-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDoDc7AS/vQwdYNP/uXD3IFUpI/YnqVsAzNOfh3p0fLwdaD2idI+O2H2SzsBi2sq lagW5u6zWGinihAneCZ7Lg== 0000939057-08-000167.txt : 20080509 0000939057-08-000167.hdr.sgml : 20080509 20080509111634 ACCESSION NUMBER: 0000939057-08-000167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080509 DATE AS OF CHANGE: 20080509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Home Federal Bancorp, Inc. CENTRAL INDEX KEY: 0001413440 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 260886727 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33795 FILM NUMBER: 08816686 BUSINESS ADDRESS: STREET 1: 500 12TH AVENUE SOUTH CITY: NAMPA STATE: ID ZIP: 83653 BUSINESS PHONE: (208) 466-4634 MAIL ADDRESS: STREET 1: 500 12TH AVENUE SOUTH CITY: NAMPA STATE: ID ZIP: 83653 10-Q 1 q33108.htm HOME FEDERAL BANCORP, INC. FORM 10-Q q33108_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

 
FORM 10-Q

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

For the quarterly period ended March 31, 2008

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: 000-52995 
HOME FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
 
 Maryland                                                                                  26-0886727   
 (State or other jurisdiction of incorporation   (I.R.S. Employer
 or organization)    I.D. 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
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, 17,343,229 shares outstanding as of May 2, 2008.


 
 

 



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


PART 1  - FINANCIAL INFORMATION

Item 1 - Financial Statements
Page
 
Consolidated Balance Sheets as of
 
              March 31, 2008 and September 30, 2007   1
 
Consolidated Statements of Income for the Three and Six Months 
 
              ended March 31, 2008 and 2007    2 
 
Consolidated Statements of Stockholders’ Equity
 
Consolidated Statements of Cash Flows for the Six Months 
 
              ended March 31, 2008 and 2007
  Selected Notes to Unaudited Interim Consolidated Financial Statements
     
Item 2 - Management’s Discussion and Analysis of Financial Condition
                 and Results of Operations     
 
12
   
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.    
 25
   
Item 4 - Controls and Procedures 
26 
   
PART II - OTHER INFORMATION   
   
Item 1 - Legal Proceedings   
26 
   
Item 1A - Risk Factors
 26
   
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 27
   
Item 3 - Defaults upon Senior Securities
 27
   
Item 4 - Submission of Matters to a Vote of Security Holders
 27
   
Item 5 - Other Information
 27
   
Item 6 - Exhibits
 28
   
SIGNATURES
 29
 
                                                                                                                                     60;                                                

 
 
 

 

Item 1.  Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
 
March 31,
 2008
   
September 30,
 2007
 
             
ASSETS
           
Cash and amounts due from depository institutions
  $ 36,353     $ 20,588  
Mortgage-backed securities available for sale, at fair value
    209,239       162,258  
Federal Home Loan Bank of Seattle (“FHLB”) stock, at cost
    9,591       9,591  
Loans receivable, net of allowance for loan losses of  $3,307
               
and $2,988
    477,155       480,118  
Loans held for sale
    2,751       4,904  
Accrued interest receivable
    2,941       2,804  
Property and equipment, net
    13,613       12,364  
Mortgage servicing rights, net
    1,903       2,047  
Bank owned life insurance
    11,377       11,168  
Real estate and property owned
    452       549  
Deferred income tax asset
    -       1,245  
Other assets
    2,736       2,318  
TOTAL ASSETS
  $ 768,111     $ 709,954  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Deposit accounts:
               
Noninterest-bearing demand deposits
  $ 37,323     $ 38,643  
Interest-bearing demand deposits
    142,820       127,659  
Savings deposits
    24,524       23,116  
Certificates of deposit
    191,439       215,191  
    Total deposit accounts
    396,106       404,609  
Advances by borrowers for taxes and insurance
    1,429       1,605  
Interest payable
    619       731  
Deferred compensation
    4,889       4,515  
FHLB advances
    155,553       180,730  
Deferred income tax liability
    377       -  
Other liabilities
    3,768       5,127  
Total liabilities
    562,741       597,317  
                 
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:      173        152  
      Mar. 31, 2008 – 17,386,517 issued, 17,343,229 outstanding
               
      Sept. 30, 2007 – 15,278,803 issued, 15,232,243 outstanding
               
Additional paid-in capital
    156,805       59,613  
Retained earnings
    59,475       58,795  
    Unearned shares issued to employee stock ownership plan ("ESOP")     (11,634 )     (3,698 )
Accumulated other comprehensive income (loss)
    551       (2,225 )
Total stockholders’ equity
    205,370       112,637  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 768,111     $ 709,954  
                 

See accompanying notes.

 

1
 


HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)
 
Three Months Ended
 March 31,
   
Six Months Ended
March 31,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Interest and dividend income:
                       
Loan interest
  $ 7,770     $ 8,470     $ 15,846     $ 16,997  
Investment interest
    510       15       774       44  
Mortgage-backed security interest
    2,148       2,244       4,091       4,550  
FHLB dividends
    31       9       50       19  
Total interest and dividend income
    10,459       10,738       20,761       21,610  
Interest expense:
                               
Deposits
    2,872       3,005       6,086       6,015  
FHLB advances
    1,810       2,372       3,842       4,735  
Total interest expense
    4,682       5,377       9,928       10,750  
Net interest income
    5,777       5,361       10,833       10,860  
Provision for loan losses
    378       -       665       71  
Net interest income after provision for loan losses
    5,399       5,361       10,168       10,789  
Noninterest income:
                               
Service charges and fees
    2,098       2,222       4,309       4,636  
Gain on sale of loans
    162       379       347       677  
    Increase in cash surrender value of bank owned
         life insurance
    104        99        208        199  
Loan servicing fees
    126       142       253       286  
Mortgage servicing rights, net
    (76 )     (92 )     (144 )     (175 )
Other
    64       11       109       21  
Total noninterest income
    2,478       2,761       5,082       5,644  
Noninterest expense:
                               
Compensation and benefits
    4,053       3,851       7,752       7,865  
Occupancy and equipment
    760       727       1,471       1,429  
Data processing
    531       493       1,053       1,001  
Advertising
    271       300       571       596  
Postage and supplies
    171       174       321       320  
Professional services
    191       215       403       411  
Insurance and taxes
    140       106       225       209  
Other
    302       228       485       509  
Total noninterest expense
    6,419       6,094       12,281       12,340  
Income before income taxes
    1,458       2,028       2,969       4,093  
Income tax expense
    513       787       1,077       1,583  
NET INCOME
  $ 945     $ 1,241     $ 1,892     $ 2,510  
                                 
Earnings per common share:
                               
Basic
  $ 0.06     $ 0.08 (1)   $ 0.12 (1)   $ 0.15 (1)
Diluted
    0.06       0.07 (1)     0.12 (1)     0.15 (1)
Weighted average number of shares outstanding:
                               
Basic
    15,962,325       16,576,439 (1)     16,352,427 (1)     16,562,244 (1)
Diluted
    15,978,217       16,690,594 (1)     16,374,451 (1)     16,682,322 (1)
                                 
Dividends declared per share:
  $ 0.055     $ 0.048 (1)   $ 0.103 (1)   $ 0.096 (1)

(1) Earnings per share, average common shares outstanding, and dividends per share have been adjusted to reflect the impact of the second-step conversion and reorganization of Home Federal Bancorp, Inc. (“Company”), which occurred on December 19, 2007.

See accompanying notes.

 

2
 


HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data) (Unaudited)
   
 
                 Unearned              
                             Shares              
                             Issued to              
                             Employee     Accumulated        
                 Additional            Stock       Other          
   
Common Stock
     Paid-In      Retained       Ownership      Comprehensive        
   
Shares
   
Amount
   
   Capital
   
Earnings    
   
      Plan   
   
Loss
   
Total
 
Balance at Sept. 30, 2006
    15,169,114     $ 152     $ 57,222     $ 54,805     $ (4,134 )   $ (176 )   $ 107,869  
                                                         
Restricted stock issued, net
        of forfeitures
    (6,924 )                                             --  
ESOP shares committed to
        be released
                    357               436               793  
Exercise of stock options
    70,053               854                               854  
Share-based compensation
                    1,036                               1,036  
Excess tax benefits from
        equity compensation
        plans
                       144                               144  
Dividends paid
       ($0.190 per share)  (1) (2)
                            (1,281 )                     (1,281 )
                                                         
Comprehensive income:
                                                       
Net income
                            5,271                       5,271  
Other comprehensive
income:
                                                       
    Change in unrealized
        holding loss on
        securities available for
        sale, net of taxes
                                            (100 )     (100 )
    Change in unrealized
        holding loss resulting
        from transfer of
        securities from held to
        maturity to available
        for sale, net of taxes
                                            (1,949 )     (1,949 )
Comprehensive income:
                                                    3,222  
Balance at Sept. 30, 2007
    15,232,243       152       59,613       58,795       (3,698 )     (2,225 )     112,637  
                                                         
Second Step Conversion(3)
    2,073,619       21       96,445               (8,160 )             88,306  
Dissolution of  Mutual
        Holding Company
                    50                               50  
Restricted stock issued, net of forfeitures
    8,502                                               -  
ESOP shares committed to
        be released
                    (149 )             224               75  
Exercise of stock options
    28,865               328                               328  
Share-based compensation
                    518                               518  
Dividends paid
       ($0.103) per share)  (1) (2)
                            (1,212 )                     (1,212 )
                                                         
Comprehensive income:
                                                       
Net income
                            1,892                       1,892  
Other comprehensive income:
                                                       
Change in unrealized
     holding loss on
     securities available
     for sale, net of
     deferred income taxes
                                            2,776       2,776  
Comprehensive income:
                                                    4,668  
Balance at March. 31, 2008
    17,343,229     $ 173     $ 156,805     $ 59,475     $ (11,634 )   $ 551     $ 205,370  


 

3
 

(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 second-step conversion and reorganization of the Company, which occurred on December 19, 2007.
(3) The total effect on equity accounts from the second-step conversion and reorganization has changed from the December 31, 2007 reported numbers due to adjustments such as true-up of total new shares issued in relation to conversion once total affect of fractional shares was known, payment of additional expenses related to conversion in the quarter ended March 31, 2008, etc.

See accompanying notes.

 

4
 


HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
Six Months Ended
 March 31,
 
   
2008
   
2007
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,892     $ 2,510  
Adjustments to reconcile net income to cash provided by operating
activities:
               
Depreciation and amortization
    796       866  
Net accretion of premiums and discounts on investments
    (17 )     (33 )
Loss on sale of repossessed assets
    95       -  
ESOP shares committed to be released
    75       416  
Equity compensation expense
    518       538  
Provision for loan losses
    665       71  
Accrued deferred compensation expense, net
    373       367  
Net deferred loan fees
    6       109  
Deferred income tax benefit
    (229 )     (220 )
Excess tax benefit from equity compensation plans
    -       (44 )
Net gain on sale of loans
    (347 )     (677 )
Proceeds from sale of loans held for sale
    25,406       44,016  
Originations of loans held for sale
    (22,944 )     (43,814 )
Net decrease in value of mortgage servicing rights
    144       175  
Net increase in value of bank owned life insurance
    (209 )     (200 )
Change in assets and liabilities:
               
Interest receivable
    (137 )     84  
Other assets
    (423 )     (580 )
Interest payable
    (112 )     (116 )
Other liabilities
    (1,359 )     950  
Net cash provided by operating activities
    4,193       4,418  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from maturity of mortgage-backed securities held to maturity
    -       11,652  
Proceeds from maturity of mortgage-backed securities available for
     sale
    13,919       1,445  
Purchase of mortgage-backed securities available for sale
    (56,257 )     (2,102 )
Purchases of property and equipment
    (2,031 )     (611 )
Net decrease (increase) in loans
    1,873       (529 )
Proceeds from sale of repossessed assets
    452       -  
Net cash (used) provided by investing activities
    (42,044 )     9,855  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net decrease in deposits
    (8,503 )     (8,063 )
Net decrease in advances by borrowers for taxes and insurance
    (176 )     (361 )
Proceeds from FHLB advances
    9,300       137,760  
Repayment of FHLB advances
    (34,477 )     (149,024 )
Net proceeds from stock issuance and exchange pursuant to second step conversion
    88,356       -  
Proceeds from exercise of stock options
    328       182  
Excess tax benefit from equity compensation plans
            44  
Dividends paid
    (1,212 )     (638 )
Net cash provided (used) by financing activities
    53,616       (20,100 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    15,765       (5,827 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    20,588       18,385  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 36,353     $ 12,558  
 
(continues on next page)
 
 

5
 

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands) (Unaudited)
 
Six Months Ended
March 31,
 
   
2008
   
2007
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
           
Cash paid during the period for:
           
Interest
  $ 10,040     $ 10,866  
            Income taxes
    1,760       1,925  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Acquisition of real estate and other assets in settlement of loans
    780       -  
Fair value adjustment to securities available for sale, net of taxes
    2,776       102  
                 

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”).  The financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America 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 accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made.

The Company was formed as the new stock holding company for the Bank in connection with the Bank’s second-step conversion from the mutual holding company structure to the stock holding company structure (“Conversion”), which was completed on December 19, 2007.  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 (“Mid-Tier”), and the Mid-Tier was a subsidiary of Home Federal MHC, a federally-chartered mutual holding company.  The Bank formed the mutual holding company structure in December 2004.  As a result of the Conversion, Home Federal MHC and the Mid-Tier ceased to exist and were replaced by the Company as the successor to the Mid-Tier.  See Note 3 below for additional information regarding the Conversion.

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 Mid-Tier’s audited financial statements and notes included in the Annual Report on Form 10-K for the year ended September 30, 2007 (“2007 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on December 14, 2007.

Note 2 - Summary of Significant Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, mortgage servicing rights, and deferred income taxes to be critical accounting estimates.

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 future losses on loans.  The impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.

The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, the most critical of which is the mortgage loan prepayment speeds assumptions.  The Company performs a quarterly review of mortgage servicing rights for potential changes in value.  This review may include an independent appraisal by an outside party of the fair value of the mortgage servicing rights.

Deferred income taxes are computed using the asset and liability approach as prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes.  Under this method, a deferred tax asset or liability is determined based on the currently enacted tax rates applicable to the period in which the differences between the financial statement carrying amounts and tax basis of the existing assets and liabilities are expected to be reported in the Company’s income tax returns.


 

7
 

Note 3 – Second-step Conversion and Reorganization

The Company is a Maryland corporation that was formed as the new stock holding company for Home Federal Bank in connection with the Conversion, which was completed on December 19, 2007.

As part of the Conversion, a total of 9,384,000 new shares of the Company were sold at $10 per share in subscription, community and syndicated community offerings through which the Company received proceeds of approximately $88.4 million, net of offering costs of approximately $5.4 million. The Company contributed $48.3 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $8.2 million to the Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire 816,000 shares of the Company’s common stock at $10 per share. As part of the Conversion, shares of outstanding common stock of the Mid-Tier 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 853,133 outstanding shares of the Company for a total of 17,326,169 outstanding shares as of the closing of the second-step conversion on December 19, 2007.

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.

Note 4 – Income Taxes

 
At October 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").  FIN 48 requires recognition and measurement of uncertain tax positions using a "more-likely-than-not" approach.  FIN 48 is effective for fiscal years beginning after December 31, 2006.  The Company’s approach to adopting FIN 48 consisted of an examination of its financial statements, its income tax provision, and its federal and state income tax returns.  The Company analyzed its tax positions including the permanent and temporary differences as well as the major components of income and expense.
 
As of October 1, 2007, and March 31, 2008, the Company did not believe that it had any uncertain tax positions that would rise to the level of having a material effect on its financial statements.  In addition, the Company had no accrued interest or penalties as of October 1, 2007 or March 31, 2008.  It is the Company’s policy to record interest and penalties as a component of income tax expense.  The adoption of this accounting standard did not have a material impact on the Company’s financial position or results of operations.
 

Note 5 - Earnings Per Share

Earnings per share (“EPS”) is computed using the basic and diluted weighted average number of common shares outstanding during the period. Basic EPS is computed by dividing the Company’s net income by the weighted average number of common shares outstanding for the period.  Diluted EPS is computed by dividing net income by diluted weighted average shares outstanding, which include common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalents arise from assumed conversion of outstanding stock options awarded under the Company’s Stock Option and Incentive Plan (“SOP”) and from assumed vesting of shares awarded but not released under the Company’s Recognition and Retention Plan (“RRP”) plan.  ESOP shares are not considered outstanding for earnings per share purposes until they are committed to be released.  The decrease in weighted-average common shares outstanding for EPS purposes for the quarter ended March 31, 2008 is primarily attributable to the 816,000 shares that were acquired for the ESOP in connection with the Conversion.

 

8
 

The following table presents the computation of basic and diluted EPS for the periods indicated:
 
   
Three Months Ended
 March 31,
   
Six Months Ended
 March 31,
 
   
2008
   
2007
   
2008
   
2007
 
   
(in thousands, except share and per share data)
 
Basic EPS:
                       
Income available to common stockholders
  $ 945     $ 1,241     $ 1,892     $ 2,510  
Weighted-average common shares outstanding
    15,962,325       16,576,439       16,352,427       16,562,244  
Basic EPS
  $ 0.06     $ 0.08     $ 0.12     $ 0.15  
                                 
Diluted EPS:
                               
Income available to common stockholders
  $ 945     $ 1,241     $ 1,892     $ 2,510  
Weighted-average common shares outstanding
    15,962,325       16,576,439       16,352,427       16,562,244  
     Net effect of dilutive SOP awards     -        66,454        -       71,947  
     Net effect of dilutive RRP awards      15,892        47,701        22,024        48,131  
Weighted-average common shares outstanding and common stock equivalents
    15,978,217       16,690,594       16,374,451       16,682,322  
Diluted EPS
  $ 0.06     $ 0.07     $ 0.12     $ 0.15  
                                 


Note 6 - Mortgage-Backed Securities
 
Mortgage-backed securities available for sale consisted of the following:
 
   
March 31, 2008
 
   
Amortized
 Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
 Value
 
   
(in thousands)
 
Agency mortgage-backed securities
  $ 204,888     $ 1,626     $ (533 )   $ 205,981  
Non-agency mortgage-backed securities
    3,433       -       (175 )     3,258  
Total
  $ 208,321     $ 1,626     $ (708 )   $ 209,239  
                                 
   
September 30, 2007
 
Agency mortgage-backed securities
  $ 162,503     $ 191     $ (3,823 )   $ 158,871  
Non-agency mortgage-backed securities
    3,464       -       (77 )     3,387  
      Total
  $ 165,967     $ 191     $ (3,900 )   $ 162,258  
                                 


 

 

 

 

9
 

The fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of March 31, 2008 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)
 
Mortgage-backed
                                   
securities, available
                                   
for sale
  $ 61,923     $ (343 )   $ 20,164     $ (365 )   $ 82,087     $ (708 )
                                                 
Management has evaluated these securities and has determined that the decline in the value is 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 will be sufficient to recover the current amortized cost of the securities.  The Company has the ability and intent to hold the securities for a reasonable period of time for a forecasted recovery of the amortized cost.
 
As of March 31, 2008, the Bank had pledged mortgage-backed securities with an amortized cost of $86.4 million and a fair value of $86.4 million as collateral for FHLB advances.  Mortgage-backed securities with an amortized cost of $6.3 million and a fair value of $6.4 million at March 31, 2008, were pledged to the Federal Reserve Bank as collateral for treasury tax and loan funds held by the Bank and for borrowings from the discount window.  The Company has also pledged a mortgage-backed security with an amortized cost of $2.1 million and a fair value of $2.1 million as collateral for a $1.5 million revolving line of credit from the Bank.  As of March 31, 2008, there was no balance owed on the line of credit.
 

 

10
 

Note 7 - Loans Receivable
 
Loans receivable are summarized as follows:
 
   
March 31, 2008
   
September 30, 2007
 
   
Balance
   
Percent
of Total
   
Balance
   
Percent
 of Total
 
   
(dollars in thousands)
 
Real Estate:
                       
One- to four-family residential
  $ 230,016       47.78 %   $ 249,545       51.55 %
Multi-family residential
    6,770       1.41       6,864       1.42  
Commercial
    144,149       29.94       133,823       27.64  
Total real estate
    380,935       79.13       390,232       80.61  
                                 
Real Estate Construction:
                               
One- to four-family residential
    18,745       3.89       20,545       4.24  
Multi-family residential
    1,768       0.37       1,770       0.36  
Commercial
    12,981       2.70       13,691       2.83  
Acquisition and land development
    10,270       2.13       8,208       1.69  
Total real estate construction
    43,764       9.09       44,214       9.12  
                                 
Consumer:
                               
Home equity
    48,932       10.16       42,990       8.88  
Automobile
    2,073       0.43       2,173       0.45  
Other consumer
    1,258       0.26       1,405       0.29  
Total consumer
    52,263       10.85       46,568       9.62  
                                 
Commercial business
    4,497       0.93       3,122       0.65  
      481,459       100.00 %     484,136       100.00 %
Less:
                               
Deferred loan fees
    997               1,030          
Allowance for loan losses
    3,307               2,988          
Loans receivable, net
  $ 477,155             $ 480,118          

 
Note 8 – Mortgage Servicing Rights
 
Mortgage servicing rights represent the fair value of the future loan servicing fees from the right to service loans for others.  The unpaid principal balances of loans serviced at March 31, 2008 and September 30, 2007 were $177.0 million and $191.6 million, respectively.  Loans serviced for others are not included in the Consolidated Balance Sheets.  In general, during periods of falling interest rates, the mortgage loans prepay faster and the value of the mortgage servicing asset declines.  Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases as a result of slower rates of prepayments.  The Company does not use derivatives to hedge fluctuations in the fair value of the servicing rights.

As of October 1, 2006, the Company adopted SFAS No. 156, Accounting for Servicing of Financial Assets, to measure mortgage servicing rights using the fair value method.  As a result, the Company will measure each class of mortgage servicing rights at fair value at each reporting date, and report changes in fair value in earnings in the period in which the change occurs.  Prior to the adoption of SFAS No. 156, the Company elected to account for its mortgage servicing rights using the amortization method previously required by SFAS No. 140.

The Company has identified two classes of mortgage servicing assets based upon the nature of the collateral, interest rate mechanism and nature of the loan.  The Company uses an independent third party to periodically value the residential mortgage servicing rights using information such as anticipated prepayment speeds, discount rates and servicing fees associated with the type of loans sold.


 

11
 

Upon the change from the amortization method to fair value accounting under SFAS No. 156, the calculation of amortization and the assessment of impairment were discontinued.  Those measurements have been replaced by adjustments to fair value that encompass market-driven valuation changes.  Under the fair value method, the changes in fair value are reported in “Mortgage servicing rights, net” on the Consolidated Statements of Income.

The following table lists the classes of servicing rights and the activities in the balance of each class for the periods indicated:

   
Three Months Ended
 March 31,
   
Six Months Ended
March 31,
 
Servicing Right Classes
 
2008
   
2007
   
2008
   
2007
 
   
(in thousands)
 
One- to four-family residential loans:
                       
Beginning Balance
  $ 1,967     $ 2,387     $ 2,033     $ 2,468  
Additions for new mortgage
       servicing rights capitalized
    -       -       -       3  
Adjustments to fair value
    (73 )     (89 )     (139 )     (173 )
Ending Balance
  $ 1,894     $ 2,298     $ 1,894     $ 2,298  
                                 
Commercial real estate loans:
                               
Beginning Balance
  $ 12     $ 22     $ 14     $ 24  
Adjustments to fair value
    (3 )     (3 )     (5 )     (5 )
Ending Balance
  $ 9     $ 19     $ 9     $ 19  
                                 

The amount of contractually specified servicing fees for one- to four-family residential loans for the three and six months ended March 31, 2008 were $126,000 and $253,000, respectively.  The servicing fees for one- to four-family residential loans are recorded in “Loan Servicing Fees” on the Consolidated Statements of Income.  The amount of contractually specified servicing fees for commercial real estate loans, as well as late fees and other ancillary fees earned for the periods indicated, were immaterial in amount.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “intends,” “expects,” “anticipates,” “estimates” or similar expressions.  Forward-looking statements include, but are not limited to:

·  
statements of our goals, intentions and expectations;
·  
statements regarding our business plan, 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 as a result of, among others, the following factors:

·  
general economic conditions, including real estate values, either nationally or in the Company’s market area, that are worse than expected;
·  
changes in the interest rate environment that reduce the Company’s interest margins or reduce the fair value of financial instruments;
·  
increased competitive pressures among financial services companies;
·  
changes in consumer spending, borrowing and savings habits;
·  
legislative or regulatory changes that adversely affect the Company’s business;
·  
adverse changes in the securities markets; and

 

12
 

·  
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board.

These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.  The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof.

Overview

The Company is the successor to Home Federal MHC and the Mid-Tier in connection with the Conversion, which was completed on December 19, 2007.

On May 11, 2007, the Boards of Directors of the Company, Home Federal MHC and the Bank adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which the Bank reorganized from the mutual holding company structure to the stock holding company structure. Pursuant to the terms of the Plan, shares of outstanding common stock of the Mid-Tier were exchanged for 1.136 shares of the Company’s common stock. No fractional shares were issued.  The exchange ratio was designed to preserve the aggregate percentage ownership interest of the existing public shareholders of Mid-Tier following the sale of 10,200,000 shares of the Company’s common stock to the Bank’s eligible account holders, to the Bank’s tax-qualified employee benefit plans and to members of the general public. The Conversion was approved by the Bank’s depositors, the Company’s stockholders (including the approval of a majority of the shares held by persons other than Home Federal MHC) and regulatory agencies.  The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “HOME” and is included in the America’s Community Bankers NASDAQ Index.

The Bank was founded in 1920 as a building and loan association and reorganized as a federal mutual savings and loan association in 1936.  On December 6, 2004, the Bank reorganized into the two-tiered mutual holding company form of organization. In connection with that transaction, the Mid-Tier sold 40.00% of its outstanding shares of common stock (6,083,500 shares) to the public and issued 59.04% of its outstanding shares of common stock (8,979,246 shares) to Home Federal MHC, the mutual holding company parent of the Mid-Tier.  In connection with that transaction, the Mid-Tier also established and capitalized the Foundation with a $1.8 million one-time contribution, which consisted of 146,004 shares of its common stock and $365,010 in cash. As part of that transaction the Bank converted from a federally-chartered mutual savings and loan association to a federally-chartered stock savings bank and became the wholly owned subsidiary of the Mid-Tier.

The Bank is a community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses within its market area.  The Bank’s primary business is attracting deposits from the general public and using these funds to originate loans.  The Bank emphasizes the origination of commercial business loans, commercial real estate loans, construction, residential development, consumer loans, loans secured by first mortgages on owner-occupied, and residential real estate.  As a result of a comprehensive and continuing review of its strategic business plan, the Company continues to expand its commercial and small business banking programs, including a variety of loan and deposit products.

The Bank serves the Treasure Valley region of southwestern Idaho, that includes Ada, Canyon, Elmore and Gem counties, through its 16 full-service banking offices and one loan center.  Nearly 40% of the state’s population lives and works in the four counties served by Home Federal Bank.  Ada County has the largest population and includes the city of Boise, the state capitol.  Home Federal Bank maintains its largest branch presence in Ada County with eight locations, followed by Canyon County with five branches, including the Company’s corporate headquarters in Nampa.  The two remaining branches are located in Elmore and Gem Counties.

The local economy is primarily urban with the city of Boise being the most populous of the markets that the Bank serves, followed by Nampa, the state’s second largest city.  The area has experienced a slowdown in the residential housing market similar to the Nation as a whole.  Housing prices have declined, and single-family housing permits have decreased from prior year levels.  The regional economy is well diversified with government, healthcare, manufacturing, service, 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 and J.R. Simplot Company.  Other major employers include Hewlett-Packard, Supervalu, two regional medical centers and Idaho state government agencies.  The city of Boise is also home to Boise State University, the state’s largest and fastest growing university.

 

13
 

Critical Accounting Policies

Allowance for Loan Losses. Management recognizes that loan 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. The Company’s Asset Liability Management Committee assesses the allowance for loan losses on a quarterly basis. The Committee analyzes several different factors including delinquency rates, charge-off rates and the changing risk profile of our 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 future losses on loans. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

The Company’s methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits and a general allowance amount, including a range of losses. The specific allowance component is determined when management believes that the collectibility of a specific large 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 realized. 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. Due to 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 our historical loss experience.

The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.

The Company also estimates a reserve related to unfunded loan commitments.  In assessing the adequacy of the reserve, the Company uses a similar approach used in the development of the allowance for loan losses.  The reserve for unfunded loan commitments is included in other liabilities on the Consolidated Balance Sheets.  The provision for unfunded commitments is charged to noninterest expense.

Mortgage Servicing Rights. Mortgage servicing rights represent the present value of the future loan servicing fees from the right to service loans for others. The most critical accounting policy associated with mortgage servicing is the methodology used to determine the fair value of capitalized mortgage servicing rights, which requires the development of a number of estimates, the most critical of which are the mortgage loan prepayment rate assumptions. The mortgage loan prepayment rate assumptions are significantly impacted by interest rates. In general, during periods of falling interest rates, the mortgage loans prepay faster and the value of our mortgage servicing asset declines. Conversely, during periods of rising rates, the value of mortgage servicing rights generally increases due to slower rates of prepayments. The Company performs a quarterly review of mortgage servicing rights for potential changes in value. This review may include an independent appraisal by an outside party of the fair value of the mortgage servicing rights.

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 SFAS No. 109, Accounting for 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.

 

14
 


Comparison of Financial Condition at March 31, 2008 and September 30, 2007

General.  Total assets increased $58.2 million, or 8.2%, to $768.1 million at March 31, 2008 from $710.0 million at September 30, 2007.  The increase in total assets was attributable primarily to $88.4 million in net proceeds raised from the Company’s second-step conversion and stock offering completed on December 19, 2007.  Cash and due from other banks increased $15.8 million, or 76.6%, to $36.4 million.  Loans receivable, net, decreased $3.0 million, or 0.6%, to $477.2 million.  Mortgage-backed securities increased $47.0 million, or 28.9%, to $209.2 million.  Total deposits decreased $8.5 million, or 2.1%, to $396.1 million.  FHLB advances decreased $25.2 million, or 13.9%, to $155.6 million.

Assets.  For the six months ended March 31, 2008, total assets increased $58.2 million.  The increases and decreases were primarily concentrated in the following asset categories:

         
Increase (decrease)
 
   
Balance at
March 31,
 2008
   
Balance at
September 30,
2007
   
Amount
   
Percent
 
   
(dollars in thousands)
 
Cash and amounts due from
    depository institutions
  $ 36,353     $ 20,588     $ 15,765       76.6 %
Mortgage-backed securities,
    available for sale
    209,239       162,258       46,981       28.9  
Loans receivable, net of
    allowance for loan losses
    477,155       480,118       (2,963 )     (0.6 )

Cash and amounts due from depository institutions increased $15.8 million to $36.4 million at March 31, 2008, from $20.6 million at September 30, 2007.  The higher cash balance at March 31, 2008 is due to a portion of the proceeds from the Company’s second-step conversion and stock offering being invested in overnight funds at the end of the most recent quarter.

Mortgage-backed securities increased $47.0 million to $209.2 million at March 31, 2008, from $162.3 million at September 30, 2007.  The increase was primarily attributable to mortgage-backed securities purchased with proceeds from the Company’s second-step conversion and stock offering.

Loans receivable, net, decreased $3.0 million to $477.2 million at March 31, 2008, from $480.1 million at September 30, 2007.  One- to four-family residential mortgage loans decreased $19.9 million as the Company sold a majority of the one-to four-family loans that were originated.  Commercial loans increased $11.6 million to $155.4 million at December 31, 2007 from $143.8 million at September 30, 2007. Construction loans decreased $102,000 to $43.8 million at March 31, 2008 from $43.9 million at September 30, 2007.  The Bank has made significant progress in building commercial and small business banking programs, including the addition of an experienced commercial banking team to expand the commercial banking activities, including business banking, cash management and other products associated with a full-service commercial bank.



 

15
 

Deposits.  Deposits decreased $8.5 million, or 2.1%, to $396.1 million at March 31, 2008, from $404.6 million at September 30, 2007.  The increase in interest-bearing demand deposits was primarily attributed to growth in money market accounts as the Bank continued its emphasis on deposit products associated with a full-service commercial bank.  The decrease in certificates of deposit was primarily the result of choosing not to match rates offered by local competitors that in many cases exceeded the Bank’s cost of alternative funding sources.  The following table details the changes in deposit accounts:

         
Increase (decrease)
 
   
Balance at
March 31,
 2008
   
Balance at
September 30,
2007
   
Amount
   
Percent
 
   
(dollars in thousands)
 
                         
Noninterest-bearing demand deposits
  $ 37,323     $ 38,643     $ (1,320 )     (3.4 )%
Interest-bearing demand deposits
    142,820       127,659       15,161       11.9  
Savings deposits
    24,524       23,116       1,408       6.1  
Certificates of deposit
    191,439       215,191       (23,752 )     (11.0 )
Total deposit accounts
  $ 396,106     $ 404,609     $ (8,503 )     (2.10 )%

Borrowings.  FHLB advances decreased $25.2 million, or 13.9%, to $155.6 million at March 31, 2008, from $180.7 million at September 30, 2007.  The decrease resulted from maturing advances funded from excess liquidity.  The Bank uses FHLB advances as an alternative funding source to deposits, manage funding costs, reduce interest rate risk, and to leverage the balance sheet.

Deferred Income Tax Asset/Liability.  The Company had a deferred tax asset of $1.2 million at September 30, 2007 versus a deferred tax liability of $377,000 at March 31, 2008.  This change primarily resulted from a shift from an unrealized loss on the Company’s mortgage-backed securities’ portfolio as of September 30, 2007 to an unrealized gain as of March 31, 2008.

Equity.  Stockholders’ equity increased $92.7 million, or 82.3%, to $205.4 million at March 31, 2008, from $112.6 million at September 30, 2007.  The increase was primarily attributable to the $88.4 million in net proceeds received from the second-step conversion and stock offering.  The Company sold approximately 9.4 million shares of stock in its subscription, community and syndicated community offerings and issued approximately 7.1 million additional shares of its stock in exchange for the previously outstanding shares of Home Federal Bancorp, Inc., the Bank’s former “mid-tier” holding company.  A portion of the offering proceeds were used to make a loan to the Company’s employee stock ownership plan, which purchased 816,000 shares of the Company’s common stock for an aggregate cost of $8.2 million.  In addition, other significant activity among equity accounts over the past six months included $1.9 million in net income, the allocation of earned employee stock ownership plan shares, equity compensation and the exercise of stock options totaling $921,000, and a $2.8 million increase in the market value of mortgage-backed securities, offset by $1.2 million in cash dividends paid to stockholders.  On March 14, 2008, the Company paid $0.055 per share in cash dividends to stockholders of record as of February 27, 2008.
 

Comparison of Operating Results for the Three Months ended March 31, 2008 and March 31, 2007

General.  Net income for the three months ended March 31, 2008 was $945,000, or $0.06 per diluted share, compared to net income of $1.2 million, or $0.07 per diluted share, for the three months ended March 31, 2007.  Earnings per share for the prior period have been adjusted to reflect the impact of the second-step conversion and reorganization of the Company, which occurred on December 19, 2007.

Net Interest Income.  Net interest income increased $416,000, or 7.8%, to $5.8 million for the three months ended March 31, 2008, from $5.4 million for the three months ended March 31, 2007.  The increase in net interest income was primarily attributable to a lower balance of FHLB advances.  The decrease in FHLB advances resulted from maturing advances funded from excess liquidity.

The Company’s net interest margin increased 15 basis points to 3.15% for the quarter ended March 31, 2008, from 3.00% for the same quarter last year.  This increase was primarily attributable to the interest earnings on the proceeds of the second-step conversion and reorganization of the Company.  In addition, the deposit mix shift toward lower cost deposits also contributed to the increase.

 

16
 

The following table sets forth the impacts to the Company’s net interest income from changes in balances of interest earning assets and interest bearing liabilities as well as changes in interest rates.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the changes in rate and volume.

   
Three Months Ended March 31, 2008
Compared to Three Months Ended 
March 31, 2007
 
   
Increase (Decrease) Due to
       
   
Rate
   
Volume
   
Total
 
   
(in thousands)
 
Interest-earning assets:
                 
Loans receivable, net
  $ (142 )   $ (523 )   $ (665 )
Loans held for sale
    -       (35 )     (35 )
Investment securities, including interest-
    bearing deposits in other banks
    (7 )     502       495  
Mortgage-backed securities
    (34 )     (62 )     (96 )
FHLB stock
    22       -       22  
Total net change in income on interest-
    earning assets
  $ (161 )   $ (118 )   $ (279 )
                         
Interest-bearing liabilities:
                       
Savings deposits
  $ 20     $ (1 )   $ 19  
Interest-bearing demand deposits
    10       (21 )     (11 )
Money market accounts
    (12 )     148       136  
Certificates of deposit
    52       (329 )     (277 )
Total deposits
    70       (203 )     (133 )
FHLB advances
    61       (623 )     (562 )
Total net change in expense on interest-
    bearing liabilities
  $ 131     $ (826 )   $ (695 )
 Total increase in net interest income
                  $ 416  
                         


 

 
 

17
 

Interest and Dividend Income.  Total interest and dividend income for the three months ended March 31, 2008 decreased $279,000, or 2.6%, to $10.5 million, from $10.7 million for the three months ended March 31, 2007.  The decrease during the quarter is primarily attributable to a decrease on yields earned on interest earning assets.

The following table compares detailed average earning asset balances, associated yields, and resulting changes in interest and dividend income:

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Increase/
 
   
Average
Balance
   
Yield
   
Average
Balance
   
Yield
   
(Decrease) in Interest and Dividend
Income from
2007
 
   
(dollars in thousands)
 
                               
Loans receivable, net
  $ 479,822       6.45 %   $ 512,191       6.56 %   $ (665 )
Loans held for sale
    2,266       6.09       4,504       6.13       (35 )
Investment securities, available for
       sale, including interest-bearing
       deposits in other banks
    57,900       3.52       1,158       5.18       495  
Mortgage-backed securities
    182,865       4.70       188,113       4.77       (96 )
FHLB stock
    9,591       1.29       9,591       0.38       22  
Total interest-earning assets
  $ 732,444       5.71 %   $ 715,557       6.00 %   $ (279 )
                                         

Interest Expense.  Interest expense decreased $695,000, or 12.9%, to $4.7 million for the three months ended March 31, 2008 from $5.4 million for the three months ended March 31, 2007.  The average balance of total interest-bearing liabilities decreased $75.9 million, or 12.8%, to $518.5 million for the three months ended March 31, 2008 from $594.4 million for the three months ended March 31, 2007.  The largest single contributing factor to the decrease in interest bearing liabilities was the decrease in average FHLB advances of $54.3 million.

The following table details average balances, cost of funds and the change in interest expense:

   
Three Months Ended March 31,
 
   
2008
   
2007
   
Increase/
 
   
Average
Balance
   
Cost
   
Average
Balance
   
Cost
   
(Decrease) in Interest
Expense from
2007
 
   
(dollars in thousands)
 
                               
Savings deposits
  $ 22,776       0.70 %   $ 23,380       0.36 %   $ 19  
Interest-bearing demand
      deposits
    78,726       0.62       92,586       0.58       (11 )
Money market deposits
    59,902       2.75       38,409       2.87       136  
Certificates of deposit
    199,652       4.60       228,346       4.51       (277 )
FHLB advances
    157,444       4.60       211,721       4.48       (562 )
Total interest-bearing liabilities
  $ 518,500       3.61 %   $ 594,442       3.62 %   $ (695 )
                                         

Provision for Loan Losses.  A provision for loan losses of $378,000 was established in connection with an analysis of the loan portfolio for the quarter ended March 31, 2008, compared to no provision for loan losses for the same quarter of the prior year.  The increase in the provision reflects a potential increased level of risk associated with the Bank’s one to four family residential construction loans given the slowdown in the local residential real estate market, and impairments specifically identified with a purchased portfolio of $26.5 million one-to-four family residential loans secured by property located primarily in the Western United States.  While the Bank’s credit quality remains solid, Management continues to keep a watchful eye on the local market closely monitoring and

 

18
 

managing credit quality, specifically acquisition and development and real estate construction loans.  The Bank has recognized and identified the risk of acquisition and development lending and has limited its exposure in this area.  The Bank does not originate or purchase one- to four-family subprime loans.  While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provision that may be required will not adversely impact the Company’s financial condition and results of operations.  In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

Standard provisions for loan losses are established based upon the type of loan and the risk factors associated with that loan type.  As the Bank increases its commercial loan portfolio, the Bank anticipates it will increase its allowance for loan losses based upon the higher risk characteristics associated with commercial loans.  

The following table details selected activity associated with the allowance for loan losses:

   
At or For the Three Months
 Ended March 31,
 
   
2008
   
2007
 
   
(dollars in thousands)
 
Provision for loan losses
  $ 378     $ -  
Net charge-offs
    87       4  
Allowance for loan losses
    3,307       2,849  
Allowance for loan losses as a percentage of gross
    loans receivable at the end of the period
    0.69 %     0.56 %
Nonperforming loans
  $ 1,852     $ 273  
Allowance for loan losses as a percentage of
    nonperforming loans at the end of the period
    178.56 %     1,043.59 %
Nonaccrual and 90 days or more past due loans as a
    percentage of loans receivable at the end of the
    period
    0.39       0.05  
Loans receivable, net
  $ 477,155     $ 503,688  

Noninterest Income.  Noninterest income decreased $283,000, or 10.3%, to $2.5 million for the three months ended March 31, 2008 from $2.8 million for the three months ended March 31, 2007.  The decrease was primarily attributable to a $217,000 decrease in gain on sale of one-to four-family residential loans in the secondary market.  The decrease in the gain on sale of loans is a result of lower volume of sold loans consistent with the slowdown in the local residential real estate market.

The following table provides a detailed analysis of the changes in components of noninterest income:

   
Three Months Ended
March 31,
   
Increase (decrease)
 
   
2008
   
2007
   
Amount
   
Percent
 
   
(dollars in thousands)
 
                         
Service fees and charges
  $ 2,098     $ 2,222     $ (124 )     (5.6 )%
Gain on sale of loans
    162       379       (217 )     (57.3 )
Increase in cash surrender value
   of bank owned life insurance
    104       99       5       5.0  
Loan servicing fees
    126       142       (16 )     (11.3 )
Mortgage servicing rights, net
    (75 )     (92 )     17       18.5  
Other
    63       11       52       472.7  
Total noninterest income
  $ 2,478     $ 2,761     $ (283 )     10.3 %

Noninterest Expense.  Noninterest expense increased $325,000, or 5.3%, to $6.4 million for the three months ended March 31, 2008 from $6.1 million for the three months ended March 31, 2007.

 

19
 


The following table provides a detailed analysis of the changes in components of noninterest expense:

   
Three Months Ended
March 31,
   
Increase (decrease)
 
   
2008
   
2007
   
Amount
   
Percent
 
                         
   
(dollars in thousands)
 
                         
Compensation and benefits
  $ 4,053     $ 3,851     $ 202       5.3 %
Occupancy and equipment
    760       727       33       4.5  
Data processing
    531       493       38       7.7  
Advertising
    271       300       (29 )     (9.7 )