Home Federal Bancorp, Inc., the parent company of Home Federal Bank, announced results for the quarter ended March 31, 2012. The Company reported earnings of $702,000, or $0.05 per diluted share, for the three months ended March 31, 2012, compared to a loss of ($1.2 million), or ($0.08) per diluted share, for the same period a year ago.
The Company reported that its return to profitability compared to the year-ago quarter was attributable to a reduction in operating expenses, gains on the sales of securities and facilities, and continued improvement in covered asset quality, which resulted in lower credit costs and higher yields on purchased loans in the 2012 quarter. On January 27, 2012, the Company announced the change of its fiscal year end to December 31 from September 30. The Company’s next fiscal year end will be December 31, 2012. As a result of this change, the quarter ended December 31, 2011, is not included in the fiscal year ended September 30, 2011, or the fiscal year ending December 31, 2012. The quarter ended March 31, 2012, represents the first quarter of the Company’s current fiscal year.
On July 30, 2010, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits and acquire certain assets of LibertyBank, headquartered in Eugene, Oregon (the LibertyBank Acquisition). In August 2009, the Bank entered into a purchase and assumption agreement with the FDIC to assume all of the deposits and certain assets of Community First Bank, headquartered in Prineville (the CFB Acquisition). Nearly all of the loans and foreclosed assets purchased in these acquisitions are subject to loss sharing agreements with the FDIC and are referred to as “covered loans” or “covered assets.” Loans and foreclosed and repossessed assets not subject to loss sharing agreements with the FDIC are referred to as “noncovered loans” or “noncovered assets.”
The following items summarize key activities of the Company during the quarter ended March 31, 2012:
- Net interest income before the provision for loan losses increased $3.8 million to $12.4 million for the quarter ended March 31, 2012, when compared to the quarter ended March 31, 2011, due to a higher yield on purchased loans and a declining cost of funds;
- The provision for loan losses, net of the FDIC indemnification impairment related to the negative provision, totaled $36,000 during the quarter ended March 31, 2012 compared to $150,000 during the same quarter in 2011. No provision for loan losses on noncovered originated loans was recorded during the quarter. The net provision for other real estate owned totaled $107,000 for the quarter ended March 31, 2012 and is reported in other noninterest expense;
- Noninterest income during the quarter ended March 31, 2012, includes impairment of the FDIC indemnification asset for covered loans of $3.3 million and an $819,000 indemnification impairment due to the negative provision for loan losses, both a result of a reduction in estimated future losses on covered loans;
- Service charges and fees declined $139,000 to $2.1 million for the quarter ended March 31, 2012 from the quarter ended December 31, 2011, and $125,000 compared to the quarter ended March 31, 2011;
- The Bank sold investment securities and recorded a pre-tax gain of $535,000 during the quarter ended March 31, 2012, compared to $590,000 in the quarter ended December 31, 2011 and none during the quarter ended March 31, 2011;
- Noninterest expense decreased by $56,000 during the quarter ended March 31, 2012, compared to the December 31, 2011 quarter and was $2.8 million lower than the quarter ended March 31, 2011;
- Total assets decreased $8.6 million during the quarter ended March 31, 2012, compared to December 31, 2011. Loans declined $14.2 million during the quarter, and deposits declined $7.4 million; and
- Noncovered nonperforming assets increased $945,000 to $23.0 million at March 31, 2012 compared to December 31, 2011, due to the classification of one large commercial real estate loan that was placed on nonaccrual status during the quarter. Total nonperforming assets decreased $5.6 million to $40.4 million at March 31, 2012.
Len E. Williams, the Company’s President and CEO, commented, “The past two quarters have clearly reflected our expense reduction, improvement in asset quality and lower funding costs. While we still have declining nonperforming assets, residential loans and leases, we are encouraged by a recent increase in commercial lending activity and look forward to additional stability as the economy improves. We continue to seek opportunities for accretive acquisitions and additional stock buybacks at a significant discount to book value.”
Results of Operations
Net interest income. Net interest margin decreased to 4.92% during the quarter ended March 31, 2012, from 5.54% in the linked quarter, but increased substantially from 2.82% during the quarter ended March 31, 2011. The linked quarter decline is primarily due to a reduction in accretable income on purchased loans during the quarter ended March 31, 2012. The increase over the year-ago quarter was also the result of the increase in accretable yield during the quarter ended March 31, 2012, on purchased loans. Similarly, the Company’s yield on earning assets decreased to 5.36% in the current quarter from 6.02% in the linked quarter, but was up from 3.57% during the quarter ended March 31, 2011, primarily due to the increase in accretable yield on purchased loans.
Managed runoff in certificates of deposits resulted in a reduced cost of funds compared to prior periods. Additionally, the Bank paid off all outstanding borrowings with the Federal Home Loan Bank (“FHLB”) in September 2011, which reduced interest expense on borrowings compared to the quarter ended March 31, 2011. The cost of funds for the quarter ended March 31, 2012, was 0.58% compared to 0.62% in the quarter ended December 31, 2011, and 0.89% for the quarter ended March 31, 2011.
Provision for loan losses. A negative provision for loan losses of ($783,000) was recorded during the quarter ended March 31, 2012, compared to a negative provision of ($474,000) for the quarter ended December 31, 2011, and a provision of $3.0 million for the same year-ago period. The negative provision related to covered loans purchased in the CFB Acquisition totaled ($1.1 million) and was primarily due to a large recovery realized during the quarter. A provision for loan losses on certain pools of loans purchased in the LibertyBank Acquisition totaled $335,000 during the quarter ended March 31, 2012. Net of amounts recorded in noninterest income as FDIC indemnification recovery, the impact of the provision for loan losses reduced income before taxes by $36,000 during the quarter ended March 31, 2012. The “FDIC indemnification recovery” of ($819,000) reported in noninterest income represents the amount of reduction of losses expected to be recovered by the Bank from the FDIC.
Loans purchased in the LibertyBank Acquisition were aggregated into pools. If an individual pool performs better than management’s original estimates, the Company may incur an increase in accretable yield in interest income, which is offset somewhat by impairment in the FDIC indemnification asset since loan losses are expected to be less than previously estimated. If the estimated cash flows in a loan pool are less than management previously estimated, an allowance for loan losses may be recorded through a provision, which is offset somewhat by the amount expected to be recovered from the FDIC under the loss sharing agreements. During the quarters ended March 31, 2012 and December 31, 2011, the Bank incurred impairments on certain loan pools purchased in the LibertyBank Acquisition that required a provision for loan losses, which was partially offset with the FDIC indemnification recovery. However, several loan pools are expected to perform with fewer losses than previously estimated, which resulted in impairment in the FDIC indemnification asset and may increase interest income on loans in the future due to higher accretable yield.
