volume multiplied
by prior rate); and (2) effects on interest income attributable to changes in
rate (changes in rate multiplied by prior volume). Changes attributable to both
rate and volume, which cannot be segregated, are allocated proportionately to
the changes in rate and volume.
|
|
Year
Ended September 30, 2010
Compared
to Year Ended
September
30, 2009
Increase
(Decrease) Due to
|
|
|
Year
Ended September 30, 2009
Compared
to Year Ended
September
30, 2008
Increase
(Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
413 |
|
|
$ |
2,876 |
|
|
$ |
3,289 |
|
|
$ |
(2,585 |
) |
|
$ |
(556 |
) |
|
$ |
(3,141 |
) |
Loans
held for sale
|
|
|
(24 |
) |
|
|
(74 |
) |
|
|
(98 |
) |
|
|
(4 |
) |
|
|
7 |
|
|
|
3 |
|
Interest
bearing deposits in other banks
|
|
|
3 |
|
|
|
276 |
|
|
|
279 |
|
|
|
(646 |
) |
|
|
(282 |
) |
|
|
(928 |
) |
Investment
securities, available for sale
|
|
|
(3 |
) |
|
|
142 |
|
|
|
139 |
|
|
|
-- |
|
|
|
7 |
|
|
|
7 |
|
Mortgage-backed
securities
|
|
|
(1,039 |
) |
|
|
(896 |
) |
|
|
(1,935 |
) |
|
|
(304 |
) |
|
|
(217 |
) |
|
|
(521 |
) |
Federal
Home Loan Bank stock
|
|
|
30 |
|
|
|
3 |
|
|
|
33 |
|
|
|
(174 |
) |
|
|
(2 |
) |
|
|
(176 |
) |
Total
net change in income on interest-earning assets
|
|
$ |
(620 |
) |
|
$ |
2,327 |
|
|
$ |
1,707 |
|
|
$ |
(3,713 |
) |
|
$ |
(1,043 |
) |
|
$ |
(4,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
3 |
|
|
$ |
67 |
|
|
$ |
70 |
|
|
$ |
3 |
|
|
$ |
56 |
|
|
$ |
59 |
|
Interest-bearing
demand deposits
|
|
|
142 |
|
|
|
304 |
|
|
|
446 |
|
|
|
(35 |
) |
|
|
(2 |
) |
|
|
(37 |
) |
Money
market accounts
|
|
|
(12 |
) |
|
|
246 |
|
|
|
234 |
|
|
|
(689 |
) |
|
|
(69 |
) |
|
|
(758 |
) |
Certificates
of deposit
|
|
|
(1,014 |
) |
|
|
389 |
|
|
|
(625 |
) |
|
|
(2,397 |
) |
|
|
(476 |
) |
|
|
(2,873 |
) |
Total
deposits
|
|
|
(881 |
) |
|
|
1,006 |
|
|
|
125 |
|
|
|
(3,118 |
) |
|
|
(491 |
) |
|
|
(3,609 |
) |
Federal
Home Loan Bank advances
|
|
|
(431 |
) |
|
|
(1,317 |
) |
|
|
(1,748 |
) |
|
|
(315 |
) |
|
|
(2,034 |
) |
|
|
(2,349 |
) |
Total
net change in expense on interest-bearing
liabilities
|
|
$ |
(1,312 |
) |
|
$ |
(311 |
) |
|
$ |
(1,623 |
) |
|
$ |
(3,433 |
) |
|
$ |
(2,525 |
) |
|
$ |
(5,958 |
) |
Total
increase in net interest income
|
|
|
|
|
|
|
|
|
|
$ |
3,330 |
|
|
|
|
|
|
|
|
|
|
$ |
1,202 |
|
ASSET
AND LIABILITY MANAGEMENT AND MARKET RISK
General.
Our Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest rate spread by managing
the differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, changes in net interest income, credit risk and
profitability. The policy includes the use of an Asset Liability Management
Committee whose members include certain members of senior management. The
Committee’s purpose is to communicate, coordinate and manage our asset/liability
positions consistent with our business plan and Board-approved policies, as well
as to price savings and lending products, and to develop new products.
The Asset
Liability Management Committee meets to review various areas
including:
§
|
interest
rate risk sensitivity;
|
§
|
change
in net interest income
|
§
|
current
market opportunities to promote specific
products;
|
§
|
historical
financial results;
|
§
|
projected
financial results; and
|
The
Committee also reviews current and projected liquidity needs. As part of its
procedures, the Asset Liability Management Committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution’s existing assets, liabilities and
off-balance sheet instruments, and evaluating such impacts against the maximum
potential change in market value of portfolio equity that is authorized by the
Board of Directors.
Our
Risk When Interest Rates Change. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those
of other financial institutions, are impacted by changes in interest rates and
the interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market risk.
In recent
years, we primarily have utilized the following strategies in our efforts to
manage interest rate risk:
§
|
we
have increased our originations of shorter term loans and particularly,
construction and land development loans and home equity
loans;
|
§
|
we
have structured our borrowings with maturities that match fund our loan
and investment portfolios;
|
§
|
we
have attempted, where possible, to extend the maturities of our deposits
which typically fund our long-term assets;
and
|
§
|
we
have invested in securities with relatively short anticipated lives,
generally three to five years.
|
How We
Measure the Risk of Interest Rate Changes. We measure our interest rate
sensitivity on a monthly basis utilizing an internal model. Management uses
various assumptions to evaluate the sensitivity of our operations to changes in
interest rates. Although management believes these assumptions are reasonable,
the interest rate sensitivity of our assets and liabilities on net interest
income and the market value of portfolio equity could vary substantially if
different assumptions were used or actual experience differs from such
assumptions. The assumptions we use are based upon proprietary and market data
and reflect historical results and current market conditions. These assumptions
relate to interest rates, prepayments, deposit decay rates and the market value
of certain assets under the various interest rate scenarios. An independent
service was used to provide decay rates and market rates of interest and certain
interest rate assumptions to determine prepayments and maturities of real estate
loans, investments and borrowings. Time deposits are modeled to reprice to
market rates upon their stated maturities. We assumed that non-maturity deposits
can be maintained with rate adjustments not directly proportionate to the change
in market interest rates. In the past, we have demonstrated that the tiering
structure of our deposit accounts during changing rate environments results in
relatively low volatility and less than market rate changes in our interest
expense for deposits. Our deposit accounts are tiered by balance and rate,
whereby higher balances within an account earn higher rates of interest.
Therefore, deposits that are not very rate sensitive (generally, lower balance
tiers) are separated from deposits that are rate sensitive (generally, higher
balance tiers).
When
interest rates rise, we generally do not have to raise interest rates
proportionately on less rate sensitive accounts to retain these deposits. These
assumptions are based upon an analysis of our customer base, competitive factors
and historical experience. The following table shows the change in our net
portfolio value at September 30, 2010, that would occur upon an immediate change
in interest rates based on our assumptions, but without giving effect to any
steps that we might take to counteract that change. The net portfolio value is
calculated based upon the present value of the discounted cash flows from assets
and liabilities. The difference between the present value of assets and
liabilities is the net portfolio value and represents the market value of equity
for the given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how much equity changes in response to
various interest rate scenarios. Large changes in net portfolio value reflect
increased interest rate sensitivity and generally more volatile earnings
streams.
|
|
Net
Portfolio Value (“NPV”)
|
|
Net
Portfolio as % of
Portfolio
Value of Assets
|
Basis
Point
Change
in Rates
|
|
Amount
|
|
$
Change (1)
|
|
%
Change
|
|
NPV
Ratio (2)
|
|
%
Change (3)
|
|
Asset
Market
Value
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300
|
|
$
220,120
|
|
$(2,151)
|
|
(0.97)%
|
|
15.26%
|
|
0.42%
|
|
$1,442,000
|
+200
|
|
222,091
|
|
(179)
|
|
(0.08)
|
|
15.19
|
|
0.35
|
|
1,462,000
|
+100
|
|
225,013
|
|
2,743
|
|
1.23
|
|
15.19
|
|
0.35
|
|
1,482,000
|
Base
|
|
222,271
|
|
--
|
|
--
|
|
14.84
|
|
--
|
|
1,498,000
|
-100
|
|
207,622
|
|
(14,648)
|
|
(6.59)
|
|
13.74
|
|
(1.10)
|
|
1,511,000
|
-200
|
|
197,148
|
|
(25,123)
|
|
(11.30)
|
|
12.95
|
|
(1.88)
|
|
1,522,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Shock
NPV Ratio
|
|
|
|
|
|
14.84
|
|
|
|
|
Post-Shock
NPV Ratio
|
|
|
|
|
|
15.19
|
|
|
|
|
Static
Sensitivity Measure – decline in NPV Ratio
|
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
Maximum
|
|
|
|
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(1)
|
Represents
the increase (decrease) of the estimated net portfolio value at the
indicated change in interest rates compared to the base net portfolio
value.
|
(2)
|
Calculated
as the estimated net portfolio value divided by the portfolio value of
total assets.
|
(3)
|
Calculated
as the increase (decrease) of the net portfolio value ratio assuming the
indicated change in interest rates over the base net portfolio value
ratio.
|
The
following table illustrates the change in net interest income at September 30,
2010, that would occur in the event of an immediate change in interest rates,
but without giving effect to any steps that might be taken to counter the effect
of that change in interest rates:
Basis
Point
|
|
Net
Interest Income
|
Change
in Rates
|
|
Amount
|
|
$
Change (1)
|
|
%
Change
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
300
|
|
$ 47,646
|
|
$ 11,230
|
|
30.84%
|
200
|
|
44,425
|
|
8,009
|
|
21.99
|
100
|
|
41,018
|
|
4,602
|
|
12.64
|
Base
|
|
36,416
|
|
--
|
|
Base
|
-100
|
|
36,538
|
|
122
|
|
0.34
|
-200
|
|
35,191
|
|
(1,225)
|
|
(3.36)
|
___________________
|
(1)
Represents the decrease of the estimated net interest income at the
indicated change in interest rates compared to net interest income
assuming no change in interest
rates.
|
We use
certain assumptions in assessing our interest rate risk. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. The table above also includes projected balances for loans and deposits,
actual results for which may be materially different from those
estimates.
As with
any method of measuring interest rate risk, shortcomings are inherent in the
method of analysis presented in the foregoing tables. For example, although
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in the market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest
rates change,
expected rates of prepayments on loans and early withdrawals from certificates
of deposit could deviate significantly from those assumed in calculating the
table.
LIQUIDITY
AND COMMITMENTS
We are
required to have sufficient cash flow in order to maintain liquidity to ensure a
safe and sound operation. Liquidity management is both a daily and long-term
function of business management. On a monthly basis, we review and update cash
flow projections to ensure that adequate liquidity is maintained. Excess
liquidity is generally invested in short-term investments such as overnight
deposits or mortgage-backed securities. On a longer-term basis, we maintain a
strategy of investing in loans
Our
primary sources of funds are from customer deposits, loan repayments, loan
sales, maturing investment securities and advances from the Federal Home Loan
Bank of Seattle. These funds, together with retained earnings and equity, are
used to make loans, acquire investment securities and other assets, and fund
continuing operations. While maturities and the scheduled amortization of loans
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by the level of interest rates, economic conditions and
competition. We use our sources of funds primarily to meet ongoing commitments,
to pay maturing certificates of deposit and savings withdrawals, to fund loan
commitments and to maintain our portfolio of mortgage-backed securities and
investment securities. Alternatively, we may also liquidate assets to meet our
funding needs.
We
measure our liquidity based on our ability to fund our assets and to meet
liability obligations when they come due. Liquidity (and funding) risk occurs
when funds cannot be raised at reasonable prices, or in a reasonable time frame,
to meet our normal or unanticipated obligations. We regularly monitor the mix
between our assets and our liabilities to manage effectively our liquidity and
funding requirements.
We
believe that our current liquidity position is sufficient to fund all of our
existing commitments. We currently maintain cash flow above the minimum level
believed to be adequate to meet the requirements of normal operations, including
potential deposit outflows, as we continue to seek acquisition opportunities and
need to ensure adequate liquidity to support the integration of the acquired
balance sheet.
Certificates
of deposit scheduled to mature in one year or less at September 30, 2010,
totaled $369.8 million, which represented 64.2% of our certificates of deposit
portfolio at September 30, 2010. Management’s policy is to generally maintain
deposit rates at levels that are competitive with other local financial
institutions. Historically, the Bank has been able to retain a significant
amount of deposits as they mature. However, recent deterioration in credit
quality and capital levels at many of our competitors have limited their sources
of wholesale funding, which has resulted in a highly price-competitive market
for retail certificates of deposit. These rates currently exceed alternative
costs of borrowings and are high compared to historical spreads to U.S. Treasury
note rates. Additionally, since loan demand has slowed, we have been reluctant
to offer rates in excess of wholesale borrowing costs. This has resulted in some
deposit runoff as customers are moving their maturing balances to competitors at
a higher pace than the Bank has historically experienced. Nonetheless, we
believe the Company has adequate resources to fund all loan commitments through
FHLB advances, loan repayments, maturing investment securities, and the sale of
mortgage loans in the secondary markets. We had the ability at September 30,
2010, to borrow an additional $117.5 million from the Federal Home Loan Bank of
Seattle. We are also approved at the Discount Window of the Federal Reserve Bank
of San Francisco and could use that facility as a funding source to meet
commitments and for liquidity purposes.
We are
highly dependent on the FHLB of Seattle to provide the primary source of
wholesale funding for immediate liquidity and borrowing needs. The
failure of the FHLB of Seattle or the FHLB system in general may materially
impair our ability to meet our growth plans or to meet short and long term
liquidity demands. However, our mortgage backed securities are
marketable and could be sold to obtain cash to meet liquidity demands should our
access to FHLB funding be impaired.
We do not
originate loans under a forward commitment with investors in the secondary
market. Many financial institutions encountered liquidity impairment as loans
that they securitized for resale were met with an abrupt absence of purchasers.
As a result, cash flow was restricted and caused significant contraction in
liquidity. Should we encounter a reduction in demand for loans in the secondary
market, we can simply discontinue the origination of such loans.
CONTRACTUAL
OBLIGATIONS
Through
the normal course of operations, we have entered into certain contractual
obligations. Our obligations generally relate to funding of operations through
deposits and borrowings as well as leases for premises. Lease terms generally
cover a five-year period, with options to extend, and are
non-cancelable.
At
September 30, 2010, scheduled maturities of contractual obligations were as
follows:
|
|
Within
1
Year
|
|
|
After
1 year through 3
Years
|
|
|
After
3
through
5
Years
|
|
|
Beyond
|
|
|
Total
Balance
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ |
369,770 |
|
|
$ |
149,732 |
|
|
$ |
55,071 |
|
|
$ |
1,461 |
|
|
$ |
576,034 |
|
Federal
Home Loan Bank advances and
other borrowings
|
|
|
12,050 |
|
|
|
43,800 |
|
|
|
3,000 |
|
|
|
-- |
|
|
|
58,850 |
|
Repurchase
agreements
|
|
|
4,766 |
|
|
|
4,006 |
|
|
|
-- |
|
|
|
-- |
|
|
|
8,772 |
|
Deferred
compensation (1)
|
|
|
357,145 |
|
|
|
556,764 |
|
|
|
556,764 |
|
|
|
4,112,391 |
|
|
|
5,583,064 |
|
Operating
leases
|
|
|
374 |
|
|
|
524 |
|
|
|
232 |
|
|
|
3,864 |
|
|
|
4,994 |
|
Total
contractual obligations
|
|
$ |
744,105 |
|
|
$ |
754,826 |
|
|
$ |
615,067 |
|
|
$ |
4,117,716 |
|
|
$ |
6,231,714 |
|
_________________________
(1) –
Disclosed at the September 30, 2010, present value of estimated payments
assuming all future vesting conditions are met.
OFF-BALANCE
SHEET ARRANGEMENTS
We are
party to financial instruments with off-balance sheet risk in the normal course
of business in order to meet the financing needs of our customers. These
financial instruments generally include commitments to originate mortgage,
commercial and consumer loans, and involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. Our maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount of those instruments. Because
some commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. We use the same
credit policies in making commitments as we do for on-balance sheet instruments.
Collateral is not required to support commitments.
Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects. Unused lines of credit include funds not disbursed, but
committed to, home equity, commercial and consumer lines of
credit. Commercial
letters of credit are conditional commitments issued by us to guarantee the
performance of a customer to a third party. Those guarantees are primarily used
to support public and private borrowing arrangements. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral is required in instances
where we deem it necessary.
In
connection with certain asset sales, particularly the sale of one-to-four family
residential real estate loans to investors in the secondary market in connection
with our mortgage banking activities, 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 based
on historical experience, the potential for significant loss under these
arrangements is remote. However, past performance may not be representative of
future performance on sold loans and the Bank may experience material losses in
the future as the Bank recorded losses totaling $65,000 in connection with these
arrangements during fiscal year 2010. At September 30, 2010 and 2009, the Bank
had a reserve for unfunded commitments and other off balance sheet contingencies
in the amount of $592,000 and $581,000, respectively.
The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of September 30, 2010:
|
|
Contract
or
Notional
Amount
|
|
|
|
(in
thousands)
|
|
Commitments
to originate loans:
|
|
|
|
Fixed
rate
|
|
$ |
3,077 |
|
Adjustable
rate
|
|
|
3,255 |
|
Undisbursed
balance of loans
|
|
|
20,308 |
|
Unused
lines of credit
|
|
|
39,301 |
|
Commercial
letters of credit
|
|
|
920 |
|
Total
|
|
$ |
66,861 |
|
CAPITAL
Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to maintain a “well capitalized” institution in accordance with
regulatory standards. Home Federal Bank’s total equity capital was $151.2
million at September 30, 2010, or 10.6%, of total assets on that date. As of
September 30, 2010, we exceeded all regulatory capital requirements. We did not apply for
government assistance through the Capital Purchase Program under the U.S.
Treasury Department’s Troubled Asset Relief Program (“TARP”).See “How We
Are Regulated – Regulation and Supervision of Home Federal Bank – Capital
Requirements” and Note 15 to the Consolidated Financial Statements under Item 8
to this Annual Report on Form 10-K.
The
following table discloses the Bank’s regulatory capital ratios at September 30,
2010 and 2009:
|
|
September
30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Minimum
Required
to
be
“Well
Capitalized”
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 core
|
|
|
10.1 |
% |
|
|
19.6 |
% |
|
|
5.0 |
% |
Tier
1 risk-based
|
|
|
27.6 |
|
|
|
33.6 |
|
|
|
6.0 |
|
Total
risk-based
|
|
|
28.8 |
|
|
|
34.9 |
|
|
|
10.0 |
|
Covered
assets and the FDIC indemnification receivable from the CFB Acquisition and the
LibertyBank Acquisition are assessed a risk-weight of 20% during the period such
assets are covered under the loss sharing agreements. While the risk-based
capital ratios would be lower if the covered assets and the FDIC indemnification
receivable were risk-weighted at their normal levels, the Bank’s capital ratios
would still exceed the minimum requirements to be considered well
capitalized.
The
Company’s total capital was $205.1 million and $209.7 million at September 30,
2010 and 2009, respectively as Home Federal Bancorp, Inc., retained some of the
capital raised in the second conversion in 2007 and did not inject all of the
capital raised into the Bank. This additional capital is held in cash and highly
liquid mortgage-backed securities and supports the payment of dividends to
shareholders and could be used for acquisitions, repurchases of the Company’s
common stock or other corporate purposes. The Company’s tangible capital to
tangible assets ratio (“TCE Ratio,” which is defined as total equity minus
intangible assets divided by total assets less intangible assets) was 13.6% and
25.3% at September 30, 2010 and 2009, with the assets purchased in the
LibertyBank Acquisition causing the decrease in the ratio in 2010, in addition
to the net loss from operations and dividend payments to shareholders. Our
target TCE Ratio is 8.0% to 10.0% and we believe we have sufficient capital to
support additional acquisitions of up to $700 million of assets, without
additional capital requirements.
IMPACT
OF INFLATION AND CHANGING PRICES
The
Consolidated Financial Statements and related financial data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These principles generally require
the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. The primary impact of inflation is
reflected in the increased cost of our operations. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services. In a period of rapidly rising interest rates, the liquidity
and maturity structures of our assets and liabilities are critical to the
maintenance of acceptable performance levels.
The
principal effect of inflation on earnings, as distinct from levels of interest
rates, is in the area of noninterest expense. Expense items such as employee
compensation, employee benefits and occupancy and equipment costs may be subject
to increases as a result of inflation. An additional effect of inflation is the
possible increase in dollar value of the collateral securing loans that we have
made. Our management is unable to determine the extent, if any, to which
properties securing loans have appreciated in dollar value due to
inflation.
Deflation,
or a decrease in overall prices from one period to the next, could have a
negative impact on the Company’s operations and financial condition.
Deflationary periods impute a higher borrowing cost to debtors as the purchasing
power of a dollar increases with time. This may decrease the demand for loan
products offered by the Bank.
Inflation
also indirectly impacts the Company through the pressure it may place on
consumer and commercial borrowers. For example, as commodity prices rose rapidly
during calendar year 2008, national delinquency rates on loans increased as the
cost of gasoline and food significantly eroded disposable income available to
consumers. As a result, they were unable to service their debt obligations as a
greater share of their income was used to meet ordinary daily expenditures.
RECENT
ACCOUNTING PRONOUNCEMENTS
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement No. 162.
With the issuance of SFAS 168, the FASB Accounting Standards Codification
(“Codification”) became the single source of authoritative U.S. accounting and
reporting standards applicable for all nongovernmental entities, with the
exception of guidance issued by the SEC. This change is effective for financial
statements issued for interim or annual periods ending after September 15, 2009.
Updates to the Codification are promulgated through an Accounting Standards
Update (“ASU”). The Codification does not modify existing GAAP or any guidance
issued by the SEC. GAAP accounting standards used to populate the Codification
are superseded, with the exception of certain standards not codified as of
September 30, 2009, including SFAS 166 and 167 described
subsequently.
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets, an amendment of FASB Statement No. 140, and SFAS No. 167, Amendments to
FASB Interpretation No. 46(R). These Statements modify the accounting for
transfers of financial assets and the determination of what entities must be
consolidated, and will have a significant effect on securitizations and
special-purpose entities. We adopted these statements effective January 1, 2010,
with no impact on the Company’s financial statements.
ASC 260
includes new guidance which clarifies that unvested share-based payment awards
with rights to receive nonforfeitable dividends are participating securities and
should be included in the computation of earnings per share. The Company adopted
this new guidance on October 1, 2009, and retrospectively applied it to earnings
per share information. There was no significant impact from the
adoption.
ASC 805
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and the goodwill acquired. The standard also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. ASC 805 was effective
for fiscal years beginning after December 15, 2008, or October 1, 2009, for the
Company. The CFB Acquisition described was accounted for under SFAS No. 141 as
the Company was not
permitted
to adopt ASC 805 early. The accounting guidance under ASC 805 was applied to the
LibertyBank Acquisition.
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
The
information contained under “Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management
and Market Risk” of this Annual Report on Form 10-K is incorporated herein by
reference.
Item 8.
Financial
Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page |
|
|
Management’s Annual
Report on Internal Control Over Financial Reporting |
92 |
|
|
Report of
Independent Registered Public Accounting Firm |
93 |
|
|
Consolidated Balance
Sheets as of September 30, 2010 and 2009 |
96 |
|
|
Consolidated Statements of
Operations For the Years Ended
September 30, 2010, 2009 and 2008
|
97
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income For
the
Years
Ended September 30, 2010, 2009 and 2008
|
98 |
|
|
Consolidated
Statements of Cash Flows For the Years Ended
September
30, 2010, 2009 and 2008
|
100 |
|
|
Selected Notes to
Consolidated Financial Statements |
102 |
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Home Federal Bancorp, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
This
process includes policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, and can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Furthermore, because of changes in
conditions, the effectiveness of internal control may vary over
time.
The
Company's management, with the participation of the Chief Executive Officer and
Chief Financial Officer, assessed the effectiveness of the Company's internal
control over financial reporting as of September 30, 2010. Management's
assessment was based on criteria described in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"). This assessment excluded the internal control over
financial reporting of LibertyBank, the operations of which were acquired on
July 30, 2010, through a purchase and assumption agreement between the Company’s
subsidiary, Home Federal Bank, and the Federal Deposit Insurance Corporation as
Receiver for LibertyBank. The assets acquired constituted approximately 45.2% of
total assets reported on the Company’s consolidated balance sheet as of
September 30, 2010. Based on that assessment, the Company's management concluded
that the Company's internal control over financial reporting was effective as of
September 30, 2010.
Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of September 30, 2010 has been audited by Crowe Horwath LLP, the
Company's independent registered public accounting firm who audits the Company's
consolidated financial statements. The Report of Independent Registered Public
Accounting Firm also excludes the internal control over financial reporting of
LibertyBank and expresses an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting as of September 30,
2010.
/s/ Len E.
Williams
|
/s/ Eric S. Nadeau
|
Len E.
Williams |
Eric S.
Nadeau |
President
and |
Executive Vice
President and |
Chief Executive
Officer |
Chief Financial
Officer |
Dated:
December 14, 2010
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Home
Federal Bancorp, Inc. and Subsidiary
Nampa,
Idaho
We have
audited the accompanying consolidated balance sheet of Home Federal Bancorp,
Inc. and Subsidiary (the Company) as of September 30, 2010, and the related
consolidated statements of operations, changes in stockholders’ equity and
comprehensive income, and cash flows for the year then ended. We also
have audited the Company’s internal control over financial reporting as of
September 30, 2010, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Controls over Financial Reporting. Our responsibility is to
express an opinion on these financial statements and an opinion on the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
As
described in Management’s Report on Internal Control over Financial Reporting,
management has excluded LibertyBank from its assessment of internal control over
financial reporting as of September 30, 2010 because its operations were
acquired through a purchase and assumption agreement between the Company’s
subsidiary, Home Federal Bank, and the Federal Deposit Insurance Corporation as
Receiver for LibertyBank on July 30, 2010. We have also excluded
LibertyBank from our audit of internal control over financial
reporting. The assets acquired constituted approximately 45.2% of
total assets reported on the Company’s consolidated balance sheet as of
September 30, 2010.
A
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A Company’s
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Home Federal
Bancorp, Inc. and Subsidiary as of September 30, 2010, and the
results
of its operations and its cash flows for the year then ended, in conformity with
U.S. generally accepted accounting principles. Also in our opinion,
Home Federal Bancorp, Inc. and Subsidiary maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2010, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
As
described in Note 18 to the consolidated financial statements, on October 1,
2009, the Company changed its method of computing earnings per common share to
comply with new accounting guidance. All previously reported earnings per
common share amounts have been retrospectively adjusted to conform to the new
accounting guidance. We audited the adjustments described in Note 18 that
were applied to revise earnings per common share for the years ended September
30, 2009 and 2008. In our opinion, such adjustments are appropriate and have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2009 or 2008 financial statements of the Company other
than with respect to such adjustments and, accordingly, we do not express an
opinion or any other form of assurance on the 2009 or 2008 financial statements
taken as a whole.
|
/s/Crowe Horwath
LLP |
|
|
|
Crowe Horwath
LLP |
Cleveland,
Ohio
December
14, 2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Home
Federal Bancorp, Inc. and Subsidiary
Nampa,
Idaho
We have
audited, before the effects of the adjustments to retrospectively apply the
change in accounting described in Note 18, the accompanying consolidated balance
sheet of Home Federal Bancorp, Inc. and Subsidiary (the Company) as of September
30, 2009, and the related consolidated statements of income, changes in
stockholders’ equity and comprehensive income, and cash flows for each of the
years in the two-year period ended September 30, 2009 (the financial statements
before the effects of the adjustments discussed in Note 18 are presented
herein). These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements, before the effects of the
adjustments to retrospectively apply the change in accounting described in Note
18, present fairly, in all material respects, the consolidated financial
position of Home Federal Bancorp, Inc. and Subsidiary as of September 30, 2009,
and the results of their operations and their cash flows for each of the years
in the two-year period ended September 30, 2009, in conformity with accounting
principles generally accepted in the United States of America.
We were
not engaged to audit, review, or apply any procedures to the adjustments to
retrospectively apply the change in accounting and disclosure for the impact of
participating securities on earnings per share in Note 18 and, accordingly, we
do not express an opinion or any other form of assurance about whether such
adjustments are appropriate and have been properly applied. Those
adjustments were audited by Crowe Horwath LLP.
/s/ Moss
Adams LLP
Spokane,
Washington
December
11, 2009
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
|
September
30,
2010
|
|
|
September
30,
2009
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and amounts due from depository institutions
|
|
$ |
416,426 |
|
|
$ |
49,953 |
|
Securities
available for sale, at fair value
|
|
|
275,180 |
|
|
|
169,320 |
|
Loans
held for sale
|
|
|
5,135 |
|
|
|
862 |
|
Loans
receivable, net of allowance for loan losses
of $15,432
|
|
|
|
|
|
|
|
|
and
$28,735
|
|
|
620,493 |
|
|
|
510,629 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
17,717 |
|
|
|
10,326 |
|
Accrued
interest receivable
|
|
|
2,694 |
|
|
|
2,781 |
|
Property
and equipment, net
|
|
|
27,955 |
|
|
|
20,462 |
|
Bank
owned life insurance
|
|
|
12,437 |
|
|
|
12,014 |
|
Real
estate and other property owned
|
|
|
30,481 |
|
|
|
18,391 |
|
FDIC
indemnification receivable, net
|
|
|
64,574 |
|
|
|
30,038 |
|
Intangible
assets
|
|
|
3,971 |
|
|
|
-- |
|
Other
assets
|
|
|
5,798 |
|
|
|
3,123 |
|
TOTAL
ASSETS
|
|
$ |
1,482,861 |
|
|
$ |
827,899 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposit
accounts
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand deposits
|
|
$ |
138,300 |
|
|
$ |
68,155 |
|
Interest-bearing
demand deposits
|
|
|
406,248 |
|
|
|
176,049 |
|
Savings
deposits
|
|
|
69,079 |
|
|
|
41,757 |
|
Certificates
of deposit
|
|
|
576,035 |
|
|
|
228,897 |
|
Total
deposit accounts
|
|
|
1,189,662 |
|
|
|
514,858 |
|
Advances
by borrowers for taxes and insurance
|
|
|
4,658 |
|
|
|
1,132 |
|
Interest
payable
|
|
|
631 |
|
|
|
553 |
|
Deferred
compensation
|
|
|
5,583 |
|
|
|
5,260 |
|
Federal
Home Loan Bank advances and other borrowings
|
|
|
67,622 |
|
|
|
84,737 |
|
Deferred
tax liability
|
|
|
2,211 |
|
|
|
5,571 |
|
Other
liabilities
|
|
|
7,406 |
|
|
|
6,123 |
|
Total
liabilities
|
|
|
1,277,773 |
|
|
|
618,234 |
|
COMMITMENTS
AND CONTINGENCIES (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Serial
preferred stock, $.01 par value; 10,000,000 authorized,
|
|
|
|
|
|
|
|
|
issued
and outstanding, none
|
|
|
-- |
|
|
|
-- |
|
Common
stock, $.01 par value; 90,000,000 authorized,
|
|
|
|
|
|
|
|
|
issued
and outstanding:
|
|
|
167 |
|
|
|
167 |
|
Sept.
30, 2010 – 17,460,311 issued, 16,687,561 outstanding
|
|
|
|
|
|
|
|
|
Sept.
30, 2009 – 17,445,311 issued, 16,698,168 outstanding
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
152,682 |
|
|
|
150,782 |
|
Retained
earnings
|
|
|
56,942 |
|
|
|
64,483 |
|
Unearned
shares issued to ESOP
|
|
|
(8,657 |
) |
|
|
(9,699 |
) |
Accumulated
other comprehensive income
|
|
|
3,954 |
|
|
|
3,932 |
|
Total
stockholders’ equity
|
|
|
205,088 |
|
|
|
209,665 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
1,482,861 |
|
|
$ |
827,899 |
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share and per share data)
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Interest
and dividend income:
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$ |
30,739 |
|
|
$ |
27,548 |
|
|
$ |
30,686 |
|
Securities
|
|
|
6,467 |
|
|
|
8,221 |
|
|
|
8,742 |
|
Other
interest and dividends
|
|
|
328 |
|
|
|
58 |
|
|
|
1,155 |
|
Total
interest and dividend income
|
|
|
37,534 |
|
|
|
35,827 |
|
|
|
40,583 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,202 |
|
|
|
7,076 |
|
|
|
10,685 |
|
Federal
Home Loan Bank borrowings
|
|
|
3,153 |
|
|
|
4,901 |
|
|
|
7,250 |
|
Total
interest expense
|
|
|
10,355 |
|
|
|
11,977 |
|
|
|
17,935 |
|
Net
interest income
|
|
|
27,179 |
|
|
|
23,850 |
|
|
|
22,648 |
|
Provision
for loan losses
|
|
|
10,300 |
|
|
|
16,085 |
|
|
|
2,431 |
|
Net
interest income after provision for loan losses
|
|
|
16,879 |
|
|
|
7,765 |
|
|
|
20,217 |
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
|
|
9,157 |
|
|
|
8,302 |
|
|
|
9,077 |
|
Gain
on sale of loans
|
|
|
648 |
|
|
|
1,218 |
|
|
|
764 |
|
Increase
in cash surrender value of BOLI
|
|
|
423 |
|
|
|
424 |
|
|
|
421 |
|
Loan
servicing fees
|
|
|
120 |
|
|
|
68 |
|
|
|
484 |
|
Prepayment
penalty on borrowings
|
|
|
-- |
|
|
|
(498 |
) |
|
|
-- |
|
Gain
(loss) on sale of securities
|
|
|
98 |
|
|
|
(203 |
) |
|
|
-- |
|
Bargain
purchase gain
|
|
|
3,209 |
|
|
|
-- |
|
|
|
-- |
|
FDIC
indemnification recovery on provision for loan losses
|
|
|
998 |
|
|
|
-- |
|
|
|
-- |
|
Mortgage
servicing rights, net
|
|
|
-- |
|
|
|
(31 |
) |
|
|
(340 |
) |
Accretion
of FDIC receivable discount
|
|
|
1,428 |
|
|
|
-- |
|
|
|
-- |
|
Other
|
|
|
598 |
|
|
|
11 |
|
|
|
256 |
|
Total
noninterest income
|
|
|
16,679 |
|
|
|
9,291 |
|
|
|
10,662 |
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits
|
|
|
20,562 |
|
|
|
15,918 |
|
|
|
15,211 |
|
Occupancy
and equipment
|
|
|
4,693 |
|
|
|
3,214 |
|
|
|
3,007 |
|
Data
processing
|
|
|
3,742 |
|
|
|
2,483 |
|
|
|
2,198 |
|
Advertising
|
|
|
1,223 |
|
|
|
913 |
|
|
|
1,043 |
|
Postage
and supplies
|
|
|
848 |
|
|
|
574 |
|
|
|
617 |
|
Professional
services
|
|
|
2,411 |
|
|
|
1,460 |
|
|
|
788 |
|
Insurance
and taxes
|
|
|
2,213 |
|
|
|
1,541 |
|
|
|
533 |
|
Amortization
of Intangibles
|
|
|
136 |
|
|
|
-- |
|
|
|
-- |
|
Provision
for REO
|
|
|
3,195 |
|
|
|
1,129 |
|
|
|
172 |
|
Other
|
|
|
1,820 |
|
|
|
1,739 |
|
|
|
1,042 |
|
Total
noninterest expense
|
|
|
40,843 |
|
|
|
28,971 |
|
|
|
24,611 |
|
Income
(loss) before income taxes
|
|
|
(7,285 |
) |
|
|
(11,915 |
) |
|
|
6,268 |
|
Income
tax expense (benefit)
|
|
|
(2,889 |
) |
|
|
(4,750 |
) |
|
|
2,263 |
|
Income
(loss) before extraordinary item
|
|
|
(4,396 |
) |
|
|
(7,165 |
) |
|
|
4,005 |
|
Extraordinary
gain on acquisition, less tax of $195 and $9,756
|
|
|
305 |
|
|
|
15,291 |
|
|
|
-- |
|
Net
income (loss)
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share before extraordinary item:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.28 |
) |
|
$ |
(0.46 |
) |
|
$ |
0.24 |
(1) |
Diluted
|
|
|
(0.28 |
) |
|
|
(0.46 |
) |
|
|
0.24 |
(1) |
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.26 |
) |
|
$ |
0.51 |
|
|
$ |
0.24 |
(1) |
Diluted
|
|
|
(0.26 |
) |
|
|
0.51 |
|
|
|
0.24 |
(1) |
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,513,850 |
|
|
|
15,651,250 |
|
|
|
16,233,200 |
(1) |
Diluted
|
|
|
15,513,850 |
|
|
|
15,651,250 |
|
|
|
16,252,747 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share:
|
|
$ |
0.220 |
|
|
$ |
0.220 |
|
|
$ |
0.213 |
(1) |
(1)
Earnings per share, average shares outstanding, and dividends per share have
been adjusted to reflect the impact of the Conversion
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In
thousands, except share data)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
|
Shares
|
Amount
|
Balance
at October 1, 2007
|
15,232,243
|
$152
|
$59,613
|
$58,795
|
$(3,698)
|
$(2,225)
|
$112,637
|
Second
Step Conversion
|
2,073,619
|
21
|
95,938
|
|
(8,160)
|
|
87,799
|
Dissolution
of Mutual Holding Company
|
|
|
50
|
|
|
|
50
|
Restricted
stock issued, net of forfeitures
|
13,502
|
|
|
|
|
|
-
-
|
ESOP
shares committed to be released
|
|
|
(23)
|
|
1,253
|
|
1,230
|
Exercise
of stock options
|
54,797
|
1
|
605
|
|
|
|
606
|
Share-based
compensation expense
|
|
|
1,022
|
|
|
|
1,022
|
Dividends
paid ($0.213 per share)(1)(2)
|
|
|
|
(2,987)
|
|
|
(2,987)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
4,005
|
|
|
4,005
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss
on securities available for sale,
net of taxes of $550
|
|
|
|
|
|
825
|
825
|
Comprehensive
income:
|
|
|
|
|
|
|
4,830
|
Balance
at September 30, 2008
|
17,374,161
|
174
|
157,205
|
59,813
|
(10,605)
|
(1,400)
|
205,187
|
|
|
|
|
|
|
|
|
(continues
on next page)
|
|
|
|
|
|
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Continued)
(In
thousands, except share data)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Unearned
Shares
Issued
to
Employee
Stock
Ownership
Plan
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
|
|
Shares
|
Amount
|
Balance
at September 30, 2008
(balance
carried forward)
|
17,374,161
|
174
|
157,205
|
59,813
|
(10,605)
|
(1,400)
|
205,187
|
Restricted
stock issued, net of forfeitures
|
159,115
|
2
2
|
(2)
|
|
|
|
|
ESOP
shares committed to be released
|
|
|
63
|
|
906
|
|
969
|
Exercise
of stock options
|
32,862
|
|
35
3
|
|
|
|
353
|
Share-based
compensation
|
|
|
1,08
8
|
|
|
|
1,088
|
Treasury
shares purchased
|
(867,970)
|
(9)
|
(7,888)
|
|
|
|
(7,897)
|
Dividends
paid ($0.220 per share)
|
|
|
|
(3,456)
|
|
|
(3,456)
|
Tax
adjustment from equity
compensation plans
|
|
|
(37)
|
|
|
|
(37)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
Loss
before extraordinary item
|
|
|
|
(7,165)
|
|
|
(7,165)
|
Extraordinary
gain, net of tax
|
|
|
|
15,291
|
|
|
15,291
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss on securities available for sale, net
of taxes of $3,473
|
|
|
|
|
|
5,210
|
5,210
|
Adjustment
for realized losses, net of taxes of $81:
|
|
|
|
|
|
122
|
122
|
Comprehensive
income:
|
|
|
|
|
|
|
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
|
(25,607)
|
-
|
-
|
|
|
|
-
|
ESOP
shares committed to be released
|
|
|
444
|
|
1,042
|
|
1,486
|
Exercise
of stock options
|
15,000
|
|
161
|
|
|
|
161
|
Share-based
compensation
|
|
|
1,279
|
|
|
|
1,279
|
Tax
adjustment from equity
compensation plans
|
|
|
16
|
|
|
|
16
|
Dividends
paid
($0.220
per share)
|
|
|
|
(3,450)
|
|
|
(3,450)
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
Loss
before extraordinary item
|
|
|
|
(4,396)
|
|
|
(4,396)
|
Extraordinary
gain, net of tax
|
|
|
|
305
|
|
|
305
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Change
in unrealized holding loss
on securities available for sale,
net
of taxes of $(49)
|
|
|
|
|
|
82
|
82
|
Adjustment
for realized gains, net
of taxes of $38
|
|
|
|
|
|
(60)
|
(60)
|
Comprehensive
income
|
|
|
|
|
|
|
(4,069)
|
Balance
at September 30, 2010
|
16,687,561
|
$ 167
|
$152,682
|
$56,942
|
$(8,657)
|
$ 3,954
|
$205,088
|
(1) Home
Federal MHC waived its receipt of dividends on the 8,979,246 shares that it
owned.
(2)
Dividends per share have been adjusted to reflect the impact of the Conversion,
which occurred on December 19, 2007.
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,172 |
|
|
|
1,716 |
|
|
|
1,699 |
|
Amortization
of core deposit intangible
|
|
|
136 |
|
|
|
-- |
|
|
|
-- |
|
Accretion
of FDIC indemnification receivable discount
|
|
|
(1,427 |
) |
|
|
|
|
|
|
|
|
Net
amortization (accretion) of premiums and discounts on
investments
|
|
|
950 |
|
|
|
45 |
|
|
|
(19 |
) |
Loss
on sale of fixed assets and repossessed assets
|
|
|
497 |
|
|
|
178 |
|
|
|
144 |
|
Loss
(Gain) on sale of securities available for sale
|
|
|
(98 |
) |
|
|
203 |
|
|
|
-- |
|
Extraordinary
gain on acquisition
|
|
|
-- |
|
|
|
(25,047 |
) |
|
|
-- |
|
Bargain
purchase gain
|
|
|
(3,209 |
) |
|
|
-- |
|
|
|
-- |
|
ESOP
shares committed to be released
|
|
|
1,486 |
|
|
|
969 |
|
|
|
1,230 |
|
Equity
compensation expense
|
|
|
1,279 |
|
|
|
1,088 |
|
|
|
1,022 |
|
Provision
for loan losses
|
|
|
10,300 |
|
|
|
16,085 |
|
|
|
2,431 |
|
Valuation
allowance on real estate and other property owned
|
|
|
3,195 |
|
|
|
1,129 |
|
|
|
-- |
|
Accrued
deferred compensation expense, net
|
|
|
323 |
|
|
|
69 |
|
|
|
676 |
|
Net
deferred loan fees
|
|
|
(821 |
) |
|
|
(115 |
) |
|
|
132 |
|
Deferred
income tax (benefit) expense
|
|
|
(3,371 |
) |
|
|
3,787 |
|
|
|
(1,075 |
) |
Net
gain on sale of loans
|
|
|
(648 |
) |
|
|
(1,218 |
) |
|
|
(764 |
) |
Proceeds
from sale of loans held for sale
|
|
|
27,585 |
|
|
|
70,019 |
|
|
|
48,543 |
|
Originations
of loans held for sale
|
|
|
(31,209 |
) |
|
|
(66,833 |
) |
|
|
(45,895 |
) |
Net
decrease in value of mortgage servicing rights
|
|
|
-- |
|
|
|
-- |
|
|
|
340 |
|
Net
increase in value of bank owned life insurance
|
|
|
(423 |
) |
|
|
(424 |
) |
|
|
(422 |
) |
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
939 |
|
|
|
847 |
|
|
|
123 |
|
Other
assets
|
|
|
(1,264 |
) |
|
|
(341 |
) |
|
|
176 |
|
Interest
payable
|
|
|
(628 |
) |
|
|
(242 |
) |
|
|
(179 |
) |
Other
liabilities
|
|
|
(169 |
) |
|
|
1,402 |
|
|
|
(2,274 |
) |
Net
cash provided by operating activities
|
|
|
1,504 |
|
|
|
11,443 |
|
|
|
9,893 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments and maturities of mortgage-backed securities available for
sale
|
|
|
47,652 |
|
|
|
38,564 |
|
|
|
31,123 |
|
Proceeds
from sale of mortgage-backed securities available for sale
|
|
|
2,735 |
|
|
|
|
|
|
|
|
|
Purchase
of mortgage-backed securities available for sale
|
|
|
(83,280 |
) |
|
|
(2,734 |
) |
|
|
(56,257 |
) |
Maturity
of (investment in) certificate of deposit
|
|
|
-- |
|
|
|
5,000 |
|
|
|
(5,000 |
) |
Principal
repayments, maturities, and calls of securities available for
sale
|
|
|
14,145 |
|
|
|
-- |
|
|
|
-- |
|
Proceeds
from sale of securities available for sale
|
|
|
-- |
|
|
|
10,947 |
|
|
|
-- |
|
Purchase
of securities available for sale
|
|
|
(53,212 |
) |
|
|
(3,037 |
) |
|
|
-- |
|
Sale
of mortgage servicing rights
|
|
|
-- |
|
|
|
1,707 |
|
|
|
-- |
|
Purchases
of property and equipment
|
|
|
(9,826 |
) |
|
|
(6,912 |
) |
|
|
(4,643 |
) |
Reimbursement
of loan losses under loss share agreement
|
|
|
22,800 |
|
|
|
|
|
|
|
|
|
Net
decrease in loans
|
|
|
60,961 |
|
|
|
31,749 |
|
|
|
17,000 |
|
Net
cash received from acquisition
|
|
|
373,103 |
|
|
|
22,078 |
|
|
|
-- |
|
Proceeds
from sale of fixed assets and repossessed assets
|
|
|
17,161 |
|
|
|
2,121 |
|
|
|
759 |
|
Net
cash provided (used) by investing activities
|
|
|
392,239 |
|
|
|
99,483 |
|
|
|
(17,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(continues
on next page)
|
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands)
|
|
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(7,765 |
) |
|
|
(1,526 |
) |
|
|
(31,684 |
) |
Net
increase (decrease) in advances by borrowers for taxes and
insurance
|
|
|
3,526 |
|
|
|
(254 |
) |
|
|
(219 |
) |
Proceeds
from Federal Home Loan Bank borrowings
|
|
|
-- |
|
|
|
23,100 |
|
|
|
68,215 |
|
Repayment
of Federal Home Loan Bank borrowings
|
|
|
(25,155 |
) |
|
|
(96,063 |
) |
|
|
(111,973 |
) |
Net
proceeds from other borrowings
|
|
|
5,413 |
|
|
|
1,500 |
|
|
|
-- |
|
Proceeds
from exercise of stock options
|
|
|
161 |
|
|
|
353 |
|
|
|
606 |
|
Repurchases
of common stock
|
|
|
-- |
|
|
|
(7,897 |
) |
|
|
-- |
|
Excess
tax benefit from equity compensation plans
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Dividends
paid
|
|
|
(3,450 |
) |
|
|
(3,456 |
) |
|
|
(2,987 |
) |
Net
proceeds from stock issuance and exchange pursuant
to
second step conversion
|
|
|
-- |
|
|
|
-- |
|
|
|
87,849 |
|
Net
cash (used) provided by financing activities
|
|
|
(27,270 |
) |
|
|
(84,243 |
) |
|
|
9,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
366,473 |
|
|
|
26,683 |
|
|
|
2,682 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
49,953 |
|
|
|
23,270 |
|
|
|
20,588 |
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
416,426 |
|
|
$ |
49,953 |
|
|
$ |
23,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
10,277 |
|
|
$ |
11,976 |
|
|
$ |
18,115 |
|
Income
taxes
|
|
|
430 |
|
|
|
2,545 |
|
|
|
3,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of real estate and other assets in settlement of loans
|
|
$ |
24,659 |
|
|
$ |
19,513 |
|
|
$ |
1,394 |
|
Fair
value adjustment to securities available for sale,
net
of taxes
|
|
|
20 |
|
|
|
5,332 |
|
|
|
825 |
|
See
accompanying notes.
HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Summary of Significant Accounting Policies
Nature of Business and
Reorganization. Home Federal Bancorp, Inc. (the “Company”), was formed as
the new stock holding company for Home Federal Bank (the “Bank”) in connection
with the Company’s conversion from a mutual holding company structure to a stock
holding company structure, which was completed on December 19, 2007
(“Conversion”). Prior to the completion of the Conversion, the Bank was the
subsidiary of Home Federal Bancorp, Inc., a federally-chartered stock mid-tier
holding company (“old Home Federal Bancorp”), which was a subsidiary of Home
Federal MHC, a federally-chartered mutual holding company. The Bank formed Home
Federal MHC in December 2004. As a result of the Conversion, Home Federal MHC
and old Home Federal Bancorp ceased to exist and were replaced by the Company as
the successor to old Home Federal Bancorp.
As part
of the Conversion, a total of 9,384,000 new shares of the Company were sold at
$10 per share in subscription, community and syndicated community offerings
through which the Company received proceeds of approximately $87.8 million, net
of offering costs of approximately $5.9 million. The Company contributed $48.0
million or approximately 50% of the net proceeds to the Bank in the form of a
capital contribution. The Company loaned $8.2 million to the Bank’s Employee
Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire
816,000 shares of the Company’s common stock at $10 per share. As part of the
Conversion, shares of outstanding common stock of old Home Federal Bancorp were
exchanged for 1.136 shares of the Company’s common stock. No fractional shares
were issued. Instead, cash was paid to stockholders at $10 per share for any
fractional shares that would otherwise be issued. The exchange resulted in an
additional 852,865 outstanding shares of the Company for a total of 17,325,901
outstanding shares as of the closing of the Conversion, after giving effect to
the redemption of fractional shares.
The
Conversion was accounted for as a reorganization in corporate form with no
change in the historical basis of the Company’s assets, liabilities and equity.
All references to the number of shares outstanding, with the exception of those
reported on the Balance Sheet, are restated to give retroactive recognition to
the exchange ratio applied in the Conversion.
The Bank
was founded in 1920 as a building and loan association and reorganized as a
federal mutual savings and loan association in 1936. The Bank is a
community-oriented financial institution dedicated to serving the financial
service needs of consumers and businesses within its market area. The Bank’s
primary business is attracting deposits from the general public and using these
funds to originate loans.
Home
Federal Bank currently has operations in three distinct market
areas. The Boise, Idaho, and surrounding area known as the Treasure
Valley region of southwestern Idaho, which includes Ada, Canyon, Elmore, and Gem
counties, the Tri-County Region of Central Oregon including the counties of
Deschutes, Crook and Jefferson, and Western Oregon including Lane, Josephine,
Jackson, & Multnomah counties. In total the Bank has 37
full-service banking offices, one loan center, and Internet banking
services.
Home
Federal Bank has five wholly-owned subsidiaries, Idaho Home Service Corporation,
Liberty Funding Inc., Liberty Insurance Services, Inc., all of which are
currently inactive. Commercial Equipment Lease Corporation was purchased in
connection with the July 30, 2010, acquisition of LibertyBank in Eugene, Oregon,
(the “LibertyBank Acquisition”) and specializes in commercial leasing
activities. Community First Real Estate, LLC, was purchased in connection with
the August 7, 2009, acquisition of Community were First Bank in Prineville,
Oregon (the “CFB Acquisition”). Three of the Bank’s banking offices were
owned by this subsidiary and there are no other business activities. See Note 2
for additional information regarding these acquisitions.
Principles of Consolidation.
The consolidated financial statements of the Company include the accounts of the
Company, the Bank and its wholly-owned subsidiaries, Idaho Home Service
Corporation, Liberty Funding, Liberty Insurance Services, Inc., Commercial
Equipment Lease Corporation and Community First Real Estate LLC. All
intercompany transactions and balances have been eliminated in
consolidation.
Use of
Estimates. To prepare financial statements in conformity with
U.S. generally accepted accounting principles management makes estimates and
assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses (including the evaluation of
impaired loans and the associated provision for loan losses), accounting for
acquired loans and covered assets, the valuation of noncovered real estate
owned, as well as deferred income taxes and the associated income tax
expense.
Management
believes that the allowance for loan losses reflects the best estimate of
probable incurred losses inherent in the loan portfolio at the balance sheet
dates presented and that the valuation of other real estate owned (“REO”) and
computation of deferred taxes are proper. While management uses currently
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their
examination.
Cash Flows. Cash
and cash equivalents include cash, deposits with other financial institutions
with original maturities fewer than 90 days, and federal funds
sold. Net cash flows are reported for customer loan and deposit
transactions, interest bearing deposits in other financial institutions, and
federal funds purchased and repurchase agreements.
The
Company is required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve in cash on hand. The amount of this
required reserve balance at September 30, 2010 and 2009 was $6.1 million and
$5.4 million, respectively.
Securities. Debt
securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them to
maturity. Debt securities are classified as available for sale when
they might be sold before maturity. Securities available for sale are carried at
fair value, with unrealized gains and losses reported in other comprehensive
income, net of taxes.
Interest
income includes amortization of purchase premium or
discount. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments, except for mortgage backed
securities where prepayments are anticipated. Gains and losses on sales are
recorded on the trade date and determined using the specific identification
method.
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. For securities in an unrealized loss position, management
considers the extent and duration of the unrealized loss, and the financial
condition and near-term prospects of the issuer. Management also
assesses whether it intends to sell, or it is more likely than not that it will
be required to sell, a security in an unrealized loss position before recovery
of its amortized cost basis. If either of the criteria regarding intent or
requirement to sell is met, the entire difference between amortized cost and
fair value is recognized as impairment through earnings. For debt
securities that do not meet the aforementioned criteria, the amount of
impairment is split into two components as follows: 1) OTTI related to credit
loss, which must be recognized in the income statement and 2)
other-than-temporary impairment (OTTI) related to other factors, which is
recognized in other comprehensive income. The credit loss is defined
as the difference between the present value of the cash flows expected to be
collected and the amortized cost basis. For equity securities, the entire amount
of impairment is recognized through earnings.
Federal Home Loan Bank (“FHLB”)
Stock. As a member of the FHLB of Seattle, the Bank is required to
maintain a minimum level of investment in capital stock of the FHLB based on
specific percentages of its outstanding FHLB advances, total assets and
mortgages. The Bank's investment in FHLB of Seattle stock is carried at par
value ($100 per share), which reasonably approximates its fair value. The Bank
may request redemption at par
value of
any stock in excess of the amount the Bank is required to hold. FHLB stock is
restricted as to purchase, sale, and redemption.
Loans Held for Sale. Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loan
commitments related to the origination of mortgage loans held for sale and the
corresponding sales contracts are considered derivative instruments as defined
by Accounting Standards Codification Topic (“ASC”) 815, “Derivatives and
Hedging.” If material, these derivatives are recognized on the consolidated
balance sheet in other assets and other liabilities at fair value.
Loans. Loans that management
has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at the principal balance outstanding, net of purchase
premiums and discounts, deferred loan fees and costs, and an allowance for loan
losses. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized in interest income using the level yield method without anticipating
prepayments.
Interest
income on loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well-secured and in process of collection. Consumer loans are
typically charged off no later than 120 days past due. Past due
status is based on the contractual terms of the loan. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful. Nonaccrual loans and loans past
due 90 days still on accrual include both smaller balance homogeneous loans that
are collectively evaluated for impairment and individually classified impaired
loans. A loan is moved to non-accrual status in accordance with the Company’s
policy, typically after 90 days of non-payment.
All
interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted
for on the cash-basis or cost recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Purchased Loans: In
connection with the acquisitions discussed in Note 2, the Bank has purchased
loans of failed banks, some of which have shown evidence of credit deterioration
since origination. These purchased loans are recorded at the amount paid, such
that there is no carryover of the seller’s allowance for loan
losses. After acquisition, losses are recognized by an increase in
the allowance for loan losses.
Loans
purchased in the CFB Acquisition were accounted for under Statement of
Accounting Standard No. 141, which has since been superseded by ASC 805, and
under the guidance of ASC 310-30. An allowance for loan losses was recorded on
loans purchased in the CFB Acquisition that did not show evidence of credit
deterioration on the acquisition date. Loans purchased in the CFB Acquisition
that are accounted for under ASC 310-30 were not aggregated into pools of loans
but are accounted for individually.
The
LibertyBank Acquisition was accounted for under ASC 805 and all related
purchased loans are accounted for under ASC 310-30. Such purchased loans are
aggregated into pools of loans based on common risk characteristics such as
credit risk and loan type. The Company estimates the amount and
timing of expected cash flows for each purchased loan or pool, and the expected
cash flows in excess of amount paid is recorded as interest income over the
remaining life of the loan or pool (accretable yield). The excess of
the pool’s contractual principal and interest over expected cash flows is not
recorded (nonaccretable difference).
Over the
life of the loan or pool, expected cash flows continue to be
estimated. If the present value of expected cash flows is less than
the carrying amount, a loss is recorded. If the present value of
expected cash flows is greater than the carrying amount, it is recognized as
part of future interest income.
Allowance for Loan
Losses. The allowance for loan losses is a valuation allowance
for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information
about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan
that, in management’s judgment, should be charged off.
The
allowance consists of specific and general components. The specific
component relates to loans that are individually classified as
impaired. The general component covers non-classified loans and is
based on historical loss experience adjusted for current factors.
A loan is
impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loans, for which the terms
have been modified, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings and classified as
impaired.
Nonhomogeneous
loans, such as commercial business, multifamily residential, construction and
commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Large
groups of smaller balance homogeneous loans, such as consumer and one-to-four
family residential real estate loans, are collectively evaluated for impairment,
and accordingly, they are not separately identified for impairment
disclosures. Troubled debt restructurings are measured at the present
value of estimated future cash flows using the loan’s effective rate at
inception.
The
allowance for loan losses on loans covered by loss sharing agreements with the
FDIC are reported gross of amounts to be recovered from the FDIC. The provision
for loan losses is also recorded gross of amounts recoverable from the FDIC. The
amount of the provision for loan losses on covered loans that is expected to be
recovered from the FDIC is recorded as an increase to the FDIC indemnification
asset with an increase in noninterest income.
Concentrations of Credit Risk.
The Bank accepts deposits and grants credit primarily within the Treasure Valley
region of southwestern Idaho, the tri-country region of central Oregon, and
western Oregon. The Bank has a diversified loan portfolio and grants consumer,
residential, commercial, and construction real estate loans, and is not
dependent on any industry or group of customers. Although the Bank has a
diversified loan portfolio, a substantial portion of its loans are real
estate-related. The ability of the Bank's debtors to honor their contracts is
dependent upon the real estate and general economic conditions in the area. The
Bank also regularly monitors real-estate related loans that include terms that
may give rise to a concentration of credit risk, including high loan-to-value
loans and interest-only loans.
Transfers of Financial
Assets. Transfers of financial assets are accounted for as
sales when control over the assets has been relinquished. Control over
transferred assets is deemed to be surrendered when the assets have been
isolated from the Company, the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Foreclosed
Assets. Assets acquired through or instead of loan foreclosure
are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. If fair value declines subsequent to
foreclosure, a valuation allowance is recorded through
expense. Operating costs after acquisition are expensed. The
carrying amount of real estate and other property owned was $30.5 million and
$18.4 million at September 30, 2010 and 2009, respectively. Covered real estate
and other property owned totaled $20.5 million and $7.5 million at September 30,
2010 and 2009, respectively.
Property and Equipment.
Properties and equipment are stated at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the term of the lease or
the estimated useful life of the improvements, whichever is less. Depreciation
and amortization are generally computed using the straight-line method for
financial statement purposes over the following estimated useful lives and lease
periods:
Buildings
and leasehold improvements
|
15-40
years
|
Furniture,
equipment, and automobiles
|
3-12
years
|
The normal costs
of maintenance and repairs are charged to expense as incurred.
Bank Owned Life
Insurance. The Company has purchased life insurance policies
on certain key executives. Bank owned life insurance is recorded at
the amount that can be realized under the insurance contract at the balance
sheet date, which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement.
FDIC Indemnification Asset.
Under the terms of the loss sharing agreements with the FDIC, which is a
significant component of the acquisitions discussed in Note 2, the FDIC will
absorb most of the losses and certain related expenses and share in loss
recoveries on loans, leases and other real estate owned covered under the loss
share agreements. The FDIC indemnification asset is measured separately from
each of the covered asset categories. The indemnification asset represents the
present value of the estimated cash payments expected to be received from the
FDIC for future losses on covered assets based on the credit adjustment
estimated for each covered asset and the loss sharing percentages. These cash
flows are discounted at a market-based rate to reflect the uncertainty of the
timing and receipt of the loss sharing reimbursement from the FDIC. The FDIC
indemnification asset will be reduced as losses are recognized on covered assets
and loss sharing payments are received from the FDIC. Realized losses in excess
of acquisition date estimates will increase the FDIC indemnification asset and
the indemnifiable loss recovery is recorded in other income. Conversely, if
realized losses are less than Acquisition Date estimates, the FDIC
indemnification asset will be reduced by a charge to earnings.
Intangible
Assets. Intangible assets acquired in a purchase business
combination with definite useful lives are amortized over their estimated useful
lives to their estimated residual values. Intangible assets on the Company’s
balance sheets consist of a core deposit intangible asset arising from whole
bank acquisitions. The core deposit intangible is initially measured
at fair value and then is amortized on an accelerated method over the estimated
useful life, which has been estimated to be 10 years. The original amount of
core deposit intangibles was $4.1 million and accumulated amortization at
September 30, 2010 totaled $136,000. Estimated amortization expense is as
follows, in thousands of dollars:
|
|
|
|
Fiscal
year ending September 30,
|
|
Amount
|
|
|
|
|
|
2011
|
|
$ |
725 |
|
2012
|
|
|
593 |
|
2013
|
|
|
485 |
|
2014
|
|
|
396 |
|
2015
|
|
|
324 |
|
Thereafter
|
|
|
1,448 |
|
|
|
$ |
3,971 |
|
Income Taxes. Income tax
expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Deferred tax assets
and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
A tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded. The Company analyzed its tax positions,
including the permanent and temporary differences as well as the major
components of income and expense, and determined that it had no uncertain tax
positions that would rise to the level of having a material effect on its
financial statements at September 30, 2010 and 2009.
The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense.
Comprehensive Income.
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as separate
components of equity.
Advertising Costs. Advertising
costs are expensed as incurred. Advertising expense for the years ended
September 30, 2010, 2009, and 2008, was $1.2 million, $913,000, and $1.0 million
respectively.
Stock-Based Compensation.
Compensation cost is recognized for stock options and restricted stock awards
issued to employees, based on the fair value of these awards at the date of
grant. A Black-Scholes model is utilized to estimate the fair value of stock
options, while the market price of the Company’s common stock at the date of
grant is used for restricted stock awards. Compensation cost is recognized over
the required service period, generally defined as the vesting period. For awards
with graded vesting, compensation cost is recognized on a straight-line basis
over the requisite service period for the entire award.
Retirement Plans. Employee
401(k) plan expense is the amount of matching contributions. Deferred
compensation and supplemental retirement plan expense allocates the benefits
over years of service.
Employee Stock Ownership
Plan. The cost of shares issued to the ESOP, but not yet
allocated to participants, is shown as a reduction of shareholders’
equity. Compensation expense is based on the market price of shares
as they are committed to be released to participant
accounts. Dividends on allocated ESOP shares reduce retained
earnings; dividends on unearned ESOP shares reduce debt and accrued
interest.
Earnings Per Share
(“EPS”). Basic
earnings per common share is net income divided by the weighted average number
of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. All outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends are considered participating securities for this
calculation. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock
options. Earnings and dividends per share are restated for all stock
splits and stock dividends through the date of issuance of the financial
statements.
Loss
Contingencies. Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial
statements.
Fair Value of Financial
Instruments. Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Operating
Segments. While the chief decision-makers monitor the revenue
streams of the various products and services, operations are managed and
financial performance is evaluated on a Company-wide basis. Operating segments
are aggregated into one as operating results for all segments are
similar. Accordingly, all of the financial services operations are
considered by management to be aggregated in one reportable operating
segment.
Reclassifications. Certain
reclassifications have been made to prior year’s financial statements in order
to conform to the current year presentation. The reclassifications had no effect
on previously reported net income or equity.
Recent Accounting Pronouncements.
ASC 260 includes new guidance which clarifies that unvested share-based
payment awards with rights to receive nonforfeitable dividends are participating
securities and should be included in the computation of earnings per share. The
Company adopted this new guidance on October 1, 2009, and retrospectively
applied it to earnings per share information. There was no significant impact
from the adoption.
ASC 805
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and the goodwill acquired. The standard also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. ASC 805 was effective
for fiscal years beginning after December 15, 2008, or October 1, 2009, for the
Company. The CFB Acquisition described was accounted for under SFAS No. 141 as
the Company was not permitted to adopt ASC 805 early. The accounting guidance
under ASC 805 was applied to the LibertyBank Acquisition.
Note
2 – Acquisitions
On August
7, 2009, the Bank entered into an agreement with the FDIC and acquired certain
assets and assumed certain liabilities of Community First Bank, a full service
community bank that was formerly headquartered in Prineville,
Oregon ("CFB Acquisition"). The results of operations for fiscal year 2009
include the impact of the CFB Acquisition from the acquisition date through
September 30, 2009. The CFB Acquisition consisted of assets with a preliminary
estimated fair value of $189.8 million and liabilities with a preliminary
estimated fair value of $174.5 million on the acquisition date. Through the CFB
Acquisition, the Bank acquired a wholly-owned subsidiary, Community First Real
Estate LLC, which owned three of the Bank’s banking offices in Central
Oregon.
On July
30, 2010, the Bank entered into an agreement with the FDIC and acquired certain
assets and assumed certain liabilities of LibertyBank, a full service community
bank that was formerly headquartered in Eugene, Oregon ("LibertyBank
Acquisition"). The results of operations for fiscal year 2010 include the impact
of the LibertyBank Acquisition from the acquisition date through September 30,
2010. The LibertyBank Acquisition consisted of assets with a preliminary
estimated fair value of $690.6 million and liabilities with a preliminary
estimated fair value of $688.6 million on the acquisition date. Through the
LibertyBank Acquisition, the Bank acquired three wholly-owned subsidiaries, two
of which are inactive with no business activities. The third was Commercial
Equipment Lease Corporation (“CELC”), which engages in the business of equipment
lease financing. Leases are generally for terms of five years or less. Equipment
financing agreements, or financing leases, are reported as commercial loans in
the Company’s balance sheet. Other leases are included in loans, but reported
separately in the accompanying footnotes.
In
addition to the assets purchased and liabilities assumed, the Bank and the FDIC
entered into loss sharing agreements. These agreements cover realized
losses and certain expenses on nearly all of the loans (“covered loans”) and
foreclosed real estate purchased in the acquisitions (together “covered
assets”). Under the agreements, the FDIC will reimburse the Bank for 80% of the
first $34.0 million of realized losses and reimbursable expenses on covered
assets and 95% on realized losses that exceed $34.0 million on covered
assets from the CFB Acquisition. The FDIC will reimburse the Bank for 80% of the
losses on covered assets from the LibertyBank Acquisition. Consumer
loans purchased in the LibertyBank acquisition that were not secured by
real estate (such as automobile and deposit secured loans) are excluded from the
loss sharing agreements. Additionally, total losses on the loans and leases of
CELC are limited to the sum of the book value of the Bank's investment in CELC
and the Bank's outstanding balance on a line of credit balance to CELC as of the
date of the LibertyBank Acquisition. These amounts totaled $57.0 million at July
30, 2010, and are eliminated upon consolidation. The FDIC will also share in any
recoveries on covered assets at the same rates as the loss sharing
provisions.
Realized
losses covered by the loss sharing agreements 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. The
loss sharing agreements and recovery provisions for one-to-four family loans is
in effect for 10 years from the acquisition dates. For all other covered loans
and leases, the loss sharing agreements and recovery provisions are in effect
for five years and eight years, respectively. The reimbursable losses from the
FDIC are based on the book value of the relevant loans and foreclosed assets as
determined by the FDIC as of the dates of the acquisitions. The expected
reimbursements under the loss sharing agreements were recorded as an
indemnification asset at their estimated fair value on the acquisition
date.
In
September 2020, approximately ten years following the LibertyBank Acquisition
date, the Bank is required to make a payment to the FDIC in the event that
losses on covered assets under the loss share agreements have been less than the
intrinsic loss estimate, which was determined by the FDIC prior to the
Acquisition. The payment amount will be 50% of the excess, if any, of (i) 20% of
the Total Intrinsic Loss Estimate of $60.0 million, which equals $12.0 million,
less the sum of the following:
A.
|
20%
of the Net Loss Amount, which is the sum of all loss amounts on covered
assets less the sum of all recovery amounts realized. This amount is not
yet known;
|
B.
|
25%
of the asset premium (discount). This amount is ($7.5) million;
and
|
C.
|
3.5%
of the total covered assets under the loss share agreements. This amount
is $10.1 million.
|
The
Company has estimated the minimum level of losses to avoid a true-up provision
payment to the FDIC to be $46.7 million. The maximum amount of the true-up
provision is $4.7 million, if there are no losses in the covered loan portfolio.
Due to the estimated level of losses at the Acquisition Date, management has
determined a true-up provision payment is unlikely. As such, no liability has
been recorded.
Based
upon the acquisition date preliminary fair values estimate of the net assets
acquired, no goodwill was recorded in either transaction. The CFB
Acquisition was accounted for under SFAS No. 141 and resulted in a pre-tax gain
of $25.0 million, which was classified as an extraordinary gain in the Company’s
Consolidated Statement of Operations for the year ended September 30, 2009, net
of income taxes. Due to the difference in tax bases of the assets
acquired and liabilities assumed, the Company recorded a deferred tax liability
of $9.7 million, resulting in an after-tax gain of $15.3 million. The
LibertyBank Acquisition was accounted for under ASC 805 and a bargain purchase
gain of $3.2 million was recorded in other income in the Company’s Consolidated
Statement of Operations for the year ended September 30, 2010. The tax liability
associated with the bargain purchase gain from the LibertyBank Acquisition was
$1.3 million at the acquisition date.
The
determination of the initial fair value of loans purchased in the acquisitions
and the initial fair value of the related FDIC indemnification asset involves a
high degree of judgment and complexity. The carrying value of the acquired loans
and the FDIC indemnification asset reflect management’s best estimate of the
amount to be realized on each of these assets. However, the amount the
Company realizes on these assets could differ materially from the carrying value
reflected in these financial statements, based upon the timing of collections on
the acquired loans in future periods. Because of the loss sharing
agreements with the FDIC on these assets, the Company does not expect to incur
any excessive losses. To the extent the actual values realized for the acquired
loans are different from the estimates, the FDIC indemnification asset will
generally be impacted in an offsetting manner due to the loss sharing support
from the FDIC. The
Company continues to assess the acquisition date fair value of loans and REO
purchased in the LibertyBank Acquisition and anticipates this assessment will be
completed by March 31, 2011.
In its
assumption of the deposit liabilities, the Company believed that the customer
relationships associated with these deposits have intangible value. The Company
applied ASC 350, Intangibles –
Goodwill and Other, which prescribes the accounting for goodwill and
other intangible assets, such as core deposit intangibles. The
Company determined the fair value of a core deposit intangible asset was
approximately $2.1 million in the CFB Acquisition and $4.1 million in the
LibertyBank Acquisition. In accordance with the provisions of SFAS No. 141, the
Company allocated the excess of fair value of net assets acquired over cost to
the fair value of the core deposit intangible asset in the CFB Acquisition, thus
reducing the carrying value of the intangible asset to zero. At September 30,
2010, the core deposit intangible reported on the Company’s balance sheet
relates to the LibertyBank Acquisition. In determining the valuation of this
intangible asset, deposits were analyzed based on factors such as type of
deposit, deposit retention, interest rates and age of deposit
relationships.
The loss
sharing agreements and recovery provisions for one-to-four family loans is in
effect for 10 years from the acquisition dates. For all other covered loans and
leases, the loss sharing agreement and recovery provision is in effect for five
years and eight years, respectively, from the Acquisition Date.
The
LibertyBank Acquisition provided an opportunity to broaden and deepen the Bank's
deposit franchise. The Company’s management has from time to time become aware
of acquisition opportunities and has performed various levels of review related
to potential acquisitions in the past. This particular transaction
was attractive for a variety of reasons, including the:
·
|
ability
to expand into non-overlapping yet complementary markets on the outer rim
of the Company’s targeted growth
markets;
|
·
|
ability
to achieve improvement in branch performance in the Bank's Central Oregon
region due to overlap of banking
offices;
|
·
|
ability
to compete against banks in LibertyBank’s markets based on Home Federal’s
relative capital strength;
|
·
|
diversification
of the Bank's loan portfolio by introducing a significant level of
commercial business loans;
|
·
|
attractiveness
of immediate core deposit growth with low cost of funds. Over
the past several years, organic core deposit growth has been difficult as
financial institutions competed over core deposits. The
LibertyBank Acquisition allowed the Bank to immediately increase core
deposits at an attractive cost.
|
A summary
of the net assets purchased in the LibertyBank Acquisition and the estimated
fair value adjustments were as follows at the acquisition date:
|
|
Estimated
fair
values
at
July 30, 2010
|
|
|
|
(in
thousands)
|
|
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$ |
59,158 |
|
Cash
due from FDIC
|
|
|
313,944 |
|
Securities
available-for-sale
|
|
|
34,719 |
|
Covered
loans and leases
|
|
|
192,023 |
|
Other
loans, not covered
|
|
|
5,572 |
|
Federal
Home Loan Bank stock
|
|
|
7,391 |
|
Covered
other real estate owned
|
|
|
15,242 |
|
Core
deposit intangible
|
|
|
4,107 |
|
FDIC
indemnification asset
|
|
|
56,694 |
|
Other
assets
|
|
|
1,728 |
|
|
|
|
|
|
Total
assets acquired
|
|
$ |
690,578 |
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
$ |
682,569 |
|
FHLB
Advances
|
|
|
1,066 |
|
Other
liabilities
|
|
|
3,735 |
|
Deferred
tax liability, due to bargain purchase gain
|
|
|
1,251 |
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
688,621 |
|
|
|
|
|
|
Net
assets acquired
|
|
$ |
1,957 |
|
The
operating results of the Company for the years ended September 30, 2010 and
2009, includes the operating results of the acquired assets and assumed
liabilities since the acquisition dates of July 30, 2010 for the LibertyBank
Acquisition and August 7, 2009, for the CFB Acquisition. Due primarily to the
significant amount of fair value adjustments and the loss sharing agreements
included in the acquisitions, historical results of LibertyBank and Community
First Bank are not believed to be relevant to the Company's results; therefore,
pro forma information is not presented herein. Expenses related to the
LibertyBank Acquisition totaled approximately $520,000 and are recorded in
professional fees in the Consolidated Statement of Operations.
Note
3 – Fair Value Measurement
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be
used to measure fair values:
Level 1 –
Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement
date.
Level 2 –
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3 –
Significant unobservable inputs that reflect a company’s own assumptions about
the assumptions that market participants would use in pricing an asset or
liability.
The
Company used the following methods and significant assumptions to estimate fair
value:
Investment
Securities: The fair values for investment securities are
determined by quoted market prices, if available (Level 1). For securities where
quoted prices are not available, fair values are calculated based on market
prices of similar securities (Level 2). For securities where quoted prices or
market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level 3).
Discounted cash
flows are calculated using spread to swap and LIBOR curves that are updated to
incorporate loss severities, volatility, credit spread and optionality. During
times when trading is more liquid, broker quotes are used (if available) to
validate the model. Rating agency and industry research reports as well as
defaults and deferrals on individual securities are reviewed and incorporated
into the calculations.
Impaired
Loans: The fair value of impaired loans with specific
allocations of the allowance for loan losses is generally based on recent real
estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are usually significant and typically result in
a Level 3 classification of the inputs for determining fair value.
Other Real Estate
Owned: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
are measured at fair value, less costs to sell. Fair values are based on recent
real estate appraisals. These appraisals may use a single valuation approach or
a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are usually significant and typically result in
a Level 3 classification of the inputs for determining fair value.
The
following table summarized the Company’s financial assets that were measured at
fair value on a recurring basis at September 30, 2010 and September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(in
thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-
Sponsored Enterprises (“GSE”)
|
|
$ |
52,022 |
|
|
$ |
-- |
|
|
$ |
52,022 |
|
|
$ |
-- |
|
Obligations
of states and
political
subdivisions
|
|
|
6,789 |
|
|
|
-- |
|
|
|
6,789 |
|
|
|
-- |
|
Corporate
note, FDIC-guaranteed
|
|
|
1,025 |
|
|
|
-- |
|
|
|
1,025 |
|
|
|
-- |
|
Mortgage
backed securities, GSE-issued
|
|
|
214,920 |
|
|
|
-- |
|
|
|
214,920 |
|
|
|
-- |
|
Mortgage
backed securities, private label
|
|
|
424 |
|
|
|
-- |
|
|
|
424 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 assets that were measured at fair value on a
non-recurring basis at September 30, 2010 and September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
6,773 |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
6,773 |
|
Real
estate owned
|
|
|
8,288 |
|
|
|
-- |
|
|
|
-- |
|
|
|
8,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
5,699 |
|
|
|
-- |
|
|
|
-- |
|
|
$ |
5,699 |
|
Real
estate owned
|
|
|
5,136 |
|
|
|
-- |
|
|
|
-- |
|
|
|
5,136 |
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
at September 30, 2010, had a carrying amount of $6.8 million, net of specific
valuation allowances totaling $2.5 million. The specific valuation allowance on
impaired loans during the fiscal years ended September 30, 2010 and 2009,
required a provision of $7.0 million and $1.5 million,
respectively.
Real
estate owned, which is measured at estimated fair value less costs to sell, had
a carrying amount of $8.3 million at September 30, 2010, which is made up of the
outstanding balance of $11.2 million, net of a valuation allowance of $2.9
million. At September 30, 2009, real estate owned measured at fair value less
costs to sell had a carrying amount of $5.1 million, which is made up of the
outstanding balance of $6.1 million, net of a valuation allowance of $982,000.
The provision for declines in the value of real estate owned totaled $3.2
million and $1.1 million for the years ending September 30, 2010 and 2009,
respectively, net of amounts recoverable from the FDIC under loss sharing
agreements.
The
estimated fair values of the Company’s financial instruments are as
follows:
|
|
September
30, 2010
|
|
|
September
30, 2009
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair
Value
|
|
|
|
(in
thousands)
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
416,426 |
|
|
$ |
416,426 |
|
|
$ |
49,953 |
|
|
$ |
49,953 |
|
Investment
securities
|
|
|
275,180 |
|
|
|
275,180 |
|
|
|
165,193 |
|
|
|
165,193 |
|
Loans
held for sale
|
|
|
5,135 |
|
|
|
5,135 |
|
|
|
862 |
|
|
|
862 |
|
Loans
receivable, net
|
|
|
613,494 |
|
|
|
627,764 |
|
|
|
510,629 |
|
|
|
517,438 |
|
FDIC
indemnification receivable, net
|
|
|
64,574 |
|
|
|
64,574 |
|
|
|
30,038 |
|
|
|
30,038 |
|
FHLB
stock
|
|
|
17,717 |
|
|
|
N/A |
|
|
|
10,326 |
|
|
|
N/A |
|
Accrued
interest receivable
|
|
|
2,694 |
|
|
|
2,694 |
|
|
|
2,781 |
|
|
|
2,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
and savings deposits
|
|
|
613,627 |
|
|
|
613,627 |
|
|
|
285,961
|
|
|
|
285,961 |
|
Certificates
of deposit
|
|
|
576,035 |
|
|
|
584,634 |
|
|
|
228,897 |
|
|
|
232,753 |
|
FHLB
advances and other borrowings
|
|
|
67,622 |
|
|
|
71,050 |
|
|
|
84,737 |
|
|
|
85,272 |
|
Advances
by borrowers for taxes and insurance
|
|
|
4,658 |
|
|
|
4,658 |
|
|
|
1,132 |
|
|
|
1,132 |
|
Accrued
interest payable
|
|
|
631 |
|
|
|
631 |
|
|
|
553 |
|
|
|
553 |
|
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. Leases are
excluded from the table above.
FDIC
Indemnification receivable: Carrying value
approximates fair value as the receivable is recorded at the net present value
of estimated cash flows.
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 September 30, 2010 and 2009, were
insignificant.
Note
4 – Securities
The
Company’s investment policies are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The investment policies generally limit
investments to mortgage-backed securities, U.S. Government and agency
securities, municipal bonds, certificates of deposit and marketable corporate
debt obligations. Investment securities available for sale consisted of the
following at September 30, 2010 and 2009:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. Government-Sponsored
Enterprises (“GSE”)
|
|
$ |
51,844 |
|
|
$ |
255 |
|
|
$ |
(77 |
) |
|
$ |
52,022 |
|
Obligations
of states and political subdivisions
|
|
|
6,786 |
|
|
|
86 |
|
|
|
(83 |
) |
|
|
6,789 |
|
Corporate
note, FDIC-guaranteed
|
|
|
1,022 |
|
|
|
3 |
|
|
|
-- |
|
|
|
1,025 |
|
Mortgage
backed securities, GSE-issued
|
|
|
208,492 |
|
|
|
6,692 |
|
|
|
(264 |
) |
|
|
214,920 |
|
Mortgage
backed securities, private label
|
|
|
449 |
|
|
|
-- |
|
|
|
(25 |
) |
|
|
424 |
|
|
|
$ |
268,593 |
|
|
$ |
7,036 |
|
|
$ |
(449 |
) |
|
$ |
275,180 |
|
September 30, 2009:
|
|
|
|
Obligations
of U.S. Government-Sponsored
Enterprises
|
|
$ |
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 |
|
|
|
$ |
162,766 |
|
|
$ |
6,571 |
|
|
$ |
(17 |
) |
|
$ |
169,320 |
|
The
contractual maturities of investment securities available for sale are shown
below. Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations without prepayment
penalties.
|
|
September
30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
3,142 |
|
|
$ |
3,137 |
|
Due
after one year through five years
|
|
|
35,292 |
|
|
|
35,438 |
|
Due
after five years through ten years
|
|
|
56,593 |
|
|
|
58,257 |
|
Due
after ten years
|
|
|
173,566 |
|
|
|
178,348 |
|
Total
|
|
$ |
268,593 |
|
|
$ |
275,180 |
|
For the
years ended September 30, 2010, 2009, and 2008, proceeds from sales of
securities available for sale amounted to $2.7 million, $10.9 million, and $0,
respectively. Gross realized gains for the years ended September 30, 2010, 2009,
and 2008 were $105,000, $121,000, and $0 respectively. Gross realized losses for
the years ended September 30, 2010, 2009, and 2008 were $7,000, $324,000, and $0
respectively. All gain and losses were included in other noninterest
income on the Consolidated Statements of Income.
The fair
value of securities with unrealized losses, the amount of unrealized losses and
the length of time these unrealized losses existed as of September 30, 2010 and
2009, are as follows:
|
|
Less
than 12 months
|
|
|
12
months or longer
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
(in
thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S.
Government Sponsored
Enterprises
|
|
$ |
14,111 |
|
|
$ |
(77 |
) |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
14,111 |
|
|
$ |
(77 |
) |
Obligations
of States and
Political Subdivisions
|
|
|
3,674 |
|
|
|
(83 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
3,674 |
|
|
|
(83 |
) |
Mortgage-backed
securities, GSE issued
|
|
|
50,997 |
|
|
|
(264 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
50,997 |
|
|
|
(264 |
) |
Mortgage-backed
securities, private label
|
|
|
424 |
|
|
|
(25 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
424 |
|
|
|
(25 |
) |
|
|
$ |
69,206 |
|
|
$ |
(449 |
) |
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
69,206 |
|
|
$ |
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S.
Government Sponsored
Enterprises
|
|
$ |
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 the value
is not other than temporary and not related to the underlying credit quality of
the issuers or an industry specific event. The declines in value are on
securities that have contractual maturity dates and future principal payments
that will be sufficient to recover the current amortized cost of the securities.
The Company does not have the intent to sell these securities and it is likely
that it will not be required to sell these securities before their anticipated
recovery.
As of
September 30, 2010, and September 30, 2009, the Bank pledged investment
securities for the following obligations:
|
|
September
30, 2010
|
|
|
September
30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in
thousands)
|
|
FHLB
borrowings
|
|
$ |
51,174 |
|
|
$ |
54,309 |
|
|
$ |
66,104 |
|
|
$ |
68,900 |
|
Treasury,
tax and loan funds at the
Federal Reserve Bank
|
|
|
3,767 |
|
|
|
3,916 |
|
|
|
4,523 |
|
|
|
4,767 |
|
Repurchase
agreements
|
|
|
17,784 |
|
|
|
18,804 |
|
|
|
3,338 |
|
|
|
3,459 |
|
Deposits
of municipalities and pubic units
|
|
|
19,977 |
|
|
|
21,106 |
|
|
|
5,074 |
|
|
|
5,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
92,702 |
|
|
$ |
98,135 |
|
|
$ |
79,039 |
|
|
$ |
82,480 |
|
At
September 30, 2010, there were no holdings of securities of any one issuer,
other than U.S. Government-sponsored enterprises, in an amount greater than 10%
of stockholders’ equity.
Note
5 – Loans Receivable
Loans
receivable are summarized as follows at September 30, 2010 and
2009:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Real
Estate:
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
157,574 |
|
|
$ |
178,311 |
|
Multi-family
residential
|
|
|
20,759 |
|
|
|
16,286 |
|
Commercial
|
|
|
228,643 |
|
|
|
213,471 |
|
Total
real estate
|
|
|
406,976 |
|
|
|
408,068 |
|
|
|
|
|
|
|
|
|
|
Real
Estate Construction:
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
24,707 |
|
|
|
10,871 |
|
Multi-family
residential
|
|
|
2,657 |
|
|
|
10,417 |
|
Commercial
and land development
|
|
|
21,190 |
|
|
|
27,144 |
|
Total
real estate construction
|
|
|
48,554 |
|
|
|
48,432 |
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
56,745 |
|
|
|
53,368 |
|
Automobile
|
|
|
1,466 |
|
|
|
2,364 |
|
Other
consumer
|
|
|
7,762 |
|
|
|
3,734 |
|
Total
consumer
|
|
|
65,973 |
|
|
|
59,466 |
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
108,051 |
|
|
|
24,256 |
|
Leases
|
|
|
6,999 |
|
|
|
-- |
|
Loans receivable,
gross
|
|
|
636,553 |
|
|
|
540,222 |
|
|
|
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(628 |
) |
|
|
(858 |
) |
Allowance
for loan losses
|
|
|
(15,432 |
) |
|
|
(28,735 |
) |
|
|
|
|
|
|
|
|
|
Loans
receivable, net
|
|
$ |
620,493 |
|
|
$ |
510,629 |
|
The
majority of residential mortgage loans are pledged as collateral for FHLB
advances (see Note 10).
The
contractual maturity of loans receivable at September 30, 2010, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to prepay loans with or without prepayment
penalties.
|
|
Within
1
Year
|
|
|
One
Year
To
5 Years
|
|
|
After
5
Years
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
$ |
4,366 |
|
|
$ |
14,227 |
|
|
$ |
138,981 |
|
|
$ |
157,574 |
|
Multi-family
residential
|
|
|
3,394 |
|
|
|
4,765 |
|
|
|
12,600 |
|
|
|
20,759 |
|
Commercial
|
|
|
12,252 |
|
|
|
37,129 |
|
|
|
179,262 |
|
|
|
228,643 |
|
Total
real estate
|
|
|
20,012 |
|
|
|
56,121 |
|
|
|
330,843 |
|
|
|
406,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four
family residential
|
|
|
17,813 |
|
|
|
6,488 |
|
|
|
406 |
|
|
|
24,707 |
|
Multi-family
residential
|
|
|
2,399 |
|
|
|
258 |
|
|
|
- |
|
|
|
2,657 |
|
Commercial
and land development
|
|
|
17,769 |
|
|
|
2,890 |
|
|
|
531 |
|
|
|
21,190 |
|
Total
real estate construction
|
|
|
37,981 |
|
|
|
9,636 |
|
|
|
937 |
|
|
|
48,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
428 |
|
|
|
8,175 |
|
|
|
48,142 |
|
|
|
56,745 |
|
Automobile
|
|
|
59 |
|
|
|
887 |
|
|
|
520 |
|
|
|
1,466 |
|
Other
consumer
|
|
|
3,276 |
|
|
|
1,932 |
|
|
|
2,554 |
|
|
|
7,762 |
|
Total
consumer
|
|
|
3,763 |
|
|
|
10,994 |
|
|
|
51,216 |
|
|
|
65,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
business
|
|
|
32,054 |
|
|
|
67,553 |
|
|
|
8,444 |
|
|
|
108,051 |
|
Leases
|
|
|
1,049 |
|
|
|
5,950 |
|
|
|
- |
|
|
|
6,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans receivable
|
|
$ |
94,859 |
|
|
$ |
150,254 |
|
|
$ |
391,440 |
|
|
$ |
636,553 |
|
Impaired
loan information is as follows:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans with related specific allowance
|
|
$ |
9,294 |
|
|
$ |
7,131 |
|
|
$ |
9,215 |
|
Impaired
loans with no related allowance
|
|
|
6,197 |
|
|
|
6,657 |
|
|
|
266 |
|
Total
impaired loans
|
|
$ |
15,491 |
|
|
$ |
13,788 |
|
|
$ |
9,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
allowance on impaired loans
|
|
$ |
2,521 |
|
|
$ |
1,516 |
|
|
$ |
1,729 |
|
Average
balance of impaired loans
|
|
|
20,824 |
|
|
|
8,297 |
|
|
|
4,041 |
|
Interest
income recognized on impaired loans during the fiscal years ended September 30,
2010, 2009 and 2008 was immaterial.
As of
September 30, 2010 and 2009, accruing loans that were contractually past due 90
days or more totaled $116,000 and $0, respectively. Nonaccrual loans totaled
$34.7 million and $38.5 million at September 30, 2010 and 2009,
respectively.
The
Company has allocated $1.1 million of specific reserves to customers whose loan
terms have been modified in troubled debt restructurings as of September 30,
2010.
On July
30, 2010, the Bank consummated the LibertyBank Acquisition. At the acquisition
date, management estimated the fair value of the acquired loan portfolio to be
$197.6 million, which represents the expected cash flows from the portfolio
discounted at a market-based rate and includes leases with a preliminary
estimated fair value of $7.4 million. After detailed review by management and
competent independent third parties, loans acquired in the LibertyBank
Acquisition that were placed on nonaccrual status, designated as troubled debt
restructurings prior to the acquisition, graded substandard or doubtful or
exhibited other evidence of credit impairment since origination were grouped
into 11 pools based on loan type, collateral and credit risk characteristics.
The Company will account for these loans with specifically-identified credit
deficiencies under ASC 310-30. The preliminary estimated fair value of purchased
loans with specifically-identified credit deficiencies in the LibertyBank
Acquisition was $40.7 million on the date of acquisition.
All
remaining loans purchased in the LibertyBank Acquisition were grouped into 11
pools with common risk characteristics, including loan type and collateral.
These loans were then evaluated to determine estimated fair value as of the
acquisition date. Although no specific credit deficiencies are specifically
identifiable, management believes there is an element of risk as to whether all
contractual cash flows will be eventually received. Factors that were considered
included the poor economic environment both nationally and locally as well as
the unfavorable real estate market particularly in Oregon and the Pacific
Northwest. In addition, these loans were acquired from a failed financial
institution which implies poor, or at least questionable, underwriting. Based on
management’s preliminary estimate of fair value, each of these pools was
assigned a discount credit adjustment that reflects expected credit losses. The
Company will apply ASC 310-30 accounting by analogy to these loans. Leases are
excluded from the application of ASC 310-30.
In
estimating the preliminary fair value, management calculated the contractual
amount and timing of undiscounted principal and interest payments (the
“undiscounted contractual cash flows”) and estimated the amount and timing of
undiscounted expected principal and interest payments (the “undiscounted
expected cash flows”). The amount by which the undiscounted expected cash flows
exceed the estimated fair value (the “accretable yield”) is accreted into
interest income over the life of the loans. The difference between the
undiscounted contractual cash flows and the undiscounted expected cash flows is
the nonaccretable difference. The nonaccretable difference represents an
estimate of the credit risk in the acquired loan and lease portfolio at the
acquisition date.
In
calculating expected cash flows, management made several assumptions regarding
prepayments, collateral cash flows, the timing of defaults and the loss severity
of defaults. Voluntary prepayment rates were applied to the principal balances.
Other factors considered in determining the preliminary estimated fair value of
acquired loans included loan level estimated cash flows, type of loan and
related collateral, risk classification status, fixed or variable interest rate,
term of loan and whether or not the loan was amortizing and current discount
rates.
The
following table summarizes information regarding loans purchased in the
LibertyBank Acquisition and accounted for under ASC 310-30:
|
|
July
30, 2010
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Face
value of loans at acquisition
|
|
$ |
259,140 |
|
|
|
|
|
|
Acquisition
date estimate of future cash flows to be collected
|
|
$ |
228,147 |
|
Less:
Preliminary estimated fair value
|
|
|
190,189 |
|
|
|
|
|
|
Acquisition
date estimate of accretable yield
|
|
$ |
37,958 |
|
|
|
|
|
|
Acquisition
date contractual cash flows
|
|
$ |
346,336 |
|
Less:
Acquisition date estimate of future cash flows to be
collected
|
|
|
228,147 |
|
|
|
|
|
|
Acquisition
date nonaccretable difference
|
|
$ |
118,188 |
|
The
following table details activity of accretable yield for the fiscal year ended
September 30, 2010, in thousands of dollars:
Beginning
balance of accretable yield, October 1, 2009
|
$ -
|
Changes
in accretable yield due to:
|
|
Acquisition of
loans
|
37,958
|
Accretable yield recognized as
interest income
|
(2,795)
|
|
|
Ending
balance of accretable yield, September 30, 2010
|
$ 35,163
|
The
carrying amount of loans for which income is not being recognized on loans
individually accounted for under ASC 310-30 totaled $20.6 million and $26.2
million at September 30, 2010 and 2009, which were purchased in the CFB
Acquisition. Transfers from nonaccretable difference to accretable yield on
loans purchased in the CFB Acquisition totaled $417,000 and $0 during the year
ended September 30, 2010 and 2009, respectively.
The
carrying amount of purchased credit impaired loans acquired in the CFB
Acquisition totaled $21.9 million and $26.2 million at September 30, 2010 and
2009, respectively. At
September 30, 2010, purchased credit impaired loans acquired in the
LibertyBank Acquisition totaled $179.6 million. A provision for loan losses has
not been recorded on purchased credit impaired loans as impairment in excess of
the original estimated losses has not occurred during the years ended September
30, 2010 and 2009, respectively.
Pursuant
to the terms of the loss sharing agreements with the FDIC, the FDIC is obligated
to reimburse the Company for a significant portion of losses on covered loans.
See Note 2 for additional information on the loss sharing agreements. Covered
loans totaled $266.0 million and $109.6 million at September 30, 2010 and 2009,
respectively.
Note
6 – Allowance for Loan Losses
An
analysis of the changes in the allowance for loan losses is as
follows:
|
|
Year
Ended
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
28,735 |
|
|
$ |
4,579 |
|
|
$ |
2,988 |
|
Provision
for loan losses
|
|
|
10,300 |
|
|
|
16,085 |
|
|
|
2,431 |
|
Losses
on loans charged-off
|
|
|
(14,707 |
) |
|
|
(8,978 |
) |
|
|
(864 |
) |
Recoveries
on loans charged-off
|
|
|
314 |
|
|
|
238 |
|
|
|
24 |
|
Increase
due to acquisition
|
|
|
-- |
|
|
|
16,811 |
|
|
|
-- |
|
Purchase
accounting adjustment
|
|
|
(9,210 |
) |
|
|
-- |
|
|
|
-- |
|
Ending
balance
|
|
$ |
15,432 |
|
|
$ |
28,735 |
|
|
$ |
4,579 |
|
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, usually lasting up to twelve months after the acquisition date. The
identification and reclassification of loans subject to ASC 310-30 was also
included in the allocation period review. During this allocation period, the
Company identified additional loans purchased in the CFB Acquisition that were
credit impaired on the date of acquisition resulting in a reclassification of
the preliminary estimated losses from the allowance for loan losses to the net
discount on estimated cash flows of credit impaired loans. Additionally,
adjustments were made to the original preliminary loss estimates on loans that
were not credit impaired on the date of acquisition. These adjustments and
reclassifications of estimated losses resulted in the reduction of the allowance
for loan losses of $9.2 million during the year ended September 30,
2010.
Note
7 –FDIC Indemnification Receivable
Activity
in the FDIC indemnification receivable for the twelve month period ended
September 30, 2010, was as follows:
|
|
Estimated
Losses at
Reimbursement
Rate:
|
|
|
Gross
Amount
|
|
|
|
|
|
Net
|
|
|
|
|
80% |
|
|
|
95% |
|
|
Receivable
|
|
|
Discount
|
|
|
Receivable
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
$ |
34,000 |
|
|
$ |
4,405 |
|
|
$ |
31,385 |
|
|
$ |
(1,347 |
) |
|
$ |
30,038 |
|
LibertyBank
acquisition
|
|
|
75,167 |
|
|
|
- |
|
|
|
60,134 |
|
|
|
(3,440 |
) |
|
|
56,694 |
|
Payments
from FDIC for losses on covered assets
|
|
|
(28,500 |
) |
|
|
- |
|
|
|
(22,800 |
) |
|
|
- |
|
|
|
(22,800 |
) |
Adjustment
for net reduction in estimated losses
|
|
|
- |
|
|
|
(827 |
) |
|
|
(786 |
) |
|
|
- |
|
|
|
(786 |
) |
Discount
accretion
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,428 |
|
|
|
1,428 |
|
Balance
at September 30, 2010
|
|
$ |
80,667 |
|
|
$ |
3,578 |
|
|
$ |
67,933 |
|
|
$ |
(3,359 |
) |
|
$ |
64,574 |
|
For the
Community First Bank acquisition, 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. For the
LibertyBank acquisition, amounts receivable from the FDIC have been estimated at
80% of losses on all covered assets.
Note
8 - Property and Equipment
Property
and equipment at September 30, 2010 and 2009 are summarized as
follows:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
5,383 |
|
|
$ |
5,159 |
|
Buildings
and leasehold improvements
|
|
|
22,613 |
|
|
|
12,461 |
|
Construction
in progress
|
|
|
137 |
|
|
|
4,760 |
|
Furniture
and equipment
|
|
|
13,800 |
|
|
|
9,918 |
|
Automobiles
|
|
|
145 |
|
|
|
114 |
|
Total
cost
|
|
|
42,078 |
|
|
|
32,412 |
|
Less
accumulated depreciation and amortization
|
|
|
(14,123 |
) |
|
|
(11,950 |
) |
Net
book value
|
|
$ |
27,955 |
|
|
$ |
20,462 |
|
Repairs
and maintenance are charged against income as incurred; major remodels and
improvements are capitalized. Depreciation and amortization charged against
operations for the years ended September 30, 2010, 2009 and 2008, was $2.1
million, $1.7 million, and $1.7 million, respectively.
In
October 2010, the Bank notified the FDIC of its intent to purchase the property
of, or assume the leases, on all but two of the banking offices of LibertyBank
under a purchase option available in the purchase and assumption agreement for
the LibertyBank Acquisition. The purchase price for the land and buildings is
estimated to be $10.7 million. Additionally the Bank agreed to purchase
furniture and equipment in these banking offices at a purchase price of
approximately $700,000.
Note
9 - Deposit Accounts
Deposit
information by type and weighted average rates are summarized as
follows:
|
|
|
|
|
|
|
|
|
Rate
|
|
|
September
30,
2010
|
|
|
Rate
|
|
|
September
30,
2009
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
|
-- |
% |
|
$ |
138,300 |
|
|
|
-- |
% |
|
$ |
68,155 |
|
Interest-bearing
demand
|
|
|
0.26 |
|
|
|
203,554 |
|
|
|
0.56 |
|
|
|
78,393 |
|
Money
market
|
|
|
0.48 |
|
|
|
180,454 |
|
|
|
1.00 |
|
|
|
76,408 |
|
Health
savings accounts
|
|
|
0.52 |
|
|
|
22,240 |
|
|
|
0.91 |
|
|
|
21,248 |
|
Savings
|
|
|
0.42 |
|
|
|
69,079 |
|
|
|
0.65 |
|
|
|
41,757 |
|
|
|
|
|
|
|
|
613,627 |
|
|
|
|
|
|
|
285,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
|
0.00-0.99 |
|
|
|
59,356 |
|
|
|
0.00-0.99 |
|
|
|
9,906 |
|
|
|
|
1.00-1.99 |
|
|
|
280,260 |
|
|
|
1.00-1.99 |
|
|
|
71,921 |
|
|
|
|
2.00-2.99 |
|
|
|
168,664 |
|
|
|
2.00-2.99 |
|
|
|
68,327 |
|
|
|
|
3.00-3.99 |
|
|
|
47,631 |
|
|
|
3.00-3.99 |
|
|
|
42,898 |
|
|
|
|
4.00-4.99 |
|
|
|
15,259 |
|
|
|
4.00-4.99 |
|
|
|
27,389 |
|
|
|
|
5.00-5.99 |
|
|
|
4,506 |
|
|
|
5.00-5.99 |
|
|
|
7,544 |
|
|
|
|
6.00-8.99 |
|
|
|
358 |
|
|
|
6.00-8.99 |
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
certificates of deposit
|
|
|
|
|
|
|
576,035 |
|
|
|
|
|
|
|
228,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
|
|
|
|
|
$ |
1,189,662 |
|
|
|
|
|
|
$ |
514,858 |
|
Scheduled
maturities of certificates of deposits are as follows during the fiscal years
presented:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Fiscal
year ending September 30,
|
|
|
|
|
|
|
2010
|
|
$ |
-- |
|
|
$ |
161,969 |
|
2011
|
|
|
369,770 |
|
|
|
34,821 |
|
2012
|
|
|
122,306 |
|
|
|
12,982 |
|
2013
|
|
|
27,426 |
|
|
|
7,932 |
|
2014
|
|
|
12,649 |
|
|
|
10,976 |
|
2015
|
|
|
42,422 |
|
|
|
217 |
|
Thereafter
|
|
|
1,462 |
|
|
|
-- |
|
|
|
$ |
576,035 |
|
|
$ |
228,897 |
|
At
September 30, 2010 and 2009, certificates of deposits of $100,000 or greater
were $228.1 million and $83.5 million, respectively.
Interest
expense by type of deposit account is summarized as follows:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
$ |
306 |
|
|
$ |
236 |
|
|
$ |
177 |
|
Demand
and money market deposits
|
|
|
1,797 |
|
|
|
1,116 |
|
|
|
1,912 |
|
Certificates
of deposit
|
|
|
5,099 |
|
|
|
5,724 |
|
|
|
8,596 |
|
Total
|
|
$ |
7,202 |
|
|
$ |
7,076 |
|
|
$ |
10,685 |
|
Accrued
interest on deposit accounts at September 30, 2010 and 2009, was $422,000 and
$188,000 respectively.
Note
10 - Federal Home Loan Bank Advances and other borrowings
The Bank
has the ability to borrow up to 40% of its total assets from the FHLB of
Seattle, limited by available collateral. Advances are collateralized by all
FHLB stock owned by the Bank, deposits with the FHLB of Seattle, and certain
residential mortgages and mortgage-backed securities. The outstanding balances
on FHLB advances at September 30, 2010 and 2009 were $58.9 million and $82.9
million, respectively, with interest rates ranging from 2.22% to 5.26% as of
September 30, 2010.
Other
borrowings include securities sold under obligations to repurchase (“repurchase
agreements”) that are originated directly with commercial and retail customers.
These borrowings are collateralized with securities issued by U.S. Government
sponsored enterprises. Repurchase agreements totaled $8.8 million and $1.8
million at September 30, 2010 and 2009, respectively and had an average rate of
1.46% at September 30, 2010.
The
Bank’s borrowings consisted of the following during the years ended September
30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Maximum
outstanding at any month end
|
|
$ |
85,000 |
|
|
$ |
137,000 |
|
Average
outstanding
|
|
|
79,000 |
|
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rates
|
|
|
|
|
|
|
|
|
For
the period
|
|
|
3.98 |
% |
|
|
4.39 |
% |
At
end of period
|
|
|
3.95 |
|
|
|
4.00 |
|
Scheduled
maturities of the Company’s borrowings are as follows during the fiscal years
presented:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Average
Interest
Rates
|
|
|
Amount
|
|
|
Average
Interest
Rates
|
|
|
Amount
|
|
|
|
(dollars
in thousands)
|
|
Fiscal
Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
-- |
% |
|
$ |
-- |
|
|
|
3.26 |
% |
|
$ |
25,887 |
|
2011
|
|
|
3.30 |
|
|
|
16,816 |
|
|
|
4.20 |
|
|
|
12,050 |
|
2012
|
|
|
4.17 |
|
|
|
21,524 |
|
|
|
4.35 |
|
|
|
20,100 |
|
2013
|
|
|
4.09 |
|
|
|
26,282 |
|
|
|
4.30 |
|
|
|
23,700 |
|
2014
|
|
|
4.83 |
|
|
|
2,000 |
|
|
|
4.83 |
|
|
|
2,000 |
|
2015
|
|
|
4.83 |
|
|
|
1,000 |
|
|
|
4.83 |
|
|
|
1,000 |
|
Total
|
|
|
|
|
|
$ |
67,622 |
|
|
|
|
|
|
$ |
84,737 |
|
Included
in the Bank’s borrowing capacity with the FHLB is a cash management advance
account. The outstanding balance of this overnight borrowing included in the
tables above was $0 and $4.9 million at September 30, 2010 and 2009,
respectively.
Note
11 - Employee Retirement Plans
401(k) Plan. The
Company has a 401(k) retirement plan covering substantially all of its
employees. Beginning on January 1, 2010, the Company matches 50% of employee
contributions up to the employee’s first 6% contributed to the
Plan. Prior to this change, the Company matched 50% of employee
contributions up to the employee’s first 10% contributed to the
Plan. For the years ended September 30, 2010, 2009, and 2008, total
Company contributions were $291,000, $251,000, and $237,000,
respectively.
Salary Continuation Plan. As
a supplement to the 401(k) retirement plan, the Company has adopted a Salary
Continuation Plan pursuant to agreements with certain executive officers of the
Company and its subsidiaries. Under the Salary Continuation Plan, an executive
will be entitled to a stated annual benefit for a period of 15 years (i) upon
retirement from the Company after attaining age 65, or (ii) upon attaining age
65 if his or her employment had been previously terminated due to disability. In
the event the executive dies while in active service, the Company shall pay the
beneficiary the normal retirement projected benefit for a period of 15 years
commencing with the month following the executive’s death. At September 30,
2010, this death benefit contingency totaled $5.5 million and is not reported on
the consolidated balance sheet. In the event the executive dies after
age 65, but before receiving the full 15 years of annual benefits, the remaining
payments shall be paid to his or her beneficiaries. Upon termination of
employment, the annual benefit amount is 50% of the officer’s average final 36
months base salary. Benefits under the Plan vest over ten years. Upon early
retirement, the Company shall pay the executive the vested accrual balance as of
the end of the month prior to the early retirement date. The Company will pay
the early retirement benefit in 180 equal installments.
The
accrued liability for the salary continuation plan was $2.4 million and $2.3
million at September 30, 2010 and 2009, respectively. The amounts
recognized in compensation expense were $265,000, $141,000 and $389,000 for the
years ended September 30, 2010, 2009 and 2008, respectively.
Deferred
Incentive Compensation. The Company has deferred incentive compensation
agreements with certain former executive officers and certain members of the
Board of Directors. Under the agreements, the Company is obligated to provide
payments for each such former executive and board member or his beneficiaries
during a period of fifteen or ten years after the death, disability, or
retirement of the executive or board member. Until October 1, 2006,
the plan provided an incentive award percentage determined by reference to Home
Federal’s return on assets and return on equity for the year. The
resulting amount was set aside in an unfunded deferral account for participants.
Although the incentive award has been discontinued, members of the Board of
Directors may still elect to defer all or a part of their directors’ fees into
the deferral account under the plan. The
deferral accounts are credited annually with an interest credit that is based on
the growth rate of Home Federal Bank’s net worth in Home Federal, subject to a
maximum of 12% per year.
The
Company accrues annual interest on the unfunded liability under the plan based
upon a formula relating to the change in retained earnings of the Bank, which
amounted to 0%, 11.56%, and 5.79% for the years ended September 30, 2010, 2009
and 2008, respectively. The accrued liability for the deferred incentive
compensation agreements was $2.5 million and $2.4 million at September 30,
2010 and 2009, respectively. The amounts recognized in compensation expense were
$141,000, $152,000, and $189,000 for the years ended September 30, 2010,
2009, and 2008, respectively.
Director Retirement Plan. Home
Federal Bancorp adopted a director retirement plan, effective January 1, 2005,
that replaced prior plans. The plan is an unfunded nonqualified retirement plan
for directors. Upon the later of attaining age 72 or termination of
service, the director will receive an annual benefit equal to 50 percent of the
fees paid to the director for the preceding year, payable in monthly
installments over 15 years. The accrued benefit vests at a rate of 10 percent
per year, except in the event of disability, in which case the vested percentage
is 100 percent. If the director terminates service within 24 months following a
change in control, he will receive 100 percent of his accrued benefit, plus a
change in control benefit equal to 2.99 times his prior years directors fees.
Change in control payments are subject to reduction to avoid excise taxes under
Section 280G of the Internal Revenue Code. In the event a director dies before
termination of service, his beneficiary would receive his projected benefit,
which is the final benefit the director would have received had he attained age
72, assuming a 4% annual increase in the directors’ fees. In the event the
director dies after separation from service, but before receiving the full 15
years of annual benefits, the remaining payments shall be paid to his or her
beneficiaries. In-service distributions are permitted in limited
circumstances.
The
accrued liability for the director retirement plans was $609,000 and $588,000 at
September 30, 2010 and 2009, respectively. The amounts recognized in
compensation expense were $63,000, $53,000, and $84,000 for the years ended
September 30, 2010, 2009, and 2008, respectively.
The
Company’s deferred compensation agreements and supplemental executive retirement
plans are unfunded plans and have no plan assets. The following table reconciles
the accumulated liability for the benefit obligation of these
contracts.
The benefit obligation represents the net present value of future payments to
individuals under the agreements.
|
|
Year
ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Beginning
balance
|
|
$ |
5,260 |
|
|
$ |
5,191 |
|
Benefit
expense
|
|
|
458 |
|
|
|
333 |
|
Director
fee deferrals
|
|
|
55 |
|
|
|
54 |
|
Benefit
payments
|
|
|
(269 |
) |
|
|
(331 |
) |
Ending
Balance
|
|
$ |
5,504 |
|
|
$ |
5,247 |
|
Note 12 - Stock-Based
Compensation
At
September 30, 2010, the Company maintained multiple long-term stock-based
benefit plans that enable the Company to grant stock options, stock appreciation
rights and restricted stock awards to employees and directors. The plans include
the 2005 Stock Option Plan, the 2005 Recognition and Retention Plan, and the
2008 Equity Incentive Plan. The plans were approved by shareholders in 2005 and
2009.
Restricted Stock Awards. The
Company grants restricted stock awards to promote the long-term interests of the
Company and its stockholders by providing restricted stock as a means for
attracting and retaining directors and key employees. The maximum number of
restricted shares that may be awarded under the plans is 692,143. The fair value
of restricted stock awards are accrued ratably as compensation expense over the
vesting period of the award. The amounts recognized in compensation expense were
$831,000, $703,000, and $657,000 for the years ended September 30, 2010, 2009,
and 2008 respectively. The Company has an aggregate of 258,292 restricted shares
available for future issuance.
Restricted
stock activity is summarized in the following table:
|
|
Number
of Shares
|
|
|
Weighted
Average
Fair
Value
at
Date of Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2007
|
|
|
210,763 |
|
|
$ |
11.44 |
|
Vested
|
|
|
(56,471 |
) |
|
|
11.40 |
|
Granted
|
|
|
30,858 |
|
|
|
11.98 |
|
Nonvested
at September 30, 2008
|
|
|
185,150 |
|
|
|
11.54 |
|
Vested
|
|
|
(53,188 |
) |
|
|
11.39 |
|
Granted
|
|
|
183,000 |
|
|
|
9.39 |
|
Forfeited
|
|
|
(23,884 |
) |
|
|
11.42 |
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2009
|
|
|
291,078 |
|
|
|
10.23 |
|
Vested
|
|
|
(74,229 |
) |
|
|
10.58 |
|
Granted
|
|
|
5,000 |
|
|
|
14.01 |
|
Forfeited
|
|
|
(30,607 |
) |
|
|
9.50 |
|
Nonvested
at September 30, 2010
|
|
|
191,242 |
|
|
$ |
10.31 |
|
Stock Option Awards. The
Company grants stock options to promote the long-term interests of the Company
and its stockholders by providing an incentive to directors and key employees
who contribute to the operating success of the Company. The maximum number of
stock options and stock appreciation rights that may be issued under the plans
is 1,730,356. The exercise price of each option equals the fair market value of
the Company’s stock on the
date of
grant. The options typically vest over five years and expire ten years from the
date of grant. The Company has an aggregate of 655,570 stock options available
for future issuance.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions noted in the
following table. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life of options granted represents the
period of time that options granted are expected to be outstanding. Expected
volatilities are based on historical volatility of the Company’s stock. Expected
forfeiture rate is the estimated forfeiture rate based upon the circumstances of
the individuals that received stock options. Expected dividends represent the
Company’s estimated annual dividend rate over the expected life.
|
|
Risk
Free
Interest
Rate
|
|
|
Expected
Life
(yrs)
|
|
|
Expected
Volatility
|
|
|
Expected
Forfeiture
Rate
|
|
|
Expected
Dividend
Yield
|
|
|
|
Options
granted in 2008
|
|
|
3.85 |
% |
|
|
7.50 |
|
|
|
25.41 |
% |
|
|
-- |
|
|
|
2.02 |
% |
Options
granted in 2009
|
|
|
2.48 |
|
|
|
7.50 |
|
|
|
34.04 |
|
|
|
-- |
|
|
|
2.01 |
|
Options
granted in 2010
|
|
|
2.90 |
|
|
|
7.50 |
|
|
|
34.76 |
|
|
|
-- |
|
|
|
2.00 |
|
Stock
option activity is summarized in the following table:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
628,467 |
|
|
$ |
11.65 |
|
|
$ |
2.29 |
|
Granted
|
|
|
83,875 |
|
|
|
11.28 |
|
|
|
3.11 |
|
Forfeited
|
|
|
(13,546 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
Exercised
|
|
|
(56,420 |
) |
|
|
10.76 |
|
|
|
1.85 |
|
Outstanding
at September 30, 2008
|
|
|
642,376 |
|
|
|
11.71 |
|
|
|
2.44 |
|
Granted
|
|
|
456,998 |
|
|
|
9.39 |
|
|
|
2.99 |
|
Forfeited
|
|
|
(120,148 |
) |
|
|
10.81 |
|
|
|
1.91 |
|
Exercised
|
|
|
(32,862 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
Outstanding
at September 30, 2009
|
|
|
946,364 |
|
|
|
10.72 |
|
|
|
2.79 |
|
Granted
|
|
|
45,000 |
|
|
|
13.20 |
|
|
|
4.40 |
|
Forfeited
|
|
|
(85,440 |
) |
|
|
9.52 |
|
|
|
2.91 |
|
Exercised
|
|
|
(15,000 |
) |
|
|
10.74 |
|
|
|
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2010
|
|
|
890,924 |
|
|
$ |
10.96 |
|
|
$ |
2.87 |
|
Options
outstanding at September 30, 2010, were as follows:
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
$ |
9.07 -9.39 |
|
|
|
8.6 |
|
|
|
388,598 |
|
|
$ |
9.39 |
|
|
$ |
1,080,494 |
|
|
|
78,200 |
|
|
$ |
9.39 |
|
|
$ |
217,587 |
|
|
10.09 -10.74 |
|
|
|
4.9 |
|
|
|
191,074 |
|
|
|
10.70 |
|
|
|
280,743 |
|
|
|
191,074 |
|
|
|
10.70 |
|
|
|
280,743 |
|
|
11.05 -11.31 |
|
|
|
6.4 |
|
|
|
59,080 |
|
|
|
11.20 |
|
|
|
57,254 |
|
|
|
37,264 |
|
|
|
11.24 |
|
|
|
34,603 |
|
|
12.27 -12.76 |
|
|
|
8.2 |
|
|
|
39,153 |
|
|
|
12.52 |
|
|
|
-- |
|
|
|
7,661 |
|
|
|
12.76 |
|
|
|
-- |
|
|
13.32 -13.93 |
|
|
|
6.4 |
|
|
|
184,619 |
|
|
|
13.47 |
|
|
|
-- |
|
|
|
142,595 |
|
|
|
13.39 |
|
|
|
-- |
|
|
15.34 |
|
|
|
6.2 |
|
|
|
28,400 |
|
|
|
15.34 |
|
|
|
-- |
|
|
|
17,040 |
|
|
|
15.34 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
890,924 |
|
|
|
|
|
|
$ |
1,418,491 |
|
|
|
473,834 |
|
|
|
|
|
|
$ |
532,933 |
|
Cash
proceeds received from the exercise of stock options were $161,000 and $353,000
for the years ended September 30, 2010 and 2009 respectively. The total
intrinsic value of stock options exercised were $50,000 and $6,000 for the years
ended September 30, 2010 and 2009 respectively. The amounts recognized in
compensation expense were $449,000, $385,000, and $366,000 for the years ended
September 30, 2010, 2009, and 2008 respectively. Tax benefits related to stock
option exercises were $8,000, $5,000 and $43,000 for the years ended September
30, 2010, 2009 and 2008 respectively. It is the Company’s general policy to
issue new shares for the exercise of stock options.
As of
September 30, 2010, the compensation expense yet to be recognized for
stock-based awards that have been awarded but not vested was as
follows:
|
|
Stock
Options
|
|
|
Restricted
Stock
|
|
|
Total
Awards
|
|
|
|
(in
thousands)
|
|
2011
|
|
$ |
385 |
|
|
$ |
389 |
|
|
$ |
774 |
|
2012
|
|
|
308 |
|
|
|
322 |
|
|
|
630 |
|
2013
|
|
|
287 |
|
|
|
315 |
|
|
|
602 |
|
2014
|
|
|
176 |
|
|
|
185 |
|
|
|
361 |
|
2015
|
|
|
17 |
|
|
|
7 |
|
|
|
24 |
|
Total
|
|
$ |
1,173 |
|
|
$ |
1,218 |
|
|
$ |
2,391 |
|
Note 13 - Employee Stock Ownership
Plan
In
connection with the minority stock offering in 2004, the Company established an
ESOP for the benefit of its employees. The ESOP covers all employees with at
least one year and 1000 hours of service. Shares are released for allocation at
the discretion of the Board of Directors. In 2004, the Company issued 566,137
shares of common stock to the ESOP in exchange for a ten-year note of
approximately $5.0 million. These shares are expected to be released over a
ten-year period. In 2007, the ESOP acquired an additional 816,000 shares of the
Company’s common stock in exchange for a fifteen-year note of approximately $8.2
million. These shares are expected to be released over a fifteen-year period. As
shares are released from collateral, the Company will report compensation
expense equal to the average market price of the shares. ESOP
compensation expense included in salaries and benefits was $1.5 million,
$969,000, and $1.2 million for the years ended September 30, 2010, 2009, and
2008, respectively. Dividends on allocated ESOP shares reduce retained earnings;
dividends on unallocated ESOP shares reduce principal or interest on the ESOP
loan.
ESOP
share activity is summarized in the following table:
|
|
Unallocated
ESOP
Shares
|
|
|
Fair
Value
of
Unallocated
Shares
|
|
|
Allocated
and
Released
Shares
|
|
|
Total
ESOP
shares
|
|
Balance
at September 30, 2007
|
|
|
396,295 |
|
|
$ |
4,643,200 |
|
|
|
169,842 |
|
|
|
566,137 |
|
ESOP
shares issued in December 2007
|
|
|
816,000 |
|
|
|
|
|
|
|
-- |
|
|
|
816,000 |
|
Allocation
on September 30, 2008
|
|
|
(97,414 |
) |
|
|
|
|
|
|
97,414 |
|
|
|
-- |
|
Balance
at September 30, 2008
|
|
|
1,114,881 |
|
|
|
14,214,733 |
|
|
|
267,256 |
|
|
|
1,382,137 |
|
Allocation
on September 30, 2009
|
|
|
(111,014 |
) |
|
|
|
|
|
|
111,014 |
|
|
|
-- |
|
Balance
at September 30, 2009
|
|
|
1,003,867 |
|
|
|
11,464,161 |
|
|
|
378,270 |
|
|
|
1,382,137 |
|
Allocation
on September 30, 2010
|
|
|
(111,014 |
) |
|
|
|
|
|
|
111,014 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
892,853 |
|
|
$ |
10,866,021 |
|
|
|
489,284 |
|
|
|
1,382,137 |
|
From the
inception of the ESOP through September 30, 2010, 79,497 shares have been taken
out of the ESOP via distributions to former employees. At September
30, 2010, a total of 1,302,640 shares remained in the ESOP, excluding shares
purchased by the plan through dividends on ESOP shares. Contributions to the
plan totaled $1.2 million, $1.2 million and $978,000 during the years
ended September 30, 2010, 2009 and 2008, respectively.
Note
14 – Commitments and Contingencies
Lease
commitments:
The
Company has entered into noncancelable operating leases for land and buildings
that require future minimum rental payments in excess of one year as of
September 30, 2010. Certain lease payments may be adjusted periodically in
accordance with changes in the Consumer Price Index.
At
September 30, 2010, the Bank was leasing seventeen banking offices from the FDIC
in connection with the LibertyBank Acquisition. Under the purchase and
assumption agreement for the LibertyBank Acquisition, the Bank had a 90-day
option to purchase banking offices and assume leased facilities. In October
2010, the Bank informed the FDIC that the Bank intended to assume the leases on
5 of the banking offices, to purchase 10 banking offices and to close two other
branches by January 26, 2011. The annualized payments on the leases to be
assumed by the Bank are included in the table below. See Note 7 for information
on facilities to be purchased.
The
estimated future minimum annual rental payments, exclusive of taxes and other
charges, are summarized as follows:
|
|
Year
ending September 30,
|
|
|
|
(in
thousands)
|
|
2011
|
|
$ |
374 |
|
2012
|
|
|
202 |
|
2013
|
|
|
322 |
|
2014
|
|
|
116 |
|
2015
|
|
|
116 |
|
Thereafter
|
|
|
3,864 |
|
Total
|
|
$ |
4,994 |
|
Total
rent expense for the years ended September 30, 2010, 2009, and 2008, was
$897,000, $501,000, and $509,000, respectively.
Commitments
to extend credit:
In the
normal course of business, the Company makes various commitments and incurs
certain contingent liabilities that are not presented in the accompanying
financial statements. The commitments and contingent liabilities include
various
guarantees and commitments to extend credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Because many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of the credit, is based on management’s credit
evaluation of the borrower. Collateral held varies but may include securities,
accounts receivable, inventory, fixed assets, and/or real estate properties. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding.
At
September 30, 2010 and 2009, commitments to extend credit were as
follows:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Commitments
to originate loans:
|
|
|
|
|
|
|
Fixed
rate
|
|
$ |
3,077 |
|
|
$ |
2,824 |
|
Adjustable
rate
|
|
|
3,255 |
|
|
|
4,949 |
|
Undisbursed
balance of loans closed
|
|
|
20,308 |
|
|
|
5,252 |
|
Unused
lines of credit
|
|
|
39,301 |
|
|
|
46,184 |
|
Commercial
letters of credit
|
|
|
920 |
|
|
|
-- |
|
|
|
$ |
66,861 |
|
|
$ |
59,209 |
|
Most of
the Bank’s business activity is with customers located in the States of Idaho
and Oregon. Loans to one borrower are generally limited, by federal banking
regulation, to 15% of the Bank's regulatory capital. As of September 30, 2010
and 2009, the Bank had no individual industry concentrations of credit
risk.
In
connection with certain asset sales, the Bank typically makes representations
and warranties about the underlying assets conforming to specified guidelines.
If the underlying assets do not conform to the specifications, the Bank may have
an obligation to repurchase the assets or indemnify the purchaser against loss.
These representations and warranties are most applicable to the residential
mortgages sold in the secondary market. At
September 30, 2010, the Bank had a reserve for this contingency of
$592,000.
Note
15 - Related Party Transactions
In the
normal course of business, the Company makes loans to its executive officers,
directors and companies affiliated with these individuals.
An
analysis of activity with respect to loans receivable from directors, executive
officers and their affiliates is as follows:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
-- |
|
|
$ |
60 |
|
Principal
advances
|
|
|
10 |
|
|
|
-- |
|
Principal
repayments
|
|
|
(10 |
) |
|
|
-- |
|
Other
changes
|
|
|
-- |
|
|
|
(60 |
) |
Balance,
end of year
|
|
$ |
-- |
|
|
$ |
-- |
|
“Other
changes” in the table above for fiscal year 2009 refers to a loan to an officer
who retired during the year.
The
Company also accepts deposits from its executive officers, directors, and
affiliated companies. The aggregate dollar amounts of these deposits were $2.4
million and $888,000 at September 2010 and 2009, respectively.
Note
16 - Capital Requirements
The Bank
is subject to various regulatory capital requirements administered by its
primary federal regulator, the Office of Thrift Supervision (“OTS”). Failure to
meet the minimum regulatory capital requirements can initiate certain mandatory
and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines involving quantitative measures of the Bank’s assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications under the prompt
corrective action guidelines are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Management
believes as of September 30, 2010, the Company and the Bank met all capital
adequacy requirements to which it is subject.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios of total risk-based capital and Tier 1
capital to risk-weighted assets (as defined in the regulations), Tier 1 capital
to adjusted total assets (as defined), and tangible capital to adjusted total
assets (as defined). As of September 2010, the Bank meets all of the capital
adequacy requirements to which it is subject.
Prompt
corrective action regulations provide five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year end
2010 and 2009, the most recent regulatory notifications categorized the Bank as
well capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification
that management believes have changed the institution’s category.
The
actual and required minimum capital amounts and ratios of the Bank are presented
in the following table:
|
|
Actual
|
|
|
For
Capital Adequacy
Purposes
|
|
To
Be Well Capitalized
Under
Prompt Corrective
Action
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(dollars
in thousands)
|
September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital
|
|
$ |
150,270 |
|
|
|
28.88 |
% |
|
$ |
41,632 |
|
≥
8.0%
|
|
$ |
52,040 |
|
≥
10.0%
|
Tier
1 risk-based capital
|
|
|
143,679 |
|
|
|
27.61 |
|
|
|
20,816 |
|
≥
4.0
|
|
|
31,224 |
|
≥ 6.0
|
Tier
1 (core) capital
|
|
|
143,775 |
|
|
|
10.12 |
|
|
|
56,801 |
|
≥
4.0
|
|
|
71,001 |
|
≥ 5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital
|
|
$ |
155,976 |
|
|
|
34.89 |
% |
|
$ |
35,768 |
|
≥
8.0%
|
|
$ |
44,709 |
|
≥
10.0%
|
Tier
1 risk-based capital
|
|
|
150,112 |
|
|
|
33.57 |
|
|
|
17,884 |
|
≥
4.0
|
|
|
26,826 |
|
≥ 6.0
|
Tier
1 (core) capital
|
|
|
150,235 |
|
|
|
19.61 |
|
|
|
30,641 |
|
≥
4.0
|
|
|
38,302 |
|
≥ 5.0
|
The
following table is a reconciliation of the Bank’s capital, calculated according
to generally accepted accounting principles, to total Tier 1
capital:
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Equity
|
|
$ |
151,187 |
|
|
$ |
153,525 |
|
Intangible
assets
|
|
|
(3,971 |
) |
|
|
-- |
|
Other
comprehensive income – unrealized gain on securities
|
|
|
(3,441 |
) |
|
|
(3,290 |
) |
|
|
|
|
|
|
|
|
|
Total
Tier 1 capital
|
|
$ |
143,775 |
|
|
$ |
150,235 |
|
OTS
regulations place certain restrictions on dividends paid by the Bank to the
Company. Generally, savings associations, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for the
year-to-date plus retained net income for the two preceding years. This
evaluation is made for the Bank on a calendar year basis. Based on this
calculation the Bank currently has $356,000 plus any retained profits for the
period from October 1, 2010, through December 31, 2010, available to pay
dividends to the Company through the end of the calendar year without prior
regulatory approval. Savings associations proposing to make any capital
distribution need not submit written notice to the OTS prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution.
Note
17 - Income Taxes
The
extraordinary gain realized from the CFB Acquisition during the year ended
September 30, 2010, is presented on the consolidated statement of income net of
applicable state and federal income taxes. The following table presents income
tax expense (benefit) included in the consolidated statement of income for the
years ended September 30, 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Income
tax benefit from loss on continuing operations
|
|
$ |
(2,889 |
) |
|
$ |
(4,750 |
) |
Income
tax expense attributable to extraordinary gain
|
|
|
195 |
|
|
|
9,756 |
|
|
|
|
|
|
|
|
|
|
Total income tax expense
(benefit) included in the
consolidated statement of income
|
|
$ |
(2,694 |
) |
|
$ |
5,006 |
|
Income
tax expense (benefit) consisted of the following:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
605 |
|
|
$ |
1,005 |
|
|
$ |
3,004 |
|
State
|
|
|
72 |
|
|
|
214 |
|
|
|
334 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,722 |
) |
|
|
3,306 |
|
|
|
(873 |
) |
State
|
|
|
(649 |
) |
|
|
481 |
|
|
|
(202 |
) |
Income
tax expense (benefit)
|
|
$ |
(2,694 |
) |
|
$ |
5,006 |
|
|
$ |
2,263 |
|
Income
tax expense differs from that computed at the statutory corporate tax rate as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income tax at statutory rates
|
|
$ |
(2,477 |
) |
|
$ |
(4,032 |
) |
|
$ |
2,131 |
|
State
income taxes, net of federal benefit
|
|
|
(381 |
) |
|
|
624 |
|
|
|
275 |
|
Federal
income tax component of extraordinary gain on FDIC
transaction
|
|
|
170 |
|
|
|
8,516 |
|
|
|
-- |
|
Effect
of permanent differences
|
|
|
(6 |
) |
|
|
(102 |
) |
|
|
(143 |
) |
Income
tax expense (benefit)
|
|
$ |
(2,694 |
) |
|
$ |
5,006 |
|
|
$ |
2,263 |
|
The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities consist of the following:
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Deferred
tax asset:
|
|
|
|
|
|
|
Deferred
compensation
|
|
$ |
2,175 |
|
|
$ |
2,079 |
|
Allowance
for loan losses
|
|
|
6,241 |
|
|
|
11,419 |
|
Equity
compensation
|
|
|
729 |
|
|
|
577 |
|
Accrued
expenses
|
|
|
254 |
|
|
|
180 |
|
REO
adjustments
|
|
|
832 |
|
|
|
490 |
|
Acquisition
intangibles
|
|
|
7,713 |
|
|
|
-- |
|
Other
|
|
|
739 |
|
|
|
564 |
|
Total
deferred tax asset
|
|
|
18,683 |
|
|
|
15,309 |
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
|
Fixed
asset basis
|
|
|
(404 |
) |
|
|
(313 |
) |
Deferred
loan costs
|
|
|
(478 |
) |
|
|
(334 |
) |
Prepaid
expenses
|
|
|
(192 |
) |
|
|
(143 |
) |
FHLB
stock dividends
|
|
|
(1,835 |
) |
|
|
(1,835 |
) |
Purchase
accounting adjustments
|
|
|
(10,494 |
) |
|
|
(9,801 |
) |
Deferred
tax gain on purchase price allocation
|
|
|
(4,808 |
) |
|
|
(5,817 |
) |
Unrealized
gain on securities available for sale
|
|
|
(2,632 |
) |
|
|
(2,621 |
) |
Other
|
|
|
(51 |
) |
|
|
(16 |
) |
Total
deferred tax liability
|
|
|
(20,894 |
) |
|
|
(20,880 |
) |
Net
deferred tax liability
|
|
$ |
(2,211 |
) |
|
$ |
(5,571 |
) |
Included
in retained earnings at September 30, 2010 and 2009 is approximately $2.1
million in bad debt reserves for which no deferred income tax liability has been
recorded. This amount represents allocations of income to bad debt
deductions for tax purposes only. Reduction of these reserves for purposes other
than tax bad debt losses or adjustments arising from carryback of net operating
losses would create income for tax purposes, which would be subject to the
then-current corporate income tax rate. The unrecorded deferred
liability on this amount was approximately $818,000 at September 30, 2010 and
2009.
The
Company determined that it was not required to establish a valuation allowance
for deferred tax assets in accordance with ASC 740, Accounting for Income Taxes,
since it is more likely than not that the deferred tax asset will be realized
through carryback to taxable income in prior years, future reversals of existing
taxable temporary differences, and, to a lesser extent, future taxable income.
The Company's net deferred tax asset is recorded in the consolidated financial
statements as a separate component of the consolidated balance sheet - Deferred
tax liability.
At
September 30, 2010 and September 30, 2009, the Company had no ASC 740-10
unrecognized tax benefits. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase within the next twelve
months.
The
Company, the Bank and the Bank's subsidiaries are subject to U.S. federal income
tax as well as an income tax in the states of Idaho and Oregon and various other
state jurisdictions. The Company and the Bank are no longer subject to
examination by taxing authorities for years before September 30,
2007.
Note
18 – Earnings Per Share
Effective
October 1, 2009, the Company adopted new authoritative accounting guidance
under ASC Topic 260, “Earnings Per Share,” which provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The Company has determined that its
outstanding non-vested stock awards are participating securities.
Accordingly, effective October 1, 2009, earnings per common share is
computed using the two-class method prescribed under FASB ASC
Topic 260. All previously reported earnings per common share data has
been retrospectively adjusted to conform to the new computation method. The
impact of adopting this new method of computing earnings per share decreased
basic and diluted earnings per common share after extraordinary item from $0.52
to $0.51 for 2009 and decreased all per share information for 2008 from $0.25 to
$0.24.
Basic
earnings per common share is computed by dividing net income allocated to common
stock by the weighted average number of common shares outstanding during the
period which excludes the participating securities. Diluted earnings per common
share includes the dilutive effect of additional potential common shares from
stock compensation awards, but excludes awards considered participating
securities. ESOP shares are not considered outstanding for earnings per share
purposes until they are committed to be released.
The
following table presents the computation of basic and diluted earnings (loss)
per share for the periods indicated:
|
|
For
the Year Ended September 30,
|
|
(in
thousands, except share and per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
Net
income (loss) allocated to participating securities
|
|
|
(63 |
) |
|
|
106 |
|
|
|
(23 |
) |
Net
income (loss) allocated to common shareholders
|
|
|
(4,028 |
) |
|
|
8,020 |
|
|
|
3,956 |
|
Extraordinary
gain, net of taxes
|
|
|
305 |
|
|
|
15,291 |
|
|
|
-- |
|
Net
income (loss) allocated to common shareholders before
extraordinary gain
|
|
$ |
(4,333 |
) |
|
$ |
(7,271 |
) |
|
$ |
4,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, including
shares considered participating securities
|
|
|
15,755,008 |
|
|
|
15,889,364 |
|
|
|
16,431,157 |
|
Less: Average
participating securities
|
|
|
(241,158 |
) |
|
|
(238,114 |
) |
|
|
(197,957 |
) |
Weighted
average shares
|
|
|
15,513,850 |
|
|
|
15,651,250 |
|
|
|
16,233,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
effect of dilutive restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
19,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and common stock equivalents
|
|
|
15,513,850 |
|
|
|
15,651,250 |
|
|
|
16,252,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share before extraordinary
item
|
|
$ |
(0.28 |
) |
|
$ |
(0.46 |
) |
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary
gain per common share
|
|
|
0.02 |
|
|
|
0.97 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
|
(0.26 |
) |
|
|
0.51 |
|
|
|
0.24 |
|
Diluted
earnings (loss) per common share before extraordinary
item
|
|
|
(0.28 |
) |
|
|
(0.46 |
) |
|
|
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share
|
|
|
(0.26 |
) |
|
|
0.51 |
|
|
|
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
excluded from the calculation due to their anti-dilutive
effect on EPS
|
|
|
890,924 |
|
|
|
946,364 |
|
|
|
642,376 |
|
Note
19 - Parent Only Financial Information
Home Federal Bancorp was formed to
serve as the stock holding company for the Bank. The following are the condensed
financial statements for Home Federal Bancorp (parent company
only):
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
BALANCE
SHEETS
(In
thousands)
|
|
September
30,
2010
|
|
|
September
30,
2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and amounts due from depository institutions
|
|
$ |
36,173 |
|
|
$ |
31,285 |
|
Mortgage-backed
securities available for sale, at fair
value
|
|
|
17,005 |
|
|
|
23,892 |
|
Investment
in the Bank
|
|
|
151,187 |
|
|
|
153,525 |
|
Other
assets
|
|
|
1,070 |
|
|
|
1,550 |
|
TOTAL
ASSETS
|
|
$ |
205,435 |
|
|
$ |
210,252 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
347 |
|
|
$ |
587 |
|
Stockholder’s
equity
|
|
|
205,088 |
|
|
|
209,665 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$ |
205,435 |
|
|
$ |
210,252 |
|
|
|
|
|
|
|
|
|
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY STATEMENTS OF
INCOME
(In
thousands)
|
|
Year
Ended
September
30,
2010
|
|
|
Year
Ended
September
30,
2009
|
|
|
Year
Ended
September
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Cash
dividends from bank
|
|
$ |
-- |
|
|
$ |
5,500 |
|
|
$ |
-- |
|
Investment
interest
|
|
|
-- |
|
|
|
34 |
|
|
|
526 |
|
Mortgage-backed
security interest
|
|
|
1,100 |
|
|
|
1,344 |
|
|
|
1,220 |
|
Other
income
|
|
|
-- |
|
|
|
127 |
|
|
|
347 |
|
Total
income
|
|
|
1,100 |
|
|
|
7,005 |
|
|
|
2,093 |
|
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
services
|
|
|
208 |
|
|
|
260 |
|
|
|
124 |
|
Other
|
|
|
470 |
|
|
|
332 |
|
|
|
1,443 |
|
Total
expense
|
|
|
678 |
|
|
|
592 |
|
|
|
1,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and equity in undistributed earnings of the
Bank
|
|
|
422 |
|
|
|
6,413 |
|
|
|
526 |
|
Income
tax expense
|
|
|
155 |
|
|
|
346 |
|
|
|
100 |
|
INCOME
OF PARENT COMPANY
|
|
|
267 |
|
|
|
6,067 |
|
|
|
426 |
|
Equity
in undistributed earnings (loss) of the Bank
|
|
|
(4,358 |
) |
|
|
2,059 |
|
|
|
3,579 |
|
NET
INCOME (LOSS)
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
HOME
FEDERAL BANCORP, INC.
PARENT-ONLY
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(4,091 |
) |
|
$ |
8,126 |
|
|
$ |
4,005 |
|
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed earnings of the Bank
|
|
|
4,358 |
|
|
|
(2,059 |
) |
|
|
(3,579 |
) |
Net
amortization of premiums on investments
|
|
|
22 |
|
|
|
34 |
|
|
|
29 |
|
ESOP
shares committed to be released
|
|
|
912 |
|
|
|
870 |
|
|
|
1,090 |
|
Net
loss on sale of investment securities
|
|
|
-- |
|
|
|
165 |
|
|
|
-- |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
480 |
|
|
|
(970 |
) |
|
|
(20 |
) |
Other
liabilities
|
|
|
(159 |
) |
|
|
141 |
|
|
|
(41 |
) |
Net
cash provided by operating activities
|
|
|
1,522 |
|
|
|
6,307 |
|
|
|
1,484 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale and maturity of mortgage-backed
securities available for sale
|
|
|
6,655 |
|
|
|
11,083 |
|
|
|
4,715 |
|
Purchase
of mortgage-backed securities available for
sale
|
|
|
-- |
|
|
|
-- |
|
|
|
(22,123 |
) |
Maturity
of (investment in) certificate of deposit
|
|
|
-- |
|
|
|
5,000 |
|
|
|
(5,000 |
) |
Loan
originations and principal collections, net
|
|
|
-- |
|
|
|
188 |
|
|
|
4 |
|
Net
cash provided (used) by investing activities
|
|
|
6,655 |
|
|
|
16,271 |
|
|
|
(22,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(3,450 |
) |
|
|
(3,456 |
) |
|
|
(2,987 |
) |
Repurchase
of common stock
|
|
|
-- |
|
|
|
(7,897 |
) |
|
|
-- |
|
Investment
in subsidiary
|
|
|
-- |
|
|
|
-- |
|
|
|
(48,345 |
) |
Net
proceeds from stock issuance and exchange
pursuant to second step conversion
|
|
|
-- |
|
|
|
-- |
|
|
|
87,849 |
|
Proceeds
from exercise of stock options
|
|
|
161 |
|
|
|
353 |
|
|
|
606 |
|
Net
cash (used) provided by financing activities
|
|
|
(3,289 |
) |
|
|
(11,000 |
) |
|
|
37,123 |
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
4,888 |
|
|
|
11,578 |
|
|
|
16,203 |
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF
PERIOD
|
|
|
31,285 |
|
|
|
19,707 |
|
|
|
3,504 |
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
36,173 |
|
|
$ |
31,285 |
|
|
$ |
19,707 |
|
Note 20 – Selected
Quarterly Financial Data (unaudited)
(In
thousands, except share data)
|
|
Quarter
Ended
|
|
|
|
December
31,
2009
|
|
|
March
31,
2010
|
|
|
June
30,
2010
|
|
|
September
30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
$ |
8,886 |
|
|
$ |
8,738 |
|
|
$ |
8,501 |
|
|
$ |
11,409 |
|
Interest
expense
|
|
|
2,505 |
|
|
|
2,436 |
|
|
|
2,573 |
|
|
|
2,841 |
|
Net interest
income
|
|
|
6,381 |
|
|
|
6,302 |
|
|
|
5,928 |
|
|
|
8,568 |
|
Provision
for loan losses
|
|
|
700 |
|
|
|
2,375 |
|
|
|
3,300 |
|
|
|
3,925 |
|
Non-interest
income
|
|
|
2,875 |
|
|
|
2,469 |
|
|
|
2,896 |
|
|
|
8,439 |
|
Non-interest
expense
|
|
|
9,083 |
|
|
|
9,560 |
|
|
|
8,668 |
|
|
|
13,532 |
|
Income
(loss) before income taxes
|
|
|
(527 |
) |
|
|
(3,164 |
) |
|
|
(3,144 |
) |
|
|
(450 |
) |
Income
tax expense (benefit)
|
|
|
(218 |
) |
|
|
(1,233 |
) |
|
|
(1,203 |
) |
|
|
(235 |
) |
Net
income (loss) before extraordinary item
|
|
|
(309 |
) |
|
|
(1,931 |
) |
|
|
(1,941 |
) |
|
|
(215 |
) |
Extraordinary
gain, net of tax
|
|
|
-- |
|
|
|
305 |
|
|
|
-- |
|
|
|
-- |
|
Net income
(loss)
|
|
$ |
(309 |
) |
|
$ |
(1,626 |
) |
|
$ |
(1,941 |
) |
|
$ |
(215 |
) |
Basic
EPS before extraordinary item(1)
|
|
$ |
(0.02 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.01 |
) |
Basic
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
(0.02 |
) |
|
|
-- |
|
|
|
-- |
|
Basic
EPS after extraordinary item(1)
|
|
|
(0.02 |
) |
|
|
(0.10 |
) |
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item(1)
|
|
|
(0.02 |
) |
|
|
(0.12 |
) |
|
|
(0.12 |
) |
|
|
(0.01 |
) |
Diluted
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
(0.02 |
) |
|
|
-- |
|
|
|
-- |
|
Diluted
EPS after extraordinary item(1)
|
|
|
(0.02 |
) |
|
|
(0.10 |
) |
|
|
(0.12 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
|
|
|
|
December
31,
2008
|
|
|
March
31,
2009
|
|
|
June
30,
2009
|
|
|
September
30,
2009
|
|
Interest
and dividend income
|
|
$ |
9,328 |
|
|
$ |
8,930 |
|
|
$ |
8,410 |
|
|
$ |
9,159 |
|
Interest
expense
|
|
|
3,583 |
|
|
|
2,970 |
|
|
|
2,697 |
|
|
|
2,727 |
|
Net
interest income
|
|
|
5,745 |
|
|
|
5,960 |
|
|
|
5,713 |
|
|
|
6,432 |
|
Provision
for loan losses
|
|
|
3,575 |
|
|
|
1,060 |
|
|
|
3,450 |
|
|
|
8,000 |
|
Non-interest
income
|
|
|
2,461 |
|
|
|
2,345 |
|
|
|
2,611 |
|
|
|
1,874 |
|
Non-interest
expense
|
|
|
6,034 |
|
|
|
6,571 |
|
|
|
7,014 |
|
|
|
9,352 |
|
Income
(loss) before income taxes
|
|
|
(1,403 |
) |
|
|
674 |
|
|
|
(2,140 |
) |
|
|
(9,046 |
) |
Income
tax expense (benefit)
|
|
|
(602 |
) |
|
|
198 |
|
|
|
(894 |
) |
|
|
(3,452 |
) |
Net
income (loss) before extraordinary item
|
|
|
(801 |
) |
|
|
476 |
|
|
|
(1,246 |
) |
|
|
(5,594 |
) |
Extraordinary
gain, net of tax
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
15,291 |
|
Net
income
|
|
$ |
(801 |
) |
|
$ |
476 |
|
|
$ |
(1,246 |
) |
|
$ |
9,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS before extraordinary item(1)
|
|
$ |
(0.05 |
) |
|
$ |
0.03 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.36 |
) |
Basic
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.98 |
|
Basic
EPS after extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS before extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
(0.36 |
) |
Diluted
EPS of extraordinary item(1)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
0.98 |
|
Diluted
EPS after extraordinary item(1)
|
|
|
(0.05 |
) |
|
|
0.03 |
|
|
|
(0.08 |
) |
|
|
0.62 |
|
_________________
(1) The
sum of quarterly earnings per share may vary from annual earnings per
share due to rounding.
|
Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
On
December 18, 2009, the Audit Committee of the Board of Directors of the company
notified Moss Adams LLP of its decision not to renew the engagement of Moss
Adams LLP to serve as the Company's independent registered public accounting
firm. The decision to change certifying accountants was approved by the Audit
Committee of the Board of Directors, which subsequently advised the Board of
Directors of its decision, on December 15, 2009.
During
the fiscal year ended September 30, 2009, and the subsequent interim period
through December 18, 2009, there were no: (1) disagreements with Moss Adams LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to their satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement, or (2)
reportable events (as defined in Regulation S-K Item 304 (a)(1)(v)). Moss Adams
LLP issued an unqualified opinion on the Company’s financial statements as of
September 30, 2009, and for the year then ended.
On
December 15, 2009, the Audit Committee engaged the firm of Crowe Horwath LLP as
independent certified public accountants of the Company and its subsidiaries for
the fiscal year ending September 30, 2010. During the fiscal year ended
September 30, 2010, there were no disagreements with Crowe Horwath LLP and Crowe
Horwath LLP issued an unqualified opinion on the Company’s financial statements
as of September 30, 2010, and for the year then ended.
Item 9A. Controls and
Procedures
Evaluation of Disclosure
Controls and Procedures: An evaluation of the Company’s
disclosure controls and procedures (as defined in Section 13a-15(e) of the
Exchange Act) was carried out under the supervision and with the participation
of the Company’s Chief Executive Officer, Chief Financial Officer and several
other members of the Company’s senior management as of the end of the period
covered by this annual report. The Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures as in effect as of September 30, 2010, are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is (i) accumulated and communicated to the
Company’s management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized and
reported within the time periods specified in the Security and Exchange
Commission’s rules and forms.
Management's Annual Report
on Internal Control Over Financial Reporting and Auditor’s
Attestation: The “Management's Annual Report on Internal
Control Over Financial Reporting” included in Item 8 of this Annual Report on
Form 10-K is incorporated herein by reference.
Attestation Report of the
Registered Public Accounting Firm: The “Report of Independent Registered
Public Accounting Firm” included in Item 8 of this Annual Report on Form 10-K is
incorporated herein by reference.
Changes in Internal
Controls: The LibertyBank Acquisition on July 30, 2010, is
expected to have a material effect on our internal control over financial
reporting (as defined in 13a-15(f) of the Exchange Act). Management
believes the most significant impact on our internal control over financial
reporting due to the LibertyBank Acquisition relates to accounting procedures
for the valuation and estimation of cash flows on purchased credit impaired
loans and the FDIC indemnification asset. A number of internal control
procedures were, modified during the quarter in conjunction with the Bank's
internal control testing and the acquisition of LibertyBank, as described in
Note 2 to the financial statements in Item 8 of this Annual Report on Form
10-K.
Item 9B. Other
Information
There was
no information to be disclosed by the Company in a report on Form 8-K during the
fourth quarter of fiscal 2010 that was not so disclosed.
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
DIRECTORS
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the sections captioned “Proposal 1 – Election of Directors” and
“Meetings and Committees of the Board of Directors and Corporate Governance
Matters” are incorporated herein by reference.
EXECUTIVE
OFFICERS
See the
information under the section captioned “Executive Officers of the Registrant”
under “Part I - Item 1. Business” in this Annual Report on Form
10-K.
COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” is incorporated herein by reference.
AUDIT
COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” is incorporated herein by
reference.
CODE
OF ETHICS
We have a
Code of Ethics for our officers (including its senior financial officers),
directors and employees. The Code of Ethics requires our officers, directors and
employees to maintain the highest standards of professional conduct. A copy of
our Code of Ethics was filed as an exhibit to the Annual Report on Form 10-K for
the fiscal year ended September 30, 2004 and is available on our website at
www.myhomefed.com/ir.
Item 11. Executive
Compensation
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the section captioned “Directors’ Compensation” and “Executive
Compensation” are incorporated herein by reference.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity Compensation Plan
Information
Plan
category
|
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
(c)
|
|
Equity
compensation plans approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
2005 Stock Option Plan |
|
|
502,926 |
|
|
$ |
12.18 |
|
|
|
159,792 |
|
2005 Recognition and Retention Plan |
|
|
-- |
|
|
|
-- |
|
|
|
60,782 |
|
2008 Stock Equity Incentive
Plan(1)
|
|
|
387,998 |
|
|
|
9.39 |
|
|
|
693,288 |
|
Equity
compensation plans not approved
by security holders:
None
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Total
|
|
|
890,924 |
|
|
$ |
10.96 |
|
|
|
913,862 |
|
_______________
(1)
|
Includes 495,778
stock options and 197,510 shares of restricted stock in column
(c).
|
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the section captioned ”Security Ownership of Certain Beneficial
Owners and Management” is incorporated herein by reference.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the section captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters” are incorporated herein by
reference.
Item 14. Principal
Accounting Fees and Services
The
information contained in the Company’s Proxy Statement for the 2011 Annual
Meeting under the sections captioned “Proposal 2 – Ratification of the
Appointment of the Independent Registered Public Accounting Firm” are
incorporated herein by reference.
PART
IV
Item 15. Exhibits and
Financial Statement Schedules
(a) Financial
Statements
See Index to Consolidated Financial Statements on page 90.
(b) Financial Statement
Schedules
All
financial statement schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or the Notes thereto or in Part I, Item 1.
|
2.1
|
Purchase
and Assumption Agreement for Community First Bank Transaction
(1)
|
|
2.2
|
Purchase
and Assumption Agreement for LibertyBank Transaction
(11)
|
|
3.1
|
Articles
of Incorporation of the Registrant (2)
|
|
3.2
|
Bylaws
of the Registrant (2)
|
|
10.1
|
Amended
Employment Agreement entered into by Home Federal Bancorp, Inc. with Len
E. Williams(8)
|
|
10.2
|
Amended
Severance Agreement with Eric S. Nadeau(8)
|
|
10.3
|
Amended
Severance Agreement with Steven D. Emerson(8)
|
|
10.4
|
Severance
Agreement with R. Shane Correa*
|
|
10.5
|
Severance
Agreement with Cindy L. Bateman*
|
|
10.6
|
Form
of Home Federal Bank Employee Severance Compensation Plan
(3)
|
|
10.7
|
Form
of Director Indexed Retirement Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
|
10.8
|
Form
of Director Deferred Incentive Agreement entered into by Home Federal
Savings and Loan Association of Nampa with each of its Directors
(2)
|
|
10.9
|
Form
of Executive Deferred Incentive Agreement, and amendment thereto, entered
into by Home Federal Savings and Loan Association of Nampa with Daniel L.
Stevens, Robert A. Schoelkoph, and Lynn A. Sander (2)
|
|
10.10
|
Form
of Amended and Restated Salary Continuation Agreement entered into by Home
Federal Savings and Loan Association of Nampa with Daniel L. Stevens
(2)
|
|
10.11
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Len E.
Williams(8)
|
|
10.12
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Eric S.
Nadeau(8)
|
|
10.13
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Savings and Loan Association of Nampa with Steven D.
Emerson(8)
|
|
10.14
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Bank with R. Shane Correa*
|
|
10.15
|
2005
Stock Option and Incentive Plan approved by stockholders on June 23, 2005
and Form of Incentive Stock Option Agreement and Non-Qualified Stock
Option Agreement (4)
|
|
10.16
|
2005
Recognition and Retention Plan approved by stockholders on June 23, 2005
and Form of Award Agreement (4)
|
|
10.17
|
Form
of new Director Retirement Plan entered into by Home Federal Bank with
each of its Directors (5)
|
|
10.18
|
Transition
Agreement with Daniel L. Stevens (6)
|
|
10.19
|
2008
Equity Incentive Plan (7)
|
|
11
|
Statement
regarding computation of per share earnings (9)
|
|
14
|
Code
of Ethics (10)
|
|
21
|
Subsidiaries
of the Registrant *
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, Crowe Horwath LLP
*
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm Moss Adams
LLP*
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act *
|
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act
*
|
______________________
|
*
|
Filed herewith |
|
(1) |
Filed as an exhibit to the
Registrant’s Current Report on Form 8-K dated August 7, 2009. |
|
(2) |
Filed
as an exhibit to the Registrant's Registration Statement on Form S-1
(333-146289)
|
|
(3) |
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008
|
|
(4) |
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-127858)
|
|
(5) |
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated October
21, 2005
|
|
(6) |
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated August
21, 2006
|
|
(7) |
Filed
as an exhibit to the Registrant’s Registration Statement on Form S-8
(333-157540)
|
|
(8) |
Filed
as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2009
|
|
(9) |
Reference
is made to Note 18 – Earnings Per Share in the Selected Notes to
Consolidated Financial Statements under Item 8 herein
|
|
(10) |
Registrant
elects to satisfy Regulation S-K §229.406(c) by posting its Code of
Ethics on its website at.www.myhomefed.com/ir
|
|
(11) |
Filed
as an exhibit to the Registrant’s Current Report on Form 8-K dated July
30, 2010.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto, duly authorized.
|
HOME FEDERAL
BANCORP, INC. |
|
|
|
|
|
|
Date: December
14, 2010 |
/s/ Len E.
Williams
|
|
Len E.
Williams |
|
President
and |
|
Chief Executive
Officer |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURES
|
TITLE
|
DATE
|
|
|
/s/
Len E. Williams
|
President,
Chief Executive Officer
|
December
14, 2010
|
Len
E. Williams
|
and
Director
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Eric S. Nadeau
|
Chief
Financial Officer
|
December
14, 2010
|
Eric
S. Nadeau
|
(Principal
Financial and Accounting Officer)
|
|
|
/s/
Brad Little
|
Director
|
December
14, 2010
|
Brad
Little
|
|
|
/s/
Charles Hedemark
|
Director
|
December
14, 2010
|
N.
Charles Hedemark
|
|
|
/s/
Richard J. Navarro
|
Director
|
December
14, 2010
|
Richard
J. Navarro
|
|
|
/s/
James R. Stamey
|
Director
|
December
14, 2010
|
James
R. Stamey
|
|
|
_ |
Director
|
December
__, 2010
|
Robert
A. Tinstman
|
|
|
|
|
|
|
|
|
/s/
Daniel L. Stevens
|
Chairman
|
December
14, 2010
|
Daniel
L. Stevens
|
|
|
EXHIBIT
INDEX
10.4
|
Severance
Agreement with R. Shane Correa
|
10.5
|
Severance
Agreement with Cindy L. Bateman
|
10.14
|
Amended
and Restated Salary Continuation Agreement entered into by Home Federal
Bank with R. Shane Correa
|
21
|
Subsidiaries
of the Registrant
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, Crowe Horwath
LLP
|
23.2
|
Consent
of Independent Registered Public Accounting Firm Moss Adams
LLP
|
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
|