home-financials.htm

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

FORM 10-K

 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended September 30, 2008
or
 
 
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-52995

HOME FEDERAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Maryland                                                                                       68-0666697    
 (State or other jurisdiction of incorporation   (I.R.S. Employer   
 or organization)    Identification No.)
   
500 12th Avenue South, Nampa, Idaho                                                           83651            
 (Address of principal executive offices)      (Zip Code)    
   
 Registrant’s telephone number, including area code:      (208) 466-4634   
   
 Securities registered pursuant to Section 12(b) of the Act:  
   
            Common Stock, par value $.01 per share                                                   Nasdaq Global Market                        
                             (Title of Each Class)
(Name of Each Exchange on Which Registered) 
   
 Securities registered pursuant to Section 12(g) of the Act:            None           
   
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes [  ]  No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]  Accelerated filer [X]   Non-accelerated filer [  ]  Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ]  No [X]

As of December 3, 2008, there were 17,359,427 shares of the registrant’s common stock outstanding. The aggregate market value of the voting stock held by non­affiliates of the registrant based on the closing sales price of the registrant's common stock as quoted on The Nasdaq Global Market on March 31, 2008, was approximately $202,565,269 (16,880,439 shares at $12.00 per share).

DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part III - Portions of the Registrant’s definitive Proxy Statement for its 2009 Annual Meeting of Stockholders.
 
 


HOME FEDERAL BANCORP, INC.
2008 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
                
             
 
     Page #
 PART I.
     
 Item 1 - Business         2 
     
 Item 1A - Risk Factors       41 
     
 Item 1B - Unresolved Staff Comments  
    49 
         
 Item 2 - Properties        49 
     
 Item 3 - Legal Proceedings       51 
     
Item 4 - Submission of Matters to a Vote of Security Holders        51 
     
 PART II.
     
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and
 Issuer Purchases of Equity Securities  
       51 
     
Item 6 - Selected Financial Data        54 
     
 Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations       56 
     
Item 7A - Quantitative and Qualitative Disclosures About Market Risk        81 
     
Item 8 - Financial Statements and Supplementary Data        82 
     
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           117 
     
Item 9A- Controls and Procedures      117 
       
Item 9B - Other Information      118 
     
PART III.
     
Item 10 - Directors, Executive Officers and Corporate Governance      118 
     
Item 11 - Executive Compensation      118 
     
Item 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters                              
     119 
     
 Item 13 - Certain Relationships and Related Transactions, and Director Independence          119 
     
Item 14 - Principal Accounting Fees and Services      119 
     
PART IV. 
     
Item 15 – Exhibits, Financial Statement Schedules      119 
 
                                                                                                                                  


 
 
 

Forward-Looking Statements

“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This Form 10-K contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include:

 
•
statements of our goals, intentions and expectations;

 
•
statements regarding our business plans, prospects, growth and operating strategies;

 
•
statements regarding the quality of our loan and investment portfolios; and

 
•
estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 
•
general economic conditions, including real estate values, either nationally or in our market area, that are worse than expected;

 
•
changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 
•
the credit risk of lending activities, including risks related to construction and development lending and commercial and small business banking;

 
•
changes in the level and trend of loan delinquencies and write-offs;

 
•
results of examinations by banking regulators;

 
•
increased competitive pressures among financial services companies;

 
•
changes in consumer spending, borrowing and savings habits;

 
•
our ability to successfully manage our growth;

 
•
changes in the value of mortgage servicing rights;

 
•
legislative or regulatory changes that adversely affect our business;

 
•
adverse changes in the securities markets; and

 
•
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.

Any of the forward-looking statements that we make in this annual report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements.



 
1 
 

PART I

Item 1. Business

Organization.

Home Federal Bancorp, Inc. (“old Home Federal Bancorp”) was organized as a federally chartered stock corporation at the direction of Home Federal Savings and Loan Association of Nampa (“Association”) in connection with its mutual holding company reorganization (“Reorganization”). On December 6, 2004, the Association completed the Reorganization and minority stock offering. In connection with the Reorganization, the Association converted to a federally chartered stock savings bank and changed its name to Home Federal Bank (the “Bank”). Old Home Federal Bancorp sold 40.06% 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 old Home Federal Bancorp. In connection with the Reorganization, the old Home Federal Bancorp received $53.6 million in net proceeds after deducting expenses, and issued an additional 146,004 shares and $365,010 in cash to the Home Federal Foundation, Inc. (the “Foundation”), a charitable foundation established as part of the Reorganization.

On May 11, 2007, the Boards of Directors of Home Federal MHC, old Home Federal Bancorp, Inc., and Home Federal Bank adopted a Plan of Conversion and Reorganization (the “Conversion”) pursuant to which Home Federal Bank reorganized from the mutual holding company structure to the stock holding company structure. Pursuant to the terms of the Plan, Home Federal MHC converted to a federal interim stock savings bank and simultaneously merged with and into Home Federal Bank, with Home Federal Bank as the survivor. Additionally, Home Federal Bancorp, Inc. converted to a federal interim stock savings bank and simultaneously merged with and into Home Federal Bank, with Home Federal Bank as the survivor. Home Federal Bank then formed a new stock holding company, Home Federal Bancorp, Inc. (“we”, “us”, the “Company” or “Home Federal Bancorp”), that serves as the holding company for Home Federal Bank. Home Federal Bancorp, Inc., is a Maryland corporation. The conversion was completed on December 19, 2007.

As part of the Conversion, a total of 9,384,000 new shares of the Company were sold at $10 per share in subscription, community and syndicated community offerings through which the Company received proceeds of approximately $87.8 million, net of offering costs of approximately $5.9 million. The Company contributed $48.0 million or approximately 50% of the net proceeds to the Bank in the form of a capital contribution. The Company loaned $8.2 million to the Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds to acquire 816,000 shares of the Company’s common stock at $10 per share. As part of the Conversion, shares of outstanding common stock of the old Home Federal Bancorp were exchanged for 1.136 shares of the Company’s common stock. No fractional shares were issued. Instead, cash was paid to stockholders at $10 per share for any fractional shares that would otherwise be issued. The exchange resulted in an additional 853,133 outstanding shares of the Company for a total of 17,326,169 outstanding shares as of the closing of the Conversion on December 19, 2007.

The Conversion was accounted for as reorganization in corporate form with no change in the historical basis of the Company’s assets, liabilities or stockholders’ equity. All references to the number of shares outstanding, including references for purposes of calculating per share amounts, are restated to give retroactive recognition to the exchange ratio applied in the Conversion.

Business.

Home Federal Bancorp’s business activity is the ownership of the outstanding capital stock of Home Federal Bank and management of the investment of offering proceeds retained from the Reorganization and the Conversion. Home Federal Bancorp neither owns nor leases any property but instead uses the premises, equipment and other property of Home Federal Bank with the payment of appropriate management fees, as required by applicable law and regulations. In the future, Home Federal Bancorp may acquire or organize other operating subsidiaries; however, there are no current plans to do so. Home Federal Bancorp has no significant assets, other than cash and cash equivalents, mortgage-backed securities and all of the outstanding shares of Home Federal, and no significant liabilities.
 
 
2

Home Federal Bank was founded in 1920 as a building and loan association and reorganized as a federal mutual savings and loan association in 1936. Home Federal Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable legal limits under the Deposit Insurance Fund. The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. Home Federal Bank is regulated by the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”).

We are in the business of attracting deposits from consumers and businesses in our market areas and utilizing those deposits to originate loans. We offer a wide range of loan products to meet the credit needs of our customers. Historically, lending activities have been primarily directed toward the origination of residential and commercial real estate loans. Residential real estate lending activities have been primarily focused on first mortgages on owner occupied, one- to four-family residential properties. The Bank now originates nearly all of its one- to four- family residential loans for sale in the secondary market.

The Board of Directors and the management team have recently undertaken efforts to change the Company’s strategy from that of a traditional thrift to a full-service community bank. This transition includes a reduced reliance on one- to four- family loans originated for the Bank’s portfolio. As a result, the Bank’s lending activities have expanded to include commercial business lending, including commercial real estate and builder finance. While continuing our commitment to residential lending through our secondary market program, management expects commercial lending to become increasingly important for the Company.

At September 30, 2008, the Company had total assets of $725.1 million, net loans of $459.8 million, deposit accounts of $372.9 million and stockholders’ equity of $205.2 million.

Operating Lines

Home Federal Bancorp’s sole subsidiary is Home Federal Bank. Management has determined that the Bank as a whole is the sole reporting unit and that no reportable operating segments exist other than Home Federal Bank.

Market Area

Home Federal Bank serves the Boise, Idaho, and surrounding metropolitan statistical area (“MSA”) known as the Treasure Valley region of southwestern Idaho, which includes Ada, Canyon, Elmore and Gem counties. We have 15 full-service banking offices, one loan center, 16 automated teller machines and Internet banking services. Included in our 15 full-service banking offices are five Wal-Mart in-store branch locations. For more information, see "Item 2. Properties."

Home Federal Bank maintains its largest branch presence in Ada County with eight locations, followed by Canyon County with five offices, including Home Federal Bank’s corporate headquarters in Nampa. As of June 30, 2008, the Bank had a 5.12% market share of the FDIC-insured deposits in these two counties, ranking it seventh among all insured depository institutions in these counties, according to the FDIC. The two remaining branches are located in Elmore and Gem counties.

The local economy is primarily urban with Boise, the state capital of Idaho, being the most populous of the markets that the Bank serves, followed by Nampa, the state's second largest city. Nearly 40% of the state’s population lives and works in the four counties of Ada, Canyon, Elmore and Gem that are served by Home Federal Bank. Of the four counties, Ada County has the largest population followed by Canyon County. The counties of Elmore and Gem are more rural and less populated than Ada and Canyon counties.

 
3 
 

The following table summarizes key economic and demographic information about these market areas:

 
Ada
Canyon
Elmore
Gem           
US          
Median Household Income
$   64,149
$48,365
$  45,108
$  43,426
$  54,749
  Change 2000 – 2008
38.9%
34.9%
27.9%
26.2%
29.8%
           
Population
384,329
186,223
29,849
17,475
  
  Change 2000 – 2008
27.7%
41.7%
2.5%
15.1%
9.9%
     
 
   
Unemployment Rate
          
  September 2008
4.5%
5.6%
4.8%
5.5%
6.1%
  September 2007
2.1   
2.5   
2.9   
2.0   
4.7   
           
Total Industry Deposits (millions)
          
  June 2008
$    6,244
$    1,467
$      355
$      145
  
  June 2007
6,549
1,525
349
156
  
           
Home Federal Bank’s Deposit
          
  Market Share, June 2008
2.6%
15.0%
15.6%
21.7%
  
           
Source: FDIC, SNL Financial, Bureau of Labor Statistics

The regional economy is well diversified with government, healthcare, manufacturing, high technology, call centers and construction providing sources of employment. In addition, agriculture and related industries continue to be key components of the economy in southwestern Idaho. Generally, sources of employment are concentrated in Ada and Canyon counties and include the headquarters of Micron Technology, J.R. Simplot Company and Boise Cascade, LLC. Other major employers include Hewlett-Packard, Supervalu, two regional medical centers and Idaho state government agencies. Boise is also home to Boise State University, the state's largest university.

The Treasure Valley has enjoyed strong population growth over the last five years, which led to an increase in residential community developments. The current economic slowdown, which has been led by significant deterioration in residential home sales, has caused acceleration in unemployment in the Treasure Valley. This slowdown has created an over-supply of speculative construction and land development projects. While the unemployment rate in the Treasure Valley is still below the national average, the rate of increase has outpaced national unemployment levels in the second half of fiscal 2008. Micron Technologies and Hewlett Packard have each announced layoffs, which will continue to place strain on the local economy and residential housing. Continued deterioration in the local economy may result in additional losses in the Bank’s loan portfolio, restrict management’s ability to execute the Company’s growth plans or impact the Bank’s liquidity due to a shrinking deposit base.

Operating Strategy

Management’s operating strategy centers on the continued development into a full service, community-oriented bank from a traditional savings and loan business model. Our goal is to continue to enhance our franchise value and earnings through controlled growth in our banking operations, especially small business lending, while maintaining the community-oriented customer service and sales focus that has characterized our success to date. In order to be successful in this objective and increase stockholder value, we are committed to the following strategies:

Continue Growing in Our Existing Markets. We believe there is a large customer base in our market that is dissatisfied with the service received from larger regional banks. By offering quicker decision making in the delivery of banking products and services, offering customized products where appropriate, and providing customer access to our senior managers, we hope to distinguish ourselves from larger, regional banks operating in our market areas.

Expand Our Product Offerings. We intend to continue our emphasis on originating commercial lending products that diversify our loan portfolio by increasing the percentage of assets consisting of higher-yielding commercial real estate and commercial business loans with higher risk adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, while still providing high quality loan products for single-family residential borrowers. We
 
 
4
 
also intend to selectively add products to provide diversification of revenue sources and to capture our customer’s full relationship by cross selling our loan and deposit products and services to our customers.

Focus on our Branch Expansion. Branch expansion has played a significant role in our ability to grow loans, deposits and customer relationships. We are planning two new branches that we intend to open within the next 12 months. We recently completed construction of a branch in Boise, Idaho, that opened in October 2008. Our long-term strategy is to build two or three branches per year if appropriate sites can be identified and obtained. We will also actively search for appropriate acquisitions to enhance our ability to deliver products and services in our existing markets and to expand into surrounding markets.

Increase Our Core Transaction Deposits. A fundamental part of our overall strategy is to improve both the level and the mix of deposits that serve as a funding base for asset growth. By growing demand deposit accounts and other transaction accounts, we intend to reduce our reliance on higher-cost certificates of deposit and borrowings such as advances from the Federal Home Loan Bank of Seattle. In order to expand our core deposit franchise, we are focusing on introducing additional products and services to obtain money market and time deposits by bundling them with other consumer services. Business deposits are being pursued by the introduction of cash management products and by specific targeting of small business customers.

Hire Experienced Employees With a Customer Service Focus. Our ability to continue to attract and retain banking professionals with strong business banking and service skills, community relationships and significant knowledge of our markets is key to our success. We believe that by focusing on hiring experienced bankers who are established in their communities, we enhance our market position and add profitable growth opportunities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete by relying on the strength of our customer service and relationship banking approach.

Develop and nurture an internal management culture which is driven by a focus on profitability, productivity and accountability for results and which responds proactively to the challenge of change. The primary method for reinforcing our culture is the comprehensive application of our “Pay for Performance” total compensation program. Every employee has clearly defined accountabilities and performance standards that tie directly or indirectly to our profitability. All incentive compensation is based on specific profitability measures, sales volume goals or a combination of specific profitability measures and individual performance goals. This approach encourages all employees to focus on our profitability and has created an environment that embraces new products, services and delivery systems.

Lending Activities

General. Historically, our principal lending activity has consisted of the origination of loans secured by first mortgages on owner-occupied, one- to four-family residences and loans for the construction of one- to four-family residences. We also originate consumer loans, with an emphasis on home equity loans and lines of credit. Commensurate with our transformation from a traditional thrift to a full-service community bank, we have been offering commercial real estate loans and to a lesser extent, multi-family loans, primarily in the Treasure Valley. While we intend to increase our commercial and industrial loans, a substantial portion of our loan portfolio is currently secured by real estate, either as primary or secondary collateral, located in the Treasure Valley.

At September 30, 2008, the maximum amount of credit that we could have extended to any one borrower and the borrower's related entities under applicable regulations was $22.7 million. Our internal policy limits loans to one borrower and the borrower's related entities to 80% of the regulatory limit, or $18.2 million. At September 30, 2008, the Company had no borrowing relationship with outstanding balances in excess of this amount. Our largest single borrower relationship at September 30, 2008 included four loans totaling $5.1 million  secured by commercial real estate.  The second largest lending relationship included five commercial real estate loans totaling $5.0 million.  Our third largest borrower relationship was five commercial real estate secured loans and one single family construction loan totaling $5.0 million.  The fourth largest lending relationship was two commercial acquisition and development loans and a letter of credit totaling $4.6 million.  The fifth largest lending relationship included four commercial real estate secured loans and a home equity line of credit totaling $4.1 million.  All of these loans, including those made to corporations, have personal guarantees in place as an additional source of repayment and are secured by property or assets in our primary market area.  These loans were performing according to their terms at September 30, 2008.
 
 
5
 
During fiscal year 2008, our Senior Management Loan Committee, which consists of the President and Chief Executive Officer, the Executive Vice President/Commercial Banking and the Senior Vice President/Chief Credit Officer, was authorized to approve loans to one borrower or a group of related borrowers of up to $7.0 million in the aggregate with no single loan exceeding $3.5 million.  Loan requests in excess of $7.0 million in the aggregate were presented to the Loan Committee of the Board of Directors for review and approval. The entire board comprises that committee. In November 2008, we changed these limits to reduce the aggregate lending limit for the Senior Management Loan Committee to $5.0 million, with relationships over $5.0 million requiring board approval. The single loan limit was increased to $5.0 million at that time.




 
6 
 


Loan Portfolio Analysis. The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated.

 
At September 30,
 
2008
  
2007
  
2006
  
2005
  
2004
 
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
                 
(in thousands)
                
Real estate:
                                      
One- to four-family residential (1)
$210,501
  
 45.23%
  
$249,545
  
51.55%
  
$293,640
  
57.88%
  
$252,126
   
  58.00%
  
$242,818
  
61.27%
Multi-family residential
8,477
 
   1.82
  
6,864
  
 1.42
  
7,049
 
  1.39 
  
5,454
  
    1.25 
  
6,265
  
1.58
Commercial
151,733
  
 32.61
  
133,823
  
27.64
  
125,401
  
24.72 
  
116,432
  
  26.78 
  
93,575
  
23.61
Total real estate
370,711
  
 79.66
  
390,232
  
80.61
  
426,090
  
83.99
  
374,012
    
  86.03
  
342,658
  
86.46
 
 
                                   
    Real estate construction:
                                      
One- to four-family residential
13,448
  
   2.89
  
20,545
  
4.24
  
23,678
  
  4.67
  
14,421
  
    3.32
  
7,207
  
1.82
Multi-family residential
920
  
   0.20
  
1,770
  
0.37
  
--
  
  --
  
1,427
  
    0.33
  
834
  
0.21
Commercial and land development
18,674
  
   4.01
  
21,899
  
4.52
  
16,344
  
  3.22
  
7,470
  
    1.72
  
11,151
  
2.81 
Total real estate construction
33,042
  
   7.10
  
44,214
  
9.13
  
40,022
  
  7.89
  
23,318
  
    5.37
  
19,192
  
4.84
     
 
     
 
                       
    Consumer:
                                      
Home equity
52,954
  
 11.38
  
42,990
  
8.88
  
34,143
  
  6.73
  
28,558
  
    6.57
  
27,351
  
6.90
Automobile
1,903
  
   0.41
  
2,173
  
0.45
  
3,245
  
  0.64
  
4,576
  
    1.05
  
3,838
  
0.97
Other consumer
1,370
  
   0.29
  
1,405
  
0.29
  
1,300
  
  0.26
  
1,530
  
    0.35
  
1,949
  
0.49
Total consumer
56,227
  
  12.08
  
46,568
  
9.62
  
38,688
  
  7.63
  
34,664
  
    7.97
  
33,138
  
8.36
             
 
                       
    Commercial business
5,385
  
    1.16
  
3,122
  
0.64
  
2,480
  
 0.49
  
2,759
  
    0.63
  
1,363
  
0.34 
 
465,365
  
100.00%
  
484,136
  
   100.00%  
  
507,280
  
   100.00%
  
434,753
  
100.00%
  
396,351
 
100.00%
     Less:
                                      
Deferred loan fees
973
      
1,030
      
1,241
      
927
      
1,080   
   
Allowance for loan losses
4,579
      
2,988
      
2,974
      
2,882
      
2,637   
   
    Loans receivable, net
$459,813
      
$480,118
      
$503,065
      
$430,944
      
$392,634
    
 
________
(1)
Does not include loans held for sale of $2.8 million, $4.9 million, $4.1 million, $5.5 million, and $3.6 million at September 30, 2008, 2007, 2006, 2005 and 2004, respectively.


 
7 
 


The following table shows the composition of the Company’s loan portfolio by fixed and adjustable rate loans at the dates indicated.

 
At September 30,
 
2008
  
2007
  
2006
  
2005
  
2004
 
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
                 
(in thousands)
                
FIXED RATE LOANS
                                      
Real estate:
                                      
One- to four-family residential
$134,772
  
28.96%
  
$159,099
  
32.87%
  
$188,102
  
37.08%
  
$199,352
  
45.86%
  
$193,241
  
48.76%
Multi-family residential
1,947
  
  0.42
  
1,993
  
  0.41
  
2,055
  
  0.41 
  
2,119
  
  0.48 
  
2,136
  
   0.54 
Commercial
20,125
  
  4.32
  
21,345
  
  4.41
  
19,236
  
  3.79 
  
16,303
  
  3.74 
  
12,428
  
   3.13 
Total real estate
156,844
  
33.70
  
182,437
  
37.69
  
209,393
  
41.28
  
217,774
  
50.08
  
207,805
  
52.43
                                       
    Real estate construction:
                                      
One- to four-family residential
1,370
  
  0.29
  
1,488
  
  0.31
  
16,797
  
  3.31
  
3,391
    
  0.78
  
2,778
  
  0.70
Multi-family residential
--
    
    --
  
--
  
    --
  
--
   
    --
  
--
   
    --
  
--
  
  --
Commercial and land development
2,973
  
  0.64
  
5,102
    
  1.05
  
5,967
  
  1.18
  
1,838
  
  0.42
  
312
  
  0.08 
Total real estate construction
4,343
  
  0.93
  
6,590
  
  1.36
  
22,764
  
  4.49
  
5,229
  
  1.20
  
3,090
  
  0.78 
                                     
 
    Consumer:
                                      
Home equity
17,239
  
  3.71
  
14,860
  
  3.07
  
9,723
  
  1.92
  
4,903
  
  1.13
  
4,393
  
  1.11
Automobile
1,903
  
  0.41
  
2,173
  
  0.45
  
3,245
  
  0.64
  
4,576
  
  1.05 
  
3,838
  
  0.97
Other consumer
1,370
  
  0.29
  
1,405
  
  0.29
  
1,300
  
  0.26
  
1,530
    
  0.35
  
1,949
  
  0.49
Total consumer
20,512
  
  4.41
  
18,438
  
  3.81
  
14,268
  
  2.82
  
11,009
  
  2.53
  
10,180
  
  2.57
         
 
                         
 
    Commercial business
1,543
  
  0.34
  
1,073
  
  0.22
  
622
  
  0.12
  
1,091
  
  0.25
  
642
  
  0.16 
Total fixed rate loans
$183,242
  
39.38%
  
$208,538
  
43.08%
  
$247,047
  
48.71%
  
$235,103
  
54.06%
  
$221,717
  
   55.94%

                                    (table continues on following page)
 
 
8

                                    (table continued from previous page)

 
At September 30,
 
2008
  
2007
  
2006
  
2005
  
2004
 
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
                 
(in thousands)
                
ADJUSTABLE RATE LOANS
                                      
Real estate
                                      
One- to four-family residential
$75,729
  
16.27%
  
$90,446
  
18.68%
  
$105,538
  
20.80%
  
$52,774
  
12.14%
  
$49,577
  
12.51%
Multi-family residential
6,530
  
  1.40
  
4,871
  
  1.01
  
4,994
  
  0.98 
  
3,335
  
  0.77 
  
4,129
  
  1.04 
Commercial
131,608
  
28.29
  
112,478
  
23.23
  
106,165
  
20.93
  
100,129
  
23.04
  
81,147
  
20.48 
Total real estate
213,867
  
45.96
  
207,795
  
42.92
  
216,697
  
42.71
  
156,238
  
35.95
  
134,853
  
34.03
                                       
    Real estate construction:
                                      
One- to four-family residential
12,078
  
  2.60
  
19,057
  
  3.93
  
6,881
  
  1.36
  
11,030
  
  2.54
  
4,429
  
  1.12
Multi-family residential
920
  
  0.20
  
1,770
  
  0.37
  
--
   
    --
  
1,427
  
  0.33 
  
834
  
  0.21
Commercial and land development
15,701
  
  3.37
  
16,797
  
  3.47
  
10,377
  
  2.04
  
5,632
    
  1.30
  
10,839
  
  2.73 
Total real estate construction
28,699
  
  6.17
  
37,624
  
  7.77
  
17,258
  
  3.40
  
18,089
  
  4.17
  
16,102
    
  4.06
     
 
                               
    Consumer:
                                      
Home equity
35,715
  
  7.67
  
28,130
  
  5.81
  
24,420
  
  4.81
  
23,655
  
  5.44
  
22,958
  
  5.79
Automobile
--
  
    --
  
--
   
    --
  
--
  
    --
  
--
  
    --
  
--
  
    --
Other consumer
--
  
    --
  
--
  
    --
  
--
  
    --
  
--
  
    --
  
--
  
    --
Total consumer
35,715
  
  7.67
  
28,130
  
  5.81
  
24,420
  
  4.81
  
23,655
  
  5.44
  
22,958
  
  5.79
                                       
    Commercial business
3,842
  
  0.82
  
2,049
  
  0.42
  
1,858
  
  0.37 
  
1,668
  
  0.38 
  
721
  
  0.18 
    Total adjustable rate loans
282,123
  
60.62
  
275,598
  
56.92
  
260,233
  
51.29
  
199,650
  
45.94
  
174,634
  
44.06 
                                       
    Total loans
465,365
  
   100.00%
  
484,136
  
   100.00%
  
507,280
  
    100.00%
  
434,753
  
   100.00%
  
396,351
  
   100.00%
    Less:
        
 
                           
Deferred loan fees
973
      
1,030
      
1,241
      
927
      
1,080
    
Allowance for loan losses
4,579
      
2,988
      
2,974
      
2,882
      
2,637
    
Loans receivable, net
$459,813
      
$480,118
      
$503,065
      
$430,944
      
$392,634
    
 
 
 
9

 
One- to Four-Family Residential Real Estate Lending. We originate both fixed-rate loans and adjustable-rate loans in our residential lending program. Generally, these loans are originated to meet the requirements of Fannie Mae and Freddie Mac for sale in the secondary market. We do from time to time, however, retain some of these loans in our loan portfolio to meet asset and liability management objectives.

We offer adjustable-rate mortgage loans at rates and terms competitive with market conditions. Presently, most of the adjustable-rate mortgage loans are originated for the purpose of selling them in the secondary market. We offer several adjustable-rate mortgage products that adjust annually after an initial period ranging from one to ten years. Contractual annual adjustments are generally limited to increases or decreases of no more than two percent, subject to a maximum increase of no more than six percent from the rate offered at the time of origination. The adjustable-rate mortgage loans held in our portfolio do not permit negative amortization of principal and generally carry no prepayment restrictions. Borrower demand for adjustable-rate mortgage loans versus fixed rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of interest rates and the difference between the initial interest rates and fees charged for each type of loan. The relative amount of fixed rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

Adjustable-rate mortgage loans in our loan portfolio help us reduce our exposure to changes in interest rates. There are, however, credit risks resulting from the potential of increased interest to be paid by the borrower as a result of increases in interest rates. It is possible that, during periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase as a result of repricing and the increased costs to the borrower. Furthermore, because adjustable-rate mortgage loans may be offered at initial rates of interest below the rates that would apply were the adjustment index used for pricing initially, these loans may be subject to increased risks of default or delinquency. Another consideration is that although adjustable-rate mortgage loans allow us to decrease the sensitivity of our asset base as a result of changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, there is no assurance that yields on adjustable-rate mortgage loans will be sufficient to offset increases in our cost of funds, particularly in today’s interest rate environment. The Bank does not hold one- to four- family residential real estate loans that have “option payment” or negative amortization features at September 30, 2008.

We generally underwrite our one- to four-family loans based on the applicant's employment, debt to income levels, credit history and the appraised value of the subject property. Generally, we lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family residential loans. In situations where we grant a loan with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure to 80% or less. Properties securing our one- to four-family loans are generally appraised by independent fee appraisers that have been approved by us. We require our borrowers to obtain title and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements.

Our fixed-rate, single family residential mortgage loans are normally originated with 15 to 30 year terms, although these loans typically remain outstanding for substantially shorter periods. In addition, substantially all residential mortgage loans in our loan portfolio contain due-on-sale clauses, which allow us to declare the unpaid amount of the loan due and payable upon the sale of the property securing the loan. Typically, we enforce these due-on-sale clauses to the extent permitted by law and as a standard course of business. The average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

At September 30, 2008, $31.7 million, or 15.0%, of our one- to four-family residential mortgages consisted of loans for non-owner occupied properties. This consisted of $6.1 million of loans on second homes and $25.6 million of loans for investment. Non-owner occupied loans secured by one to two units are generally made with loan-to-value ratios of up to 90% and non-owner occupied loans secured by three units or more are generally made with loan-to-value ratios of up to 75%. In situations where we grant a loan with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure to 80% or less. As of September 30, 2008, delinquent non-owner occupied loans made up 3.5% of total non-owner occupied residential mortgages.  Delinquent owner-occupied properties were 0.7% of total owner-occupied residential mortgages.

In an effort to provide financing for moderate income and first-time buyers, we participate in the Idaho Housing and Finance Association's Single Family Mortgage Program. The Idaho Housing and Finance Association is a non-profit
 
 
10
 
organization that provides housing resources to low to moderate-income families through various below market housing programs. The program is designed to meet the needs of qualified borrowers in the low-to moderate-income brackets. The program has established income limits based on family size and sales price limits for both existing and new construction. We offer residential mortgage loans through this program to qualified individuals and originate the loans using modified underwriting guidelines. All of these loans have private mortgage insurance on the portion of the principal amount that exceeds 80% of the appraised value of the property. Approximately $8.7 million of loans were sold to the Idaho Housing and Finance Association in the year ended September 30, 2008.

The Idaho Housing and Finance Association has designed two programs to provide down payment and/or closing cost assistance to qualified low-to-moderate income borrowers in Idaho. The assistance consists of grant programs and a second mortgage for a maximum combined loan-to-value of 102%. The grant program is open to first time homebuyers whose total household income is equal to or less than 80% of the Area Median Income based on the property location and the total number of household members. The subsidy assistance can range up to a maximum of $20,000, based on need.

Real Estate Construction. We have been an active originator of real estate construction loans in our market area for many years. At September 30, 2008, our construction and land development loans amounted to $33.0 million, or 7.1%, of the total loan portfolio.

The following table shows the composition of the construction loan portfolio at the dates indicated:

 
At September 30,
 
2008
  
2007
 
(in thousands)
One- to four-family residential:
      
Speculative
$11,324
  
$15,672
Permanent
--
  
347
Custom
2,124
  
4,526
       
Multi-family residential
920
  
1,770
       
Commercial real estate:
      
Construction
6,181
  
13,691
Land development loans
12,493
  
8,208
Total construction and land development
$33,042
  
$44,214

We reduced our exposure to speculative construction loans in response to the general slowdown in residential construction projects in the Treasure Valley during fiscal 2008. Total originations of construction loans declined by 48% and 59% during fiscal 2008 compared to fiscal 2007 and 2006, respectively.

Our construction loans to individuals to build their personal residences typically are structured as construction/permanent loans whereby there is one closing for both the construction loan and the permanent financing. During the construction phase, which typically lasts for six months, our staff appraiser or an approved fee inspector makes periodic inspections of the construction site and loan proceeds are disbursed directly to the contractors or borrowers as construction progresses. Typically, disbursements are made in five draws during the construction period. Construction loans require payment of interest only during the construction phase and are structured to be converted to fixed or adjustable rate permanent loans at the end of the construction phase. Prior to making a commitment to fund a construction loan, we require an appraisal of the property by an independent fee appraiser. Our staff appraiser or an approved fee inspector also reviews and inspects each project prior to each disbursement of funds during the term of the construction loan. Loan proceeds are disbursed based on a percentage of completion.

During the year ended September 30, 2008, we originated $12.8 million of short-term builder construction loans to fund the construction of one- to four-family residential properties. Most loans are written with maturities of one year, have interest rates that are tied to The Wall Street Journal Prime rate plus a margin, and are subject to monthly rate adjustments tied to the movement of the prime rate. All builder/borrowers are underwritten to the same
 
 
11
 
standards as other commercial loan credits, requiring minimum debt service coverage ratios and established cash reserves to carry projects through construction completion and sale of the project. The maximum loan-to-value ratio on both pre-sold and speculative projects is 80%.

We originate construction and site development loans to contractors and builders primarily to finance the construction of single-family homes and subdivisions, which homes typically have an average price ranging from $150,000 to $400,000. Loans to finance the construction of single-family homes and subdivisions are generally offered to experienced builders in our primary market areas. The maximum loan-to-value limit applicable to these loans is generally up to 80% of the appraised market value upon completion of the project. We generally do not require any cash equity from the borrower if there is sufficient equity in the land being used as collateral. Development plans are required from builders prior to making the loan. Our Chief Appraiser is required to personally visit the proposed site of the development and the sites of competing developments. We require that builders maintain adequate insurance coverage. Maturity dates for residential construction loans are largely a function of the estimated construction period of the project, and generally do not exceed 36 months for residential subdivision development loans. Substantially all of our residential construction loans have adjustable rates of interest based on the Wall Street Journal prime rate and during the term of construction, the accumulated interest is added to the principal of the loan through an interest reserve. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by our approved inspectors warrant. At September 30, 2008, our largest subdivision development loan had a commitment for $3.5 million and an outstanding principal balance of $351,000. This loan was secured by a first mortgage lien and was performing according to its original terms at September 30, 2008. At September 30, 2008, the average outstanding principal balance of subdivision loans to contractors and developers was $1.0 million.

We also make construction loans for commercial development projects. These projects include multi-family, apartment, retail, office/warehouse and office buildings. These loans generally have an interest-only phase during construction, and generally convert to permanent financing when construction is completed. Disbursement of funds is at our sole discretion and is based on the progress of construction. The maximum loan-to-value limit applicable to these loans is 80% of the appraised post-construction value.

We originate land loans to local contractors and developers for the purpose of holding the land for future development. These loans are secured by a first lien on the property, are limited to 50% of the lower of the acquisition price or the appraised value of the land, and generally have a term of up to two years with an interest rate based on the Wall Street Journal prime rate.  Our land loans are generally secured by property in our primary market area. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste.

Our construction and land development loans are based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction and land development lending involves additional risks when compared with permanent residential lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio.

This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we generally require cash curtailments or additional collateral to support the shortfall.

Commercial and Multi-Family Real Estate Lending. Multi-family and commercial real estate loans generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Often payments on loans secured by multi-family or commercial properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from
 
 
12
 
financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports.

We target individual multi-family and commercial real estate loans to small- and mid-size owner occupants and investors between $500,000 and $2.0 million; however, we can by policy originate loans to one borrower up to 80% of our regulatory limit. As of September 30, 2008, the maximum we could lend to any one borrower based on this limit was $18.2 million. Commercial real estate loans are primarily secured by office and warehouse space, professional buildings, retail sites, industrial facilities and churches located in the Treasure Valley market area.

We offer both fixed and adjustable rate loans on multi-family and commercial real estate loans. Loans originated on a fixed rate basis generally are originated at fixed terms up to ten years, with amortization terms up to 25 years. Commercial and multi-family real estate loans are originated with rates that generally adjust after an initial period ranging from three to ten years. Adjustable rate multi-family residential and commercial real estate loans are generally priced utilizing the applicable FHLB Term Borrowing Rate plus an acceptable margin. These loans are generally amortized for up to 25 years with prepayment penalty structures applied for each rate lock period.

The maximum loan-to-value ratio for commercial and multi-family real estate loans is generally 75% on purchases and refinances. We require appraisals of all properties securing commercial and multi-family real estate loans. Appraisals are performed by independent appraisers designated by us or by our staff appraiser. We require our commercial and multi-family real estate loan borrowers with outstanding balances in excess of $500,000 to submit annual financial statements and rent rolls on the subject property. We also inspect the subject property at least every three to five years if the loan balance exceeds $250,000. We generally require a minimum pro forma debt coverage ratio of 1.25 times for loans secured by commercial and multi-family properties.

Consumer Lending. We offer a variety of consumer loans to our customers, including home equity loans and lines of credit, savings account loans, automobile loans, recreational vehicle loans and personal unsecured loans. Generally, consumer loans have shorter terms to maturity and higher interest rates than mortgage loans. The maximum term we offer on automobile loans is 72 months and is applicable to new and one year old cars and light trucks. In addition, we offer loan terms of up to 120 months on motor homes, and qualifying travel trailers and boats. All automobile loans are risk priced based on the percentage of cost, or established value, being financed. Consumer loans are made with both fixed and variable interest rates and with varying terms.

At September 30, 2008, the largest component of the consumer loan portfolio consisted of home equity loans and lines of credit. Home equity loans are made for, among other purposes, the improvement of residential properties, debt consolidation and education expenses. The majority of these loans are secured by a first or second mortgage on residential property. The maximum loan-to-value ratio is 80%, when taking into account both the balance of the home equity loan and the first mortgage loan. Home equity lines of credit allow for a ten-year draw period, plus an additional ten year repayment period, and the interest rate is tied to the Prime rate as published in The Wall Street Journal, and may include a margin.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. These risks are not as prevalent with respect to our consumer loan portfolio because a large percentage of the portfolio consists of home equity loans and lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to four-family residential mortgage loans. Nevertheless, home equity loans and lines of credit have greater credit risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold. In addition, we do not have private mortgage insurance coverage for these loans. We do not actively participate in wholesale or brokered home equity loan origination.
 
 
13

 
Commercial Business Lending. As part of our strategic plan, we are focusing on increasing the commercial business loans that we originate, including lines of credit, term loans and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment and general investment. Loan terms vary from one to seven years. The interest rates on such loans are generally floating rates indexed to the Wall Street Journal Prime rate plus a margin.

Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market area. Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our commercial business loans.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our commercial business loans are originated primarily based on the identified cash flow of the borrower and secondarily on the general liquidity and secondary cash flow support of the borrower. Advance ratios against collateral provide additional support to repay the loan. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Loan Maturity and Repricing. The following table sets forth certain information at September 30, 2008, regarding the dollar amount of loans maturing or repricing in our portfolio based on their contractual terms to maturity or next repricing date, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

 
Within
 1 Year
  
After
 1 Year
Through 3
Years
  
After
 3 Years
Through
 5 Years
  
After
5 Years
Through
 10 Years
  
Beyond
10 Years
  
Total
 
(in thousands)
 Real estate:
                      
One- to four-family residential
$ 14,000
  
$ 48,056
  
$15,016
  
$53,980
  
$79,449
  
$210,501
Multi-family residential
398
  
3,473
  
1,530
  
1,129
  
1,947
  
8,477
Commercial
13,049
  
48,926
  
59,653
  
29,457
  
648
  
151,733
Total real estate
27,447
  
100,455
  
76,199
  
84,566
  
82,044
  
370,711
                       
 Real estate construction:
                      
One- to four-family residential
13,448
  
--
  
--
  
--
  
--
  
13,448
Multi-family residential
920
  
--
  
--
  
--
  
--
  
920
Commercial and land development
18,674
  
--
  
--
  
--
  
--
  
18,674
Total real estate construction
33,042
  
--
  
--
  
--
  
--
  
33,042
                       
 Consumer:
                      
Home equity
35,893
  
58
  
278
  
1,129
  
15,596
  
52,954
Automobile
39
  
802
  
683
  
366
  
13
  
1,903
Other consumer
265
  
424
  
659
  
12
  
10
  
1,370
 Total consumer
36,197
  
1,284
  
1,620
  
1,507
  
15,619
  
56,227
                       
 Commercial business
3,595
  
766
  
951
  
59
  
14
  
5,385
Total loans receivable
$100,281
  
$102,505
  
$78,770
  
$86,132
  
$97,677
  
$465,365

 
 
14
 
The following table sets forth the dollar amount of all loans maturing or repricing more than one year after September 30, 2008, which have fixed interest rates and have floating or adjustable interest rates.

 
Floating or
Adjustable
Rate
  
Fixed
Rates
  
Total
 
(in thousands)
 Real estate:
          
One- to four-family residential
$ 61,758
  
$134,743
  
$196,501
Multi-family residential
6,132
  
1,947
  
8,079
Commercial
119,672
  
19,012
  
138,684
Total real estate
187,562
  
155,702
  
343,264
           
 Real estate construction:
          
One- to four-family residential
--
  
--
  
--
Multi-family residential
--
  
--
  
--
Commercial and land development
--
  
--
  
--
Total real estate construction
--
  
--
  
--
           
 Consumer:
          
Home equity
--
  
17,061
  
17,061
Automobile
--
  
1,864
  
1,864
Other consumer
--
  
1,105
  
1,105
 Total consumer
--
  
20,030
  
20,030
           
Commercial business
320
  
1,470
  
1,790
           
Total loans receivable
$187,882
  
$177,202
  
$365,084

 
Loan Solicitation and Processing. Loan originations are obtained primarily from walk-in customers and referrals from builders and realtors. As part of our commercial banking strategy, we are focusing our efforts in increasing the amount of our direct originations of commercial and multi-family real estate loans, construction loans to builders and commercial business loans. Residential real estate loans are solicited through media advertising, direct mail to existing customers and by realtor referrals. Loan originations are further supported by lending services offered through our internet website, advertising, cross-selling and through our employees' community service.


Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify specific information relating to the applicant's employment, income and credit standing. An appraisal of the real estate offered as collateral generally is undertaken by an appraiser we have retained and approved, and who is licensed in the State of Idaho.

Mortgage loan applications are initiated by loan officers and are required to be approved by our underwriting staff who have appropriately delegated lending authority. Loans that exceed the underwriter’s lending authority must be approved by one or more members of the Management Loan Committee. We require title insurance on real estate loans as well as fire and casualty insurance on all secured loans and on home equity loans and lines of credit where the property serves as collateral.

Loan Originations, Servicing, Purchases and Sales. During the year ended September 30, 2008, our total loan originations were $190.3 million. The majority of all first lien residential mortgages are sold to the secondary market at the time of origination. During the year ended September 30, 2008, we sold $48.0 million to the secondary market. This number included $4.9 million in loans originated in prior years. The remaining $43.1 million of loans represents 89.9% of total current year one- to four-family residential loan originations. Our primary secondary market relationships have been with Freddie Mac, Fannie Mae and major correspondent banks.  The decline in loans sold during 2008 was a result of the slowdown in new and existing home sales during the year combined with higher mortgage rates.
 
 
15
 
One- to four-family home loans are generally originated in accordance with the guidelines established by Freddie Mac and Fannie Mae, with the exception of our special community development loans under the Community Reinvestment Act. We utilize the Freddie Mac Loan Prospector and Fannie Mae Desktop Underwriter automated loan systems to underwrite the majority of our residential first mortgage loans (excluding community development loans). The remaining loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our Board-approved loan policy. The underwriting criteria we use on loans that are not sold to investors and retained in our portfolio are at least as stringent as those we use for the loans we sell.
 
Since 2006, the majority of our one- to four-family home loans have been sold into the secondary market with servicing released. Loans are generally sold on a non-recourse basis. In the past, we generally retained the servicing on the majority of loans sold into the secondary market. On August 28, 2008, Home Federal Bank entered into a binding agreement with another bank whereby Home Federal Bank would sell its remaining servicing rights. The purchase price was 1.02% of the unpaid principal balance of all loans in the servicing portfolio, except for those loans that are 60 days or more past due, in litigation, in bankruptcy or in foreclosure as of October 31, 2008. The transfer is to be completed by December 16, 2008. At September 30, 2008, our residential loan servicing portfolio was $167.0 million.

The following table shows total loans originated, purchased, sold and repaid during the periods indicated.

 
Year Ended September 30,
 
2008
  
2007
  
2006
 
(in thousands)
Loans originated:
          
  Real estate:
          
One- to four-family residential (1)
$    48,114
  
$    96,254
  
$124,670
Multi-family residential
1,819
  
2,000
  
345
Commercial
47,662
  
23,598
  
26,152
Total real estate
97,595
  
121,852
  
151,167
           
  Real estate construction:
          
One- to four-family residential
17,853
  
41,529
  
58,233
Multi-family residential
--
  
1,770
  
9
Commercial and land development
14,152
  
18,266
  
19,623
Total real estate construction
32,005
  
61,565
  
77,865
           
  Consumer:
          
Home equity
35,339
  
32,136
  
33,454
Automobile
894
  
654
  
667
Other consumer
3,104
  
3,264
  
2,876
 Total consumer
39,337
  
36,054
  
36,997
           
  Commercial business
21,352
  
5,159
  
5,164
           
 Total loans originated
190,289
  
224,630
  
271,193
     
 
   
Loans purchased:
          
One- to four-family residential
--
  
--
  
38,782
           
Loans sold:
          
One- to four-family residential
(47,968)
  
(96,370)
  
(81,575)
Participation loans
--
  
--
  
--
Total loans sold
(47,968)
  
(96,370)
  
(81,575)
           
Principal repayments
(161,575)
  
(149,714)
  
(157,581)
Transfer to real estate owned
(1,394)
  
(857)
  
--
Increase (decrease) in other items (net)
(1,730)
  
149
  
(128)
           
Net increase (decrease) in loans receivable and loans held for sale
$(22,378)
  
$(22,162)
  
$    70,691
________
(1)
Includes originations of loans held for sale of $45.9 million, $97.2 million, and $80.1 million for the years ended September 30, 2008, 2007 and 2006, respectively.

 
16 
 


Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate related products. Loan fees generally represent a percentage of the principal amount of the loan, and are paid by the borrower. Accounting standards require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or sold are recognized as income at the time of prepayment. We had $973,000 of net deferred loan fees and costs as of September 30, 2008.

Asset Quality

The objective of our loan review process is to determine risk levels and exposure to loss. The depth of review varies by asset types, depending on the nature of those assets. While certain assets may represent a substantial investment and warrant individual reviews, other assets may have less risk because the asset size is small, the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of individual assets would expand the review process without measurable advantage to risk assessment. Asset types with these characteristics may be reviewed as a total portfolio on the basis of risk indicators such as delinquency (consumer and residential real estate loans) or credit rating. A formal review process is conducted on individual assets that represent greater potential risk. A formal review process is a total reevaluation of the risks associated with the asset and is documented by completing an asset review report. Certain real estate-related assets must be evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of loss exposure and, consequently, the adequacy of valuation allowances.

We define a loan as being impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. Large groups of smaller balance homogenous loans such as consumer secured loans, residential mortgage loans and consumer unsecured loans are collectively evaluated for potential loss. All other loans are evaluated for impairment on an individual basis.

We generally assess late fees or penalty charges on delinquent loans of five percent of the monthly principal and interest amount. The borrower is given a 10 to 15-day grace period to make the loan payment depending on loan type. When a borrower fails to make a required payment when it is due, we institute collection procedures. The first notice is mailed to the borrower on the day following the expiration of the grace period requesting payment and assessing a late charge. Attempts to contact the borrower by telephone generally begin upon the 30th day of delinquency. If a satisfactory response is not obtained, continual follow-up contacts are attempted until the loan has been brought current. Before the 90th day of delinquency, attempts to interview the borrower are made to establish the cause of the delinquency, whether the cause is temporary, the attitude of the borrower toward the debt and a mutually satisfactory arrangement for curing the default.

The Board of Directors is informed monthly as to the number and dollar amount of commercial, mortgage and consumer loans that are delinquent by more than 30 days, and is given information regarding classified assets.

If a borrower is chronically delinquent and all reasonable means of obtaining payments have been exercised, we will seek to recover any collateral securing the loan according to the terms of the security instrument and applicable law. In the event of an unsecured loan, we will either seek legal action against the borrower or refer the loan to an outside collection agency.

 
17 
 

The following table shows our delinquent loans by the type of loan and number of days delinquent as of September 30, 2008:

 
Loans Delinquent For:
  
Total
 
60-89 Days
  
Over 90 Days
  
 Delinquent Loans
 
 
Number of
Loans
  
Principal
Balance
Loans
  
Number of
Loans
  
Principal
Balance
Loans
  
Number of
Loans
  
Principal
Balance
Loans
 
(in thousands)
 Real estate:
                      
One- to four-family residential
7
  
$     878
  
9
  
$    1,518
  
16
  
$    2,396
Multi-family residential
--
  
--
  
--
 
--
  
--
  
--
Commercial
1
  
1,150
  
1
  
100
  
2
  
1,250
Total real estate
8
  
2,028
  
10
  
1,618
  
18
  
3,646
                       
 Real estate construction:
                      
One- to four-family residential
2
  
242
  
8
  
2,724
  
10
  
2,966
Multi-family residential
--
  
--
  
--
  
--
  
--
  
--
Commercial and land development
--
  
--
  
1
  
353
  
1
  
353
Total real estate construction
2
  
242
  
9
  
3,077
  
11
  
3,319
                       
 Consumer:
                      
Home equity
4
  
306
  
4
  
195
  
8
  
501
Automobile
1
  
1
  
--
  
--
  
1
  
1
Other consumer
1
  
4
  
--
  
--
  
1
  
4
 Total consumer
6
  
311
  
4
  
195
  
10
  
506
                     
 
 Commercial business
1
  
8
  
--
  
--
  
1
  
8
                       
                       
 Total
17
  
$2,589
  
23
  
$    4,890
  
40
  
$    7,479

When a loan becomes 90 days delinquent, we place the loan on nonaccrual status; accordingly, we have no accruing loans that are contractually past due 90 days or more. As of September 30, 2008, nonaccrual loans as a percentage of total loans was 2.16%, and as a percentage of total assets it was 1.37%.

Nonperforming Assets. The following table sets forth information with respect to our nonperforming assets and troubled debt restructurings within the meaning of Statement of Financial Accounting Standards (“FAS”) No. 15 for the periods indicated. During the periods presented, there were no accruing loans that were contractually past due 90 days or more. Nonperforming assets include real estate acquired through foreclosure and loans that are not delinquent but exhibit weaknesses that have evidenced doubt as to our ability to collect all contractual principal and interest and have been classified as impaired under FAS No. 114. As a result, nonperforming loans and nonperforming assets were higher in balance than total delinquent loans at September 30, 2008. There were $31,000 of troubled debt restructurings at September 30, 2008 that were not delinquent or in nonperforming status.

 
18 
 


 
At September 30,
 
2008
  
2007
  
2006
  
2005
  
2004
 
(in thousands)
Loans accounted for on a non-accrual basis:
                  
Real estate:
                  
One- to four-family residential
$1,518
  
$     588
  
$     358
  
$     388
  
$        --
Multi-family residential
--
  
--
  
--
  
--
  
--
Commercial
100
  
407
  
--
  
--
  
560
Total real estate
1,618
  
995
  
358
  
388
  
560
                   
 Real estate construction:
                  
One- to four-family residential
3,787
  
436
  
--
  
--
  
--
Multi-family residential
--
  
--
  
--
  
--
  
--
Commercial and land development
4,204
  
--
  
--
  
--
  
--
Total real estate construction
7,991
  
436
  
--
  
--
  
--
                   
 Consumer:
                  
Home equity
306
  
100
  
30
  
79
  
30
Automobile
--
  
--
  
--
  
5
  
7
Other consumer
10
  
--
  
--
  
6
  
13
 Total consumer
316
  
100
  
30
  
90
  
50
                   
Commercial business
20
  
--
  
--
  
--
  
--
Total loans
9,945
  
1,531
  
388
  
478
  
610
Accruing loans which are contractually past due 90 days or more
--
  
--
  
--
  
--
  
--
Total of nonaccrual and 90 days past due loans
9,945
  
1,531
  
388
  
478
  
610
Repossessed assets
--
  
--
  
--
  
--
  
--
Real estate owned
650
  
549
  
--
  
534
  
113
Total nonperforming assets
$10,595
  
$2,080
  
$     388
  
$1,012
  
$     723
                   
Restructured loans
$     812
  
$    35
  
 $  11
  
$  322
  
$   --
                   
Allowance for loan loss on nonperforming loans
1,733
  
66
  
--
  
7
  
92
                   
Classified assets included in nonperforming assets
10,152
  
1,666
  
388
  
1,000
  
704
                   
Allowance for loan loss on classified assets
1,767
  
191
  
46
  
64
  
225
                   
Nonaccrual and accruing loans 90 days or more past due as a percentage of loans receivable
2.16%
  
0.32%
  
0.08%
  
0.11%
  
0.16%
                   
Nonaccrual and accruing loans 90 days or more past due as a percentage of total assets
1.37%
  
0.22%
  
0.05%
  
0.07%
  
0.08%
                   
Nonperforming assets as a percentage of total assets
1.46%
  
0.29%
  
0.05%
  
0.15%
  
0.10%
                   
Loans receivable, net
$459,813
  
$480,118
  
$503,065
  
$430,944
  
$392,634
                   
Nonaccrued interest (1)
182
  
36
  
11
  
5
  
12
                   
Total assets
725,070
  
709,954
  
761,292
  
689,577
  
743,867
 
________
(1)      
If interest on the loans classified as nonaccrual had been accrued, interest income in these amounts would have been recorded on nonaccrual loans.

Real Estate Owned and Other Repossessed Assets. Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When the property is acquired, it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan plus foreclosure costs, or the fair market value of the property less selling costs. Other repossessed collateral, including autos, are also recorded at the lower of cost (i.e., the unpaid principal balance plus repossession costs) or fair market value. As of September 30, 2008, we had $650,000 in real estate owned.
 
 
19

 
Restructured Loans. According to generally accepted accounting principles, we are required to account for certain loan modifications or restructuring as a "troubled debt restructuring."  In general, the modification or restructuring of a debt is considered a troubled debt restructuring if we, for economic or legal reasons related to a borrower's financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of September 30, 2008, we had three restructured loans with an aggregate balance of $812,000.

Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth, liquidity and paying capacity of the borrower or any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent and approved by the Classified Asset Committee to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated as special mention. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OTS, which can order the establishment of additional loss allowances.

In connection with the filing of periodic reports with the OTS and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets, as of September 30, 2008, we had classified assets of $10.6 million. The total amount of classified assets represented 5.2% of equity capital and 1.5% of total assets as of September 30, 2008. The increase in classified assets from prior year detailed in the table above was due to an increase in troubled loans primarily in our construction and land development portfolio. As of September 30, 2008, there were 18 impaired loans included in classified assets. The aggregate amounts of classified assets at the dates indicated were as follows:

 
At September 30,
 
2008
  
2007
 
(in thousands)
Classified assets:
      
Doubtful
$        --
  
$     10
Substandard
10,638
  
4,521
Total
$10,638
  
$4,531
       
Classified assets included in nonperforming loans
$  9,945
  
$1,531
Specific allowance for loan loss on classified assets
1,767
  
191

Potential Problem Loans. Potential problem loans are loans that do not yet meet the criteria for placement on non-accrual status, but known information about possible credit problems of the borrowers causes management to have doubts as to the ability of the borrowers to comply with present loan repayment terms. This may result in the future inclusion of such loans in the non-accrual loan category. As of September 30, 2008, the aggregate amount of potential problem loans was $8.6 million, which includes loans that were rated “Special Mention” or “Substandard under the Bank’s risk grading process but were not impaired or on non-accrual status as well as other delinquent loans that possessed inherent weaknesses other than their delinquent status.  The $8.6 million balance includes $4.0 million in loans secured by commercial real estate loans, $2.3 million in one- to four- family residential real loans and $2.3 million in real estate construction and land development loans.

 
20 
 


The following table summarizes the distribution of the allowance for loan losses by loan category.

 
 At September 30,
 
 2008
  
 2007
  
2006 
  
2005 
  
 2004
 
(in thousands)
 
Loan  Balance
Amount
by Loan Category
Percent
of Loans
in Loan Category
to Total Loans
  
Loan Balance
Amount
by Loan Category
Percent
of Loans
in Loan Category
to Total Loans
  
Loan
Balance
Amount
by Loan Category
Percent
of Loans
in Loan Category
to Total Loans
  
Loan
Balance
Amount
by Loan Category
Percent
of Loans
in Loan Category
to Total Loans
  
Loan Balance
Amount
by Loan Category
Percent
of Loans
in Loan Category
to Total Loans
Real estate:
                                      
   One- to four-family
      residential
$210,501
$849
   45.23%
  
$249,545
$   840
51.55%
  
$293,640
$   873
   57.88%
  
$252,126
$   784
58.00%
  
$242,818
$   704    
     61.27%
  Multi-family residential
8,477
70
1.82
  
6,864
60
1.42  
 
7,049
61
1.39
  
5,454
61
1.25  
 
6,265
75
1.58
  Commercial
151,733
1,345
32.61
  
133,823
1,205
27.64   
 
125,401
1,087
24.72
  
116,432
1,297
26.78   
 
93,575
1,281
23.61
  Total real estate
370,711
2,264
79.66
  
390,232
2,105
80.61  
 
426,090
2,021
83.99
  
374,012
2,142
86.03   
 
342,658
2,060
86.46
                                       
                                       
Real estate construction:
                                      
One- to four-family
    residential
13,448
610
2.89
  
20,545
188
4.24  
 
23,678
290
4.67
  
14,421
241
3.32   
 
7,207
69
1.82
Multi-family residential
920
11
0.20
  
1,770
23
0.37  
 
--
--
   --
  
1,427
18
0.33   
 
834
11
0.21
Commercial and land
   development
18,674
1,029
4.01
  
21,899
245
4.52  
 
16,344
294
3.22
  
7,470
132
1.72   
 
11,151
148
2.81
    Total real estate
33,042
1,650
7.10
  
44,214
455
9.13  
 
40,022
584
7.89
  
23,318
391
5.37   
 
19,192
228
4.84
                                       
                                       
Consumer:
        
 
                           
    Home equity
52,954
529
11.38
  
42,990
311
8.88  
 
34,143
243
6.73
  
28,558
192
6.57   
 
27,351
204
6.90
Automotive
1,903
29
  0.41
  
2,173
35
0.45  
 
3,245
58
0.64
  
4,576
79
1.05   
 
3,838
79
0.97
Other consumer
1,370
28
  0.29
 
1,405
37
0.29  
 
1,300
32
0.26
  
1,530
39
0.35   
 
1,949
45
0.49
 Total consumer
56,227
586
12.08
  
46,568
383
9.62  
 
38,688
333
7.63
  
34,664
310
7.97   
 
33,138
328
8.36
             
 
                     
 
  Commercial business
5,385
79
  1.16
  
3,122
45
0.64  
 
2,480
36
0.49
  
2,759
39
0.63  
 
1,363
21
0.34
                                 
 
   
  Total loans
$465,365
$4,579
       100.00%
  
$484,136
$2,988
100.00%
  
$507,280
$2,974
     100.00%
  
$434,753
$2,882
   100.00%
  
$396,351
$2,637
  100.00%
                                       
                                       
                                       




 
21
 

The following table sets forth an analysis of our allowance for loan losses at the dates and for the periods indicated.

 
Year Ended September 30,
  
 
2008
  
2007
  
2006
  
2005
  
2004
  
 
(in thousands)
  
                     
Allowance at beginning of period
$     2,988
  
$2,974
  
$2,882
  
$2,637
  
$1,853
  
Provisions for loan losses
2,431
  
409
  
138
  
456
  
900
  
Transfer to unfunded commitments
--
  
(192)
  
--
  
--
  
--
  
                     
Recoveries:
                    
Real estate:
                    
One- to four-family residential
--
  
--
  
--
  
--
  
1
  
Multi-family residential
--
  
--
  
--
  
--
  
--
  
Commercial
--
  
--
  
--
  
2
  
--
  
Total real estate
--
  
--
  
--
  
2
  
1
  
                     
 Real estate construction:
                    
One- to four-family residential
--
  
--
  
--
  
--
  
--
  
Multi-family residential
--
  
--
  
--
  
--
  
--
  
Commercial and land development
--
  
--
  
--
  
--
  
--
  
Total real estate construction
--
  
--
  
--
  
--
  
--
  
                     
 Consumer: