Edgar Filing: Home Federal Bancorp, Inc.

Unassociated Document

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, 2011

	or

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

	For the transition period from ______________ to _______________

Commission File Number: 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 [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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, 16,191,716 shares outstanding as of August 5, 2011.

HOME FEDERAL BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS	2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4. CONTROLS AND PROCEDURES	42

PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	43
ITEM 1A. RISK FACTORS	43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4. REMOVED AND RESERVED	43
ITEM 5. OTHER INFORMATION	43
SIGNATURES	45

Item 1. Financial Statements

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY	June 30,			September 30,
CONSOLIDATED BALANCE SHEETS	2011			2010
(In thousands, except share data) (Unaudited)

ASSETS
Cash and equivalents	$	201,944		$	416,426
Investments available-for-sale, at fair value		422,142			275,180
FHLB stock, at cost		17,717			17,717
Loans and leases receivable, net of allowance for loan and lease losses of $13,387 and $15,432		491,421			621,010
Loans held for sale		524			5,135
Accrued interest receivable		2,771			2,694
Property and equipment, net		33,519			27,955
Bank owned life insurance		12,745			12,437
Real estate owned and other repossessed assets		24,179			30,481
FDIC indemnification receivable, net		58,139			64,574
Core deposit intangible		3,414			3,971
Other assets		4,279			5,281
TOTAL ASSETS	$	1,272,794		$	1,482,861

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts:
Noninterest-bearing demand	$	133,143		$	138,300
Interest-bearing demand		235,061			225,794
Money market		176,180			180,454
Savings		82,774			69,079
Certificates		382,311			576,035
Total deposit accounts		1,009,469			1,189,662

Advances by borrowers for taxes and insurance		711			4,658
Accrued interest payable		458			631
Deferred compensation		5,724			5,583
FHLB advances and other borrowings		53,422			67,622
Deferred income tax liability, net		2,689			2,211
Other liabilities		3,494			7,406
Total liabilities		1,075,967			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:		162			167
Jun. 30, 2011 - 17,512,197 issued; 16,191,716 outstanding
Sep. 30, 2010 - 17,460,311 issued; 16,687,561 outstanding
Additional paid-in capital		147,968			152,682
Retained earnings		51,737			56,942
Unearned shares issued to employee stock ownership plan		(7,875	)		(8,657	)
Accumulated other comprehensive income		4,835			3,954
Total stockholders’ equity		196,827			205,088
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,272,794		$	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)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
Interest and dividend income:
Loans and leases	$	8,824		$	6,918		$	26,565		$	21,054
Investment securities		2,450			1,479			6,392			4,831
Other interest and dividends		118			104			463			240
Total interest and dividend income		11,392			8,501			33,420			26,125
Interest expense:
Deposits		1,452			1,781			5,410			5,129
FHLB advances and other borrowings		547			792			1,769			2,385
Total interest expense		1,999			2,573			7,179			7,514
Net interest income		9,393			5,928			26,241			18,611
Provision for loan losses		2,811			3,300			8,811			6,375
Net interest income after provision for loan losses		6,582			2,628			17,430			12,236
Noninterest income:
Service charges and fees		2,446			2,325			7,138			6,735
Gain on sale of loans		119			125			655			433
Increase in cash surrender value of life insurance		103			105			309			316
FDIC indemnification recovery		2,389			278			7,235			278
Other		650			63			2,767			478
Total noninterest income		5,707			2,896			18,104			8,240
Noninterest expense:
Compensation and benefits		6,780			4,660			21,054			13,966
Occupancy and equipment		1,518			979			5,241			3,023
Data processing		1,152			929			3,279			2,526
Advertising		173			233			648			775
Postage and supplies		298			173			901			516
Professional services		863			391			2,617			1,375
Insurance and taxes		716			423			2,792			1,461
Amortization of intangibles		176			--			557			--
Provision for REO		296			418			1,328			2,509
Other		451			462			1,548			1,160
Total noninterest expense		12,423			8,668			39,965			27,311
Loss before income taxes		(134	)		(3,144	)		(4,431	)		(6,835	)
Income tax benefit		(56	)		(1,203	)		(1,819	)		(2,654	)
Net loss before extraordinary gain		(78	)		(1,941	)		(2,612	)		(4,181	)
Extraordinary gain, net of tax of $195		--			--			--			305
Net loss	$	(78	)	$	(1,941	)	$	(2,612	)	$	(3,876	)

Loss per common share before extraordinary item:
Basic	$	(0.01	)	$	(0.12	)	$	(0.17	)	$	(0.27	)
Diluted		(0.01	)		(0.12	)		(0.17	)		(0.27	)
Gain per common share of extraordinary item:
Basic		n/a			n/a			n/a			0.02
Diluted		n/a			n/a			n/a			0.02
Loss per common share:
Basic		(0.01	)		(0.12	)		(0.17	)		(0.25	)
Diluted		(0.01	)		(0.12	)		(0.17	)		(0.25	)
Weighted average number of shares outstanding:
Basic		15,536,539			15,543,199			15,616,285			15,491,203
Diluted		15,536,539			15,543,199			15,616,285			15,491,203
Dividends declared per share:	$	0.055		$	0.055		$	0.165		$	0.165

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)

												Unearned			Accumulated
	Common Stock					Additional						Shares			Other
						Paid-In			Retained			Issued to			Comprehensive
	Shares		Amount			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 issued, net of forfeitures	(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 adjustments for 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

Restricted stock issued, net of forfeitures	27,269			--															--
ESOP shares committed to be released							174						782						956
Exercise of stock options	51,886			--			541												541
Share-based compensation							633												633
Dividends paid ($0.165 per share)										(2,593	)								(2,593	)
Stock repurchase	(575,000	)		(5	)		(6,062	)											(6,067	)

Comprehensive income (loss):
Net loss										(2,612	)								(2,612	)

Other comprehensive income:
Change in unrealized holding loss on securities available- for-sale, net of taxes of $612																881			881

Comprehensive loss																			(1,731	)

Balance at June 30, 2011	16,191,716		$	162		$	147,968		$	51,737		$	(7,875	)	$	4,835		$	196,827

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)	Nine Months Ended June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,612	)	$	(3,876	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		1,825			1,541
Amortization of core deposit intangible		557			--
Accretion of FDIC indemnification receivable		(1,927	)		--
Net amortization of premiums and discounts on investments		4,320			336
Gain on sale of fixed assets and repossessed assets		(581	)		(161	)
Gain on sale of securities		(6	)		--
ESOP shares committed to be released		956			1,133
Share-based compensation		633			962
Provision for loan losses		8,811			6,375
Provision for losses on REO and other repossessed assets		1,328			2,509
Accrued deferred compensation expense, net		141			135
Net deferred loan fees		(177	)		(58	)
Deferred income tax benefit		26			(3,082	)
Net gain on sale of loans		(655	)		(433	)
Proceeds from sale of loans held for sale		24,133			19,239
Originations of loans held for sale		(18,866	)		(20,439	)
Increase in cash surrender value of bank owned life insurance		(309	)		(316	)
Change in assets and liabilities:
Interest receivable		(77	)		451
Other assets		(2,377	)		2,135
Interest payable		(173	)		7
Other liabilities		(3,912	)		(319	)
Net cash provided from operating activities		11,058			6,139

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of mortgage-backed securities available-for-sale		64,756			30,298
Purchase of securities available-for-sale		(241,532	)		(35,516	)
Proceeds from maturities and calls of securities available-for-sale		26,835			11,137
Reimbursement of loan losses under loss share agreement		15,289			19,455
Purchases of property and equipment		(7,424	)		(8,229	)
Net decrease in loans		103,506			39,990
Proceeds from sale of fixed assets and real estate and other property owned		19,490			11,229
Net cash (used by) provided from investing activities		(19,080	)		68,364

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(180,193	)		60,021
Net decrease in advances by borrowers for taxes and insurance		(3,947	)		(614	)
Repayment of FHLB advances		(10,602	)		(15,390	)
Net (repayments of) proceeds from other borrowings		(3,599	)		4,189
Proceeds from exercise of stock options		541			161
Repurchase of common stock		(6,067	)		--
Dividends paid		(2,593	)		(2,588	)
Net cash (used by) provided from financing activities		(206,460	)		45,779

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(214,482	)		120,282
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		416,426			49,953

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	201,944		$	170,235

(Continued)

See accompanying notes.

HOME FEDERAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands) (Unaudited)	Nine Months Ended June 30,
	2011			2010
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	7,352		$	7,507
Taxes		(159	)		430

NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate owned and other assets in settlement of loans	$	18,162		$	11,045
Fair value adjustment to securities available-for-sale, net of taxes		881			359

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 a state-chartered commercial bank 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 nine month periods ended June 30, 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 (“REO”) 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. A loan with a specific allowance is charged down to the estimated recoverable amount when the loan enters the process of foreclosure, at which point the specific allowance is classified as loss and is removed. 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. All loans purchased in the LibertyBank Acquisition have been aggregated into pools of loans with similar risk characteristics 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 real estate and other property owned directly or originated by the Bank or purchased loans not subject to loss sharing agreements with the FDIC 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.

Note 4 - Earnings (Loss) Per Share and Comprehensive Income (Loss)

The Company has granted stock compensation awards with non-forfeitable dividend rights, which are considered participating securities. Accordingly, 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 (in thousands, except share and per share data):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010

Net loss	$	(78	)	$	(1,941	)	$	(2,612	)	$	(3,876	)
Allocated to participating securities		--			26			28			60
Net loss allocated to common shareholders		(78	)		(1,915	)		(2,584	)		(3,816	)

Extraordinary gain, net of taxes		--			--			--			305
Net loss allocated to common stock before extraordinary gain	$	(78	)	$	(1,915	)	$	(2,584	)	$	(4,121	)

Weighted average common shares outstanding, including shares considered participating securities		15,686,911			15,754,145			15,773,664			15,734,164
Less: Average participating securities		(150,372	)		(210,946	)		(157,379	)		(242,961	)
Weighted average shares		15,536,539			15,543,199			15,616,285			15,491,203

Net effect of dilutive restricted stock		--			--			--			--
Weighted average shares and common stock equivalents		15,536,539			15,543,199			15,616,285			15,491,203

Loss per common share before extraordinary item:
Basic	$	(0.01	)	$	(0.12	)	$	(0.17	)	$	(0.27	)
Diluted		(0.01	)		(0.12	)		(0.17	)		(0.27	)

Loss per common share after extraordinary item:
Basic		(0.01	)		(0.12	)		(0.17	)		(0.25	)
Diluted		(0.01	)		(0.12	)		(0.17	)		(0.25	)

Options excluded from the calculation due to their anti-dilutive effect on EPS		878,460			873,324			878,460			873,324

For the three months ended June 30, 2011, the Company recognized comprehensive income of $2.8 million, compared to comprehensive loss of $1.1 million for the same period a year earlier. For the nine months ended June 30, 2011 and 2010, the Company recognized comprehensive losses of $1.7 million and $3.5 million, respectively.

Note 5 - Investment securities

Investment securities available-for-sale consisted of the following at the dates indicated (dollars in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Percent of Total
June 30, 2011
Obligations of U.S. Government Sponsored Enterprises (“GSE”)	$	83,188	$	336	$	(227	)	$	83,297		19.7	%
Obligations of states and political subdivisions		11,588		106		(158	)		11,536		2.7
Corporate note, FDIC-guaranteed		1,012		4		--			1,016		0.3
Mortgage-backed securities, GSE-issued		318,051		8,092		(202	)		325,941		77.2
Mortgage-backed securities, private label		383		--		(31	)		352		0.1

Total	$	414,222	$	8,538	$	(618	)	$	422,142		100.0	%

September 30, 2010
Obligations of U.S. GSE	$	51,844	$	255	$	(77	)	$	52,022		18.9	%
Obligations of states and political subdivisions		6,786		86		(83	)		6,789		2.5
Corporate note, FDIC-guaranteed		1,022		3		--			1,025		0.4
Mortgage-backed securities, GSE-issued		208,492		6,692		(264	)		214,920		78.1
Mortgage-backed securities, private label		449		--		(25	)		424		0.1

Total	$	268,593	$	7,036	$	(449	)	$	275,180		100.0	%

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 (in thousands):

	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2011
Obligations of U.S. GSE	$	25,570	$	(227	)	$	--	$	--		$	25,570	$	(227	)
Obligations of states and political subdivisions		7,378		(158	)		--		--			7,378		(158	)
Mortgage-backed securities, GSE-issued		29,706		(202	)		--		--			29,706		(202	)
Mortgage-backed securities, private label		--		--			351		(31	)		351		(31	)

Total	$	62,654	$	(587	)	$	351	$	(31	)	$	63,005	$	(618	)

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.

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

	June 30, 2011				September 30, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due within one year	$	5,085	$	5,096	$	3,142	$	3,137
Due after one year through five years		61,746		61,912		35,292		35,438
Due after five years through ten years		92,968		95,214		56,593		58,257
Due after ten years		254,423		259,920		173,566		178,348
Total	$	414,222	$	422,142	$	268,593	$	275,180

As of June 30, 2011, and September 30, 2010, the Bank pledged investment securities for the following obligations (in thousands):

	June 30, 2011				September 30, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

FHLB borrowings	$	39,500	$	42,378	$	51,174	$	54,309
Treasury, tax and loan funds at the Federal Reserve Bank		2,854		3,048		3,767		3,916
Repurchase agreements		8,959		9,384		17,784		18,804
Deposits of municipalities and public units		18,694		19,588		19,977		21,106
Total	$	70,007	$	74,398	$	92,702	$	98,135

Note 6 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized by collateral type as follows (dollars in thousands):

	June 30, 2011						September 30, 2010
	Amount			Percent of Gross			Amount			Percent of Gross
Real estate:
One- to four- family residential	$	133,936			26.5	%	$	157,574			24.7	%
Multifamily residential		18,282			3.6			20,759			3.3
Commercial		204,216			40.4			228,643			35.9
Total real estate		356,434			70.5			406,976			63.9

Real estate construction:
One- to four-family residential		10,889			2.2			24,707			3.9
Multifamily residential		559			0.1			2,657			0.4
Commercial and land development		19,503			3.8			21,190			3.3
Total real estate construction		30,951			6.1			48,554			7.6

Consumer:
Home equity		50,710			10.0			56,745			8.9
Automobile		1,083			0.2			1,466			0.2
Other consumer		5,347			1.1			8,279			1.3
Total consumer		57,140			11.3			66,490			10.4

Commercial business		57,524			11.4			108,051			17.0
Leases		3,451			0.7			6,999			1.1
Gross loans		505,500			100.0	%		637,070			100.0	%

Deferred loan fees		(692	)					(628	)
Allowance for loan losses		(13,387	)					(15,432	)

Loans receivable, net	$	491,421					$	621,010

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 June 30, 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 June 30, 2011 (in thousands):

	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
Noncovered loans
Real estate:
One- to four- family residential	$	4,014	$	--	$	4,014	$	1,306	$	323	$	111,583	$	117,226
Multifamily residential		--		--		--		--		--		9,722		9,722
Commercial real estate		6,285		--		6,285		--		--		133,284		139,569
Total real estate		10,299		--		10,299		1,306		323		254,589		266,517

Real estate construction:
One- to four- family residential		210		--		210		--		--		9,618		9,828
Multifamily residential		--		--		--		--		--		559		559
Commercial real estate		2,719		--		2,719		--		--		4,495		7,214
Total real estate construction		2,929		--		2,929		--		--		14,672		17,601