UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  FORM
10-Q
  
 [X]
                QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended December 31, 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 February 5,
2010.
  
  
  
 HOME
FEDERAL BANCORP, INC.
 FORM
10-Q
 TABLE
OF CONTENTS
  
 PART 1  - FINANCIAL
      INFORMATIONItem 1 -
      Financial Statements
                Page
 Consolidated
      Balance Sheets
                1Consolidated
      Statements of Operations
                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
                  14Item 3 -
      Quantitative and Qualitative Disclosures About Market Risk
                  27Item 4 -
      Controls and Procedures
                  28PART II - OTHER
      INFORMATIONItem 1 - Legal
      Proceedings
                  29Item 1A - Risk
      Factors
                  29Item 2 -
      Unregistered Sales of Equity Securities and Use of Proceeds
                  30Item 3 -
      Defaults Upon Senior Securities
                  30Item 4 -
      Submission of Matters to a Vote of Security Holders
                  30Item 5 - Other
      Information
                  30Item 6 -
      Exhibits
                  31SIGNATURES
                  32
  
  Item
1.  Financial Statements
 
 HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED
      BALANCE SHEETS
                (In
      thousands, except share data) (Unaudited)
              
              December
      31,
                2009
              
              
              September
      30, 2009ASSETSCash
      and due from depository institutions
              
              $
              58,711
              
              
              $
              46,783Federal
      funds sold
              
              
              9,760
              
              
              
              3,170Cash
      and cash equivalents
              
              
              68,471
              
              
              
              49,953Investment
      securities available for sale, at fair value
              
              
              162,322
              
              
              
              169,320Federal
      Home Loan Bank of Seattle (“FHLB”) stock, at cost
              
              
              10,326
              
              
              
              10,326Loans
      receivable, net of allowance for loan losses
      of  $28,141and
      $28,735
              
              
              497,862
              
              
              
              510,629Loans
      held for sale
              
              
              2,008
              
              
              
              862Accrued
      interest receivable
              
              
              2,530
              
              
              
              2,781Property
      and equipment, net
              
              
              25,777
              
              
              
              20,462Bank
      owned life insurance
              
              
              12,121
              
              
              
              12,014Real
      estate and other property owned
              
              
              14,782
              
              
              
              18,391FDIC
      indemnification receivable, net
              
              
              21,252
              
              
              
              30,038Other
      assets
              
              
              4,671
              
              
              
              3,123TOTAL
      ASSETS
              
              $
              822,122
              
              
              $
              827,899LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIESDeposit
      accounts:Noninterest-bearing
      demand deposits
              
              $
              67,212
              
              
              $
              68,155Interest-bearing
      demand deposits
              
              
              187,325
              
              
              
              176,049Savings
      deposits
              
              
              42,939
              
              
              
              41,757Certificates
      of deposit
              
              
              224,975
              
              
              
              228,897Total
      deposit accounts
              
              
              522,451
              
              
              
              514,858Advances
      by borrowers for taxes and insurance
              
              
              660
              
              
              
              1,132Interest
      payable
              
              
              535
              
              
              
              553Deferred
      compensation
              
              
              5,307
              
              
              
              5,260FHLB
      advances and other borrowings
              
              
              76,890
              
              
              
              84,737Deferred
      tax liability
              
              
              4,889
              
              
              
              5,571Other
      liabilities
              
              
              3,076
              
              
              
              6,123Total
      liabilities
              
              
              613,808
              
              
              
              618,234STOCKHOLDERS’
      EQUITYSerial
      preferred stock, $.01 par value; 10,000,000 authorized;Issued
      and outstanding, none
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; 90,000,000 authorized;17,445,311
      issued, 16,698,168 outstanding
              
              
              167
              
              
              
              167Additional
      paid-in capital
              
              
              151,211
              
              
              
              150,782Retained
      earnings
              
              
              63,311
              
              
              
              64,483Unearned
      shares issued to employee stock ownership plan (“ESOP”)
              
              
              (9,438
              )
              
              
              (9,699
              )Accumulated
      other comprehensive income
              
              
              3,063
              
              
              
              3,932Total
      stockholders’ equity
              
              
              208,314
              
              
              
              209,665TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              822,122
              
              
              $
              827,899
  
 See accompanying
notes.
  
 HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED
      STATEMENTS OF OPERATIONS
                (In
      thousands, except share data) (Unaudited)
              
              Three
      Months Ended
                December
      31,2009
              
              
              2008Interest
      and dividend income:Loans,
      including fees
              
              $
              7,103
              
              
              $
              7,113Investment
      securities
              
              
              1,734
              
              
              
              2,172Other
      interest and dividends
              
              
              49
              
              
              
              43Total
      interest and dividend income
              
              
              8,886
              
              
              
              9,328Interest
      expense:Deposits
              
              
              1,674
              
              
              
              2,018FHLB
      advances and other borrowings
              
              
              831
              
              
              
              1,565Total
      interest expense
              
              
              2,505
              
              
              
              3,583Net
      interest income
              
              
              6,381
              
              
              
              5,745Provision
      for loan losses
              
              
              700
              
              
              
              3,575Net
      interest income after provision for loan losses
              
              
              5,681
              
              
              
              2,170Noninterest
      income:Service
      charges and fees
              
              
              2,264
              
              
              
              2,109Gain
      on sale of loans
              
              
              183
              
              
              
              190Increase
      in cash surrender value of bank owned life insurance
              
              
              107
              
              
              
              106Other,
      net
              
              
              321
              
              
              
              56Total
      noninterest income
              
              
              2,875
              
              
              
              2,461Noninterest
      expense:Compensation
      and benefits
              
              
              4,617
              
              
              
              3,575Occupancy
      and equipment
              
              
              1,064
              
              
              
              770Data
      processing
              
              
              800
              
              
              
              542Advertising
              
              
              260
              
              
              
              248Postage
      and supplies
              
              
              166
              
              
              
              137Professional
      services
              
              
              479
              
              
              
              335Insurance
      and taxes
              
              
              558
              
              
              
              155Provision
      for losses on real estate owned
              
              
              801
              
              
              
              --Other
              
              
              338
              
              
              
              272Total
      noninterest expense
              
              
              9,083
              
              
              
              6,034Loss
      before income taxes
              
              
              (527
              )
              
              
              (1,403
              )Income
      tax benefit
              
              
              (218
              )
              
              
              (602
              )NET
      LOSS
              
              $
              (309
              )
              
              $
              (801
              )Loss
      per share:Basic
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted
              
              
              (0.02
              )
              
              
              (0.05
              )Weighted
      average number of shares outstanding:Basic
              
              
              15,447,705
              
              
              
              16,129,252Diluted
              
              
              15,447,705
              
              
              
              16,129,252Dividends
      declared per share:
              
              $
              0.055
              
              
              $
              0.055
 
 
  See accompanying
notes.
  HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
      INCOME
 (In
thousands, except share data) (Unaudited)
 Common
      Stock
              
              
              Additional
                Paid-In
              
              
              Retained
              
              
              Unearned
                Shares
                Issued
      to
                Employee
                Stock
                Ownership
              
              
              Accumulated
                Other
                ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Plan
              
              
              Income
      (Loss)
              
              
              TotalBalance
      at September 30, 2008
              
              
              17,374,161
              
              
              $
              174
              
              
              $
              157,205
              
              
              $
              59,813
              
              
              $
              (10,605
              )
              
              $
              (1,400
              )
              
              $
              205,187Restricted
      stock issued, net of forfeitures
              
              
              159,115
              
              
              
              2
              
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -ESOP
      shares committed to be released
              
              
              
              
              
              
              
              
              
              
              63
              
              
              
              
              
              
              
              906
              
              
              
              
              
              
              
              969Exercise
      of stock options
              
              
              32,862
              
              
              
              
              
              
              
              353
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              353Share-based
      compensation
              
              
              
              
              
              
              
              
              
              
              1,088
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,088Treasury
      shares purchased
              
              
              (867,970
              )
              
              
              (9
              )
              
              
              (7,888
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,897
              )Dividends
      paid
                ($0.220
      per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,456
              )
              
              
              
              
              
              
              
              
              
              
              (3,456
              )Tax
      adjustment from equity
                compensation plans
              
              
              
              
              
              
              
              
              
              (37
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (37
              )Comprehensive
      income:Loss
      before extraordinary item
              
              
              
              
              
              
              
              
              
              
              
              
              (7,165
              )
              
              
              
              
              
              
              
              
              
              
              (7,165
              )Extraordinary
      gain, net of tax
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,291
              
              
              
              
              
              
              
              
              
              
              
              15,291Other
      comprehensive income:Change
      in unrealized  holding gain on securities available for sale,
      net of  taxes of $3,473
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,210
              
              
              
              5,210Adjustment for realized
                losses, net of taxes
      of
                $81
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              122
              
              
              
              122Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,458Balance
      at September 30, 2009
              
              
              16,698,168
              
              
              
              167
              
              
              
              150,782
              
              
              
              64,483
              
              
              
              (9,699
              )
              
              
              3,932
              
              
              
              209,665ESOP
      shares committed to be released
              
              
              
              
              
              
              
              
              
              
              74
              
              
              
              
              
              
              
              261
              
              
              
              
              
              
              
              335Share-based
      compensation
              
              
              
              
              
              
              
              
              
              
              355
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              355Dividends
      paid
                ($0.055
      per share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (863
              )
              
              
              
              
              
              
              
              
              
              
              (863
              )Comprehensive
      income:Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (309
              )
              
              
              
              
              
              
              
              
              
              
              (309
              )Other
      comprehensive income:Change
      in unrealized holding loss on securities available for sale, net
      of  taxes of $(551)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (869
              )
              
              
              (869
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,178
              )Balance
      at December 31, 2009
              
              
              16,698,168
              
              
              $
              167
              
              
              $
              151,211
              
              
              $
              63,311
              
              
              $
              (9,438
              )
              
              $
              3,063
              
              
              $
              208,314
 
 
 See accompanying
notes.
 
 
 
 HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                (In
      thousands) (Unaudited)
              
              Three
      Months Ended
                December
      31,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (309
              )
              
              $
              (801
              )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
              
              
              501
              
              
              
              442Net
      amortization of premiums and discounts on investments
              
              
              87
              
              
              
              2Loss
      on sale of fixed assets and repossessed assets
              
              
              61
              
              
              
              63ESOP
      shares committed to be released
              
              
              335
              
              
              
              254Share-based
      compensation
              
              
              355
              
              
              
              228Provision
      for loan losses
              
              
              700
              
              
              
              3,575Valuation
      allowance on other real estate owned
              
              
              801
              
              
              
              -Accrued
      deferred compensation expense, net
              
              
              48
              
              
              
              39Net
      deferred loan fees
              
              
              12
              
              
              
              171Deferred
      income tax benefit
              
              
              (130
              )
              
              
              -Net
      gain on sale of loans
              
              
              (183
              )
              
              
              (190
              )Proceeds
      from sale of loans held for sale
              
              
              8,316
              
              
              
              10,476Originations
      of loans held for sale
              
              
              (9,279
              )
              
              
              (9,817
              )Net
      decrease in value of mortgage servicing rights
              
              
              -
              
              
              
              31Net
      increase in value of bank owned life insurance
              
              
              (107
              )
              
              
              (106
              )Change
      in assets and liabilities:Interest
      receivable
              
              
              251
              
              
              
              148Other
      assets
              
              
              (2,190
              )
              
              
              (673
              )Interest
      payable
              
              
              (18
              )
              
              
              (66
              )Other
      liabilities
              
              
              (3,049
              )
              
              
              (894
              )Net
      cash (used) provided by operating activities
              
              
              (3,798
              )
              
              
              2,882CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from repayments of mortgage-backed securities available for
      sale
              
              
              9,859
              
              
              
              6,215Purchases
      of mortgage-backed securities available for sale
              
              
              (599
              )
              
              
              (465
              )Purchase
      of securities available for sale
              
              
              (3,769
              )
              
              
              -Maturity
      of certificate of deposit
              
              
              -
              
              
              
              5,000Sale
      of mortgage servicing rights
              
              
              -
              
              
              
              1,676Reimbursement
      of loan losses under loss share agreement
              
              
              9,406
              
              
              
              -Purchases
      of property and equipment
              
              
              (5,867
              )
              
              
              (1,269
              )Net
      decrease (increase) in loans
              
              
              10,292
              
              
              
              (10,956
              )Proceeds
      from sale of fixed assets and repossessed assets
              
              
              4,582
              
              
              
              188Net
      cash provided by investing activities
              
              
              23,904
              
              
              
              389CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase in deposits
              
              
              7,593
              
              
              
              4,474Net
      decrease in advances by borrowers for taxes and insurance
              
              
              (472
              )
              
              
              (665
              )Proceeds
      from FHLB advances
              
              
              -
              
              
              
              18,030Repayment
      of FHLB advances
              
              
              (7,850
              )
              
              
              (30,428
              )Proceeds
      from other borrowings
              
              
              4
              
              
              
              -Proceeds
      from exercise of stock options
              
              
              -
              
              
              
              353Dividends
      paid
              
              
              (863
              )
              
              
              (893
              )Net
      cash used by financing activities
              
              
              (1,588
              )
              
              
              (9,129
              )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              18,518
              
              
              
              (5,858
              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              49,953
              
              
              
              23,270CASH
      AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              68,471
              
              
              $
              17,412
 (Continued)
  See accompanying
notes.
  HOME
      FEDERAL BANCORP, INC. AND SUBSIDIARY
                CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)
                (In
      thousands) (Unaudited)
              
              Three
      Months Ended
                December
      31,2009
              
              
              2008SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid (received) during the period for:Interest
              
              $
              2,523
              
              
              $
              3,648Taxes
              
              
              (700
              )
              
              
              -NONCASH
      INVESTING AND FINANCING ACTIVITIES:Acquisition
      of real estate and other assets in settlement of loans
              
              $
              2,270
              
              
              $
              947Fair
      value adjustment to securities available for sale, net of
      taxes
              
              
              (869
              )
              
              
              3,121
 
  See accompanying
notes.
  
 HOME
FEDERAL BANCORP, INC. AND SUBSIDIARY
 SELECTED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 Note
1 - Basis of Presentation
 
 The
consolidated financial statements presented in this quarterly report include the
accounts of Home Federal Bancorp, Inc., a Maryland corporation (the “Company”),
and its wholly-owned subsidiary, Home Federal Bank (the “Bank”), which is
headquartered in Nampa, Idaho.  The financial statements of the
Company have been prepared in conformity with U.S. generally accepted accounting
principles for interim financial information and are unaudited.  In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through February 8,
2010.All
significant intercompany transactions and balances have been
eliminated.  In the opinion of the Company’s management, all
adjustments consisting of normal recurring adjustments necessary for a fair
presentation of the financial condition and results of operations for the
interim periods included herein have been made. Operating results for the three
month period ended December 31, 2009, are not necessarily indicative of the
results that may be expected for the year ending September 30,
2010.
 
 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, 2009 (“2009 Form
10-K”), filed with the Securities and Exchange Commission (“SEC”) on December
14, 2009.
 
 Note
2 - Critical Accounting Estimates and Related Accounting Policies
 
 The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements.  Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the consolidated financial
statements, and thus actual results could differ from the amounts reported and
disclosed herein.  The Company considers the allowance for loan
losses, loans acquired with deteriorated credit quality, the indemnification
asset due from the Federal Deposit Insurance Corporation (“FDIC”), deferred
income taxes and valuation of real estate owned to be critical accounting
estimates.
 
 Allowance for loan losses.
Management recognizes that losses may occur over the life of a loan and that the
allowance for loan losses must be maintained at a level necessary to absorb
specific losses on impaired loans and probable, incurred losses inherent in the
loan portfolio. Management assesses the allowance for loan losses on a quarterly
basis by analyzing several factors including delinquency rates, charge-off rates
and the changing risk profile of the Bank’s loan portfolio, as well as local
economic conditions such as unemployment rates, bankruptcies and vacancy rates
of business and residential properties.
 
 The
Company believes that the accounting estimate related to the allowance for loan
losses is a critical accounting estimate because it is highly susceptible to
change from period to period, requiring management to make assumptions about
probable incurred losses inherent in the loan portfolio at the balance sheet
date. The impact of a sudden large loss could deplete the allowance and require
increased provisions to replenish the allowance, which would negatively affect
earnings.
 
 The
Company’s methodology for analyzing the allowance for loan losses consists of
specific allocations on significant individual credits and a general allowance
amount, including a range of loss estimates. 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 takes into consideration probable, incurred losses that are inherent
within the loan portfolio but have not been specifically identified. The general
allowance is determined by applying a historical loss percentage to various
types of loans with similar characteristics and classified loans that are not
analyzed specifically. Adjustments are made to historical loss percentages to
reflect current economic and internal environmental factors such as changes in
underwriting standards and unemployment rates that may increase or decrease
those loss factors. As a result of the imprecision in
   
  calculating
inherent and incurred losses, a range is added to the general allowance to
provide an allowance for loan losses that is adequate to cover losses that may
arise as a result of changing economic conditions and other qualitative factors
that may alter historical loss experience.
 The
allowance 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.
 
 Loans Acquired with Deteriorated
Credit Quality. Accounting Standards Codification Topic (“ASC”) 310-30
applies to a loan with evidence of deterioration of credit quality since
origination, acquired by completion of a transfer for which it is probable, at
acquisition, that the investor will be unable to collect all contractually
required payments receivable. For loans accounted for under ASC 310-30,
management determined the value of the loan portfolio based on work provided by
an appraiser.  Factors considered in the valuation were projected cash
flows for the loans, type of loan and related collateral, classification status
and current discount rates.  Loans were grouped together according to
similar characteristics and were treated in the aggregate when applying various
valuation techniques.  Management also estimated the amount of credit
losses that were expected to be realized for the loan portfolio primarily by
estimating the liquidation value of collateral securing loans on non-accrual
status or classified as substandard or doubtful. At December 31, 2009, a
majority of these loans were valued based on the liquidation value of the
underlying collateral. Certain amounts related to the ASC 310-30 loans are
preliminary estimates and are highly subjective. Adjustments in future quarters
may occur up to one year from the date of acquisition.
 
 FDIC Indemnification Asset.
On August 7, 2009, the Bank entered into a purchase and assumption agreement
with the FDIC to acquire certain assets and assume certain liabilities of a
failed financial institution. The loans and real estate owned (“REO”) purchased
under the agreement are covered by a loss sharing agreement between the FDIC and
the Bank which affords the Bank significant protection. This agreement covers
realized losses on loans and foreclosed real estate purchased from the FDIC.
Under this agreement, the FDIC will reimburse the Bank for 80% of the first
$34.0 million of losses.  The FDIC will reimburse the Bank 95% on
realized losses that exceed $34.0 million.  Realized losses covered by
the loss sharing agreement include loan contractual balances (and related
unfunded commitments that were acquired), accrued interest on loans for up to 90
days, the book value of foreclosed real estate acquired, and certain direct
costs, less cash or other consideration received by the Bank. This agreement
extends for ten years for one-to-four family real estate loans and for five
years for other loans.
 
 Management
has estimated the amount of losses inherent in the acquired loan and foreclosed
real estate portfolios and the amounts that would be receivable from the FDIC
upon a loss event. The Bank cannot submit claims of loss until certain events
occur, as defined under the purchase and assumption agreement. As such, the
value of the indemnification asset is subject to a high degree of uncertainty
and estimation as to the timing of the losses and subsequent recovery of a
portion of those losses under the loss sharing agreement.
 
 Deferred income taxes.
Deferred income taxes are computed using the asset and liability approach as
prescribed by ASC 740.  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.
 
 Real Estate Owned.Real
estate properties acquired through, or in lieu of, loan foreclosure (“REO”) are
initially recorded at the lesser of the outstanding loan balance or the fair
value at the date of foreclosure minus estimated costs to sell. Any valuation
adjustments required at the time of foreclosure are charged to the allowance for
loan losses. After foreclosure, the properties are carried at the lower of
carrying value or fair value less estimated costs to sell. Any subsequent
valuation adjustments, operating expenses or income, and gains and losses on
disposition of such properties are recognized in current
operations.
 
  
  Note
3 - Acquisition
 
 On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
share with the FDIC to assume all of the deposits (excluding nearly all brokered
deposits) and certain assets of Community First Bank, a full service commercial
bank, headquartered in Prineville, Oregon (the “Acquisition”). The Bank assumed
approximately $142.8 million of the deposits of Community First Bank.
Additionally, the Bank purchased approximately $142.3 million in loans and $12.9
million of real estate and other repossessed assets.  The loans and
REO purchased are covered by a loss share agreement between the FDIC and Home
Federal Bank which affords the Bank significant protection.  Under the
loss sharing agreement, the Bank will share in the losses on assets covered
under the agreement (referred to as covered assets).  The FDIC has
agreed to reimburse the Bank for 80% of losses up to $34.0 million, and 95% of
losses that exceed that amount.  In addition, the Bank also purchased
cash and cash equivalents and investment securities of Community First Bank
valued at $37.7 million at the date of the Acquisition, and assumed $18.3
million in Federal Home Loan Bank advances and other borrowings. The Company
accounts for the Bank’s loss sharing agreement with the FDIC as an
indemnification asset.  The transaction did not generate any
goodwill.
 
 Note
4 - Earnings (Loss) Per Share
 
 The
Company has granted stock compensation awards with non-forfeitable dividend
rights which are considered participating securities. As such, earnings per
share is computed using the two-class method as required by ASC
260-10-45.  Basic earnings per common share is computed by dividing
net income allocated to common stock by the weighted average number of common
shares outstanding during the period which excludes the participating
securities. Diluted earnings per common share includes the dilutive effect of
additional potential common shares from stock compensation awards, but excludes
awards considered participating securities.  ESOP shares are not
considered outstanding for earnings per share purposes until they are committed
to be released.
 
 The
following table presents the computation of basic and diluted earnings (loss)
per share for the periods indicated:
  Three
      Months Ended
                December
      31,2009
              
              
              2008(in
      thousands, except share and per share data)Basic:Distributed
      earnings allocated to common shareholders
              
              $
              851
              
              
              $
              828Undistributed
      loss allocated to common shareholders
              
              
              (1,154
              )
              
              
              (1,675
              )Net loss allocated to common shareholders
              
              $
              (303
              )
              
              $
              (793
              )Weighted
      average common shares outstanding, including shares
                considered participating securities
              
              
              15,719,698
              
              
              
              16,282,872Less:  Average
      participating securities
              
              
              (271,993
              )
              
              
              (153,620
              )Weighted
      average shares
              
              
              15,447,705
              
              
              
              16,129,252Net
      loss per common share – basic
              
              $
              (0.02
              )
              
              $
              (0.05
              )Diluted:Net
      loss allocated to common shareholders
              
              $
              (303
              )
              
              $
              (793
              )Weighted-average
      common shares outstanding for basic earnings per
                common share
              
              
              15,447,705
              
              
              
              16,129,252Net
      effect of dilutive stock options
              
              
              -
              
              
              
              -Weighted-average
      common shares outstanding and common stock
                equivalents
              
              
              15,447,705
              
              
              
              16,129,252Net
      loss per common share – diluted
              
              $
              (0.02
              )
              
              $
              (0.05
              )
 
  
  During
the three months ended December 31, 2009 and 2008, there were 946,364 and
573,544 options excluded from the calculation of EPS as their effect was
anti-dilutive.
 
 
 Note
5 - Investment securities
  Investment
securities available for sale consisted of the following:
  Amortized
      Cost
              
              
              Gross
      Unrealized Gains
              
              
              Gross
      Unrealized Losses
              
              
              Fair
                Value(in
      thousands)December 31, 2009Obligations
      of U.S. Government-sponsored
      enterprises
              
              $
              7,085
              
              
              $
              3
              
              
              $
              (6
              )
              
              $
              7,082Obligations
      of states and politicalsubdivisions
              
              
              749
              
              
              
              7
              
              
              
              -
              
              
              
              756Mortgage-backed
      securities
              
              
              149,355
              
              
              
              5,148
              
              
              
              (19
              )
              
              
              154,484Total
              
              $
              157,189
              
              
              $
              5,158
              
              
              $
              (25
              )
              
              $
              162,322September 30, 2009Obligations
      of U.S. Government-ponsored
      enterprises
              
              $
              4,089
              
              
              $
              42
              
              
              $
              (4
              )
              
              $
              4,127Mortgage-backed
      securities
              
              
              158,677
              
              
              
              6,529
              
              
              
              (13
              )
              
              
              165,193Total
              
              $
              162,766
              
              
              $
              6,571
              
              
              $
              (17
              )
              
              $
              169,320
 
 The fair
value of impaired securities, the amount of unrealized losses and the length of
time these unrealized losses existed as of December 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)Obligations
      of U.S. Government-sponsored enterprises
              
              $
              4,572
              
              
              $
              (6
              )
              
              $
              --
              
              
              $
              --
              
              
              $
              4,572
              
              
              $
              (6
              )Mortgage-backed
      securities
              
              
              1,161
              
              
              
              (19
              )
              
              
              --
              
              
              
              --
              
              
              
              1,161
              
              
              
              (19
              )$
              5,733
              
              
              $
              (25
              )
              
              $
              --
              
              
              $
              --
              
              
              $
              5,733
              
              
              $
              (25
              )
 
  Management
has evaluated these securities and has determined that the decline in fair value
is not other than temporary.  These securities have contractual
maturity dates and, at December 31, 2009, management believes it is reasonably
probable that principal and interest balances on these securities will be
collected based on the performance, underwriting, credit support and vintage of
the loans underlying the securities. However, continued deteriorating economic
conditions may result in degradation in the performance of the loans underlying
these securities in the future. The Company has the ability and intent to
hold these securities for a reasonable period of time for a forecasted recovery
of the amortized cost.  The Company does not intend to sell these
securities and it is not likely that the Company would be required to sell
securities in an unrealized position before recovery of its cost
basis.
  As of
December 31, 2009, the Bank pledged investment securities with an amortized cost
of $62.9 million and a fair value of $64.9 million as collateral for FHLB
advances.  In addition, investment securities with an amortized cost
of $4.3 million and a fair value of $4.5 million at December 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.  Investment securities with an amortized cost of $3.1 million
and a fair value of $3.2 million at December 31, 2009,
   
  were
pledged as collateral for a commercial repurchase agreement. Investment
securities with a combined amortized cost of $4.8 million and a fair value of
$5.0 million were pledged as collateral for public funds.
 
 Note
6 - Loans Receivable
 
 Loans
receivable are summarized as follows:
  December
      31, 2009
              
              
              September
      30, 2009Balance
              
              
              Percent
                of
      Total
              
              
              Balance
              
              
              Percent
                of
      Total(dollars
      in thousands)Real
      estate:One-to-four
      family residential
              
              $
              167,900
              
              
              
              31.87
              %
              
              $
              178,311
              
              
              
              33.01
              %Multi-family
      residential
              
              
              16,462
              
              
              
              3.12
              
              
              
              16,286
              
              
              
              3.01Commercial
              
              
              218,638
              
              
              
              41.50
              
              
              
              213,471
              
              
              
              39.52Total
      real estate
              
              
              403,000
              
              
              
              76.49
              
              
              
              408,068
              
              
              
              75.54Real
      estate construction:One-
      to four-family residential
              
              
              8,952
              
              
              
              1.70
              
              
              
              10,871
              
              
              
              2.01Multi-family
      residential
              
              
              8,852
              
              
              
              1.68
              
              
              
              10,417
              
              
              
              1.93Commercial
      and land development
              
              
              27,060
              
              
              
              5.14
              
              
              
              27,144
              
              
              
              5.02Total
      real estate construction
              
              
              44,864
              
              
              
              8.52
              
              
              
              48,432
              
              
              
              8.96Consumer:Home
      equity
              
              
              51,640
              
              
              
              9.80
              
              
              
              53,368
              
              
              
              9.88Automobile
              
              
              1,972
              
              
              
              0.37
              
              
              
              2,364
              
              
              
              0.44Other
      consumer
              
              
              3,879
              
              
              
              0.74
              
              
              
              3,734
              
              
              
              0.69Total
      consumer
              
              
              57,491
              
              
              
              10.91
              
              
              
              59,466
              
              
              
              11.01Commercial
      business
              
              
              21,518
              
              
              
              4.08
              
              
              
              24,256
              
              
              
              4.49526,873
              
              
              
              100.00
              %
              
              
              540,222
              
              
              
              100.00
              %Deferred
      loan fees
              
              
              (870
              )
              
              
              
              
              
              
              (858
              )Allowance
      for loan losses
              
              
              (28,141
              )
              
              
              
              
              
              
              (28,735
              )Loans receivable,
      net
              
              $
              497,862
              
              
              
              
              
              
              $
              510,629
 
  Note
7 – Allowance for Loan Losses
 
 Activity
in the allowance for loan losses for the three month period ended December 31,
2009 and 2008, was as follows:
 
 Three
      Months Ended
                December
      31,2009
              
              
              2008(in
      thousands)Beginning
      balance
              
              $
              28,735
              
              
              $
              4,579Provision
      for loan losses
              
              
              700
              
              
              
              3,575Losses
      on loans charged-off
              
              
              (1,364
              )
              
              
              (130
              )Recoveries
      on loans charged-off
              
              
              70
              
              
              
              3Ending
      balance
              
              $
              28,141
              
              
              $
              8,027
 
  
  The
following table summarizes impaired loans at December 31 and September 30,
2009:
 
 December
      31,
                2009
              
              
              September
      30,
                2009Impaired
      loans with related specific allowance
              
              $
              6,499
              
              
              $
              7,131Impaired
      loans with no related allowance
              
              
              40,375
              
              
              
              32,880Total
      impaired loans
              
              $
              46,874
              
              
              $
              40,011Specific
      allowance on impaired loans
              
              $
              2,130
              
              
              $
              1,516
 
 Impaired
loans reported for September 30, 2009, in the above table differ from those
reported in the Company’s 10-K for the year ended September 30,
2009.  September 30, 2009, data was adjusted to conform with the
presentation as of December 31, 2009.
 
 Note
8 – Fair Value Measurement
 
 ASC 820,
Fair Value Measurements and
Disclosures,defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure requirements about fair value
measurements.  The Company attempts 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 assets that were measured at
fair value on a recurring basis at December 31, 2009:
 
 Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3(in
      thousands)December 31, 2009Obligations
      of U.S. Government-sponsored enterprises
              
              $
              7,085
              
              
              
              -
              
              
              $
              7,085
              
              
              
              -Obligations
      of states and political subdivisions
              
              
              749
              
              
              
              -
              
              
              
              749
              
              
              
              -Mortgage-backed
      securities
              
              
              149,355
              
              
              
              -
              
              
              
              149,355
              
              
              
              -September 30, 2009Obligations
      of U.S. Government-sponsored enterprises
              
              $
              4,127
              
              
              
              -
              
              
              $
              4,127
              
              
              
              -Mortgage-backed
      securities
              
              
              165,193
              
              
              
              -
              
              
              
              165,193
              
              
              
              -
 
 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 assets that were measured at
fair value on a non-recurring basis at December 31, 2009:
 
 Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3(in
      thousands)December 31, 2009Impaired
      loans
              
              $
              29,637
              
              
              
              -
              
              
              
              -
              
              
              $
              29,637Real
      estate owned
              
              
              14,782
              
              
              
              -
              
              
              
              -
              
              
              
              14,782September 30, 2009Impaired
      loans
              
              $
              31,922
              
              
              
              --
              
              
              
              --
              
              
              $
              31,922Real
      estate owned
              
              
              18,391
              
              
              
              --
              
              
              
              --
              
              
              
              18,391
 
 Impaired
loans, which are measured for impairment using the fair value of the collateral
at December 31, 2009, had a carrying amount of $31.8 million, net of specific
valuation allowances totaling $2.1 million. The specific valuation allowance
required a provision of $770,000 during the quarter ended December 31, 2009. The
fair value of loans purchased in the Acquisition and accounted for under ASC
310-30 totaled $25.3 million, which included a fair value adjustment of ($1.4)
million.
 
 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 that are collateral dependent
and have experienced a write-down in carrying value or have a recognized
valuation allowance are included in the table above. Impaired loans whose fair
value exceeds the carrying value are excluded from the table above as these
loans do not represent assets measured and carried at fair value.
 
 Fair
value for real estate owned is determined by obtaining appraisals on the
properties. The fair value under such appraisals is determined by using an
income, cost or comparable sales valuation technique. The fair value is then
reduced by management’s estimate for the direct costs expected to be incurred in
order to sell the property. Holding costs or maintenance expenses are recorded
as period costs when occurred and are not included in the fair value
estimate.
 
 The
estimated fair values of the Company’s financial instruments were as
follows:
 
 December
      31, 2009Carrying
      Amount
              
              
              Estimated
      Fair Value(in
      thousands)Financial
      Assets:Cash
      and cash equivalents
              
              $
              68,471
              
              
              $
              68,471Investment
      securities
              
              
              162,322
              
              
              
              162,322Loans
      held for sale
              
              
              2,008
              
              
              
              2,008Loans
      receivable, net
              
              
              497,862
              
              
              
              501,359FHLB
      stock
              
              
              10,326
              
              
              
              N/AAccrued
      interest receivable
              
              
              2,530
              
              
              
              2,530Financial
      Liabilities:Demand
      and savings deposits
              
              $
              297,476
              
              
              $
              297,476Certificates
      of deposit
              
              
              224,975
              
              
              
              229,153FHLB
      advances and other borrowings
              
              
              76,890
              
              
              
              81,871Accrued
      interest payable
              
              
              535
              
              
              
              535
 
  
  The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
 
 Cash and cash
equivalents: The carrying amount approximates fair value.
 
 Investment
Securities:The Company’s investment securities available for sale
primarily 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.
 
 Loans held for
sale: The carrying amount approximates fair value.
 
 FHLB
stock: The determination of fair value of FHLB stock was impractical due
to restrictions on the transferability of the stock.
 
 Loans
receivable: Fair values for all performing loans are estimated using a
discounted cash flow analysis, utilizing interest rates currently being offered
for loans with similar terms to borrowers of similar credit
quality.  In addition, the fair value reflects the decrease in loan
values as estimated in the allowance for loan losses calculation.
 
 Accrued interest
receivable: The carrying amount approximates fair value.
 
 Deposits:
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit are estimated using discounted cash
flow analysis using the rates currently offered for deposits of similar
remaining maturities.
 
 FHLB
advances: The fair value of the borrowings is estimated by discounting
the future cash flows using the current rate at which similar borrowings with
similar remaining maturities could be made.
 
 Accrued interest
payable: The carrying amount approximates fair value.
 
 Off-balance-sheet
instruments: Fair values of off-balance-sheet lending commitments are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the borrower’s credit
standing. The fair value of the fees at December 31, 2009 and 2008 were
insignificant.
 
 
  Note
9 –FDIC Indemnification Receivable
  Activity
in the FDIC indemnification receivable for the three month period ended December
31, 2009 was as follows:
 
 Reimbursement
      rate
              
              
              Amount
              
              
              
              
              
              Net80%
              
              
              
              95%
              
              
              Receivable
              
              
              Discount
              
              
              Receivable(in
      thousands)Balance
      at September 30, 2009
              
              $
              34,000
              
              
              $
              4,405
              
              
              $
              31,385
              
              
              $
              (1,347
              )
              
              $
              30,038Payments
      from FDIC for losses on covered assets
              
              
              (11,758
              )
              
              
              -
              
              
              
              (9,406
              )
              
              
              -
              
              
              
              (9,406
              )Recoverable
      amounts for reimbursable expenses
              
              
              575
              
              
              
              -
              
              
              
              460
              
              
              
              -
              
              
              
              460Discount
      accretion
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              160
              
              
              
              160Balance
      at December 31, 2009
              
              $
              22,818
              
              
              $
              4,405
              
              
              $
              22,439
              
              
              $
              (1,187
              )
              
              $
              21,252
 
 Amounts
receivable from the FDIC have been estimated at 80% of losses on covered assets
(acquired loans and REO) up to $34.0 million. Reimbursable losses in excess of
$34.0 million have been estimated at 95% of the amount recoverable from the
FDIC. Reimbursable expenses have been estimated at 80% of the actual expense
until cumulative reimbursable expenses and losses on covered assets exceed $34.0
million.
 
 
  
  Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Forward-Looking
Statements and “Safe Harbor” statement under the Private Securities Litigation
Reform Act of 1995
 
 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 plans, 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 due to, among others, the following
factors:
 
 ·
              the
      credit risks of lending activities, including changes in the level and
      trend of loan delinquencies and write-offs and changes in our allowance
      for loan losses and provision for loan losses that may be impacted by
      deterioration in the housing and commercial real estate
      markets;
 ·
              changes
      in general economic conditions, either nationally or in our market
      areas;
 ·
              changes
      in the levels of general interest rates, and the relative differences
      between short and long term interest rates, deposit interest rates, our
      net interest margin and funding
sources;
 ·
              fluctuations
      in the demand for loans, the number of unsold homes, land and other
      properties and fluctuations in real estate values in our market
      areas;
 ·
              secondary
      market conditions for loans and our ability to sell loans in the secondary
      market;
 ·
              results
      of examinations of us by the Office of Thrift Supervision or other
      regulatory authorities, including the possibility that any such regulatory
      authority may, among other things, require us to increase our reserve for
      loan losses, write-down assets, change our regulatory capital position or
      affect our ability to borrow funds or maintain or increase deposits, which
      could adversely affect our liquidity and
  earnings;
 ·
              our
      compliance with  regulatory enforcement
  actions;
 ·
              legislative
      or regulatory changes that adversely affect our business including changes
      in regulatory policies and principles, or  the interpretation of
      regulatory capital or other rules;
 ·
              our
      ability to attract and retain
deposits;
 ·
              further
      increases in premiums for deposit
insurance;
 ·
              our
      ability to control operating costs and
expenses;
 ·
              the
      use of estimates in determining fair value of certain of our assets, which
      estimates may prove to be incorrect and result in significant declines in
      valuation;
 ·
              difficulties
      in reducing risks associated with the loans on our balance
      sheet;
 ·
              staffing
      fluctuations in response to product demand or the implementation of
      corporate strategies that affect our workforce and potential associated
      charges;
 ·
              computer
      systems on which we depend could fail or experience a security
      breach;
 ·
              our
      ability to retain key members of our senior management
    team;
 ·
              costs
      and effects of litigation, including settlements and
      judgments;
 ·
              our
      ability to successfully integrate any assets, liabilities, customers,
      systems, and management personnel we may in the future acquire into our
      operations and our ability to realize related revenue synergies and cost
      savings within expected time frames and any goodwill charges related
      thereto;
 ·
              increased
      competitive pressures among financial services
  companies;
 ·
              changes
      in consumer spending, borrowing and savings
  habits;
 ·
              the
      availability of resources to address changes in laws, rules, or
      regulations or to respond to regulatory
actions;
 ·
              our
      ability to pay dividends on our common
stock;
 ·
              adverse
      changes in the securities markets;
 ·
              inability
      of key third-party providers to perform their obligations to
      us;
 
 
   
 ·
                changes
      in accounting policies and practices, as may be adopted by the financial
      institution regulatory agencies or the Financial Accounting Standards
      Board, including additional guidance and interpretation on accounting
      issues and details of the implementation of new accounting methods;
      and
 ·
                other
      economic, competitive, governmental, regulatory, and technological factors
      affecting our operations, pricing, products and services and the other
      risks described elsewhere in this prospectus and the incorporated
      documents.
  Some of
these and other factors are discussed in the 2009 Form 10-K under the caption
“Risk Factors” Such developments could have an adverse impact on our financial
position and our results of operations.
 Any of
the forward-looking statements that we make in this quarterly report and in
other public statements we make may turn out to be wrong because of inaccurate
assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Because of these and other
uncertainties, our actual future results may be materially different from the
results indicated by these forward-looking statements and you should not rely 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.These risks
could cause our actual results for fiscal year 2010 and beyond to differ
materially from those expressed in any forward-looking statements by or on
behalf of us, and could negatively affect the Company’s financial condition,
liquidity and operating and stock price performance.
 
 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”). 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.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.
 
 On August
7, 2009, the Bank entered into a purchase and assumption agreement with loss
share with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of
the deposits (excluding nearly all brokered deposits) and certain assets,
including loans and REO of Community First Bank, a full service commercial bank,
headquartered in Prineville, Oregon (the “Acquisition”). Home Federal Bank
acquired seven banking office locations in central Oregon.  The loans
and REO purchased are covered by a loss share agreement between the FDIC and
Home Federal Bank which affords the Bank significant
protection.  Under the loss sharing agreement, Home Federal Bank will
share in the losses on assets covered under the agreement (referred to as
covered assets).  The FDIC has agreed to reimburse Home Federal Bank
for 80% of losses up to $34.0 million, and 95% of losses that exceed that
amount. The Acquisition has been incorporated prospectively in the Company’s
financial statements. Therefore, year over year results of operations may not be
comparable. Additionally, only 54 days of operations from the Acquisition are
included in the fourth quarter of fiscal 2009, which impacts linked quarter
comparisons. In certain areas of this discussion and analysis, we have
separately disclosed the impact of the Acquisition on the financial condition
and results of operations of the Company.
   
 
 Home
Federal Bank currently has operations in two distinct market
areas.  The Bank’s primary market area is the Boise, Idaho,
metropolitan statistical area (“MSA”) and surrounding communities, together
known as the Treasure Valley region of southwestern Idaho, including Ada,
Canyon, Elmore and Gem counties. We refer to this market as the “Idaho Region.”
The Acquisition resulted in the Bank’s entrance to the Tri-County Region of
Central Oregon, including the counties of Crook, Deschutes and
Jefferson.  We refer to this market as the “Central Oregon Region.” In
total, we have 22 full-service banking offices, one loan center, 23 automated
teller machines and Internet banking services.
 
 The
following summarizes key activities of the Company during the first fiscal
quarter ended December 31, 2009:
 
 ·
              We
      launched two full-service banking offices in Boise and Meridian, Idaho,
      and closed two Walmart branches;
 ·
              Average
      core deposit balances continued to
increase;
 ·
              In
      connection with the Acquisition, the Bank purchased two banking offices
      and assumed leases on five other offices in the Central Oregon
      Region;
 ·
              Provision
      for loan losses totaled $700,000 as delinquent loans and classified assets
      increased during the quarter;
 ·
              Net
      charge offs totaled $1.3 million;
 ·
              The
      Bank received $9.4 million in reimbursed losses from the FDIC on assets
      covered under the loss share
agreement.
 
 The
current economic and interest rate environments continue to challenge our
organic growth plans. Total assets declined during the first quarter of fiscal
year 2010 as a lack of demand for loans, or more importantly a diminished supply
of creditworthy lending opportunities, resulted in a decrease in outstanding
loan balances. Cash and amounts due from depository institutions increased
significantly. We have conserved cash balances as a liquidity cushion to support
the acquisition of a failed institution. Alternative investments to loans are
also unattractive as investment securities offer very low yields within our
credit and interest rate risk tolerances. As competitor financial institutions
continue to struggle with liquidity, some are offering deposit rates that exceed
our wholesale borrowing costs. We have decided not to match those rates;
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 our stated strategy to transform the Company’s balance sheet, we reduced
fixed-term borrowing balances with the Federal Home Loan Bank of Seattle
(“FHLB”) and continued to focus on growing core deposits, defined as
non-maturity deposits such as checking, savings and money market accounts, which
we believe will increase the franchise value of the Company and improve
profitability by reducing interest rate sensitivity and high-cost borrowing
balances. We launched a new checking account product, the “Ultimate Checking
Account,” in the second half of fiscal 2009, which has been the primary driver
of organic core deposit growth. Balances in this product totaled $13.4 million
at December 31, 2009, with new relationship balances comprising 56% of that
total.
 
 While we
were successful in selling some foreclosed real estate during the quarter,
continued deterioration in commercial real estate loans resulted in an overall
increase in nonperforming assets during the quarter ended December 31, 2009.
Nonperforming commercial real estate loans increased in both markets as
vacancies continued to rise, particularly in our Idaho Region. We continue to
see retail stores closing after December 31, 2009, and expect delinquencies in
our commercial real estate loan portfolio to rise, which may lead to additional
loan losses. We recorded a provision of $700,000 during the first quarter of
fiscal 2010 after recording a provision of $8.0 million in the fourth quarter of
fiscal 2009 as we anticipated this increase in nonperforming loans.
 
 The
economic environment in our markets of Southwestern Idaho and Central Oregon
continues to be weak with unemployment rates exceeding national levels and a
pessimistic economic growth outlook over the next 12 months. We continue to
believe that meaningful organic growth in loans will be difficult to achieve in
the short term. Therefore, we continue to review and pursue FDIC-assisted
acquisitions in order to take advantage of the unique opportunity these
acquisitions present to grow the organization with quantifiable credit risk
exposure. The Board and Management of the Company have identified the
intermountain region between Salt Lake City and the Cascade Mountain range as
the initial primary target market for organic and acquisitive growth. We believe
several institutions may be placed into FDIC receivership in this region and we
intend to participate in auctions of failed
   
  institutions
that provide attractive franchise expansion. This primary target market may be
expanded, should FDIC-assisted acquisition opportunities meeting our investment
objectives arise in adjacent markets.  Nonetheless, we can provide no
assurance that any of these opportunities will materialize or, if they do, that
the Bank will be the successful bidder for a failed institution.
 
 Critical
Accounting Estimates and Related Accounting Policies
 
 Note 2 to
the consolidated financial statements in this Quarterly Report on Form 10-Q
provides a description of critical accounting policies and significant estimates
in the financial statements that should be considered in conjunction with the
reading of this discussion and analysis.
 
 Comparison
of Financial Condition at December 31, 2009 and September 30, 2009
 
 For the
three months ended December 31, 2009, total assets decreased $5.8
million.  The changes in total assets were primarily concentrated in
the following asset categories:
 
 Balance
      at
                December
      31,
              
              
              Balance
      at
                September
      30,
              
              
              Increase/(Decrease)2009
              
              
              2009
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Cash
      and amounts due from depository institutions
              
              $
              68,471
              
              
              $
              49,953
              
              
              $
              18,518
              
              
              
              37.1
              %Investments
      available for sale, at fair value
              
              
              162,322
              
              
              
              169,320
              
              
              
              (6,998
              )
              
              
              (4.1
              )Loans
      receivable, net of allowance for loan losses
              
              
              497,862
              
              
              
              510,629
              
              
              
              (12,767
              )
              
              
              (2.5
              )FDIC
      indemnification receivable, net
              
              
              21,252
              
              
              
              30,038
              
              
              
              (8,786
              )
              
              
              (29.2
              )
 
 Cash and amounts due from depository
institutions. Cash and amounts due from depository institutions increased
$18.5 million to $68.5 million at December 31, 2009, from $50.0 million at
September 30, 2009.  Cash increased due to principal repayments on
one- to four-family residential mortgages and mortgage backed securities
partially offset by cash utilized to pay maturing borrowings from the FHLB. In
addition, cash was increased as $9.4 million was received from the FDIC during
the quarter just ended in reimbursements from losses incurred on acquired assets
per the agreement with the FDIC.  Management has increased its
liquidity as a result of the very low interest rate environment, which makes
medium-term investments unattractive, and provides increased flexibility for
potential acquisitions.
 
 Investments. Investments
decreased $7.0 million to $162.3 million at December 31, 2009, from $169.3
million at September 30, 2009.  The decrease was primarily the result
of principal repayments exceeding the purchases of agency securities during the
quarter just ended.  Principal reduction totaled $9.9 million for the
three months ended December 31, 2009 and is occurring at an accelerating rate
due to the historically-low rates available on residential mortgages, which is
increasing refinancing activity.
 
 Nearly
all of our investment securities are issued by U.S. Government sponsored
enterprises, primarily Fannie Mae and Freddie Mac. While the U.S. Government has
affirmed its support for government sponsored enterprises and the obligations
and mortgage-backed securities they issued, significant deterioration in the
financial strength of Fannie Mae, Freddie Mac or mortgage-backed security
insurers or actions by the U.S. Government to modify the structure of these
government enterprises may have a material effect on the valuation and
performance of our mortgage-backed securities portfolio in future periods.
Additionally, in an effort to stabilize the housing market, the Federal Reserve
Bank has been purchasing significant amounts of mortgage-backed securities in
the open market since early 2009, which may be providing price support for these
types of securities resulting in fair values that are currently higher than
might otherwise be realized if the Federal Reserve’s initiatives were not in
place. The value of our securities may decline materially if the Federal Reserve
Bank stops buying these securities.
 
 FHLB Stock.At December 31,
2009, the Bank held $10.3 million of common stock in the FHLB. This security is
reported at par value, which represents the Bank’s cost. For the last several
quarters, the FHLB has reported a capital
   
  deficiency
under the regulations of the Federal Housing Finance Agency (the “FHFA”), its
primary regulator. As a result, the FHLB has stopped paying a dividend and has
suspended the repurchase and redemption of outstanding common stock until its
retained earnings deficiency is reclaimed.
 
 The FHLB
has stated 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 it has 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, or the requirement that the Bank contribute
additional funds to recapitalize the FHLB, or reduce the Bank’s ability to
borrow funds from the FHLB, which would impair the Bank’s ability to meet
liquidity demands.
 
 Loans.Net loans receivable
decreased $12.8 million to $497.9 million at December 31, 2009, from $510.6
million at September 30, 2009.  One-to-four family residential
mortgage loans decreased $12.2 million due to runoff. The Bank originates
conventional one-to-four family residential loans solely 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 $2.1 million to $57.0 million as of December 31,
2009.  Commercial real estate, multifamily and acquisition and
development loans increased $912,000 to $300.8 million at December 31, 2009 from
$299.9 million at September 30, 2009. We plan to continue our emphasis on
commercial and small business banking products.
 
 Asset Quality. Net loan
charge-offs totaled $1.3 million during the quarter ended December 31, 2009
compared to $127,000 during the quarter ended December 31,
2008.  Loans delinquent 30 to 89 days totaled $15.8 million at
December 31, 2009, compared to $7.9 million at September 30, 2009. Included in
that $15.8 million is $7.5 million of delinquent loans covered by the loss share
agreement with the FDIC.  The following table summarizes loans
delinquent 30 to 89 days:
 
 December
      31,
              
              
              September
      30,2009
              
              
              2009(in
      thousands)Land
      acquisition and development
              
              $
              1,555
              
              
              $
              3,537One-
      to four-family construction
              
              
              -
              
              
              
              481Commercial
      real estate
              
              
              7,732
              
              
              
              1,886One-
      to four-family residential
              
              
              5,342
              
              
              
              1,551Other
              
              
              1,123
              
              
              
              415Total loans delinquent 30 to 89
      days
              
              $
              15,752
              
              
              $
              7,870
 
 The
allowance for loan losses was $28.1 million, or 5.34%, of gross loans at
December 31, 2009, compared to $28.7 million, or 5.32% of gross loans at
September 30, 2009. At December 31, 2009, the Company recorded an allowance of
$16.0 million on loans purchased in the Acquisition and an allowance of $12.1
million on loans in the Idaho Region loan portfolio. All of the allowance on
acquired loans is considered a “general allowance” available for allocation to
any loan, although the calculation of the allowance was performed on each pool
component in the acquired loan portfolio. Approximately $2.1 million of the
allowance for loan losses on the Idaho Region portfolio is allocated directly to
nonperforming loans. The remaining $26.0 million represents a general reserve
reflecting the Company’s best estimate of inherent losses at December 31,
2009.
 
 Loans
that were troubled on the date of the Acquisition were recorded at fair value
under ASC 310-30, which means an allowance for loan losses is not reported
separately on the balance sheet. Loans accounted for under ASC 310-30 reported
in loans on the balance sheet totaled $25.3 million at December 31, 2009, which
represents gross receivable balances of $26.7 million, net of fair value
adjustments for estimated credit losses of $1.4 million. Because of the loss
sharing agreement with the FDIC on these assets, we do not expect to incur
excessive future losses on the acquired loan portfolio.
 
 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 considered
impaired.
 
 Nonperforming
assets, which include all loans past due greater than 90 days, loans on on
nonaccrual status and real estate and other property owned, totaled $62.8
million at December 31, 2009, compared to $56.9 million at September 30, 2009.
The delinquency table above includes $6.4 million, and $5.1 million of loans
that were placed on nonaccrual status at December 31, 2009, and September 30,
2009, respectively, which are also included in the table below that summarizes
total nonperforming loans (including nonaccrual and impaired loans) and real
estate owned:
  
  December 31, 2009
              
              
              September 30, 2009(in
      thousands)
              
              Covered
                Assets(1)
              
              
              Legacy
                Portfolio
              
              
              Total
              
              
              Covered
                Assets(1)
              
              
              Legacy
                Portfolio
              
              
              TotalAcquisition
      and development
              
              $
              7,439
              
              
              $
              653
              
              
              $
              8,092
              
              
              $
              6,985
              
              
              $
              623
              
              
              $
              7,608One-to-four
      family construction
              
              
              628
              
              
              
              2,029
              
              
              
              2,657
              
              
              
              481
              
              
              
              2,283
              
              
              
              2,764Commercial
      real estate
              
              
              14,821
              
              
              
              7,006
              
              
              
              21,827
              
              
              
              11,016
              
              
              
              2,725
              
              
              
              13,741One-to-four
      family residential
              
              
              5,831
              
              
              
              7,058
              
              
              
              12,889
              
              
              
              5,020
              
              
              
              5,971
              
              
              
              10,991Other
              
              
              2,417
              
              
              
              157
              
              
              
              2,574
              
              
              
              3,206
              
              
              
              182
              
              
              
              3,388Total
      nonperforming loans
              
              
              31,136
              
              
              
              16,903
              
              
              
              48,039
              
              
              
              26,708
              
              
              
              11,784
              
              
              
              38,492Real
      estate owned and other property owned
              
              
              6,038
              
              
              
              8,744
              
              
              
              14,782
              
              
              
              7,516
              
              
              
              10,875
              
              
              
              18,391Total
      nonperforming assets
              
              $
              37,174
              
              
              $
              25,647
              
              
              $
              62,821
              
              
              $
              34,224
              
              
              $
              22,659
              
              
              $
              56,883
 
 (1)  
      Assets covered by the loss share agreement are presented at estimated fair
      value, net of adjustments of $1.4 million and $14.3 million at December
      31, 2009 and September 30, 2009,
respectively
 
 Troubled
debt restructurings that are not included in the delinquency or nonperforming
asset tables above totaled $1.4 million, $4.6 million and $34,000 at December
31, 2009, September 30, 2009 and December 31, 2008, respectively.
 
 Real
estate and other property owned decreased $3.6 million during the first quarter
of fiscal 2010 to $14.8 million at December 31, 2009, and was comprised of $9.4
million of land development and speculative one- to four-family construction
projects, $3.8 million of commercial real estate, $1.3 million of one- to
four-family residential properties, and $330,000 of other repossessed
assets.
 
 Nearly
all of our loans are secured by collateral located in southern Idaho and Central
Oregon. At December 31, 2009, approximately 44% and 14% of our commercial real
estate and construction and land development loans were secured by properties in
Ada and Canyon counties, respectively, and approximately 5% was secured by
properties in eastern Idaho.  Within Oregon, approximately 18% of the
Bank’s commercial real estate and construction and land development loans were
secured by properties in Deschutes County with approximately 4% in Crook County.
At December 31, 2009, approximately 74.8% of our commercial real estate loan
portfolio was comprised of nonowner-occupied investor real estate
projects.
 
 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 $20.8 million at December 31, 2009.
Approximately 93% 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 December 31, 2009, this portfolio had $3.9 million of
nonperforming loans that are reported in the table above. The total reserve
allocated to loans in this loan portfolio was $1.5 million at December 31, 2009,
or 7.0% of the balance of loans outstanding on that date.
  
 
 We
believe the Treasure Valley and Central Oregon markets are at the beginning of a
downturn in commercial real estate. As a result of this uncertainty, management
recorded a significant provision for loan losses in the fourth quarter of fiscal
2009 and a provision of $700,000 in the first quarter of fiscal 2010 in order to
increase the general reserve component of the allowance for loan losses. We
believe such an increase in the allowance for loan losses is prudent and
appropriate and that the allowance for loan losses reflects our best estimate of
probable, known and estimable losses inherent in the loan portfolio at December
31, 2009. However, additional information may later come to our attention,
evidencing losses in excess of the amounts estimated, which may negatively
affect earnings in the future.
 
 Property and
equipment.  The Company did not acquire banking locations in
Central Oregon at the same time as the closing of the Acquisition. Under the
purchase and assumption agreement with the FDIC, the Company had a period of
time after the August 7, 2009, transaction date to review the eight banking
facilities of the failed institution and obtain appraisals of the banking office
and their contents. After its review, the Company determined to purchase two
banking offices in Redmond and Bend, Oregon and to assume the lease agreements
on five of the other banking offices. The value of the purchased banking offices
totaled $4.7 million and the contents of all seven of the assumed locations
totaled approximately $412,000, accounting for the increase in property and
equipment during the quarter.
 
 FDIC indemnification
receivable. As part of the Acquisition, the Company entered into a loss
sharing agreement with the FDIC.  This agreement covers realized
losses on loans and foreclosed real estate purchased in the
Acquisition.  Under this agreement, the FDIC will reimburse Home
Federal Bank for 80% of the first $34.0 million of realized losses and 95% on
realized losses that exceed $34.0 million. The FDIC indemnification receivable
declined $8.8 million to $21.3 million from September 30, 2009, due to a $9.4
million payment for reimbursement on losses on loans under the loss share
agreement, offset slightly by discount accretion and reimbursable expenses on
covered assets during the quarter.
 
 Deposits.  Deposits
increased $7.6 million, or 1.5%, to $522.5 million at December 31, 2009, from
$514.9 million at September 30, 2009, primarily as a result of core deposit
growth. The increase included a $11.5 million increase in core deposits and a
decrease of $3.9 million in certificates of deposit.  While average
balances of core deposits were higher during the first quarter of fiscal 2010
compared to the linked quarter, we believe a large portion of the increase in
core deposits during the first quarter can be attributed to end-of-year seasonal
balance increases by depositors, and we do not believe all of the increase in
balances will continue into future quarters. The decrease in certificates of
deposit was due our prudent pricing of certificate products and our decision to
not match rates offered by local competitors that in many cases exceeded the
Bank’s cost of alternative funding sources.
 
 The
following table details the composition of the deposit portfolio and changes in
deposit balances:
 
 Balance
      at
                December
      31,
              
              
              Balance
      at
                September
      30,
              
              
              Increase
      (decrease)2009
              
              
              2009
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Noninterest-bearing
      demand
              
              $
              67,211
              
              
              $
              68,155
              
              
              $
              (944
              )
              
              
              (1.4
              )%Interest-bearing
      demand
              
              
              86,744
              
              
              
              78,393
              
              
              
              8,351
              
              
              
              10.7Health
      savings account
              
              
              21,104
              
              
              
              21,248
              
              
              
              (144
              )
              
              
              (0.7
              )Money
      market
              
              
              79,478
              
              
              
              76,408
              
              
              
              3,070
              
              
              
              4.0Savings
              
              
              42,939
              
              
              
              41,757
              
              
              
              1,182
              
              
              
              2.8Certificates
      of deposit
              
              
              224,975
              
              
              
              228,897
              
              
              
              (3,922
              )
              
              
              (1.7
              )Total
      deposit accounts
              
              $
              522,451
              
              
              $
              514,858
              
              
              $
              7,593
              
              
              
              1.5
              %
 
 Approximately
66% of the certificates of deposit portfolio at December 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 we are unable to retain the maturing
balances.
   
 
 Borrowings.  FHLB
advances decreased $7.8 million, or 9.3%, to $76.9 million at December 31, 2009,
from $84.7 million at September 30, 2009.  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, from time to time, to leverage the balance
sheet.
 
 Deferred Income
Taxes.  The Company had a deferred tax liability of $4.9
million and $5.6 million at December 31, 2009, and September 30, 2009,
respectively. Approximately $551,000 of the decline was due to the change in the
unrealized gain on the investment securities’ available for sale as of December
31, 2009.  The other component is a decrease of $130,000 due to a
reclassification between current and deferred taxes due to the fair market
adjustment of loans receivable.
 
 Equity.Stockholders’ equity
decreased $1.4 million, or 1%, to $208.3 million at December 31, 2009, compared
to $209.7 million at September 30, 2009.  Dividends paid during the
quarter reduced retained earnings $863,000.  In addition, movements in
interest rates reduced the unrealized gain on securities by $869,000, net of
tax, compared to September 30, 2009.  The Company’s book value per
share as of December 31, 2009 was $12.48 per share based upon 16,698,168
outstanding shares of common stock.
  
 Comparison
of Operating Results for the Three Months Ended December 31, 2009 and December
31, 2008
 
 Net loss
for the three months ended December 31, 2009 was ($309,000), or ($0.02) per
diluted share, compared to a net loss of ($801,000), or ($0.05) per diluted
share, for the three months ended December 31, 2008.  Total revenue
for the quarter ended December 31, 2009, which consisted of net interest income
before the provision for loan losses plus noninterest income, increased $1.1
million or 12.8% to $9.3 million from $8.2 million for the same period of the
prior year.  Total revenue for the first quarter of fiscal 2010
increased $1.0 million from the linked quarter.  Total revenue for the
linked quarter was reduced by transactions related to the Acquisition, including
a prepayment penalty of $498,000 incurred on the prepayment of assumed FHLB
borrowings. The efficiency ratio increased to 98.13% for the quarter ended
December 31, 2009, compared to 73.53% for the same quarter a year ago due mainly
to increased expenses associated with troubled assets not covered under the loss
sharing agreement with the FDIC and the additional burden of operating two core
processing systems, including certain back-office operations assumed in the
Acquisition, until the conversion and consolidation of both platforms occurs in
the fourth quarter of fiscal 2010.
 
 Net Interest
Income.  Net interest income increased $636,000, or 11.1%, to
$6.4 million for the three months ended December 31, 2009, from $5.7 million for
the three months ended December 31, 2008.  The increase in net
interest income is due to both the acquisition as well as the significantly
lower rates paid on deposits in the quarter just ended than in the year ago same
period. Net interest income associated with the Acquisition accounted for
$593,000 of the increase. Fair value amortization of purchased loans and assumed
deposits decreased interest income and interest expense by $427,000 and
$200,000, respectively, during the first quarter of fiscal 2010. The Company’s
net interest margin was unchanged at 3.37% for the quarter ended December 31,
2009, and December 31, 2008.
 
  
  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 December 31, 2009
                Compared
      to Three Months Ended December 31, 2008Increase
      (Decrease) Due toRate
              
              
              Volume
              
              
              Total(in
      thousands)Interest-earning
      assets:Loans
      receivable, net
              
              $
              (865
              )
              
              $
              864
              
              
              $
              (1
              )Loans
      held for sale
              
              
              (4
              )
              
              
              (6
              )
              
              
              (10
              )Interest-bearing
      deposits in other banks
              
              
              (13
              )
              
              
              27
              
              
              
              14Investment
      securities, available for sale
              
              
              (16
              )
              
              
              8
              
              
              
              (8
              )Mortgage-backed
      securities
              
              
              (198
              )
              
              
              (272
              )
              
              
              (470
              )Federal
      Home Loan Bank stock
              
              
              33
              
              
              
              
              
              
              
              33Total
      net change in income on interest-earning assets
              
              $
              (1,063
              )
              
              $
              621
              
              
              $
              (442
              )Interest-bearing
      liabilities:Savings
      deposits
              
              $
              (15
              )
              
              $
              27
              
              
              $
              12Interest-bearing
      demand deposits
              
              
              10
              
              
              
              38
              
              
              
              48Money
      market accounts
              
              
              (61
              )
              
              
              67
              
              
              
              6Certificates
      of deposit
              
              
              (786
              )
              
              
              376
              
              
              
              (410
              )Total
      deposits
              
              
              (852
              )
              
              
              508
              
              
              
              (344
              )FHLB
      advances
              
              
              (145
              )
              
              
              (589
              )
              
              
              (734
              )Total
      net change in expense on interest-bearing liabilities
              
              $
              (997
              )
              
              $
              (81
              )
              
              $
              (1,078
              )Total
      increase in net interest income
              
              
              
              
              
              
              
              
              
              $
              636
 
 Interest and Dividend
Income.  Total interest and dividend income for the three
months ended December 31, 2009, decreased $442,000, or 4.7%, to $8.9 million,
from $9.3 million for the three months ended December 31, 2008.  The
decrease during the quarter was attributable to a decrease on yields earned on
interest earning assets, which more than offset the effect of higher levels of
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 December 31,2009
              
              
              2008
              
              
              Increase/Average
                Balance
              
              
              Yield
              
              
              Average
                Balance
              
              
              Yield
              
              
              (Decrease)
      in
                Interest
      and
                Dividend
                Income
      from
                2008(dollars
      in thousands)Loans
      receivable, net of deferred fees/costs
              
              $
              533,152
              
              
              
              5.31
              %
              
              $
              471,888
              
              
              
              6.00
              %
              
              $
              (1
              )Loans
      held for sale
              
              
              1,608
              
              
              
              5.04
              
              
              
              2,022
              
              
              
              5.76
              
              
              
              (9
              )Interest
      bearing deposits in other banks
              
              
              43,947
              
              
              
              0.25
              
              
              
              7,696
              
              
              
              0.68
              
              
              
              14Investment
      securities, available for sale
              
              
              5,966
              
              
              
              1.48
              
              
              
              4,511
              
              
              
              2.66
              
              
              
              (8
              )Mortgage-backed
      securities
              
              
              161,309
              
              
              
              4.30
              
              
              
              185,666
              
              
              
              4.75
              
              
              
              (471
              )FHLB
      stock
              
              
              10,326
              
              
              
              -
              
              
              
              9,591
              
              
              
              (1.38
              )
              
              
              33Total
      interest-earning assets
              
              $
              756,308
              
              
              
              4.70
              %
              
              $
              681,374
              
              
              
              5.48
              %
              
              $
              (442
              )
 
 The yield
on loans fell to 5.31% in the first quarter of fiscal 2010 due to the extremely
low interest rate environment that has persisted for over a year and the impact
of nonaccrual loans. Foregone interest income on nonaccrual loans was
approximately $680,000 during the quarter ended December 31, 2009. While most of
our adjustable-rate loans contain floors, new loans originated during fiscal
year 2010 as well as portfolio loans repricing during the current year continue
to drive down the average yield on the loan portfolio. In addition, the
significant amount of interest bearing deposits in other banks yielding an
average of 25 basis points is also a major factor in reducing the overall yield
on interest earning assets.
 
 Interest
Expense.  Interest expense decreased $1.1 million, or 30.1%, to
$2.5 million for the three months ended December 31, 2009 from $3.6 million for
the three months ended December 31, 2008.  While the average balance
of total interest-bearing liabilities increased $57.1 million, or 12.1%, to
$527.4 million for the three months ended December 31, 2009 from $470.3 million
for the three months ended December 31, 2008, interest expense
decreased.  The reduction in average outstanding FHLB borrowings of
$54.4 million was the most significant factor in the decrease in interest
expense.  In addition, the average rate on certificates of deposit
decreased from 3.73% to 2.20% and was also a factor in the
decrease.
 
 The
following table details average balances, cost of funds and the change in
interest expense:
 
 Three
      Months Ended December 31,2009
              
              
              2008
              
              
              Increase/Average
                Balance
              
              
              Cost
              
              
              Average
                Balance
              
              
              Cost
              
              
              (Decrease)in
                Interest
                Expense
      from
                2008(dollars
      in thousands)Savings
      deposits
              
              $
              42,439
              
              
              
              0.65
              %
              
              $
              27,294
              
              
              
              0.84
              %
              
              $
              12Interest-bearing
      demand deposits
              
              
              103,772
              
              
              
              0.60
              
              
              
              77,609
              
              
              
              0.55
              
              
              
              48Money
      market deposits
              
              
              77,224
              
              
              
              1.07
              
              
              
              55,268
              
              
              
              1.45
              
              
              
              6Certificates
      of deposit
              
              
              225,507
              
              
              
              2.20
              
              
              
              177,219
              
              
              
              3.73
              
              
              
              (410
              )FHLB
      advances
              
              
              78,496
              
              
              
              4.23
              
              
              
              132,929
              
              
              
              4.71
              
              
              
              (734
              )Total
      interest-bearing liabilities
              
              $
              527,438
              
              
              
              1.90
              %
              
              $
              470,319
              
              
              
              3.05
              %
              
              $
              (1,078
              )
   
 
 Provision for Loan
Losses.  A provision for loan losses of $700,000 was recorded
as a result of our analysis of the loan portfolio for the quarter ended December
31, 2009, compared to a provision for loan losses of $3.6 million for the same
quarter of the prior year.  The provision recorded during the first
quarter of fiscal 2010 was mainly due to continued signs of stress in the
commercial real estate portfolio in the Idaho Region. We recorded a provision of
$8.0 million in the quarter ended September 30, 2009, as we expected delinquent
and nonperforming loans, particularly commercial real estate loans, to increase
in the first quarter of fiscal year 2010. The review of our loan portfolio
during the quarter ended September 30, 2009, evidenced continued deterioration
in the ability of some commercial borrowers to service their debt requirements
in the near future. At December 31, 2009, the allowance for loan losses included
a general reserve of $10.1 million for loans in the Idaho Region portfolio that
are not covered under a loss share agreement with the FDIC. The allowance for
loan losses specifically allocated to impaired loans not covered under the loss
share agreement totaled $2.1 million at December 31, 2009.
 
 While we
believe the estimates and assumptions used in our 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.
 
 The
provision for loan losses is impacted by the types of loans and the risk factors
associated with each loan type in the Bank’s portfolio. As the Bank increases
its commercial and commercial real estate loan portfolios, 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
      December 31,2009
              
              
              2008(dollars
      in thousands)Provision
      for loan losses
              
              $
              700
              
              
              $
              3,575Net
      charge-offs
              
              
              1,294
              
              
              
              127Allowance
      for loan losses
              
              
              28,141
              
              
              
              8,027Allowance
      for loan losses as a percentage of gross loans receivable at the end of
      the period
              
              
              5.34
              %
              
              
              1.69
              %Nonperforming  loans
              
              $
              48,039
              
              
              $
              17,034Allowance
      for loan losses as a percentage of nonperforming loans at the end of the
      period
              
              
              58.58
              %
              
              
              47.12
              %Nonaccrual
      and 90 days or more past due loans as a percentage of loans receivable at
      the end of the period
              
              
              9.12
              
              
              
              3.58Loans
      receivable, net
              
              $
              497,862
              
              
              $
              466,169
 
 Noninterest
Income.  Noninterest income increased $414,000, or 16.8%, to
$2.9 million for the three months ended December 31, 2009 from $2.5 million for
the three months ended December 31, 2008, with the Acquisition accounting for
$444,000 of the increase. Excluding $752,000 from losses on transactions
associated with the Acquisition recorded in the fourth quarter of fiscal 2009,
noninterest income increased $249,000 from the linked quarter. The majority of
the increase is within other income including increases in rental income and
accretable income. Rental income increased $100,000 from the same period of the
prior year due to rent received on foreclosed properties in the quarter just
ended.  Other income of $160,000 was also recorded in the first
quarter of fiscal 2010 associated with the accretion of the present value
component of the FDIC indemnification asset.  In addition, interchange
income increased $125,000 or 22.8% from the same period of the prior
year.
  
 
 Excluding
the impact of the Acquisition, the Bank continues to experience year over year
declines in nonsufficient funds fee income on checking accounts as the deposit
portfolio strategically is shifted away from low-balance high overdraft accounts
to higher-balance relationship accounts. Nonsufficient funds fee income is
expected to continue to decline as a result of this shift and in reaction to
newly promulgated regulations.
 
 The
following table provides a detailed analysis of the changes in components of
noninterest income:
 
 Three
      Months Ended
                December
      30,
              
              
              Increase
      (decrease)2009
              
              
              2008
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Service
      fees and charges
              
              $
              2,264
              
              
              $
              2,109
              
              
              $
              155
              
              
              
              7.4
              %Gain
      on sale of loans
              
              
              183
              
              
              
              190
              
              
              
              (7
              )
              
              
              (3.7
              )Increase
      in cash surrender value of bank owned life insurance
              
              
              107
              
              
              
              106
              
              
              
              1
              
              
              
              0.9Loan
      servicing fees
              
              
              15
              
              
              
              69
              
              
              
              (54
              )
              
              
              (78.3
              )Mortgage
      servicing rights, net
              
              
              -
              
              
              
              (31
              )
              
              
              31
              
              
              
              (100.0
              )Other
              
              
              306
              
              
              
              18
              
              
              
              288
              
              
              
              1,600.0Total
      noninterest income
              
              $
              2,875
              
              
              $
              2,461
              
              
              $
              414
              
              
              
              16.8
              %
 
 Noninterest
Expense.  Noninterest expense increased $3.0 million, or 50.5%,
to $9.1 million for the three months ended December 31, 2009 from $6.0 million
for the three months ended December 31, 2008. Noninterest expense associated
with the Acquisition accounted for $1.8 million of the increase.
 
 The
following table provides a detailed analysis of the changes in components of
noninterest expense:
 
 Three
      Months Ended
                December
      31,
              
              
              Increase
      (decrease)2009
              
              
              2008
              
              
              Amount
              
              
              Percent(dollars
      in thousands)Compensation
      and benefits
              
              $
              4,617
              
              
              $
              3,575
              
              
              $
              1,042
              
              
              
              29.2
              %Occupancy
      and equipment
              
              
              1,064
              
              
              
              770
              
              
              
              294
              
              
              
              38.2Data
      processing
              
              
              800
              
              
              
              542
              
              
              
              258
              
              
              
              47.6Advertising
              
              
              260
              
              
              
              248
              
              
              
              12
              
              
              
              4.8Professional
      services
              
              
              479
              
              
              
              335
              
              
              
              144
              
              
              
              43.0Insurance
      and taxes
              
              
              558
              
              
              
              155
              
              
              
              403
              
              
              
              260.0Provision
      for REO
              
              
              801
              
              
              
              -
              
              
              
              801
              
              
              
              -Other
              
              
              504
              
              
              
              409
              
              
              
              95
              
              
              
              23.2Total
      noninterest expense
              
              $
              9,083
              
              
              $
              6,034
              
              
              $
              3,049
              
              
              
              50.5
              %
 
 Compensation
and benefits increased $1.0 million from the year ago period primarily as a
result of personnel added in the Acquisition. The Bank will continue to operate
separate back offices in the Idaho and Central Oregon Regions until a full
conversion and integration to a new core application platform is completed,
which is anticipated in the fourth quarter of fiscal 2010.
 
 Occupancy
and equipment expenses were $294,000 higher in the first quarter of fiscal 2010
compared to the first quarter of fiscal year 2009 as the Acquisition accounted
for $258,000 of the increase. During the 2010 quarter, the Bank purchased two
former Community First Bank banking offices in Central Oregon from the FDIC as
well as the furniture and fixtures in seven banking offices. Buildings and
furniture and fixtures were not purchased at the closing of the Acquisition.
Rent recorded on those assets during the first quarter of fiscal 2010 totaled
$62,000.
 
 Data
processing expenses increased $258,000 during the first quarter of 2010 compared
to the year-ago period with the Acquisition accounting for $165,000 of the
increase. Professional services increased during the quarter due to audit costs
related to external loan review services for the Acquisition.
   
 
 Insurance
and taxes increased $403,000 from the same period of the prior year due to
insurance premiums on the increased number of foreclosed properties as well as
overdue taxes paid on real estate owned upon foreclosure. The Bank also paid
$2.2 million in prepaid FDIC deposit insurance premiums during the first quarter
of fiscal 2010. This amount will be amortized to expense over three years
beginning in the second quarter of fiscal 2010.
 
 The
provision for real estate owned increased $801,000 during the first quarter of
fiscal year 2010 compared to the same period of the prior year as a result of
quarterly valuation assessments performed on a significantly higher number of
foreclosed properties.
 
 Income Tax
Benefit.The Company recorded an income tax benefit of
$218,000 for the three months ended December 31, 2009.  Net loss
before income taxes was $527,000 for the three months ended December 31, 2009
compared to a net loss before taxes of $1.4 million for the three months ended
December 31, 2008.
 
 Liquidity,
Commitments and Capital Resources
 
 Liquidity.  We
actively analyze and manage the Company’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.  We believe our current liquidity
position and anticipated operating results are sufficient to fund the Company’s
known existing commitments and activity levels.
 
 Liquidity
is essential to the Company’s business and liquidity management is both a daily
and long-term function of business management. Excess liquidity is generally
invested in short-term investments such as overnight deposits with financial
institutions, primarily the Federal Reserve Bank of San Francisco or the FHLB of
Seattle. On a longer-term basis, we maintain a strategy of investing in
loans.
 
 An
inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on liquidity. Our access
to funding sources in amounts adequate to finance the Company’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, a disruption in the
financial markets or negative views and expectations about the prospects for the
financial services industry in light of the turmoil faced by banking
organizations and the continued deterioration in credit markets.
 
 At
December 31, 2009, certificates of deposit were $225.0 million, or 43.1% of
total deposits, including $149.4 million that are scheduled to mature by
December 31, 2010.  Recent disruptions in the credit markets have
resulted in a highly price-competitive market for certificates of deposit. Some
rates offered by competitors 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, we have 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. Nonetheless, we
believe the Company has adequate resources to fund all loan commitments through
FHLB advances, loan repayments, maturing investment securities, and the sale of
mortgage loans in the secondary markets.
 
 At
December 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 December 31, 2009, the
Bank was in compliance with the collateral requirements and $143.8 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.
 
 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
 December
31, 2009:
 Contract
      or
                Notional
      Amount(in
      thousands)Commitments
      to originate loans:Fixed
      rate
              
              $
              1,889Adjustable
      rate
              
              
              11,935Undisbursed
      balance of loans closed
              
              
              4,839Unused
      lines of credit
              
              
              39,137Commercial
      letters of credit
              
              
              369Total
              
              $
              58,169
 
 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
$150.3 million at December 31, 2009, or 19.1%, of total assets on that date. As
of December 31, 2009, the Bank exceeded all regulatory capital requirements. The
Bank’s regulatory capital ratios at December 31, 2009 were as follows: Tier 1
capital 19.1%; Tier 1 (core) risk-based capital 33.3%; and total risk-based
capital 34.6%. 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.
 
 In recent
years, the Company has primarily utilized the following strategies in its
efforts to manage interest rate risk:
 
 ·
              Reduced
      our reliance on long-term, fixed-rate one-to-four family residential loans
      by originating nearly all of these loans for sale in the secondary
      market;
 ·
              Increased
      originations of adjustable-rate commercial and commercial real estate
      loans;
 ·
              Reduced
      our reliance on higher-rate certificates of deposit and FHLB borrowings by
      focusing on core deposit growth, including checking and savings accounts
      that are less-sensitive to interest rate changes and have longer average
      lives than certificates of deposit.
 
 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 December 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 2009 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 December 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 Securities and Exchange Commission’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 December 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
 
 Our
loan portfolio has a concentration of loans secured by commercial real estate,
which is primarily secured by nonowner-occupied investment properties. Continued
deterioration in the local economy may result in additional losses on
loans.
 
 We define
our commercial loan portfolio to include commercial real estate, multi-family,
commercial business and real estate construction loans. At December 31, 2009,
the outstanding balance of the commercial loan portfolio was $301.5 million,
which comprised 57.2% of our gross loans. Total commitments outstanding in the
commercial loan portfolio, which includes unfunded lines of credit and
construction loans in process, totaled approximately $320.3 million. Non-owner
occupied and owner-occupied commercial loan commitments totaled $157.9 million
and $75.9 million, respectively, at December 31, 2009. Non-owner occupied and
owner-occupied commercial loan commitments covered under the loss share
agreement with the FDIC totaled $32.7 million and $25.5 million, respectively,
at December 31, 2009.
 
 Generally,
deterioration in the performance and collectability of a loan secured by
owner-occupied real estate can be better monitored than a nonowner-occupied real
estate loan as we typically do not have the ability to assess the financial
performance of tenants who are leasing from borrowers on investment property
loans. We regularly review financial information of borrowers on owner-occupied
loans whereas we can typically review only vacancy and rent rolls of tenants of
borrowers on nonowner-occupied loans.
 
 Office,
retail and industrial real estate comprised, respectively, 33%, 18% and 17% of
the collateral securing our nonowner-occupied commercial real estate commitments
at December 31, 2009. Specialty or single-use, industrial and office real estate
comprised, respectively, 31%, 28% and 25% of our owner-occupied commercial real
estate loan portfolio at December 31, 2009. Vacancies in office, retail and
industrial real estate projects continue to increase in both of the Bank’s
markets. Continued deterioration in the general economy may increase vacancies
further, which may result in decreased cash flow to our borrowers and further
declines in value on foreclosed commercial real estate causing additional
provisions for loan and REO losses.
 
 
  
  Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds
 
 (a)
              Not
      applicable.
 
 (b)
              Not
      applicable.
 
 (c)
              Not
      applicable.
 
 
 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 19, 2010. 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
              WithheldJames
      R. Stamey
              12,479,802
              139,165Robert
      A. Tinstman
              12,535,589
              83,378
 
 Each of
the following directors who were not up for re-election at the annual meeting of
stockholders will continue in office:  Daniel L. Stevens, Richard J.
Navarro, Brad J. Little, Len E. Williams, and N. Charles Hedemark.
 
 
 Proposal
2. Ratifying the appointment of independent auditor
 
 Shareholders
ratified the appointment of Crowe Horwath LLP as the Company’s independent
registered public accounting firm for the year ending September 30, 2010, by the
following vote:
 
 For
              Against
              Abstaining14,563,443
              91,304
              9,343
 
 
 Item 5.  Other
Information
 
 Not
applicable.
  
  Item
6.  Exhibits
 
 2.1
              Purchase
      and Assumption Agreement for Community First Bank
      Transaction(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(8)10.2
              Amended
      Severance Agreement with Eric S. Nadeau(8)10.3
              Amended
      Severance Agreement with Steven D. Emerson(8)10.4
              Amended
      Severance Agreement with Steven K. Eyre(8)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(8)10.11
              Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Eric S.
    Nadeau(8)10.12
              Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven D.
      Emerson(8)10.13
              Amended
      and Restated Salary Continuation Agreement entered into by Home Federal
      Savings and Loan Association of Nampa with Steven K.
    Eyre(8)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 August
      7, 2009
 (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)
 (8)
              Filed
      as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended March 31, 2009
 
 *      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:  February 8, 2010
              /s/ Len E. WilliamsLen E.
      WilliamsPresident
      and
                Chief
      Executive Officer
                (Principal
      Executive Officer)Date:  February 8, 2010
              /s/ Eric S. NadeauEric S.
      NadeauExecutive
      Vice President and
                Chief
      Financial Officer
                (Principal
      Financial and Accounting Officer)
  
 
 
  
  EXHIBIT
INDEX
 
 31.1
              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
   
  33