Edgar Filing: Home Federal Bancorp, Inc.

q33111.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

For the transition period from

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, 16,561,816 shares outstanding as of May 5, 2011.

HOME FEDERAL BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I-FINANCIAL INFORMATION
		2
	ITEM 1. FINANCIAL STATEMENTS

	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23

	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37

	ITEM 4. CONTROLS AND PROCEDURES	38

PART II-OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS	39

	ITEM 1A. RISK FACTORS	39

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES	39

	ITEM 4. REMOVED AND RESERVED	40

	ITEM 5. OTHER INFORMATION	40

	SIGNATURES	41

Item 1. Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited)
	March 31, 2011			September 30, 2010
ASSETS
Cash and equivalents	$	195,720		$	416,426
Investments available for sale, at fair value		439,692			275,180
Loans and leases receivable, net of allowance for loan and lease losses of $14,281 and $15,432		531,130			620,493
Loans held for sale		671			5,135
Accrued interest receivable		3,036			2,694
FDIC indemnification receivable, net		74,518			64,574
Bank owned life insurance		12,643			12,437
Real estate and other property owned		24,577			30,481
FHLB stock, at cost		17,717			17,717
Core deposit intangible		3,590			3,971
Property and equipment, net		28,294			27,955
Other assets		3,942			5,798
TOTAL ASSETS	$	1,335,530		$	1,482,861

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts:
Noninterest-bearing demand	$	135,572		$	138,300
Interest-bearing demand		235,428			225,794
Money market		177,790			180,454
Savings		80,421			69,079
Certificates		444,648			576,035
Total deposit accounts		1,073,859			1,189,662
Advances by borrowers for taxes and insurance		1,006			4,658
Interest payable		490			631
FHLB advances and other borrowings		53,302			67,622
Deferred compensation		5,680			5,583
Deferred income tax liability, net		1,577			2,211
Other liabilities		1,408			7,406
Total liabilities		1,137,322			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:		166			167
Mar. 31, 2011 - 17,506,997 issued; 16,562,213 outstanding
Sept. 30, 2010 – 17,460,311 issued, 16,687,561 outstanding
Additional paid-in capital		151,580			152,682
Retained earnings		52,676			56,942
Unearned shares issued to employee stock ownership plan		(8,136	)		(8,657	)
Accumulated other comprehensive income		1,922			3,954
Total stockholders’ equity		198,208			205,088
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,335,530		$	1,482,861

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)	Three Months Ended March 31,						Six Months Ended March 31,
	2011			2010			2011			2010
Interest and dividend income:
Loans, including fees	$	8,395		$	7,033		$	17,741		$	4,136
Investment securities		2,256			1,618			3,942			3,352
Other interest and dividends		134			87			345			136
Total interest and dividend income		10,785			8,738			22,028			17,624
Interest expense:
Deposits		1,692			1,674			3,958			3,348
FHLB advances and other borrowings		558			762			1,222			1,593
Total interest expense		2,250			2,436			5,180			4,941
Net interest income		8,535			6,302			16,848			12,683
Provision for loan losses		3,000			2,375			6,000			3,075
Net interest income after provision for loan losses		5,535			3,927			10,848			9,608
Noninterest income:
Service charges and fees		2,232			2,146			4,692			4,410
Gain on sale of loans		187			125			536			308
Increase in cash surrender value of bank owned life insurance		101			104			206			211
FDIC indemnification recovery		2,850			--			4,846			--
Other, net		724			94			2,117			415
Total noninterest income		6,094			2,469			12,397			5,344
Noninterest expense:
Compensation and benefits		7,181			4,689			14,274			9,306
Occupancy and equipment		1,877			980			3,723			2,044
Data processing		950			797			2,127			1,597
Advertising		262			282			475			542
Postage and supplies		349			177			603			343
Professional services		1,036			505			1,754			984
Insurance and taxes		1,026			480			2,076			1,038
Amortization of Intangibles		186			--			381			--
Provision for losses on real estate and other property owned		357			1,290			1,032			2,091
Other		499			360			1,097			698
Total noninterest expense		13,723			9,560			27,542			18,643
Loss before income taxes		(2,094	)		(3,164	)		(4,297	)		(3,691	)
Income tax benefit		(892	)		(1,233	)		(1,763	)		(1,451	)
Loss before extraordinary item		(1,202	)		(1,931	)		(2,534	)		(2,240	)
Extraordinary gain on acquisition, less income taxes of $195		--			305			--			305
Net loss	$	(1,202	)	$	(1,626	)	$	(2,534	)	$	(1,935	)

Loss per common share before extraordinary item:
Basic	$	(0.08	)	$	(0.12	)	$	(0.16	)	$	(0.14	)
Diluted		(0.08	)		(0.12	)		(0.16	)		(0.14	)
Loss per common share after extraordinary item:
Basic	$	(0.08	)	$	(0.10	)	$	(0.16	)	$	(0.12	)
Diluted		(0.08	)		(0.10	)		(0.16	)		(0.12	)
Weighted average number of shares outstanding:
Basic		15,648,721			15,481,827			15,656,159			15,464,699
Diluted		15,648,721			15,481,827			15,656,159			15,464,699

Dividends declared per share:	$	0.055		$	0.055		$	0.110		$	0.110

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 Paid-In Capital	Retained Earnings	Unearned Shares Issued to Employee Stock Ownership Plan (“ESOP”)	Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount	Additional Paid-In Capital	Retained Earnings		Accumulated Other Comprehensive 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 loss							(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	30,666	-	-				-
ESOP shares committed to be released			128		521		649
Exercise of stock options	46,686	1	492				493
Share-based compensation			416				416
Dividends paid ($0.11 per share)				(1,732)			(1,732)
Stock Repurchase	(202,700)	(2)	(2,138)				(2,140)
Comprehensive income:
Net loss				(2,534)			(2,534)
Other comprehensive income:
Change in unrealized holding gain on securities available for sale, net of taxes of ($1,408)						(2,032)	(2,032)
Comprehensive loss							(4,566)
Balance at March 31, 2011	16,562,213	$166	$151,580	$52,676	$(8,136)	$1,922	$198,208

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)	Six Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,534	)	$	(1,935	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		1,174			1,023
Amortization of core deposit intangible		381			-
Accretion of FDIC indemnification receivable		(1,571	)		-
Net amortization of premiums and discounts on investments		2,925			206
(Gain) Loss on sale of fixed assets and repossessed assets		(398	)		33
ESOP shares committed to be released		649			714
Share-based compensation		416			624
Provision for loan losses		6,000			3,075
Provision for losses on real estate and other property owned		1,032			2,091
Accrued deferred compensation expense, net		97			94
Net deferred loan fees		(230	)		4
Deferred income tax benefit		773			65
Net gain on sale of loans		(536	)		(308	)
Proceeds from sale of loans held for sale		19,595			13,068
Originations of loans held for sale		(14,596	)		(14,078	)
Increase in cash surrender value of bank owned life insurance		(206	)		(211	)
Change in assets and liabilities:
Interest receivable		(342	)		359
Other assets		(4,933	)		(3,512	)
Interest payable		(141	)		3
Other liabilities		(5,998	)		(3,540	)
Net cash used by operating activities		1,557			(2,225	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of mortgage-backed securities available for sale		45,290			21,485
Purchase of securities available for sale		(232,938	)		(14,762	)
Proceeds from maturities and calls of securities available for sale		16,773			6,000
Reimbursement of loan losses under loss share agreement		-			15,317
Purchases of property and equipment		(1,548	)		(7,059	)
Net decrease in loans		72,047			22,101
Proceeds from sale of fixed assets and real estate and other property owned		15,268			9,113
Net cash provided (used) by investing activities		(85,108	)		52,195

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		(115,803	)		40,042
Net decrease in advances by borrowers for taxes and insurance		(3,652	)		(81	)
Repayment of FHLB advances		(10,602	)		(10,890	)
Net proceeds from (repayments of) other borrowings		(3,719	)		1,451
Proceeds from exercise of stock options		493			161
Repurchase of common stock		(2,140	)
Dividends paid		(1,732	)		(1,725	)
Net cash used by financing activities		(137,155	)		28,958
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(220,706	)		78,928
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		416,426			49,953
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	195,720		$	128,881

(Continued)

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) (Unaudited)	Six months Ended March 31,
	2011			2010
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	5,321		$	4,938
Taxes		(159	)		(700	)

NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate and other assets in settlement of loans	$	12,978		$	6,327
Fair value adjustment to securities available for sale, net of taxes		(2,032	)		(472	)

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 and six month periods ended March 31, 2011, are not necessarily indicative of the results that may be expected for the fiscal 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 fiscal 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 acquire certain assets and assume deposits and certain other 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 and certain related expenses 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 acquire certain assets and assume all of the deposits and certain other liabilities of LibertyBank, a full service commercial bank headquartered in Eugene, Oregon (“LibertyBank Acquisition”). Under the loss sharing agreements, the FDIC has agreed to reimburse the Bank for 80% of losses and certain related expenses. 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.

Loans and foreclosed and repossessed assets purchased in the CFB and Liberty Bank Acquisitions 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.”

FDIC Indemnification Receivable. As noted above, 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 the Bank to collect from the FDIC under the loss sharing agreements. The difference between the present value and the undiscounted cash flow the Company expects the Bank 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 the lower of cost or 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

As noted above, 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 other liabilities and acquire certain assets of LibertyBank, headquartered 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 the Bank for 80% of losses on purchased real estate owned (“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 March 31,						Six Months Ended March 31,
	2011			2010			2011			2010
	(in thousands, except share and per share data)
Net loss	$	(1,202	)	$	(1,626	)	$	(2,534	)	$	(1,935	)
Allocated to participating securities		12			24			28			32
Net loss allocated to common shareholders		(1,190	)		(1,602	)		(2,506	)		(1,903	)
Extraordinary gain, net of taxes		-			305			-			305
Net loss allocated to common stock before extraordinary gain	$	(1,190	)	$	(1,907	)	$	(2,506	)	$	(2,208	)

Weighted average common shares outstanding, including shares considered participating securities		15,803,662			15,721,805			15,835,515			15,723,760
Less: Average participating securities		(154,941	)		(239,978	)		(179,356	)		(259,061	)
Weighted average shares		15,648,721			15,481,827			15,656,159			15,464,699
Net effect of dilutive restricted stock		-			-			-			-
Weighted average shares and common stock equivalents		15,648,721			15,481,827			15,656,159			15,464,699
Basic loss per common share before extraordinary item	$	(0.08	)	$	(0.12	)	$	(0.16	)	$	(0.14	)
Basic loss per common share after extraordinary item		(0.08	)		(0.10	)		(0.16	)		(0.12	)
Diluted loss per common share before extraordinary item		(0.08	)		(0.12	)		(0.16	)		(0.14	)
Diluted loss per common share after extraordinary item		(0.08	)		(0.10	)		(0.16	)		(0.12	)

Options excluded from the calculation due to their anti-dilutive effect on EPS		895,460			873,324			895,460			873,324

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)
March 31, 2011
Obligations of U.S. Government Sponsored Enterprises (“GSE”)	$	89,947	$	102	$	(1,097	)	$	88,952
Obligations of states and political subdivisions		13,613		52		(526	)		13,139
Corporate note, FDIC-guaranteed		1,015		3		--			1,018
Mortgage-backed securities, GSE-issued		331,567		6,009		(1,378	)		336,198
Mortgage-backed securities, private label		403		--		(18	)		385
Total	$	436,545	$	6,166	$	(3,019	)	$	439,692

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)
March 31, 2011
Obligations of U.S. GSE	$	68,437	$	(1,097	)	$	--	$	--		$	68,437	$	(1,097	)
Obligations of states and political subdivisions		11,582		(526	)		--		--			11,582		(526	)
Mortgage-backed securities, GSE-issued		157,143		(1,378	)		--		--			157,143		(1,378	)
Mortgage-backed securities, private label		--		-			384		(18	)		384		(18	)
Total	$	237,162	$	(3,001	)	$	384	$	(18	)	$	237,546	$	(3,019	)

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 March 31, 2011, and September 30, 2010, the Bank pledged investment securities for the following obligations:

	March 31, 2011				September 30, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
FHLB borrowings	$	42,081	$	44,348	$	51,174	$	54,309
Treasury, tax and loan funds at the Federal Reserve Bank		3,093		3,211		3,767		3,916
Repurchase agreements		11,460		12,115		17,784		18,804
Deposits of municipalities and pubic units		19,795		20,928		19,977		21,106
Total	$	76,429	$	80,602	$	92,702	$	98,135

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

	March 31, 2011
	Amortized Cost		Fair Value
	(in thousands)
Due within one year	$	5,102	$	5,108
Due after one year through five years		70,564		69,843
Due after five years through ten years		99,325		100,330
Due after ten years		261,554		264,411
Total	$	436,545	$	439,692

Note 6 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized by collateral type as follows:

	March 31, 2011						September 30, 2010
	Balance			Percent of Gross			Balance			Percent of Gross
	(dollars in thousands)
Real estate:
One-to-four family residential	$	141,514			25.92	%	$	157,574			24.75	%
Multi-family residential		20,115			3.68			20,759			3.26
Commercial		214,573			39.30			228,643			35.92
Total real estate		376,202			68.90			406,976			63.93

Real estate construction:
One- to four-family residential		7,877			1.44			24,707			3.88
Multi-family residential		2,523			0.46			2,657			0.42
Commercial and land development		22,744			4.17			21,190			3.33
Total real estate construction		33,144			6.07			48,554			7.63

Consumer:
Home equity		52,605			9.63			56,745			8.91
Automobile		1,129			0.21			1,466			0.23
Other consumer		6,210			1.14			7,762			1.22
Total consumer		59,944			10.98			65,973			10.36

Commercial business		72,220			13.22			108,051			16.97
Leases		4,540			0.83			6,999			1.10
Gross loans		546,050			100.00	%		636,553			100.00	%

Deferred loan fees		(639	)					(628	)
Allowance for loan losses		(14,281	)					(15,432	)
Loans receivable, net	$	531,130					$	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 $1.2 million and $1.5 million as of March 31, 2011 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 March 31, 2011:

	Nonperforming Loans
	Nonaccrual		Past Due 90 or More Days, Still Accruing		Total		Loans Delinquent 30-59 Days		Loans Delinquent 60-89 Days		Loans Not Past Due		Total Loans
	(in thousands)
Noncovered loans:
One-to-four family residential	$	3,843	$	-	$	3,843	$	2,674	$	1,012	$	115,846	$	123,375
Multi-family residential		-		-		-		-		-		9,810		9,810
Commercial real estate		8,777		-		8,777		-		-		134,526		143,303
Total real estate		12,620		-		12,620		2,674		1,012		260,183		276,488
One-to-four family residential construction		-		-		-		-		-		7,357		7,357
Multi-family residential construction		-		-		-		-		-		1,526		1,526
Commercial and land development		3,136		-		3,136		-		-		4,644		7,780
Total real estate construction		3,136		-		3,136		-		-		13,527		16,663
Home equity		1,135		-		1,135		52		-		37,472		38,659
Automobile		17		-		17		-		-		694		711
Other consumer		1		-		1		-		-		4,411		4,412
Total consumer		1,153		-		1,153		52		-		42,577		43,782
Commercial business		1,174		-		1,174		-		-		6,186		7,360
Leases		-		-		-		-		-		344		344
Total noncovered loans		18,082		-		18,082		2,726		1,012		322,817		344,637

Covered loans:
One-to-four family residential		1,050		-		1,050		-		-		17,252		18,302
Multi-family residential		2,942		-		2,942		-		-		7,362		10,304
Commercial real estate		9,378		-		9,378		-		-		61,892		71,270
Total real estate		13,370		-		13,370		-		-		86,506		99,876
One-to-four family residential construction		-		-		-		-		-		520		520
Multi-family residential construction		998		-		998		-		-		0		998
Commercial and land development		5,056		-		5,056		470		-		9,437		14,963
Total real estate construction		6,054		-		6,054		470		-		9,957		16,481
Home equity		39		-		39		-		241		13,838		14,118
Automobile		7		-		7		-		1		410		418
Other consumer		26		-		26		-		-		1,797		1,823
Total consumer		72		-		72		-		242		16,045		16,359
Commercial Business		697		-		697		-		-		64,395		65,092
Leases		-		-		-		-		-		4,196		4,196
Total covered loans		20,193		-		20,193		470		242		181,099		202,004

Total gross loans	$	38,275	$	-	$	38,275	$	3,196	$	1,254	$	503,916	$	546,641

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, and 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 if warranted. At the time of this classification, they are not believed to 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 March 31, 2011, 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	$	118,084	$	80	$	-	$	5,211	$	-	$	123,375
Multi-family residential		5,533		1,702		1,027		1,548		-		9,810
Commercial real estate		87,545		8,777		22,096		24,885		-		143,303
Total real estate		211,162		10,559		23,123		31,644		-		276,488
One-to-four family residential construction		7,357		-		-		-		-		7,357
Multi-family residential construction		-		-		915		611		-		1,526
Commercial and land development		2,488		-		1,957		3,335		-		7,780
Total real estate construction		9,845		-		2,872		3,946		-		16,663
Home equity		37,600		-		39		1,020		-		38,659
Automobile		699		3		-		9		-		711
Other consumer		4,265		59		-		88		-		4,412
Total consumer		42,564		62		39		1,117		-		43,782
Commercial business		5,412		313		168		1,467		-		7,360
Leases		344		-		-		-		-		344
Total noncovered loans		269,327		10,934		26,202		38,174		-		344,637

Covered loans:

One-to-four family residential		4,875		353		1,590		11,484		-		18,302
Multi-family residential		7,299		-		-		3,005		-		10,304
Commercial real estate		38,510		1,421		8,192		23,147		-		71,270
Total real estate		50,684		1,774		9,782		37,636		-		99,876
One-to-four family residential construction		324		-		-		196		-		520
Multi-family residential construction		-		-		-		998		-		998
Commercial and land development		3,617		123		1,831		9,392		-		14,965
Total real estate construction		3,941		123		1,831		10,586		-		16,481
Home equity		13,427		496		-		195