Edgar Filing: Home Federal Bancorp, Inc.

HOME-9.30.2013-10Q

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 September 30, 2013



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

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 or organization)		(I.R.S. Employer Identification No.)



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



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



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 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, $0.01 par value per share, 14,523,315 shares outstanding as of November 1, 2013.

HOME FEDERAL BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS



		Page Number
PART I- FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49

PART II- OTHER INFORMATION		50
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51
Signatures		52

Item 1. Financial Statements



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY	September 30,			December 31,
CONSOLIDATED BALANCE SHEETS	2013			2012
(In thousands, except share data) (unaudited)
ASSETS
Cash and cash equivalents	$	102,269		$	115,529
Investments available-for-sale, at fair value	414,026			420,505
FHLB stock, at cost	16,929			17,401
Loans receivable, net of allowance for loan losses of $10,583 and $12,528	401,842			409,846
Accrued interest receivable	2,852			2,776
Property and equipment, net	26,592			29,057
Bank owned life insurance (“BOLI”)	15,635			15,938
Real estate owned and other repossessed assets (“REO”)	6,513			10,386
FDIC indemnification receivable, net	6,129			10,846
Core deposit intangible	2,168			2,523
Deferred tax assets, net	15,853			9,022
Other assets	5,022			4,791
TOTAL ASSETS	$	1,015,830		$	1,048,620

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts:
Noninterest-bearing demand	$	161,335		$	142,207
Interest-bearing demand	247,099			248,836
Money market	158,231			167,202
Savings	86,792			83,401
Certificates	178,319			209,242
Total deposit accounts	831,776			850,888

Advances by borrowers for taxes and insurance	1,334			490
Accrued interest payable	127			167
Deferred compensation	6,422			6,149
Repurchase agreements	511			4,775
Other liabilities	5,490			6,366
Total liabilities	845,660			868,835

STOCKHOLDERS’ EQUITY
Serial preferred stock, $0.01 par value; 10,000,000 authorized; issued and outstanding: none	—			—
Common stock, $0.01 par value; 90,000,000 authorized; issued and outstanding:	145			145
Sep. 30, 2013 - 17,542,217 issued; 14,522,196 outstanding
Dec. 31, 2012 - 17,512,997 issued; 14,453,399 outstanding
Additional paid-in capital	133,354			131,934
Retained earnings	45,942			46,337
Unearned shares issued to employee stock ownership plan (“ESOP”)	(6,254		)	(6,823		)
Accumulated other comprehensive income (loss)	(3,017		)	8,192
Total stockholders’ equity	170,170			179,785
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,015,830		$	1,048,620

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 September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Interest income:
Loans	$	7,762		$	10,150		$	24,751		$	30,400
Investments	2,661			2,249			7,841			6,662
Other interest income	51			38			167			179
Total interest income	10,474			12,437			32,759			37,241
Interest expense:
Deposits	707			891			2,253			2,984
Repurchase agreements	0			17			19			54
Total interest expense	707			908			2,272			3,038
Net interest income	9,767			11,529			30,487			34,203
Provision for loan losses	(970		)	105			(1,553		)	(1,112		)
Net interest income after provision for loan losses	10,737			11,424			32,040			35,315
Noninterest income:
Service charges and fees	2,120			2,110			6,234			6,491
Gain on sale of investments ($485 of gains during the nine months ended September 30, 2013, are comprised of accumulated other comprehensive income reclassifications)	—			79			485			1,217
Increase in cash surrender value of BOLI	116			122			350			365
FDIC indemnification recovery (provision)	(648		)	50			(695		)	(1,180		)
Impairment of FDIC indemnification asset, net	(1,164		)	(2,994		)	(5,480		)	(8,042		)
Other income	331			282			591			827
Total noninterest income	755			(351		)	1,485			(322		)
Noninterest expense:
Compensation and benefits	5,822			5,717			17,491			18,029
Occupancy and equipment	1,302			1,466			4,096			4,543
Data processing	860			920			2,723			2,867
Advertising	138			219			427			596
Postage and supplies	195			210			616			763
Professional services	702			678			1,821			1,947
Insurance and taxes	427			503			1,231			1,585
Amortization of intangibles	112			137			354			433
Provision for REO	1			56			644			454
Other expenses	374			580			1,024			1,335
Total noninterest expense	9,933			10,486			30,427			32,552
Income before income taxes	1,559			587			3,098			2,441
Income tax provision	506			265			1,009			858
Net income	$	1,053		$	322		$	2,089		$	1,583

Earnings per common share:
Basic	$	0.08		$	0.02		$	0.15		$	0.11
Diluted	0.08			0.02			0.15			0.11
Weighted average number of shares outstanding:
Basic	13,742,613			14,109,468			13,696,484			14,505,210
Diluted	13,836,734			14,117,621			13,776,096			14,505,210

Dividends declared per share:	$	0.06		$	0.06		$	0.18		$	0.17

See accompanying notes.



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) (unaudited)	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Comprehensive income (loss):
Net income	$	1,053		$	322		$	2,089		$	1,583
Other comprehensive income (loss):
Change in unrealized holding gain (loss) on securities available-for-sale, net of taxes of $(847), $1,282, $(6,963) and $2,687, respectively	(1,328		)	2,009			(10,913		)	4,212
Adjustment for realized gains, net of taxes of $0, $(31), $(189) and $(474), respectively	—			(48		)	(296		)	(743		)
Other comprehensive income (loss)	(1,328		)	1,961			(11,209		)	3,469
Comprehensive income (loss)	$	(275	)	$	2,283		$	(9,120	)	$	5,052

See accompanying notes.



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data) (unaudited)					Additional Paid-In Capital			Retained Earnings			Unearned Shares Issued to ESOP			Accumulated Other Comprehensive Income (Loss)			Total
	Common Stock
	Shares		Amount
Balance at December 31, 2012	14,453,399		$	145	$	131,934		$	46,337		$	(6,823	)	$	8,192		$	179,785
Restricted stock issued, net of forfeitures	45,457		—														—
Repurchased restricted stock to pay taxes	(5,880	)			(73		)										(73		)
ESOP shares committed to be released					172						569						741
Exercise of stock options	29,220				341												341
Share-based compensation					982												982
Dividends paid ($0.18 per share)								(2,484		)							(2,484		)
Tax adjustments for equity comp. plans					(2		)										(2		)
Net income								2,089									2,089
Other comprehensive loss														(11,209		)	(11,209		)
Balance at September 30, 2013	14,522,196		$	145	$	133,354		$	45,942		$	(6,254	)	$	(3,017	)	$	170,170

See accompanying notes.



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,089		$	1,583
Adjustments to reconcile net income to cash provided from operating activities:
Depreciation and amortization	2,111			2,292
Amortization of core deposit intangible	354			433
Impairment of FDIC indemnification receivable	5,480			8,042
Net amortization of premiums and discounts on investments	2,102			4,311
Gain on sale of investments available-for-sale (“AFS”)	(485		)	(1,217		)
Gain on insurance proceeds	(161		)	—
Gain on sale of fixed assets and repossessed assets	(233		)	(554		)
ESOP shares committed to be released	741			592
Share based compensation expense	982			758
Provision for loan losses	(1,553		)	(1,112		)
Valuation allowance on real estate and other property owned	644			454
Accrued deferred compensation expense, net	273			185
Net deferred loan fees	130			203
Deferred income tax provision (benefit)	321			(4,495		)
Net increase in cash surrender value of BOLI	(350		)	(365		)
Change in assets and liabilities:
Interest receivable	(76		)	(205		)
Other assets	(250		)	(2,227		)
Interest payable	(39		)	(46		)
Other liabilities	(879		)	(1,938		)
Net cash provided from operating activities	11,201			6,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments, maturities and calls of investments AFS	78,166			77,602
Proceeds from sales of investments AFS	19,460			62,849
Purchase of investments AFS	(111,124		)	(182,435		)
Proceeds from redemption of FHLB stock	473			158
Reimbursement (repayment) of loan losses under loss share agreement	(492		)	2,932
Net decrease in loans	7,864			28,493
Loans purchased	—			(7,711		)
Proceeds from sales of fixed assets and repossessed assets	5,444			14,980
Purchases of fixed assets	(318		)	(682		)
Proceeds from BOLI policies	814			—
Net cash provided from (used by) investing activities	287			(3,814		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits	(19,112		)	(47,717		)
Net increase in advances by borrowers for taxes and insurance	844			963
Net decrease in repurchase agreements	(4,264		)	(155		)
Repurchased restricted stock to pay taxes	(73		)	(87		)
Proceeds from exercise of stock options	341			—
Repurchases of common stock	—			(11,464		)
Dividends paid	(2,484		)	(2,479		)
Net cash used by financing activities	(24,748		)	(60,939		)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(13,260		)	(58,059		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	115,529			144,293
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	102,269		$	86,234

See accompanying notes.



HOME FEDERAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) (unaudited)	Nine Months Ended September 30,
	2013			2012
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	2,312		$	3,084
Income taxes	865			7,489

NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate and other assets in settlement of loans	$	1,630		$	9,851
Fair value adjustment to securities AFS, net of taxes	(11,209		)	3,469
Transfer of fixed assets into REO	609			—

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 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. As used throughout this report, the term the “Company” refers to Home Federal Bancorp, Inc., and its consolidated subsidiary, unless the context otherwise requires.

The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) 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 months ended September 30, 2013, are not necessarily indicative of the results that may be expected for future periods.

On July 30, 2010, the Bank entered into a purchase and assumption agreement with the FDIC to assume all of the deposits and acquire certain assets of LibertyBank, headquartered in Eugene, Oregon (“LibertyBank Acquisition”). In August 2009, the Bank entered into a purchase and assumption agreement with the FDIC to assume all of the deposits and certain assets of Community First Bank, headquartered in Prineville, Oregon ( “CFB Acquisition”). All of the loans purchased in the CFB Acquisition and the majority of loans and leases purchased in the LibertyBank Acquisition are included under the loss sharing agreements with the FDIC and are referred to as “covered loans.” Real estate owned and repossessed assets (“REO”) acquired in the CFB Acquisition and the LibertyBank Acquisition that are also included in the loss sharing agreements are referred to as “covered REO.” The covered loans and covered REO are collectively referred to as “covered assets.” Loans and foreclosed and repossessed assets not subject to loss sharing agreements with the FDIC are referred to as “noncovered loans” or “noncovered assets.”

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 December 31, 2012 (“2012 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 15, 2013.

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 – Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about these amounts. The new guidance was effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance did not have a significant impact on the Company's Consolidated Financial Statements but the disclosures are included.

In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. ASU 2012-06 addresses the diversity in practice about how to interpret the terms “on the same basis” and “contractual limitations” when subsequently measuring an indemnification asset. The adoption of this ASU was effective for fiscal years and interim periods beginning on or after December 15, 2012. This ASU did not have a

significant impact on the Company’s Consolidated Financial Statements as the Company accounted for its indemnification asset in a manner consistent with this ASU.

Note 3 – Earnings Per Share (“EPS”)

Basic earnings per common share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period, which excludes the participating securities (securities that may participate in undistributed earnings with common stock). Diluted earnings per common share 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 earnings per share purposes until they are committed to be released.

The following table presents the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share and per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	1,053		$	322		$	2,089		$	1,583
Allocated to participating securities	(7		)	(3		)	(15		)	(14		)
Net income allocated to common stock	$	1,046		$	319		$	2,074		$	1,569

Weighted average common shares outstanding, gross	14,485,554			14,964,693			14,468,721			15,377,013
Less: Average unearned ESOP shares	(651,909		)	(729,749		)	(671,370		)	(749,210		)
Less: Average participating securities	(91,032		)	(125,476		)	(100,867		)	(122,593		)
Weighted average common shares outstanding, net	13,742,613			14,109,468			13,696,484			14,505,210
Net effect of dilutive stock options	94,121			8,153			79,612			—
Weighted average shares and common stock equivalents	13,836,734			14,117,621			13,776,096			14,505,210
Income per common share:
Basic	$	0.08		$	0.02		$	0.15		$	0.11
Diluted	0.08			0.02			0.15			0.11
Options excluded from the calculation due to their anti-dilutive effect on EPS	322,349			968,092			361,399			968,092

Note 4 – Investments

The Company’s investment policies are designed to provide and maintain adequate liquidity and to generate favorable rates of return without incurring undue interest rate or credit risk, and generally limit investments to mortgage-backed securities, securities issued by U.S. Government-sponsored enterprises (“GSE”), municipal bonds, certificates of deposit and marketable corporate debt obligations. Investments available-for-sale consisted of the following at September 30, 2013 and December 31, 2012 (dollars in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Percent of Total
September 30, 2013
Obligations of U.S. GSE	$	57,157	$	331	$	(1,417	)	$	56,071	13.5	%
Obligations of states and political subdivisions	42,025		578		(1,315		)	41,288		10.0
U.S. Treasury bonds	9,604		—		(1,117		)	8,487		2.1
Mortgage-backed securities, GSE-issued	309,933		5,155		(7,152		)	307,936		74.3
Mortgage-backed securities, private label	249		—		(5		)	244		0.1
Total	$	418,968	$	6,064	$	(11,006	)	$	414,026	100.0	%

December 31, 2012
Obligations of U.S. GSE	$	56,179	$	1,481	$	—		$	57,660	13.7	%
Obligations of states and political subdivisions	38,932		2,009		(51		)	40,890		9.7
Mortgage-backed securities, GSE-issued	311,690		10,116		(134		)	321,672		76.5
Mortgage-backed securities, private label	287		—		(4		)	283		0.1
Total	$	407,088	$	13,606	$	(189	)	$	420,505	100.0	%

For the nine months ended September 30, 2013 and 2012, proceeds from sales of investments available-for-sale amounted to $19.5 million and $62.8 million, respectively. Gross realized gains for the nine months ended September 30, 2013 and 2012 were $518,000 and $1.2 million respectively, against gross realized losses of $33,000 and $0, respectively. All gains and losses were included in noninterest income on the Consolidated Statements of Operations.

The fair value of investments with unrealized losses, the amount of unrealized losses and the length of time these unrealized losses existed as of September 30, 2013 and December 31, 2012, 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
September 30, 2013
Obligations of U.S. GSE	$	31,276	$	(1,417	)	$	—	$	—		$	31,276	$	(1,417	)
Obligations of states and political subdivisions	27,639		(1,315		)	—		—			27,639		(1,315		)
U.S. Treasury bonds	8,487		(1,117		)	—		—			8,487		(1,117		)
Mortgage-backed securities, GSE-issued	144,722		(7,150		)	111		(2		)	144,833		(7,152		)
Mortgage-backed securities, private label	—		—			244		(5		)	244		(5		)
Total	$	212,124	$	(10,999	)	$	355	$	(7	)	$	212,479	$	(11,006	)

December 31, 2012
Obligations of states and political subdivisions	$	6,117	$	(51	)	$	—	$	—		$	6,117	$	(51	)
Mortgage-backed securities, GSE-issued	20,461		(131		)	114		(3		)	20,575		(134		)
Mortgage-backed securities, private label	—		—			283		(4		)	283		(4		)
Total	$	26,578	$	(182	)	$	397	$	(7	)	$	26,975	$	(189	)

Management has evaluated these investments and has determined that the decline in value is not other than temporary and not related to the underlying credit quality of the issuers or an industry specific event. The declines in value are on investments that have contractual maturity dates and future principal payments that will be sufficient to recover the current amortized cost of the investments. The Company does not have the intent to sell these investments and it is likely that it will not be required to sell these investments before their anticipated recovery.

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



	September 30, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	10,006	$	10,047	$	14,136	$	14,206
Due after one year through five years	3,333		3,506		7,051		7,280
Due after five years through ten years	23,725		23,760		20,719		21,908
Due after ten years	71,722		68,533		53,205		55,156

Mortgage-backed securities	310,182		308,180		311,977		321,955
Total	$	418,968	$	414,026	$	407,088	$	420,505

As of September 30, 2013, and December 31, 2012, the Bank pledged investments for the following obligations (in thousands):



	September 30, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
FHLB borrowings	$	17,076	$	18,408	$	23,482	$	25,397
Federal Reserve Bank	805		836		1,166		1,222
Repurchase agreements	5,421		5,632		4,607		4,855
Deposits of municipalities and public units	7,605		8,111		9,871		10,573
Total	$	30,907	$	32,987	$	39,126	$	42,047

Note 5 – Loans and Leases Receivable and the Allowance for Loan Losses

Loans and leases receivable are summarized as follows at September 30, 2013, and December 31, 2012 (dollars in thousands):



	September 30, 2013					December 31, 2012
	Amount			Percent of Gross		Amount			Percent of Gross
Real estate:
One-to-four family residential	$	72,039		17.5	%	$	87,833		20.8	%
Multifamily residential	38,532			9.3		34,377			8.1
Commercial	176,467			42.8		185,132			43.8
Total real estate	287,038			69.6		307,342			72.7
Real estate construction:
One-to-four family residential	24,362			5.9		13,016			3.1
Multifamily residential	4,598			1.1		520			0.1
Commercial and land development	25,169			6.1		25,391			6.0
Total real estate construction	54,129			13.1		38,927			9.2
Consumer:
Home equity	37,970			9.2		41,793			9.9
Automobile	844			0.2		966			0.2
Other consumer	3,067			0.8		4,012			1.1
Total consumer	41,881			10.2		46,771			11.2
Commercial business	29,422			7.1		29,249			6.9
Gross loans	412,470			100.0	%	422,289			100.0	%
Deferred loan (fees) costs, net	(45		)			85
Allowance for loan losses	(10,583		)			(12,528		)
Loans receivable, net	$	401,842				$	409,846

The following tables present loans at their recorded investment. Recorded investment includes the unpaid principal balance, net of purchase adjustments, plus accrued interest less charge offs and net deferred loan fees. Accrued interest on loans was $1.1 million at both September 30, 2013, and December 31, 2012.

Delinquent and nonaccrual loans. The following tables present the recorded investment in nonperforming loans and an aging of performing loans by class as of September 30, 2013 and December 31, 2012 (in thousands):



	September 30, 2013
	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	$	2,790	$	—	$	2,790	$	—	$	117	$	62,470	$	65,377
Multifamily residential	780		—		780		—		—		36,013		36,793
Commercial real estate	114		—		114		—				134,279		134,393
Total real estate	3,684		—		3,684		—		117		232,762		236,563
Real estate construction:
One-to-four family residential	596		—		596		—		—		23,676		24,272
Multifamily residential	—		—		—		—		—		4,598		4,598
Commercial real estate	185		—		185		—		—		21,066		21,251
Total real estate construction	781		—		781		—		—		49,340		50,121
Consumer:
Home equity	473		—		473		—		29		29,135		29,637
Automobile	6		—		6		—		—		733		739
Other consumer	—		—		—		5		—		2,527		2,532
Total consumer	479		—		479		5		29		32,395		32,908
Commercial business	223		—		223		—		—		23,164		23,387
Total noncovered loans	5,167		—		5,167		5		146		337,661		342,979
Covered loans
Real estate:
One-to-four family residential	243		—		243		—		332		6,144		6,719
Multifamily residential	68		—		68		—		—		2,516		2,584
Commercial real estate	3,301		—		3,301		—				38,809		42,110
Total real estate	3,612		—		3,612		—		332		47,469		51,413
Commercial real estate construction	223		—		223		—		—		3,655		3,878
Consumer:
Home equity	34		—		34		—		—		8,515		8,549
Automobile	—		—		—		9		—		96		105
Other consumer	—		—		—		—		—		566		566
Total consumer	34		—		34		9		—		9,177		9,220
Commercial business	—		—		—		—		—		6,029		6,029
Total covered loans	3,869		—		3,869		9		332		66,330		70,540
Total gross loans	$	9,036	$	—	$	9,036	$	14	$	478	$	403,991	$	413,519



	December 31, 2012
	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	$	3,240	$	—	$	3,240	$	498	$	217	$	75,741	$	79,696
Multifamily residential	825		—		825		—		—		30,228		31,053
Commercial real estate	3,727		—		3,727		—				132,825		136,552
Total real estate	7,792		—		7,792		498		217		238,794		247,301
Real estate construction:
One-to-four family residential	593		—		593		—		—		12,423		13,016
Multifamily residential	—		—		—		—		—		520		520
Commercial real estate	218		—		218		—		—		19,756		19,974
Total real estate construction	811		—		811		—		—		32,699		33,510
Consumer:
Home equity	643		—		643		31		7		30,979		31,660
Automobile	—		—		—		—		3		752		755
Other consumer	—		—		—		13		—		3,257		3,270
Total consumer	643		—		643		44		10		34,988		35,685
Commercial business	351		—		351		—		—		17,183		17,534
Total noncovered loans	9,597		—		9,597		542		227		323,664		334,030
Covered loans
Real estate:
One-to-four family residential	338		—		338		—		—		7,835		8,173
Multifamily residential	—		—		—		—		—		3,325		3,325
Commercial real estate	4,108		—		4,108		—				44,471		48,579
Total real estate	4,446		—		4,446		—		—		55,631		60,077
Commercial real estate construction	248		—		248		—		—		5,169		5,417
Consumer:
Home equity	85		—		85		30		—		10,164		10,279
Automobile	—		—		—		—		—		210		210
Other consumer	10		—		10		5		5		742		762
Total consumer	95		—		95		35		5		11,116		11,251
Commercial business	—		—		—		—		—		12,699		12,699
Total covered loans	4,789		—		4,789		35		5		84,615		89,444
Total gross loans	$	14,386	$	—	$	14,386	$	577	$	232	$	408,279	$	423,474

Loan classification. 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. A loan is categorized as watch if it possesses 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 Company to significant risk.

Special Mention. Performing loans that have developed minor credit weaknesses since origination are categorized as special mention. Evidence of credit weakness include the primary source of repayment has deteriorated and no longer meets debt service requirements as defined in Company 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.

Loss. This classification of loans includes loans that are considered uncollectible and of such little value that their continuance as an active asset is not warranted. This does not mean the loan has no salvage value, however, is neither desirable nor practical to defer writing off this asset at this time. Once a determination has been made that a loss exists, the loss amount will be charged-off. As a result, generally, the Company will not report loan balances as “Loss.”

Pass. Loans not meeting the criteria above are considered to be pass rated loans. The pass classification also includes homogeneous loans (such as one-to-four family residential and consumer loans) unless the borrower experiences a delinquency or requests a modification, at which point the loan is graded as specified above.

As of September 30, 2013, and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):



	September 30, 2013
	Pass		Watch			Special Mention		Substandard		Doubtful		Total Loans
Noncovered loans
Real estate:
One-to-four family residential	$	61,729	$	—		$	—	$	3,648	$	—	$	65,377
Multifamily residential	35,859		20			45		869		—		36,793
Commercial real estate	108,234		9,672			9,577		6,910		—		134,393
Total real estate	205,822		9,692			9,622		11,427		—		236,563
Real estate construction:
One-to-four family residential	21,606		2,070			—		596		—		24,272
Multifamily residential	4,598		—			—		—		—		4,598
Commercial real estate	20,897		169			—		185		—		21,251
Total real estate construction	47,101		2,239			—		781		—		50,121
Consumer:
Home equity	29,120		44			—		473		—		29,637
Automobile	723		10			—		6		—		739
Other consumer	2,477		32			15		8		—		2,532
Total consumer	32,320		86		<