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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 September 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) |
(815) 943-5261
Registrant’s telephone number, including area code:
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. Yes x 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). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer”, “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
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 ¨ No x
As of November 14, 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 SEPTEMBER 30, 2011
Page | ||||
PART I | ||||
Item 1. | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
7-36 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35-51 | ||
Item 3. | 51 | |||
Item 4. | 51 | |||
PART II | 52 | |||
Item 1. | 52 | |||
Item 1A. | 52 | |||
Item 2. | 52 | |||
Item 3. | 52 | |||
Item 4. | 52 | |||
Item 5. | 52 | |||
Item 6. | 52 | |||
53 | ||||
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.
(Dollars in thousands)
(Unaudited) September 30, 2011 | December 31, 2010 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 926 | $ | 883 | ||||
Interest-bearing demand deposits in banks | 2,079 | 3,184 | ||||||
Securities purchased under agreements to resell | 15,052 | 13,896 | ||||||
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Cash and cash equivalents | 18,057 | 17,963 | ||||||
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Interest-bearing deposits with other financial institutions | 5,762 | 10,825 | ||||||
Available-for-sale securities | 5,270 | 4,965 | ||||||
Held-to-maturity securities, at amortized cost (estimated fair value of $2,112 and $2,745 at September 30, 2011 and December 31, 2010, respectively) | 1,953 | 2,548 | ||||||
Loans, net of allowance for loan losses of $2,350 and $1,873 at September 30, 2011 and December 31, 2010, respectively | 117,281 | 113,153 | ||||||
Premises and equipment, net | 3,506 | 3,615 | ||||||
Federal Home Loan Bank stock, at cost | 6,549 | 6,549 | ||||||
Foreclosed assets held for sale | 1,297 | 767 | ||||||
Accrued interest receivable | 771 | 901 | ||||||
Deferred income taxes | 1,549 | 1,279 | ||||||
Bank-owned life insurance | 4,198 | 4,097 | ||||||
Mortgage servicing rights | 384 | 425 | ||||||
Other | 521 | 664 | ||||||
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Total assets | $ | 167,098 | $ | 167,751 | ||||
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Liabilities and Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand | $ | 4,231 | $ | 4,156 | ||||
Savings, NOW and money market | 47,804 | 47,937 | ||||||
Certificates of deposit | 77,997 | 79,030 | ||||||
Brokered certificates of deposit | 1,499 | 1,499 | ||||||
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Total deposits | 131,531 | 132,622 | ||||||
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Federal Home Loan Bank advances | 14,191 | 13,653 | ||||||
Advances from borrowers for taxes and insurance | 207 | 402 | ||||||
Deferred compensation | 2,224 | 2,171 | ||||||
Accrued interest payable | 43 | 53 | ||||||
Other | 384 | 264 | ||||||
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Total liabilities | 148,580 | 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 September 30, 2011 and December 31, 2010 | 8 | 8 | ||||||
Additional paid-in capital | 6,825 | 6,799 | ||||||
Unearned ESOP shares, at cost | (555 | ) | (590 | ) | ||||
Amount reclassified on ESOP shares | (70 | ) | (26 | ) | ||||
Retained earnings | 12,289 | 12,399 | ||||||
Accumulated other comprehensive income (loss), net of tax | 21 | (4 | ) | |||||
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Total stockholders’ equity | 18,518 | 18,586 | ||||||
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Total liabilities and stockholders’ equity | $ | 167,098 | $ | 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 September 30, | (Unaudited) Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and Dividend Income | ||||||||||||||||
Interest and fees on loans | $ | 1,725 | $ | 1,798 | $ | 5,081 | $ | 5,382 | ||||||||
Securities | ||||||||||||||||
Taxable | 58 | 62 | 138 | 210 | ||||||||||||
Tax-exempt | 1 | 6 | 8 | 20 | ||||||||||||
Securities purchased under agreements to resell | 42 | 22 | 138 | 58 | ||||||||||||
Other | 28 | 41 | 98 | 132 | ||||||||||||
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Total interest and dividend income | 1,854 | 1,929 | 5,463 | 5,802 | ||||||||||||
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Interest Expense | ||||||||||||||||
Deposits | 445 | 596 | 1,416 | 1,818 | ||||||||||||
Federal Home Loan Bank advances | 104 | 155 | 330 | 488 | ||||||||||||
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Total interest expense | 549 | 751 | 1,746 | 2,306 | ||||||||||||
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Net Interest Income | 1,305 | 1,178 | 3,717 | 3,496 | ||||||||||||
Provision for Loan Losses | 597 | 190 | 893 | 622 | ||||||||||||
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Net Interest Income After Provision for Loan Losses | 708 | 988 | 2,824 | 2,874 | ||||||||||||
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Noninterest Income | ||||||||||||||||
Customer service fees | 69 | 56 | 193 | 186 | ||||||||||||
Brokerage commission income | 5 | 14 | 22 | 31 | ||||||||||||
Net realized gains (losses) on loan sales | (21 | ) | 67 | 26 | 76 | |||||||||||
Net realized losses on sales of available-for-sale securities | — | — | — | (1 | ) | |||||||||||
Losses on other than temporary impairment of equity securities | (3 | ) | (20 | ) | (3 | ) | (26 | ) | ||||||||
Loan servicing fees | 45 | 43 | 138 | 127 | ||||||||||||
Bank-owned life insurance income, net | 33 | 38 | 101 | 116 | ||||||||||||
Other | 3 | 3 | 10 | 10 | ||||||||||||
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Total noninterest income | 131 | 201 | 487 | 519 | ||||||||||||
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Noninterest Expense | ||||||||||||||||
Compensation and benefits | 598 | 596 | 1,813 | 1,820 | ||||||||||||
Occupancy | 121 | 132 | 390 | 380 | ||||||||||||
Data processing | 110 | 114 | 348 | 348 | ||||||||||||
Professional fees | 58 | 60 | 183 | 163 | ||||||||||||
Marketing | 23 | 20 | 58 | 64 | ||||||||||||
Office supplies | 13 | 8 | 41 | 37 | ||||||||||||
Federal deposit insurance | 21 | 53 | 126 | 169 | ||||||||||||
Indirect automobile loan servicing fees | 24 | 31 | 65 | 102 | ||||||||||||
Foreclosed assets, net | 105 | (14 | ) | 235 | 80 | |||||||||||
Other | 99 | 89 | 272 | 229 | ||||||||||||
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Total noninterest expense | 1,172 | 1,089 | 3,531 | 3,392 | ||||||||||||
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Income (Loss) Before Income Taxes | (333 | ) | 100 | (220 | ) | 1 | ||||||||||
Provision (Benefit) for Income Taxes | (124 | ) | 19 | (110 | ) | (49 | ) | |||||||||
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Net Income (Loss) | $ | (209 | ) | $ | 81 | $ | (110 | ) | $ | 50 | ||||||
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Earnings (Loss) Per Share (Note 5) | ||||||||||||||||
Basic | $ | (.29 | ) | $ | .11 | $ | (.15 | ) | $ | .07 | ||||||
Diluted | (.29 | ) | .11 | (.15 | ) | .07 |
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 nine months ended September 30, 2011 (unaudited) | ||||||||||||||||||||||||||||
Balance, January 1, 2011 | $ | 8 | $ | 6,799 | $ | (590 | ) | $ | (26 | ) | $ | 12,399 | $ | (4 | ) | $ | 18,586 | |||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net loss | — | — | — | — | (110 | ) | — | (110 | ) | |||||||||||||||||||
Change in unrealized appreciation on available-for-sale securities, net of taxes of $14 | — | — | — | — | — | 25 | 25 | |||||||||||||||||||||
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Total comprehensive loss | (85 | ) | ||||||||||||||||||||||||||
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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 | — | — | — | (44 | ) | — | — | (44 | ) | |||||||||||||||||||
ESOP shares earned | — | (1 | ) | 35 | — | — | — | 34 | ||||||||||||||||||||
Stock-based compensation expense | — | 27 | — | — | — | — | 27 | |||||||||||||||||||||
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Balance, September 30, 2011 | $ | 8 | $ | 6,825 | $ | (555 | ) | $ | (70 | ) | $ | 12,289 | $ | 21 | $ | 18,518 | ||||||||||||
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For the nine months ended September 30, 2010 (unaudited) | ||||||||||||||||||||||||||||
Balance, January 1, 2010 | $ | — | $ | — | $ | — | $ | — | $ | 12,250 | $ | 65 | $ | 12,315 | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | — | — | — | — | 50 | — | 50 | |||||||||||||||||||||
Change in unrealized appreciation on available-for-sale securities, net of tax of $19 | — | — | — | — | — | (39 | ) | (39 | ) | |||||||||||||||||||
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Total comprehensive income | 11 | |||||||||||||||||||||||||||
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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 | — | (6 | ) | 26 | — | — | — | 20 | ||||||||||||||||||||
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Balance, September 30, 2010 | $ | 8 | $ | 6,803 | $ | (602 | ) | $ | — | $ | 12,300 | $ | 26 | $ | 18,535 | |||||||||||||
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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) Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Operating Activities | ||||||||
Net income (loss) | $ | (110 | ) | $ | 50 | |||
Items not requiring (providing) cash | ||||||||
Depreciation | 150 | 153 | ||||||
Provision for loan losses | 893 | 622 | ||||||
Amortization (accretion) of premiums and discounts on securities | 10 | (13 | ) | |||||
Deferred income taxes | (284 | ) | (50 | ) | ||||
Net realized gains on loan sales | (26 | ) | (76 | ) | ||||
Net realized losses on sales of available-for-sale securities | — | 1 | ||||||
Loss on other than temporary impairment of equity securities | 3 | 26 | ||||||
Losses and write downs on foreclosed assets held for sale | 195 | 27 | ||||||
Bank-owned life insurance income, net | (101 | ) | (116 | ) | ||||
Originations of loans held for sale | (6,539 | ) | (14,005 | ) | ||||
Proceeds from sales of loans held for sale | 6,606 | 14,115 | ||||||
ESOP compensation expense | 34 | 20 | ||||||
Stock-based compensation expense | 27 | — | ||||||
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Accrued interest receivable | 130 | (319 | ) | |||||
Other assets | 143 | 690 | ||||||
Accrued interest payable | (10 | ) | (14 | ) | ||||
Deferred compensation | 53 | 56 | ||||||
Other liabilities | 76 | 432 | ||||||
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Net cash provided by operating activities | 1,250 | 1,599 | ||||||
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Investing Activities | ||||||||
Net (increase) decrease in interest-bearing deposits | 5,063 | (1,125 | ) | |||||
Purchases of available-for-sale securities | (3,392 | ) | (3,484 | ) | ||||
Proceeds from the sales of available-for-sale securities | — | 927 | ||||||
Proceeds from maturities and pay-downs of available-for-sale securities | 3,090 | 2,892 | ||||||
Proceeds from maturities and pay-downs of held-to-maturity securities | 618 | 894 | ||||||
Net change in loans | (6,377 | ) | (12,290 | ) | ||||
Purchase of premises and equipment | (41 | ) | (154 | ) | ||||
Proceeds from sale of foreclosed assets | 631 | 376 | ||||||
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Net cash used in investing activities | (408 | ) | (11,964 | ) | ||||
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Financing Activities | ||||||||
Net decrease in demand deposits, money market, NOW and savings accounts | (58 | ) | (2,386 | ) | ||||
Net increase (decrease) in certificates of deposit, including brokered certificates | (1,033 | ) | 4,954 | |||||
Net decrease in advances from borrowers for taxes and insurance | (195 | ) | (221 | ) | ||||
Proceeds from Federal Home Loan Bank advances | 12,200 | 2,456 | ||||||
Repayments of Federal Home Loan Bank advances | (11,662 | ) | (3,991 | ) | ||||
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 | (748 | ) | 7,001 | |||||
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Net Increase (Decrease) in Cash and Cash Equivalents | 94 | (3,364 | ) | |||||
Cash and Cash Equivalents, Beginning of Period | 17,963 | 15,367 | ||||||
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Cash and Cash Equivalents, End of Period | $ | 18,057 | $ | 12,003 | ||||
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Supplemental Cash Flows Information | ||||||||
Interest paid | $ | 1,756 | $ | 2,320 | ||||
Income taxes paid | 135 | — | ||||||
Foreclosed assets acquired in settlement of loans | 1,356 | 418 |
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 September 30, 2011 and December 31, 2010 and the consolidated statements of income, stockholders’ equity and cash flows for the three and nine months ended September 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 September 30, 2011 and December 31, 2010, and the results of its operations for the three and nine month periods ended September 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 nine month period ended September 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 $628. $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 was permitted. The Company adopted the provisions of this guidance and resulted in no additional loans classified as troubled debt restructures. The impact of ASU 2011-02 on our disclosures is reflected in Note 8 – Loans.
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 September 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):
September 30, 2011 | December 31, 2010 | |||||||
Shares committed for release | 7,324 | 4,185 | ||||||
Unearned shares | 55,451 | 58,590 | ||||||
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Total ESOP shares | 62,775 | 62,775 | ||||||
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Fair value of unearned ESOP shares | $ | 530 | $ | 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 September 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 nine months ended September 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, September 30, 2011 | 73,761 | $ | 8.10 | 9.73 | $ | — | (1) | |||||||||
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Exercisable, September 30, 2011 | — | $ | N/A | N/A | $ | — | ||||||||||
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(1) | Based on closing price of $8.00 per share on September 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 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 three and nine months ended September 30, 2011. Stock-based compensation expense for stock options for the three and nine months ended September 30, 2011 was $14 and $14, respectively. Total unrecognized compensation cost related to nonvested stock options was $289 at September 30, 2011 and is expected to be recognized over a weighted-average period of 4.73 years.
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The following table summarizes non-vested restricted stock activity for the nine months ended September 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 nine months ended September 30, 2011 was $8.10 per share or $254. Stock-based compensation expense for restricted stock for the three and nine months ended September 30, 2011 was $13 and $13, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $241 and is expected to be recognized over a weighted average period of 4.73 years.
Note 5: Earnings Per Common Share (“EPS”)
Basic and diluted earnings per common share are presented for the three-month and nine-month periods ended September 30, 2011. Income per share data presented for the period ended September 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 September 30, 2011 | Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 | April 18, 2010 to September 30, 2010 | |||||||||||||
Net income (loss) | $ | (209 | ) | $ | 81 | $ | (110 | ) | $ | 49 | ||||||
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Basic weighted average shares outstanding | 786,374 | 784,689 | 786,374 | 784,689 | ||||||||||||
Less: Average unallocated ESOP shares | (55,800 | ) | (60,655 | ) | (56,846 | ) | (61,291 | ) | ||||||||
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Basic average shares outstanding | 730,574 | 724,034 | 729,528 | 723,398 | ||||||||||||
Diluted effect of restricted stock awards | — | — | — | — | ||||||||||||
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Diluted average shares outstanding | 730,574 | 724,034 | 729,528 | 723,398 | ||||||||||||
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Basic earnings (loss) per share | $ | (.29 | ) | $ | .11 | $ | (.15 | ) | $ | .07 | ||||||
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Diluted earnings (loss) per share | $ | (.29 | ) | $ | .11 | $ | (.15 | ) | $ | .07 | ||||||
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Options to purchase 73,761 shares were outstanding at September 30, 2011, but were not included in the computation of diluted earnings per share as the options were considered antidilutive for all periods ended September 30, 2011. There were no common shares outstanding prior to April 8, 2010.
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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 $15,052 and $13,896 at September 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 September 30, 2011 and December 31, 2010, agreements to resell securities purchased were outstanding with the following entities (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
BCM High Income Fund, LP | $ | 4,721 | $ | 2,000 | ||||
HEC Opportunity Fund, LLC | 2,930 | 5,800 | ||||||
Coastal Securities | 4,502 | 6,096 | ||||||
Cohen Securities Funding, LLC | 2,899 | — | ||||||
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Total | $ | 15,052 | $ | 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: | ||||||||||||||||
September 30, 2011: | ||||||||||||||||
U.S. government agencies | $ | 3,871 | $ | 3 | $ | (4 | ) | $ | 3,870 | |||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 909 | 22 | — | 931 | ||||||||||||
Equity securities | 458 | 11 | — | 469 | ||||||||||||
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$ | 5,238 | $ | 36 | $ | (4 | ) | $ | 5,270 | ||||||||
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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: | ||||||||||||||||
September 30, 2011: | ||||||||||||||||
U.S. government agencies | $ | 500 | $ | 43 | $ | — | $ | 543 | ||||||||
Mortgage-backed: | ||||||||||||||||
Government-sponsored enterprises (GSE) – residential | 25 | — | — | 25 | ||||||||||||
Private-label residential | 1,328 | 116 | — | 1,444 | ||||||||||||
State and political subdivisions | 100 | — | — | 100 | ||||||||||||
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$ | 1,953 | $ | 159 | $ | — | $ | 2,112 | |||||||||
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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 September 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 nine month periods ended September 30, 2011 and 2010 totaled $3 and $26, respectively.
As of September 30, 2011 and December 31, 2010, the Company held investments in Shay Asset Management mutual funds with an amortized cost of $429 and $424, respectively. The investments in mutual funds are valued using available market prices. The Company recorded an other-than-temporary impairment in mutual funds of $1 and $10 for the nine months ended September 30, 2011 and December 31, 2010, respectively. Management performed an analysis and deemed the remaining investment in the mutual funds was not other than temporarily impaired as of September 30, 2011 and December 31, 2010.
As of September 30, 2011 and December 31, 2010, the Company held investments in FNMA and FHLMC common stock with amortized cost of $9 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 $2 and $12 for the nine month periods ended September 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 September 30, 2011 and December 31, 2010.
As of September 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 $4 for the nine month periods ended September 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 September 30, 2011 and December 31, 2010.
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $2,413 and $2,623 as of September 30, 2011 and December 31, 2010, respectively.
Gross gains of $0 and $1, and gross losses of $0 and $2, resulting from sales of available-for-sale securities were realized for the nine month periods ended September 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 September 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 | $ | 720 | $ | 721 | $ | 100 | $ | 100 | ||||||||
One to five years | 2,101 | 2,101 | 500 | 543 | ||||||||||||
Five to ten years | 1,050 | 1,048 | — | — | ||||||||||||
After ten years | — | — | — | — | ||||||||||||
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3,871 | 3,870 | 600 | 643 | |||||||||||||
Mortgage-backed securities | 909 | 931 | 1,353 | 1,469 | ||||||||||||
Equity securities | 458 | 469 | — | — | ||||||||||||
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Totals | $ | 5,238 | $ | 5,270 | $ | 1,953 | $ | 2,112 | ||||||||
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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 September 30, 2011 was $1,746, which is approximately 24% 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 September 30, 2011 (in thousands):
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Description of | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. Government agencies | $ | 1,746 | $ | (4 | ) | $ | — | $ | — | $ | 1,746 | $ | (4 | ) | ||||||||||
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Total temporarily impaired securities | $ | 1,746 | $ | (4 | ) | $ | — | $ | — | $ | 1,746 | $ | (4 | ) | ||||||||||
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Note 8: Loans
Categories of loans include:
September 30, 2011 | December 31, 2010 | |||||||
Mortgage loans on real estate | ||||||||
One-to-four family | $ | 45,466 | $ | 45,556 | ||||
Home equity lines of credit and other 2nd mortgages | 10,648 | 11,388 | ||||||
Multi-family residential | 1,489 | 1,431 | ||||||
Commercial | 25,242 | 26,702 | ||||||
Farmland | 7,746 | 3,622 | ||||||
Construction and land development | 2,469 | 1,588 | ||||||
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Total mortgage loans on real estate | 93,060 | 90,287 | ||||||
Commercial and industrial | 4,569 | 4,751 | ||||||
Agricultural | 15,661 | 13,735 | ||||||
Purchased indirect automobile, net of dealer reserve | 6,168 | 5,893 | ||||||
Other consumer | 173 | 372 | ||||||
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119,631 | 115,038 | |||||||
Less | ||||||||
Loans in process | — | 6 | ||||||
Net deferred loan fees and costs | — | 6 | ||||||
Allowance for loan losses | 2,350 | 1,873 | ||||||
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Net loans | $ | 117,281 | $ | 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.
The Company’s lending can be summarized into nine primary areas; one-to-four family residential mortgage loans, home equity loans, multi-family real estate loans, commercial real estate loans, farmland loans, construction and land development loans, commercial and industrial loans, agricultural loans and consumer loans. A description of each lending area can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
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 nine months ended September 30, 2011 and the year ended December 31, 2010:
Three Months Ended September 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 | $ | 465 | $ | 142 | $ | 35 | $ | 508 | $ | 75 | $ | 278 | ||||||||||||
Provision charged to expense | 109 | 41 | 317 | 5 | 41 | 50 | ||||||||||||||||||
Losses charged off | (32 | ) | — | (60 | ) | — | — | (50 | ) | |||||||||||||||
Recoveries | — | — | — | 7 | — | — | ||||||||||||||||||
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Balance, end of period | $ | 542 | $ | 183 | $ | 292 | $ | 520 | $ | 116 | $ | 278 | ||||||||||||
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Ending balance: individually evaluated for impairment | $ | 169 | $ | 54 | $ | 264 | $ | — | $ | — | $ | 234 | ||||||||||||
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Ending balance: collectively evaluated for impairment | $ | 373 | $ | 129 | $ | 28 | $ | 520 | $ | 116 | $ | 44 | ||||||||||||
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Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
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Loans: | ||||||||||||||||||||||||
Ending balance | $ | 45,466 | $ | 10,648 | $ | 1,489 | $ | 25,242 | $ | 7,746 | $ | 2,469 | ||||||||||||
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Ending balance: individually evaluated for impairment | $ | 2,946 | $ | 131 | $ | 923 | $ | — | $ | — | $ | 1,015 | ||||||||||||
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Ending balance: collectively evaluated for impairment | $ | 42,520 | $ | 10,517 | $ | 566 | $ | 25,242 | $ | 7,746 | $ | 1,454 | ||||||||||||
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Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
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Three Months Ended September 30, 2011 (Continued) | ||||||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Unallocated | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Balance, beginning of period | $ | 94 | $ | 234 | $ | 81 | $ | 4 | $ | — | $ | 1,916 | ||||||||||||
Provision charged to expense | 2 | 1 | 28 | 3 | — | 597 | ||||||||||||||||||
Losses charged off | — | — | (28 | ) | (1 | ) | — | (171 | ) | |||||||||||||||
Recoveries | — | — | 1 | — | 8 | |||||||||||||||||||
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Balance, end of period | $ | 96 | $ | 235 | $ | 82 | $ | 6 | $ | — | $ | 2,350 | ||||||||||||
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Ending balance: individually evaluated for impairment | $ | 21 | $ | — | $ | 5 | $ | 4 | $ | — | $ | 751 | ||||||||||||
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Ending balance: collectively evaluated for impairment | $ | 75 | $ | 235 | $ | 77 | $ | 2 | $ | — | $ | 1,599 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 4,569 | $ | 15,661 | $ | 6,168 | $ | 173 | $ | $ | 119,631 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 50 | $ | — | $ | 19 | $ | 3 | $ | — | $ | 5,087 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 4,519 | $ | 15,661 | $ | 6,149 | $ | 170 | $ | — | $ | 114,544 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
Nine Months Ended September 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 | 303 | 38 | 318 | 16 | 111 | 37 | ||||||||||||||||||
Losses charged off | (157 | ) | (5 | ) | (60 | ) | (163 | ) | — | (50 | ) | |||||||||||||
Recoveries | 44 | — | — | 38 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 542 | $ | 183 | $ | 292 | $ | 520 | $ | 116 | $ | 278 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 169 | $ | 54 | $ | 264 | $ | — | $ | — | $ | 234 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 373 | $ | 129 | $ | 28 | $ | 520 | $ | 116 | $ | 44 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 45,466 | $ | 10,648 | $ | 1,489 | $ | 25,242 | $ | 7,746 | $ | 2,469 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 2,946 | $ | 131 | $ | 923 | $ | — | $ | — | $ | 1,015 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 42,520 | $ | 10,517 | $ | 566 | $ | 25,242 | $ | 7,746 | $ | 1,454 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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 | (1 | ) | 29 | 39 | 3 | — | 893 | |||||||||||||||||
Losses charged off | — | — | (68 | ) | (1 | ) | — | (504 | ) | |||||||||||||||
Recoveries | — | — | 6 | — | — | 88 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, end of period | $ | 96 | $ | 235 | $ | 82 | $ | 6 | $ | — | $ | 2,350 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 21 | $ | — | $ | 5 | $ | 4 | $ | — | $ | 751 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 75 | $ | 235 | $ | 77 | $ | 2 | $ | — | $ | 1,599 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 4,569 | $ | 15,661 | $ | 6,168 | $ | 173 | $ | — | $ | 119,631 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: individually evaluated for impairment | $ | 50 | $ | — | $ | 19 | $ | 3 | $ | — | $ | 5,087 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Ending balance: collectively evaluated for impairment | $ | 4,519 | $ | 15,661 | $ | 6,149 | $ | 170 | $ | — | $ | 114,544 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
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 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
17
Table of Contents
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 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | |||||||
Allowance for Loan Losses | ||||||||
Balance, beginning of period | $ | 1,603 | $ | 1,426 | ||||
Provision charged to expense | 190 | 622 | ||||||
Losses charged off, net of recoveries of $7 and $38 | (118 | ) | (373 | ) | ||||
|
|
|
| |||||
Balance end of period | $ | 1,675 | $ | 1,675 | ||||
|
|
|
|
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.
18
Table of Contents
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.
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 represent loans with the minimum level of acceptable credit risk and servicing requirements and the borrower has the capacity to perform according to the terms and repayment is expected. However, one or more elements of uncertainty exist.
Special Mention –Loans classified as special mention 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.
19
Table of Contents
The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2011 and December 31, 2010:
September 30, 2011 Mortgage Loans on Real Estate | ||||||||||||||||||||||||
1-4 Family | HELOC and 2nd Mortgage | Multi-Family Residential | Commercial | Farmland | Construction and Land Development | |||||||||||||||||||
Pass | $ | 40,426 | $ | 10,083 | $ | 566 | $ | 22,044 | $ | 7,746 | $ | 1,454 | ||||||||||||
Watch | 949 | 309 | — | 1,464 | — | — | ||||||||||||||||||
Special Mention | 1,145 | 125 | — | 1,734 | — | — | ||||||||||||||||||
Substandard | 2,946 | 131 | 923 | — | — | 1,015 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 45,466 | $ | 10,648 | $ | 1,489 | $ | 25,242 | $ | 7,746 | $ | 2,469 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 (Continued) | ||||||||||||||||||||
Commercial and Industrial | Agricultural | Purchased Indirect Automobile, Net | Other Consumer | Total | ||||||||||||||||
Pass | $ | 3,310 | $ | 15,661 | $ | 6,149 | $ | 170 | $ | 107,609 | ||||||||||
Watch | 1,027 | — | — | — | 3,749 | |||||||||||||||
Special Mention | 182 | — | — | — | 3,186 | |||||||||||||||
Substandard | 50 | — | 19 | 3 | 5,087 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 4,569 | $ | 15,661 | $ | 6,168 | $ | 173 | $ | 119,631 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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.
20
Table of Contents
The following tables present the Company’s loan portfolio aging analysis as of September 30, 2011 and December 31, 2010:
September 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 | $ | 1,573 | $ | 682 | $ | 1,999 | $ | 4,254 | $ | 41,212 | $ | 45,466 | $ | — | ||||||||||||||
Home equity lines of credit and other 2nd mortgages | 128 | 78 | 101 | 307 | 10,341 | 10,648 | — | |||||||||||||||||||||
Multi-family | — | — | — | — | 1,489 | 1,489 | — | |||||||||||||||||||||
Commercial | — | 75 | — | 75 | 25,167 | 25,242 | — | |||||||||||||||||||||
Farmland | — | — | — | — | 7,746 | 7,746 | — | |||||||||||||||||||||
Construction and land development | — | — | 400 | 400 | 2,069 | 2,469 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total real estate loans | 1,701 | 835 | 2,500 | 5,036 | 88,024 | 93,060 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Commercial and industrial | 8 | — | — | 8 | 4,561 | 4,569 | — | |||||||||||||||||||||
Agriculture | — | — | — | — | 15,661 | 15,661 | — | |||||||||||||||||||||
Consumer loans: | ||||||||||||||||||||||||||||
Purchased indirect automobile | 11 | 8 | — | 19 | 6,149 | 6,168 | — | |||||||||||||||||||||
Other | 21 | — | 3 | 24 | 149 | 173 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total consumer loans | 32 | 8 | 3 | 43 | 6,298 | 6,341 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,741 | $ | 843 | $ | 2,503 | $ | 5,087 | $ | 114,544 | $ | 119,631 | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2011 and December 31, 2010, the Company held $15,661 and $13,735 in agricultural production loans and $7,746 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 September 30, 2011 and December 31, 2010, the Company held $25,242 and $26,702 in commercial real estate loans and $2,469 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 $807,000 from December 31, 2010 to $2.5 million at September 30, 2011 primarily as a result of additional one-to-four family real estate loans of $793,000.
21
Table of Contents
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 initially classified as impaired.
22
Table of Contents
The following tables present impaired loans at September 30, 2011 and December 31, 2010:
September 30, 2011 | ||||||||||||
(Dollars in thousands) | ||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | ||||||||||
Loans without a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 1,202 | $ | 1,297 | $ | — | ||||||
Home equity lines of credit and other 2nd mortgages | 78 | 88 | — | |||||||||
Multi-family | — | — | — | |||||||||
Commercial | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | 400 | 450 | — | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 1,680 | 1,835 | — | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | — | — | — | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | — | — | — | |||||||||
Purchased indirect automobile | — | — | — | |||||||||
Other | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Total loans | $ | 1,680 | $ | 1,835 | $ | — | ||||||
|
|
|
|
|
| |||||||
Loans with a specific allowance | ||||||||||||
Real estate loans: | ||||||||||||
One-to-four family | $ | 1,744 | $ | 1,744 | $ | 169 | ||||||
Home equity lines of credit and other 2nd mortgages | 53 | 53 | 54 | |||||||||
Multi-family | 923 | 983 | 264 | |||||||||
Commercial | — | — | — | |||||||||
Farmland | — | — | — | |||||||||
Construction and land development | 615 | 657 | 234 | |||||||||
|
|
|
|
|
| |||||||
Total real estate loans | 3,335 | 3,437 | 721 | |||||||||
|
|
|
|
|
| |||||||
Commercial and industrial | 50 | 50 | 21 | |||||||||
Agriculture | — | — | — | |||||||||
Consumer loans: | ||||||||||||
Purchased indirect automobile | 19 | 19 | 5 | |||||||||
Other | 3 | 3 | 4 | |||||||||
|
|
|
|
|
| |||||||
Total consumer loans | 22 | 22 | 9 | |||||||||
|
|
|
|
|
| |||||||
Total loans | 3,407 | 3,509 | 751 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 5,087 | $ | 5,344 | $ | 751 | ||||||
|
|
|
|
|
|
23
Table of Contents
Average Investment in Impaired Loans | Interest Income Recognized | |||||||||||||||
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Loans without a specific allowance | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | $ | 1,329 | $ | 1,035 | $ | 34 | $ | 40 | ||||||||
Home equity lines of credit and other 2nd mortgages | 103 | 69 | 3 | 3 | ||||||||||||
Multi-family | — | — | — | — | ||||||||||||
Commercial | — | — | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Construction and land development | 200 | 200 | 5 | 8 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total real estate loans | 1,632 | 1,304 | 42 | 51 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Commercial and industrial | 3 | — | — | — | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Consumer loans: | — | — | — | — | ||||||||||||
Purchased indirect automobile | — | — | — | — | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer loans | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total loans | $ | 1,635 | $ | 1,304 | $ | 42 | $ | 51 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loans with a specific allowance | ||||||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | $ | 1,424 | $ | 1,042 | $ | 37 | $ | 40 | ||||||||
Home equity lines of credit and other 2nd mortgages | 36 | 43 | 1 | 2 | ||||||||||||
Multi-family | 462 | 462 | 12 | 18 | ||||||||||||
Commercial | — | 541 | — | 21 | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Construction and land development | 615 | 640 | 16 | 25 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total real estate loans | 2,537 | 2,728 | 66 | 106 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Commercial and industrial | 73 | 75 | 2 | 2 | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Purchased indirect automobile | 29 | 72 | — | 2 | ||||||||||||
Other | 2 | 2 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer loans | 31 | 74 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total loans | 2,641 | 2,877 | 68 | 110 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 4,276 | $ | 4,181 | $ | 110 | $ | 161 | ||||||||
|
|
|
|
|
|
|
|
24
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 | ||||||
|
|
|
|
|
|
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.
25
Table of Contents
Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties, that were classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of at least twelve months.
When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or based on the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.
During the quarter ended September 30, 2011, the Company adopted ASU 2011-02. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those receivables newly identified as impaired. As a result of adopting ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011, the beginning of our current fiscal year, for identification as TDRs. The Company identified no loans as troubled debt restructurings for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology. Thereafter there was no additional impact to the allowance for loan losses as a result of the adoption.
Given the current adverse economic environment and negative outlook in the residential real estate market, the Company includes in its methodology for the valuation of loans in its real estate portfolio a methodology that applies downward “qualitative” adjustments to the real estate appraised values for residential loans that are deemed impaired. We believe that these qualitative appraisal adjustments more accurately reflect real estate values in light of the sales experience and economic conditions that we have recently observed. As a result of the increased TDR’s in residential real estate the specific and general allowance have been increased in this category since December 31, 2010.
The following table presents the recorded balance, at original cost, of troubled debt restructurings, all of which were performing according to the terms of the restructuring, but on nonaccrual, as of September 30, 2011 and December 31, 2010:
(Dollars in thousands) | September 30, 2011 | December 31, 2010 | ||||||
Real estate loans: | ||||||||
One-to-four family | $ | 1,377 | $ | — | ||||
Home equity lines of credit and other 2nd mortgages | — | — | ||||||
Multi-family | 923 | — | ||||||
Commercial | — | 686 | ||||||
Farmland | — | — | ||||||
Construction and land development | 615 | 666 | ||||||
|
|
|
| |||||
Total real estate loans | 2,915 | 1,352 | ||||||
|
|
|
| |||||
Commercial and industrial | — | — | ||||||
Agriculture | — | — | ||||||
Consumer loans: | ||||||||
Purchased indirect automobile | — | — | ||||||
Other | — | — | ||||||
|
|
|
| |||||
Total consumer loans | — | — | ||||||
|
|
|
| |||||
Total | $ | 2,915 | $ | 1,352 | ||||
|
|
|
|
26
Table of Contents
The following table represents loans modified as troubled debt restructures during the three and nine month periods ended September 30, 2011:
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | |||||||||||||||
Number of | Recorded | Number of | Recorded | |||||||||||||
(Dollars in thousands) | Modifications | Investment | Modifications | Investment | ||||||||||||
Real estate loans: | ||||||||||||||||
One-to-four family | 1 | $ | 161 | 10 | $ | 1,377 | ||||||||||
Home equity lines of credit and other 2nd mortgages | — | — | — | — | ||||||||||||
Multi-family | 1 | 923 | 1 | 923 | ||||||||||||
Commercial | — | — | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Construction and land development | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total real estate loans | 2 | 1,084 | 11 | 2,300 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Commercial and industrial | — | — | — | — | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Consumer loans: | ||||||||||||||||
Purchased indirect automobile | — | — | — | — | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total consumer loans | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 2 | $ | 1,084 | 11 | $ | 2,300 | ||||||||||
|
|
|
|
|
|
|
|
During the nine month period ended September 30, 2011, the Company modified ten residential real estate loans, with a recorded investment of $1,377 prior to modification, which were deemed TDRs. One of the modifications, totaling $157 was to lower the interest rate and extend the maturity date. This resulted in a specific allowance of $9 based upon the fair value of the collateral. Eight of the modifications, totaling $1,059 involved maturity concessions, and did not result in a reduction in the contractual interest rate or a write-off of the principal balance. Such loans are considered collateral dependent, and the modifications resulted in specific allowances of $72, based upon the fair value of the collateral. Finally, one of the modifications, totaling $161, involved an interest rate concession only and resulted in an impairment loss of $23 based upon the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement.
In addition, the Company modified one multi-family residential real estate loan during the period, which had recorded investment of $923 prior to modification and was deemed a TDR. The Company lowered the interest rate and extended the maturity date, which resulted in a specific allowance of $264 based upon the fair value of the collateral. The restructure also resulted in a specific loss of $60 based upon the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement.
Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of estimating future losses.
Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses.
During the nine month period ended September 30, 2011, one residential real estate loan, totaling $686 that was considered a TDR during the past twelve months defaulted and was transferred to foreclosed assets with a charge-off of $152. Default occurs when a loan or lease is 90 days or more past due, transferred to nonaccrual or charged-off and is within 12 months of restructuring.
27
Table of Contents
The following table presents the Company’s nonaccrual loans at September 30, 2011 and December 31, 2010. This table includes all troubled debt restructurings, all of which are performing.
September 30, 2011 | December 31, 2010 | |||||||
Mortgages on real estate: | ||||||||
One-to-four family | $ | 2,946 | $ | 1,206 | ||||
Home equity lines of credit and other 2nd mortgages | 131 | 94 | ||||||
Multi-family residential | 923 | — | ||||||
Commercial | — | 1,082 | ||||||
Construction and land development | 1,015 | 666 | ||||||
Commercial and industrial | 50 | 99 | ||||||
Purchased indirect automobile | — | 16 | ||||||
Other consumer | 3 | 1 | ||||||
|
|
|
| |||||
Total | $ | 5,068 | $ | 3,164 | ||||
|
|
|
|
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 September 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 Agency (FHFA). During the third quarter, FHLB’s capital plan was approved by the FHFA. This plan will include a capital stock conversion as of January 1, 2012. In conjunction with the capital plan, FHLB is preparing a plan for submission to FHFA, for the FHLB to begin repurchasing excess stock over time after the effective date of the capital plan. The FHLB continues 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 $5 for the nine months ended September 30, 2011. Management performed an analysis as of September 30, 2011 and December 31, 2010 and deemed the cost method investment in FHLB stock was ultimately recoverable.
Note 10: Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) components and related taxes were as follows (in thousands):
Nine Months Ended September, | ||||||||
2011 | 2010 | |||||||
Net unrealized gains (losses) on securities available-for-sale | $ | 36 | $ | (85 | ) | |||
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 | (3 | ) | (26 | ) | ||||
|
|
|
| |||||
Other comprehensive loss, before tax effect | 39 | (58 | ) | |||||
Less income tax expense (benefit) | 14 | (19 | ) | |||||
|
|
|
| |||||
Other comprehensive income (loss) | $ | 25 | $ | (39 | ) | |||
|
|
|
|
28
Table of Contents
The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Net unrealized gain (loss) on securities available-for-sale | $ | 32 | $ | (7 | ) | |||
Tax effect | 11 | (3 | ) | |||||
|
|
|
| |||||
Net-of-tax amount | $ | 21 | $ | (4 | ) | |||
|
|
|
|
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):
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Computed at the statutory rate (34%) | $ | (75 | ) | $ | — | |||
Decrease resulting from | ||||||||
Tax exempt interest | (2 | ) | (7 | ) | ||||
Nondeductible expenses | 1 | 1 | ||||||
Cash surrender value of life insurance | (34 | ) | (39 | ) | ||||
Other | — | (4 | ) | |||||
|
|
|
| |||||
Actual expense (benefit) | $ | (110 | ) | $ | (49 | ) | ||
|
|
|
| |||||
Tax benefit as a percentage of pre-tax income (loss) | (50.00 | )% | (4900.00 | )% | ||||
|
|
|
|
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.
29
Table of Contents
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 September 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) | |||||||||||||
September 30, 2011: | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
US Government and federal agency | $ | 3,870 | $ | — | $ | 3,870 | $ | — | ||||||||
Mortgage-backed securities – GSE residential | 931 | — | 931 | — | ||||||||||||
Equity securities | 469 | 19 | 450 | — | ||||||||||||
Mortgage servicing rights | 384 | — | — | 384 |
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 |
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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 | — | (31 | ) | |||||
Servicing rights that result from asset transfers | — | 40 | ||||||
Loans refinanced | — | (50 | ) | |||||
Maturity of securities | (372 | ) | — | |||||
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Balance, September 30, 2011 | $ | — | $ | 384 | ||||
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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 $1,337 at September 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.
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.
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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 September 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) | |||||||||||||
September 30, 2011: | ||||||||||||||||
Impaired loans (collateral dependent) | $ | 4,336 | $ | — | $ | — | $ | 4,336 | ||||||||
Foreclosed assets | 1,041 | — | — | 1,041 | ||||||||||||
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 September 30, 2011 and December 31, 2010 (in thousands).
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 18,057 | $ | 18,057 | $ | 17,963 | $ | 17,963 | ||||||||
Interest-bearing deposits | 5,762 | 5,762 | 10,825 | 10,825 | ||||||||||||
Available-for-sale securities | 5,270 | 5,270 | 4,965 | 4,965 | ||||||||||||
Held-to-maturity securities | 1,953 | 2,112 | 2,548 | 2,745 | ||||||||||||
Loans, net of allowance for loan losses | 117,281 | 119,293 | 113,153 | 114,607 | ||||||||||||
Federal Home Loan Bank stock | 6,549 | 6,549 | 6,549 | 6,549 | ||||||||||||
Mortgage servicing rights | 384 | 384 | 425 | 425 | ||||||||||||
Interest receivable | 771 | 771 | 901 | 901 | ||||||||||||
Financial liabilities | ||||||||||||||||
Deposits | 131,531 | 132,636 | 132,622 | 132,037 | ||||||||||||
Federal Home Loan Bank advances | 14,191 | 14,726 | 13,653 | 14,130 | ||||||||||||
Advances from borrowers for taxes and insurance | 207 | 207 | 402 | 402 | ||||||||||||
Interest payable | 43 | 43 | 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 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.
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.
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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 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 September 30, 2011, non-performing loans, including troubled debt restructurings, represented 4.24% of total loans, compared to 2.77% at December 31, 2010. Annualized net charge-offs to average loans were 0.48% and 0.41%, for the nine months ended September 30, 2011 and 2010, respectively. The high levels of non-performing loans, including troubled debt restructurings, and net charge-offs contributed to the high provisions for loan losses of $893,000 and $622,000 for the nine months ended September 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 September 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 loss for the quarter ended September 30, 2011 was $(209,000), compared to our net income of $81,000 for the quarter ended September 30, 2010. The decrease in net income to a net loss was due to increases in the provision for loan losses and noninterest expense, and a decrease in noninterest income, respectively, partially offset by an increase in net interest income and a decrease in the provision for income taxes.
Our net loss for the nine months ended September 30, 2011 was $(110,000), compared to our net income of $50,000 for the nine months ended September 30, 2010. The decrease in net income to a net loss was due to increases in the provision for loan losses and noninterest expense, and a decrease in noninterest income, respectively, partially offset by an increase in net interest income and an increase in the benefit for income taxes.
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 September 30, 2011 to its financial condition at December 31, 2010, and the results of operations for the three months and nine months ended September 30, 2011 to the same periods in 2010. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.
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.
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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.
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.
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FINANCIAL CONDITION
Comparison of Financial Condition at September 30, 2011 and December 31, 2010
Total assets at September 30, 2011 decreased $653,000 or 0.4% to $167.1million from $167.8 million at December 31, 2010. Total liabilities decreased $585,000 or 0.4% to $148.6 million at September 30, 2011 from $149.2 million at December 31, 2010. The modest changes in total assets and liabilities were consistent with our strategy to limit growth of our balance sheet in the current economic environment.
Loans, net increased $4.1 million to $117.3 million at September 30, 2011 from $113.2 million at December 31, 2010. During the first nine months of 2011, loan originations, advances and purchases were $40.9 million, which were offset by $6.5 million in loans sold, $28.9 million of loan repayments and payoffs, net of $504,000 in charge-offs, a net increase in allowance for loan losses of $477,000 and transfers to foreclosed assets of $1.4 million. Farmland and agricultural production loans provided most of the growth, increasing $6.1 million or 34.9% to $23.4 million at September 30, 2011 from $17.4 million at December 31, 2011. The increase in loans was funded primarily by maturities of interest-bearing deposits with other financial institutions which decreased $5.1 million during 2011 to $5.8 million at September 30, 2011. Foreclosed assets held for sale at September 30, 2011 increased $530,000 to $1.3 million from $767,000 at December 31, 2010 primarily due to the $1.4 million transfer from the loan portfolio during the nine months ended September 30, 2011, offset partially by sales which provided for net proceeds totaling $631,000, and writedowns of $183,000 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 September 30, 2011. Total stockholders’ equity decreased by $68,000 during the nine months of 2011 to $18.5 million at September 30, 2011. The decrease was primarily due to a net loss of $(110,000) for the nine months ended September 30, 2011.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010
General. Net loss for the three months ended September 30, 2011 was $(209,000), compared to net income of $81,000 for the three months ended September 30, 2010, a decrease in net income of $290,000. The decrease in net income was due to increases in the provision for loan losses and noninterest expense of $407,000 and $83,000, and a decrease in noninterest income of $70,000, respectively, partially offset by an increase in net interest income of $127,000 and a decrease in the provision for income taxes of $143,000.
Interest and Dividend Income. Total interest and dividend income decreased $75,000 or 3.9% to $1.85 million for the three months ended September 30, 2011 from $1.93 million for the same period in 2010. Although average interest-earning assets increased $2.5 million to $156.4 million for the three months ended September 30, 2011 from $153.8 million for the same quarter in 2010, the average yield decreased 28 basis points to 4.74% from 5.02%. 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 September 30, 2011 compared to the quarter ended September 30, 2010. Interest and fees on loans decreased $73,000 during the period as the average balance of loans decreased $5.7 million to $117.7 million primarily due to repayments and sales of loans outpacing originations and purchases, offset partially by higher average yield on loans, which increased 3 basis points to 5.86% from 5.83%. Interest income on securities and other interest-earning assets decreased $2,000 for the three months ended September 30, 2011 compared to the year ago period as average balances increased $8.3 million, primarily due to slower loan demand, and the average yield on those assets decreased 39 basis points to 1.33% from 1.72%, due to the lower interest rate environment.
Interest Expense. Total interest expense decreased $202,000 or 26.9% to $549,000 for the three months ended September 30, 2011 from $751,000 for the same period in 2010. Interest expense on deposit accounts decreased $151,000 or 25.3% to $445,000 for the three months ended September 30, 2011 from $596,000 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 $131,000 during the period while interest expense on savings, NOW and money market accounts decreased $20,000. The average balances of savings, NOW and money market accounts increased $2.3 million while the cost of these deposits decreased 19 basis points to 0.23% during the three months ended September 30, 2011 from the three months ended September 30, 2010. The average balance in certificates of deposits and brokered certificates of deposit increased $1.4 million, with the cost of these deposits decreasing 70 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.
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Interest expense on Federal Home Loan Bank advances decreased $51,000 to $104,000 for the three months ended September 30, 2011 from $155,000 for the three months ended September 30, 2010. The average balance of advances decreased $2.1 million while the average cost of this funding decreased 87 basis points for the three months ended September 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 borrowed funds. 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 $127,000 or 10.8% to $1.3 million for the three months ended September 30, 2011 from $1.2 million for the three months ended September 30, 2010, primarily as a result of an increase in our net interest rate spread of 32 basis points to 3.19% from 2.87%. The ratio of our average interest-earning assets to average interest-bearing liabilities increased to 110.20% for the three months ended September 30, 2011 from 109.63% for the same period in 2010. Our net interest margin increased to 3.34% from 3.06%. 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 long-term fixed –rate 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.
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 $597,000 was recorded for the three months ended September 30, 2011, an increase of $407,000 or 214.2% from $190,000 for the three months ended September 30, 2010. The provision for loan losses reflected net charge offs of $163,000 for the three months ended September 30, 2011, compared to $118,000 for the three months ended September 30, 2010. The allowance for loan losses was $2.4 million, or 1.96% of total loans at September 30, 2011, compared to $1.9 million, or 1.63% of total loans at December 31, 2010. At September 30, 2011, we had identified substandard loans totaling $5.1 million, all of which were considered impaired, and established an allowance for loan losses of $751,000. 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 46.37% at September 30, 2011 from 47.06% at September 30, 2010. Nonperforming loans increased to $5.1 million at September 30, 2011, compared to $3.6 million at September 30, 2010. Net charge-offs as a percent of average total loans outstanding increased to 0.55% for the quarter ended September 30, 2011 from 0.38% for the same quarter in 2010, due to an increase in net charge-offs of $45,000 to $163,000, partially offset by a $5.7 million decrease in average loans outstanding to $117.7 million.
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To the best of our knowledge, we have recorded all losses that are both probable and reasonably estimable for the three months ended September 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 September 30, 2011 and December 31, 2010 (dollars in thousands).
September 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 | $ | 542 | 23.05 | % | 38.01 | % | $ | 352 | 18.79 | % | 39.60 | % | ||||||||||||
Home equity line of credit and other 2nd mortgage | 183 | 7.79 | 8.90 | 150 | 8.01 | 9.90 | ||||||||||||||||||
Multi-family | 292 | 12.43 | 1.24 | 34 | 1.82 | 1.24 | ||||||||||||||||||
Commercial | 520 | 22.13 | 21.10 | 629 | 33.58 | 23.21 | ||||||||||||||||||
Farmland | 116 | 4.94 | 6.47 | 5 | 0.26 | 3.15 | ||||||||||||||||||
Construction and land development | 278 | 11.83 | 2.06 | 291 | 15.54 | 1.38 | ||||||||||||||||||
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Total real estate loans | 1,931 | 82.17 | 77.78 | 1,461 | 78.00 | 78.48 | ||||||||||||||||||
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Commercial and industrial | 96 | 4.09 | 3.82 | 97 | 5.18 | 4.13 | ||||||||||||||||||
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Agriculture | 235 | 10.00 | 13.10 | 206 | 11.00 | 11.94 | ||||||||||||||||||
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Consumer loans: | ||||||||||||||||||||||||
Purchased indirect automobile | 82 | 3.48 | 5.16 | 105 | 5.61 | 5.13 | ||||||||||||||||||
Other | 6 | 0.26 | 0.14 | 4 | 0.21 | 0.32 | ||||||||||||||||||
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Total consumer loans | 88 | 3.74 | 5.30 | 109 | 5.82 | 5.45 | ||||||||||||||||||
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Unallocated | — | — | — | — | 0.00 | 0.00 | ||||||||||||||||||
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Total allowance for loan losses | $ | 2,350 | 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 increase in nonperforming loans and related specific reserves of $1.7 million and $109,000, and an increase in the allowance of $67,000 for the recourse obligation on loans sold to the Federal Home Loan Bank which was impacted by claims processed on loan foreclosures. The increase in the allowance for loan losses allocated to multi-family real estate loans was primarily due to one loan secured by a senior-assisted living center with a balance of $923,000, net of an impairment loss of $60,000, with a related specific reserve of $264,000 that was a troubled debt restructuring during the quarter ended September 30, 2011.
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 nine months ended September 30, 2011. Charge-offs in the amount of $162,000 were incurred on those loans in 2011.
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The following table sets forth information regarding nonperforming assets at the dates indicated (dollars in thousands):
At September 30, 2011 | At December 31, 2010 | |||||||
Non-accrual loans: | ||||||||
Real estate loans: | ||||||||
One-to four-family | $ | 2,946 | $ | 1,206 | ||||
Home equity lines of credit and other 2nd mortgage | 131 | 94 | ||||||
Multi-family residential | 923 | — | ||||||
Commercial | — | 1,082 | ||||||
Construction and land development | 1,015 | 666 | ||||||
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Total real estate loans | 5,015 | 3,048 | ||||||
Commercial and industrial | 50 | 99 | ||||||
Consumer loans: | ||||||||
Purchased indirect automobile | — | 16 | ||||||
Other | 3 | 1 | ||||||
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Total consumer loans | 3 | 17 | ||||||
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Total non-accrual loans | 5,068 | 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 | 5,068 | 3,181 | ||||||
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Other real estate owned: | ||||||||
One-to four family | 419 | 696 | ||||||
Commercial | 825 | — | ||||||
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Total other real estate owned | 1,244 | 696 | ||||||
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Repossessed automobiles | 53 | 71 | ||||||
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Total non-performing assets | 6,365 | 3,948 | ||||||
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Troubled debt restructurings (not included in nonaccrual loans above) | — | — | ||||||
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Total non-performing assets and troubled debt restructurings | $ | 6,365 | $ | 3,948 | ||||
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Total non-performing loans to total loans | 4.24 | % | 2.77 | % | ||||
Total non-performing assets to total assets | 3.81 | % | 2.35 | % | ||||
Total non-performing loans and troubled debt restructurings to total loans | 4.24 | % | 2.77 | % | ||||
Total non-performing assets and troubled debt restructurings to total assets | 3.81 | % | 2.35 | % |
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Table of Contents
The increase in nonaccrual one-to four-family real estate loans is in part due to the addition of loans totaling $625,000 that were troubled debt restructurings in 2011, that are current to the terms of the restructuring, as well as an increase of $793,000 in loans contractually delinquent 90 days or more.
The increase in nonaccrual multi-family real estate loans was due to one loan secured by a senior-assisted living center with a balance of $923,000, net of an impairment loss of $60,000, that was a troubled debt restructuring 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 increase in nonaccrual construction and land development loans was due primarily to one loan secured by commercial land for development in McHenry County with a balance of $400,000, net of a partial charge-off of $50,000, which is more than 90 days past due and in foreclosure.
The following table shows the aggregate principal amount of potential problem loans on the Company’s watch list at September 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).
September 30, 2011 | December 31, 2010 | |||||||
Watch loans | $ | 3,749 | $ | 4,779 | ||||
Special Mention loans | 3,186 | 2,774 | ||||||
Substandard loans | 5,087 | 3,274 | ||||||
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Total watch list loans | $ | 12,022 | $ | 10,827 | ||||
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The $1.2 million net increase in watch list loans during 2011 is primarily due to a $2.5 million increase in one-to-four family loans, offset partially by $1.1 million in commercial real estate loans transferred to foreclosed assets in 2011.
Noninterest Income. Noninterest income decreased $70,000 or 34.8% to $131,000 for the three months ended September 30, 2011 from $201,000 for the three months ended September 30, 2010. The decrease was primarily due to an increase in net losses on loan sales of $88,000 for the three months ended September 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 for the three months ended September 30, 2011 due to the significant increase in prepayment speeds for the servicing portfolio during the third quarter of 2011. Gains on loan sales for the three months ended September 30, 2010 included the net increase in fair value of servicing rights of $4,000. Net realized gains of $32,000 and $63,000 were recognized on loans sold of $3.6 million and $6.5 million for the three months ended September 30, 2011 and 2010.
Noninterest Expense. Noninterest expense increased $83,000 or 7.6% to $1.2 million for the three months ended September 30, 2011 from $1.1 million for the three months ended September 30, 2010. Increases in compensation and benefits, marketing, office supplies, foreclosed assets net, and other expenses in 2011 compared to 2010, were partially offset by decreases in occupancy, data processing, professional fees, federal deposit insurance and indirect automobile loan servicing fees. The largest increase was foreclosed assets, net, which increased $119,000 to $105,000, due primarily to higher losses and writedowns on foreclosed assets for sale of $99,000 for the three months ended September 30, 2011, compared to a net gain of $23,000 for the same period in 2010. The largest decrease was federal deposit insurance which decreased $32,000 to $21,000 due to a reduced fee structure.
Provision (Benefit) for Income Taxes. The benefit for income taxes was $124,000 for the three months ended September 30, 2011 compared to a provision of $19,000 for the same period in 2010, a decrease of $143,000. The lower income tax expense for the third quarter of 2011 reflects a lower level of pre-tax income, compared to 2010. The effective tax benefit as a percent of pre-tax loss was 37.24% for the three months ended September 30, 2011, compared to an effective tax expense as a percent of pre-tax income of 19.00% for the three months ended September 30, 2010.
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Table of Contents
Comparison of Operating Results for the Nine Months Ended September 30, 2011 and 2010
General. Net loss for the nine months ended September 30, 2011 was $(110,000), compared to net income of $50,000 for the nine months ended September 30, 2010, a decrease of $160,000. The decrease in net income was due to increases in the provision for loan losses and noninterest expense of $271,000 and $139,000, and a decrease in noninterest income of $32,000, respectively, partially offset by increases in net interest income and the benefit for income taxes of $221,000 and $61,000, respectively.
Interest and Dividend Income. Total interest and dividend income decreased $339,000 or 5.8% to $5.5 million for the nine months ended September 30, 2011 from $5.8 million for the same period in 2010. Although average interest-earning assets increased $4.7 million to $156.2 million for the nine months ended September 30, 2011 from $151.6 million for the same period in 2010, the average yield decreased 44 basis points to 4.66% from 5.10%. 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 $301,000 for the first three quarters of 2011 compared to the same period in 2010 as the average balance of loans decreased $5.5 million to $115.6 million primarily due to repayments and sales of loans outpacing originations and purchases, and as the average yield on loans decreased 6 basis points to 5.86% from 5.92%. Interest income on securities and other interest-earning assets decreased $38,000 for the nine months ended September 30, 2011 compared to the year ago period as the average yield on those assets decreased 59 basis points to 1.25% from 1.84%, due to the lower interest rate environment, offset by an increase in average balances of those assets of $10.2 million, primarily due to slower loan demand.
Interest Expense. Total interest expense decreased $560,000 or 24.3% to $1.7 million for the nine months ended September 30, 2011 from $2.3 million for the same period in 2010. Interest expense on deposit accounts decreased $402,000 or 22.1% to $1.4 for the nine months ended September 30, 2011 from $1.8 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 $324,000, while interest expense on savings, NOW and money market accounts decreased $78,000 during the period. The average balance in certificates of deposits and brokered certificates of deposit increased $2.7 million, with the cost of these deposits decreasing 64 basis points to 2.19% for the nine months ended September 30, 2011 compared to the same period in 2010. The average balances of savings, NOW and money market accounts increased $2.3 million while the cost of these deposits decreased 24 basis points to 0.28% during the nine months ended September 30, 2011 from the nine months ended September 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 $158,000 to $330,000 for the nine months ended September 30, 2011 from $488,000 for the nine months ended September 30, 2010. The average balance of advances decreased $3.0 million while the average cost of this funding decreased 68 basis points to 3.18% for the nine months ended September 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 $221,000 or 6.3% to $3.7 million for the nine months ended September 30, 2011 from $3.5 million for the nine months ended September 30, 2010, primarily as a result of the ratio of our average interest-earning assets to average interest-bearing liabilities which increased to 110.07% for the nine months ended September 30, 2011 from 108.28% for the same period in 2010, and modest improvement in our net interest rate spread and net interest margin to 3.02% and 3.17%, respectively, from 2.91% and 3.08%, respectively.
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Provision for Loan Losses.
The following table shows the activity in the allowance for loan losses for the nine months ended September 30, 2011 and 2010 (dollars in thousands):
2011 | 2010 | |||||||
Allowance at beginning of period | $ | 1,873 | $ | 1,426 | ||||
Provision for loan losses | ||||||||
Charge-offs: | 893 | 622 | ||||||
Real estate loans: | ||||||||
One-to four family | 157 | 90 | ||||||
Home equity line of credit and other 2nd mortgage | 5 | 25 | ||||||
Multi-family residential | 60 | — | ||||||
Commercial | 163 | 195 | ||||||
Construction and land development | 50 | 2 | ||||||
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Total charge-offs, real estate loans | 435 | 312 | ||||||
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Consumer loans: | ||||||||
Purchased indirect automobile | 68 | 98 | ||||||
Other | 1 | 1 | ||||||
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Total charge-offs, consumer loans | 69 | 99 | ||||||
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Total charge-offs | 504 | 411 | ||||||
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Recoveries: | ||||||||
Real estate loans: | ||||||||
One-to four family | 44 | 12 | ||||||
Commercial | 38 | — | ||||||
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Total recoveries, real estate loans | 82 | 12 | ||||||
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Commercial and industrial | — | 5 | ||||||
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Consumer loans: | ||||||||
Purchased indirect automobile | 6 | 21 | ||||||
Other | — | — | ||||||
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Total recoveries, consumer loans | 6 | 21 | ||||||
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Total recoveries | 88 | 38 | ||||||
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Net charge-offs | 416 | 373 | ||||||
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Allowance at end of period | $ | 2,350 | $ | 1,675 | ||||
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Allowance to non-performing loans | 46.37 | % | 47.06 | % | ||||
Allowance to total loans outstanding at the end of the period | 1.96 | % | 1.37 | % | ||||
Net charge-offs to average total loans outstanding during the period | 0.48 | % | 0.41 | % |
Based upon our evaluation of these factors, a provision of $893,000 was recorded for the nine months ended September 30, 2011, an increase of $271,000 or 43.6% from $622,000 for the same period in 2010. The provision for loan losses reflected net charge offs of $416,000 or 0.48% of average total loans for the first three quarters of 2011, compared to $373,000 or 0.41% of average total loans for the same period in 2010. Substandard loans increased $1.9 million to $5.1 million during the nine months ended September 30, 2011, while the related specific loss allowances for those loans increased $174,000 to $751,000. Substandard loans were unchanged at $3.7 million at September 30, 2010 from December 31, 2009, while the related specific loss allowances decreased by $92,000 to $339,000. 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 nine months ended September 30, 2011 and 2010, respectively.
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Noninterest Income. Noninterest income decreased $32,000 or 6.2% to $487,000 for the nine months ended September 30, 2011 from $519,000 for the nine months ended September 30, 2010. The decrease was primarily related to net gains on loan sales which decreased $50,000 to $26,000 for the nine months ended September 30, 2011, compared to $76,000 for the same period in 2010. Net realized gains of $67,000 and $110,000 were recognized on loans sold of $6.6 million and $14.1 million for the nine months ended September 30, 2011 and 2010. Gains on loan sales included the net decrease in fair value of mortgage servicing rights of $41,000 in 2011 compared to $34,000 for the same period in 2010. The decreases in fair value of mortgage servicing rights were primarily due to the increase in prepayment speeds for the servicing portfolio during the nine months ended September 30, 2011 and 2010.
Noninterest Expense. Noninterest expense increased $139,000 or 4.1% to $3.5 million for the nine months ended September 30, 2011 from $3.4 million for the nine months ended September 30, 2010. The increase in noninterest expense was primarily due to increases in professional fees, foreclosed assets, net, and other noninterest expense of $20,000, $155,000, and $43,000, respectively for the nine months ended September 30, 2011 compared to the same period in 2010. The increase in losses on foreclosed assets, net was primarily due to losses from writedowns and sales of foreclosed assets totaling $195,000 in 2011 compared to writedowns and losses on sales totaling $27,000 in 2010, an increase of $168,000. 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 decreases in federal deposit insurance and indirect automobile loan servicing fees of $43,000 and $37,000, respectively, for the nine months ended September 30, 2011 compared to the same period in 2010. The decrease in federal deposit insurance is due to lower applicable rates in 2011. The decrease in indirect automobile loan servicing fees was due to lower average balance of loans being serviced which decreased $3.0 million to $6.0 million in 2011.
Provision (Benefit) for Income Taxes. The benefit for income taxes increased $61,000 to $110,000 for the nine months ended September 30, 2011 compared to a benefit $49,000 for the same period in 2010. The higher benefit for income taxes for 2011 reflects the higher pre-tax loss 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 $1.3 and $1.6 million for the nine months ended September 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 used in investing activities were $408,000 and $12.0 million for the nine months ended September 30, 2011 and 2010, respectively. For the nine months ended September 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 $(748,000) and $7.0 million for the nine months ended September 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 September 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 September 30, 2011. Management is not aware of any conditions or events since the most recent notification that would change our category.
September 30, 2011 | December 31, 2010 | Minimum | ||||||||||
Actual | Actual | Required | ||||||||||
Tier 1 capital to average assets | 9.91 | % | 10.2 | % | 5.0 | % | ||||||
Tier 1 capital to risk-weighted assets | 12.72 | % | 14.5 | % | 6.0 | % | ||||||
Total capital to risk-weighted assets | 13.85 | % | 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 September 30, 2011 and December 31, 2010 (in thousands).
September 30, 2011 | December 31, 2010 | |||||||
Commitments to fund loans | $ | 11,281 | $ | 17,500 | ||||
Standby letters of credit | 6 | 125 |
Certificates of deposit that are scheduled to mature in less than one year from September 30, 2011 totaled $41.3 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 September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Income/ | |||||||||||||||||||||
Balance | Expense | Yield/Cost | Balance | Expense | Yield/Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest- earning assets: | ||||||||||||||||||||||||
Interest -earning deposits | $ | 7,459 | $ | 26 | 1.39 | % | $ | 10,819 | $ | 41 | 1.52 | % | ||||||||||||
Securities purchased under agreements to resell | 17,586 | 42 | 0.96 | % | 6,579 | 22 | 1.34 | % | ||||||||||||||||
Securities, tax-exempt | 100 | 1 | 4.00 | % | 462 | 6 | 5.19 | % | ||||||||||||||||
Securities, taxable | 7,023 | 58 | 3.30 | % | 6,032 | 62 | 4.11 | % | ||||||||||||||||
Loans | 117,668 | 1,725 | 5.86 | % | 123,406 | 1,798 | 5.83 | % | ||||||||||||||||
Federal Home Loan Bank stock | 6,549 | 2 | 0.12 | % | 6,549 | — | 0.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 156,385 | 1,854 | 4.74 | % | 153,847 | 1,929 | 5.02 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest earning assets | 11,903 | 12,198 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 168,288 | $ | 166,045 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 15,546 | 8 | 0.21 | % | $ | 14,215 | 12 | 0.34 | % | ||||||||||||||
NOW and money market accounts | 32,326 | 20 | 0.25 | % | 31,327 | 36 | 0.46 | % | ||||||||||||||||
Certificates of deposit | 78,369 | 398 | 2.03 | % | 75,690 | 516 | 2.73 | % | ||||||||||||||||
Brokered certificates of deposit | 1,499 | 19 | 5.07 | % | 2,812 | 32 | 4.55 | % | ||||||||||||||||
Federal Home Loan Bank advances | 14,166 | 104 | 2.94 | % | 16,294 | 155 | 3.81 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 141,906 | 549 | 1.55 | % | 140,338 | 751 | 2.14 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest-bearing deposits | 4,389 | 4,130 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,168 | 2,994 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities | 149,463 | 147,462 | ||||||||||||||||||||||
Equity | 18,825 | 18,583 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and equity | $ | 168,288 | $ | 166,045 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ | 1,305 | $ | 1,178 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread | 3.19 | % | 2.87 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin | 3.34 | % | 3.06 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Average interest earning assets to average interest-bearing liabilities | 110.20 | % | 109.63 | % | ||||||||||||||||||||
|
|
|
|
48
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 September 30, | ||||||||||||
2011 Compared to 2010 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
Interest income: | ||||||||||||
Interest-earning deposits | $ | (3 | ) | $ | (12 | ) | $ | (15 | ) | |||
Securities purchased under agreements to resell | (4 | ) | 24 | 20 | ||||||||
Securities, tax-exempt | (1 | ) | (4 | ) | (5 | ) | ||||||
Securities, taxable | (24 | ) | 20 | (4 | ) | |||||||
Loans | 11 | (84 | ) | (73 | ) | |||||||
Federal Home Loan Bank stock | 2 | — | 2 | |||||||||
|
|
|
|
|
| |||||||
Total | (19 | ) | (56 | ) | (75 | ) | ||||||
|
|
|
|
|
| |||||||
Interest Expense: | ||||||||||||
Savings accounts | (5 | ) | 1 | (4 | ) | |||||||
NOW and money market accounts | (17 | ) | 1 | (16 | ) | |||||||
Certificates of deposit | (137 | ) | 19 | (118 | ) | |||||||
Brokered certificates of deposit | 4 | (17 | ) | (13 | ) | |||||||
Federal Home Loan Bank advances | (32 | ) | (19 | ) | (51 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (187 | ) | (15 | ) | (202 | ) | ||||||
|
|
|
|
|
| |||||||
Increase in net interest income | $ | 168 | $ | (41 | ) | $ | 127 | |||||
|
|
|
|
|
|
49
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):
Nine Months Ended September 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Income/ | |||||||||||||||||||||
Balance | Expense | Yield/Cost | Balance | Expense | Yield/Cost | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest- earning assets: | ||||||||||||||||||||||||
Interest -earning deposits | $ | 9,321 | $ | 93 | 1.33 | % | $ | 11,371 | $ | 132 | 1.55 | % | ||||||||||||
Securities purchased under agreements to resell | 17,697 | 138 | 1.04 | % | 5,551 | 58 | 1.39 | % | ||||||||||||||||
Securities, tax-exempt | 227 | 8 | 4.70 | % | 580 | 20 | 4.60 | % | ||||||||||||||||
Securities, taxable | 6,871 | 138 | 2.68 | % | 6,408 | 210 | 4.37 | % | ||||||||||||||||
Loans | 115,580 | 5,081 | 5.86 | % | 121,120 | 5,382 | 5.92 | % | ||||||||||||||||
Federal Home Loan Bank stock | 6,549 | 5 | 0.10 | % | 6,549 | — | 0.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest earning assets | 156,245 | 5,463 | 4.66 | % | 151,579 | 5,802 | 5.10 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest earning assets | 11,929 | 12,316 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total assets | $ | 168,174 | $ | 163,895 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Savings accounts | $ | 15,703 | 31 | 0.26 | % | $ | 14,171 | 39 | 0.37 | % | ||||||||||||||
NOW and money market accounts | 32,572 | 71 | 0.29 | % | 31,826 | 141 | 0.59 | % | ||||||||||||||||
Certificates of deposit | 78,355 | 1,258 | 2.14 | % | 74,310 | 1,542 | 2.77 | % | ||||||||||||||||
Brokered certificates of deposit | 1,499 | 56 | 4.98 | % | 2,812 | 96 | 4.55 | % | ||||||||||||||||
Federal Home Loan Bank advances | 13,827 | 330 | 3.18 | % | 16,867 | 488 | 3.86 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total interest-bearing liabilities | 141,956 | 1,746 | 1.64 | % | 139,986 | 2,306 | 2.20 | % | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Non-interest-bearing deposits | 4,247 | 4,914 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,203 | 3,061 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities | 149,406 | 147,961 | ||||||||||||||||||||||
Equity | 18,768 | 15,934 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total liabilities and equity | $ | 168,174 | $ | 163,895 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest income | $ | 3,717 | $ | 3,496 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Interest rate spread | 3.02 | % | 2.91 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net interest margin | 3.17 | % | 3.08 | % | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Average interest earning assets to average interest-bearing liabilities | 110.07 | % | 108.28 | % | ||||||||||||||||||||
|
|
|
|
50
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).
Nine Months Ended September 30, | ||||||||||||
2011 Compared to 2010 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Rate | Volume | Net | ||||||||||
Interest income: | ||||||||||||
Interest-earning deposits | $ | (13 | ) | $ | (26 | ) | $ | (39 | ) | |||
Securities purchased under agreements to resell | (7 | ) | 87 | 80 | ||||||||
Securities, tax-exempt | — | (12 | ) | (12 | ) | |||||||
Securities, taxable | (100 | ) | 28 | (72 | ) | |||||||
Loans | (41 | ) | (260 | ) | (301 | ) | ||||||
Federal Home Loan Bank stock | 5 | — | 5 | |||||||||
|
|
|
|
|
| |||||||
Total | (156 | ) | (183 | ) | (339 | ) | ||||||
|
|
|
|
|
| |||||||
Interest Expense: | ||||||||||||
Savings accounts | (19 | ) | 11 | (8 | ) | |||||||
NOW and money market accounts | (75 | ) | 5 | (70 | ) | |||||||
Certificates of deposit | (444 | ) | 160 | (284 | ) | |||||||
Brokered certificates of deposit | 6 | (46 | ) | (40 | ) | |||||||
Federal Home Loan Bank advances | (62 | ) | (96 | ) | (158 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (594 | ) | 34 | (560 | ) | |||||||
|
|
|
|
|
| |||||||
Increase (decrease) in net interest income | $ | 438 | $ | (217 | ) | $ | 221 | |||||
|
|
|
|
|
|
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 September 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.
51
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.
Item 1.A. | Risk Factors |
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 |
52
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:November 14, 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 |
53