Edgar Filing: Home Federal Bancorp, Inc.

q063009.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 June 30, 2009

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

For the transition period from _____ to _____

Commission File Number: 001-33795

HOME FEDERAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

	Maryland		68-0666697
	(State or other jurisdiction of incorporation		(I.R.S. Employer
	or organization)		I.D. Number)

	500 12thAvenue South, Nampa, Idaho		83651
	(Address of principal executive offices)		(Zip Code)


	Registrant’s telephone number, including area code:		(208) 466-4634

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	[ ]	Accelerated filer	[X]
	Non-accelerated filer	[ ]	Smaller reporting company	[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.01 par value per share, 16,698,168 shares outstanding as of August 5, 2009.

HOME FEDERAL BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION

Item 1 -

Financial Statements

		Page
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income	3
	Consolidated Statements of Cash Flows	4
	Selected Notes to Interim Consolidated Financial Statements	6

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3 -	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4 -	Controls and Procedures	29

PART II - OTHER INFORMATION

Item 1 -	Legal Proceedings	30

Item 1A - Risk Factors		30

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3 -	Defaults Upon Senior Securities	30

Item 4 -	Submission of Matters to a Vote of Security Holders	30

Item 5 -	Other Information	30

Item 6 -	Exhibits	31

SIGNATURES		32

Item 1. Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)	June 30, 2009			September 30, 2008

ASSETS
Cash and amounts due from depository institutions	$	26,778		$	23,270
Certificate of deposit in correspondent bank		-			5,000
Mortgage-backed securities available for sale, at fair value		169,716			188,787
Loans receivable, net of allowance for loan losses of $8,266
and $4,579		418,198			459,813
Loans held for sale		5,064			2,831
Accrued interest receivable		2,209			2,681
Property and equipment, net		17,057			15,246
Mortgage servicing rights, net		-			1,707
Bank owned life insurance		11,906			11,590
Federal Home Loan Bank of Seattle (“FHLB”) stock, at cost		9,591			9,591
Real estate and other property owned		8,614			650
Deferred tax asset		1,853			1,770
Other assets		1,757			2,134
TOTAL ASSETS	$	672,743		$	725,070

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposit accounts:
Noninterest-bearing demand deposits	$	39,931		$	41,398
Interest-bearing demand deposits		131,202			127,714
Savings deposits		35,880			26,409
Certificates of deposit		168,983			177,404
Total deposit accounts		375,996			372,925
Advances by borrowers for taxes and insurance		589			1,386
Interest payable		370			552
Deferred compensation		5,219			5,191
FHLB advances and other borrowings		88,891			136,972
Other liabilities		3,030			2,857
Total liabilities		474,095			519,883

STOCKHOLDERS’ EQUITY
Serial preferred stock, $.01 par value; 10,000,000 authorized;
Issued and outstanding, none		-			-
Common stock, $.01 par value; 90,000,000 authorized;
Issued and outstanding:		167			174
June 30, 2009 – 17,445,311 issued, 16,698,168 outstanding
Sept. 30, 2008 – 17,412,449 issued, 17,374,161 outstanding
Additional paid-in capital		150,391			157,205
Retained earnings		55,643			59,813
Unearned shares issued to employee stock ownership plan (“ESOP”)		(9,926	)		(10,605	)
Accumulated other comprehensive income (loss)		2,373			(1,400	)
Total stockholders’ equity		198,648			205,187
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	672,743		$	725,070

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)	Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2009			2008
Interest and dividend income:
Loan interest	$	6,418		$	7,544		$	20,337		$	23,390
Mortgage-backed security interest		1,983			2,372			6,311			6,463
Other interest and dividends		9			177			20			1,001
Total interest and dividend income		8,410			10,093			26,668			30,854
Interest expense:
Deposits		1,629			2,429			5,389			8,515
FHLB advances and other borrowings		1,068			1,752			3,861			5,594
Total interest expense		2,697			4,181			9,250			14,109
Net interest income		5,713			5,912			17,418			16,745
Provision for loan losses		3,450			652			8,085			1,317
Net interest income after provision for loan losses		2,263			5,260			9,333			15,428
Noninterest income:
Service charges and fees		2,008			2,396			6,009			6,731
Gain on sale of loans		416			213			1,013			560
Increase in cash surrender value of bank owned life insurance		107			106			317			314
Loan servicing fees		-			116			54			369
Mortgage servicing rights, net		-			(63	)		(31	)		(206	)
Other		80			(33	)		55			75
Total noninterest income		2,611			2,735			7,417			7,843
Noninterest expense:
Compensation and benefits		3,594			3,840			10,948			11,592
Occupancy and equipment		804			771			2,303			2,242
Data processing		654			615			1,773			1,668
Advertising		211			241			656			786
Postage and supplies		126			147			409			468
Professional services		236			130			870			533
Insurance and taxes		783			158			1,244			383
Other		606			272			1,416			809
Total noninterest expense		7,014			6,174			19,619			18,481
Income (loss) before income taxes		(2,140	)		1,821			(2,869	)		4,790
Income tax expense (benefit)		(894	)		702			(1,298	)		1,779
NET INCOME (LOSS)	$	(1,246	)	$	1,119		$	(1,571	)	$	3,011

Earnings (loss) per share:
Basic	$	(0.08	)	$	0.07		$	(0.10	)	$	0.19	(1)
Diluted		(0.08	)		0.07			(0.10	)		0.19	(1)
Weighted average number of shares outstanding:
Basic		15,352,714			16,007,599			15,742,102			16,237,911	(1)
Diluted		15,352,714			16,043,435			15,742,102			16,255,548	(1)

Dividends declared per share:	$	0.055		$	0.055		$	0.165		$	0.158	(1)

(1) Earnings (loss) per share, average 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., which occurred on December 19, 2007.

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(In thousands, except share data) (Unaudited)

	Common Stock						Additional Paid-In			Retained			Unearned Shares Issued to Employee Stock Ownership		Accumulated Other Comprehensive
	Shares			Amount			Capital			Earnings			Plan		Income (Loss)				Total
Balance at Sept. 30, 2007	15,232,243		$	152		$	59,613		$	58,795		$	(3,698	)	$	(2,225	)	$	112,637
Second Step Conversion(1)	2,073,619			21			95,938						(8,160	)					87,799
Dissolution of Mutual Holding Company							50												50
Restricted stock issued, net of forfeitures	13,502																		-
ESOP shares committed to be released							(23	)					1,253						1,230
Exercise of stock options	54,797			1			605												606
Share-based compensation							1,022												1,022
Dividends paid ($0.213 per share) (2) (3)										(2,987	)								(2,987	)
Comprehensive income:
Net income										4,005									4,005
Other comprehensive income:
Change in unrealized holding loss on securities available for sale, net of taxes																825			825
Comprehensive income																			4,830
Balance at Sept. 30, 2008	17,374,161			174			157,205			59,813			(10,605	)		(1,400	)		205,187
Restricted stock issued, net of forfeitures	159,115			2			(2	)											-
ESOP shares committed to be released							12						679						691
Exercise of stock options	32,862						353												353
Share-based compensation							730												730
Treasury shares purchased	(867,970	)		(9	)		(7,886	)											(7,895	)
Dividends paid ($0.165 per share)										(2,599	)								(2,599	)
Tax adjustment							(21	)											(21	)
Comprehensive income:
Net loss										(1,571	)								(1,571	)
Other comprehensive income:
Change in unrealized holding loss on securities available for sale, net of taxes																3,804			3,804
Adjustment for realized gains, net of taxes of $20																(31	)		(31	)
Comprehensive income																			2,202
Balance at June 30, 2009	16,698,168		$	167		$	150,391		$	55,643		$	(9,926	)	$	2,373		$	198,648

(1)	The total effect on equity accounts from the second-step conversion has changed from the December 31, 2007 reported numbers due to adjustments such as the effect of fractional shares and payment of additional expenses related to the second-step conversion.

(2)	Home Federal MHC waived its receipt of dividends on the 8,979,246 shares that it owned.
(3)	Dividends per share have been adjusted to reflect the impact of the second-step conversion of Home Federal Bancorp, Inc., which occurred on December 19, 2007.

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)	Nine Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,571	)	$	3,011
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		1,294			1,247
Net amortization (accretion) of premiums and discounts on investments		9			(18	)
Loss on sale of fixed assets and repossessed assets		82			119
Gain on sale of securities available for sale		(51	)		-
ESOP shares committed to be released		691			423
Equity compensation expense		730			779
Provision for loan losses		8,085			1,317
Valuation allowance on other real estate owned		552			-
Accrued deferred compensation expense, net		28			513
Net deferred loan fees		(77	)		54
Deferred income tax benefit		(2,598	)		(598	)
Net gain on sale of loans		(1,013	)		(560	)
Proceeds from sale of loans held for sale		56,151			38,579
Originations of loans held for sale		(57,371	)		(37,193	)
Net decrease in value of mortgage servicing rights		31			207
Loss on sale of mortgage servicing rights		74
Net increase in value of bank owned life insurance		(316	)		(314	)
Change in assets and liabilities:
Interest receivable		472			5
Other assets		368			158
Interest payable		(182	)		(151	)
Other liabilities		154			(903	)
Net cash provided by operating activities		5,542			6,675
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of mortgage-backed securities available for sale		26,931			23,976
Proceeds from sales of mortgage-backed securities available for sale		1,203			-
Purchases of mortgage-backed securities available for sale		(2,734	)		(56,257	)
Maturity of (Investment in) certificate of deposit		5,000			(5,000	)
Sale of mortgage servicing rights		1,602			-
Purchases of property and equipment		(3,088	)		(3,218	)
Net decrease in loans		23,910			9,720
Proceeds from sale of fixed assets and repossessed assets		1,090			501
Net cash provided (used) by investing activities		53,914			(30,278	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		3,071			(22,267	)
Net decrease in advances by borrowers for taxes and insurance		(797	)		(948	)
Proceeds from FHLB advances		18,000			59,715
Repayment of FHLB advances		(67,582	)		(94,863	)
Proceeds from other borrowings		1,501			-
Net proceeds from stock issuance and exchange pursuant to second step conversion		-			88,336
Proceeds from exercise of stock options		353			328
Repurchases of common stock		(7,895	)		-
Dividends paid		(2,599	)		(2,099	)
Net cash (used) provided by financing activities		(55,948	)		28,202
NET INCREASE IN CASH AND CASH EQUIVALENTS		3,508			4,599
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		23,270			20,588
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	26,778		$	25,187

(Continued)

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) (Unaudited)	Nine Months Ended June 30,
	2009		2008
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	9,433	$	14,259
Income taxes		2,545		2,610

NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate and other assets in settlement of loans	$	9,682	$	1,137
Fair value adjustment to securities available for sale, net of taxes		3,804		117

See accompanying notes.

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. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through August 6, 2009, the date the financial statements were available to be issued. All significant intercompany transactions and balances have been eliminated. In the opinion of the Company’s management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made. Operating results for the three and nine month periods ended June 30, 2009, are not necessarily indicative of the results that may be expected for the year ending September 30, 2009.

The Company was formed as the new stock holding company for the Bank in connection with the Bank’s conversion from the mutual holding company structure to the stock holding company structure, which was completed on December 19, 2007 (the “Conversion”). Prior to the completion of the Conversion, the Bank was the subsidiary of Home Federal Bancorp, Inc., a federally-chartered stock mid-tier holding company (“Old Home Federal”), and Old Home Federal 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 Old Home Federal ceased to exist and were replaced by the Company as the successor to Old Home Federal.

Certain information and note disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted. Therefore, these consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes included in the Annual Report on Form 10-K for the year ended September 30, 2008 (“2008 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on December 15, 2008.

Note 2 - Critical Accounting Estimates and Related 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, deferred income taxes and valuation of real estate owned to be critical accounting estimates.

Allowance for loan losses. The procedures for assessing the adequacy of the allowance for loan losses reflect evaluation of credit risk after careful consideration and interpretation of relevant information. In developing this assessment, management must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. The allowance for loan losses is maintained at a level that management believes to be the best estimate of probable incurred losses inherent in the loan portfolio at the balance sheet dates presented. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.

Deferred income taxes. 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.

Real Estate Owned. Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lesser of the outstanding loan balance or the fair value at the date of foreclosure minus estimated costs to sell. Any valuation adjustments required at the time of foreclosure are charged to the allowance for loan losses. After foreclosure, the properties are carried at the lower of carrying value or fair value less estimated costs to sell. Any subsequent valuation adjustments, operating expenses or income, and gains and losses on disposition of such properties are recognized in current operations. The valuation allowance is established based on our historical realization of losses and adjusted for current market trends.

Note 3 - Earnings (Loss) Per Share

Earnings (Loss) per share (“EPS”) is computed using the basic and diluted weighted average number of common shares outstanding during the period as applicable. Basic EPS is computed by dividing the Company’s net income or loss by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the 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 and vesting of restricted stock awards. ESOP shares are not considered outstanding for earnings per share purposes until they are committed to be released.

The following table presents the computation of basic and diluted EPS for the periods indicated:

	Three Months Ended June 30,					Nine Months Ended June 30,
	2009			2008		2009			2008
	(in thousands, except share and per share data)
Basic EPS:
Net income (loss)	$	(1,246	)	$	1,119	$	(1,571	)	$	3,011
Weighted-average common shares outstanding		15,352,714			16,007,599		15,742,102			16,237,911
Basic EPS	$	(0.08	)	$	0.07	$	(0.10	)	$	0.19

Diluted EPS:
Net income (loss)	$	(1,246	)	$	1,119	$	(1,571	)	$	3,011
Weighted-average common shares outstanding		15,352,714			16,007,599		15,742,102			16,237,911
Net effect of dilutive stock options		-			2,986		-			-
Net effect of dilutive restricted stock		-			32,850		-			17,637
Weighted-average common shares outstanding and common stock equivalents		15,352,714			16,043,435		15,742,102			16,255,548
Diluted EPS	$	(0.08	)	$	0.07	$	(0.10	)	$	0.19

For the nine months ended June 30, 2008, earnings (loss) per share and average shares outstanding have been adjusted to reflect the impact of the second-step conversion and reorganization of Home Federal Bancorp, Inc., which occurred on December 19, 2007.

Note 4 - Mortgage-Backed Securities

Mortgage-backed securities available for sale consisted of the following:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
June 30, 2009
Issued by U.S. Government sponsored enterprises	$	162,472	$	4,275	$	-		$	166,747
Other		3,290		-		(321	)		2,969
Total	$	165,762	$	4,275	$	(321	)	$	169,716

September 30, 2008
Issued by U.S. Government sponsored enterprises	$	187,730	$	669	$	(2,669	)	$	185,730
Other		3,390		-		(333	)		3,057
Total	$	191,120	$	669	$	(3,002	)	$	188,787

The fair value of impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of June 30, 2009 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	$ -	$ -	$2,969	$(321)	$2,969	$(321)

Management has evaluated these securities and has determined that the decline in fair value is not other than temporary. These securities have contractual maturity dates and, at June 30, 2009, management believes it is reasonably probable that principal and interest balances on these securities will be collected based on the performance, underwriting, credit support and vintage of the loans underlying the securities. However, continued deteriorating economic conditions may result in degradation in the performance of the loans underlying these securities in the future. The Company has the ability and intent to hold these securities for a reasonable period of time for a forecasted recovery of the amortized cost.

As of June 30, 2009, the Bank had pledged mortgage-backed securities with an amortized cost of $70.3 million and a fair value of $72.1 million as collateral for FHLB advances. Mortgage-backed securities with an amortized cost of $3.4 million and a fair value of $3.5 million at June 30, 2009, were pledged as collateral for a commercial repurchase agreement. Mortgage-backed securities with an amortized cost of $4.8 million and a fair value of $5.0 million at June 30, 2009, 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. As of June 30, 2009, and September 30, 2008, there was no balance owed by the Bank through the Federal Reserve Bank discount window.

Note 5 - Loans Receivable

Loans receivable are summarized as follows:

	June 30, 2009						September 30, 2008
	Balance			Percent of Total			Balance			Percent of Total
	(dollars in thousands)
Real Estate:
One- to four-family residential	$	176,038			41.21	%	$	210,302			45.22	%
Multi-family residential		10,092			2.36			8,477			1.82
Commercial		154,209			36.10			151,733			32.62
Total real estate		340,339			79.67			370,512			79.66

Real Estate Construction:
One- to four-family residential		9,710			2.27			13,448			2.89
Multi-family residential		-			-			920			0.20
Commercial and land development		21,349			5.00			18,674			4.01
Total real estate construction		31,059			7.27			33,042			7.10

Consumer:
Home equity		48,404			11.33			52,954			11.38
Automobile		1,353			0.32			1,903			0.41
Other consumer		1,217			0.29			1,370			0.29
Total consumer		50,974			11.94			56,227			12.08

Commercial business		4,803			1.12			5,385			1.16
		427,175			100.00	%		465,166			100.00	%

Premium on purchased loans		184						199
Deferred loan fees		(895	)					(973	)
Allowance for loan losses		(8,266	)					(4,579	)
Loans receivable, net	$	418,198					$	459,813

Note 6 – Allowance for Loan Losses

Activity in the allowance for loan losses for the three and nine month periods ended June 30, 2009 and 2008, was as follows:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2009			2008
	(in thousands)

Beginning balance	$	7,333		$	3,307		$	4,579		$	2,988
Provision for loan losses		3,450			652			8,085			1,317
Losses on loans charged-off		(2,616	)		(168	)		(4,524	)		(528	)
Recoveries on loans charged-off		99			10			126			24
Ending balance	$	8,266		$	3,801		$	8,266		$	3,801

Note 7 – Fair Value Measurement

SFAS No. 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments whose significant value drivers are unobservable.

The following table summarized the Company’s financial instruments that were measured at fair value on a recurring basis at June 30, 2009:

	June 30, 2009
		Total	Level 1	Level 2	Level 3
	(in thousands)

Securities available for sale		$169,716	-	$169,716	-

Additionally, certain assets are measured at fair value on a non-recurring basis. These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following table summarizes the Company’s financial instruments that were measured at fair value on a non-recurring basis at June 30, 2009:

	June 30, 2009
		Total	Level 1	Level 2	Level 3
	(in thousands)

Impaired loans		$7,424	-	-	$7,424
Real estate owned		8,614	-	-	8,614

Impaired loans, which are measured for impairment using the fair value of the collateral at June 30, 2009, had a carrying amount of $9.9 million, net of valuation allowances totaling $2.4 million, resulting in an additional provision for loan losses of $1.6 million during the third quarter of fiscal 2009.

The Company used the following methods and significant assumptions to estimate fair value:

Securities: The Company’s securities available for sale primarily consist of mortgage-backed securities issued by U.S. Government sponsored enterprises and trade in active markets. These securities are included under Level 2 because there may or may not be daily trades in each of the individual securities and because the valuation of these securities may be based on instruments that are not exactly identical to those owned by the Company.

Impaired loans: A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. Impaired loans that are collateral dependent are included in the table above.

Real estate owned: Fair value for real estate owned is determined by obtaining appraisals on the properties. The fair value under such appraisals is determined by using an income, cost or comparable sales valuation technique. The fair value is then reduced by management’s estimate for the direct costs expected to be incurred in order to sell the property. Holding costs or maintenance expenses are recorded as period costs when occurred and are not included in the fair value estimate

Note 8 – Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments are as follows:

	June 30, 2009
	Carrying Amount		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and cash equivalents	$	26,778	$	26,778
Mortgage-backed securities available for sale		169,716		169,716
Loans held for sale		5,064		5,064
Loans receivable, gross		427,359		443,895
FHLB stock		9,591		9,591

Financial Liabilities:
Demand and savings deposits		207,013		207,013
Certificates of deposit		168,983		171,079
FHLB advances and other borrowings		88,891		94,972

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents:

The carrying amount approximates fair value.

Mortgage-backed securities available for sale:

The fair values of mortgage-backed securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans held for sale:

The carrying amount approximates fair value.

Loans receivable:

Fair values for loans are estimated using a discounted cash flow analysis, utilizing interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for loans that are classified as substandard or doubtful under the Bank’s asset classification guidelines are estimated using a similar methodology as that employed in computing the appropriate loan loss reserve for classified loans. Fair value of impaired loans is discussed in Note 7.

FHLB stock:

The carrying value of FHLB stock approximates fair value based on the respective redemption provisions.

Deposits:

The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounted cash flow analysis using the rates currently offered for deposits of similar remaining maturities.

FHLB advances and other borrowings:

The fair value of the borrowings is estimated by discounting the future cash flows using the current rate at which similar borrowings with similar remaining maturities could be made.

Off-balance-sheet instruments:

Fair values of off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the borrower’s credit standing. The fair value of the fees at June 30, 2009 were insignificant.

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 continue to decline;

·	changes in the interest rate environment that reduce the Company’s interest margins or reduce the fair value of financial instruments;

·	the credit risk of lending activities, including risks related to construction and land 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;

·	legislative or regulatory changes that adversely affect the Company’s business, including restrictions or limitations on permissible lending activities for thrifts and savings banks;

·	our ability to integrate the operations from any acquisition we may make;

·	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.

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.

Background and Overview

Home Federal Bank (the “Bank”) was founded in 1920 as a building and loan association and reorganized as a federal mutual savings and loan association in 1936. On December 6, 2004, the Bank converted to stock form and reorganized into the two-tiered mutual holding company form of organization and formed Home Federal MHC and Home Federal Bancorp, Inc. (“Old Home Federal”). In connection with that transaction, Old Home Federal 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 Old Home Federal. In connection with that transaction, Old Home Federal also established and capitalized the Home Federal Foundation (“Foundation”) for the purpose of supporting charitable organizations and activities that enhance the quality of life for residents within the Bank’s market area. The Foundation was capitalized with a $1.8 million one-time contribution, which consisted of 146,004 shares of its common stock and $365,010 in cash.

On May 11, 2007, the Boards of Directors of Old Home Federal, Home Federal MHC and the Bank adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which the Bank reorganized from the mutual holding company structure to the stock holding company structure. As a result of that transaction, Home Federal Bank formed a new stock holding company, Home Federal Bancorp, Inc. (“we”, “us”, the “Company”), that serves as the holding company for Home Federal Bank. Home Federal Bancorp, Inc., is a Maryland corporation. The Conversion was completed on December 19, 2007.

Pursuant to the terms of the Plan, shares of outstanding common stock of Old Home Federal were exchanged for 1.136 shares of the Company’s common stock. Cash was paid in lieu of fractional shares. The Conversion was approved by the Bank’s members, 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 U.S. Russell 2000® Index.

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

The Bank serves the Treasure Valley region of southwestern Idaho, which includes Ada, Canyon, Elmore and Gem counties, through its 15 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 capital. 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 following items summarize the key factors affecting performance of the Company and the key strategic initiatives undertaken by management during the Company’s third quarter of fiscal year 2009:

■	Economic conditions in the Treasure Valley continued to deteriorate as a result of rising unemployment, bankruptcies and foreclosures and declining real estate values, which resulted in rising levels of nonperforming assets and the need for an additional provision for loan losses;

■	The Company’s total assets declined and maturing borrowings were repaid with excess cash;

■	Total loans declined reflecting a decrease in lending opportunities to good credit customers in Southwestern Idaho and management’s strategy to reduce 1-4 family residential loan exposure;

■	Core deposits increased and certificates of deposit decreased as management continued to focus on low-cost relationship accounts;

■	The Bank launched a new checking account product that is expected to increase core deposit balances and generate interchange income;

■	While nonperforming loans increased during the quarter, loans delinquent less than 90 days declined compared to March 31, 2009;

■	Deteriorating asset quality and foreclosed asset valuations resulted in increased operating expenses through additional valuation allowances and maintenance and property tax expense;,
■	The Bank accrued $250,000 related to a special assessment levied by the Federal Deposit Insurance Corporation (“FDIC”) to be paid in September 2009; and
■	The Bank maintained its strong capital position with a total risk-based capital ratio of 33.6% at
	June 30, 2009.

The current economic and interest rate environments continue to challenge management’s growth plans. Total assets declined during the third quarter of fiscal year 2009 as a lack of demand for loans, or more importantly a diminished supply of creditworthy lending opportunities, and residential loan refinancing, limited the Company’s ability to increase outstanding loan balances. Alternative investments are also unattractive as investment securities offer very low yields within management’s credit and interest rate risk tolerances. As competitor financial institutions continue to struggle with liquidity, some are offering deposit rates that exceed the Company’s wholesale borrowing costs. Therefore, certificate of deposit balances have declined as some customers chose to move their maturing certificate of deposit balances to competitors in search of higher returns.

Consistent with its business strategy, the Company reduced fixed-term borrowing balances with the Federal Home Loan Bank of Seattle (“FHLB”) and management of the Bank continued to focus on growing core deposits, defined as non-maturity deposits such as checking, savings and money market accounts, which management believes will increase the franchise value of the Company and improve profitability by reducing interest rate sensitivity and high-cost borrowing balances. Core deposit relationships should also increase revenue through service and interchange fee income. In response to recent declines in nonsufficient fund and interchange income and to execute the strategy of increasing core deposit balances, the Bank launched a new checking account, the “Ultimate Checking Account,” during the third quarter of fiscal 2009. Management believes this will result in higher checking account balances and provide an incentive for customers to use their check cards more frequently, which should result in higher interchange income.

While balances on loans delinquent less than 90 days declined at June 30, 2009, compared to March 31, 2009, nonperforming assets increased during the third quarter of fiscal 2009. Commercial real estate loans are now being pressured as property vacancies continue to climb in the Treasure Valley and the slowdown in consumer spending is causing many independent and national retailers to close stores or reduce inventory. The Bank’s Credit Administration Department is also spending considerable time reviewing home equity lines of credit and, in some cases, suspending lines at their current balances in order to mitigate future loan losses.

Micron Technology, Inc., one of the larger employers headquartered in our market area, recently announced a plan to eliminate 2,000 jobs in the Treasure Valley during calendar 2009. The unemployment rate in the Treasure Valley has increased significantly over the last 12 months as total employment in the Boise-Nampa metropolitan statistical area fell 7.3% in June 2009 to 255,000 nonfarm employees from 275,000 in June 2008.

Nonetheless, management is optimistic about the long-term outlook for the Company as capital levels remain very high compared to peers and the level of liquidity in the balance sheet provides flexibility to execute several strategies to weather this economic recession.

Critical Accounting Estimates and Related Accounting Policies

Allowance for Loan Losses. Management recognizes that losses may occur over the life of a loan and that the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management assesses the allowance for loan losses on a quarterly basis by analyzing several factors including delinquency rates, charge-off rates and the changing risk profile of the Bank’s loan portfolio, as well as local economic conditions such as unemployment rates, bankruptcies and vacancy rates of business and residential properties.

The Company believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a

sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively impact 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 an individually reviewed loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration losses that are inherent within the portfolio but have not been identified. The general allowance is determined by applying a historical loss percentage to various types of loans with similar characteristics and classified loans that are not analyzed specifically. Adjustments are made to historical loss percentages to reflect current economic and internal environmental factors, such as changes in underwriting standards and management turnover, which may increase or decrease those loss factors. As a result of the imprecision in calculating inherent and potential losses, a range is added to the general allowance to estimate an allowance for loan losses that is adequate to cover losses that may arise as a result of changing economic conditions and other qualitative factors that may alter historical loss experience. Additionally, future events may evidence additional losses that were unknown at the time management estimated the allowance, which may require an increase in the allowance for loan losses in future periods.

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.

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.

Comparison of Financial Condition at June 30, 2009 and September 30, 2008

For the nine months ended June 30, 2009, total assets decreased $52.3 million. The changes in total assets were primarily concentrated in the following asset categories:

					Increase/(Decrease)

	Balance at June 30, 2009		Balance at September 30, 2008		Amount			Percent
	(dollars in thousands)
Mortgage-backed securities, at fair value	$	169,716	$	188,787	$	(19,071	)		(10.1	)%
Loans receivable, net		418,198		459,813		(41,615	)		(9.1	)
Real estate and other property owned		8,614		650		7,964			1,225

Cash. Cash and amounts due from depository institutions increased $3.5 million to $26.8 million at June 30, 2009, from $23.3 million at September 30, 2008. The increase was primarily attributable to principal repayments on one- to four-family residential mortgages and mortgage backed securities offset by maturing borrowings from the Federal Home Loan Bank of Seattle (the “FHLB”). Management has been maintaining higher than optimal levels of cash to provide liquidity in the event of material degradation in the economy and flexibility for strategic initiatives. Additionally, $9.3 million of FHLB borrowings with an average rate of 5.00% are scheduled to mature in September 2009, which will be repaid with excess cash if alternative, more profitable, investments are not available at that time.

Securities. Mortgage-backed securities decreased $19.1 million to $169.7 million at June 30, 2009, from $188.8 million at September 30, 2008. The decrease was the net of principal repayments and the increase in the value of the mortgage backed securities portfolio during the nine months ended June 30, 2009. At June 30, 2009, the unrealized gain on the portfolio was $4.0 million compared to an unrealized loss of $2.3 million at September 30, 2008. Principal reduction totaled $25.4 million for the nine months ended June 30, 2009 and is occurring at an accelerating rate due to the historically-low rates available on residential mortgages, which is increasing refinancing activity.

Nearly all of the Company’s mortgage-backed securities are issued by U.S. Government sponsored enterprises, primarily Fannie Mae and Freddie Mac. While the U.S. Government has affirmed its support for government sponsored enterprises and the mortgage-backed securities they issued, significant deterioration in the financial strength of Fannie Mae, Freddie Mac or mortgage-backed security insurers may have a material effect on the valuation and performance of the Company’s mortgage-backed securities portfolio in future periods.

Non-agency, also referred to as “private label,” mortgage-backed securities had a fair value of $3.0 million at June 30, 2009, compared to their amortized cost of $3.3 million. The securities carried a rating of ‘AAA’ by Moody’s and Standard & Poor’s at that date. However, one of theses securities was downgraded by Moody’s in July 2009 from AAA to A1. Management has reviewed the delinquency status, credit support and collateral coverage of the loans pooled in the private label securities portfolio and has concluded the securities were not other than temporarily impaired at June 30, 2009, or after the ratings downgrade in July 2009. However, continued deterioration in the economy and rapid increases in unemployment may result in a change in the performance expectation for these securities in the future, which may negatively impact the Company’s earnings. At June 30, 2009, the Company did not own collateralized debt obligations or trust preferred securities.

FHLB Stock. At June 30, 2009, the Bank held $9.6 million of common stock in the FHLB. This security is reported at par value, which represents the Bank’s cost. The FHLB recently announced that it would report a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency (the “FHFA”), its primary regulator. As a result, the FHLB has stopped paying a dividend and stated that it would suspend the repurchase and redemption of outstanding common stock until its retained earnings deficiency was reclaimed.

The FHLB has communicated to the Company that it believes the calculation of risk-based capital under the current rules of the FHFA significantly overstates the market and credit risk of the FHLB’s private-label mortgage-backed securities in the current market environment and that they have enough capital to cover the risks reflected in the FHLB’s balance sheet. As a result, the Company has not recorded an "other than temporary impairment" on its investment in FHLB stock. However, continued deterioration in the FHLB’s financial position may result in

impairment in the value of those securities, or the requirement that the Bank contribute additional funds to recapitalize the FHLB, or reduce the Bank’s ability to borrow funds from the FHLB, which would impair the Bank’s ability to meet liquidity demands.

Loans. Net loans receivable decreased $41.6 million to $418.2 million at June 30, 2009, from $459.8 million at September 30, 2008. One- to four-family residential mortgage loans decreased $34.3 million as mortgage rates remained at historically low levels through the third quarter of fiscal 2009, which led to significantly higher levels of mortgage loan refinancing. Additionally, the Bank originates conventional one- to four-family residential loans for sale in the secondary market. As a result, the residential loan portfolio will likely continue to decline as new loans are not added to the portfolio. Consumer loans decreased $5.3 million to $51.0 million as of June 30, 2009. Commercial real estate, multifamily and acquisition and development loans increased $1.5 million to $200.2 million at June 30, 2009 from $198.6 million at September 30, 2008. The Company plans to continue its emphasis on commercial and small business banking products.

Asset Quality. Net charge-offs totaled $2.5 million during the quarter ended June 30, 2009. Loans delinquent 30 to 89 days totaled $3.8 million at June 30, 2009, compared to $11.6 million at March 31, 2009, and $6.5 million at September 30, 2008. The following table summarizes loans delinquent 30 to 89 days:

	June 30,		March 31,		September 30,
	2009		2009		2008
	(in thousands)
Land acquisition and development	$	623	$	133	$	1,150
One- to four-family construction		245		760		241
Commercial real estate		1,357		5,313		3,094
One- to four-family residential		1,300		5,242		1,836
Other		256		193		190
Total loans delinquent 30 to 89 days	$	3,781	$	11,641	$	6,511

Nonperforming assets, which includes all loans on nonaccrual status, impaired loans and real estate owned, totaled $25.1 million at June 30, 2009, compared to $19.1 million at March 31, 2009, and $10.6 million at September 30, 2008. The allowance for loan losses was $8.3 million, or 1.93%, of gross loans at June 30, 2009, compared to $7.3 million, or 1.64% of gross loans at March 31, 2009, and $4.6 million, or 0.98% of gross loans at September 30, 2008.

When a loan becomes 90 days delinquent, the Bank places the loan on nonaccrual status. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Generally, an impaired loan is also placed on nonaccrual status, regardless of delinquency. As a result, some loans that are not 90 days or more past due may be in nonaccrual status if it is considered impaired.

The delinquency table above includes $1.5 million, $1.2 million, and $5.1 million of loans that were placed on nonaccrual status at June 30, 2009, March 31, 2009 and September 30, 2008, respectively, which are also included in the table below that summarizes total nonperforming loans (including nonaccrual and impaired loans) and real estate owned:

	June 30, 2009				March 31, 2009				September 30, 2008
	(in thousands)
	Balance		Loss Reserve		Balance		Loss Reserve		Balance		Loss Reserve
Land acquisition and development	$	3,734	$	1,352	$	5,266	$	1,029	$	3,975	$	916
One- to four-family construction		3,478		390		2,307		286		4,239		596
Commercial real estate		4,000		256		3,074		220		-		-
One- to four-family residential		5,169		816		3,943		441		1,701		219
Other		81		6		-		-		30		2
Total nonperforming and impaired loans	$	16,462		2,820	$	14,590		1,976	$	9,945		1,733
General loss reserve				5,446				5,357				2,846
Total allowance for loan losses			$	8,266			$	7,333			$	4,579

Real estate owned, net	$	8,614			$	4,478			$	650

Total nonperforming assets	$	25,076			$	19,068			$	10,595

Troubled debt restructurings that are not included in the delinquency or nonperforming asset tables above totaled $1.1 million and $654,000 and $812,000 at June 30, 2009, March 31, 2009 and September 30, 2008, respectively.

Real estate owned increased $4.1 million during the third quarter of fiscal 2009 to $8.6 million at June 30, 2009, and was comprised of $4.3 million of land development and speculative one- to four-family construction projects, $3.9 million of commercial real estate and $383,000 of one- to four-family residential properties.

Nearly all of the Company’s loans are secured by collateral located in the Treasure Valley or southern Idaho. The Bank’s commercial real estate and construction and land development loans are secured by properties in the following locations in Idaho: approximately 61% and 19% Ada and Canyon counties, respectively, approximately 6% in eastern Idaho, 5% in Valley County, and 3% in the Twin Falls and Ketchum areas.

In 2005, the Bank purchased approximately $38.8 million of residential real estate loans from Countrywide Financial, now Bank of America, who continues to service the loans. Balances on the portfolio totaled $22.4 million at June 30, 2009. Approximately 92% of the portfolio balance is secured by properties outside of the state of Idaho and delinquencies and foreclosures are rising quickly in that portfolio. At June 30, 2009, this portfolio had $3.1 million of nonperforming loans that are reported in the table above. The total reserve allocated to loans in this loan portfolio was $1.1 million at June 30, 2009, or 5% of the balance of loans outstanding on that date.

At June 30, 2009, nearly all of the Company’s home equity lines of credit (“HELOC”) were directly originated through the Bank’s branch network. However, approximately $924,000 of HELOCs, or 3% of the HELOC portfolio at June 30, 2009, were referred to the Bank through broker relationships. While nearly all of these loans are secured by properties in southern Idaho, management ceased indirect origination of HELOCs in fiscal 2008.

The Treasure Valley economy continues to deteriorate as unemployment rose quickly from 4.80% in September 2008 to an estimated 10.1% in June 2009. New home and commercial real estate construction has nearly come to a standstill as excess inventory in the residential and commercial real estate markets continues to reduce property

values. The pending closure of retail locations as a result of reduced consumer spending will exacerbate this problem.

Management believes the Treasure Valley is at the beginning of a downturn in the commercial real estate market. As a result of this uncertainty, management recorded a significant provision for loan losses during the nine months ended June 30, 2009, in order to increase the general reserve component of the allowance for loan losses. While the $2.4 million provision for loan losses for the full fiscal year of 2008 and the $8.1 million provision recorded for the first nine months of fiscal 2009 exceeds the level of net charge-offs during those periods, management believes such an increase in the allowance for loan losses is prudent and appropriate and that the allowance for loan losses reflects management’s best estimate of probable, known and estimable losses inherent in the loan portfolio at June 30, 2009. However, additional information may later come to management’s attention, evidencing losses in excess of the amounts estimated, which may negatively affect earnings in the future.

Deposits. Deposits increased $3.1 million, or 0.8%, to $376.0 million at June 30, 2009, from $372.9 million at September 30, 2008, primarily as a result of savings accounts. Savings account balances have been steadily increasing throughout fiscal 2009. The decrease in certificates of deposit was due to choosing not to match rates offered by local competitors that in many cases exceeded the Bank’s cost of alternative funding sources. The Bank had no brokered deposits at June 30, 2009, or September 30, 2008.

The following table details the composition of the deposit portfolio and changes in deposit balances:

					Increase (decrease)

	Balance at June 30, 2009		Balance at September 30, 2008		Amount			Percent
	(dollars in thousands)

Noninterest-bearing demand deposits	$	39,931	$	41,398	$	(1,467	)		(3.5	)%
Interest-bearing demand deposits		131,202		127,714		3,488			2.7
Savings deposits		35,880		26,409		9,471			35.9
Certificates of deposit		168,983		177,404		(8,421	)		(4.7	)
Total deposit accounts	$	375,996	$	372,925	$	3,071			0.8	%

Approximately 74% of the certificates of deposit portfolio at June 30, 2009, is scheduled to mature within 12 months. While this presents an opportunity to reduce the cost of interest bearing deposits in the current low interest rate environment, the significant level of maturities of certificates also places a burden on the Company’s liquidity if management is unable to retain the maturing balances.

Borrowings. FHLB advances decreased $48.1 million, or 35.1%, to $88.9 million at June 30, 2009, from $137.0 million at September 30, 2008. Excess cash and principal payment proceeds from mortgage-backed securities and residential loan portfolios were used to repay FHLB advances as they matured. The Bank uses FHLB advances as an alternative funding source to deposits, manage funding costs, reduce interest rate risk, and, from time to time, to leverage the balance sheet.

Deferred Income Tax Asset/Liability. The Company had a deferred tax asset of $1.9 million at June 30, 2009 versus a deferred tax asset of $1.8 million at September 30, 2008. There are three major components to the change. There was a $2.5 million shift from an unrealized loss on the Company’s mortgage-backed securities’ portfolio as of September 30, 2008 to an unrealized gain as of June 30, 2009, as interest rates fell and spreads narrowed, increasing the value of the securities portfolio during the quarter. There was a $1.5 million increase in deferred tax assets due to an $8.1 million provision for loan loss recorded during the nine month period ended June 30, 2009. Lastly, deferred tax liability decreased $710,000 due to the sale of mortgage servicing rights completed in December 2008.

Equity. Stockholders’ equity decreased $6.5 million, or 3%, to $198.7 million at June 30, 2009, compared to $205.2 million at September 30, 2008. The execution of the entire share repurchase program during the quarter ended March 31, 2009, was the primary cause for the decrease in stockholders’ equity. Dividends and a year-to-date loss from operations in fiscal 2009 reduced retained earnings while a lower interest rate environment at June 30, 2009

increased the unrealized gain on securities by $3.8 million, net of tax, compared to September 30, 2008. The Company’s book value per share as of June 30, 2009 was $11.90 per share based upon 16,698,168 outstanding shares of common stock.

Comparison of Operating Results for the Three Months Ended June 30, 2009 and June 30, 2008

Net loss for the three months ended June 30, 2009 was $1.2 million, or $0.08 per diluted share, compared to net income of $1.1 million, or $0.07 per diluted share, for the three months ended June 30, 2008. Total revenue for the quarter ended June 30, 2009, which consisted of net interest income before the provision for loan losses plus noninterest income, decreased $323,000 or 3.7% to $8.3 million from $8.6 million for the same period of the prior year. Total revenue for the third quarter of fiscal 2009 was unchanged at $8.3 million compared to the linked second quarter of fiscal 2009. The Company’s efficiency ratio increased to 84.26% for the quarter ended June 30, 2009, compared to 71.40% for the same quarter a year ago due to higher expenses and lower revenue in the 2009 period.

Net Interest Income. Net interest income decreased $199,000, or 3.4%, to $5.7 million for the three months ended June 30, 2009, from $5.9 million for the three months ended June 30, 2008. The decrease in net interest income is primarily attributable to approximately $307,000 in interest income reversed due to nonaccrual loans.

The Company’s net interest margin increased 24 basis points to 3.53% for the quarter ended June 30, 2009, from 3.29% for the same quarter last year. The improvement in the net interest margin is primarily attributable to the decrease in interest expense between the two periods.

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

	Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
	Increase (Decrease) Due to

	Rate			Volume			Total
	(in thousands)
Interest-earning assets:
Loans receivable, net	$	(513	)	$	(617	)	$	(1,130	)
Loans held for sale		(11	)		15			4
Interest-bearing deposits in other banks		(93	)		(15	)		(108	)
Mortgage-backed securities		(78	)		(311	)		(389	)
FHLB stock		(60	)		-			(60	)
Total net change in income on interest-earning assets	$	(755	)	$	(928	)	$	(1,683	)

Interest-bearing liabilities:
Savings deposits	$	(4	)	$	16		$	12
Interest-bearing demand deposits		(12	)		4			(8	)
Money market accounts		(108	)		(50	)		(158	)
Certificates of deposit		(527	)		(119	)		(646	)