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, 2009
 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.
      Employeror
      organization)
              
              I.D.
      Number)500
      12thAvenue
      South, Nampa, Idaho
              
              83651(Address of
      principal executive offices)
              
              (Zip
      Code)Registrant’s
      telephone number, including area code:
              
              (208) 466-4634
   Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
[X]    No [   ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes
[  ]    No [   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
      accelerated filer
              [   ]
              
              Accelerated
      filer
              [X]Non-accelerated
      filer
              [   ]
              
              Smaller
      reporting company
              [   ]
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
[   ]    No [X]
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  Common Stock, $.01 par
value per share, 16,698,168 shares outstanding as of May 1, 2009.
  
  
  
  
 HOME
FEDERAL BANCORP, INC.
 FORM
10-Q
 TABLE
OF CONTENTS
  
 PART 1  - FINANCIAL
      INFORMATIONItem 1 -
      Financial Statements
 Page
 Consolidated
      Balance Sheets
              1Consolidated
      Statements of Income
              2Consolidated Statements of Changes in Stockholders’ Equity
      andComprehensive
      Income
              3Consolidated
      Statements of Cash Flows
              4Selected Notes
      to Interim Consolidated Financial Statements
              6
  Item 2 -
      Management’s Discussion and Analysis of Financial Conditionand Results of Operations
                11Item 3 -
      Quantitative and Qualitative Disclosures About Market Risk
                27Item 4 -
      Controls and Procedures
                28PART II - OTHER
      INFORMATIONItem 1 - Legal
      Proceedings
                28Item 1A - Risk
      Factors
                29Item 2 -
      Unregistered Sales of Equity Securities and Use of Proceeds
                29Item 3 -
      Defaults Upon Senior Securities
                29Item 4 -
      Submission of Matters to a Vote of Security Holders
                29Item 5 - Other
      Information
                30Item 6 -
      Exhibits
                30SIGNATURES
                32
  
   Item
1.  Financial Statements
 
 HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED
      BALANCE SHEETS
                (In
      thousands, except share data) (Unaudited)
              
              March
      31,
                2009
              
              
              September
      30, 2008ASSETSCash
      and amounts due from depository institutions
              
              $
              18,826
              
              
              $
              23,270Certificate
      of deposit in correspondent bank
              
              
              -
              
              
              
              5,000Mortgage-backed
      securities available for sale, at fair value
              
              
              181,532
              
              
              
              188,787Federal
      Home Loan Bank of Seattle (“FHLB”) stock, at cost
              
              
              9,591
              
              
              
              9,591Loans
      receivable, net of allowance for loan losses
      of  $7,333and
      $4,579
              
              
              439,170
              
              
              
              459,813Loans
      held for sale
              
              
              5,549
              
              
              
              2,831Accrued
      interest receivable
              
              
              2,418
              
              
              
              2,681Property
      and equipment, net
              
              
              16,327
              
              
              
              15,246Mortgage
      servicing rights, net
              
              
              -
              
              
              
              1,707Bank
      owned life insurance
              
              
              11,800
              
              
              
              11,590Real
      estate and other property owned
              
              
              4,478
              
              
              
              650Deferred
      tax asset
              
              
              1,106
              
              
              
              1,770Other
      assets
              
              
              1,700
              
              
              
              2,134TOTAL
      ASSETS
              
              $
              692,497
              
              
              $
              725,070LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      accounts:Noninterest-bearing
      demand deposits
              
              $
              37,323
              
              
              $
              41,398Interest-bearing
      demand deposits
              
              
              134,047
              
              
              
              127,714Savings
      deposits
              
              
              33,704
              
              
              
              26,409Certificates
      of deposit
              
              
              171,494
              
              
              
              177,404Total
      deposit accounts
              
              
              376,568
              
              
              
              372,925Advances
      by borrowers for taxes and insurance
              
              
              1,309
              
              
              
              1,386Interest
      payable
              
              
              428
              
              
              
              552Deferred
      compensation
              
              
              5,225
              
              
              
              5,191FHLB
      advances
              
              
              103,909
              
              
              
              136,972Other
      liabilities
              
              
              4,409
              
              
              
              2,857Total
      liabilities
              
              
              491,848
              
              
              
              519,883STOCKHOLDERS’
      EQUITYSerial
      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:
              
              
              165
              
              
              
              174Mar.
      31, 2009 – 17,445,311 issued, 16,515,168 outstandingSept.
      30, 2008 – 17,412,449 issued, 17,374,161 outstandingAdditional
      paid-in capital
              
              
              150,087
              
              
              
              157,205Retained
      earnings
              
              
              57,746
              
              
              
              59,813Unearned
      shares issued to employee stock ownership plan (“ESOP”)
              
              
              (10,152
              )
              
              
              (10,605
              )Accumulated
      other comprehensive income (loss)
              
              
              2,803
              
              
              
              (1,400
              )Total
      stockholders’ equity
              
              
              200,649
              
              
              
              205,187TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              692,497
              
              
              $
              725,070


See accompanying
notes.










HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
              CONSOLIDATED
      STATEMENTS OF INCOME
              (In
      thousands, except share data) (Unaudited)
            
            Three
      Months Ended
              March
      31,
            
            
            Six
      Months Ended
              March
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      and dividend income:Loan
      interest
            
            $
            6,806
            
            
            $
            7,770
            
            
            $
            13,919
            
            
            $
            15,846Mortgage-backed
      security interest
            
            
            2,123
            
            
            
            2,148
            
            
            
            4,328
            
            
            
            4,091Other
      interest and dividends
            
            
            1
            
            
            
            541
            
            
            
            11
            
            
            
            824Total
      interest and dividend income
            
            
            8,930
            
            
            
            10,459
            
            
            
            18,258
            
            
            
            20,761Interest
      expense:Deposits
            
            
            1,742
            
            
            
            2,872
            
            
            
            3,760
            
            
            
            6,086FHLB
      advances
            
            
            1,228
            
            
            
            1,810
            
            
            
            2,793
            
            
            
            3,842Total
      interest expense
            
            
            2,970
            
            
            
            4,682
            
            
            
            6,553
            
            
            
            9,928Net
      interest income
            
            
            5,960
            
            
            
            5,777
            
            
            
            11,705
            
            
            
            10,833Provision
      for loan losses
            
            
            1,060
            
            
            
            378
            
            
            
            4,635
            
            
            
            665Net
      interest income after provision for loan losses
            
            
            4,900
            
            
            
            5,399
            
            
            
            7,070
            
            
            
            10,168Noninterest
      income:Service
      charges and fees
            
            
            1,892
            
            
            
            2,102
            
            
            
            4,001
            
            
            
            4,335Gain
      on sale of loans
            
            
            407
            
            
            
            162
            
            
            
            597
            
            
            
            347Increase
      in cash surrender value of bank owned life insurance
            
            
            104
            
            
            
            104
            
            
            
            210
            
            
            
            208Loan
      servicing fees
            
            
            (15
            )
            
            
            126
            
            
            
            54
            
            
            
            253Mortgage
      servicing rights, net
            
            
            -
            
            
            
            (75
            )
            
            
            (31
            )
            
            
            (143
            )Other
            
            
            (43
            )
            
            
            64
            
            
            
            (25
            )
            
            
            108Total
      noninterest income
            
            
            2,345
            
            
            
            2,483
            
            
            
            4,806
            
            
            
            5,108Noninterest
      expense:Compensation
      and benefits
            
            
            3,779
            
            
            
            4,053
            
            
            
            7,354
            
            
            
            7,752Occupancy
      and equipment
            
            
            729
            
            
            
            760
            
            
            
            1,499
            
            
            
            1,471Data
      processing
            
            
            577
            
            
            
            531
            
            
            
            1,119
            
            
            
            1,053Advertising
            
            
            197
            
            
            
            258
            
            
            
            445
            
            
            
            546Postage
      and supplies
            
            
            146
            
            
            
            171
            
            
            
            283
            
            
            
            321Professional
      services
            
            
            299
            
            
            
            191
            
            
            
            634
            
            
            
            403Insurance
      and taxes
            
            
            306
            
            
            
            140
            
            
            
            461
            
            
            
            225Other
            
            
            538
            
            
            
            320
            
            
            
            810
            
            
            
            536Total
      noninterest expense
            
            
            6,571
            
            
            
            6,424
            
            
            
            12,605
            
            
            
            12,307Income
      (loss) before income taxes
            
            
            674
            
            
            
            1,458
            
            
            
            (729
            )
            
            
            2,969Income
      tax expense (benefit)
            
            
            198
            
            
            
            513
            
            
            
            (404
            )
            
            
            1,077NET
      INCOME (LOSS)
            
            $
            476
            
            
            $
            945
            
            
            $
            (325
            )
            
            $
            1,892Earnings
      (loss) per share:Basic
            
            $
            0.03
            
            
            $
            0.06
            
            
            $
            (0.02
            )
            
            $
            0.12
            (1)Diluted
            
            
            0.03
            
            
            
            0.06
            
            
            
            (0.02
            )
            
            
            0.12
            (1)Weighted
      average number of shares outstanding:Basic
            
            
            15,740,064
            
            
            
            15,962,325
            
            
            
            15,936,796
            
            
            
            16,352,427
            (1)Diluted
            
            
            15,776,330
            
            
            
            15,978,217
            
            
            
            15,936,796
            
            
            
            16,374,451
            (1)Dividends
      declared per share:
            
            $
            0.055
            
            
            $
            0.055
            
            
            $
            0.110
            
            
            $
            0.103
            (1)





(1)
Earnings per share, average shares outstanding, and dividends per share have
been adjusted to reflect the impact of the


second-step conversion and reorganization of Home Federal Bancorp, Inc., which
occurred on December 19, 2007.








See
accompanying notes.









HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME


(In
thousands, except share data) (Unaudited)




UnearnedSharesIssued
      toEmployee
            
            
            AccumulatedStock
            
            
            OtherCommon
            
            
            Stock
            
            
            Additional
      Paid-
            
            
            Retained
            
            
            Ownership
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            In
      Capital
            
            
            Earnings
            
            
            Plan
            
            
            Loss
            
            
            TotalBalance
      at Sept. 30, 2007
            
            
            15,232,243
            
            
            $
            152
            
            
            $
            59,613
            
            
            $
            58,795
            
            
            $
            (3,698
            )
            
            $
            (2,225
            )
            
            $
            112,637Second
      Step Conversion(1)
            
            
            2,073,619
            
            
            
            21
            
            
            
            95,938
            
            
            
            
            
            
            
            (8,160
            )
            
            
            
            
            
            
            87,799Dissolution
      of  Mutual Holding Company
            
            
            
            
            
            
            
            
            
            
            50
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            50Restricted
      stock issued, net of forfeitures
            
            
            13,502
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -ESOP
      shares committed to be released
            
            
            
            
            
            
            
            
            
            
            (23
            )
            
            
            
            
            
            
            1,253
            
            
            
            
            
            
            
            1,230Exercise
      of stock options
            
            
            54,797
            
            
            
            1
            
            
            
            605
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            606Share-based
      compensation
            
            
            
            
            
            
            
            
            
            
            1,022
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,022Dividends
      paid
              ($0.213
      per share)  (2) (3)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,987
            )
            
            
            
            
            
            
            
            
            
            
            (2,987
            )Comprehensive
      income:Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,005
            
            
            
            
            
            
            
            
            
            
            
            4,005Other
      comprehensive income:Change inunrealized
      holdingloss
      on securitiesavailable
      for sale,net
      oftaxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            825
            
            
            
            825Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,830Balance
      at Sept. 30, 2008
            
            
            17,374,161
            
            
            
            174
            
            
            
            157,205
            
            
            
            59,813
            
            
            
            (10,605
            )
            
            
            (1,400
            )
            
            
            205,187Restricted
      stock issued, net of forfeitures
            
            
            (23,885
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -ESOP
      shares committed to be released
            
            
            
            
            
            
            
            
            
            
            7
            
            
            
            
            
            
            
            453
            
            
            
            
            
            
            
            460Exercise
      of stock options
            
            
            32,862
            
            
            
            
            
            
            
            353
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            353Share-based
      compensation
            
            
            
            
            
            
            
            
            
            
            417
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            417Treasury
      shares
              purchased
            
            
            (867,970
            )
            
            
            (9
            )
            
            
            (7,886
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,895
            )Dividends
      paid
              ($0.110
      per share)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,742
            )
            
            
            
            
            
            
            
            
            
            
            (1,742
            )Tax
      adjustment
            
            
            
            
            
            
            
            
            
            
            (9
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (9
            )Comprehensive
      income:Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (325
            )
            
            
            
            
            
            
            
            
            
            
            (325
            )Other
      comprehensive income:Change in unrealized holding loss on securities available for sale, net
      of  taxes
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,203
            
            
            
            4,203Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,878Balance
      at March 31, 2009
            
            
            16,515,168
            
            
            $
            165
            
            
            $
            150,087
            
            
            $
            57,746
            
            
            $
            (10,152
            )
            
            $
            2,803
            
            
            $
            200,649





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


(2)
            Home
      Federal MHC waived its receipt of dividends on the 8,979,246 shares that
      it owned.


(3)
            Dividends
      per share have been adjusted to reflect the impact of the second-step
      conversion of Home Federal Bancorp, Inc., which occurred on December 19,
      2007.






See
accompanying notes.








HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
              CONSOLIDATED
      STATEMENTS OF CASH FLOWS
              (In
      thousands) (Unaudited)
            
            Six
      Months Ended
              March
      31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
            
            $
            (325
            )
            
            $
            1,892Adjustments
      to reconcile net income (loss) to cash provided (used) by operating
      activities:Depreciation
      and amortization
            
            
            871
            
            
            
            796Net
      amortization (accretion) of premiums and discounts on
      investments
            
            
            7
            
            
            
            (17
            )Loss
      on sale of fixed assets and repossessed assets
            
            
            51
            
            
            
            95ESOP
      shares committed to be released
            
            
            460
            
            
            
            549Equity
      compensation expense
            
            
            417
            
            
            
            518Provision
      for loan losses
            
            
            4,635
            
            
            
            665Valuation
      allowance on other real estate owned
            
            
            161
            
            
            
            -Accrued
      deferred compensation expense, net
            
            
            34
            
            
            
            373Net
      deferred loan fees
            
            
            (2
            )
            
            
            6Deferred
      income tax benefit
            
            
            (2,137
            )
            
            
            (229
            )Net
      gain on sale of loans
            
            
            (597
            )
            
            
            (347
            )Proceeds
      from sale of loans held for sale
            
            
            32,950
            
            
            
            25,406Originations
      of loans held for sale
            
            
            (35,071
            )
            
            
            (22,944
            )Net
      decrease in value of mortgage servicing rights
            
            
            31
            
            
            
            144Net
      increase in value of bank owned life insurance
            
            
            (210
            )
            
            
            (209
            )Change
      in assets and liabilities:Interest
      receivable
            
            
            263
            
            
            
            (137
            )Other
      assets
            
            
            429
            
            
            
            (423
            )Interest
      payable
            
            
            (124
            )
            
            
            (112
            )Other
      liabilities
            
            
            1,542
            
            
            
            (1,359
            )Net
      cash provided by operating activities
            
            
            3,385
            
            
            
            4,667CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from maturities of mortgage-backed securities available for
      sale
            
            
            14,717
            
            
            
            13,919Purchases
      of mortgage-backed securities available for sale
            
            
            (465
            )
            
            
            (56,257
            )Maturity
      of investment in certificate of deposit
            
            
            5,000
            
            
            
            -Sale
      of mortgage servicing rights
            
            
            1,676
            
            
            
            -Purchases
      of property and equipment
            
            
            (1,941
            )
            
            
            (2,031
            )Net
      decrease in loans
            
            
            11,455
            
            
            
            1,873Proceeds
      from sale of fixed assets and repossessed assets
            
            
            510
            
            
            
            452Net
      cash provided (used) by investing activities
            
            
            30,952
            
            
            
            (42,044
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase in deposits
            
            
            3,643
            
            
            
            (8,503
            )Net
      decrease in advances by borrowers for taxes and insurance
            
            
            (77
            )
            
            
            (176
            )Proceeds
      from FHLB advances
            
            
            18,000
            
            
            
            4,000Repayment
      of FHLB advances
            
            
            (51,063
            )
            
            
            (29,177
            )Net
      proceeds from stock issuance and exchange pursuant to second step
      conversion
            
            
            -
            
            
            
            87,882Proceeds
      from exercise of stock options
            
            
            353
            
            
            
            328Repurchases
      of common stock
            
            
            (7,895
            )
            
            
            -Dividends
      paid
            
            
            (1,742
            )
            
            
            (1,212
            )Net
      cash (used) provided by financing activities
            
            
            (38,781
            )
            
            
            53,142NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (4,444
            )
            
            
            15,765CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            23,270
            
            
            
            20,588CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            18,826
            
            
            $
            36,353


(Continued)





See accompanying
notes.







HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
              CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)
              (In
      thousands) (Unaudited)
            
            Six
      Months Ended
              March
      31,2009
            
            
            2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
            
            $
            6,678
            
            
            $
            10,040Income
      taxes
            
            
            2,285
            
            
            
            1,760NONCASH
      INVESTING AND FINANCING ACTIVITIES:Acquisition
      of real estate and other assets in settlement of loans
            
            $
            5,635
            
            
            $
            780Fair
      value adjustment to securities available for sale, net of
      taxes
            
            
            4,203
            
            
            
            2,776
























See accompanying
notes.








HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY


SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





Note
1 - Basis of Presentation





The
consolidated financial statements presented in this quarterly report include the
accounts of Home Federal Bancorp, Inc., a Maryland corporation (the “Company”),
and its wholly-owned subsidiary, Home Federal Bank (the “Bank”).  The
financial statements of the Company have been prepared in conformity with
accounting principles generally accepted in the United States of America for
interim financial information and are unaudited.  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,
2009, are not necessarily indicative of the results that may be expected for the
year ending September 30, 2009.





The
Company was formed as the new stock holding company for the Bank in connection
with the Bank’s conversion from the mutual holding company structure to the
stock holding company structure, which was completed on December 19, 2007 (the
“Conversion”).  Prior to the completion of the Conversion, the Bank
was the subsidiary of Home Federal Bancorp, Inc., a federally-chartered stock
mid-tier holding company (“Old Home Federal”), and Old Home Federal was a
subsidiary of Home Federal MHC, a federally-chartered mutual holding
company.  The Bank formed the mutual holding company structure in
December 2004.  As a result of the Conversion, Home Federal MHC and
Old Home Federal ceased to exist and were replaced by the Company as the
successor to Old Home Federal.  See Note 3 below for additional
information regarding the Conversion.





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





Note
2 - Critical Accounting Estimates and Related Accounting Policies





The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the consolidated financial statements.  Changes in these
estimates and assumptions are considered reasonably possible and may have a
material impact on the consolidated financial statements, and thus actual
results could differ from the amounts reported and disclosed
herein.  The Company considers the allowance for loan losses, and
deferred income taxes to be critical accounting estimates.





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





Deferred income taxes.
Deferred income taxes are computed using the asset and liability approach as
prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 109,
Accounting for Income
Taxes.  Under this method, a deferred tax asset or liability is
determined based on the currently enacted tax rates applicable to the period in
which the differences between the financial statement carrying amounts and tax
basis of the existing assets and liabilities are expected to be reported in the
Company’s income tax returns.









See accompanying
notes.




Note
3 –Conversion and Reorganization





The
Company is a Maryland corporation that was formed as the new stock holding
company for Home Federal Bank in connection with the Conversion. As part of the
Conversion, a total of 9,384,000 new shares of the Company were sold at $10.00
per share in subscription, community and syndicated community offerings through
which the Company received proceeds of approximately $87.8 million, net of
offering costs of approximately $5.9 million. The Company contributed $48.0
million, or approximately 50%, of the net proceeds of the offering to the Bank
in the form of a capital contribution. The Company loaned $8.2 million to the
Bank’s Employee Stock Ownership Plan (the “ESOP”) and the ESOP used those funds
to acquire 816,000 shares of the Company’s common stock at $10 per share. As
part of the Conversion, shares of outstanding common stock of Old Home Federal
were exchanged for 1.136 shares of the Company’s common stock. No fractional
shares were issued. Instead, cash was paid to stockholders at $10.00 per share
for any fractional shares that would otherwise be issued. The exchange resulted
in an additional 852,865 outstanding shares of the Company for a total of
17,325,901 outstanding shares as of the closing of the Conversion on December
19, 2007, after giving effect to the redemption of fractional
shares.





The
Conversion was accounted for as a reorganization in corporate form with no
change in the historical basis of the Company’s assets, liabilities and equity.
All references to the number of shares outstanding, with the exception of those
reported on the Consolidated Balance Sheets, are restated to give retroactive
recognition to the exchange ratio applied in the Conversion.





Note
4 - Earnings (Loss) Per Share





Earnings
(Loss) per share (“EPS”) is computed using the basic and diluted weighted
average number of common shares outstanding during the period as applicable.
Basic EPS is computed by dividing the Company’s net income or loss by the
weighted average number of common shares outstanding for the
period.  Diluted EPS is computed by dividing net income by the diluted
weighted average shares outstanding, which include common stock equivalent
shares outstanding using the treasury stock method, unless such shares are
anti-dilutive. Common stock equivalents arise from assumed conversion of
outstanding stock options and vesting of restricted stock
awards.  ESOP shares are not considered outstanding for earnings per
share purposes until they are committed to be released.





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




Three
      Months Ended
              March
      31,
            
            
            Six
      Months Ended
              March
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008(in
      thousands, except share and per share data)Basic
      EPS:Net
      income (loss)
            
            $
            476
            
            
            $
            945
            
            
            $
            (325
            )
            
            $
            1,892Weighted-average
      common shares outstanding
            
            
            15,740,064
            
            
            
            15,962,325
            
            
            
            15,936,796
            
            
            
            16,352,427Basic
      EPS
            
            $
            0.03
            
            
            $
            0.06
            
            
            $
            (0.02
            )
            
            $
            0.12Diluted
      EPS:Net
      income (loss)
            
            $
            476
            
            
            $
            945
            
            
            $
            (325
            )
            
            $
            1,892Weighted-average
      common shares outstanding
            
            
            15,740,064
            
            
            
            15,962,325
            
            
            
            15,936,796
            
            
            
            16,352,427Net
      effect of dilutive stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      effect of dilutive restricted stock
            
            
            36,266
            
            
            
            15,892
            
            
            
            -
            
            
            
            22,024Weighted-average
      common shares outstanding and common stock equivalents
            
            
            15,776,330
            
            
            
            15,978,217
            
            
            
            15,936,796
            
            
            
            16,374,451Diluted
      EPS
            
            $
            0.03
            
            
            $
            0.06
            
            
            $
            (0.02
            )
            
            $
            0.12





For the
three and six month periods ended March 31, 2009 and 2008, there were 547,942
and 638,308 options excluded from the calculation of EPS, respectively as their
effect was anti-dilutive.  For the six months ended March











31, 2008,
earnings per share and average shares outstanding have been adjusted to reflect
the impact of the second-step conversion and reorganization of Home Federal
Bancorp, Inc., which occurred on December 19, 2007.





Note
5 - Mortgage-Backed Securities




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




Amortized
      Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              Value(in thousands)March 31, 2009Issued
      by U.S. Government sponsored enterprises
            
            $
            173,507
            
            
            $
            5,326
            
            
            $
            (9
            )
            
            $
            178,824Other
            
            
            3,353
            
            
            
            -
            
            
            
            (645
            )
            
            
            2,708Total
            
            $
            176,860
            
            
            $
            5,326
            
            
            $
            (654
            )
            
            $
            181,532September 30, 2008Issued
      by U.S. Government sponsored enterprises
            
            $
            187,730
            
            
            $
            669
            
            
            $
            (2,669
            )
            
            $
            185,730Other
            
            
            3,390
            
            
            
            -
            
            
            
            (333
            )
            
            
            3,057Total
            
            $
            191,120
            
            
            $
            669
            
            
            $
            (3,002
            )
            
            $
            188,787





The fair
value of temporarily impaired securities, the amount of unrealized losses and
the length of time these unrealized losses existed as of March 31, 2009 were as
follows:







Less
      than 12 months
            
            12
      months or longer
            
            TotalFair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              Losses
            
            Fair
              Value
            
            Unrealized
              Losses(in
      thousands)Mortgage-backedsecurities,
      availablefor
      sale
            $2,854
            
            $(9)
            
            $2,708
            
            $(645)
            
            $5,562
            
            $(654)







Management
has evaluated these securities and has determined that the decline in the value
is temporary and not related to the underlying credit quality of the
issuers.  The declines in value are on securities that have
contractual maturity dates and, at March 31, 2009, management believes it is
reasonably probable that principal and interest balances on those securities
will be collected based on the performance, underwriting and vintage of the
loans underlying the temporarily-impaired securities. However, continued
deteriorating economic conditions may result in degradation in the performance
of the loans underlying those securities in the future. The Company has the
ability and intent to hold the temporarily-impaired securities for a reasonable
period of time for a forecasted recovery of the amortized cost.




As of
March 31, 2009, the Bank had pledged mortgage-backed securities with an
amortized cost of $75.0 million and a fair value of $77.4 million as collateral
for FHLB advances.  Mortgage-backed securities with an amortized cost
of $5.2 million and a fair value of $5.4 million at March 31, 2009, were pledged
to the Federal Reserve Bank as collateral for treasury tax and loan funds held
by the Bank and for borrowings from the discount window.  As of March
31, 2009, and September 30, 2008, there was no balance owed by the Bank through
the Federal Reserve Bank discount window.
















Note
6 - Loans Receivable





Loans
receivable are summarized as follows:




March
      31, 2009
            
            
            September
      30, 2008Balance
            
            
            Percent
              of
      Total
            
            
            Balance
            
            
            Percent
              of
      Total(dollars
      in thousands)Real
      Estate:One-
      to four-family residential
            
            $
            185,911
            
            
            
            41.58
            %
            
            $
            210,302
            
            
            
            45.22
            %Multi-family
      residential
            
            
            10,121
            
            
            
            2.26
            
            
            
            8,477
            
            
            
            1.82Commercial
            
            
            159,867
            
            
            
            35.73
            
            
            
            151,733
            
            
            
            32.62Total
      real estate
            
            
            355,899
            
            
            
            79.57
            
            
            
            370,512
            
            
            
            79.66Real
      Estate Construction:One-
      to four-family residential
            
            
            10,869
            
            
            
            2.43
            
            
            
            13,448
            
            
            
            2.89Multi-family
      residential
            
            
            -
            
            
            
            -
            
            
            
            920
            
            
            
            0.20Commercial
      and land development
            
            
            22,055
            
            
            
            4.93
            
            
            
            18,674
            
            
            
            4.01Total
      real estate construction
            
            
            32,924
            
            
            
            7.36
            
            
            
            33,042
            
            
            
            7.10Consumer:Home
      equity
            
            
            50,644
            
            
            
            11.32
            
            
            
            52,954
            
            
            
            11.38Automobile
            
            
            1,562
            
            
            
            0.35
            
            
            
            1,903
            
            
            
            0.41Other
      consumer
            
            
            1,161
            
            
            
            0.26
            
            
            
            1,370
            
            
            
            0.29Total
      consumer
            
            
            53,367
            
            
            
            11.93
            
            
            
            56,227
            
            
            
            12.08Commercial
      business
            
            
            5,096
            
            
            
            1.14
            
            
            
            5,385
            
            
            
            1.16447,286
            
            
            
            100.00
            %
            
            
            465,166
            
            
            
            100.00
            %Premium
      on purchased loans
            
            
            188
            
            
            
            
            
            
            
            199Deferred
      loan fees
            
            
            (971
            )
            
            
            
            
            
            
            (973
            )Allowance
      for loan losses
            
            
            (7,333
            )
            
            
            
            
            
            
            (4,579
            )Loans
      receivable, net
            
            $
            439,170
            
            
            
            
            
            
            $
            459,813







Note
7 – Allowance for Loan Losses





Activity
in the allowance for loan losses for the three and six month periods ended March
31, 2009 and 2008, was as follows:





Three
      months ended
              March
      31,
            
            
            Six
      months ended
              March
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008(in
      thousands)Beginning
      balance
            
            $
            8,027
            
            
            $
            3,015
            
            
            $
            4,579
            
            
            $
            2,988Provision
      for loan losses
            
            
            1,060
            
            
            
            378
            
            
            
            4,635
            
            
            
            665Losses
      on loans charged-off
            
            
            (1,778
            )
            
            
            (96
            )
            
            
            (1,908
            )
            
            
            (360
            )Recoveries
      on loans charged-off
            
            
            24
            
            
            
            10
            
            
            
            27
            
            
            
            14Ending
      balance
            
            $
            7,333
            
            
            $
            3,307
            
            
            $
            7,333
            
            
            $
            3,307














Note
8 – Fair Value Measurement





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





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


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


·
            Level
      3 – Instruments whose significant value drivers are
      unobservable.





The
following table summarized the Company’s financial instruments that were
measured at fair value on a recurring basis at March 31, 2009:








March
      31, 2009Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3(in
      thousands)Securities
      available for sale
            
            $181,532
            
            
            -
            
            
            $181,532
            
            
            -





Additionally,
certain assets are measured at fair value on a non-recurring
basis.  These adjustments to fair value generally result from the
application of lower-of-cost-or-market accounting or write-downs of individual
assets due to impairment.  The following table summarizes the
Company’s financial instruments that were measured at fair value on a
non-recurring basis at March 31, 2009:








March
      31, 2009Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3(in
      thousands)Impaired
      loans
            
            $9,864
            
            
            -
            
            
            -
            
            
            $9,864





Impaired
loans, which are measured for impairment using the fair value of the collateral
at March 31, 2009, had a carrying amount of $9.9 million, net of valuation
allowances totaling $1.6 million, resulting in an additional provision for loan
losses of $207,000 during the second quarter of fiscal 2009.





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





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





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











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




Forward-Looking
Statements





This
report contains forward-looking statements, which can be identified by the use
of words such as “believes,” “intends,” “expects,” “anticipates,” “estimates” or
similar expressions.  Forward-looking statements include, but are not
limited to:





·
            statements
      of our goals, intentions and
expectations;


·
            statements
      regarding our business plan, prospects, growth and operating
      strategies;


·
            statements
      regarding the quality of our loan and investment portfolios;
      and,


·
            estimates
      of our risks and future costs and
benefits.





These
forward-looking statements are subject to significant risks and
uncertainties.  Actual results may differ materially from those
contemplated by the forward-looking statements as a result of, among others, the
following factors:





·
            general
      economic conditions, including real estate values, either nationally or in
      the Company’s market area, that are worse than
  expected;


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


·
            the
      credit risk of lending activities, including risks related to construction
      and land development lending and commercial and small business
      banking;


·
            changes
      in the level and trend of loan delinquencies and
    write-offs;


·
            results
      of examinations by banking
regulators;


·
            increased
      competitive pressures among financial services
  companies;


·
            changes
      in consumer spending, borrowing and savings
  habits;


·
            our
      ability to successfully manage our
growth;


·
            legislative
      or regulatory changes that adversely affect the Company’s
      business;


·
            adverse
      changes in the securities markets;
and


·
            changes
      in accounting policies and practices, as may be adopted by the bank
      regulatory agencies, the Public Company Accounting Oversight Board or the
      Financial Accounting Standards
Board.





These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.  The Company
undertakes no obligation to publish revised forward-looking statements to
reflect the occurrence of unanticipated events or circumstances after the date
hereof.





Background
and Overview





Home
Federal Bank (the “Bank”) was founded in 1920 as a building and loan association
and reorganized as a federal mutual savings and loan association in
1936.  On December 6, 2004, the Bank converted to stock form and
reorganized into the two-tiered mutual holding company form of organization and
formed Home Federal MHC and Home Federal Bancorp, Inc. (“Old Home Federal”). In
connection with that transaction, Old Home Federal sold 40.00% of its
outstanding shares of common stock (6,083,500 shares) to the public and issued
59.04% of its outstanding shares of common stock (8,979,246 shares) to Home
Federal MHC, the mutual holding company parent of Old Home
Federal.  In connection with that transaction, Old Home Federal also
established and capitalized the Home Federal Foundation (“Foundation”) for the
purpose of supporting charitable organizations and activities that enhance the
quality of life for residents within the Bank’s market area. The Foundation was
capitalized with a $1.8 million one-time contribution, which consisted of
146,004 shares of its common stock and $365,010 in cash.





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













holding
company for Home Federal Bank. Home Federal Bancorp, Inc., is a Maryland
corporation. The Conversion was completed on December 19, 2007.





Pursuant
to the terms of the Plan, shares of outstanding common stock of Old Home Federal
were exchanged for 1.136 shares of the Company’s common stock. Cash was paid in
lieu of fractional shares.  The Conversion was approved by the Bank’s
members, the Company’s stockholders (including the approval of a majority of the
shares held by persons other than Home Federal MHC) and regulatory
agencies.  The Company’s common stock is traded on the NASDAQ Global
Select Market under the symbol “HOME” and is included in the U.S. Russell 2000®
Index.





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





The Bank
serves the Treasure Valley region of southwestern Idaho, which includes Ada,
Canyon, Elmore and Gem counties, through its 15 full-service banking offices and
one loan center.  Nearly 40% of the state’s population lives and works
in the four counties served by Home Federal Bank.  Ada County has the
largest population and includes the city of Boise, the state
capital.  Home Federal Bank maintains its largest branch presence in
Ada County with eight locations, followed by Canyon County with five branches,
including the Company’s corporate headquarters in Nampa.  The two
remaining branches are located in Elmore and Gem Counties.





The
following items summarize the key factors affecting performance of the Company
and the key strategic initiatives undertaken by management during the Company’s
second quarter of fiscal year 2009:





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


§
            Costs
      associated with foreclosed real estate and FDIC insurance premiums caused
      an increase in the efficiency ratio as noninterest expense increases
      outpaced higher revenue;


§
            The
      previously announced 5% share repurchase program was
      completed.  A total of 867,970 shares were purchased at an
      average purchase price of $9.04 per share during the
    quarter;


§
            The
      slowdown in consumer spending reduced fee
  income;


§
            The
      Bank’s newly-formed Small Business Banking Group had a successful second
      quarter by generating new deposit balance
  relationships;


§
            Net
      interest margin expanded due to declining funding costs and continued
      deleveraging of low-spread assets and liabilities;
  and


§
            The
      Bank maintained its strong capital position with a total risk-based
      capital ratio of 32.9% at


March
      31, 2009.





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





Consistent
with its business strategy, the Company reduced fixed-term borrowing balances
with the Federal Home Loan Bank of Seattle (“FHLB”) and management of the Bank
continued to focus on growing core deposits, which are defined as non-maturity
deposits such as checking, savings and money market accounts. Some success
during the quarter, particularly in the Bank’s new Small Business Banking Group,
resulted in higher core deposit balances, which management believes will
increase the franchise value of the Company and improve profitability by
reducing















interest
rate sensitivity and high-cost borrowing balances. Core deposit relationships
should also increase revenue through service and interchange fee
income.





While
interchange income fell slightly in fiscal year 2009 compared to fiscal year
2008, fee income from nonsufficient funds (“NSF”) transactions has fallen
significantly from the Bank’s historical levels. The reason for this is twofold:
(1) management is focusing on higher-balance relationship deposit accounts
rather than low-balance, high fee accounts and (2) the economic slowdown has
reduced consumer spending and management believes depositors are more closely
monitoring their account balances. Nonetheless, management is concerned that
continued declines in NSF revenue will limit future non interest revenue growth
and cause the Company to be more dependent on net interest income. In response
to this and to execute the strategy of increasing core deposit balances, the
Bank will launch a new checking account that management believes will result in
higher checking account balances and provide an incentive for customers to use
their check cards more frequently, which should result in higher interchange
income.





Nonperforming
assets and delinquent loans increased during the second quarter of fiscal 2009.
Loans to finance construction and land acquisition and development projects have
been the source of the Company’s nonperforming loan balance increases.
Commercial real estate loans are now being pressured as property vacancies
continue to climb in the Treasure Valley and the previously mentioned slow down
in consumer spending is causing many independent and national retailers to close
stores or reduce inventory. The Bank’s Credit Administration Department is also
spending considerable time reviewing home equity lines of credit and, in some
cases, suspending lines at their current balances in order to mitigate future
loan losses.





Micron
Technology, Inc., one of the larger employers headquartered in our market area,
recently announced a plan to eliminate 2,000 jobs in the Treasure Valley during
calendar 2009. The unemployment rate in the Treasure Valley has increased to
8.4% in February 2009 from 4.5% in March 2008 as total employment fell 6.5%
during that time period to a level in February 2009 that has not been seen in
the Boise-Nampa market since February 2005.





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





Critical
Accounting Estimates and Related Accounting Policies





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





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





The
Company’s methodology for analyzing the allowance for loan losses consists of
specific allocations on significant individual credits and a general allowance
amount, including a range of losses. The specific allowance component is
determined when management believes that the collectibility of an individually
reviewed loan has been impaired and a loss is probable. The general allowance
component relates to assets with no well-defined deficiency or weakness and
takes into consideration losses that are inherent within the portfolio but have
not been identified. The general allowance is determined by applying a
historical loss percentage to various types of loans with similar
characteristics and classified loans that are not analyzed specifically.
Adjustments are made to historical loss percentages to reflect current economic
and internal environmental factors, such as changes in underwriting standards
and management turnover, which may increase or decrease those loss factors. As a
result of the













imprecision
in calculating inherent and potential losses, a range is added to the general
allowance to 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. Additionally,
future events may evidence additional losses that were unknown at the time
management estimated the allowance, which may require an increase in the
allowance for loan losses in future periods.





The
allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.





The
Company also estimates a reserve related to unfunded loan commitments. In
assessing the adequacy of the reserve, the Company uses a similar approach used
in the development of the allowance for loan losses. The reserve for unfunded
loan commitments is included in other liabilities on the Consolidated Balance
Sheets. The provision for unfunded commitments is charged to noninterest
expense.





Deferred Income Taxes.Deferred income taxes are reported for temporary differences between
items of income or expense reported in the financial statements and those
reported for income tax purposes. Deferred taxes are computed using the asset
and liability approach as prescribed in SFAS No. 109, Accounting for Income
Taxes. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in an institution’s income tax returns.
The deferred tax provision for the year is equal to the net change in the net
deferred tax asset from the beginning to the end of the year, less amounts
applicable to the change in value related to investments available for sale. The
effect on deferred taxes of a change in tax rates is recognized as income in the
period that includes the enactment date. The primary differences between
financial statement income and taxable income result from depreciation expense,
mortgage servicing rights, loan loss reserves, deferred compensation, mark to
market adjustments on our available for sale securities, and dividends received
from the Federal Home Loan Bank of Seattle. Deferred income taxes do not include
a liability for pre-1988 bad debt deductions allowed to thrift institutions that
may be recaptured if the institution fails to qualify as a bank for income tax
purposes in the future.





Comparison
of Financial Condition at March 31, 2009 and September 30, 2008





For the
six months ended March 31, 2009, total assets decreased $32.6
million.  The changes in total assets were primarily concentrated in
the following asset categories:





(decrease)Balance
      at March 31,
              2009
            
            
            Balance
      at September 30, 2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Cash
      and amounts due from depository institutions
            
            $
            18,826
            
            
            $
            23,270
            
            
            $
            (4,444
            )
            
            
            (19.1
            )%Mortgage-backed
      securities, at fair value
            
            
            181,532
            
            
            
            188,787
            
            
            
            (7,255
            )
            
            
            (3.8
            )Loans
      receivable, net
            
            
            439,170
            
            
            
            459,813
            
            
            
            (20,643
            )
            
            
            (4.5
            )





Cash. Cash and amounts due
from depository institutions decreased $4.4 million to $18.8 million at March
31, 2009, from $23.3 million at September 30, 2008.  The decrease was
primarily attributable to excess cash being used to pay off maturing borrowings
from the Federal Home Loan Bank of Seattle (the “FHLB”).





Securities. The fair value of
mortgage-backed securities decreased $7.3 million to $181.5 million at March 31,
2009, from $188.8 million at September 30, 2008.  The decrease was the
net of principal repayments and the increase in the value of the mortgage backed
securities portfolio during the six months ended March 31, 2009.  At
March 31, 2009, the unrealized gain on the portfolio was $4.7 million compared
to an unrealized loss of $2.3 million at September 30.
2008.  Principal reduction totaled $14.7 million for the six months
ended March 31, 2009 and are occurring at an accelerating rate due to the
historically low rates available on residential mortgages, which is increasing
refinancing activity.













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





Non-agency,
also referred to as “private label,” mortgage-backed securities had a fair value
of $2.7 million at


March 31,
2009, compared to their amortized cost of $3.4 million. The securities carried a
rating of ‘AAA’ by Moody’s and Standard & Poor’s at that date. The value of
private label mortgage-backed securities have fallen and have been more volatile
than securities issued by government-sponsored enterprises due to the
deterioration of the national residential loan market. Management has reviewed
the delinquency status, credit support and collateral coverage of the loans
pooled in the private label securities portfolio and has concluded the
securities were not other than temporarily impaired at March 31, 2009. However,
continued deterioration in the economy and rapid increases in unemployment may
result in a change in the performance expectation for these securities in the
future, which may negatively impact the Company’s earnings. At March 31, 2009,
the Company did not own collateralized debt obligations or trust preferred
securities.





FHLB Stock.At March 31, 2009,
the Bank held $9.6 million of common stock in the FHLB. This security is
reported at par value, which represents the Bank’s cost. The FHLB recently
announced that it would report a risk-based capital deficiency under the
regulations of the Federal Housing Finance Agency (the “FHFA”), its primary
regulator, as of December 31, 2008. As a result, the FHLB stopped paying a
dividend and stated that it would suspend the repurchase and redemption of
outstanding common stock until its retained earnings deficiency was
reclaimed.





The FHLB
has communicated to the Company that it believes the calculation of risk-based
capital under the current rules of the FHFA significantly overstates the market
and credit risk of the FHLB’s private-label mortgage-backed securities in the
current market environment and that they have enough capital to cover the risks
reflected in the FHLB’s balance sheet. As a result, the Company has not recorded
an "other than temporary impairment" on its investment in FHLB stock. However,
continued deterioration in the FHLB’s financial position may result in
impairment in the value of those securities, the requirement that the Bank
contribute additional funds to recapitalize the FHLB, or reduce the Bank’s
ability to borrow funds from the FHLB, impairing the Bank’s ability to meet
liquidity demands.





Loans.Net loans receivable
decreased $20.6 million to $439.2 million at March 31, 2009, from $459.8 million
at September 30, 2008.  One- to four-family residential mortgage loans
decreased $24.4 million as mortgage rates fell during the second quarter of
fiscal 2009, which led to significantly higher levels of mortgage loan
refinancing. Additionally, the Bank originates conventional one- to four-family
residential loans for sale in the secondary market. As a result, the residential
loan portfolio will likely continue to decline as new loans are not added to the
portfolio. Consumer loans decreased $2.9 million to $53.4 million as of March
31, 2009.  Commercial real estate, multifamily and acquisition and
development loans increased $9.4 million to $208.0 million at March 31, 2009
from $198.6 million at September 30, 2008.  However, commercial,
multifamily and acquisition and development loans declined $6.9 million during
the second quarter of fiscal 2009 primarily as a result of a $7.3 million
reduction in the real estate construction loan portfolio associated with the
repayment of a large loan during the period. The Company plans to continue its
emphasis on commercial and small business banking products.





Asset Quality. Loans
delinquent 30 to 89 days, which included $1.2 million of loans on nonaccrual
status, totaled $11.6 million at March 31, 2009, compared to $6.5 million at
September 30, 2008, and $4.0 million at March 31, 2008. Nonperforming assets,
which includes all loans on nonaccrual status, impaired loans and real estate
owned, totaled $19.1 million at March 31, 2009, compared to $10.6 million at
September 30, 2008, and $2.3 million at March 31, 2008. The allowance for loan
losses was $7.3 million, or 1.64%, of gross loans at March 31, 2009, compared to
$4.6 million, or 0.98% of gross loans at September 30, 2008, and $3.3 million,
or 0.69% of gross loans at March 31, 2008.





The
largest increase in delinquent loans during the second quarter of fiscal 2009
occurred in the commercial real estate portfolio with balances delinquent more
than 30 days increasing by $3.9 million to $8.4 million at March 31, 2009. Net
charge-offs totaled $1.8 million during the quarter ended March 31, 2009. Real
estate owned increased















$3.1
million during the second quarter of fiscal 2009 to $4.5 million at March 31,
2009. Real estate owned was comprised of $2.9 million of land development and
speculative one- to four-family construction projects, $1.0 million of
commercial real estate and $610,000 of one- to four-family residential
properties.





The
following table summarizes loans delinquent 30 to 89 days at March 31, 2009, and
September 30, 2008:





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





When a
loan becomes 90 days delinquent, the Bank places the loan on nonaccrual status.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Generally, an impaired loan is also
placed on nonaccrual status, regardless of delinquency. As a result, some loans
that are not 90 days or more past due may be in nonaccrual status if it is
considered impaired. The delinquency table above includes $1.2 million of loans
that have been placed on nonaccrual status at March 31, 2009, which are also
included in the table below that summarizes total nonperforming loans (including
nonaccrual and impaired loans) as well as real estate owned at March 31, 2009,
and September 30, 2008:





March
      31, 2009
            
            
            September
      30, 2008Balance
            
            
            Loss Reserve
            
            
            Balance
            
            
            Loss Reserve(in
      thousands)Land
      acquisition and development
            
            $
            5,266
            
            
            $
            1,029
            
            
            $
            3,975
            
            
            $
            916One-
      to four-family construction
            
            
            2,307
            
            
            
            286
            
            
            
            4,239
            
            
            
            596Commercial
      real estate
            
            
            3,074
            
            
            
            220
            
            
            
            -
            
            
            
            -One-
      to four-family residential
            
            
            3,943
            
            
            
            441
            
            
            
            1,701
            
            
            
            219Other
            
            
            -
            
            
            
            -
            
            
            
            30
            
            
            
            2Total nonperforming and impaired
      loans
            
            $
            14,590
            
            
            
            1,976
            
            
            $
            9,945
            
            
            
            1,733General
      loss reserve
            
            
            
            
            
            
            5,357
            
            
            
            
            
            
            
            2,846Total
      allowance for loan losses
            
            
            
            
            
            $
            7,333
            
            
            
            
            
            
            $
            4,579Real
      estate owned, net
            
            $
            4,478
            
            
            
            
            
            
            $
            650




Troubled
debt restructurings that are not included in the delinquency or nonperforming
asset tables above totaled $654,000 at March 31, 2009.




Nearly
all of the Company’s loans are secured by collateral located in the Treasure
Valley or southern Idaho. Approximately 60% and 20% of the Bank’s commercial
real estate and construction and land development loans are secured by
properties in Ada and Canyon counties in Idaho, respectively. Approximately 6%
of that portfolio is secured by properties located in eastern Idaho, 5% is
located in Valley County in Idaho, and 4% is located in the Twin Falls and
Ketchum areas.





In 2005,
the Bank purchased approximately $38.8 million of residential real estate loans
from Countrywide Financial, now Bank of America, who continues to service the
loans. Balances on the portfolio totaled $23.0 million at March 31, 2009.
Approximately 92.1% of the portfolio balance is secured by properties outside of
the state of Idaho and delinquencies and foreclosures are rising quickly in that
portfolio. At March 31, 2009, loans in this portfolio that were delinquent over
30 days totaled $3.1 million, or 12.8%, of the portfolio, including $2.2 million
of















nonperforming
loans that are reported in the table above. The total reserve allocated to loans
in this loan portfolio was $1.0 million at March 31, 2009, or 4.1% of the
balance of loans outstanding on that date.





At March
31, 2009, nearly all of the Company’s home equity lines of credit (“HELOC”) were
directly originated through the Bank’s branch network. However, approximately
$1.5 million of HELOCs, or 4.2% of the HELOC portfolio at March 31, 2009, were
originated through broker relationships. While nearly all of these loans are
secured by properties in southern Idaho, management ceased indirect origination
of HELOCs in fiscal 2008. The average credit score of borrowers in the Bank’s
total HELOC portfolio was 748 at loan origination, and the average combined loan
to value was 72%.





The
Treasure Valley economy continues to deteriorate as unemployment rose quickly
from 4.80% in September 2008 to an estimated 8.40% in February 2009. New home
and commercial real estate construction has nearly come to a standstill as
excess inventory in the residential and commercial real estate markets continues
to reduce property values. The pending closure of retail locations as a result
of reduced consumer spending will exacerbate the problem.




Management
believes the Treasure Valley is at the beginning of a downturn in the commercial
real estate market. As a result of this uncertainty, management recorded a
significant provision for loan losses during the six months ended March 31,
2009, in order to increase the general reserve component of the allowance for
loan losses. While the $2.4 million provision for loan losses for the full
fiscal year of 2008 and the $4.6 million provision recorded for the first six
months of fiscal 2009 exceeds the level of net charge-offs during those periods,
management believes such an increase in the allowance for loan losses is
prudent and appropriate and that the allowance for loan losses reflects
management’s best estimate of probable, known and estimable losses inherent in
the loan portfolio at March 31, 2009. However, additional information may later
come to management’s attention, evidencing losses in excess of the amounts
estimated, which may negatively affect earnings in the future.






Last
year, management realigned the Credit Administration Department and appointed a
Chief Credit Officer, reporting directly to the Chief Executive Officer, in
anticipation of this environment. The Bank also recently hired a senior workout
professional to increase the Credit Administration Department’s
resources.




Deposits.  Deposits
increased $3.6 million, or 1.0%, to $376.6 million at March 31, 2009, from
$372.9 million at September 30, 2008, primarily as a result of savings
accounts.  Savings account balances have been increasing each month in
the current fiscal year with the most significant increase in balances occurring
during the quarter ended March 31, 2009.  The decrease in certificates
of deposit was due to choosing not to match rates offered by local competitors
that in many cases exceeded the Bank’s cost of alternative funding sources. The
Bank had no brokered deposits at March 31, 2009, or September 30, 2008. The
following table details the composition of the deposit portfolio and changes in
deposit balances:





Increase
      (decrease)Balance
      at March 31,
              2009
            
            
            Balance
      at September 30, 2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Noninterest-bearing
      demand deposits
            
            $
            37,323
            
            
            $
            41,398
            
            
            $
            (4,075
            )
            
            
            (9.8
            )%Interest-bearing
      demand deposits
            
            
            134,047
            
            
            
            127,714
            
            
            
            6,333
            
            
            
            5.0Savings
      deposits
            
            
            33,704
            
            
            
            26,409
            
            
            
            7,295
            
            
            
            27.6Certificates
      of deposit
            
            
            171,494
            
            
            
            177,404
            
            
            
            (5,910
            )
            
            
            (3.3
            )Total
      deposit accounts
            
            $
            376,568
            
            
            $
            372,925
            
            
            $
            3,643
            
            
            
            1.0
            %





Approximately
72% of the certificates of deposit portfolio at March 31, 2009, is scheduled to
mature within 12 months. While this presents an opportunity to reduce the cost
of interest bearing deposits in the current low interest rate environment, the
significant level of maturities of certificates also places a burden on the
Company’s liquidity if management is unable to retain the maturing
balances.





Borrowings.  FHLB
advances decreased $33.1 million, or 24.1%, to $103.9 million at March 31, 2009,
from $137.0 million at September 30, 2008.  Excess cash and principal
payment proceeds from mortgage-backed securities and













residential
loan portfolios were used to repay FHLB advances as they matured.  The
Bank uses FHLB advances as an alternative funding source to deposits, manage
funding costs, reduce interest rate risk, and to leverage the balance
sheet.





Deferred Income Tax
Asset/Liability.  The Company had a deferred tax asset of $1.1
million at March 31, 2009 versus a deferred tax asset of $1.8 million at
September 30, 2008.  There are three major components to the
change.  There was a $2.8 million shift from an unrealized loss on the
Company’s mortgage-backed securities’ portfolio as of September 30, 2008 to an
unrealized gain as of March 31, 2009, as interest rates fell and spreads
narrowed, increasing the value of the securities portfolio during the quarter.
There was a $1.4 million increase in deferred tax assets due to a $4.6 million
provision for loan loss recorded during the six month period.  Lastly,
deferred tax liability decreased $710,000 due to the sale of mortgage servicing
rights completed in December 2008.





Equity.Stockholders’ equity
decreased $4.5 million, or 2.2%, to $200.6 million at March 31, 2009, compared
to $205.2 million at September 30, 2008.  The funds used to complete
the repurchase of the remaining shares pursuant to our share repurchase program
during the quarter ended March 31, 2009 was the primary cause for the decrease
in stockholders’ equity.  Dividends and a year-to-date loss from
operations in fiscal 2009 reduced retained earnings while a lower interest rate
environment at March 31, 2009 increased the unrealized gain on securities by
$4.2 million, net of tax, compared to September 30, 2008.  The
Company’s book value per share as of March 31, 2009 was $12.15 per share based
upon 16,515,168 outstanding shares of common stock, a 2.9% increase from
September 30, 2008.







Comparison
of Operating Results for the Three Months Ended March 31, 2009 and March 31,
2008





Net
income for the three months ended March 31, 2009 was $476,000, or $0.03 per
diluted share, compared to net income of $945,000, or $0.06 per diluted share,
for the three months ended March 31, 2008.  Total revenue for the
quarter ended March 31, 2009, which consisted of net interest income before the
provision for loan losses plus noninterest income, was unchanged at $8.3 million
for both the quarter ended March 31, 2009 and the same period of the prior
year.  However, total revenue for the second quarter of fiscal 2009
increased $99,000, or 1.2%, from the linked first quarter of fiscal 2009. The
Company’s efficiency ratio increased to 79.12% for the quarter ended March 31,
2009, compared to 77.77% for the same quarter a year ago.





Net Interest
Income.  Net interest income increased $183,000, or 3.2%, to
$6.0 million for the three months ended March 31, 2009, from $5.8 million for
the three months ended March 31, 2008.  The increase in net interest
income is primarily attributable to a decrease in interest
expense.   Current rates paid on deposits are significantly lower
than in the prior year.  In addition, Federal Home Loan Bank borrowing
balances are lower than in the same period of the prior year as some maturing
advances have been repaid with excess liquidity.





The
Company’s net interest margin increased 45 basis points to 3.60% for the quarter
ended March 31, 2009, from 3.15% for the same quarter last year.  The
improvement in the net interest margin is primarily attributable to the decrease
in interest expense between the two periods.





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

















Three
      Months Ended March 31, 2009
              Compared
      to Three Months Ended March 31, 2008Increase
      (Decrease) Due toRate
            
            
            Volume
            
            
            Total(in
      thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            (646
            )
            
            $
            (340
            )
            
            $
            (986
            )Loans
      held for sale
            
            
            (6
            )
            
            
            28
            
            
            
            22Interest-bearing
      deposits in other banks
            
            
            (263
            )
            
            
            (246
            )
            
            
            (509
            )Mortgage-backed
      securities
            
            
            (44
            )
            
            
            19
            
            
            
            (25
            )FHLB
      stock
            
            
            (31
            )
            
            
            -
            
            
            
            (31
            )Total
      net change in income on interest-earning assets
            
            $
            (990
            )
            
            $
            (539
            )
            
            $
            (1,529
            )Interest-bearing
      liabilities:Savings
      deposits
            
            $
            2
            
            
            $
            14
            
            
            $
            16Interest-bearing
      demand deposits
            
            
            (26
            )
            
            
            3
            
            
            
            (23
            )Money
      market accounts
            
            
            (209
            )
            
            
            (45
            )
            
            
            (254
            )Certificates
      of deposit
            
            
            (579
            )
            
            
            (290
            )
            
            
            (869
            )Total
      deposits
            
            
            (812
            )
            
            
            (318
            )
            
            
            (1,130
            )FHLB
      advances
            
            
            (104
            )
            
            
            (478
            )
            
            
            (582
            )Total
      net change in expense on interest-bearing liabilities
            
            $
            (916
            )
            
            $
            (796
            )
            
            $
            (1,712
            )Total
      increase in net interest income
            
            
            
            
            
            
            
            
            
            $
            183





Interest and Dividend
Income.  Total interest and dividend income for the three
months ended March 31, 2009, decreased $1.5 million, or 14.6%, to $8.9 million,
from $10.5 million for the three months ended March 31, 2008.  The
decrease during the quarter was attributable to both a decrease on yields earned
on interest earning assets as well as a decrease in interest earning
assets.





The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Increase/Average
      Balance
            
            
            Yield
            
            
            Average
      Balance
            
            
            Yield
            
            
            (Decrease)
      in Interest and Dividend Income from 2008(dollars
      in thousands)Interest-bearing
      deposits in other banks
            
            $
            4,855
            
            
            
            0.08
            %
            
            $
            57,900
            
            
            
            3.52
            %
            
            $
            (509
            )Mortgage-backed
      securities
            
            
            184,491
            
            
            
            4.60
            
            
            
            182,865
            
            
            
            4.70
            
            
            
            (25
            )Loans
      receivable, net
            
            
            458,105
            
            
            
            5.89
            
            
            
            479,822
            
            
            
            6.45
            
            
            
            (986
            )Loans
      held for sale
            
            
            4,386
            
            
            
            5.13
            
            
            
            2,266
            
            
            
            6.09
            
            
            
            22FHLB
      stock
            
            
            9,591
            
            
            
            -
            
            
            
            9,591
            
            
            
            1.29
            
            
            
            (31
            )Total
      interest-earning assets
            
            $
            661,428
            
            
            
            5.40
            %
            
            $
            732,444
            
            
            
            5.71
            %
            
            $
            (1,529
            )














The
decline in the yield on interest-bearing deposits in other banks reflects the
significantly lower short-term interest rate environment in the second quarter
of fiscal 2009 compared to the second quarter of fiscal 2008. The significantly
higher balance of interest-bearing deposits in other banks in the prior year is
due to proceeds received from the Conversion.





The yield
on loans fell to 5.89% in the second quarter of fiscal 2009 also as a result of
the decrease in short-term interest rates. For example, the Wall Street Journal
Prime rate was 3.25% for the second fiscal quarter of 2009 compared to an
average of 6.24% during the same quarter last year. Loans on nonaccrual status
during the second quarter of 2009 reduced interest income by approximately
$255,000.





Interest
Expense.  Interest expense decreased $1.7 million, or 36.6%, to
$3.0 million for the three months ended March 31, 2009 from $4.7 million for the
three months ended March 31, 2008.  The average balance of total
interest-bearing liabilities decreased $69.3 million, or 13.4%, to $449.2
million for the three months ended March 31, 2009 from $518.5 million for the
three months ended March 31, 2008.  The decrease in interest expense
in 2009 was mainly due to a reduction in the outstanding balance of FHLB
advances and a lower rate paid on certificates of deposit.





The
following table details average balances, cost of funds and the change in
interest expense:





Three
      Months Ended March 31,2009
            
            
            2008
            
            
            Increase/Average
      Balance
            
            
            Cost
            
            
            Average
      Balance
            
            
            Cost
            
            
            (Decrease)
      in Interest Expense from 2008(dollars
      in thousands)Savings
      deposits
            
            $
            30,642
            
            
            
            0.73
            %
            
            $
            22,776
            
            
            
            0.70
            %
            
            $
            16Interest-bearing
      demand deposits
            
            
            80,404
            
            
            
            0.50
            
            
            
            78,726
            
            
            
            0.62
            
            
            
            (23
            )Money
      market deposits
            
            
            52,567
            
            
            
            1.20
            
            
            
            59,902
            
            
            
            2.75
            
            
            
            (254
            )Certificates
      of deposit
            
            
            171,870
            
            
            
            3.32
            
            
            
            199,652
            
            
            
            4.60
            
            
            
            (869
            )FHLB
      advances
            
            
            113,692
            
            
            
            4.32
            
            
            
            157,444
            
            
            
            4.60
            
            
            
            (582
            )Total
      interest-bearing liabilities
            
            $
            449,175
            
            
            
            2.64
            %
            
            $
            518,500
            
            
            
            3.61
            %
            
            $
            (1,712
            )





The
slight increase in the cost of savings deposits was due to product
disintermediation during the second quarter of 2009 as customers shifted their
balances to a higher-yielding savings product. The decline in the cost of all
other interest-bearing deposits reflects the significantly lower interest rate
environment in the second quarter of fiscal 2009 compared to the second quarter
of fiscal 2008.





Provision for Loan
Losses.  A provision for loan losses of $1.1 million was
recorded as a result of our analysis of the loan portfolio for the quarter ended
March 31, 2009, compared to a provision for loan losses of $378,000 for the same
quarter of the prior year.  The provision reflects the increase in
delinquent loans in fiscal 2009 and adjusted valuations on nonperforming loans,
as well as losses on loans charged-off during the second quarter of fiscal 2009
that exceeded the losses previously estimated. Additionally, the estimated loss
rates and the range of losses were increased during the quarter ended December
31, 2008, as the Treasure Valley and national economies continued to deteriorate
rapidly.





While
management believes the estimates and assumptions used in its determination of
the adequacy of the allowance are reasonable, there can be no assurance that
such estimates and assumptions will not be proven incorrect in the future, or
that the actual amount of future provisions will not exceed the amount of past
provisions or that any increased provision that may be required will not
adversely impact the Company’s financial condition and results of
operations.  In addition, the determination of the amount of the
allowance for loan losses is subject to review by bank regulators, as part of
the routine examination process, which may result in the establishment of
additional reserves based upon their judgment of information available to them
at the time of their examination.














Standard
provisions for loan losses are established based upon the type of loan and the
risk factors associated with that loan type.  As the Bank increases
its commercial loan portfolio, the Bank anticipates it will increase its
allowance for loan losses based upon the higher risk characteristics associated
with commercial loans compared with one- to four- family residential loans,
which have historically comprised the majority of the Bank’s loan
portfolio.





The
following table details selected activity associated with the allowance for loan
losses:





At
      or For the Three Months
              Ended
      March 31,2009
            
            
            2008(dollars
      in thousands)Provision
      for loan losses
            
            $
            1,060
            
            
            $
            378Net
      charge-offs
            
            
            1,754
            
            
            
            87Allowance
      for loan losses
            
            
            7,333
            
            
            
            3,307Allowance
      for loan losses as a percentage of gross loans receivable
            
            
            1.64
            %
            
            
            0.69
            %Nonperforming  loans
      (nonaccrual and 90 days or more past due)
            
            $
            14,590
            
            
            $
            1,852Allowance
      for loan losses as a percentage of nonperforming loans
            
            
            50.26
            %
            
            
            178.56
            %Nonperforming
      loans as a percentage of gross loans receivable
            
            
            3.26
            
            
            
            0.39Loans
      receivable, net
            
            $
            439,170
            
            
            $
            477,155





Noninterest
Income.  Noninterest income decreased $138,000, or 5.6%, to
$2.3 million for the three months ended March 31, 2009 from $2.5 million for the
three months ended March 31, 2008. The decrease was primarily attributable to
decreases of $210,000 and $141,000 in service charges and fees and loan
servicing fees, respectively, offset somewhat by an increase in gain on sale of
loans of $245,000.  The decreases in service charges and fees reflect
the continuing slowdown in consumer spending, which has reduced nonsufficient
fund fees. The decrease in loan servicing fees is due to the sale of loan
servicing rights completed in the first quarter of fiscal 2009.  The
increase in gain on sale of loans is attributed to the historically low rates
available on residential mortgages during the second quarter of fiscal
2009.





The
following table provides a detailed analysis of the changes in components of
noninterest income:





Three
      Months Ended
              March
      31,
            
            
            Increase
      (decrease)2009
            
            
            2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Service
      fees and charges
            
            $
            1,892
            
            
            $
            2,102
            
            
            $
            (210
            )
            
            
            (10.0
            )%Gain
      on sale of loans
            
            
            407
            
            
            
            162
            
            
            
            245
            
            
            
            151.2Increase
      in cash surrender value of bank owned life insurance
            
            
            104
            
            
            
            104
            
            
            
            -
            
            
            
            -Loan
      servicing fees
            
            
            (15
            )
            
            
            126
            
            
            
            (141
            )
            
            
            (111.9
            )Mortgage
      servicing rights, net
            
            
            -
            
            
            
            (75
            )
            
            
            75
            
            
            
            (100.0
            )Other
            
            
            (43
            )
            
            
            64
            
            
            
            (107
            )
            
            
            (167.2
            )Total
      noninterest income
            
            $
            2,345
            
            
            $
            2,483
            
            
            $
            (138
            )
            
            
            (5.6
            )%





Other
income includes a $66,000 reduction of noninterest income related to the
settlement of the purchase price proceeds for the sale of the Bank’s mortgage
servicing rights.















Noninterest
Expense.  Noninterest expense increased $147,000, or 2.3%, to
$6.6 million for the three months ended March 31, 2009 from $6.4 million for the
three months ended March 31, 2008. The following table provides a detailed
analysis of the changes in components of noninterest expense:





Three
      Months Ended
              March
      31,
            
            
            Increase
      (decrease)2009
            
            
            2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Compensation
      and benefits
            
            $
            3,779
            
            
            $
            4,053
            
            
            $
            (274
            )
            
            
            (6.8
            )%Occupancy
      and equipment
            
            
            729
            
            
            
            760
            
            
            
            (31
            )
            
            
            (4.1
            )Data
      processing
            
            
            577
            
            
            
            531
            
            
            
            46
            
            
            
            8.7Advertising
            
            
            197
            
            
            
            258
            
            
            
            (61
            )
            
            
            (23.6
            )Insurance
      and taxes
            
            
            306
            
            
            
            140
            
            
            
            166
            
            
            
            118.6Other
            
            
            983
            
            
            
            682
            
            
            
            301
            
            
            
            44.1Total
      noninterest expense
            
            $
            6,571
            
            
            $
            6,424
            
            
            $
            147
            
            
            
            2.3
            %





Compensation
and benefits, which included severance accruals of $98,000, declined $274,000 or
6.8% in the second quarter of 2009 compared to the year-ago
period.  Insurance and taxes increased as Federal Deposit Insurance
Corporation premiums were $109,000 higher in the second quarter of 2009 compared
to the same period of 2008. Additionally, property taxes were $49,000 higher in
the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008
as a result of the payment of taxes on foreclosed properties. Other expenses
increased during the second quarter of fiscal 2009 compared to 2008 primarily as
a result of a $161,000 provision for the decline in the value of foreclosed
properties.





Income Tax
Expense.The Company recorded an income tax expense of
$198,000 for the three months ended March 31, 2009.  Net income before
income taxes was $674,000 for the three months ended March 31, 2009 compared to
net income before taxes of $1.5 million for the three months ended March 31,
2008.





Comparison
of Operating Results for the Six Months ended March 31, 2009 and March 31,
2008





Net loss
for the six months ended March 31, 2009 was $325,000, or $0.02 per diluted
share, compared to net income of $1.9 million, or $0.12 per diluted share, for
the six months ended March 31, 2008.  Earnings per share for the prior
period have been adjusted to reflect the impact of the second-step conversion
and reorganization of the Company, which occurred on December 19,
2007.  Total revenue for the six months ended March 31, 2009, which
consisted of net interest income before the provision for loan losses plus
noninterest income, increased $570,000 or 3.6% to $16.5 million compared to
$15.9 million for the same period of the prior year.  The Company’s
efficiency ratio decreased to 76.3% for the six months ended March 31, 2009,
compared to 77.2% for the same period of the prior year.





Net Interest
Income.  Net interest income increased $872,000, or 8.1%, to
$11.7 million for the six months ended March 31, 2009, from $10.8 million for
the six months ended March 31, 2008.  The increase was mainly
attributable to a decrease in interest expense.  Lower interest rates
as well as lower outstanding borrowings in the current year than in the year ago
period were the main drivers in the decrease.





The
Company’s net interest margin increased 41 basis points to 3.48% for the six
months ended March 31, 2009, from 3.07% for the same period last
year.  The improvement in the net interest margin is primarily
attributable to the decrease in interest expense between the two
periods.





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
















Six
      Months Ended March 31, 2009
              Compared
      to Six Months Ended March 31, 2008Increase
      (Decrease) Due toRate
            
            
            Volume
            
            
            Total(in
      thousands)Interest-earning
      assets:Loans
      receivable, net
            
            $
            (1,419
            )
            
            $
            (519
            )
            
            $
            (1,938
            )Loans
      held for sale
            
            
            (3
            )
            
            
            14
            
            
            
            11Interest-bearing
      deposits in other banks
            
            
            (371
            )
            
            
            (359
            )
            
            
            (730
            )Mortgage-backed
      securities
            
            
            (16
            )
            
            
            253
            
            
            
            237FHLB
      stock
            
            
            (83
            )
            
            
            -
            
            
            
            (83
            )Total
      net change in income on interest-earning assets
            
            $
            (1,892
            )
            
            $
            (611
            )
            
            $
            (2,503
            )Interest-bearing
      liabilities:Savings
      deposits
            
            $
            13
            
            
            $
            23
            
            
            $
            36Interest-bearing
      demand deposits
            
            
            (65
            )
            
            
            -
            
            
            
            (65
            )Money
      market accounts
            
            
            (487
            )
            
            
            (27
            )
            
            
            (514
            )Certificates
      of deposit
            
            
            (1,098
            )
            
            
            (685
            )
            
            
            (1,783
            )Total
      deposits
            
            
            (1,637
            )
            
            
            (689
            )
            
            
            (2,326
            )FHLB
      advances
            
            
            (57
            )
            
            
            (992
            )
            
            
            (1,049
            )Total
      net change in expense on interest-bearing liabilities
            
            $
            (1,694
            )
            
            $
            (1,681
            )
            
            $
            (3,375
            )Total
      increase in net interest income
            
            
            
            
            
            
            
            
            
            $
            872








Interest and Dividend
Income.  Total interest and dividend income for the six months
ended March 31, 2009 decreased $2.5 million, or 12.1%, to $18.3 million, from
$20.8 million for the six months ended March 31, 2008.  The decrease
during the period was attributable to both a decrease in the average balance of
interest-earning assets of $32.9 million and a drop in yields earned on
interest-earning assets of 46 basis points.





The
following table compares detailed average earning asset balances, associated
yields, and resulting changes in interest and dividend income:





Six
      Months Ended March 31,2009
            
            
            2008
            
            
            Increase/Average
      Balance
            
            
            Yield
            
            
            Average
      Balance
            
            
            Yield
            
            
            (Decrease)
      in Interest and Dividend Income from 2008(dollars
      in thousands)Interest-bearing
      deposits in other banks
            
            $
            10,320
            
            
            
            0.85
            %
            
            $
            41,073
            
            
            
            3.77
            %
            
            $
            (730
            )Mortgage-backed
      securities
            
            
            185,085
            
            
            
            4.68
            
            
            
            171,724
            
            
            
            4.76
            
            
            
            237Loans
      receivable, net
            
            
            465,072
            
            
            
            5.95
            
            
            
            481,309
            
            
            
            6.55
            
            
            
            (1,938
            )Loans
      held for sale
            
            
            3,191
            
            
            
            5.51
            
            
            
            2,472
            
            
            
            6.24
            
            
            
            11FHLB
      stock
            
            
            9,591
            
            
            
            (0.69
            )
            
            
            9,591
            
            
            
            1.04
            
            
            
            (83
            )Total
      interest-earning assets
            
            $
            673,259
            
            
            
            5.42
            %
            
            $
            706,169
            
            
            
            5.88
            %
            
            $
            (2,503
            )
















Interest
Expense.  Interest expense decreased $3.4 million, or 34.0%, to
$6.6 million for the six months ended March 31, 2009 from $9.9 million for the
six months ended March 31, 2008.  The average balance of total
interest-bearing liabilities decreased $70.9 million, or 13.4%, to $459.9
million for the six months ended March 31, 2009 from $530.7 million for the six
months ended March 31, 2008.  Decreases in certificates of deposit and
FHLB advances of $32.3 million and $43.8 million respectively were primarily
responsible for the decrease in interest bearing liabilities.





The
following table details average balances, cost of funds and the change in
interest expense:





Six
      Months Ended March 31,2009
            
            
            2008
            
            
            Increase/Average
      Balance
            
            
            Cost
            
            
            Average
      Balance
            
            
            Cost
            
            
            (Decrease)
      in Interest Expense from 2008(dollars
      in thousands)Savings
      deposits
            
            $
            28,950
            
            
            
            0.78
            %
            
            $
            22,691
            
            
            
            0.68
            %
            
            $
            36Interest-bearing
      demand
              deposits
            
            
            78,991
            
            
            
            0.52
            
            
            
            78,284
            
            
            
            0.69
            
            
            
            (65
            )Money
      market deposits
            
            
            53,932
            
            
            
            1.33
            
            
            
            55,749
            
            
            
            3.13
            
            
            
            (514
            )Certificates
      of deposit
            
            
            174,574
            
            
            
            3.53
            
            
            
            206,830
            
            
            
            4.70
            
            
            
            (1,783
            )FHLB
      advances
            
            
            123,416
            
            
            
            4.53
            
            
            
            167,172
            
            
            
            4.60
            
            
            
            (1,049
            )Total
      interest-bearing liabilities
            
            $
            459,863
            
            
            
            2.85
            %
            
            $
            530,726
            
            
            
            3.74
            %
            
            $
            (3,375
            )





Provision for Loan
Losses.  A provision for loan losses of $4.6 million was
recorded as a result of our analysis of the loan portfolio for the six months
ended March 31, 2009, compared to a provision for loan losses of $665,000 for
the same period of the prior year.





The
following table details selected activity associated with the allowance for loan
losses:





At
      or For the Six Months
              Ended
      March 31,2009
            
            
            2008(dollars
      in thousands)Provision
      for loan losses
            
            $
            4,635
            
            
            $
            665Net
      charge-offs
            
            
            1,881
            
            
            
            347Allowance
      for loan losses
            
            
            7,333
            
            
            
            3,307Allowance
      for loan losses as a percentage of gross loans receivable
            
            
            1.64
            %
            
            
            0.69
            %Nonperforming  loans
      (nonaccrual and 90 days or more past due)
            
            $
            14,590
            
            
            $
            1,852Allowance
      for loan losses as a percentage of nonperforming loans
            
            
            50.26
            %
            
            
            178.56
            %Nonperforming
      loans as a percentage of gross loans receivable
            
            
            3.26
            
            
            
            0.39Loans
      receivable, net
            
            $
            439,170
            
            
            $
            477,155





Noninterest
Income.  Noninterest income decreased $302,000, or 5.9%, to
$4.8 million for the six months ended March 31, 2009 from $5.1 million for the
six months ended March 31, 2008.  The decrease was primarily
attributable to decreases of $334,000 and $199,000 in service fees and charges
and loan servicing fees offset by an increase in gain on sale of loans of
$250,000.  The decreases in service charges and fees reflect the
continuing slowdown in consumer spending and the decrease in loan servicing fees
is due to the sale of loan servicing rights completed in the first quarter of
fiscal 2009.  The increase in gain on sale of loans is attributed to
the historically low rates available on residential mortgages during the first
six months of fiscal 2009.
















The
following table provides a detailed analysis of the changes in components of
noninterest income:





Six
      Months Ended
              March
      31,
            
            
            Increase
      (decrease)2009
            
            
            2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Service
      fees and charges
            
            $
            4,001
            
            
            $
            4,335
            
            
            $
            (334
            )
            
            
            (7.7
            )%Gain
      on sale of loans
            
            
            597
            
            
            
            347
            
            
            
            250
            
            
            
            72.1Increase
      in cash surrender value of bank owned life insurance
            
            
            210
            
            
            
            208
            
            
            
            2
            
            
            
            1.0Loan
      servicing fees
            
            
            54
            
            
            
            253
            
            
            
            (199
            )
            
            
            (78.7
            )Mortgage
      servicing rights, net
            
            
            (31
            )
            
            
            (143
            )
            
            
            112
            
            
            
            78.3Other
            
            
            (25
            )
            
            
            108
            
            
            
            (133
            )
            
            
            (123.2
            )Total
      noninterest income
            
            $
            4,806
            
            
            $
            5,108
            
            
            $
            (302
            )
            
            
            (5.9
            )%





Noninterest
Expense.  Noninterest expense increased $298,000, or 2.4%, to
$12.6 million for the six months ended March 31, 2009 from $12.3 million for the
six months ended March 31, 2008. Compensation and benefits declined $398,000 or
5.1% from the year ago period.  This reduction is mainly attributable
to the absence of accruals in the current year for incentive awards due to the
Company’s financial results to date.  The increase in other expense is
mainly attributable to costs associated with troubled loans and real estate
owned.  The following table provides a detailed analysis of the
changes in components of noninterest expense:





Six
      Months Ended
              March
      31,
            
            
            Increase
      (decrease)2009
            
            
            2008
            
            
            Amount
            
            
            Percent(dollars
      in thousands)Compensation
      and benefits
            
            $
            7,354
            
            
            $
            7,752
            
            
            $
            (398
            )
            
            
            (5.1
            )%Occupancy
      and equipment
            
            
            1,499
            
            
            
            1,471
            
            
            
            28
            
            
            
            1.9Data
      processing
            
            
            1,119
            
            
            
            1,053
            
            
            
            66
            
            
            
            6.3Advertising
            
            
            445
            
            
            
            546
            
            
            
            (101
            )
            
            
            (18.5
            )Insurance
      and taxes
            
            
            461
            
            
            
            225
            
            
            
            236
            
            
            
            104.9Other
            
            
            1,727
            
            
            
            1,260
            
            
            
            467
            
            
            
            37.1Total
      noninterest expense
            
            $
            12,605
            
            
            $
            12,307
            
            
            $
            298
            
            
            
            2.4
            %








Income Tax Expense
(Benefit).The Company recorded an income tax benefit of
404,000 for the six months ended March 31, 2009.  Net loss before
income taxes was $729,000 for the six months ended March 31, 2009 compared to
net income of $3.0 million for the six months ended March 31, 2008.





Liquidity,
Commitments and Capital Resources





Liquidity.  The
Company actively analyzes and manages the Bank’s liquidity with the objectives
of maintaining an adequate level of liquidity and to ensure the availability of
sufficient cash flows to support loan growth, fund deposit withdrawals, fund
operations and satisfy other financial commitments.  See the
"Consolidated Statements of Cash Flows" contained in Item 1 - Financial
Statements, included herein.





The
primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and FHLB advances.  These sources of
funds are used to make loans, acquire investment securities and other assets,
and fund continuing operations.  While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the level of interest rates,
economic conditions and competition.  Management believes the
Company’s current liquidity position and anticipated operating results are
sufficient to fund the Bank’s known existing commitments and activity
levels.














Liquidity
is essential to the Company’s business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on liquidity. The Company’s access to funding
sources in amounts adequate to finance the Bank’s activities on acceptable terms
could be impaired by factors that affect the Company and the Bank specifically
or within the financial services industry or economy in general. Factors that
could detrimentally impact the Company’s access to liquidity sources include
adverse regulatory action against us, a disruption in the financial markets or
negative views and expectations about the prospects for the financial services
industry in light of the recent turmoil faced by banking organizations and the
continued deterioration in credit markets.





At March
31, 2009, certificates of deposit were $171.5 million, or 45.5% of total
deposits, including $123.3 million that are scheduled to mature by March 31,
2009.  Historically, the Bank has been able to retain a significant
amount of deposits as they mature. However, recent disruptions in the credit
markets have resulted in a highly price-competitive market for certificates of
deposit. These rates currently exceed alternative costs of borrowings and are
high compared to historical spreads to U.S. Treasury note rates. Additionally,
since loan demand continues to slow, management has been reluctant to offer
rates in excess of wholesale borrowing costs. This has resulted in some deposit
runoff as customers are moving their maturing balances to competitors at a
higher pace than the Bank has historically experienced.





At March
31, 2009, the Bank maintained a line of credit with the FHLB of Seattle equal to
40% of total assets to the extent the Bank provides qualifying collateral and
holds sufficient FHLB stock.  At March 31, 2009, the Bank was in
compliance with the collateral requirements and $160.1 million of the line of
credit was available. The Bank is highly dependent on the FHLB of Seattle to
provide the primary source of wholesale funding for immediate liquidity and
borrowing needs.  The failure of the FHLB of Seattle or the FHLB
system in general, may materially impair the Company’s ability to meet our
growth plans or to meet short and long-term liquidity
demands.  However, the Company’s mortgage backed securities are
marketable and could be sold to obtain cash to meet liquidity demands should
access to FHLB funding be impaired. Additionally, the Bank could access funding
from the Discount Window at the Federal Reserve Bank of San Francisco or through
the origination of out of market brokered deposits.





During
the second quarter of fiscal year 2009, the Bank was notified by a correspondent
bank that the Bank’s $10.0 million unsecured federal funds purchased line was
suspended due to the increase in the Bank’s nonperforming assets. This line was
available on a secured-borrowing basis at March 31, 2009. The Bank had no
balances drawn on the line of credit and management does not believe this has a
material impact on the Bank’s liquidity position or on the ability of management
to execute the Company’s strategic growth plan.





Off-Balance Sheet
Arrangements.  The Bank is party to financial instruments with
off-balance sheet risk in the normal course of business in order to meet the
financing needs of the Bank’s customers.  These financial instruments
generally include commitments to originate mortgage, commercial and consumer
loans, and involve to varying degrees, elements of credit and interest rate risk
in excess of amounts recognized in the consolidated balance
sheets.  The Bank’s maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments.  Because some commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.  The same credit policies are used in making commitments
as are used for on-balance sheet instruments.  Collateral is required
in instances where deemed necessary.





Undisbursed
balances of loans closed include funds not disbursed but committed for
construction projects.  Unused lines of credit include funds not
disbursed, but committed for, home equity, commercial and consumer lines of
credit.





Commercial
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party.  Those guarantees are
primarily used to support public and private borrowing
arrangements.  The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers.














The
following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of March 31,
2009:




Contract
      or
              Notional
      Amount(in
      thousands)Commitments
      to originate loans:Fixed
      rate
            
            $
            12,780Adjustable
      rate
            
            
            127Undisbursed
      balance of loans closed
            
            
            9,676Unused
      lines of credit
            
            
            36,192Commercial
      letters of credit
            
            
            346Total
            
            $
            59,121





Capital.Consistent with the Bank’s
goal to operate a sound and profitable financial organization, efforts are
ongoing to actively seek to maintain a “well capitalized” institution in
accordance with regulatory standards. The Bank’s total regulatory capital was
$141.2 million at March 31, 2009, or 21.5%, of total assets on that date. As of
March 31, 2009, the Bank exceeded all regulatory capital requirements. The
Bank’s regulatory capital ratios at March 31, 2009 were as follows: Tier 1
capital 21.5%; Tier 1 (core) risk-based capital 31.6%; and total risk-based
capital 32.9%. The applicable regulatory capital requirements to be considered
well capitalized are 5%, 6% and 10%, respectively.








Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





The
Company’s Board of Directors has established an asset and liability management
policy to guide management in maximizing net interest spread by managing the
differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy,
interest rate sensitivity, credit risk and profitability.  The
Asset/Liability Management Committee, consisting of certain members of senior
management, communicate, coordinate and manage asset/liability positions
consistent with the business plan and Board-approved policies, as well as to
price savings and lending products, and to develop new products.





One of
the Bank’s primary financial objectives is to generate ongoing
profitability.  The Bank’s profitability depends primarily on its net
interest income, which is the difference between the income it receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings.  The rates the Company earns on
assets and pays on liabilities generally are established contractually for a
period of time.  Market interest rates change over
time.  The Bank’s loans generally have longer maturities than the
deposits.  Accordingly, the Company’s results of operations, like
those of other financial institutions, are affected by changes in interest rates
and the interest rate sensitivity of assets and liabilities.  The Bank
measures its interest rate sensitivity on a quarterly basis using an internal
model.





Management
employs various strategies to manage the Company’s interest rate sensitivity
including: (1) selling long-term fixed-rate mortgage loans in the secondary
market; (2) borrowing intermediate to long-term funds at fixed rates from the
FHLB; (3) originating commercial and consumer loans at shorter maturities or at
variable rates; (4) originating adjustable rate mortgage loans; (5)
appropriately modifying loan and deposit pricing to capitalize on the then
current market opportunities; and (6) increasing lower cost core deposits, such
as savings and checking accounts. At March 31, 2009, the Company had no
off-balance sheet derivative financial instruments, and the Bank did not
maintain a trading account for any class of financial instruments or engage in
hedging activities or purchase high risk derivative
instruments.  Furthermore, the Company is not subject to foreign
currency exchange rate risk or commodity price risk.





There has
not been any material change in the market risk disclosures contained in the
Company’s 2008 Form 10-K.

















Item 4.  Controls
and Procedures





(a)
Evaluation of Disclosure Controls and Procedures.





An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was
carried out under the supervision and with the participation of the Company’s
Chief Executive Officer, Chief Financial Officer, and other members of the
Company’s management team as of the end of the period covered by this quarterly
report.  The Company’s Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2009, the Company’s disclosure controls
and procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company’s management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms.





(b)
Changes in Internal Controls.





There
have been no changes in the Company’s internal control over financial reporting
(as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter
ended March 31, 2009, that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.  A number of internal control procedures were, however,
modified during the quarter in conjunction with the Bank's internal control
testing.  The Company also continued to implement suggestions from its
internal auditor and independent auditors to strengthen existing
controls.





The
Company intends to continually review and evaluate the design and effectiveness
of its disclosure controls and procedures and to improve its controls and
procedures over time and to correct any deficiencies that it may discover in the
future. The goal is to ensure that senior management has timely access to all
material financial and non-financial information concerning the Company's
business.  While the Company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures.  The Company does not expect that its
disclosure controls and procedures and internal control over financial reporting
will prevent every error or instance of fraud.  A control procedure,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control procedure are
met.  Because of the inherent limitations in all control procedures,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns in controls or
procedures can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control.  The design of any control procedure is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate.  Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.








PART II - OTHER
INFORMATION





Item 1.  Legal
Proceedings





From time
to time, the Company is engaged in legal proceedings in the ordinary course of
business, none of which are currently considered to have a material impact on
the Company’s financial position or results of operations.

















Item 1A.  Risk
Factors





Economic
conditions in the Treasure Valley continue to weaken and declines in housing
prices and real estate values may result in additional loan losses.





The
United States, including our primary banking market, has experienced weakening
economic conditions and declines in housing prices and real estate values in
general. Our loan portfolio contains significant amounts of loans secured by
residential and commercial real estate.  We have experienced increases
in non-performing assets, net charge-offs and provisions for credit losses as a
result of continuing deterioration of the housing markets, increasing financial
stress on consumers and weakening economic conditions.  We expect
continued economic weakness for most of calendar years 2009 and
2010.  This environment could lead to increased levels of
non-performing assets, net charge-offs and provision for credit losses compared
to previous periods.








Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds





(a)
            Not
      applicable.





(b)
            Not
      applicable.





(c)
            The
      following table shows the total number of shares repurchased during the
      quarter.








Issuer Purchases of Equity
      SecuritiesPeriod of
      Repurchase
            
            Total
      Numberof
      SharesPurchased
            
            
            Average
      Price
              Paid Per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans orPrograms
            
            
            Maximum
      Number of Shares that May Yet Be Purchased Under theProgramJanuary
      1 – January 31, 2009
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            
            867,970February
      1 – February 28, 2009
            
            
            842,404
            
            
            
            9.08
            
            
            
            842,404
            
            
            
            25,566March
      1 – March 31, 2009
            
            
            25,566
            
            
            
            7.73
            
            
            
            867,970
            
            
            
            -





All
purchases of shares during the quarter related to the 5% stock repurchase
program announced December 23, 2008.











Item 3.  Defaults
Upon Senior Securities





Not
applicable.








Item
4.  Submission of Matters to a Vote of Security
Holders





The
Company’s Annual Meeting of the Shareholders (“the Annual Meeting”) was held on
January 16, 2009. The following matters were submitted to a vote of the
shareholders of the Company at the Annual Meeting and received the required vote
for election or approval as follows:























Proposal
1.  Election of Directors





Shareholders
elected the following Directors:





Nominee
            For
            WithheldDaniel
      L. Stevens
            15,763,088
            521,870Richard
      J. Navarro
            15,821,404
            463,554Brad
      J. Little
            15,832,618
            452,340





Each of
the following directors who were not up for re-election at the annual meeting of
stockholders will continue in office:  James R. Stamey, Robert A.
Tinstman, Len E. Williams, and N. Charles Hedemark.








Proposal
2. Ratifying the appointment of independent auditor





Shareholders
ratified the appointment of Moss Adams LLP as the Company’s independent
registered public accounting firm for the year ending September 30, 2009, by the
following vote:





For
            Against
            Abstaining16,187,423
            93,110
            4,425








Proposal
3. Adoption of the Company’s 2008 Equity Incentive Plan





Shareholders
approved the adoption of the Company’s 2008 Equity Incentive Plan by the
following vote:





For
            Against
            Abstaining
            Broker
      non-vote10,136,858
            3,781,474
            144,354
            2,222,272





Item 5.  Other
Information





Not
applicable.





Item
6.  Exhibits





2.1
            Plan
      of Conversion and Reorganization (1)3.1
            Articles
      of Incorporation of the Registrant (2)3.2
            Bylaws
      of the Registrant (2)10.1
            Amended
      Employment Agreement entered into by Home Federal Bancorp, Inc. with Len
      E. Williams*10.2
            Amended
      Severance Agreement with Eric S. Nadeau*10.3
            Amended
      Severance Agreement with Steven D. Emerson*10.4
            Amended
      Severance Agreement with Steven K. Eyre*10.5
            Form
      of Home Federal Bank Employee Severance Compensation Plan
    (3)10.6
            Form
      of Director Indexed Retirement Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with each of its Directors
      (2)10.7
            Form
      of Director Deferred Incentive Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with each of its Directors
      (2)10.8
            Form
      of Executive Deferred Incentive Agreement, and amendment thereto, entered
      into by Home Federal Savings and Loan Association of Nampa with Daniel L.
      Stevens, Robert A. Schoelkoph, and Lynn A. Sander (2)10.9
            Form
      of Amended and Restated Salary Continuation Agreement entered into by Home
      Federal Savings and Loan Association of Nampa with Daniel L. Stevens
      (2)10.10
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Len E.
  Williams*10.11
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Eric S.
  Nadeau*10.12
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven D.
    Emerson*













10.13
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven K.
  Eyre*10.14
            2005
      Stock Option and Incentive Plan approved by stockholders on June 23, 2005
      and Form of Incentive Stock Option Agreement and Non-Qualified Stock
      Option Agreement  (4)10.15
            2005
      Recognition and Retention Plan approved by stockholders on June 23, 2005
      and Form of Award Agreement  (4)10.15
            Form
      of new Director Retirement Plan entered into by Home Federal Bank with
      each of its Directors (5)10.16
            Transition
      Agreement with Daniel L. Stevens (6)10.17
            2008
      Equity Incentive Plan (7)31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act *31.2
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act *32
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act
  * ___________


(1)
            Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K dated May 11,
      2007


(2)
            Filed
      as an exhibit to the Registrant's Registration Statement on Form S-1
      (333-146289)


(3)
            Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended December 31, 2008


(4)
            Filed
      as an exhibit to the Registrant’s Registration Statement on Form S-8
      (333-127858)


(5)
            Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K dated October
      21, 2005


(6)
            Filed
      as an exhibit to the Registrant’s Current Report on Form 8-K dated August
      21, 2006


(7)
            Filed
      as an exhibit to the Registrant’s Registration Statement on Form S-8
      (333-157540)





*      Filed
herewith



























SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.










Home
      Federal Bancorp, Inc.Date:  May 8,
      2009
            
            /s/
      Len E.
      WilliamsLen E.
      WilliamsPresident
      andChief
      Executive Officer(Principal
      Executive Officer)Date:  May 8,
      2009
            
            /s/ Eric S.
      NadeauEric S.
      NadeauExecutive Vice
      President andChief
      Financial Officer(Principal
      Financial and Accounting Officer)



















EXHIBIT
INDEX





10.1
            Amended
      Employment Agreement entered into by Home Federal Bancorp, Inc. with Len
      E. Williams10.2
            Amended
      Severance Agreement with Eric S. Nadeau10.3
            Amended
      Severance Agreement with Steven D. Emerson10.4
            Amended
      Severance Agreement with Steven K. Eyre10.10
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Len E.
  Williams10.11
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Eric S.
  Nadeau10.12
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven D.
    Emerson10.13
            Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven K.
  Eyre31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act31.2
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act32
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley
  Act


























EXHIBIT
31.1











Certification
of Chief Executive Officer Pursuant to


Section
302 of the Sarbanes-Oxley Act of 2002





I, Len E.
Williams, President and Chief Executive Officer of Home Federal Bancorp, Inc.,
certify that:





1.
            I
      have reviewed this Quarterly Report on Form 10-Q of Home Federal Bancorp,
      Inc.;





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:





(a)
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this quarterly report is
      being prepared;





(b)
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            Evaluated
      the effectiveness of the registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





(d)
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fiscal fourth quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5.
            The
      registrant’s other certifying officer(s) and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant’s auditors and the audit committee of registrant’s board
      of directors (or persons performing the equivalent
    functions):





(a)
            All
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the registrant’s ability to record, process, summarize
      and report financial data information;
and





(b)
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant’s internal control
      over financial reporting.












Date:
            May 8, 2009
            
            /s/
      Len E.
      WilliamsLen E.
      WilliamsPresident andChief
      Executive Officer

















EXHIBIT
31.2











Certification
of Chief Financial Officer Pursuant to


Section
302 of the Sarbanes-Oxley Act of 2002





I, Eric
S. Nadeau, Chief Financial Officer of Home Federal Bancorp, Inc., certify
that:





1.
            I
      have reviewed this Quarterly Report on Form 10-Q of Home Federal Bancorp,
      Inc.;





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:





(a)
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this quarterly report is
      being prepared;





(b)
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;





(c)
            Evaluated
      the effectiveness of the registrant’s disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





(d)
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fiscal fourth quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5.
            The
      registrant’s other certifying officer(s) and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant’s auditors and the audit committee of registrant’s board
      of directors (or persons performing the equivalent
    functions):





(a)
            All
      significant deficiencies and material weakness in the design or operation
      of internal control over financial reporting which are reasonably likely
      to adversely affect the registrant’s ability to record, process, summarize
      and report financial data information;
and





(b)
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant’s internal control
      over financial reporting.







Date:
              May 8, 2009
              
              /s/
      Eric S.
      NadeauEric S.
      NadeauExecutive Vice
      President andChief Financial
      Officer














EXHIBIT
32





Certification
of Chief Executive Officer and Chief Financial Officer of Home Federal Bancorp,
Inc.


Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002








The
undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and in connection with this Quarterly Report on Form 10-Q,
that:





1.
            the
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities Exchange Act of 1934, as amended;
  and





2.
            the
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the Company
      as of the dates and for the periods presented in the financial statements
      included in the Report.












/s/
      Len E. Williams
            
            /s/
      Eric S. NadeauLen E.
      Williams
            
            Eric S.
      NadeauPresident and
            
            Executive Vice
      President andChief
      Executive Officer
            
            Chief
      Financial OfficerDated:   May 8, 2009