Edgar Filing: Home Federal Bancorp, Inc.

q123110home.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2010

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

For the transition period from _____ to _____

Commission File Number: 001-33795

HOME FEDERAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Yes [X] No [ ]

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

Yes [ ] No [ ]

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

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

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

Yes [ ] No [X]

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

HOME FEDERAL BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

SIGNATURES

Item 1. Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
	December 31, 2010			September 30, 2010
ASSETS
Cash and equivalents	$	212,246		$	416,426
Investments available for sale, at fair value		426,192			275,180
Loans and leases receivable, net of allowance for loan and lease losses of $15,409 and $15,432		573,400			621,011
Loans held for sale		3,263			5,135
Accrued interest receivable		2,905			2,694
FDIC indemnification receivable, net		69,546			64,574
Bank owned life insurance		12,542			12,437
Real estate and other property owned		25,147			30,481
FHLB stock, at cost		17,717			17,717
Core deposit intangible		3,776			3,971
Property and equipment, net		28,209			27,955
Other assets		5,711			5,280
TOTAL ASSETS	$	1,380,654		$	1,482,861

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts:
Noninterest-bearing demand	$	134,652		$	138,300
Interest-bearing demand		231,590			225,794
Money market		172,657			180,454
Savings		74,681			69,079
Certificates		492,032			576,035
Total deposit accounts		1,105,612			1,189,662

Advances by borrowers for taxes and insurance		539			4,658
Interest payable		578			631
FHLB advances and other borrowings		60,368			67,622
Deferred compensation		5,656			5,583
Deferred income tax liability, net		866			2,211
Other liabilities		5,537			7,406
Total liabilities		1,179,156			1,277,773

STOCKHOLDERS’ EQUITY
Serial preferred stock, $.01 par value; 10,000,000 authorized;
issued and outstanding, none		-			-
Common stock, $.01 par value; 90,000,000 authorized;
issued and outstanding:		167			167
Dec. 31, 2010 - 17,478,171 issued; 16,710,025 outstanding
Sept. 30, 2010 - 17,460,311 issued, 16,687,561 outstanding
Additional paid-in capital		153,139			152,682
Retained earnings		54,741			56,942
Unearned shares issued to employee stock ownership plan		(8,396	)		(8,657	)
Accumulated other comprehensive income		1,847			3,954
Total stockholders’ equity		201,498			205,088
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,380,654		$	1,482,861

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) (Unaudited)
	For the Three Months Ended
	December 31, 2010			December 31, 2009
Interest and dividend income:
Loans and leases	$	9,347		$	7,103
Investment securities		1,684			1,756
Other interest and dividends		213			27
Total interest and dividend income		11,244			8,886

Interest expense:
Deposits		2,266			1,674
FHLB advances and other borrowings		664			831
Total interest expense		2,930			2,505
Net interest income		8,314			6,381
Provision for loan losses		3,000			700
Net interest income after provision for loan losses		5,314			5,681

Noninterest income:
Service charges and fees		2,459			2,264
Gain on sale of loans		348			183
Increase in cash surrender value of life insurance		105			107
FDIC indemnification recovery		1,996			-
Other		1,395			321
Total noninterest income		6,303			2,875

Noninterest expense:
Compensation and benefits		7,094			4,617
Occupancy and equipment		1,845			1,064
Data processing		1,177			800
Advertising		213			260
Postage and supplies		254			166
Professional services		718			479
Insurance and taxes		1,049			558
Amortization of intangibles		195			-
Provision for real estate owned		675			801
Other		599			338
Total noninterest expense		13,819			9,083
Loss before income taxes		(2,202	)		(527	)
Income tax benefit		(871	)		(218	)
Net loss	$	(1,331	)	$	(309	)

Loss per common share:
Basic	$	(0.08	)	$	(0.02	)
Diluted		(0.08	)		(0.02	)
Weighted average number of shares outstanding:
Basic		15,663,436			15,447,705
Diluted		15,663,436			15,447,705

Dividends declared per share:	$	0.055		$	0.055

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share data) (Unaudited)

	Common Stock					Additional		Retained			Unearned Shares Issued to Employee Stock Ownership Plan			Accumulated Other Comprehensive
	Shares			Amount		Paid-In Capital		Earnings			(“ESOP”)			Income (Loss)			Total
Balance at September 30, 2009		16,698,168		$	167	$	150,782	$	64,483		$	(9,699	)	$	3,932		$	209,665
Restricted stock forfeited, net of new issuance		(25,607	)		-		-											-
ESOP shares committed to be released							444					1,042						1,486
Exercise of stock options		15,000					161											161
Share-based compensation							1,279											1,279
Tax adjustment from equity compensation plans							16											16
Dividends paid ($0.220 per share)									(3,450	)								(3,450	)

Comprehensive income (loss):
Loss before extraordinary item									(4,396	)								(4,396	)
Extraordinary gain, net of tax									305									305
Other comprehensive income:
Change in unrealized holding loss on securities available for sale, net of taxes of $(49)															82			82
Adjustment for realized gains, net of taxes of $38															(60	)		(60	)
Comprehensive income																		(4,069	)

Balance at September 30, 2010		16,687,561			167		152,682		56,942			(8,657	)		3,954			205,088
Shares issued, net of forfeitures		4,604			-													-
ESOP shares committed to be released							75					261						336
Exercise of stock options		17,860					186											186
Share-based compensation							196											196
Dividends paid ($0.055 per share)									(870	)								(870	)

Comprehensive income:
Net loss									(1,331	)								(1,331	)
Other comprehensive income:
Change in unrealized holding gain on securities available for sale, net of taxes of ($822)															(2,107	)		(2,107	)

Comprehensive loss																		(3,438	)

Balance at December 31, 2010		16,710,025		$	167	$	153,139	$	54,741		$	(8,396	)	$	1,847		$	201,498

See accompanying notes.

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

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(84,050	)		7,593
Net decrease in advances by borrowers for taxes and insurance		(4,119	)		(472	)
Repayment of FHLB advances		(6,604	)		(7,850	)
Net proceeds from (repayments of) other borrowings		(650	)		4
Proceeds from exercise of stock options		186			-
Dividends paid		(870	)		(863	)
Net cash used by financing activities		(96,107	)		(1,588	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(204,180	)		18,518
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		416,426			49,953
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	212,246		$	68,471

(Continued)

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) (Unaudited)	Three months Ended December 31,
	2010			2009
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2,983		$	2,523
Taxes		(49	)		(700	)

NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate and other assets in settlement of loans	$	4,667		$	2,270
Fair value adjustment to securities available for sale, net of taxes		(2,107	)		(869	)

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

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

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

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

Note 2 - Critical Accounting Estimates and Related Accounting Policies

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

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

The Company believes that the accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period, requiring management to make assumptions about probable incurred losses inherent in the loan portfolio at the balance sheet date. The impact of a sudden large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings.

The Company’s methodology for analyzing the allowance for loan losses consists of specific allocations on significant individual credits and a general allowance amount, including a range of losses. The specific allowance component is determined when management believes that the collectability of an individually reviewed loan has been impaired and a loss is probable. The general allowance component relates to assets with no well-defined deficiency or weakness and takes into consideration loss that is inherent within the portfolio but has not been identified. The general allowance is determined by applying a historical loss percentage to various types of loans with similar characteristics and classified loans that are not analyzed specifically. Adjustments are made to historical

loss percentages to reflect current economic and internal environmental factors such as changes in underwriting standards and unemployment rates that may increase or decrease those loss factors. As a result of the imprecision in calculating inherent and potential losses, a range is added to the general allowance to provide an allowance for loan losses that is adequate to cover losses that may arise as a result of changing economic conditions and other qualitative factors that may alter historical loss experience.

The allowance for loan losses is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries. Provisions for losses on covered loans are recorded gross of recoverable amounts from the FDIC under the loss sharing agreements. The recoverable portion of the provision for loan losses on covered loans is recorded in noninterest income.

Acquired Loans. On August 7, 2009, the Bank entered into a purchase and assumption agreement with loss sharing agreements with the FDIC to assume the deposits and certain assets and liabilities of Community First Bank, a full-service commercial bank headquartered in Prineville, Oregon (“CFB Acquisition”). Under the loss sharing agreements, the FDIC has agreed to reimburse Home Federal Bank for 80% of losses up to $34.0 million, and 95% of losses that exceed that amount. Loans acquired in the CFB Acquisition were valued as of the acquisition date in accordance with Statement of Financial Accounting Standard ("SFAS") No. 141, which has since been superseded by Accounting Standards Codification Topic (“ASC”) 805 [formerly SFAS No. 141(R)]. The Company was not permitted to adopt ASC 805 prior to its effective date, which was October 1, 2009. ASC 310-30 applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. For loans purchased in the CFB Acquisition that were accounted for under ASC 310-30, management determined the value of the loan portfolio based on work provided by an appraiser. Factors considered in the valuation were projected cash flows for the loans, the type of loan and related collateral, classification status and current discount rates. Loans purchased in the CFB Acquisition accounted for under ASC 310-30 were not aggregated into pools and are accounted for on a loan-by-loan basis. An allowance for loan losses was established for loans purchased in the CFB Acquisition that are not accounted for under ASC 310-30.

On July 30, 2010, the Bank entered into a purchase and assumption agreement with loss sharing agreements with the FDIC to assume all of the deposits and certain assets of LibertyBank, a full service commercial bank headquartered in Eugene, Oregon (“LibertyBank Acquisition”). See Note 3 to the Selected Notes to the Consolidated Financial Statements for additional information on the LibertyBank Acquisition. Loans purchased in the LibertyBank Acquisition are valued as of acquisition date in accordance with ASC 805. Further, the Company elected to account for all loans purchased in the LibertyBank Acquisition within the scope of ASC 310-30. Under ASC 805 and ASC 310-30, loans purchased in the LibertyBank Acquisition were recorded at fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date, unlike the loans purchased in the CFB Acquisition, which are accounted for under previous accounting guidance as described above. In situations where loans have similar risk characteristics, loans were aggregated into pools to estimate cash flows under ASC 310-30. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The Company aggregated all of the loans purchased in the LibertyBank Acquisition into 22 different pools, based on common risk characteristics such as loan classification, loan structure, nonaccrual status and collateral type.

The cash flows expected over the life of the pools are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to cumulative loss rates, loss curves and prepayment speeds are utilized to calculate the expected cash flows. Under ASC 310-30, the excess of the expected cash flows at acquisition over the fair value is considered to be the accretable yield and is recognized as interest income over the life of the loan or pool. The excess of the contractual cash flows over the expected cash flows is considered to be the nonaccretable difference. Subsequent increases in cash flow over those expected at purchase date in excess of fair value are recorded as an adjustment to accretable difference on a prospective basis. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the ASC 310-30 portfolio at the carrying amount.

FDIC Indemnification Receivable. In conjunction with the CFB Acquisition and the LibertyBank Acquisition, the Bank entered into loss sharing agreements with the FDIC. At each acquisition date the Company elected to account for amounts receivable under the loss sharing agreements as an indemnification asset. Subsequent to the acquisitions, changes in the value of the indemnification asset are based upon the estimated losses in the covered assets purchased in the acquisitions. The FDIC indemnification asset is accounted for on the same basis as the related covered loans and is the present value of the cash flows the Company expects to collect from the FDIC under the loss sharing agreements. The difference between the present value and the undiscounted cash flow the Company expects to collect from the FDIC is accreted into noninterest income over the life of the FDIC indemnification receivable.

The FDIC indemnification receivable is adjusted for any changes in expected cash flows based on the loan performance. Any increases in cash flow of the loans over those expected will reduce the FDIC indemnification receivable and any decreases in cash flow of the loans over those expected will increase the FDIC indemnification receivable. The FDIC indemnification receivable will be reduced as loss sharing payments are received from the FDIC. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

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

Deferred Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes are computed using the asset and liability approach as prescribed in ASC Topic 740, “Income Taxes.” Under this method, a deferred tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in an institution’s income tax returns. The deferred tax provision for the year is equal to the net change in the net deferred tax asset from the beginning to the end of the year, less amounts applicable to the change in value related to investments available for sale. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. The primary differences between financial statement income and taxable income result from acquisition intangibles, the allowance for loan losses, deferred compensation, purchase accounting adjustments and related deferred acquisition gains. Deferred income taxes do not include a liability for pre-1988 bad debt deductions allowed to thrift institutions that may be recaptured if the institution fails to qualify as a bank for income tax purposes in the future.

Note 3 – Acquisition of LibertyBank

On July 30, 2010, the Bank entered into a purchase and assumption agreement with loss sharing agreements with the FDIC to assume all of the deposits and certain assets of LibertyBank in Eugene, Oregon. LibertyBank operated fifteen locations in central and western Oregon. The LibertyBank Acquisition consisted of assets with a preliminary fair value estimate on the acquisition date of approximately $690.6 million, including $373.1 million of cash and cash equivalents, $197.6 million of loans and leases and $34.7 million of securities. Liabilities with a preliminary fair value estimate of $688.6 million were also assumed, including $682.6 million of deposits. The LibertyBank Acquisition has been incorporated prospectively in the Company’s financial statements; therefore, year over year results of operations may not be comparable.

Under the loss sharing agreements, the FDIC has agreed to reimburse Home Federal for 80% of losses on purchased REO, nearly all of the loans and leases purchased in the LibertyBank Acquisition. Loans and foreclosed and repossessed assets purchased in all FDIC-assisted acquisitions (including the CFB Acquisition) that are subject to the loss sharing agreements are referred to herein as “covered loans” and “covered assets.” Loans and foreclosed and repossessed assets organically originated or purchased loans not subject to loss sharing agreements are referred to herein as “noncovered loans” and “noncovered assets.”

Note 4 - Earnings (Loss) Per Share

The Company has granted stock compensation awards with non-forfeitable dividend rights, which are considered participating securities. As such, earnings (loss) per share (“EPS”) is computed using the two-class method as required by ASC 260-10-45. Basic EPS is computed by dividing net income (or loss) allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are committed to be released. The following table presents the computation of basic and diluted EPS for the periods indicated:

	Three Months Ended December 31,
	2010			2009
	(In thousands except share data)

Net loss	$	(1,331	)	$	(309	)
Allocated to participating securities		(14	)		(5	)
Net loss allocated to common shareholders	$	(1,317	)	$	(304	)

Weighted average common shares outstanding, including shares considered participating securities		15,830,261			15,719,698
Less: Average participating securities		(166,825	)		(271,993	)
Weighted average shares		15,663,436			15,447,705
Net effect of dilutive restricted stock		-			- -
Weighted average shares and common stock equivalents		15,663,436			15,447,705
Basic loss per common share	$	(0.08	)	$	(0.02	)
Diluted loss per common share		(0.08	)		(0.02	)

Options excluded due to their anti-dilutive effect on EPS		886,381			946,364

Note 5 - Investment securities

Investment securities available for sale consisted of the following at the dates indicated:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
December 31, 2010
Obligations of U.S. Government-sponsored enterprises (“GSE”)	$	95,508	$	120	$	(1,106	)	$	94,522
Obligations of states and political subdivisions		15,102		14		(630	)		14,486
Corporate note, FDIC-guaranteed		1,019		2		--			1,021
Mortgage-backed securities, GSE-issued		311,005		6,098		(1,339	)		315,764
Mortgage-backed securities, private label		424		--		(25	)		399
Total	$	423,058	$	6,234	$	(3,100	)	$	426,192

September 30, 2010
Obligations of U.S. GSE	$	51,844	$	255	$	(77	)	$	52,022
Obligations of states and political subdivisions		6,786		86		(83	)		6,789
Corporate note, FDIC-guaranteed		1,022		3		--			1,025
Mortgage backed securities, GSE-issued		208,492		6,692		(264	)		214,920
Mortgage backed securities, private label		449		--		(25	)		424
Total	$	268,593	$	7,036	$	(449	)	$	275,180

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

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

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

September 30, 2010
Obligations of U.S. GSE	$	14,111	$	(77	)	$	--	$	--		$	14,111	$	(77	)
Obligations of states and political subdivisions		3,674		(83	)		--		--			3,674		(83	)
Mortgage-backed securities, GSE issued		50,997		(264	)		--		--			50,997		(264	)
Mortgage-backed securities, private label		424		(25	)		--		--			424		(25	)
Total	$	69,206	$	(449	)	$	--	$	--		$	69,206	$	(449	)

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

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

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

The contractual maturities of investment securities available for sale are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.

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

Note 6 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized by collateral type as follows:

	December 31, 2010						September 30, 2010
	Balance			Percent of Gross			Balance			Percent of Gross
	(dollars in thousands)
Real estate:
One-to-four family residential	$	148,916			25.26	%	$	157,574			24.75	%
Multi-family residential		20,639			3.50			20,759			3.26
Commercial		217,462			36.90			228,643			35.92
Total real estate		387,017			65.66			406,976			63.93

Real estate construction:
One- to four-family residential		20,841			3.54			24,707			3.88
Multi-family residential		2,512			0.43			2,657			0.42
Commercial and land development		17,989			3.05			21,190			3.33
Total real estate construction		41,342			7.02			48,554			7.63

Consumer:
Home equity		54,332			9.22			56,745			8.91
Automobile		1,261			0.21			1,466			0.23
Other consumer		6,904			1.17			6,947			1.10
Total consumer		62,497			10.60			65,158			10.24

Commercial business		92,895			15.76			108,866			17.10
Leases		5,678			0.96			6,999			1.10
Gross loans		589,429			100.00	%		636,553			100.00	%

Deferred loan fees		(620	)					(628	)
Allowance for loan losses		(15,409	)					(15,432	)
Loans receivable, net	$	573,400					$	620,493

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

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

	Nonperforming Loans
	Nonaccrual		Past Due 90 or more Days Still Accruing		Total		Loans Delinquent 30-89 Days		Loans Not Past Due		Total Loans
	(in thousands)
Noncovered loans:
One-to-four family residential	$	4,292	$	-	$	4,292	$	3,361	$	121,768	$	129,421
Multi-family residential		-		-		-		-		9,900		9,900
Commercial real estate		8,733		-		8,733		144		134,000		142,877
Total real estate		13,025		-		13,025		3,505		265,668		282,198

One-to-four family residential construction		-		-		-		-		6,704		6,704
Multi-family residential construction		-		-		-		-		1,513		1,513
Commercial and land development		3,183		-		3,183		-		4,834		8,017
Total real estate construction		3,183		-		3,183		-		13,051		16,234

Home Equity		1,030		-		1,030		284		37,627		38,941
Automobile		18		-		18		2		762		782
Other Consumer		1		-		1		13		5,526		5,540
Total consumer		1,049		-		1,049		299		43,915		45,263

Commercial business		1,235		-		1,235		33		8,120		9,388
Leases		-		-		-		-		380		380

Total noncovered loans		18,492		-		18,492		3,837		331,134		353,463

Covered loans:
One-to-four family residential		667		-		667		-		18,999		19,666
Multi-family residential		2,985		-		2,985		-		7,754		10,739
Commercial real estate		10,264		-		10,264		337		63,985		74,586
Total real estate		13,916		-		13,916		337		90,738		104,991

One-to-four family residential construction		-		-		-		-		14,137		14,137
Multi-family residential construction		998		-		998		-		-		998
Commercial and land development		5,780		-		5,780		262		3,930		9,972
Total real estate construction		6,778		-		6,778		262		18,067		25,107

Home equity		23		-		23		-		15,535		15,558
Automobile		-		-		-		-		480		480
Other consumer		26		3		29		-		1,362		1,391
Total consumer		49		3		52		-		17,377		17,429

Commercial Business		782		-		782		-		83,085		83,867
Leases		-		-		-		-		5,297		5,297

Total covered loans		21,525		3		21,528		599		214,564		236,691

Total gross loans	$	40,017	$	3	$	40,020	$	4,436	$	545,698	$	590,154

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

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

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

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

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

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

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.

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

	Pass		Watch		Special Mention		Substandard			Doubtful		Total Loans
	(in thousands)
Noncovered loans:
One-to-four family residential	$	123,544	$	254	$	-	$	5,623		$	-	$	129,421
Multi-family residential		5,586		1,711		1,035		1,568			-		9,900
Commercial real estate		83,289		10,061		25,663		23,864			-		142,877
Total real estate		212,419		12,026		26,698		31,055			-		282,198
One-to-four family residential construction		6,284		420		-		-			-		6,704
Multi-family residential construction		902		-		-		611			-		1,513
Commercial and land development		4,186		687		447		2,697			-		8,017
Total real estate construction		11,372		1,107		447		3,308			-		16,234
Home equity		38,026		17		39		859			-		38,941
Automobile		772		1		-		9			-		782
Other consumer		5,472		67		1		-			-		5,540
Total consumer		44,270		85		40		868			-		45,263
Commercial business		7,507		108		193		1,580			-		9,388
Leases		380		-		-		-			-		380

Total noncovered loans		275,948		13,326		27,378		36,811			-		353,463

Covered loans:
One-to-four family residential		5,174		355		1,075		13,062			-		19,666
Multi-family residential		7,517		-		-		3,222			-		10,739
Commercial real estate		40,199		2,728		2,787		28,872			-		74,586
Total real estate		52,890		3,083		3,862		45,156			-		104,991
One-to-four family residential construction		5,042		-		-		9,095	</