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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period of to
Commission File Number 000-53935
Harvard Illinois Bancorp, Inc.
(Exact name of Registrant as specified in its charter)
Maryland | 27-2238553 | |
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification Number) | |
58 N. Ayer Street Harvard, IL | 60033 | |
(Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code: (815) 943-5261
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 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. x Yes ¨ No
Indicate by check mark whether the Registrant has submitted electronic and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings). x 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 | ¨ | |||
Non-Accelerated Filer | ¨ | Smaller Reporting Company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of August 12, 2011, 816,076 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.
Table of Contents
HARVARD ILLINOIS BANCORP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
TABLE OF CONTENTS
Page | ||||||
PART I | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
Consolidated Balance Sheets | 3 | |||||
Consolidated Statements of Income | 4 | |||||
Consolidated Statements of Equity | 5 | |||||
Consolidated Statements of Cash Flows | 6 | |||||
Notes to the Consolidated Financial Statements | 7-36 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 36-52 | ||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 52 | ||||
Item 4. | Controls and Procedures | 52 | ||||
PART II | OTHER INFORMATION | 53 | ||||
Item 1. | Legal Proceedings | 53 | ||||
Item 1A. | Risk Factors | 53 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 53 | ||||
Item 3. | Defaults Upon Senior Securities | 53 | ||||
Item 4. | [Removed and Reserved] | 53 | ||||
Item 5. | Other Information | 53 | ||||
Item 6. | Exhibits | 53 | ||||
Signatures | 54 | |||||
EXHIBITS | ||||||
Exhibit 31.1 | Section 302 Certification | |||||
Exhibit 31.2 | Section 302 Certification | |||||
Exhibit 32.1 | Section 906 Certification | |||||
Exhibit 101.INS | XBRL Instance Document | |||||
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document | |||||
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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PART I – FINANCIAL INFORMATION
HARVARD ILLINOIS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited) June 30, 2011 | December 31, 2010 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 1,309 | $ | 883 | ||||
Interest-bearing demand deposits in banks | 1,351 | 3,184 | ||||||
Securities purchased under agreements to resell | 16,381 | 13,896 | ||||||
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Cash and cash equivalents | 19,041 | 17,963 | ||||||
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Interest-bearing deposits with other financial institutions | 7,705 | 10,825 | ||||||
Available-for-sale securities | 5,401 | 4,965 | ||||||
Held-to-maturity securities, at amortized cost (estimated fair value of $2,280 and $2,745 at June 30, 2011 and December 31, 2010, respectively) | 2,091 | 2,548 | ||||||
Loans, net of allowance for loan losses of $1,916 and $1,873 at June 30, 2011 and December 31, 2010, respectively | 114,280 | 113,153 | ||||||
Premises and equipment, net | 3,552 | 3,615 | ||||||
Federal Home Loan Bank stock, at cost | 6,549 | 6,549 | ||||||
Foreclosed assets held for sale | 1,412 | 767 | ||||||
Accrued interest receivable | 681 | 901 | ||||||
Deferred income taxes | 1,307 | 1,279 | ||||||
Bank-owned life insurance | 4,165 | 4,097 | ||||||
Mortgage servicing rights | 437 | 425 | ||||||
Other | 551 | 664 | ||||||
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Total assets | $ | 167,172 | $ | 167,751 | ||||
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Liabilities and Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 4,475 | $ | 4,156 | ||||
Savings, NOW and money market | 47,612 | 47,937 | ||||||
Certificates of deposit | 78,630 | 79,030 | ||||||
Brokered certificates of deposit | 1,499 | 1,499 | ||||||
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Total deposits | 132,216 | 132,622 | ||||||
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Federal Home Loan Bank advances | 13,187 | 13,653 | ||||||
Advances from borrowers for taxes and insurance | 413 | 402 | ||||||
Deferred compensation | 2,208 | 2,171 | ||||||
Accrued interest payable | 42 | 53 | ||||||
Other | 404 | 264 | ||||||
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Total liabilities | 148,470 | 149,165 | ||||||
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Commitments and Contingencies | — | — | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $.01 par value, 30,000,000 shares authorized; 816,076 and 784,689 shares issued and outstanding, respectively at June 30, 2011 and December 31, 2010 | 8 | 8 | ||||||
Additional paid-in capital | 6,798 | 6,799 | ||||||
Unearned ESOP shares, at cost | (565 | ) | (590 | ) | ||||
Amount reclassified on ESOP shares | (60 | ) | (26 | ) | ||||
Retained earnings | 12,498 | 12,399 | ||||||
Accumulated other comprehensive income (loss), net of tax | 23 | (4 | ) | |||||
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Total equity | 18,702 | 18,586 | ||||||
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Total liabilities and equity | $ | 167,172 | $ | 167,751 | ||||
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See accompanying notes to the unaudited consolidated financial statements.
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HARVARD ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited) Three Months Ended June 30, | (Unaudited) Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and Dividend Income | ||||||||||||||||
Interest and fees on loans | $ | 1,659 | $ | 1,809 | $ | 3,356 | $ | 3,584 | ||||||||
Securities | ||||||||||||||||
Taxable | 48 | 72 | 80 | 148 | ||||||||||||
Tax-exempt | 2 | 6 | 7 | 14 | ||||||||||||
Securities purchased under agreements to resell | 56 | 11 | 96 | 36 | ||||||||||||
Other | 33 | 46 | 70 | 91 | ||||||||||||
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Total interest and dividend income | 1,798 | 1,944 | 3,609 | 3,873 | ||||||||||||
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Interest Expense | ||||||||||||||||
Deposits | 473 | 608 | 971 | 1,222 | ||||||||||||
Federal Home Loan Bank advances | 107 | 163 | 226 | 333 | ||||||||||||
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Total interest expense | 580 | 771 | 1,197 | 1,555 | ||||||||||||
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Net Interest Income | 1,218 | 1,173 | 2,412 | 2,318 | ||||||||||||
Provision for Loan Losses | 127 | 216 | 296 | 432 | ||||||||||||
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Net Interest Income After Provision for Loan Losses | 1,091 | 957 | 2,116 | 1,886 | ||||||||||||
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Noninterest Income | ||||||||||||||||
Customer service fees | 61 | 70 | 124 | 130 | ||||||||||||
Brokerage commission income | 10 | 11 | 17 | 17 | ||||||||||||
Net realized gains (losses) on loan sales | (36 | ) | (25 | ) | 47 | 9 | ||||||||||
Net realized losses on sales of available-for-sale securities | — | (1 | ) | — | (1 | ) | ||||||||||
Losses on other than temporary impairment of equity securities | — | (2 | ) | — | (6 | ) | ||||||||||
Loan servicing fees | 46 | 41 | 93 | 84 | ||||||||||||
Bank-owned life insurance income, net | 34 | 40 | 68 | 78 | ||||||||||||
Other | 3 | 3 | 7 | 7 | ||||||||||||
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Total noninterest income | 118 | 137 | 356 | 318 | ||||||||||||
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Noninterest Expense | ||||||||||||||||
Compensation and benefits | 609 | 621 | 1,215 | 1,224 | ||||||||||||
Occupancy | 130 | 113 | 269 | 248 | ||||||||||||
Data processing | 114 | 118 | 238 | 234 | ||||||||||||
Professional fees | 67 | 66 | 125 | 103 | ||||||||||||
Marketing | 18 | 20 | 35 | 44 | ||||||||||||
Office supplies | 11 | 14 | 28 | 29 | ||||||||||||
Federal deposit insurance | 54 | 62 | 105 | 116 | ||||||||||||
Indirect automobile loan servicing fees | 19 | 56 | 41 | 94 | ||||||||||||
Foreclosed assets, net | 44 | 34 | 130 | 71 | ||||||||||||
Other | 95 | 76 | 173 | 140 | ||||||||||||
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Total noninterest expense | 1,161 | 1,180 | 2,359 | 2,303 | ||||||||||||
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Income (Loss) Before Income Taxes | 48 | (86 | ) | 113 | (99 | ) | ||||||||||
Provision (Benefit) for Income Taxes | 5 | (54 | ) | 14 | (68 | ) | ||||||||||
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Net Income (Loss) | $ | 43 | $ | (32 | ) | $ | 99 | $ | (31 | ) | ||||||
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Earnings (Loss) Per Share (Note 5) | ||||||||||||||||
Basic | $ | .06 | $ | (.04 | ) | $ | .14 | $ | N/A | |||||||
Diluted | .06 | (.04 | ) | .14 | N/A |
See accompanying notes to the unaudited consolidated financial statements.
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HARVARD ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Common Stock | Additional Paid-In Capital | Unearned ESOP Shares | Amount Reclassified on ESOP Shares | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
For the six months ended June 30, 2011 (unaudited) | ||||||||||||||||||||||||||||
Balance, January 1, 2011 | $ | 8 | $ | 6,799 | $ | (590 | ) | $ | (26 | ) | $ | 12,399 | $ | (4 | ) | $ | 18,586 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | — | 99 | — | 99 | |||||||||||||||||||||
Change in unrealized appreciation on available-for-sale securities, net of taxes of $16 | — | — | — | — | — | 27 | 27 | |||||||||||||||||||||
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Total comprehensive income | 126 | |||||||||||||||||||||||||||
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Issuance of 31,387 shares of restricted stock (rounded to less than $1) | — | — | — | — | — | — | — | |||||||||||||||||||||
Reclassification due to change in fair value of common stock in ESOP subject to contingent repurchase obligation | — | — | — | (34 | ) | — | — | (34 | ) | |||||||||||||||||||
ESOP shares earned | — | (1 | ) | 25 | — | — | — | 24 | ||||||||||||||||||||
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Balance, June 30, 2011 | $ | 8 | $ | 6,798 | $ | (565 | ) | $ | (60 | ) | $ | 12,498 | $ | 23 | $ | 18,702 | ||||||||||||
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For the six months ended June 30, 2010 (unaudited) | ||||||||||||||||||||||||||||
Balance, January 1, 2010 | $ | — | $ | — | $ | — | $ | — | $ | 12,250 | $ | 65 | $ | 12,315 | ||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | (31 | ) | — | (31 | ) | |||||||||||||||||||
Change in unrealized appreciation on available-for-sale securities, net of tax benefit of $23 | — | — | — | — | — | (16 | ) | (16 | ) | |||||||||||||||||||
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Total comprehensive loss | (47 | ) | ||||||||||||||||||||||||||
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Common stock issued in initial public offering, 784,689 shares, net of issuance costs of $1,030 | 8 | 6,809 | — | — | — | — | 6,817 | |||||||||||||||||||||
Acquisition of ESOP shares | — | — | (628 | ) | — | — | — | (628 | ) | |||||||||||||||||||
ESOP shares earned | — | (2 | ) | 13 | — | — | — | 11 | ||||||||||||||||||||
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Balance, June 30, 2010 | $ | 8 | $ | 6,807 | $ | (615 | ) | $ | — | $ | 12,219 | $ | 49 | $ | 18,468 | |||||||||||||
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See accompanying notes to unaudited consolidated financial statements.
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HARVARD ILLINOIS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating Activities | ||||||||
Net income (loss) | $ | 99 | $ | (31 | ) | |||
Items not requiring (providing) cash | ||||||||
Depreciation | 101 | 102 | ||||||
Provision for loan losses | 296 | 432 | ||||||
Amortization (accretion) of premiums and discounts on securities | 22 | (9 | ) | |||||
Deferred income taxes | (44 | ) | (68 | ) | ||||
Net realized gains on loan sales | (47 | ) | (9 | ) | ||||
Net realized losses on sales of available-for-sale securities | — | 1 | ||||||
Loss on other than temporary impairment of equity securities | — | 6 | ||||||
Losses and write downs on foreclosed assets held for sale | 96 | 50 | ||||||
Bank-owned life insurance income, net | (68 | ) | (78 | ) | ||||
Originations of loans held for sale | (2,933 | ) | (7,540 | ) | ||||
Proceeds from sales of loans held for sale | 2,968 | 7,587 | ||||||
ESOP compensation expense | 24 | 11 | ||||||
Changes in | ||||||||
Accrued interest receivable | 220 | (249 | ) | |||||
Other assets | 113 | 740 | ||||||
Accrued interest payable | (11 | ) | (12 | ) | ||||
Deferred compensation | 37 | 42 | ||||||
Other liabilities | 106 | 29 | ||||||
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Net cash provided by operating activities | 979 | 1,004 | ||||||
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Investing Activities | ||||||||
Net (increase) decrease in interest-bearing deposits | 3,120 | (3,446 | ) | |||||
Purchases of available-for-sale securities | (1,640 | ) | (2,011 | ) | ||||
Proceeds from the sales of available-for-sale securities | — | 927 | ||||||
Proceeds from maturities and pay-downs of available-for-sale securities | 1,216 | 823 | ||||||
Proceeds from maturities and pay-downs of held-to-maturity securities | 466 | 584 | ||||||
Net change in loans | (2,744 | ) | (13,748 | ) | ||||
Purchase of premises and equipment | (38 | ) | (151 | ) | ||||
Proceeds from sale of foreclosed assets | 580 | 140 | ||||||
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Net cash provided by (used in) investing activities | 960 | (16,882 | ) | |||||
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Financing Activities | ||||||||
Net decrease in demand deposits, money market, NOW and savings accounts | (6 | ) | (2,136 | ) | ||||
Net increase (decrease) in certificates of deposit, including brokered certificates | (400 | ) | 5,751 | |||||
Net increase in advances from borrowers for taxes and insurance | 11 | 87 | ||||||
Proceeds from Federal Home Loan Bank advances | 6,100 | 2,206 | ||||||
Repayments of Federal Home Loan Bank advances | (6,566 | ) | (2,822 | ) | ||||
Proceeds from issuance of common stock, net of costs | — | 6,817 | ||||||
Stock issuance from Employee Stock Ownership Plan purchase | — | (628 | ) | |||||
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Net cash provided by (used in) financing activities | (861 | ) | 9,275 | |||||
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Net Increase (Decrease) in Cash and Cash Equivalents | 1,078 | (6,603 | ) | |||||
Cash and Cash Equivalents, Beginning of Period | 17,963 | 15,367 | ||||||
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Cash and Cash Equivalents, End of Period | $ | 19,041 | $ | 8,764 | ||||
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Supplemental Cash Flows Information | ||||||||
Interest paid | $ | 1,208 | $ | 1,567 | ||||
Income taxes paid | 65 | — | ||||||
Foreclosed assets acquired in settlement of loans | 1,321 | 404 |
Supplemental disclosure of noncash financing activities:
With the initial public offering in April 2010, the company loaned $628 to the Employee Stock Ownership Plan, which was used to acquire 62,775 shares of the Company’s common stock. The loan is secured by the shares purchased and is shown as unearned ESOP shares in the consolidated balance sheets. There were no payments on the loan during 2011.
See accompanying notes to unaudited consolidated financial statements.
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HARVARD ILLINOIS BANCORP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Dollar Amounts In thousands)
Note 1: | Basis of Financial Statement Presentation |
The consolidated financial statements include the accounts of Harvard Illinois Bancorp, Inc. (Company) and its wholly-owned subsidiaries, Harvard Savings Bank and Harvard Illinois Financial Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.
The conversion referred to in Note 2 has been accounted for in accordance with accounting principles generally accepted in the United States of America (GAAP). The consolidated balance sheets as of June 30, 2011 and December 31, 2010 and the consolidated statements of income, stockholders’ equity and cash flows for the three and six months ended June 30, 2011 are presented as results of the Company and its subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2011 and December 31, 2010, and the results of its operations for the three and six month periods ended June 30, 2011 and 2010. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 included as part of Harvard Illinois Bancorp, Inc.’s Form 10-K (File No. 000-53935) (2010 Form 10-K) filed with the Securities and Exchange Commission on March 30, 2011.
The results of operations for the six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes thereto included in the 2010 Form 10–K.
Note 2: | Conversion |
On April 8, 2010, Harvard Savings, MHC completed its conversion and reorganization from a two-tier mutual holding company to a stock holding company. In accordance with the plan of conversion adopted by the Board of Directors of Harvard Savings, MHC on July 23, 2009, Harvard Savings, MHC (the mutual holding company) and Harvard Illinois Financial Corporation (the mid-tier stock holding company) ceased to exist as separate legal entities and a stock holding company, Harvard Illinois Bancorp, Inc. issued and sold shares of common stock to eligible depositors of Harvard Savings Bank and to former borrowers of Morris Building & Loan, s.b. in a subscription offering, and to the general public in a community offering. A total of 784,689 shares, par value of $0.01 per shares, were sold in the conversion at $10 per share, raising $7.8 million of gross proceeds. The Company established an employee stock ownership plan that purchased 8% of the total shares, or a total of 62,775 shares in the offering, for a total of $627,750. $1.0 million of conversion expenses were offset against the gross proceeds. Harvard Illinois Bancorp, Inc.’s common stock began trading on the over-the-counter market under the symbol “HARI” on April 9, 2010. The consolidated financial statements include the accounts of Harvard Illinois Bancorp, Inc. and its wholly-owned subsidiaries, Harvard Savings Bank and Harvard Illinois Financial Corporation.
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Note 3: | New Accounting Pronouncements |
Recent and Future Accounting Requirements
ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption is permitted. The Company intends to adopt the methodologies prescribed by this ASU by the date required, and is continuing to evaluate the impact of adoption of this ASU.
ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements.In April, 2011, FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.
The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May, 2011, FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.
The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.
The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company is currently evaluating the impact of this standard.
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Note 4: | Stock-based Compensation |
In connection with the conversion to stock form, the Bank established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 18). The ESOP borrowed funds from the Company in an amount sufficient to purchase 62,775 shares (approximately 8% of the Common Stock issued in the stock offering). The loan is secured by the shares purchased and is being repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions are being applied to repay interest on the loan first, then the remainder are being applied to principal. The loan is expected to be repaid over a period of up to 15 years. Shares purchased with the loan proceeds are being held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants vest 100% in their accrued benefits under the employee stock ownership plan after three vesting years, with no prorated vesting prior to reaching three vesting years. Vesting is accelerated upon retirement, death or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.
Participants receive the shares at the end of employment. Because the Company’s stock is not traded on an established market, as of June 30, 2011, it is required to provide the participants in the Plan with a put option to repurchase their shares. This repurchase obligation is reflected in the Company’s financial statements in other liabilities and reduces shareholders’ equity by the estimated fair value of the earned shares.
The Company is accounting for its ESOP in accordance with ASC Topic 718,Employers Accounting for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per shares computations. Dividends, if any, on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.
A summary of ESOP shares is as follows (dollars in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Shares committed for release | 6,277 | 4,185 | ||||||
Unearned shares | 56,498 | 58,590 | ||||||
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Total ESOP shares | 62,775 | 62,775 | ||||||
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Fair value of unearned ESOP shares | $ | 540 | $ | 421 | ||||
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On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company’s common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted. Certain option awards provide for accelerated vesting if there is a change of control (as defined in the Equity Incentive Plan).
On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Of the 73,761 stock options granted, 63,167 were qualified stock options and 10,594 were nonqualified. Stock options and restricted stock vest over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At June 30, 2011, there were 4,708 shares available for future grants under this plan.
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The following table summarizes stock option activity for the six months ended June 30, 2011 (dollars in thousands):
Options | Weighted- Average Exercise Price/Share | Weighted- Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding, January 1, 2011 | — | $ | — | |||||||||||||
Granted | 73,761 | 8.10 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited | — | — | ||||||||||||||
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Outstanding, June 30, 2011 | 73,761 | $ | 8.10 | 9.98 | $ | 4 | (1) | |||||||||
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Exercisable, June 30, 2011 | 0 | $ | N/A | N/A | $ | 0 | ||||||||||
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(1) | Based on closing price of $8.15 per share on June 30, 2011. |
Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.
The weighted-average grant-date fair value of options granted during the period was $4.11. The total intrinsic value of options exercised during the period ended June 30, 2011, was $4.
The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected volatility is based on historical volatility of the Company’s stock and other factors. The expected life of the options is calculated based on the “simplified” method as provided for under Staff Accounting Bulletin No. 110. The expected term of options granted represents the period of time that options are expected to be outstanding.
The weighted-average assumptions used in the Black-Scholes option pricing model for the years indicated were as follows:
2011 | ||||
Risk-free interest rate | 2.50 | % | ||
Expected dividend yield | 0.00 | % | ||
Expected stock volatility | 46.00 | % | ||
Expected life (years) | 7.00 | |||
Fair value (not in thousands) | $ | 4.11 |
There were no options that vested during the six months ended June 30, 2011. Stock-based compensation expense and related tax benefit was considered nominal for stock options for the six months ended June 30, 2011. Total unrecognized compensation cost related to nonvested stock options was $303 at June 30, 2011 and is expected to be recognized over a weighted-average period of 5 years.
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The following table summarizes non-vested restricted stock activity for the six months ended June 30, 2011:
Shares | Weighted Average Grant-Date Fair Value | |||||||
Balance, beginning of year | — | $ | — | |||||
Granted | 31,387 | 8.10 | ||||||
Forfeited | — | — | ||||||
Earned and issued | — | — | ||||||
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Balance, end of period | 31,387 | $ | 8.10 | |||||
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The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (five years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. The weighted-average grant date fair value of restricted stock granted during the six months ended March 31, 2011 was $8.10 per share or $254. Stock-based compensation expense and related tax benefit for restricted stock was nominal and was recognized in non-interest expense for the six months ended June 30, 2011. Unrecognized compensation expense for nonvested restricted stock awards was $254 and is expected to be recognized over 5 years with a corresponding credit to paid-in capital.
Note 5: | Earnings Per Common Share (“EPS”) |
Basic and diluted earnings per common share are presented for the three-month and six-month periods ended June 30, 2011. Income per share data presented for the period ended June 30, 2010 is from the date of conversion on April 8, 2010 since there were no outstanding shares of common stock until that date. The factors used in the earnings per common share computation follow (dollars in thousands):
Three Months Ended June 30, 2011 | April 18, 2010 to June 30, 2010 | Six Months Ended June 30, 2011 | ||||||||||
Net income (loss) | $ | 43 | $ | (32 | ) | $ | 99 | |||||
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Basic weighted average shares outstanding | 784,689 | 784,689 | 784,689 | |||||||||
Less: Average unallocated ESOP shares | (56,846 | ) | (61,927 | ) | (57,369 | ) | ||||||
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Basic average shares outstanding | 727,843 | 722,762 | 727,320 | |||||||||
Diluted effect of restricted stock awards | 8 | — | 4 | |||||||||
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Diluted average shares outstanding | 727,851 | 722,762 | 727,324 | |||||||||
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Basic earnings (loss) per share | $ | .06 | $ | (.04 | ) | $ | .14 | |||||
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Diluted earnings (loss) per share | $ | .06 | $ | (.04 | ) | $ | .14 | |||||
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Options to purchase 73,761 shares were outstanding at June 30, 2011, but were not included in the computation of diluted earnings per share as the options were considered antidilutive for all periods ended June 30, 2011. There were no common shares outstanding prior to April 8, 2010.
Note 6: | Securities Purchased Under Agreements to Resell |
The Company enters into purchases of securities under agreements to resell. The amounts advanced under these agreements were $16,381 and $13,896 at June 30, 2011 and December 31, 2010, respectively, and represent short-term SBA and USDA loans. The securities underlying the agreements are book-entry securities. All securities are delivered by appropriate entry into the third-party custodian’s account designated by the Company under a written custodial agreement that explicitly recognizes the Company’s interest in the securities. These agreements mature by notice by the Company or 30 days by the custodian. The Company’s policy requires that all securities purchased under agreements to resell be fully collateralized.
At June 30, 2011 and December 31, 2010, agreements to resell securities purchased were outstanding with the following entities (in thousands):
June 30, 2011 | December 31, 2010 | |||||||
BCM High Income Fund, LP | $ | 10,221 | $ | 2,000 | ||||
HEC Opportunity Fund, LLC | 2,930 | 5,800 | ||||||
Coastal Securities | — | 6,096 | ||||||
Cohen Securities Funding, LLC | 3,230 | — | ||||||
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Total | $ | 16,381 | $ | 13,896 | ||||
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Note 7: | Securities |
The amortized cost and approximate fair value of securities, together with gross unrealized gains and losses, of securities are as follows (in thousands):
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available-for-sale Securities: | ||||||||||||||||
June 30, 2011: | ||||||||||||||||
U.S. government agencies | $ | 3,963 | $ | 10 | $ | (8 | ) | $ | 3,965 | |||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 943 | 17 | (1 | ) | 959 | |||||||||||
Equity securities | 459 | 18 | — | 477 | ||||||||||||
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$ | 5,365 | $ | 45 | $ | (9 | ) | $ | 5,401 | ||||||||
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December 31, 2010: | ||||||||||||||||
U.S. Government and federal agency | $ | 3,600 | $ | — | $ | (38 | ) | $ | 3,562 | |||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 545 | 15 | — | 560 | ||||||||||||
State and political subdivisions | 372 | — | — | 372 | ||||||||||||
Equity securities | 455 | 16 | — | 471 | ||||||||||||
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$ | 4,972 | $ | 31 | $ | (38 | ) | $ | 4,965 | ||||||||
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Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Held-to-maturity Securities: | ||||||||||||||||
June 30, 2011: | ||||||||||||||||
U.S. government agencies | $ | 500 | $ | 43 | $ | — | $ | 543 | ||||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 26 | — | — | 26 | ||||||||||||
Private-label residential | 1,465 | 146 | — | 1,611 | ||||||||||||
State and political subdivisions | 100 | — | — | 100 | ||||||||||||
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$ | 2,091 | $ | 189 | $ | — | $ | 2,280 | |||||||||
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December 31, 2010: | ||||||||||||||||
U.S. Government agencies | $ | 500 | $ | 45 | $ | — | $ | 545 | ||||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 30 | — | — | 30 | ||||||||||||
Private-label residential | 1,918 | 152 | — | 2,070 | ||||||||||||
State and political subdivisions | 100 | — | — | 100 | ||||||||||||
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$ | 2,548 | $ | 197 | $ | — | $ | 2,745 | |||||||||
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The Company held no securities at June 30, 2011 or December 31, 2010 with a book value that exceeded 10% of total equity, with the exception of obligations of U.S. Treasury and other U.S. government agencies and corporations.
Available for sale equity securities consist of shares in the Shay Asset Management mutual funds, shares of FHLMC and FNMA common stock, and shares in other financial institutions. Other than temporary impairment recorded for the six month periods ended June 30, 2011 and 2010 totaled $0 and $6, respectively.
As of June 30, 2011 and December 31, 2010, the Company held investments in Shay Asset Management mutual funds with an amortized cost of $428 and $424, respectively. The investments in mutual funds are valued using available market prices. Management performed an analysis and deemed the remaining investment in the mutual funds was not other than temporarily impaired as of June 30, 2011 and December 31, 2010.
As of June 30, 2011 and December 31, 2010, the Company held investments in FNMA and FHLMC common stock with amortized cost of $11 and $11, respectively. The investments in FNMA and FHLMC common stock are valued using available market prices. The Company recorded an other-than-temporary impairment on FNMA and FHLMC common stock of $0 and $3 for the six month periods ended June 30, 2011 and 2010, respectively. Management performed an analysis and deemed the remaining investment in FNMA and FHLMC common stock was not other than temporarily impaired as of June 30, 2011 and December 31, 2010.
As of June 30, 2011 and December 31, 2010, the Company held investments in other equity securities with an amortized cost of $20 at each date. The Company recorded an other-than-temporary impairment on other equity securities of $0 and $3 for the six month periods ended June 30, 2011 and 2010, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of June 30, 2011 and December 31, 2010.
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $2,688 and $2,623 as of June 30, 2011 and December 31, 2010, respectively.
Gross gains of $0 and $1, and gross losses of $0 and $0, resulting from sales of available-for-sale securities were realized for the six month periods ended June 30, 2011 and 2010, respectively. The tax expense applicable to the net realized gain was nominal and rounds to $0.
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The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2011, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-sale | Held-to-maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Within one year | $ | 470 | $ | 471 | $ | 100 | $ | 100 | ||||||||
One to five years | 2,692 | 2,700 | 500 | 543 | ||||||||||||
Five to ten years | 801 | 794 | — | — | ||||||||||||
After ten years | — | — | — | — | ||||||||||||
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3,963 | 3,965 | 600 | 643 | |||||||||||||
Mortgage-backed securities | 943 | 959 | 1,491 | 1,637 | ||||||||||||
Equity securities | 459 | 477 | — | — | ||||||||||||
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Totals | $ | 5,365 | $ | 5,401 | $ | 2,091 | $ | 2,280 | ||||||||
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Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical cost. Total fair value of these investments at June 30, 2011 was $1,265, which is approximately 17% of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent increases in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Management believes the declines in fair value for these securities are not other-than-temporary.
The following table shows the Company’s securities’ gross unrealized losses and fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011 (in thousands):
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 794 | $ | (8 | ) | $ | — | $ | — | $ | 794 | $ | (8 | ) | ||||||||||
Mortgage-backed GSE – residential | 471 | (1 | ) | — | — | 471 | (1 | ) | ||||||||||||||||
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Total temporarily impaired securities | $ | 1,265 | $ | (9 | ) | $ | — | $ | — | $ | 1,265 | $ | (9 | ) | ||||||||||
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Note 8: | Loan Portfolio Composition |
Categories of loans include:
June 30, 2011 | December 31, 2010 | |||||||
Mortgage loans on real estate | ||||||||
One-to-four family | $ | 44,809 | $ | 45,556 | ||||
Home equity lines of credit and other 2nd mortgages | 10,983 | 11,388 | ||||||
Multi-family residential | 1,579 | 1,431 | ||||||
Commercial | 25,333 | 26,702 | ||||||
Farmland | 5,031 | 3,622 | ||||||
Construction and land development | 2,458 | 1,588 | ||||||
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Total mortgage loans on real estate | 90,193 | 90,287 | ||||||
Commercial and industrial | 4,643 | 4,751 | ||||||
Agricultural | 15,572 | 13,735 | ||||||
Purchased indirect automobile, net of dealer reserve | 5,544 | 5,893 | ||||||
Other consumer | 244 | 372 | ||||||
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116,196 | 115,038 | |||||||
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Loans in process | (6 | ) | 6 | |||||
Net deferred loan fees and costs | 6 | 6 | ||||||
Allowance for loan losses | 1,916 | 1,873 | ||||||
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Net loans | $ | 114,280 | $ | 113,153 | ||||
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The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s principal lending activity is the origination of one-to four-family residential mortgage loans but also includes, commercial real estate loans, commercial and industrial, home equity, construction, agricultural and other loans. The primary lending market is McHenry, Grundy and to a lesser extent Boone Counties in Illinois and Walworth County in Wisconsin. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
Pursuant to applicable law, the aggregate amount of loans that the Company is permitted to make to any one borrower or a group of related borrowers is generally limited to 25% of our total capital plus the allowance for loan losses.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Under our loan policy, the individual processing an application is responsible for ensuring that all documentation is obtained prior to the submission of the application to an officer for approval. An officer then reviews these materials and verifies that the requested loan meets our underwriting guidelines described below.
All one-to-four family residential loans up to $500,000, vacant land loans up to $250,000, and any consumer loans require approval of our loan committee consisting of three officers. All such loan approvals are reported at the next board meeting following said approval. All secured commercial loans, including agricultural loans, up to $1,500,000 and unsecured loans up to $250,000 must be approved by our commercial credit management committee, which currently consists of our Chief Executive Officer, Executive Vice President and our Vice President – Commercial Loan Officer. These approvals are reported at the next board meeting following said approval. All other loans must be approved by the board.
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Generally, title insurance or title searches on our mortgage loans are required as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan.
One-to-Four Family Residential Mortgage Loans
The cornerstone of our lending program has long been the origination of long-term permanent loans secured by mortgages on owner-occupied one-to-four family residences. Virtually all of the residential loans originated are secured by properties located in our market area.
Due to consumer demand in the current low market interest rate environment, many of our recent originations are 10- to 30-year fixed-rate loans secured by one-to-four family residential real estate. The Company generally originates fixed-rate one-to-four family residential loans in accordance with secondary market standards to permit their sale. During the last several years, consistent with our asset-liability management strategy, most of the fixed rate one-to-four family residential loans we originated with original terms to maturity in excess of ten years were sold in the secondary market.
During recent years, as a part of our asset/liability management policy, seven-year balloon loans with up to 30-year amortization schedules secured by one-to-four family real estate have been originated.
In order to reduce the term to repricing of the loan portfolio, adjustable-rate one-to-four family residential mortgage loans were originated. However, our ability to originate such loans is limited in the current low interest rate environment due to low consumer demand. Our current adjustable-rate mortgage loans carry interest rates that adjust annually at a margin over the one year U.S. Treasury index. Many of our adjustable-rate one-to-four family residential mortgage loans have fixed rates for initial terms of three to five years. Such loans carry terms to maturity of up to 30 years. The adjustable-rate mortgage loans currently offered by the Company generally provide for a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over the initial rate.
Although adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically reprice as interest rates increase, the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on many of our adjustable-rate loans do not adjust for the first three to five years. As a result, the effectiveness of adjustable-rate mortgage loans may be limited during periods of rapidly rising interest rates.
The Company evaluates both the borrower’s ability to make principal, interest and escrow payments and the value of the property that will secure the loan. One-to-four family residential mortgage loans do not currently include prepayment penalties, are non-assumable and do not produce negative amortization. One-to-four family residential mortgage loans customarily include due-on-sale clauses giving the Company the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage. Residential mortgage loans are originated for our portfolio with loan-to-value ratios of up to 75% for one-to-four family homes, with higher limits applicable to loans with private mortgage insurance on owner-occupied residences.
Commercial Real Estate Loans
In recent years, in an effort to enhance the yield and reduce the term to maturity of our loan portfolio, the Company has sought to increase the commercial real estate loans. Most of the commercial real estate loans have balloon loan terms of three to ten years with amortization terms of 15 to 25 years and fixed interest rates. The maximum loan-to-value ratio of the commercial real estate loans is generally 75%.
The Company considers a number of factors in originating commercial real estate loans. The qualifications and financial condition of the borrower are evaluated, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with the Company and other financial institutions are considered. In evaluating the property securing the loan, the factors considered include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). All commercial real estate loans are appraised by outside independent appraisers approved by the board of directors or by internal evaluations, where permitted by regulation. Personal guarantees are generally obtained from the principals of commercial real estate loans.
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Loans secured by commercial real estate generally are larger than one-to-four family residential loans and involve greater credit risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Repayment of these loans depends to a large degree on the results of operations and management of the properties securing the loans or the businesses conducted on such property, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of these loans makes them more difficult for management to monitor and evaluate.
Multi Family Real Estate Loans
The Company has a limited number of loans on multi-family residences in our market area. Such loans have terms and are underwritten similarly to our commercial real estate loans and are subject to similar risks.
Home Equity Loans
The Company originates variable-rate home equity lines-of-credit and, to a lesser extent, fixed- and variable-rate loans secured by liens on the borrower’s primary residence. Home equity products are generally limited to 75% of the property value less any other mortgages. Prior to 2009, home equity loans were originated up to 90% of the property value to our customers where we serviced their first lien mortgage loan. The same underwriting standards are used for home equity lines-of-credit and loans as used for one-to-four family residential mortgage loans. The home equity line-of-credit product carries an interest rate tied to the prime rate published in the Wall Street Journal. The product has a rate ceiling of 18%. Home equity loans with fixed-rate terms typically amortize over a period of up to 15 years. Home equity lines-of-credit provide for an initial draw period of up to five years, with monthly payments of interest calculated on the outstanding balance. At the end of the initial five years, the line may be paid in full or restructured at our then current home equity program.
Construction and Land Development Loans
The Company has construction loans to builders and developers for the construction of one- to four- and multi-family residential units and to individuals for the construction of their primary or secondary residence. The Company has a limited amount of land loans to developers, primarily for the purpose of developing residential subdivisions.
The application process includes a submission of plans, specifications and costs of the project to be constructed or developed. These items are used as a basis to determine the appraised value of the subject property. Loans are based on the lesser of current appraised value and/or the cost of construction (land plus building). Construction loan agreements generally provide that loan proceeds are disbursed in increments as construction progresses. Outside independent licensed appraisers or title company representatives under a construction loan escrow agreement inspect the progress of the construction of the dwelling before disbursements are made.
The Company occasionally makes loans to builders and developers “on speculation” to finance the construction of residential property where no buyer for the property has been identified. At June 30, 2011, there were no construction loans secured by a one-to-four family residential property built on speculation.
The Company has construction loans for commercial development projects such as multi-family, apartment and other commercial buildings. These loans generally have an interest-only phase during construction then convert to permanent financing. Disbursements of construction loan funds are at our discretion based on the progress of construction. The maximum loan-to-value ratio limit applicable to these loans is generally 75%.
The Company has loans to builders and developers for the development of one-to-four family lots in our market area. These loans have terms of five years or less. Land loans are generally made in amounts up to a maximum loan-to-value ratio of 65% on raw land and up to 75% on developed building lots based upon an independent appraisal. Personal guarantees are obtained for land loans.
Loans to individuals for the construction of their residences typically run for up to seven months and then convert to permanent loans. These construction loans have rates and terms comparable to one-to-four family residential loans offered. During the construction phase, the borrower pays interest only at a fixed rate. The maximum loan-to-value ratio of owner-occupied single-family construction loans is 75%. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential loans.
17
Table of Contents
Construction and land lending generally affords the Company an opportunity to receive higher origination and other loan fees. In addition, such loans are generally made for relatively short terms. Nevertheless, construction and land lending to persons other than owner-occupants is generally considered to involve a higher level of credit risk than one-to-four family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on construction projects, real estate developers and managers. In addition, the nature of these loans is such that they are more difficult to evaluate and monitor. Risk of loss on a construction or land loan is dependent largely upon the accuracy of the initial estimate of the property’s value upon completion of the project and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project with a value which is insufficient to assure full repayment and/or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage. When loan payments become due, the cash flow from the property may not be adequate to service the debt. In such cases, the Company may be required to modify the terms of the loan.
Farmland
These loans are primarily secured by farmland located in our market area. Adjustable rate farmland loans have interest rates that generally adjust every one, three or five years in accordance with a designated index and are generally amortized over 15-25 years. Fixed-rate farmland loans generally are for terms of up to 15 years, although many are amortized over longer periods, and include a balloon payment at maturity. Lending policies on such loans generally limit the maximum loan-to-value ratio to 75% of the lesser of the appraised value or purchase price of the property.
While earning higher yields on agricultural mortgage loans than on single-family residential mortgage loans, agricultural-related lending involves a greater degree of risk than single-family residential mortgage loans because of the typically larger loan amounts and potential volatility in the market. In addition, repayments on agricultural loans are substantially dependent on the successful operation of the underlying business and the value of the property collateralizing the loan, both of which are affected by many factors, such as weather and changing market prices, outside the control of the borrower. Finally, some commentators believe that the recent sharp increases in farm land prices could make a price correction more likely.
Substantially all farmland loans are underwritten to conform to agency guidelines to qualify for a government guarantee of up to 90% of the original loan amount, which in turn qualifies them to be sold to a variety of investors in the secondary market. Once the government guarantee is secured from Farmers Home Loan Administration, the guarantee covers up to 90% of any loss on the loan. Longer-term fixed-rate agricultural mortgage loans may be sold in the secondary market, which the Company services for the secondary market purchaser.
Commercial and Industrial Loans
Commercial and industrial loans and lines of credit are originated to small and medium-sized companies in our primary market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Commercial and industrial loans generally carry a floating-rate indexed to the prime rate as published in The Wall Street Journal and a one-year term. All commercial and industrial loans are secured.
When making commercial and industrial loans, the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower are considered. Commercial and industrial loans are generally secured by accounts receivable, inventory, equipment and personal guarantees.
Commercial and industrial loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. These risks are minimized through underwriting standards and personal guarantees.
18
Table of Contents
Agricultural Loans
Agricultural operating lines of credit generally have terms of one year and are secured by growing crops, livestock and equipment, and mortgages on the farmland. Intermediate-term loans have terms of 2-7 years and will be secured by machinery and equipment. Generally these loans are extended to farmers in our market area for the purchase of equipment, seed, fertilizer, insecticide and other purposes in connection with agricultural production. The maximum term for equipment secured loans is tied to the useful life of the underlying collateral but generally does not exceed 10 years. The interest rate is generally increased with respect to the longer terms loans due to the rate exposure of these loans. The amount of the commitment is based on management’s review of the borrower’s business plan, prior performance, marketability of crops, and current market prices. Recent financial statements are examined and evaluate cash flow analysis and debt-to-net worth, and liquidity ratios. Loans for crop production generally require 75% or more crop insurance coverage.
The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower’s ability to repay a loan. Many borrowers also have more than one agricultural business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan. Finally, if the Company forecloses on an agricultural commercial loan, our holding period for the collateral, if any, typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral.
Consumer Loans
The Company has secured and unsecured loans to consumers. However, during recent years, most consumer lending efforts were focused on purchases of indirect automobile loans.
In an effort to expand and diversify our loan portfolio and increase the overall yield on our loan portfolio, since 1999 the Company has purchased indirect loans on new and used automobiles located primarily in Cook County, Illinois. Although we do not separately underwrite each purchased loan, we thoroughly review the knowledge and experience of the originators’ management teams, their underwriting standards, and their historical loss rates. In 2008, we dramatically reduced new indirect automobile loan purchases based on the risk concentration in our portfolio, liquidity requirements, and current economic conditions. The Company resumed purchases in April 2011.
Under the loan purchase arrangement, on a monthly basis the seller aggregates indirect automobile loans into separate loan pools. The pools are then segregated into risk categories with each category having predefined limits as to the maximum amounts allowed. Generally, the pools are sold without recourse. The Company receives a listing of the individual loans in the pool, including loan and borrower information prior to funding the purchase but the Company is not generally permitted to substitute loans in a pool or purchase part of a pool.
The seller is responsible for dealer relationships and the monitoring of their performance. The seller performs all servicing functions including the collection of principal, interest, and fees as well as repossessions and recoveries. Thus, the Company is not involved in the sale of repossessed vehicles.
The Company performs semi-annual reviews of newly purchased loan files and review operational procedures as part of our internal audit function.
Consumer loans may entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances as well as the economy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
19
Table of Contents
The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three and six months ended June 30, 2011 and the year ended December 31, 2010:
Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 444 | $ | 147 | $ | 35 | $ | 607 | $ | 5 | $ | 293 | ||||||||||||
Provision charged to expense | 17 | (5 | ) | — | 23 | 70 | (15 | ) | ||||||||||||||||
Losses charged off | (38 | ) | — | — | (153 | ) | — | — | ||||||||||||||||
Recoveries | 42 | — | — | 31 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 465 | $ | 142 | $ | 35 | $ | 508 | $ | 75 | $ | 278 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 104 | $ | 10 | $ | — | $ | — | $ | — | $ | 241 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 361 | $ | 132 | $ | 35 | $ | 508 | $ | 75 | $ | 37 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 44,809 | $ | 10,983 | $ | 1,579 | $ | 25,333 | $ | 5,031 | $ | 2,458 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,559 | $ | 148 | $ | — | $ | — | $ | — | $ | 615 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 42,250 | $ | 10,835 | $ | 1,579 | $ | 25,333 | $ | 5,031 | $ | 1,843 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Three Months Ended June 30, 2011 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 96 | $ | 212 | $ | 72 | $ | 2 | $ | — | $ | 1,913 | ||||||||||||
Provision charged to expense | (2 | ) | 22 | 15 | 2 | — | 127 | |||||||||||||||||
Losses charged off | — | — | (9 | ) | — | — | (200 | ) | ||||||||||||||||
Recoveries | — | — | 3 | — | — | 76 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 94 | $ | 234 | $ | 81 | $ | 4 | $ | — | $ | 1,916 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 18 | $ | — | $ | 11 | $ | 1 | $ | — | $ | 385 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 76 | $ | 234 | $ | 70 | $ | 3 | $ | — | $ | 1,531 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
| �� |
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 4,643 | $ | 15,572 | $ | 5,544 | $ | 244 | $ | — | $ | 116,196 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 102 | $ | — | $ | 40 | $ | 1 | $ | — | $ | 3,465 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 4,541 | $ | 15,572 | $ | 5,504 | $ | 243 | $ | — | $ | 112,731 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 352 | $ | 150 | $ | 34 | $ | 629 | $ | 5 | $ | 291 | ||||||||||||
Provision charged to expense | 194 | (3 | ) | 1 | 11 | 70 | (13 | ) | ||||||||||||||||
Losses charged off | (125 | ) | (5 | ) | — | (163 | ) | — | — | |||||||||||||||
Recoveries | 44 | — | — | 31 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 465 | $ | 142 | $ | 35 | $ | 508 | $ | 75 | $ | 278 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 104 | $ | 10 | $ | — | $ | — | $ | — | $ | 241 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 361 | $ | 132 | $ | 35 | $ | 508 | $ | 75 | $ | 37 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 44,809 | $ | 10,983 | $ | 1,579 | $ | 25,333 | $ | 5,031 | $ | 2,458 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,559 | $ | 148 | $ | — | $ | — | $ | — | $ | 615 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 42,250 | $ | 10,835 | $ | 1,579 | $ | 25,333 | $ | 5,031 | $ | 1,843 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
Six Months Ended June 30, 2011 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 97 | $ | 206 | $ | 105 | $ | 4 | $ | — | $ | 1,873 | ||||||||||||
Provision charged to expense | (3 | ) | 28 | 11 | — | — | 296 | |||||||||||||||||
Losses charged off | — | — | (40 | ) | — | — | (333 | ) | ||||||||||||||||
Recoveries | — | — | 5 | — | — | 80 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 94 | $ | 234 | $ | 81 | $ | 4 | $ | — | $ | 1,916 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 18 | $ | — | $ | 11 | $ | 1 | $ | — | $ | 385 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 76 | $ | 234 | $ | 70 | $ | 3 | $ | — | $ | 1,531 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 4,643 | $ | 15,572 | $ | 5,544 | $ | 244 | $ | — | $ | 116,196 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 102 | $ | — | $ | 40 | $ | 1 | $ | — | $ | 3,465 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 4,541 | $ | 15,572 | $ | 5,504 | $ | 243 | $ | — | $ | 112,731 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||||||
Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 504 | $ | 83 | $ | 4 | $ | 437 | $ | 5 | $ | 74 | ||||||||||||
Provision charged to expense | (58 | ) | 102 | 30 | 397 | — | 261 | |||||||||||||||||
Losses charged off | (111 | ) | (35 | ) | — | (205 | ) | — | (44 | ) | ||||||||||||||
Recoveries | 17 | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of year | $ | 352 | $ | 150 | $ | 34 | $ | 629 | $ | 5 | $ | 291 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 60 | $ | 15 | $ | — | $ | 174 | $ | — | $ | 275 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 292 | $ | 135 | $ | 34 | $ | 455 | $ | 5 | $ | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 45,556 | $ | 11,388 | $ | 1,431 | $ | 26,702 | $ | 3,622 | $ | 1,588 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 1,206 | $ | 94 | $ | — | $ | 1,082 | $ | — | $ | 666 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 44,350 | $ | 11,294 | $ | 1,431 | $ | 25,620 | $ | 3,622 | $ | 922 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Year Ended December 31, 2010 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 120 | $ | 12 | $ | 183 | $ | 4 | $ | — | $ | 1,426 | ||||||||||||
Provision charged to expense | (28 | ) | 194 | 5 | 1 | — | 904 | |||||||||||||||||
Losses charged off | — | — | (110 | ) | (1 | ) | — | (506 | ) | |||||||||||||||
Recoveries | 5 | — | 27 | — | — | 49 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of year | $ | 97 | $ | 206 | $ | 105 | $ | 4 | $ | — | $ | 1,873 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 21 | $ | — | $ | 32 | $ | — | $ | — | $ | 577 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 76 | $ | 206 | $ | 73 | $ | 4 | $ | — | $ | 1,296 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 4,751 | $ | 13,735 | $ | 5,893 | $ | 372 | $ | — | $ | 115,038 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 99 | $ | — | $ | 126 | $ | 1 | $ | — | $ | 3,274 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 4,652 | $ | 13,735 | $ | 5,767 | $ | 371 | $ | — | $ | 111,764 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | |||||||
Balance, beginning of period | $ | 1,567 | $ | 1,426 | ||||
Provision charged to expense | 216 | 432 | ||||||
Losses charged off, net of recoveries of $8 and $31 | (180 | ) | (255 | ) | ||||
|
|
|
| |||||
Balance end of period | $ | 1,603 | $ | 1,603 | ||||
|
|
|
|
Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.
Allowance for Loan Losses
Our allowance for loan losses is the estimated amount considered necessary to reflect probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Company. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
Since a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the value of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating classified loans from the remaining loans, and then categorizing each group by type of loan. Loans within each type exhibit common characteristics including terms, collateral type, and other risk characteristics. The Company also analyzes historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations.
Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.
There have been no changes to the Company’s accounting policies or methodology from the prior periods.
22
Table of Contents
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All commercial, agricultural and land development loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:
Pass –Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.
Watch –Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard –Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful –Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.
The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2011 and December 31, 2010:
June 30, 2011 | ||||||||||||||||||||||||
Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Pass | $ | 40,123 | $ | 10,555 | $ | 594 | $ | 22,113 | $ | 5,031 | $ | 1,393 | ||||||||||||
Watch | 976 | 155 | — | 2,868 | — | 450 | ||||||||||||||||||
Special Mention | 1,151 | 125 | 985 | 352 | — | — | ||||||||||||||||||
Substandard | 2,559 | 148 | — | — | — | 615 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 44,809 | $ | 10,983 | $ | 1,579 | $ | 25,333 | $ | 5,031 | $ | 2,458 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
June 30, 2011 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Total | ||||||||||||||||||||
Pass | $ | 3,293 | $ | 15,572 | $ | 5,504 | $ | 242 | $ | 104,420 | ||||||||||||||
Watch | 1,058 | — | — | 1 | 5,508 | |||||||||||||||||||
Special Mention | 190 | — | — | — | 2,803 | |||||||||||||||||||
Substandard | 102 | — | 40 | 1 | 3,465 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 4,643 | $ | 15,572 | $ | 5,544 | $ | 244 | $ | 116,196 | ||||||||||||||
|
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|
|
|
|
|
|
|
|
23
Table of Contents
December 31, 2010 | ||||||||||||||||||||||||
Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Pass | $ | 42,997 | $ | 11,026 | $ | 443 | $ | 22,275 | $ | 3,622 | $ | 472 | ||||||||||||
Watch | 194 | 142 | — | 2,903 | — | 450 | ||||||||||||||||||
Special Mention | 1,159 | 126 | 988 | 442 | — | — | ||||||||||||||||||
Substandard | 1,206 | 94 | — | 1,082 | — | 666 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 45,556 | $ | 11,388 | $ | 1,431 | $ | 26,702 | $ | 3,622 | $ | 1,588 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
December 31, 2010 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Total | ||||||||||||||||||||
Pass | $ | 3,504 | $ | 13,735 | $ | 5,767 | $ | 370 | $ | 104,211 | ||||||||||||||
Watch | 1,089 | — | — | 1 | 4,779 | |||||||||||||||||||
Special Mention | 59 | — | — | — | 2,774 | |||||||||||||||||||
Substandard | 99 | — | 126 | 1 | 3,274 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 4,751 | $ | 13,735 | $ | 5,893 | $ | 372 | $ | 115,038 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
The accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at the earlier date if collection of principal and interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual or charged-off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following tables present the Company’s loan portfolio aging analysis as of June 30, 2011 and December 31, 2010:
June 30, 2011 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loans Receivable | Total Loans > 90 Days & Accruing | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
One-to-four family | $ | 2,659 | $ | 696 | $ | 2,138 | $ | 5,493 | $ | 39,316 | $ | 44,809 | $ | — | ||||||||||||||
Home equity lines of credit and other 2nd mortgages | 99 | 61 | 127 | 287 | 10,696 | 10,983 | — | |||||||||||||||||||||
Multi-family | — | — | — | — | 1,579 | 1,579 | — | |||||||||||||||||||||
Commercial | 229 | 75 | — | 304 | 25,029 | 25,333 | — | |||||||||||||||||||||
Farmland | — | — | — | — | 5,031 | 5,031 | — | |||||||||||||||||||||
Construction and land development | — | — | — | — | 2,458 | 2,458 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total real estate loans | 2,987 | 832 | 2,265 | 6,084 | 84,109 | 90,193 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Commercial and industrial | — | 25 | 5 | 30 | 4,613 | 4,643 | — | |||||||||||||||||||||
Agriculture | — | — | — | — | 15,572 | 15,572 | — | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Purchased indirect automobile | 34 | 6 | — | 40 | 5,504 | 5,544 | — | |||||||||||||||||||||
Other | — | 1 | 1 | 2 | 242 | 244 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer loans | 34 | 7 | 1 | 42 | 5,746 | 5,788 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,021 | $ | 864 | $ | 2,271 | $ | 6,156 | $ | 110,040 | $ | 116,196 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Table of Contents
December 31, 2010 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Loans Receivable | Total Loans > 90 Days & Accruing | ||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||
One-to-four family | $ | 1,708 | $ | 193 | $ | 1,206 | $ | 3,107 | $ | 42,449 | $ | 45,556 | $ | — | ||||||||||||||
Home equity lines of credit and other 2nd mortgages | 121 | 44 | 60 | 225 | 11,163 | 11,388 | — | |||||||||||||||||||||
Multi-family | — | — | — | — | 1,431 | 1,431 | — | |||||||||||||||||||||
Commercial | 1,216 | — | 396 | 1,612 | 25,090 | 26,702 | — | |||||||||||||||||||||
Farmland | — | — | — | — | 3,622 | 3,622 | — | |||||||||||||||||||||
Construction and land development | — | — | — | — | 1,588 | 1,588 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total real estate loans | 3,045 | 237 | 1,662 | 4,944 | 85,343 | 90,287 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Commercial and industrial | — | 77 | — | 77 | 4,674 | 4,751 | — | |||||||||||||||||||||
Agriculture | — | — | — | — | 13,735 | 13,735 | — | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Purchased indirect automobile | 70 | 24 | 33 | 127 | 5,766 | 5,893 | 17 | |||||||||||||||||||||
Other | 6 | 1 | 1 | 8 | 364 | 372 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer loans | 76 | 25 | 34 | 135 | 6,130 | 6,265 | 17 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 3,121 | $ | 339 | $ | 1,696 | $ | 5,156 | $ | 109,882 | $ | 115,038 | $ | 17 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 and December 31, 2010, the Company held $15,572 and $13,735 in agricultural production loans and $5,031 and $3,622, respectively in agricultural real estate loans in the Company’s geographic lending area. Generally, those loans are collateralized by assets of the borrower. The loans are expected to be repaid from cash flows or from proceeds of sale of related assets of the borrower. Declines in prices for corn, beans, livestock and farm land could significantly affect the repayment ability for many agricultural loan customers.
At June 30, 2011 and December 31, 2010, the Company held $25,333 and $26,702 in commercial real estate loans and $2,458 and $1,588 in loans collateralized by construction and development real estate primarily in the Company’s geographic lending area. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.
Loans contractually delinquent 90 days or more increased $575,000 from December 31, 2010 to $2.3 million at June 30, 2011 primarily as a result of additional one-to-four family real estate loans of $932,000.
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.
The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.
The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are classified as impaired.
25
Table of Contents
The following tables present impaired loans at June 30, 2011 and December 31, 2010:
June 30, 2011 | ||||||||||||
(Dollars in thousands) | ||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | ||||||||||
Loans without a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 1,456 | $ | 1,527 | $ | — | ||||||
Home equity lines of credit and other 2nd mortgages | 128 | 138 | — | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 1,584 | 1,665 | — | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | 5 | 5 | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Purchased indirect automobile | — | — | — | |||||||||
Other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total loans | $ | 1,589 | $ | 1,670 | $ | — | ||||||
|
|
|
|
|
| |||||||
Loans with a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 1,103 | $ | 1,103 | $ | 104 | ||||||
Home equity lines of credit and other 2nd mortgages | 20 | 20 | 10 | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | 615 | 657 | 241 | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 1,738 | 1,780 | 355 | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | 97 | 97 | 18 | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Purchased indirect automobile | 40 | 40 | 11 | |||||||||
Other | 1 | 1 | 1 | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | 41 | 41 | 12 | |||||||||
|
|
|
|
|
| |||||||
Total loans | 1,876 | 1,918 | 385 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 3,465 | $ | 3,588 | $ | 385 | ||||||
|
|
|
|
|
|
26
Table of Contents
Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Loans without a specific allowance | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | $ | 1,105 | $ | 1,162 | $ | 8 | $ | 21 | ||||||||
Home equity lines of credit and other 2nd mortgages | 91 | 94 | 1 | 2 | ||||||||||||
Multi-family | — | — | — | — | ||||||||||||
Commercial | — | — | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Construction and land development | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total real estate loans | 1,196 | 1,256 | 9 | 23 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Commercial and industrial | 2 | 2 | — | — | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Purchased indirect automobile | — | — | — | — | ||||||||||||
Other | 1 | 1 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer loans | 1 | 1 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total loans | $ | 1,199 | $ | 1,259 | $ | 9 | $ | 23 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loans with a specific allowance | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | $ | 606 | $ | 721 | $ | 10 | $ | 16 | ||||||||
Home equity lines of credit and other 2nd mortgages | 31 | 27 | — | — | ||||||||||||
Multi-family | — | — | — | — | ||||||||||||
Commercial | 713 | 541 | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Construction and land development | 653 | 640 | 9 | 9 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total real estate loans | 2,003 | 1,929 | 19 | 25 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Commercial and industrial | 98 | 98 | 1 | 2 | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Purchased indirect automobile | 86 | 83 | — | 1 | ||||||||||||
Other | 1 | 1 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer loans | 87 | 84 | 1 | 1 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total loans | 2,188 | 2,111 | 21 | 28 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 3,387 | $ | 3,370 | $ | 30 | $ | 51 | ||||||||
|
|
|
|
|
|
|
|
27
Table of Contents
December 31, 2010 | ||||||||||||
(Dollars in thousands) | ||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | ||||||||||
Loans without a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 867 | $ | 905 | $ | — | ||||||
Home equity lines of credit and other 2nd mortgages | 60 | 70 | — | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 927 | 975 | — | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | — | — | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Purchased indirect automobile | — | — | — | |||||||||
Other | 1 | 1 | — | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | 1 | 1 | — | |||||||||
|
|
|
|
|
| |||||||
Total loans | $ | 928 | $ | 976 | $ | — | ||||||
|
|
|
|
|
| |||||||
Loans with a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 339 | $ | 352 | $ | 60 | ||||||
Home equity lines of credit and other 2nd mortgages | 34 | 34 | 15 | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | 1,082 | 1,277 | 174 | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | 666 | 708 | 275 | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 2,121 | 2,371 | 524 | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | 99 | 99 | 21 | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Purchased indirect automobile | 126 | 126 | 32 | |||||||||
Other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | 126 | 126 | 32 | |||||||||
|
|
|
|
|
| |||||||
Total loans | 2,346 | 2,596 | 577 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 3,274 | $ | 3,572 | $ | 577 | ||||||
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Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.
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Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. At June 30, 2011 and December 31, 2010, the Company had $0 and $686 of commercial real estate loans and one-to-four-family real estate loans of $427 and $0 that were modified in troubled debt restructurings and impaired that were considered nonperforming. The Company had troubled debt restructurings that were performing in accordance with their modified terms of $615 and $666 of residential land development loans at June 30, 2011 and December 31, 2010. At June 30, 2011 and December 31, 2010, the Company had $421 and $0 of one-to-four family real estate loans that were modified in troubled debt restructuring and were performing in accordance with their modified terms.
The following table presents the Company’s nonaccrual loans at June 30, 2011 and December 31, 2010. This table excludes performing troubled debt restructurings.
June 30, 2011 | December 31, 2010 | |||||||
Mortgages on real estate: | ||||||||
One-to-four family | $ | 2,559 | $ | 1,206 | ||||
Home equity lines of credit and other 2nd mortgages | 148 | 94 | ||||||
Commercial | — | 1,082 | ||||||
Construction and land development | 615 | 666 | ||||||
Commercial and industrial | 102 | 99 | ||||||
Purchased indirect automobile | — | 16 | ||||||
Other consumer | 1 | 1 | ||||||
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Total | $ | 3,425 | $ | 3,164 | ||||
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Note 9: | Federal Home Loan Bank Stock |
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned $6,549 or 65,489 shares of Federal Home Loan Bank stock as of June 30, 2011 and December 31, 2010. The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from its regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances. With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and make appropriate request for approval. The FHLB did not pay a dividend in 2010; however, in 2011 the FHLB has twice declared and paid quarterly dividends at an annualized rate of 10 basis points per share, totaling $3 for the six months ended June 30, 2011. Management performed an analysis as of June 30, 2011 and December 31, 2010 and deemed the cost method investment in FHLB stock was ultimately recoverable.
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Note 10: | Accumulated Other Comprehensive Income (Loss) |
Other comprehensive income (loss) components and related taxes were as follows (in thousands):
Six Months Ended June, | ||||||||
2011 | 2010 | |||||||
Net unrealized gains (losses) on securities available-for-sale | $ | 43 | $ | (46 | ) | |||
Less reclassification adjustment for realized losses on sales of securities included in income | — | (1 | ) | |||||
Less reclassification adjustment for loss on other than temporary impairment of equity securities | — | (6 | ) | |||||
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Other comprehensive loss, before tax effect | 43 | (39 | ) | |||||
Less income tax expense (benefit) | 16 | (23 | ) | |||||
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Other comprehensive income (loss) | $ | 27 | $ | (16 | ) | |||
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The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows (in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Net unrealized gain (loss) on securities available-for-sale | $ | 36 | $ | (7 | ) | |||
Tax effect | 13 | (3 | ) | |||||
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Net-of-tax amount | $ | 23 | $ | (4 | ) | |||
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Note 11: | Income Taxes |
A reconciliation of the income tax expense (benefit) at the statutory rate to the Company’s actual income tax expense (benefit) is shown below (in thousands):
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Computed at the statutory rate (34%) | $ | 38 | $ | (34 | ) | |||
Decrease resulting from | ||||||||
Tax exempt interest | (2 | ) | (4 | ) | ||||
Nondeductible expenses | 1 | 1 | ||||||
Cash surrender value of life insurance | (23 | ) | (26 | ) | ||||
Other | — | (5 | ) | |||||
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Actual expense (benefit) | $ | 14 | $ | (68 | ) | |||
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Tax benefit as a percentage of pre-tax income (loss) | 12.39 | % | (68.69 | )% | ||||
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Note 12: | Disclosures About Fair Value of Assets and Liabilities |
ASC Topic 820, Fair Value Measurements (FAS 157) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities | |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities | |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities in FNMA and FHLMC common stock as well as shares in publicly traded financial institutions. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE - residential), municipal securities, and mutual funds. Municipal securities are generally priced using a matrix pricing model. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. These securities include municipal securities with no observable market inputs.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010 (in thousands):
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
June 30, 2011: | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
US Government and federal agency | $ | 3,965 | $ | — | $ | 3,965 | $ | — | ||||||||
Mortgage-backed securities – GSE residential | 959 | — | 959 | — | ||||||||||||
Equity securities | 477 | 23 | 454 | — | ||||||||||||
Mortgage servicing rights | 437 | — | — | 437 |
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Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
December 31, 2010: | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
US Government and federal agency | $ | 3,562 | $ | — | $ | 3,562 | $ | — | ||||||||
Mortgage-backed securities – GSE residential | 560 | — | 560 | — | ||||||||||||
State and political subdivisions | 372 | — | — | 372 | ||||||||||||
Equity securities | 471 | 23 | 438 | — | ||||||||||||
Mortgage servicing rights | 425 | — | — | 425 |
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs (in thousands):
Available-for- sale Securities | Mortgage Servicing Rights | |||||||
Balance, January 1, 2011 | $ | 372 | $ | 425 | ||||
Total realized and unrealized gains and losses included in net income | — | 15 | ||||||
Servicing rights that result from asset transfers | — | 15 | ||||||
Loans refinanced | — | (18 | ) | |||||
Maturity of securities | (372 | ) | — | |||||
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Balance, June 30, 2011 | $ | — | $ | 437 | ||||
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Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date | $ | — | $ | — | ||||
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Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amounts of impairment include estimating fair value include using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy. Fair value adjustments on impaired loans were $1,127 at June 30, 2011 compared to $38 at December 31, 2010.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
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Foreclosed Assets
Foreclosed assets consist primarily of real estate owned. Real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the real estate owned or foreclosed asset could differ from the original estimate and are classified within Level 3 of the fair value hierarchy.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010 (in thousands):
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
June 30, 2011: | ||||||||||||||||
Impaired loans (collateral dependent) | $ | 3,080 | $ | — | $ | — | $ | 3,080 | ||||||||
Foreclosed assets | 940 | — | — | 940 | ||||||||||||
December 31, 2010: | ||||||||||||||||
Impaired loans (collateral dependent) | $ | 1,953 | $ | — | $ | — | $ | 1,953 |
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents, Interest-Bearing Deposits with Other Institutions, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable and Advances from Borrowers for Taxes and Insurance
The carrying amount approximates fair value.
Held-to-maturity Securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these types of deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.
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Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements, or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010 (in thousands).
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 19,041 | $ | 19,041 | $ | 17,963 | $ | 17,963 | ||||||||
Interest-bearing deposits | 7,705 | 7,705 | 10,825 | 10,825 | ||||||||||||
Available-for-sale securities | 5,401 | 5,401 | 4,965 | 4,965 | ||||||||||||
Held-to-maturity securities | 2,091 | 2,280 | 2,548 | 2,745 | ||||||||||||
Loans, net of allowance for loan losses | 114,280 | 116,123 | 113,153 | 114,607 | ||||||||||||
Federal Home Loan Bank stock | 6,549 | 6,549 | 6,549 | 6,549 | ||||||||||||
Mortgage servicing rights | 437 | 437 | 425 | 425 | ||||||||||||
Interest receivable | 681 | 681 | 901 | 901 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | 132,216 | 132,167 | 132,622 | 132,037 | ||||||||||||
Federal Home Loan Bank advances | 13,187 | 13,620 | 13,653 | 14,130 | ||||||||||||
Advances from borrowers for taxes and insurance | 413 | 413 | 402 | 402 | ||||||||||||
Interest payable | 42 | 42 | 53 | 53 | ||||||||||||
Unrecognized financial instruments (net of contract amount) | ||||||||||||||||
Commitments to originate loans | 0 | 0 | 0 | 0 | ||||||||||||
Letters of credit | 0 | 0 | 0 | 0 | ||||||||||||
Lines of credit | 0 | 0 | 0 | 0 |
Note 13: | Commitments |
Commitments to Originate Loans
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
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Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
Note 14: | Defined Benefit Retirement Plan |
The Company has elected to freeze its defined benefit retirement plan. Effective July 1, 2010, all benefit accruals under the plan ceased.
Note 15: | Regulatory Matters |
Effective September 2, 2010, the Board of Directors of the Company entered into a memorandum of understanding (the “MOU”) with the Office of Thrift Supervision (the “OTS”). The MOU, which is an informal enforcement action, requires the Company to take a number of actions, including among other things:
(A) | review the business plan of its subsidiary, Harvard Savings Bank, and provide the OTS with a written compliance report identifying any instances of Bank’s material non-compliance with its business plan and establishing a target date for correcting any such non-compliance or indicating that a new business plan will be submitted; |
(B) | submit a capital plan (the “Capital Plan”) which shall include, among other things, a minimum tangible capital ratio commensurate with the Company’s consolidated risk profile, capital preservation strategies to achieve and maintain the Board-established minimum tangible equity capital ratio, operating strategies to achieve net income levels that will result in adequate cash flow throughout the term of the Capital Plan, and quarterly pro forma consolidated and unconsolidated financial statements for the period covered by the Capital Plan; |
(C) | submit any material modifications to the Capital Plan to the OTS for its non-objection; |
(D) | update the Capital Plan on an annual basis; |
(E) | prepare and submit quarterly reports comparing projected operating results contained in the Capital Plan to actual results; |
(F) | implement a risk management program which shall, among other things, appoint one or more individuals responsible for implementing and maintaining the program, clearly define the duties of the appointed individual(s), and identify the means and methods to be used to identify and monitor significant risks and trends impacting the Company’s consolidated risk and compliance profile; |
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(G) | to not declare or pay any dividends or purchase, repurchase, or redeem, or commit to purchase, repurchase, or redeem any Company stock without the prior written non-objection of the OTS; and |
(H) | to not incur any additional debt at the holding company without the prior written non-objection of the OTS. |
The Company has taken the relevant actions to comply with the terms of the agreement and believes it will be able to maintain compliance, although compliance will be determined by the Federal Reserve Board (FRB) which now supervises the Company, and not by the Company. The requirements of the MOU will remain in effect until the FRB decides to terminate, suspend or modify it.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes thereto.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These 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 asset quality of our loan and investment portfolios; and |
• | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
• | general economic conditions (including real estate values, loan demand and employment levels), either nationally or in our market areas, that are different than expected; |
• | competition among depository and other financial institutions; |
• | our ability to improve our asset quality even as we increase our non-residential lending; |
• | our success in increasing our commercial real estate and commercial business lending, including agricultural lending; |
• | changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments and real estate; |
• | adverse changes in the securities markets; |
• | changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees, capital requirements and consumer protection measures, which increase our compliance costs; |
• | our ability to enter new markets successfully and capitalize on growth opportunities; |
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• | our ability to successfully grow our Morris operations; |
• | changes in consumer spending, borrowing and savings habits; |
• | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board; |
• | changes in our organization, compensation and benefit plans; |
• | loan delinquencies and changes in the underlying cash flows of our borrowers; |
• | changes in our financial condition or results of operations that reduce capital available to pay dividends; and |
• | changes in the financial condition or future prospects of issuers of securities that we own, including our stock in the FHLB of Chicago. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
OVERVIEW
Harvard Illinois Bancorp, Inc. (Company) is a savings and loan holding company and is subject to regulation by the Federal Reserve Board. The Company’s business activities are limited to oversight of its investment in Harvard Savings Bank (Bank).
The Bank is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in McHenry, Grundy, and to a lesser extent Boone counties, Illinois and Walworth County in Wisconsin. The Bank is subject to regulation by the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation.
On April 8, 2010, the Company reorganized from a two-tier mutual holding company to a stock holding company and completed its initial public offering. A total of 784,689 shares, par value of $0.01 per share, were sold at $10 per share, raising $6.8 million of proceeds, net of conversion expenses. The Company established an employee stock ownership plan that purchased 8% of the total shares, or a total of 62,775 shares in the offering, for a total of $627,750. The Company’s common stock began trading on the over-the-counter market under the symbol “HARI” on April 9, 2010.
On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company’s common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.
On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Stock options and restricted stock vest over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued. At June 30, 2011, there were 4,708 shares available for future grants under this plan.
On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions.
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Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, net realized gains on loan sales, loan servicing fees, and net income on bank-owned life insurance, offset by impairment charges on securities. Noninterest expense consists primarily of compensation and benefits, occupancy, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, indirect automobile servicing fees, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
The national economy, and the local economies within our market areas, remain weak. The economy has been marked by high unemployment rates, rising numbers of foreclosures, and contractions in business and consumer credit. The national and local unemployment rates have shown some improvement in 2010 and 2011, but remain high. These conditions have had a significant negative impact on real estate and related industries, which has led to decreases in commercial and residential real estate sales, construction and property values. We have experienced high levels of non-performing loans and net charge-offs. At June 30, 2011, non-performing loans, including troubled debt restructurings, represented 3.49% of total loans, compared to 2.77% at December 31, 2010. Annualized net charge-offs to average loans were 0.44% and 0.43%, for the six months ended June 30, 2011 and 2010, respectively. The high levels of non-performing loans, including troubled debt restructurings, and net charge-offs resulted in provisions for loan losses of $296,000 and $432,000 for the six months ended June 30, 2011 and 2010, respectively.
Should the housing market and economic conditions in our market area stagnate or continue to deteriorate, it will continue to have a material negative effect on the Company’s business and results of operation.
At June 30, 2011, the Bank was categorized as “well capitalized” under regulatory capital requirements.
As further discussed in Note 15 to the financial statements and footnotes included herein, the Company entered into a memorandum of understanding (the “MOU”) with the Office of Thrift Supervision (the “OTS”) in 2010. Among other provisions, this informal enforcement action prohibits the Company from declaring or paying dividends, or repurchasing any Company stock without the prior written non-objection of the OTS. The Company has taken the relevant actions to comply with the terms of the agreement and believes it will be able to maintain compliance. The requirements of the MOU will remain in effect until the Federal Reserve Board which now supervises the Company decides to terminate, suspend or modify it.
Our net income for the quarter ended June 30, 2011 was $43,000, compared to our net loss of $(32,000) for the quarter ended June 30, 2010. The increase in net income was due to an increase in net interest income, and decreases in the provision for loan losses and noninterest expense, partially offset by an increase in the provision for income taxes and a decrease in noninterest income, respectively.
Our net income for the six months ended June 30, 2011 was $99,000, compared to our net loss of $(31,000) for the six months ended June 30, 2010. The increase in net income was due to increases in net interest income and noninterest income, and a decrease in the provision for loan losses, partially offset by increases in noninterest expense and the provision for income taxes, respectively.
The following discussion compares the financial condition of Harvard Illinois Bancorp, Inc. and its wholly owned subsidiaries, Harvard Savings Bank and Harvard Illinois Financial Corporation at June 30, 2011 to its financial condition at December 31, 2010, and the results of operations for the three months and six months ended June 30, 2011 to the same periods in 2010. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.
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CRITICAL ACCOUNTING POLICIES AND USE OF SIGNIFICANT ESTIMATES
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes the following discussion addresses our most critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Allowance for Loan Losses.Our allowance for loan losses is the estimated amount considered necessary to reflect probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for the Company. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
Since a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the value of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating classified loans from the remaining loans, and then categorizing each group by type of loan. Loans within each type exhibit common characteristics including terms, collateral type, and other risk characteristics. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. The Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
Other Real Estate Owned. Other real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the property is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a charge to operations through noninterest expense is recorded. Operating costs associated with the asset after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense.
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Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Additionally, we review our uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not” test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.
FINANCIAL CONDITION
Comparison of Financial Condition at June 30, 2011 and December 31, 2010
Total assets at June 30, 2011 decreased $579,000 or 0.4% to $167.2 million from $167.8 million at December 31, 2010. This decrease was primarily the result of a decrease in interest-bearing deposits with other financial institutions of $3.1 million at June 30, 2011, offset by increases in cash and cash equivalents of $1.1 million, loans of $1.1 million and foreclosed assets held for sale of $645,000.
Cash and cash equivalents increased $1.1 million to $19.0 million at June 30, 2011 from $18.0 million at December 31, 2010 primarily due to an increase of $2.5 million in securities purchased under agreements to resell. The increase in cash and cash equivalents was primarily due to the reinvestment of liquidity generated by the decreases in interest-bearing deposits with other financial institutions, offset by the funding loans and the decreases in deposits and Federal Home Loan Bank advances.
Loans, net increased $1.1 million to $114.3 million at June 30, 2011 from $113.2 million at December 31, 2010. During the first half of 2011, loan originations, advances and purchases were $25.7 million, which were offset by $2.9 million in loans sold, $20.0 million of loan repayments and payoffs, net of $333,000 in charge-offs, a net increase in allowance for loan losses of $43,000 and transfers to foreclosed assets of $1.3 million. Foreclosed assets held for sale at June 30, 2011 increased $645,000 to $1.4 million from $767,000 at December 31, 2010 primarily due to the $1.3 million transfer from the loan portfolio during the six months ended June 30, 2011, offset partially by sales which provided for net proceeds totaling $580,000, and writedowns of $86,000 as a result of a decline in certain property values. Based on recent appraisals and sales contract negotiations, management believes the properties are recorded at fair value less costs to sell as of June 30, 2011. Other assets decreased $113,000 to $551,000 at June 30, 2011 from $664,000 at December 31, 2010 due to amortization of prepaid federal deposit insurance premiums.
Total liabilities at June 30, 2011 were $148.5 million, a decrease of $695,000, or 0.5%, compared to $149.2 million at December 31, 2010. The change was due primarily to decreases in deposits of $406,000 and Federal Home Loan Bank advances of $466,000 at June 30, 2011. Deposits decreased modestly as we continued to follow our pricing discipline in a competitive environment to lower our cost of funds. The decrease in Federal Home Loan Bank advances was due to our plan to reduce reliance on borrowed funds by maintaining sufficient liquidity levels to allow these advances to mature without renewal.
Total stockholders’ equity increased by $116,000 during the first half of 2011 to $19.0 million at June 30, 2011. The increase was primarily due to net income of $99,000 for the six months ended June 30, 2011, and by an increase in accumulated other comprehensive income of $27,000 due to an increase in the market value of securities available for sale.
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RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010
General. Net income for the three months ended June 30, 2011 was $43,000, compared to net loss of $(32,000) for the three months ended June 30, 2010, an increase in net income of $75,000. The increase in net income was due to an increase in net interest income of $45,000, and decreases in the provision for loan losses and noninterest expense of $89,000 and $19,000, respectively, partially offset by a decrease in noninterest income of $19,000, and an increase in the provision for income taxes of $59,000.
Interest and Dividend Income. Total interest and dividend income decreased $146,000 or 7.5% to $1.8 million for the three months ended June 30, 2011 from $1.9 million for the same period in 2010. Although average interest-earning assets increased $2.8 million to $156.7 million for the three months ended June 30, 2011 from $153.9 million for the same quarter in 2010, the average yield decreased 46 basis points to 4.59% from 5.05%. This decrease reflected the lower reinvestment rates and the reallocation of interest-earning assets between asset categories and the decreases in yield on those assets during the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010. Interest and fees on loans decreased $150,000 during the period as the average balance of loans decreased $10.0 million to $113.7 million primarily due to repayments and sales of loans outpacing originations and purchases, and the lower average yield on loans, which decreased 2 basis points to 5.83% from 5.85%. Interest income on securities and other interest-earning assets increased $4,000 for the three months ended June 30, 2011 compared to the year ago period as average balances increased $12.8 million, primarily due to soft loan demand, and the average yield on those assets decreased 50 basis points to 1.29% from 1.79%, due to the lower interest rate environment.
Interest Expense. Total interest expense decreased $191,000 or 24.8% to $580,000 for the three months ended June 30, 2011 from $771,000 for the same period in 2010. Interest expense on deposit accounts decreased $135,000 or 22.2% to $473,000 for the three months ended June 30, 2011 from $608,000 for the same period in 2010. This decrease was primarily due to a decrease in interest expense on certificates of deposit and brokered certificate accounts of $113,000 during the period while interest expense on savings, NOW and money market accounts decreased $22,000. The average balances of savings, NOW and money market accounts increased $2.9 million while the cost of these deposits decreased 21 basis points to 0.30% during the three months ended June 30, 2011 from the three months ended June 30, 2010. The average balance in certificates of deposits and brokered certificates of deposit increased $2.0 million, with the cost of these deposits decreasing 64 basis points. The movement in deposit accounts and reduction in the cost of these funds was the result of our competitive pricing and the declining market interest rates for deposits.
Interest expense on Federal Home Loan Bank advances decreased $56,000 to $107,000 for the three months ended June 30, 2011 from $163,000 for the three months ended June 30, 2010. The average balance of advances decreased $3.0 million while the average cost of this funding decreased 77 basis points for the three months ended June 30, 2011 from the comparable period in 2010. The decrease in the average balance of advances was due to adhering to our capital and liquidity plans to lessen our reliance on advances. The decrease in the cost of these funds was a reflection of the lower market interest rate environment in 2011 compared to 2010.
Net Interest Income. Net interest income increased $45,000 or 3.8% to $1.22 million for the three months ended June 30, 2011 from $1.17 million for the three months ended June 30, 2010, primarily as a result of an increase in our net interest rate spread of 11 basis points to 2.96% from 2.85%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 110.41% for the three months ended June 30, 2011 from 109.88% for the same period in 2010. Our net interest margin also increased to 3.11% from 3.05%. The increases in our net interest rate spread and net interest margin reflected the more rapid repricing of all deposit products at lower rates, and the maturity of higher cost fixed –rate fixed –term Federal Home Loan Bank advances.
Provision for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We evaluate the allowance for loan losses on a regular basis and the provision is based upon our periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
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A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The factors we considered in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar loan characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements.
Based upon our evaluation of these factors, a provision of $127,000 was recorded for the three months ended June 30, 2011, a decrease of $89,000 or 41.2% from $216,000 for the three months ended June 30, 2010. The provision for loan losses reflected net charge offs of $124,000 for the three months ended June 30, 2011, compared to $180,000 for the three months ended June 30, 2010. The allowance for loan losses was $1.9 million, or 1.65% of total loans at June 30, 2011, compared to $1.9 million, or 1.63% of total loans at December 31, 2010. At June 30, 2011, we had identified substandard loans totaling $3.5 million, all of which were considered impaired, and established an allowance for loan losses of $385,000. At December 31, 2010, we considered all substandard loans totaling $3.3 million impaired and established an allowance for loan losses of $577,000. We used the same methodology in assessing the allowance for each period.
The allowance as a percent of nonperforming loans decreased to 55.94% at June 30, 2011 from 67.64% at June 30, 2010, primarily due to a 41.7% increase in nonperforming loans to $3.4 million at June 30, 2011, compared to $2.4 million at June 30, 2010. Net charge-offs as a percent of average total loans outstanding decreased to 0.44% for the quarter ended June 30, 2011 from 0.58% for the same quarter in 2010, due to a decrease in net charge-offs of $56,000 to $124,000, partially offset by a $10.0 million decrease in average loans outstanding to $113.7 million.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended June 30, 2011 and 2010, respectively.
The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each loan category to the total allowance, and the percent of loans in each loan category to total loans as of June 30, 2011 and December 31, 2010 (dollars in thousands).
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
Amount | Percent of Allowance to Total Allowance | Percent of Loans in Category to Total Loans | Amount | Percent of Allowance to Total Allowance | Percent of Loans in Category to Total Loans | |||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||
One-to-four-family | $ | 465 | 24.27 | % | 38.55 | % | $ | 352 | 18.79 | % | 39.60 | % | ||||||||||||
Home equity line of credit and other 2nd mortgage | 142 | 7.41 | 9.45 | 150 | 8.01 | 9.90 | ||||||||||||||||||
Multi-family | 35 | 1.83 | 1.36 | 34 | 1.82 | 1.24 | ||||||||||||||||||
Commercial | 508 | 26.51 | 21.80 | 629 | 33.58 | 23.21 | ||||||||||||||||||
Farmland | 75 | 3.91 | 4.33 | 5 | 0.26 | 3.15 | ||||||||||||||||||
Construction and land development | 278 | 14.51 | 2.12 | 291 | 15.54 | 1.38 | ||||||||||||||||||
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Total real estate loans | 1,503 | 78.44 | 77.61 | 1,461 | 78.00 | 78.48 | ||||||||||||||||||
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Commercial and industrial | 94 | 4.91 | 4.00 | 97 | 5.18 | 4.13 | ||||||||||||||||||
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Agriculture | 234 | 12.21 | 13.41 | 206 | 11.00 | �� | 11.94 | |||||||||||||||||
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Consumer loans: | ||||||||||||||||||||||||
Purchased indirect automobile | 81 | 4.23 | 4.77 | 105 | 5.61 | 5.13 | ||||||||||||||||||
Other | 4 | 0.21 | 0.21 | 4 | 0.21 | 0.32 | ||||||||||||||||||
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Total consumer loans | 85 | 4.44 | 4.98 | 109 | 5.82 | 5.45 | ||||||||||||||||||
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Unallocated | — | 0.00 | 0.00 | — | 0.00 | 0.00 | ||||||||||||||||||
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Total allowance for loan losses | $ | 1,916 | 100.00 | % | 100.00 | % | $ | 1,873 | 100.00 | % | 100.00 | % | ||||||||||||
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The increase in the allowance for loan losses allocated to one-to-four family real estate loans was primarily due to the increased recourse obligation on loans sold to the Federal Home Loan Bank which was impacted by claims processed on loan foreclosures, as well as an increase in impaired loans and related specific reserves in that category.
The decrease in the allowance for loan losses allocated to commercial real estate loans was largely due to the two impaired loans at December 31, 2010 totaling $1.1 million with specific reserves totaling $174,000 that were transferred to other real estate owned during the six months ended June 30, 2011. Charge-offs in the amount of $162,000 were incurred on those loans in 2011.
The following table sets forth information regarding nonperforming assets at the dates indicated (dollars in thousands):
At June 30, 2011 | At December 31, 2010 | |||||||
Non-accrual loans: | ||||||||
Real estate loans: | ||||||||
One-to four-family | $ | 2,559 | $ | 1,206 | ||||
Home equity lines of credit and other 2nd mortgage | 148 | 94 | ||||||
Commercial | — | 1,082 | ||||||
Construction and land development | 615 | 666 | ||||||
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Total real estate loans | 3,322 | 3,048 | ||||||
Commercial and industrial | 102 | 99 | ||||||
Consumer loans: | ||||||||
Purchased indirect automobile | — | 16 | ||||||
Other | 1 | 1 | ||||||
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Total consumer loans | 1 | 17 | ||||||
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Total non-accrual loans | 3,425 | 3,164 | ||||||
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Accruing loans past due 90 days or more: | ||||||||
Consumer loans: | ||||||||
Purchased indirect automobile | — | 17 | ||||||
Other | — | — | ||||||
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Total consumer loans | — | 17 | ||||||
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Total accruing loans past due 90 days or more | — | 17 | ||||||
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Total of nonaccrual and 90 days or more past due loans | 3,425 | 3,181 | ||||||
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Other real estate owned: | ||||||||
One-to four family | 501 | 696 | ||||||
Commercial | 885 | — | ||||||
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Total other real estate owned | 1,386 | 696 | ||||||
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Repossessed automobiles | 26 | 71 | ||||||
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Total non-performing assets | 4,837 | 3,948 | ||||||
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Troubled debt restructurings (not included in nonaccrual loans above) | 632 | — | ||||||
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Total non-performing assets and troubled debt restructurings | $ | 5,469 | $ | 3,948 | ||||
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Total non-performing loans to total loans | 2.95 | % | 2.77 | % | ||||
Total non-performing assets to total assets | 2.89 | % | 2.35 | % | ||||
Total non-performing loans and troubled debt restructurings to total loans | 3.49 | % | 2.77 | % | ||||
Total non-performing assets and troubled debt restructurings to total assets | 3.27 | % | 2.35 | % |
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The increase in nonaccrual one-to four-family real estate loans is in part due to the addition of five loans totaling $685,000 that were troubled debt restructurings in 2011. The decrease in nonaccrual commercial real estate loans is primarily the result of two commercial real estate loans totaling $1.1 million and secured by retail strip centers in McHenry County that were transferred to other real estate owned in 2011.
The following table shows the aggregate principal amount of potential problem loans on the Company’s watch list at June 30, 2011 and December 31, 2010. Substantially all non-accruing loans, troubled debt restructurings and loans past due 60 days or more are placed on the watch list (in thousands).
June 30, 2011 | December 31, 2010 | |||||||
Watch loans | $ | 5,508 | $ | 4,779 | ||||
Special Mention loans | 2,803 | 2,774 | ||||||
Substandard loans | 3,465 | 3,274 | ||||||
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Total watch list loans | $ | 11,776 | $ | 10,827 | ||||
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The increase in watch loans during the first half of 2011 is primarily due to an increase in one-to-four family real estate loans past due 60 days or more.
Noninterest Income. Noninterest income decreased $19,000 or 13.9% to $118,000 for the three months ended June 30, 2011 from $137,000 for the three months ended June 30, 2010. The decrease was primarily due to a decrease in customer service fees of $9,000 and an increase in net losses on loan sales of $11,000 for the three months ended June 30, 2011, compared to the same period in 2010. Losses on loan sales included the net decrease in fair value of mortgage servicing rights of $53,000 and $50,000 for the three months ended June 30, 2011 and 2010, those decreases were due to the significant increase in prepayment speeds for the servicing portfolio during the first quarter of 2011 and 2010. Net realized gains of $17,000 and $25,000 were recognized on loans sold of $1.2 million and $4.5 million for the three months ended June 30, 2011 and 2010.
Noninterest Expense. Noninterest expense decreased $19,000 or 1.6% to $1.2 million for the three months ended June 30, 2011 from $1.2 million for the three months ended June 30, 2010. Decreases in compensation and benefits, data processing, marketing, office supplies, federal deposit insurance and indirect automobile loan servicing fees expenses in 2011 compared to 2010, were partially offset by increases in occupancy, professional fees, foreclosed assets, net, and other noninterest expenses. The largest decrease was indirect automobile loan servicing fees which decreased $37,000 to $19,000, due to lower collection expenses and lower average balance of loans being serviced. The largest increase was other noninterest expense which increased $19,000 to $95,000 due to the costs of the annual meeting, regulatory filings and other obligations of being a new public company.
Provision (Benefit) for Income Taxes. The provision for income taxes was $5,000 for the three months ended June 30, 2011 compared to a benefit of $54,000 for the same period in 2010, an increase of $59,000. The lower income tax expense for the second quarter of 2010 reflects a lower level of pre-tax income, compared to 2011. The effective tax expense as a percent of pre-tax income was 10.4% for the three months ended June 30, 2011, compared to an effective tax benefit as a percent of pre-tax loss of 62.8% for the three months ended June 30, 2010.
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Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010
General. Net income for the six months ended June 30, 2011 was $99,000, compared to net loss of $31,000 for the six months ended June 30, 2010, an increase of $130,000. The increase in net income was due to an increase in net interest income of $94,000, an increase in noninterest income of $38,000 and a decrease in the provision for loan losses of $136,000, partially offset by increases in noninterest expense and the provision for income taxes of $56,000 and $82,000, respectively.
Interest and Dividend Income. Total interest and dividend income decreased $264,000 or 6.8% to $3.6 million for the six months ended June 30, 2011 from $3.9 million for the same period in 2010. Although average interest-earning assets increased $5.8 million to $156.2 million for the six months ended June 30, 2011 from $150.4 million for the same period in 2010, the average yield decreased 53 basis points to 4.62% from 5.15%. This decrease reflected a decline in the interest rate environment for nearly all asset categories during the period, and that most of the increase in interest-earning assets was invested in lower-yielding short-duration securities repurchase agreements. Interest and fees on loans decreased $228,000 for the first half of 2011 compared to the same period in 2010 as the average balance of loans decreased $5.4 million to $114.5 million primarily due to repayments and sales of loans outpacing originations and purchases, and as the average yield on loans decreased 11 basis points to 5.86% from 5.97%. Interest income on securities and other interest-earning assets decreased $36,000 for the six months ended June 30, 2011 compared to the year ago period as the average yield on those assets decreased 68 basis points to 1.22% from 1.90%, due to the lower interest rate environment, offset by an increase in average balances of those assets of $11.1 million, primarily due to slow loan demand and the net proceeds of $6.2 million raised from the initial public offering of common stock.
Interest Expense. Total interest expense decreased $358,000 or 23.0% to $1.2 million for the six months ended June 30, 2011 from $1.6 million for the same period in 2010. Interest expense on deposit accounts decreased $251,000 or 20.5% to $971,000 for the six months ended June 30, 2011 from $1.2 million for the same period in 2010. This decrease was primarily due to a decrease in interest expense on certificates of deposit and brokered certificate accounts of $193,000, while interest expense on savings, NOW and money market accounts decreased $58,000 during the period. The average balance in certificates of deposits and brokered certificates of deposit increased $3.4 million, with the cost of these deposits decreasing 60 basis points to 2.25% for the six months ended June 30, 2011 compared to the same period in 2010. The average balances of savings, NOW and money market accounts increased $2.2 million while the cost of these deposits decreased 26 basis points to 0.31% during the six months ended June 30, 2011 from the six months ended June 30, 2010. The movement in deposit accounts and reduction in the cost of these funds was the result of our competitive pricing and promotional events pricing, and the declining market interest rates for deposits.
Interest expense on Federal Home Loan Bank advances decreased $107,000 to $226,000 for the six months ended June 30, 2011 from $333,000 for the six months ended June 30, 2010. The average balance of advances decreased $3.4 million while the average cost of this funding decreased 60 basis points to 3.31% for the six months ended June 30, 2011 from the comparable period in 2010. The decrease in the average balance of advances was due to adhering to our capital and liquidity plans to lessen our reliance on advances. The decrease in the cost of these funds was a reflection of the lower market interest rate environment in 2011 compared to 2010.
Net Interest Income. Net interest income increased $94,000 or 4.1% to $2.4 million for the six months ended June 30, 2011 from $2.3 million for the six months ended June 30, 2010, primarily as a result of the ratio of our average interest-earning assets to average interest-bearing liabilities which increased to 110.0% for the six months ended June 30, 2011 from 107.63% for the same period in 2010. Our net interest rate spread and net interest margin remained relatively unchanged at 2.93% and 3.09%, respectively, for the first half of 2011 compared to the first half of 2010.
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Provision for Loan Losses.
The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2011 and 2010 (dollars in thousands):
2011 | 2010 | |||||||
Allowance at beginning of period | $ | 1,873 | $ | 1,426 | ||||
Provision for loan losses | 296 | 432 | ||||||
Charge-offs: | ||||||||
Real estate loans: | ||||||||
One-to four family | 125 | 73 | ||||||
Home equity line of credit and other 2nd mortgage | 5 | 25 | ||||||
Commercial | 163 | 100 | ||||||
Construction and land development | — | 1 | ||||||
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Total charge-offs, real estate loans | 293 | 199 | ||||||
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Consumer loans: | ||||||||
Purchased indirect automobile | 40 | 86 | ||||||
Other | — | 1 | ||||||
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Total charge-offs, consumer loans | 40 | 87 | ||||||
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Total charge-offs | 333 | 286 | ||||||
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Recoveries: | ||||||||
Real estate loans: | ||||||||
One-to four family | 44 | 8 | ||||||
Commercial | 31 | — | ||||||
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Total recoveries, real estate loans | 75 | 8 | ||||||
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Commercial and industrial | — | 5 | ||||||
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Consumer loans: | ||||||||
Purchased indirect automobile | 5 | 18 | ||||||
Other | — | — | ||||||
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Total recoveries, consumer loans | 5 | 18 | ||||||
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Total recoveries | 80 | 31 | ||||||
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Net charge-offs | (253 | ) | (255 | ) | ||||
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Allowance at end of period | $ | 1,916 | $ | 1,603 | ||||
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Allowance to non-performing loans | 55.94 | % | 67.64 | % | ||||
Allowance to total loans outstanding at the end of the period | 1.65 | % | 1.30 | % | ||||
Net charge-offs to average total loans outstanding during the period | 0.44 | % | 0.43 | % |
Based upon our evaluation of these factors, a provision of $296,000 was recorded for the six months ended June 30, 2011, a decrease of $136,000 or 31.5% from $432,000 for the same period in 2010. The provision for loan losses reflected net charge offs of $253,000 or 0.44% of average total loans for the first half of 2011, compared to $255,000 or 0.43% of average total loans for the first half of 2010. The larger provision in 2010 was impacted by the $12.5 million growth in total loans, primarily agricultural loans, during the six months ended June 30, 2010 compared to the $1.2 million increase in total loans during the same period in 2011. We used the same methodology in assessing the allowance for each period.
To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended June 30, 2011 and 2010, respectively.
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Noninterest Income. Noninterest income increased $38,000 or 11.9% to $356,000 for the six months ended June 30, 2011 from $318,000 for the six months ended June 30, 2010. The increase was primarily related to net gains on loan sales which increased $38,000 to $47,000 for the six months ended June 30, 2011, compared to $9,000 for the same period in 2010. Loans sold during the six months ended June 30, 2011 totaled $2.9 million, compared to $7.5 million during the same period in 2010. Gains on loan sales included the net increase in fair value of mortgage servicing rights of $12,000 in 2011 and the net decrease in fair value of mortgage servicing rights of $38,000 in 2010, an increase of $50,000 primarily due to the significant decrease in prepayment speeds for the servicing portfolio during the first half of 2011 compared to the significant increase in prepayment speeds for the servicing portfolio during the first half of 2010.
Noninterest Expense. Noninterest expense increased $56,000 or 2.4%% to $2.4 million for the six months ended June 30, 2011 from $2.3 million for the six months ended June 30, 2010. The increase in noninterest expense was primarily due to increases in occupancy, professional fees, foreclosed assets, net, and other noninterest expense of $21,000, $22,000, 59,000 and $33,000, respectively for the six months ended June 30, 2011 compared to the same period in 2010. The increase in occupancy expense was primarily due to higher utilities and equipment maintenance costs. The increase in losses on foreclosed assets, net was primarily due to losses from writedowns and sales of foreclosed assets of $86,000 and $10,000 in 2011 compared to writedowns of $38,000 and losses on sales of $12,000 in 2010. The increases in professional fees and other noninterest expense were primarily related to the Company becoming a public company in 2010. These increases were partially offset by a decrease in indirect automobile loan servicing fees of $53,000 for the six months ended June 30, 2011, compared to the same period in 2010, due to lower average balance of loans being serviced which decreased $3.8 million to $5.7 million in 2011.
Provision (Benefit) for Income Taxes. The provision for income taxes increased $82,000 to $14,000 for the six months ended June 30, 2011 compared to a benefit $(68,000) for the same period in 2010. The higher income tax provision for the first half of 2011 reflects the higher pre-tax income compared to 2010.
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Table of Contents
Liquidity and Capital Resources
Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from maturities and calls of securities, and Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including securities repurchase agreements. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities were $979,000 and $1.0 million for the six months ended June 30, 2011 and 2010, respectively. Net cash used in investing activities consisted primarily of disbursements for loan originations and the purchase of securities and interest-bearing deposits, offset by net cash provided by principal collections on loans, and proceeds from maturing securities and interest-bearing deposits and pay downs on mortgage-backed securities. Net cash provided by (used in) investing activities were $960,000 and $(16.9) million for the six months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2010, net cash provided by financing activities included $6.2 million in proceeds from issuance of common stock net of ESOP purchase of $628,000. Net cash provided by (used in) financing activities also consisted primarily of the activity in deposit accounts and Federal Home Loan Bank borrowings. The net cash provided by (used in) financing activities was $(861,000) and $9.3 million for the six months ended June 30, 2011 and 2010, respectively.
The Bank is required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. The Bank’s actual ratios at June 30, 2011 and the required minimums to be considered adequately capitalized are shown in the table below. In order to be considered well-capitalized, the Bank must maintain: (i) Tier 1 Capital to Average Assets of 5.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 6.0%, and (iii) Total Capital to Risk-Weighted Assets of 10.0%. Accordingly, Harvard Savings Bank was categorized as well capitalized at June 30, 2011. Management is not aware of any conditions or events since the most recent notification that would change our category.
June 30, 2011 Actual | December 31, 2010 Actual | Minimum Required | ||||||||||
Tier 1 capital to average assets | 10.2 | % | 10.2 | % | 5.0 | % | ||||||
Tier 1 capital to risk-weighted assets | 14.4 | % | 14.5 | % | 6.0 | % | ||||||
Total capital to risk-weighted assets | 15.7 | % | 15.8 | % | 10.0 | % |
The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at June 30, 2011 and December 31, 2010 (in thousands).
June 30, 2011 | December 31, 2010 | |||||||
Commitments to fund loans | $ | 18,862 | $ | 17,500 | ||||
Standby letters of credit | 6 | 125 |
Certificates of deposit that are scheduled to mature in less than one year from June 30, 2011 totaled $44.1 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
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Analysis of Net Interest Income and Average Balance Sheet
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated (dollars in thousands):
Three Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Cost | Average Balance | Interest Income/ Expense | Yield/ Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest- earning assets: | ||||||||||||||||||||||||
Interest -earning deposits | $ | 9,257 | $ | 32 | 1.38 | % | $ | 13,195 | $ | 46 | 1.39 | % | ||||||||||||
Securities purchased under agreements to resell | 20,063 | 56 | 1.12 | % | 3,235 | 11 | 1.36 | % | ||||||||||||||||
Securities, tax-exempt | 115 | 2 | 6.96 | % | 600 | 6 | 4.00 | % | ||||||||||||||||
Securities, taxable | 6,978 | 48 | 2.75 | % | 6,581 | 72 | 4.38 | % | ||||||||||||||||
Loans | 113,745 | 1,659 | 5.83 | % | 123,742 | 1,809 | 5.85 | % | ||||||||||||||||
Federal Home Loan Bank stock | 6,549 | 1 | 0.06 | % | 6,549 | — | 0.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 156,707 | 1,798 | 4.59 | % | 153,902 | 1,944 | 5.05 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest earning assets | 11,656 | 12,150 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 168,363 | $ | 166,052 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 16,208 | 12 | 0.30 | % | $ | 14,195 | 14 | 0.39 | % | ||||||||||||||
NOW and money market accounts | 32,433 | 24 | 0.30 | % | 31,559 | 44 | 0.56 | % | ||||||||||||||||
Certificates of deposit | 78,315 | 418 | 2.13 | % | 74,985 | 518 | 2.76 | % | ||||||||||||||||
Brokered certificates of deposit | 1,499 | 19 | 5.07 | % | 2,812 | 32 | 4.55 | % | ||||||||||||||||
Federal Home Loan Bank advances | 13,475 | 107 | 3.18 | % | 16,517 | 163 | 3.95 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 141,930 | 580 | 1.63 | % | 140,068 | 771 | 2.20 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest-bearing deposits | 4,324 | 5,801 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,340 | 3,810 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities | 149,594 | 149,679 | ||||||||||||||||||||||
Equity | 18,769 | 16,373 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and equity | $ | 168,363 | $ | 166,052 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ | 1,218 | $ | 1,173 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread | 2.96 | % | 2.85 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin | 3.11 | % | 3.05 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Average interest earning assets to average interest-bearing liabilities | 110.41 | % | 109.88 | % | ||||||||||||||||||||
|
|
|
|
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Table of Contents
The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities (in thousands).
Three Months Ended June 30, 2011 Compared to 2010 Increase (Decrease) Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
Interest income: | ||||||||||||
Interest-earning deposits | $ | — | $ | (14 | ) | $ | (14 | ) | ||||
Securities purchased under agreements to resell | (2 | ) | 47 | 45 | ||||||||
Securities, tax-exempt | 43 | (47 | ) | (4 | ) | |||||||
Securities, taxable | (29 | ) | 5 | (24 | ) | |||||||
Loans | (4 | ) | (146 | ) | (150 | ) | ||||||
Federal Home Loan Bank stock | 1 | — | 1 | |||||||||
|
|
|
|
|
| |||||||
Total | 9 | (155 | ) | (146 | ) | |||||||
|
|
|
|
|
| |||||||
Interest Expense: | ||||||||||||
Savings accounts | (5 | ) | 3 | (2 | ) | |||||||
NOW and money market accounts | (21 | ) | 1 | (20 | ) | |||||||
Certificates of deposit | (124 | ) | 24 | (100 | ) | |||||||
Brokered certificates of deposit | 4 | (17 | ) | (13 | ) | |||||||
Federal Home Loan Bank advances | (29 | ) | (27 | ) | (56 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (175 | ) | (16 | ) | (191 | ) | ||||||
|
|
|
|
|
| |||||||
Increase in net interest income | $ | 184 | $ | (139 | ) | $ | 45 | |||||
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Table of Contents
The following table sets forth average balance sheets, average yields and costs, and certain other information at or for the periods indicated (dollars in thousands):
Six Months Ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Yield/ Cost | Average Balance | Interest Income/ Expense | Yield/ Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest- earning assets: | ||||||||||||||||||||||||
Interest -earning deposits | $ | 10,252 | $ | 67 | 1.31 | % | $ | 11,647 | $ | 91 | 1.56 | % | ||||||||||||
Securities purchased under agreements to resell | 17,753 | 96 | 1.08 | % | 5,037 | 36 | 1.43 | % | ||||||||||||||||
Securities, tax-exempt | 291 | 7 | 4.81 | % | 639 | 14 | 4.38 | % | ||||||||||||||||
Securities, taxable | 6,798 | 80 | 2.35 | % | 6,572 | 148 | 4.50 | % | ||||||||||||||||
Loans | 114,536 | 3,356 | 5.86 | % | 119,976 | 3,584 | 5.97 | % | ||||||||||||||||
Federal Home Loan Bank stock | 6,549 | 3 | 0.09 | % | 6,549 | — | 0.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 156,179 | 3,609 | 4.62 | % | 150,420 | 3,873 | 5.15 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest earning assets | 11,970 | 12,359 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 168,149 | $ | 162,779 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 15,782 | 23 | 0.29 | % | $ | 14,149 | 27 | .38 | % | ||||||||||||||
NOW and money market accounts | 32,696 | 51 | 0.31 | % | 32,149 | 105 | .65 | % | ||||||||||||||||
Certificates of deposit | 78,348 | 859 | 2.19 | % | 73,619 | 1,026 | 2.79 | % | ||||||||||||||||
Brokered certificates of deposit | 1,499 | 38 | 5.07 | % | 2,812 | 64 | 4.55 | % | ||||||||||||||||
Federal Home Loan Bank advances | 13,658 | 226 | 3.31 | % | 17,021 | 333 | 3.91 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 141,983 | 1,197 | 1.69 | % | 139,750 | 1,555 | 2.23 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest-bearing deposits | 4,211 | 5,308 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,212 | 3,381 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities | 149,406 | 148,439 | ||||||||||||||||||||||
Equity | 18,743 | 14,340 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and equity | $ | 168,149 | $ | 162,779 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ | 2,412 | $ | 2,318 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread | 2.93 | % | 2.92 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin | 3.09 | % | 3.08 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Average interest earning assets to average interest-bearing liabilities | 110.00 | % | 107.63 | % | ||||||||||||||||||||
|
|
|
|
51
Table of Contents
The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities (in thousands).
Six Months Ended June 30, 2011 Compared to 2010 Increase (Decrease) Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
Interest income: | ||||||||||||
Interest-earning deposits | $ | (14 | ) | $ | (10 | ) | $ | (24 | ) | |||
Securities purchased under agreements to resell | (6 | ) | 66 | 60 | ||||||||
Securities, tax-exempt | 2 | (9 | ) | (7 | ) | |||||||
Securities, taxable | (73 | ) | 5 | (68 | ) | |||||||
Loans | (68 | ) | (160 | ) | (228 | ) | ||||||
Federal Home Loan Bank stock | 3 | — | 3 | |||||||||
|
|
|
|
|
| |||||||
Total | (156 | ) | (108 | ) | (264 | ) | ||||||
|
|
|
|
|
| |||||||
Interest Expense: | ||||||||||||
Savings accounts | (8 | ) | 4 | (4 | ) | |||||||
NOW and money market accounts | (56 | ) | 2 | (54 | ) | |||||||
Certificates of deposit | (239 | ) | 72 | (167 | ) | |||||||
Brokered certificates of deposit | 8 | (34 | ) | (26 | ) | |||||||
Federal Home Loan Bank advances | (47 | ) | (60 | ) | (107 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (342 | ) | (16 | ) | (358 | ) | ||||||
|
|
|
|
|
| |||||||
Increase (decrease) in net interest income | $ | 186 | $ | (92 | ) | $ | 94 | |||||
|
|
|
|
|
|
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company has adopted interim disclosure controls and procedures designed to facilitate financial reporting. The Company’s interim disclosure controls currently consist of communications among the Company’s Chief Executive Officer, the Company’s Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to its operations. These disclosure controls also contain certain elements of the Company’s internal controls adopted in connection with applicable accounting and regulatory guidelines. In addition, the Company’s Chief Executive Officer, Chief Financial Officer, Audit Committee and independent registered public accounting firm meet on a quarterly basis to discuss disclosure matters. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s interim disclosure controls and procedures as of the end of the period covered by this report and found them to be effective.
During the quarter ended June 30, 2011, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
52
Table of Contents
Item 1. | Legal Proceedings |
The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.
Not required for smaller reporting companies
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
31.1 – Certification of the Chief Executive Officer Pursuant to Rule 13a-15(e)/15d-15(e)
31.2 – Certification of the Chief Financial Officer Pursuant to Rule 13a-15(e)/15d-15(e)
32.1 – Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
101.INS – XBRL Instance Document
101.SCH – XBRL Taxonomy Extension Schema Document
101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF – XBRL Taxonomy Extension Definition Linkbase Document
101.LAB – XBRL Taxonomy Extension Label Linkbase Document
101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document
53
Table of Contents
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.
HARVARD ILLINOIS BANCORP, INC. | ||
Registrant | ||
Date:August 12, 2011 | /s/ Duffield J. Seyller III | |
Duffield Seyller III | ||
President and Chief Executive Officer | ||
/s/ Donn L. Claussen | ||
Donn L. Claussen | ||
Executive Vice President and Chief Financial Officer |
54