q123110home.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

or

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from _____ to _____
 
Commission File Number: 001-33795
 
HOME FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter) 
 
 
                      Maryland                                    68-0666697        
(State or other jurisdiction of incorporation  (I.R.S. Employer 
or organization)  Identification Number) 
   
500 12th Avenue South, Nampa, Idaho                83651             
(Address of principal executive offices)  (Zip Code) 
   
Registrant’s telephone number, including area code:   (208) 466-4634
                                                                                                 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [   ] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
  Large accelerated filer                                     [   ] Accelerated filer                                        [X] 
  Non-accelerated filer                                       [   ] Smaller reporting company                       [   ] 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value per share, 16,764,313 shares outstanding as of February 9, 2011.


 
 

 


HOME FEDERAL BANCORP, INC.
FORM 10-Q
TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
 
  
ITEM 1.  FINANCIAL STATEMENTS
  2
 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
   RESULTS OF OPERATIONS
 
20
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 31
 
 
ITEM 4. CONTROLS AND PROCEDURES
 32
 
 
ITEM 1. LEGAL PROCEEDINGS
 33
 
 
ITEM 1A. RISK FACTORS
 33
 
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 33
 
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 33
 
 
ITEM 4. REMOVED AND RESERVED
 33
 
 
ITEM 5. OTHER INFORMATION
 33
 
 
SIGNATURES
 35




 
 

 


Item 1.  Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
           
   
December 31,
2010
   
September 30,
2010
 
ASSETS
           
    Cash and equivalents
  $ 212,246     $ 416,426  
Investments available for sale, at fair value
    426,192       275,180  
    Loans and leases receivable, net of allowance for loan and
          lease losses of $15,409 and $15,432
    573,400       621,011  
Loans held for sale
    3,263       5,135  
Accrued interest receivable
    2,905       2,694  
FDIC indemnification receivable, net
    69,546       64,574  
Bank owned life insurance
    12,542       12,437  
Real estate and other property owned
    25,147       30,481  
FHLB stock, at cost
    17,717       17,717  
Core deposit intangible
    3,776       3,971  
Property and equipment, net
    28,209       27,955  
Other assets
    5,711       5,280  
TOTAL ASSETS
  $ 1,380,654     $ 1,482,861  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
LIABILITIES
               
Deposit accounts:
               
Noninterest-bearing demand
  $ 134,652     $ 138,300  
Interest-bearing demand
    231,590       225,794  
Money market
    172,657       180,454  
Savings
    74,681       69,079  
Certificates
    492,032       576,035  
    Total deposit accounts
    1,105,612       1,189,662  
                 
Advances by borrowers for taxes and insurance
    539       4,658  
Interest payable
    578       631  
FHLB advances and other borrowings
    60,368       67,622  
Deferred compensation
    5,656       5,583  
Deferred income tax liability, net
    866       2,211  
Other liabilities
    5,537       7,406  
Total liabilities
    1,179,156       1,277,773  
                 
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  
      Dec. 31, 2010 - 17,478,171 issued; 16,710,025 outstanding
               
      Sept. 30, 2010 - 17,460,311 issued, 16,687,561 outstanding
               
Additional paid-in capital
    153,139       152,682  
Retained earnings
    54,741       56,942  
Unearned shares issued to employee stock ownership plan
    (8,396 )     (8,657 )
Accumulated other comprehensive income
    1,847       3,954  
  Total stockholders’ equity
    201,498       205,088  
  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,380,654     $ 1,482,861  
 
See accompanying notes.
 
 

2
 

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data) (Unaudited)
 
   
For the Three Months Ended
 
   
December 31,
2010
   
December 31,
2009
 
Interest and dividend income:
           
Loans and leases
  $ 9,347     $ 7,103  
Investment securities
    1,684       1,756  
Other interest and dividends
    213       27  
Total interest and dividend income
    11,244       8,886  
                 
Interest expense:
               
Deposits
    2,266       1,674  
FHLB advances and other borrowings
    664       831  
Total interest expense
    2,930       2,505  
Net interest income
    8,314       6,381  
Provision for loan losses
    3,000       700  
Net interest income after provision for loan losses
    5,314       5,681  
                 
Noninterest income:
               
Service charges and fees
    2,459       2,264  
Gain on sale of loans
    348       183  
    Increase in cash surrender value of life insurance
    105       107  
FDIC indemnification recovery
    1,996       -  
Other
    1,395       321  
Total noninterest income
    6,303       2,875  
                 
Noninterest expense:
               
Compensation and benefits
    7,094       4,617  
Occupancy and equipment
    1,845       1,064  
Data processing
    1,177       800  
Advertising
    213       260  
Postage and supplies
    254       166  
Professional services
    718       479  
Insurance and taxes
    1,049       558  
Amortization of intangibles
    195       -  
Provision for real estate owned
    675       801  
Other
    599       338  
Total noninterest expense
    13,819       9,083  
Loss before income taxes
    (2,202 )     (527 )
Income tax benefit
    (871 )     (218 )
               Net loss
  $ (1,331 )   $ (309 )
                 
Loss per common share:
               
Basic
  $ (0.08 )   $ (0.02 )
Diluted
    (0.08 )     (0.02 )
Weighted average number of shares outstanding:
               
Basic
    15,663,436       15,447,705  
Diluted
    15,663,436       15,447,705  
                 
Dividends declared per share:
  $ 0.055     $ 0.055  



See accompanying notes.
 
 

3
 


HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data) (Unaudited)
   
Common Stock
     Additional     Retained     
Unearned
Shares
Issued to
Employee
Stock
Ownership
Plan
     
Accumulated
Other
Comprehensive
       
   
Shares
   
Amount
   
Paid-In Capital
   
Earnings
   
(“ESOP”)
   
Income (Loss)
   
Total
 
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  
Shares issued, net of forfeitures
4,604       -                                       -  
ESOP shares committed to be
       released
                  75               261               336  
Exercise of stock options
    17,860               186                               186  
Share-based compensation
                    196                               196  
Dividends paid
       ($0.055 per share)
                            (870 )                     (870 )
                                                         
Comprehensive income:
                                                       
       Net loss
                            (1,331 )                     (1,331 )
       Other comprehensive income:
                                                   
Change in unrealized
     holding gain on securities
     available for sale, net of  
     taxes of ($822)
                                            (2,107 )     (2,107 )
                                                         
Comprehensive loss
                                                    (3,438 )
                                                         
Balance at December 31, 2010
    16,710,025     $ 167     $ 153,139     $ 54,741     $ (8,396 )   $ 1,847     $ 201,498  



See accompanying notes.
 
 

4
 



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
Three Months Ended
 December 31,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (1,331 )   $ (309 )
Adjustments to reconcile net loss to cash provided by operating activities:
               
Depreciation and amortization
    636       501  
Amortization of core deposit intangible
    195       -  
Accretion of FDIC indemnification receivable
    (922 )     (160 )
Net amortization of premiums and discounts on investments
    1,337       87  
(Gain) Loss on sale of fixed assets and repossessed assets
    (332 )     61  
ESOP shares committed to be released
    336       335  
Share-based compensation
    196       355  
Provision for loan losses
    3,000       700  
Provision for losses on real estate and other property owned
    675       801  
Accrued deferred compensation expense, net
    73       48  
Net deferred loan fees
    (250 )     12  
Deferred income tax benefit
    -       (130 )
Net gain on sale of loans
    (348 )     (183 )
Proceeds from sale of loans held for sale
    13,356       8,316  
Originations of loans held for sale
    (11,136 )     (9,279 )
Increase in cash surrender value of bank owned life insurance
    (105 )     (107 )
Change in assets and liabilities:
               
Interest receivable
    (211 )     251  
Other assets
    (3,380 )     (2,030 )
Interest payable
    (53 )     (18 )
Other liabilities
    (1,868 )     (3,049 )
Net cash used by operating activities
    (132 )     (3,798 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from repayments of mortgage-backed securities available for sale
    22,304       9,859  
Purchase of securities available for sale
    (186,860 )     (4,368 )
Proceeds from maturities and calls of securities available for sale
    8,755       -  
Reimbursement of loan losses under loss share agreement
    -       9,406  
Purchases of property and equipment
    (887 )     (5,867 )
Net decrease in loans
    41,301       10,292  
Proceeds from sale of fixed assets and real estate and other property owned
    7,446       4,582  
Net cash provided (used) by investing activities
    (107,941 )     23,904  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase (decrease) in deposits
    (84,050 )     7,593  
Net decrease in advances by borrowers for taxes and insurance
    (4,119 )     (472 )
Repayment of FHLB advances
    (6,604 )     (7,850 )
Net proceeds from (repayments of) other borrowings
    (650 )     4  
Proceeds from exercise of stock options
    186       -  
Dividends paid
    (870 )     (863 )
Net cash used by financing activities
    (96,107 )     (1,588 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (204,180 )     18,518  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    416,426       49,953  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 212,246     $ 68,471  
                 


(Continued)


See accompanying notes.
 
 

5
 



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)
 
Three months Ended
 December 31,
 
   
2010
   
2009
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid during the period for:
           
 Interest
  $ 2,983     $ 2,523  
            Taxes
    (49 )     (700 )
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Acquisition of real estate and other assets in settlement of loans
  $ 4,667     $ 2,270  
Fair value adjustment to securities available for sale, net of taxes
    (2,107 )     (869 )


 
 
 
See accompanying notes.

6
 


HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation

The consolidated financial statements presented in this quarterly report include the accounts of Home Federal Bancorp, Inc., a Maryland corporation (the “Company”), and its wholly-owned subsidiary, Home Federal Bank (the “Bank”), which is headquartered in Nampa, Idaho. The financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and are unaudited. All significant intercompany transactions and balances have been eliminated. In the opinion of the Company’s management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made. Operating results for the three month period ended December 31, 2010, are not necessarily indicative of the results that may be expected for the year ending September 30, 2011.

Certain information and note disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. Therefore, these consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010 (“2010 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on December 14, 2010.

Certain reclassifications have been made to prior year’s financial statements in order to conform to the current year presentation. The reclassifications had no effect on previously reported net income or equity.

Note 2 - Critical Accounting Estimates and Related Accounting Policies

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements, and thus actual results could differ from the amounts reported and disclosed herein. The Company considers the allowance for loan losses, acquired loans, the indemnification receivable due from the Federal Deposit Insurance Corporation (“FDIC”), deferred income taxes and valuation of real estate owned to be critical accounting estimates.

Allowance for Loan Losses. Management recognizes that losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable 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
 
 
 
 

7
 
 
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 noninterest income.

Acquired Loans. On August 7, 2009, the Bank entered into a purchase and assumption agreement with loss sharing agreements with the FDIC to assume the deposits and certain assets and liabilities of Community First Bank, a full-service commercial bank headquartered in Prineville, Oregon (“CFB Acquisition”). Under the loss sharing agreements, 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. Loans acquired in the CFB Acquisition were valued as of the acquisition date in accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, which has since been superseded by Accounting Standards Codification Topic (“ASC”) 805 [formerly SFAS No. 141(R)]. The Company was not permitted to adopt ASC 805 prior to its effective date, which was October 1, 2009. ASC 310-30 applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. For loans 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, the type of loan and related collateral, classification status and current discount rates. 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.

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 (“LibertyBank Acquisition”). See Note 3 to the Selected Notes to the Consolidated Financial Statements for additional information on the LibertyBank Acquisition. Loans purchased in the LibertyBank Acquisition are valued as of acquisition date in accordance with ASC 805. Further, the Company elected to account for all loans purchased in the LibertyBank Acquisition within the scope of ASC 310-30. 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 accounting 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 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.
 
 
 
 

8
 

FDIC Indemnification Receivable. In conjunction with the CFB Acquisition and the LibertyBank Acquisition, the Bank entered into loss sharing agreements with the FDIC. 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, changes in the value of the indemnification asset are based upon the estimated losses in the covered assets purchased in the acquisitions. 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 loss sharing agreements. 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 receivable.

The FDIC indemnification receivable 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 receivable and any decreases in cash flow of the loans over those expected will increase the FDIC indemnification receivable. The FDIC indemnification receivable will be reduced as loss sharing payments are received from the FDIC. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Real Estate Owned. Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at 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 acquisition intangibles, the allowance for loan losses, deferred compensation, purchase accounting adjustments and related deferred acquisition gains. 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.

Note 3 – Acquisition 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 in Eugene, Oregon. LibertyBank operated fifteen locations in central and western Oregon.  The LibertyBank Acquisition consisted of assets with a preliminary fair value estimate on the acquisition date 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. The LibertyBank Acquisition has been incorporated prospectively in the Company’s financial statements; therefore, year over year results of operations may not be comparable.

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 purchased in the LibertyBank Acquisition. Loans and foreclosed and repossessed assets purchased in all FDIC-assisted acquisitions (including the CFB Acquisition) that are subject to the loss sharing agreements are referred to herein as “covered loans” and “covered assets.” Loans and foreclosed and repossessed assets organically originated or purchased loans not subject to loss sharing agreements are referred to herein as “noncovered loans” and “noncovered assets.”


 
 

9
 


Note 4 - Earnings (Loss) Per Share

The Company has granted stock compensation awards with non-forfeitable dividend rights, which are considered participating securities. As such, earnings (loss) per share (“EPS”) is computed using the two-class method as required by ASC 260-10-45. Basic EPS is computed by dividing net income (or loss) allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS 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 EPS until they are committed to be released. The following table presents the computation of basic and diluted EPS for the periods indicated:

   
Three Months Ended
 December 31,
 
   
2010
   
2009
 
   
(In thousands except share data)
 
             
Net loss
  $ (1,331 )   $ (309 )
Allocated to participating securities
    (14 )     (5 )
Net loss allocated to common shareholders
  $ (1,317 )   $ (304 )
                 
Weighted average common shares outstanding, including shares
    considered participating securities
    15,830,261       15,719,698  
Less:  Average participating securities
    (166,825 )     (271,993 )
Weighted average shares
    15,663,436       15,447,705  
Net effect of dilutive restricted stock
    -       - -  
Weighted average shares and common stock equivalents
    15,663,436       15,447,705  
Basic loss per common share
  $ (0.08 )   $ (0.02 )
Diluted loss per common share
    (0.08 )     (0.02 )
                 
Options excluded due to their anti-dilutive effect on EPS
    886,381       946,364  

Note 5 - Investment securities

Investment securities available for sale consisted of the following at the dates indicated:
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(in thousands)
 
December 31, 2010
                       
Obligations of U.S. Government-sponsored
   enterprises (“GSE”)
  $ 95,508     $ 120     $ (1,106 )   $ 94,522  
Obligations of states and political subdivisions
    15,102       14       (630 )     14,486  
Corporate note, FDIC-guaranteed
    1,019       2       --       1,021  
Mortgage-backed securities, GSE-issued
    311,005       6,098       (1,339 )     315,764  
Mortgage-backed securities, private label
    424       --       (25 )     399  
Total
  $ 423,058     $ 6,234     $ (3,100 )   $ 426,192  
                                 
September 30, 2010
                               
Obligations of U.S. 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  
Total
  $ 268,593     $ 7,036     $ (449 )   $ 275,180  
 

 
 
 

10
 
Mortgage-backed securities are comprised of fixed and variable-rate residential mortgages.

The fair value of impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed for the periods indicated were as follows:

   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
   
(in thousands)
 
December 31, 2010
                                   
Obligations of U.S. GSE
  $ 72,874     $ (1,106 )   $ --     $ --     $ 72,874     $ (1,106 )
Obligations of states and
   political subdivisions
    13,727       (630 )     --       --       13,727       (630 )
Mortgage-backed
   securities, GSE-issued
    138,366       (1,339 )     --       --       138,366       (1,339 )
Mortgage-backed
   securities, private label
    --       -       399       (25 )     399       (25 )
Total
  $ 224,967     $ (3,075 )   $ 399     $ (25 )   $ 225,366     $ (3,100 )
                                                 
September 30, 2010
                                               
Obligations of U.S. GSE
  $ 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 )
Total
  $ 69,206     $ (449 )   $ --     $ --     $ 69,206     $ (449 )

Management has evaluated these securities and has determined that the decline in fair value is not other than temporary. These securities have contractual maturity dates and management believes it is reasonably probable that principal and interest balances on these securities will be collected based on the performance, underwriting, credit support and vintage of the loans underlying the securities. However, continued deteriorating economic conditions may result in degradation in the performance of the loans underlying these securities in the future. The Company has the ability and intent to hold these securities for a reasonable period of time for a forecasted recovery of the amortized cost. The Company does not intend to sell these securities and it is not likely that the Company would be required to sell securities in an unrealized loss position before recovery of its cost basis.

As of December 31, 2010, and September 30, 2010, the Bank pledged investment securities for the following obligations:

   
December 31, 2010
   
September 30, 2010
 
   
Amortized
Cost
   
Fair
 Value
   
Amortized
Cost
   
Fair
 Value
 
   
(in thousands)
 
FHLB borrowings
  $ 46,068     $ 48,552     $ 51,174     $ 54,309  
Treasury, tax and loan funds at the
    Federal Reserve Bank
    4,428       4,575       3,767       3,916  
Repurchase agreements
    19,960       20,931       17,784       18,804  
Deposits of municipalities and pubic units
    21,802       22,926       19,977       21,106  
Total
  $ 92,258     $ 96,984     $ 92,702     $ 98,135  


 
 

11
 


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.
 
   
December 31, 2010
 
   
Amortized
Cost
   
Fair
Value
 
   
(in thousands)
 
Due within one year
  $ 3,042     $ 3,041  
Due after one year through five years
    77,746       77,118  
Due after five years through ten years
    94,434       95,343  
Due after ten years
    247,836       250,690  
    Total
  $ 423,058     $ 426,192  

 
Note 6 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized by collateral type as follows:
 
   
December 31, 2010
   
September 30, 2010
 
   
Balance
   
Percent of
Gross
   
Balance
   
Percent of
Gross
 
   
(dollars in thousands)
 
Real estate:
                       
One-to-four family residential
  $ 148,916       25.26 %   $ 157,574       24.75 %
Multi-family residential
    20,639       3.50       20,759       3.26  
Commercial
    217,462       36.90       228,643       35.92  
 Total real estate
    387,017       65.66       406,976       63.93  
                                 
Real estate construction:
                               
One- to four-family residential
    20,841       3.54       24,707       3.88  
Multi-family residential
    2,512       0.43       2,657       0.42  
Commercial and land development
    17,989       3.05       21,190       3.33  
 Total real estate construction
    41,342       7.02       48,554       7.63  
                                 
Consumer:
                               
Home equity
    54,332       9.22       56,745       8.91  
Automobile
    1,261       0.21       1,466       0.23  
Other consumer
    6,904       1.17       6,947       1.10  
 Total consumer
    62,497       10.60       65,158       10.24  
                                 
Commercial business
    92,895       15.76       108,866       17.10  
Leases
    5,678       0.96       6,999       1.10  
  Gross loans
    589,429       100.00 %     636,553       100.00 %
                                 
Deferred loan fees
    (620 )             (628 )        
Allowance for loan losses
    (15,409 )             (15,432 )        
Loans receivable, net
  $ 573,400             $ 620,493          

The following tables present loans at their recorded investment. Recorded investment includes the unpaid principal balance or the carrying amount of loans plus accrued interest less charge offs and net deferred loan fees. Accrued interest on loans was $1.3 million and $1.5 million as of December 31, 2010 and September 30, 2010 respectively.

 
 

12
 

The following table presents the recorded investment in nonperforming loans and an aging of performing loans by class as of December 31, 2010:

   
Nonperforming Loans
                   
   
Nonaccrual
   
Past Due
90 or more
Days Still
Accruing
   
Total
   
Loans
Delinquent
30-89 Days
   
Loans Not
Past Due
   
Total
 Loans
 
   
(in thousands)
 
Noncovered loans:
                                   
One-to-four family residential
  $ 4,292     $ -     $ 4,292     $ 3,361     $ 121,768     $ 129,421  
Multi-family residential
    -       -       -       -       9,900       9,900  
Commercial real estate
    8,733       -       8,733       144       134,000       142,877  
Total real estate
    13,025       -       13,025       3,505       265,668       282,198  
                                                 
One-to-four family residential construction
-       -       -       -       6,704       6,704  
Multi-family residential construction
    -       -       -       -       1,513       1,513  
Commercial and land development
    3,183       -       3,183       -       4,834       8,017  
Total real estate construction
    3,183       -       3,183       -       13,051       16,234  
                                                 
Home Equity
    1,030       -       1,030       284       37,627       38,941  
Automobile
    18       -       18       2       762       782  
Other Consumer
    1       -       1       13       5,526       5,540  
Total consumer
    1,049       -       1,049       299       43,915       45,263  
                                                 
Commercial business
    1,235       -       1,235       33       8,120       9,388  
Leases
    -       -       -       -       380       380  
                                                 
Total noncovered loans
    18,492       -       18,492       3,837       331,134       353,463  
                                                 
Covered loans:
                                               
One-to-four family residential
    667       -       667       -       18,999       19,666  
Multi-family residential
    2,985       -       2,985       -       7,754       10,739  
Commercial real estate
    10,264       -       10,264       337       63,985       74,586  
Total real estate
    13,916       -       13,916       337       90,738       104,991  
                                                 
One-to-four family residential construction
-       -       -       -       14,137       14,137  
Multi-family residential construction
    998       -       998       -       -       998  
Commercial and land development
    5,780       -       5,780       262       3,930       9,972  
Total real estate construction
    6,778       -       6,778       262       18,067       25,107  
                                                 
Home equity
    23       -       23       -       15,535       15,558  
Automobile
    -       -       -       -       480       480  
Other consumer
    26       3       29       -       1,362       1,391  
Total consumer
    49       3       52       -       17,377       17,429  
                                                 
Commercial Business
    782       -       782       -       83,085       83,867  
Leases
    -       -       -       -       5,297       5,297  
                                                 
Total covered loans
    21,525       3       21,528       599       214,564       236,691  
                                                 
Total gross loans
  $ 40,017     $ 3     $ 40,020     $ 4,436     $ 545,698     $ 590,154  

The recorded investment in nonperforming loans as of September 30, 2010 was $35.0 million.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a monthly basis.  The Company uses the following definitions for risk classification ratings:

Watch: Loans that possess some reason for additional management oversight, such as correctable documentation deficiencies, recent financial setbacks, deteriorating financial position, industry concerns, failure to perform on other
 
 
 

13
 
 
borrowing obligations. Loans with this classification are to be monitored in an effort to correct deficiencies and upgrade the credit. They do not however expose the Bank to significant risk.

Special Mention: Performing loans that have developed minor credit weaknesses since origination. Evidence of credit weakness include the primary source of repayment has deteriorated and no longer meets debt service requirements as defined in policy, the borrower may have a short track record and little depth of management, inadequate current financial information, marginal capitalization, and susceptibility to negative industry trends. The primary source of repayment remains viable but there is increasing reliance on collateral or guarantor support.

Substandard:  A loan is considered substandard if it is inadequately protected by the current net worth, liquidity and paying capacity of the borrower or collateral pledged. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful:  Loans 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.

Loans not meeting the criteria above are considered to be Pass rated loans. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

   
Pass
   
Watch
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
Loans
 
   
(in thousands)
 
Noncovered loans:
                                   
One-to-four family residential
  $ 123,544     $ 254     $ -     $ 5,623     $ -     $ 129,421  
Multi-family residential
    5,586       1,711       1,035       1,568       -       9,900  
Commercial real estate
    83,289       10,061       25,663       23,864       -       142,877  
Total real estate
    212,419       12,026       26,698       31,055       -       282,198  
One-to-four family residential construction
6,284       420       -       -       -       6,704  
Multi-family residential construction
    902       -       -       611       -       1,513  
Commercial and land development
    4,186       687       447       2,697       -       8,017  
Total real estate construction
    11,372       1,107       447       3,308       -       16,234  
Home equity
    38,026       17       39       859       -       38,941  
Automobile
    772       1       -       9       -       782  
Other consumer
    5,472       67       1       -       -       5,540  
Total consumer
    44,270       85       40       868       -       45,263  
Commercial business
    7,507       108       193       1,580       -       9,388  
Leases
    380       -       -       -       -       380  
                                                 
Total noncovered loans
    275,948       13,326       27,378       36,811       -       353,463  
                                                 
Covered loans:
                                               
One-to-four family residential
    5,174       355       1,075       13,062       -       19,666  
Multi-family residential
    7,517       -       -       3,222       -       10,739  
Commercial real estate
    40,199       2,728       2,787       28,872       -       74,586  
Total real estate
    52,890       3,083       3,862       45,156       -       104,991  
One-to-four family residential construction
5,042       -       -       9,095