Item 1:
|
Financial Statements
|
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
72,995
|
|
|
|
83,660
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Mortgage-backed and related securities
(amortized cost $8,090 and $9,825)
|
|
|
8,586
|
|
|
|
10,421
|
|
Other marketable securities
(amortized cost $82,773 and $75,759)
|
|
|
82,438
|
|
|
|
75,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,024
|
|
|
|
85,891
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
2,210
|
|
|
|
2,584
|
|
Loans receivable, net
|
|
|
434,634
|
|
|
|
454,045
|
|
Accrued interest receivable
|
|
|
1,971
|
|
|
|
2,018
|
|
Real estate, net
|
|
|
9,918
|
|
|
|
10,595
|
|
Federal Home Loan Bank stock, at cost
|
|
|
4,063
|
|
|
|
4,063
|
|
Mortgage servicing rights, net
|
|
|
1,783
|
|
|
|
1,732
|
|
Premises and equipment, net
|
|
|
7,019
|
|
|
|
7,173
|
|
Prepaid expenses and other assets
|
|
|
1,469
|
|
|
|
1,566
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
627,086
|
|
|
|
653,327
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
487,645
|
|
|
|
514,951
|
|
Federal Home Loan Bank advances
|
|
|
70,000
|
|
|
|
70,000
|
|
Accrued interest payable
|
|
|
173
|
|
|
|
247
|
|
Customer escrows
|
|
|
1,365
|
|
|
|
830
|
|
Accrued expenses and other liabilities
|
|
|
6,850
|
|
|
|
6,465
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
566,033
|
|
|
|
592,493
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Serial preferred stock ($.01 par value):
|
|
|
|
|
|
|
|
|
Authorized 500,000 shares; issued shares 26,000
|
|
|
25,481
|
|
|
|
25,336
|
|
Common stock ($.01 par value):
|
|
|
|
|
|
|
|
|
Authorized 11,000,000; issued shares 9,128,662
|
|
|
91
|
|
|
|
91
|
|
Additional paid-in capital
|
|
|
51,691
|
|
|
|
51,795
|
|
Retained earnings, subject to certain restrictions
|
|
|
47,386
|
|
|
|
47,004
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(195
|
)
|
|
|
(49
|
)
|
Unearned employee stock ownership plan shares
|
|
|
(2,949
|
)
|
|
|
(2,997
|
)
|
Treasury stock, at cost 4,722,418 and 4,705,073 shares
|
|
|
(60,452
|
)
|
|
|
(60,346
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
61,053
|
|
|
|
60,834
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
627,086
|
|
|
|
653,327
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
6,028
|
|
|
|
7,796
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Mortgage-backed and related
|
|
|
94
|
|
|
|
193
|
|
Other marketable
|
|
|
139
|
|
|
|
249
|
|
Cash equivalents
|
|
|
33
|
|
|
|
27
|
|
Other
|
|
|
29
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
6,323
|
|
|
|
8,275
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
557
|
|
|
|
1,217
|
|
Federal Home Loan Bank advances
|
|
|
835
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,392
|
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
4,931
|
|
|
|
6,213
|
|
Provision for loan losses
|
|
|
0
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
4,931
|
|
|
|
6,341
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Fees and service charges
|
|
|
789
|
|
|
|
829
|
|
Loan servicing fees
|
|
|
248
|
|
|
|
232
|
|
Gain on sales of loans
|
|
|
678
|
|
|
|
909
|
|
Gain on sale of branch office
|
|
|
0
|
|
|
|
552
|
|
Other
|
|
|
159
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
1,874
|
|
|
|
2,706
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,199
|
|
|
|
3,413
|
|
Gain on real estate owned
|
|
|
(19
|
)
|
|
|
(77
|
)
|
Occupancy
|
|
|
850
|
|
|
|
882
|
|
Deposit insurance
|
|
|
318
|
|
|
|
270
|
|
Data processing
|
|
|
330
|
|
|
|
337
|
|
Other
|
|
|
1,361
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
6,039
|
|
|
|
6,243
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
766
|
|
|
|
2,804
|
|
Income tax expense
|
|
|
25
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
741
|
|
|
|
2,804
|
|
Preferred stock dividends and discount
|
|
|
(476
|
)
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
265
|
|
|
|
2,343
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during the period
|
|
$
|
(146
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
|
|
(146
|
)
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to common shareholders
|
|
$
|
119
|
|
|
|
2,164
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.07
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.06
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
For the Three Month Period Ended March 31, 2013
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Unearned
Employee
Stock
Ownership
Plan
Shares
|
|
|
Treasury
Stock
|
|
|
Total
Stock-
Holders
Equity
|
|
Balance, December 31, 2012
|
|
$
|
25,336
|
|
|
|
91
|
|
|
|
51,795
|
|
|
|
47,004
|
|
|
|
(49
|
)
|
|
|
(2,997
|
)
|
|
|
(60,346
|
)
|
|
|
60,834
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
741
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
(146
|
)
|
Preferred stock discount amortization
|
|
|
145
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock awards cancelled
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
(88
|
)
|
Amortization of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Preferred stock dividends accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
Earned employee stock ownership plan shares
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
25,481
|
|
|
|
91
|
|
|
|
51,691
|
|
|
|
47,386
|
|
|
|
(195
|
)
|
|
|
(2,949
|
)
|
|
|
(60,452
|
)
|
|
|
61,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
741
|
|
|
|
2,804
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
0
|
|
|
|
(128
|
)
|
Depreciation
|
|
|
273
|
|
|
|
291
|
|
Amortization of premiums, net
|
|
|
26
|
|
|
|
37
|
|
Amortization of deferred loan fees
|
|
|
(71
|
)
|
|
|
(64
|
)
|
Amortization of mortgage servicing rights
|
|
|
161
|
|
|
|
175
|
|
Capitalized mortgage servicing rights
|
|
|
(212
|
)
|
|
|
(187
|
)
|
Gain on sales of real estate and premises
|
|
|
(19
|
)
|
|
|
(77
|
)
|
Gain on sales of loans
|
|
|
(678
|
)
|
|
|
(909
|
)
|
Proceeds from sale of loans held for sale
|
|
|
26,527
|
|
|
|
27,605
|
|
Disbursements on loans held for sale
|
|
|
(24,953
|
)
|
|
|
(22,672
|
)
|
Amortization of restricted stock awards
|
|
|
40
|
|
|
|
76
|
|
Amortization of unearned ESOP shares
|
|
|
48
|
|
|
|
49
|
|
Cancellation of vested restricted stock awards
|
|
|
(88
|
)
|
|
|
0
|
|
Earned employee stock ownership shares priced below original cost
|
|
|
(18
|
)
|
|
|
(23
|
)
|
Stock option compensation
|
|
|
1
|
|
|
|
2
|
|
Decrease in accrued interest receivable
|
|
|
47
|
|
|
|
187
|
|
Decrease in accrued interest payable
|
|
|
(74
|
)
|
|
|
(218
|
)
|
Decrease in other assets
|
|
|
99
|
|
|
|
377
|
|
Increase (decrease) in other liabilities
|
|
|
11
|
|
|
|
(745
|
)
|
Other, net
|
|
|
125
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,986
|
|
|
|
6,654
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Principal collected on securities available for sale
|
|
|
1,738
|
|
|
|
2,979
|
|
Proceeds collected on maturities of securities available for sale
|
|
|
3,000
|
|
|
|
35,000
|
|
Purchases of securities available for sale
|
|
|
(10,034
|
)
|
|
|
0
|
|
Redemption of Federal Home Loan Bank stock
|
|
|
0
|
|
|
|
50
|
|
Proceeds from sales of real estate and premises
|
|
|
572
|
|
|
|
3,508
|
|
Net decrease in loans receivable
|
|
|
18,973
|
|
|
|
14,063
|
|
Gain on sale of branch office
|
|
|
0
|
|
|
|
(552
|
)
|
Payment on sale of branch office
|
|
|
0
|
|
|
|
(36,981
|
)
|
Purchases of premises and equipment
|
|
|
(119
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
14,130
|
|
|
|
18,042
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease in deposits
|
|
|
(27,316
|
)
|
|
|
(47,250
|
)
|
Increase in customer escrows
|
|
|
535
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(26,781
|
)
|
|
|
(46,559
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(10,665
|
)
|
|
|
(21,863
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
83,660
|
|
|
|
67,840
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
72,995
|
|
|
|
45,977
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,467
|
|
|
|
2,280
|
|
Cash paid for income taxes
|
|
|
155
|
|
|
|
5
|
|
Supplemental noncash flow disclosures:
|
|
|
|
|
|
|
|
|
Transfer of loans to real estate
|
|
|
0
|
|
|
|
478
|
|
Loans transferred to loans held for sale
|
|
|
509
|
|
|
|
3,818
|
|
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1)
HMN Financial, Inc.
HMN Financial, Inc. (HMN or the Company) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank
(the Bank). The Bank has a community banking philosophy and operates retail banking and loan production offices in Minnesota and Iowa. The Bank has one wholly owned subsidiary, Osterud Insurance Agency, Inc. (OIA), which offers financial planning
products and services. HMN has another wholly owned subsidiary, Security Finance Corporation (SFC), which is currently not actively engaged in any activities.
The consolidated financial statements included herein are for HMN, SFC, the Bank and OIA. All significant intercompany accounts and transactions have been eliminated in consolidation.
(2)
Basis of Preparation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statement of stockholders equity and consolidated statements of
cash flows in conformity with U.S. generally accepted accounting principles. However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been
included. The results of operations for the three-month period ended March 31, 2013 is not necessarily indicative of the results which may be expected for the entire year.
(3)
New Accounting Standards
In January 2013, the Financial Accounting Standards Board (the FASB) issued ASU 2013-01,
Balance Sheet (Topic
210).
The objective of this ASU is to clarify that the scope of ASU 2011-11,
Balance Sheet (Topic 210),
applies to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This ASU is the final version of
proposed ASU 2011-11,
Balance Sheet (Topic 210),
which has been deleted. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption
of this ASU in the first quarter of 2013 did not have any impact on the Companys consolidated financial statements as it has no outstanding rights of setoff.
In February 2013, the FASB issued ASU 2013-02,
Other Comprehensive Income (Topic 220)
. The
amendments in the ASU supersede and replace the presentation requirements of reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private
organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective prospectively for reporting periods beginning
after December 15, 2012. The adoption of this ASU in the first quarter of 2013 did not have a material impact on the Companys consolidated financial statements.
(4)
Derivative Instruments and Hedging Activities
The Company had commitments outstanding to extend credit to future borrowers that had not closed prior to the end of the quarter. The
Company intends to sell these commitments, which are referred to as its mortgage pipeline. As commitments to originate or purchase loans enter the mortgage pipeline, the Company generally enters into commitments to sell the mortgage pipeline into
the secondary market on a firm commitment or best efforts basis. The commitments to originate, purchase or sell loans on a firm commitment basis are derivatives and are recorded at market value. As a result of marking these derivatives to market for
the period ended March 31, 2013, the Company recorded an increase in other assets of $2,000, an increase in other liabilities of $4,000 and a loss included in the gain on sales of loans of $2,000. As a result of marking these derivatives to
market for the period ended March 31, 2012, the Company recorded an increase in other assets of $14,000, an increase in other liabilities of $11,000 and a gain included in the gain on sales of loans of $3,000.
7
The current commitments to sell loans held for sale are derivatives that do not qualify for hedge
accounting. As a result, these derivatives are marked to market and the related loans held for sale are recorded at the lower-of-cost-or-market. The Company recorded an increase in other liabilities of $11,000 and a loss included in the gain on
sales of loans of $11,000 for the period ended March 31, 2013. The Company recorded a decrease in other liabilities of $56,000 and a gain included in the gain on sales of loans of $56,000 for the period ended March 31, 2012.
(5)
Fair Value Measurements
ASC 820,
Fair Value Measurements,
establishes a framework for measuring the fair value of
assets and liabilities using a hierarchy system consisting of three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1
- Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability
to access.
Level 2
- Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques for which significant assumptions are observable in the market.
Level 3
- Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available.
These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar
techniques.
The following table summarizes the assets of the Company for which fair values are determined on a recurring basis as of
March 31, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at March 31, 2013
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available for sale
|
|
$
|
91,024
|
|
|
|
41
|
|
|
|
90,983
|
|
|
|
0
|
|
Mortgage loan commitments
|
|
|
(55
|
)
|
|
|
0
|
|
|
|
(55
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,969
|
|
|
|
41
|
|
|
|
90,928
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at December 31, 2012
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Securities available for sale
|
|
$
|
85,891
|
|
|
|
81
|
|
|
|
85,810
|
|
|
|
0
|
|
Mortgage loan commitments
|
|
|
(40
|
)
|
|
|
0
|
|
|
|
(40
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,851
|
|
|
|
81
|
|
|
|
85,770
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Levels 1, 2, or 3 during the three months ended March 31, 2013.
The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with
generally accepted accounting principles. These adjustments to fair value usually result from the application of the lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis
that were still held at March 31, 2013 and December 31, 2012, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at
March 31, 2013 and December 31, 2012.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Carrying value at March 31, 2013
|
|
|
March 31, 2013
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
total gains (losses)
|
|
Loans held for sale
|
|
$
|
2,210
|
|
|
|
0
|
|
|
|
2,210
|
|
|
|
0
|
|
|
|
11
|
|
Mortgage servicing rights
|
|
|
1,783
|
|
|
|
0
|
|
|
|
1,783
|
|
|
|
0
|
|
|
|
0
|
|
Loans
(1)
|
|
|
27,472
|
|
|
|
0
|
|
|
|
27,472
|
|
|
|
0
|
|
|
|
(3,877
|
)
|
Real estate, net
(2)
|
|
|
9,918
|
|
|
|
0
|
|
|
|
9,918
|
|
|
|
0
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,383
|
|
|
|
0
|
|
|
|
41,383
|
|
|
|
0
|
|
|
|
(3,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
Carrying value at December 31, 2012
|
|
|
December 31, 2012
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
total gains (losses)
|
|
Loans held for sale
|
|
$
|
2,584
|
|
|
|
0
|
|
|
|
2,584
|
|
|
|
0
|
|
|
|
15
|
|
Mortgage servicing rights
|
|
|
1,732
|
|
|
|
0
|
|
|
|
1,732
|
|
|
|
0
|
|
|
|
0
|
|
Loans
(1)
|
|
|
32,287
|
|
|
|
0
|
|
|
|
32,287
|
|
|
|
0
|
|
|
|
(2,307
|
)
|
Real estate, net
(2)
|
|
|
10,595
|
|
|
|
0
|
|
|
|
10,595
|
|
|
|
0
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,198
|
|
|
|
0
|
|
|
|
47,198
|
|
|
|
0
|
|
|
|
(2,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral. The carrying value of loans fully
charged-off is zero.
|
(2)
|
Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial
classification as foreclosed assets.
|
(6)
Fair Value of Financial Instruments
Generally accepted accounting principles require interim reporting period disclosure about the fair value of financial instruments,
including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value hierarchy level for each asset and liability, as defined in note 5, have been included in the following table for
March 31, 2013. The fair value estimates are made based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the
Companys financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimated fair
value of the Companys financial instruments as of March 31, 2013 and December 31, 2012 are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair value hierarchy
|
|
Contract
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Fair value hierarchy
|
|
Contract
amount
|
|
(Dollars in thousands)
|
|
amount
|
|
|
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
amount
|
|
|
amount
|
|
|
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
72,995
|
|
|
|
72,995
|
|
|
|
72,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,660
|
|
|
|
83,660
|
|
|
|
83,660
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
91,024
|
|
|
|
91,024
|
|
|
|
41
|
|
|
|
90,983
|
|
|
|
|
|
|
|
|
|
85,891
|
|
|
|
85,891
|
|
|
|
81
|
|
|
|
85,810
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
2,210
|
|
|
|
2,210
|
|
|
|
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
2,584
|
|
|
|
2,584
|
|
|
|
|
|
|
|
2,584
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
434,634
|
|
|
|
438,400
|
|
|
|
|
|
|
|
438,400
|
|
|
|
|
|
|
|
|
|
454,045
|
|
|
|
459,177
|
|
|
|
|
|
|
|
459,177
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
1,971
|
|
|
|
1,971
|
|
|
|
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
2,018
|
|
|
|
2,018
|
|
|
|
|
|
|
|
2,018
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
487,645
|
|
|
|
487,645
|
|
|
|
|
|
|
|
487,645
|
|
|
|
|
|
|
|
|
|
514,951
|
|
|
|
514,951
|
|
|
|
|
|
|
|
514,951
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
|
70,000
|
|
|
|
70,863
|
|
|
|
|
|
|
|
70,863
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
71,623
|
|
|
|
|
|
|
|
71,623
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
173
|
|
|
|
173
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
|
|
|
|
|
|
Off-balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,678
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,877
|
|
Commitments to sell loans
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
4,610
|
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,046
|
|
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value.
Securities
Available for Sale
The fair values of securities were based upon quoted market prices for identical or similar instruments in active
markets.
9
Loans Held for Sale
The fair values of loans held for sale were based upon quoted market prices for loans with similar interest rates and terms to maturity.
Loans Receivable
The fair values of loans receivable were estimated for groups of loans
with similar characteristics. The fair value of the loan portfolio, with the exception of the adjustable rate portfolio, was calculated by discounting the scheduled cash flows through the estimated maturity using anticipated prepayment speeds and
using discount rates that reflect the credit and interest rate risk inherent in each loan portfolio. The fair value of the adjustable loan portfolio was estimated by grouping the loans with similar characteristics and comparing the characteristics
of each group to the prices quoted for similar types of loans in the secondary market. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820, Fair Value Measurements and Disclosures.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value since it is short-term in nature and does not present unanticipated credit
concerns.
Deposits
The fair
value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
The fair value estimate for deposits does not include the benefit that results from the low cost funding provided by the Companys existing deposits
and long-term customer relationships compared to the cost of obtaining different sources of funding. This benefit is commonly referred to as the core deposit intangible.
Federal Home Loan Bank Advances
The fair values of advances with fixed maturities are
estimated based on discounted cash flow analysis using as discount rates the interest rates charged by the FHLB for borrowings of similar remaining maturities.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its
fair value since it is short-term in nature.
Commitments to Extend Credit
The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counter parties.
Commitments to Sell Loans
The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.
(7)
Other Comprehensive Loss
Other comprehensive loss is defined as the change in equity during a period from transactions and other events from nonowner sources.
Comprehensive income is the total of net income and other comprehensive loss, which for the Company is comprised of unrealized losses on securities available for sale. The components of other comprehensive loss and the related tax effects were as
follows:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
(Dollars in thousands)
|
|
Before tax
|
|
|
Tax effect
|
|
|
Net of tax
|
|
|
Before tax
|
|
|
Tax effect
|
|
|
Net of tax
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses arising during the period
|
|
$
|
(146
|
)
|
|
|
0
|
|
|
|
(146
|
)
|
|
|
(179
|
)
|
|
|
0
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(146
|
)
|
|
|
0
|
|
|
|
(146
|
)
|
|
|
(179
|
)
|
|
|
0
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
Securities Available For Sale
The following table shows the gross unrealized losses and fair values for the securities available for sale portfolio, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
Less than twelve months
|
|
|
Twelve months or more
|
|
|
Total
|
|
(Dollars in thousands)
|
|
# of
Investments
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
# of
Investments
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Other marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations
|
|
|
3
|
|
|
$
|
12,993
|
|
|
|
(9
|
)
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
12,993
|
|
|
|
(9
|
)
|
Corporate preferred stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
245
|
|
|
|
(455
|
)
|
|
|
245
|
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
|
3
|
|
|
$
|
12,993
|
|
|
|
(9
|
)
|
|
|
1
|
|
|
$
|
245
|
|
|
|
(455
|
)
|
|
$
|
13,238
|
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Less than twelve months
|
|
|
Twelve months or more
|
|
|
Total
|
|
(Dollars in thousands)
|
|
# of
Investments
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
# of
Investments
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Other marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations
|
|
|
1
|
|
|
$
|
4,996
|
|
|
|
(4
|
)
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
4,996
|
|
|
|
(4
|
)
|
Corporate preferred stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
245
|
|
|
|
(455
|
)
|
|
|
245
|
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
|
1
|
|
|
$
|
4,996
|
|
|
|
(4
|
)
|
|
|
1
|
|
|
$
|
245
|
|
|
|
(455
|
)
|
|
$
|
5,241
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of
time and the extent to which the fair value has been lower than the cost, the market liquidity for the investment, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the
issuer, and our intent and ability to hold the investment for a period of time sufficient to recover the temporary loss.
The unrealized
losses reported for corporate preferred stock at March 31, 2013 and December 31, 2012 related to a single trust preferred security that was issued by the holding company of a small community bank. Typical of most trust preferred issuances,
the issuer has the ability to defer interest payments for up to five years with interest payable on the deferred balance. In October 2009, the issuer elected to defer its scheduled interest payments as allowed by the terms of the security agreement.
The issuers subsidiary bank has incurred operating losses due to increased provisions for loan losses but still meets the regulatory requirements to be considered well capitalized based on its most recent regulatory filing. Based
on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at March 31, 2013. The Company does not intend to sell the preferred stock and has the intent and ability to hold it for a
period of time sufficient to recover the temporary loss. Management believes that the Company will receive all principal and interest payments contractually due on the security and that the decrease in the market value is primarily due to a lack of
liquidity in the market for trust preferred securities and the deferral of interest by the issuer. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this
security in future periods.
11
A summary of securities available for sale at March 31, 2013 and December 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized cost
|
|
|
Gross unrealized
gains
|
|
|
Gross unrealized
losses
|
|
|
Fair value
|
|
March 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
$
|
4,656
|
|
|
|
251
|
|
|
|
0
|
|
|
|
4,907
|
|
FNMA
|
|
|
3,393
|
|
|
|
245
|
|
|
|
0
|
|
|
|
3,638
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
41
|
|
|
|
0
|
|
|
|
0
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,090
|
|
|
|
496
|
|
|
|
0
|
|
|
|
8,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations
|
|
|
82,073
|
|
|
|
129
|
|
|
|
(9
|
)
|
|
|
82,193
|
|
Corporate preferred stock
|
|
|
700
|
|
|
|
0
|
|
|
|
(455
|
)
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,773
|
|
|
|
129
|
|
|
|
(464
|
)
|
|
|
82,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,863
|
|
|
|
625
|
|
|
|
(464
|
)
|
|
|
91,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized cost
|
|
|
Gross unrealized
gains
|
|
|
Gross unrealized
losses
|
|
|
Fair value
|
|
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
$
|
5,669
|
|
|
|
294
|
|
|
|
0
|
|
|
|
5,963
|
|
FNMA
|
|
|
4,076
|
|
|
|
301
|
|
|
|
0
|
|
|
|
4,377
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
|
80
|
|
|
|
1
|
|
|
|
0
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,825
|
|
|
|
596
|
|
|
|
0
|
|
|
|
10,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency obligations
|
|
|
75,059
|
|
|
|
170
|
|
|
|
(4
|
)
|
|
|
75,225
|
|
Corporate preferred stock
|
|
|
700
|
|
|
|
0
|
|
|
|
(455
|
)
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,759
|
|
|
|
170
|
|
|
|
(459
|
)
|
|
|
75,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,584
|
|
|
|
766
|
|
|
|
(459
|
)
|
|
|
85,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2013 based
upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due less than one year
|
|
$
|
40,269
|
|
|
|
40,499
|
|
Due after one year through five years
|
|
|
49,894
|
|
|
|
50,280
|
|
Due after 10 years
|
|
|
700
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,863
|
|
|
|
91,024
|
|
|
|
|
|
|
|
|
|
|
The allocation of mortgage-backed securities and collateralized mortgage obligations in the table above is based upon the anticipated
future cash flow of the securities using estimated mortgage prepayment speeds. The allocation of other marketable securities that have call features is based on the anticipated cash flows to the call date if it is anticipated that the security will
be called, or to the maturity date if it is not anticipated to be called.
12
(9)
Loans Receivable, Net
A summary of loans receivable at March 31, 2013 and December 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
1-4 family
|
|
$
|
91,416
|
|
|
|
97,037
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
46,091
|
|
|
|
46,343
|
|
Other
|
|
|
190,843
|
|
|
|
198,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,934
|
|
|
|
244,907
|
|
Consumer
|
|
|
54,049
|
|
|
|
53,975
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
6,025
|
|
|
|
2,666
|
|
Other
|
|
|
68,220
|
|
|
|
77,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,245
|
|
|
|
79,854
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
456,644
|
|
|
|
475,773
|
|
Less:
|
|
|
|
|
|
|
|
|
Unamortized discounts
|
|
|
26
|
|
|
|
33
|
|
Net deferred loan fees
|
|
|
43
|
|
|
|
87
|
|
Allowance for loan losses
|
|
|
21,941
|
|
|
|
21,608
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable, net
|
|
$
|
434,634
|
|
|
|
454,045
|
|
|
|
|
|
|
|
|
|
|
(10)
Allowance for Loan Losses and Credit Quality Information
The allowance for loan losses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
1-4 Family
|
|
|
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Commercial
Business
|
|
|
Total
|
|
Balance, December 31, 2012
|
|
$
|
2,821
|
|
|
|
|
|
13,588
|
|
|
|
1,146
|
|
|
|
4,053
|
|
|
|
21,608
|
|
Provision for losses
|
|
|
(469
|
)
|
|
|
|
|
968
|
|
|
|
182
|
|
|
|
(681
|
)
|
|
|
0
|
|
Charge-offs
|
|
|
0
|
|
|
|
|
|
(337
|
)
|
|
|
(46
|
)
|
|
|
0
|
|
|
|
(383
|
)
|
Recoveries
|
|
|
0
|
|
|
|
|
|
362
|
|
|
|
62
|
|
|
|
292
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
2,352
|
|
|
|
|
|
14,581
|
|
|
|
1,344
|
|
|
|
3,664
|
|
|
|
21,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
3,718
|
|
|
|
|
|
13,622
|
|
|
|
1,159
|
|
|
|
5,389
|
|
|
|
23,888
|
|
Provision for losses
|
|
|
30
|
|
|
|
|
|
(184
|
)
|
|
|
219
|
|
|
|
(193
|
)
|
|
|
(128
|
)
|
Charge-offs
|
|
|
0
|
|
|
|
|
|
(2,630
|
)
|
|
|
(265
|
)
|
|
|
(8
|
)
|
|
|
(2,903
|
)
|
Recoveries
|
|
|
0
|
|
|
|
|
|
241
|
|
|
|
9
|
|
|
|
317
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012
|
|
$
|
3,748
|
|
|
|
|
|
11,049
|
|
|
|
1,122
|
|
|
|
5,505
|
|
|
|
21,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific reserves
|
|
$
|
571
|
|
|
|
|
|
2,591
|
|
|
|
537
|
|
|
|
1,114
|
|
|
|
4,813
|
|
General reserves
|
|
|
2,250
|
|
|
|
|
|
10,997
|
|
|
|
609
|
|
|
|
2,939
|
|
|
|
16,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
2,821
|
|
|
|
|
|
13,588
|
|
|
|
1,146
|
|
|
|
4,053
|
|
|
|
21,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific reserves
|
|
$
|
477
|
|
|
|
|
|
5,563
|
|
|
|
699
|
|
|
|
1,588
|
|
|
|
8,327
|
|
General reserves
|
|
|
1,875
|
|
|
|
|
|
9,018
|
|
|
|
645
|
|
|
|
2,076
|
|
|
|
13,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
2,352
|
|
|
|
|
|
14,581
|
|
|
|
1,344
|
|
|
|
3,664
|
|
|
|
21,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
4,687
|
|
|
|
|
|
28,195
|
|
|
|
1,823
|
|
|
|
2,395
|
|
|
|
37,100
|
|
Collectively reviewed for impairment
|
|
|
92,350
|
|
|
|
|
|
216,712
|
|
|
|
52,152
|
|
|
|
77,459
|
|
|
|
438,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
97,037
|
|
|
|
|
|
244,907
|
|
|
|
53,975
|
|
|
|
79,854
|
|
|
|
475,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable at March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually reviewed for impairment
|
|
$
|
4,309
|
|
|
|
|
|
27,229
|
|
|
|
1,711
|
|
|
|
2,450
|
|
|
|
35,699
|
|
Collectively reviewed for impairment
|
|
|
87,107
|
|
|
|
|
|
209,705
|
|
|
|
52,338
|
|
|
|
71,795
|
|
|
|
420,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
91,416
|
|
|
|
|
|
236,934
|
|
|
|
54,049
|
|
|
|
74,245
|
|
|
|
456,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table summarizes the amount of classified and unclassified loans at March 31, 2013 and
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
Classified
|
|
|
Unclassified
|
|
|
|
|
(Dollars in thousands)
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
Total
|
|
|
Total
Loans
|
|
1-4 family
|
|
$
|
1,756
|
|
|
|
12,939
|
|
|
|
32
|
|
|
|
0
|
|
|
|
14,727
|
|
|
|
76,689
|
|
|
|
91,416
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
714
|
|
|
|
34,732
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,446
|
|
|
|
10,645
|
|
|
|
46,091
|
|
Other
|
|
|
18,572
|
|
|
|
29,336
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47,908
|
|
|
|
142,935
|
|
|
|
190,843
|
|
Consumer
|
|
|
0
|
|
|
|
1,402
|
|
|
|
95
|
|
|
|
215
|
|
|
|
1,712
|
|
|
|
52,337
|
|
|
|
54,049
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
0
|
|
|
|
485
|
|
|
|
0
|
|
|
|
0
|
|
|
|
485
|
|
|
|
5,540
|
|
|
|
6,025
|
|
Other
|
|
|
1,230
|
|
|
|
9,946
|
|
|
|
335
|
|
|
|
0
|
|
|
|
11,511
|
|
|
|
56,709
|
|
|
|
68,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,272
|
|
|
|
88,840
|
|
|
|
462
|
|
|
|
215
|
|
|
|
111,789
|
|
|
|
344,855
|
|
|
|
456,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Classified
|
|
|
Unclassified
|
|
|
|
|
(Dollars in thousands)
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
Total
|
|
|
Total
Loans
|
|
1-4 family
|
|
$
|
1,004
|
|
|
|
13,915
|
|
|
|
33
|
|
|
|
0
|
|
|
|
14,952
|
|
|
|
82,085
|
|
|
|
97,037
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
744
|
|
|
|
36,210
|
|
|
|
0
|
|
|
|
0
|
|
|
|
36,954
|
|
|
|
9,389
|
|
|
|
46,343
|
|
Other
|
|
|
17,170
|
|
|
|
30,365
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47,535
|
|
|
|
151,029
|
|
|
|
198,564
|
|
Consumer
|
|
|
0
|
|
|
|
1,543
|
|
|
|
123
|
|
|
|
157
|
|
|
|
1,823
|
|
|
|
52,152
|
|
|
|
53,975
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
0
|
|
|
|
320
|
|
|
|
0
|
|
|
|
0
|
|
|
|
320
|
|
|
|
2,346
|
|
|
|
2,666
|
|
Other
|
|
|
1,224
|
|
|
|
12,628
|
|
|
|
134
|
|
|
|
0
|
|
|
|
13,986
|
|
|
|
63,202
|
|
|
|
77,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,142
|
|
|
|
94,981
|
|
|
|
290
|
|
|
|
157
|
|
|
|
115,570
|
|
|
|
360,203
|
|
|
|
475,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified loans represent special mention, performing substandard and non-performing loans. Loans classified as substandard are loans
that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional
characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet is not warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge-off any loans, or portion thereof, that are deemed uncollectible.
14
The aging of past due loans at March 31, 2013 and December 31, 2012 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
30-59
Days
Past Due
|
|
|
60-89
Days
Past Due
|
|
|
90 Days
or More
Past Due
|
|
|
Total
Past Due
|
|
|
Current
Loans
|
|
|
Total
Loans
|
|
|
Loans 90 Days or
More Past Due
and Still Accruing
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
1,775
|
|
|
|
0
|
|
|
|
13
|
|
|
|
1,788
|
|
|
|
89,628
|
|
|
|
91,416
|
|
|
|
0
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
308
|
|
|
|
0
|
|
|
|
968
|
|
|
|
1,276
|
|
|
|
44,815
|
|
|
|
46,091
|
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
208
|
|
|
|
208
|
|
|
|
190,635
|
|
|
|
190,843
|
|
|
|
0
|
|
Consumer
|
|
|
1,410
|
|
|
|
120
|
|
|
|
10
|
|
|
|
1,540
|
|
|
|
52,509
|
|
|
|
54,049
|
|
|
|
0
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
0
|
|
|
|
0
|
|
|
|
78
|
|
|
|
78
|
|
|
|
5,947
|
|
|
|
6,025
|
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
260
|
|
|
|
260
|
|
|
|
67,960
|
|
|
|
68,220
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,493
|
|
|
|
120
|
|
|
|
1,537
|
|
|
|
5,150
|
|
|
|
451,494
|
|
|
|
456,644
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
1,172
|
|
|
|
240
|
|
|
|
0
|
|
|
|
1,412
|
|
|
|
95,625
|
|
|
|
97,037
|
|
|
|
0
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
46,343
|
|
|
|
46,343
|
|
|
|
0
|
|
Other
|
|
|
49
|
|
|
|
0
|
|
|
|
289
|
|
|
|
338
|
|
|
|
198,226
|
|
|
|
198,564
|
|
|
|
0
|
|
Consumer
|
|
|
591
|
|
|
|
80
|
|
|
|
0
|
|
|
|
671
|
|
|
|
53,304
|
|
|
|
53,975
|
|
|
|
0
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
45
|
|
|
|
0
|
|
|
|
79
|
|
|
|
124
|
|
|
|
2,542
|
|
|
|
2,666
|
|
|
|
0
|
|
Other
|
|
|
1,441
|
|
|
|
106
|
|
|
|
7,467
|
|
|
|
9,014
|
|
|
|
68,174
|
|
|
|
77,188
|
|
|
|
7,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,298
|
|
|
|
426
|
|
|
|
7,835
|
|
|
|
11,559
|
|
|
|
464,214
|
|
|
|
475,773
|
|
|
|
7,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a
troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of March 31, 2013 and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
(Dollars in thousands)
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
Loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
1,638
|
|
|
|
1,826
|
|
|
|
0
|
|
|
|
1,617
|
|
|
|
1,617
|
|
|
|
0
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
8,385
|
|
|
|
13,174
|
|
|
|
0
|
|
|
|
10,714
|
|
|
|
15,530
|
|
|
|
0
|
|
Other
|
|
|
387
|
|
|
|
387
|
|
|
|
0
|
|
|
|
640
|
|
|
|
640
|
|
|
|
0
|
|
Consumer
|
|
|
251
|
|
|
|
258
|
|
|
|
0
|
|
|
|
393
|
|
|
|
400
|
|
|
|
0
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
63
|
|
|
|
830
|
|
|
|
0
|
|
|
|
102
|
|
|
|
1,038
|
|
|
|
0
|
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
0
|
|
|
|
34
|
|
|
|
534
|
|
|
|
0
|
|
Loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
2,671
|
|
|
|
2,714
|
|
|
|
477
|
|
|
|
3,070
|
|
|
|
3,114
|
|
|
|
571
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
15,953
|
|
|
|
18,438
|
|
|
|
4,339
|
|
|
|
14,061
|
|
|
|
16,545
|
|
|
|
1,669
|
|
Other
|
|
|
2,504
|
|
|
|
3,007
|
|
|
|
1,223
|
|
|
|
2,780
|
|
|
|
3,133
|
|
|
|
921
|
|
Consumer
|
|
|
1,460
|
|
|
|
1,460
|
|
|
|
700
|
|
|
|
1,430
|
|
|
|
1,430
|
|
|
|
537
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
69
|
|
|
|
69
|
|
|
|
69
|
|
|
|
74
|
|
|
|
74
|
|
|
|
62
|
|
Other
|
|
|
2,315
|
|
|
|
3,067
|
|
|
|
1,519
|
|
|
|
2,185
|
|
|
|
2,936
|
|
|
|
1,053
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
4,309
|
|
|
|
4,540
|
|
|
|
477
|
|
|
|
4,687
|
|
|
|
4,731
|
|
|
|
571
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
24,338
|
|
|
|
31,612
|
|
|
|
4,339
|
|
|
|
24,775
|
|
|
|
32,075
|
|
|
|
1,669
|
|
Other
|
|
|
2,891
|
|
|
|
3,394
|
|
|
|
1,223
|
|
|
|
3,420
|
|
|
|
3,773
|
|
|
|
921
|
|
Consumer
|
|
|
1,711
|
|
|
|
1,718
|
|
|
|
700
|
|
|
|
1,823
|
|
|
|
1,830
|
|
|
|
537
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
132
|
|
|
|
899
|
|
|
|
69
|
|
|
|
176
|
|
|
|
1,112
|
|
|
|
62
|
|
Other
|
|
|
2,318
|
|
|
|
3,070
|
|
|
|
1,519
|
|
|
|
2,219
|
|
|
|
3,470
|
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,699
|
|
|
|
45,233
|
|
|
|
8,327
|
|
|
|
37,100
|
|
|
|
46,991
|
|
|
|
4,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table summarizes the average recorded investment and interest income recognized on impaired
loans during the three months ended March 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
(Dollars in thousands)
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
Loans with no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
1,628
|
|
|
|
16
|
|
|
|
3,409
|
|
|
|
27
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
9,550
|
|
|
|
31
|
|
|
|
9,767
|
|
|
|
227
|
|
Other
|
|
|
514
|
|
|
|
5
|
|
|
|
3,814
|
|
|
|
10
|
|
Consumer
|
|
|
322
|
|
|
|
1
|
|
|
|
425
|
|
|
|
1
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development
|
|
|
83
|
|
|
|
0
|
|
|
|
438
|
|
|
|
0
|
|
Other
|
|
|
19
|
|
|
|
0
|
|
|
|
1,493
|
|
|
|
0
|
|
Loans with an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
2,871
|
|
|
|
8
|
|
|
|
4,069
|
|
|
|
23
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
15,007
|
|
|
|
13
|
|
|
|
14,733
|
|
|
|
37
|
|
Other
|
|
|
2,642
|
|
|
|
3
|
|
|
|
5,967
|
|
|
|
4
|
|
Consumer
|
|
|
1,445
|
|
|
|
10
|
|
|
|
867
|
|
|
|
11
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development
|
|
|
72
|
|
|
|
0
|
|
|
|
84
|
|
|
|
0
|
|
Other
|
|
|
2,250
|
|
|
|
8
|
|
|
|
5,091
|
|
|
|
15
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
4,499
|
|
|
|
24
|
|
|
|
7,478
|
|
|
|
50
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
24,557
|
|
|
|
44
|
|
|
|
24,500
|
|
|
|
264
|
|
Other
|
|
|
3,156
|
|
|
|
8
|
|
|
|
9,781
|
|
|
|
14
|
|
Consumer
|
|
|
1,767
|
|
|
|
11
|
|
|
|
1,292
|
|
|
|
12
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction/development
|
|
|
155
|
|
|
|
0
|
|
|
|
522
|
|
|
|
0
|
|
Other
|
|
|
2,269
|
|
|
|
8
|
|
|
|
6,584
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,403
|
|
|
|
95
|
|
|
|
50,157
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2013 and December 31, 2012, non-accruing loans totaled $28.8 million and $30.0 million, respectively, for which
the related allowance for loan losses was $7.2 million and $3.2 million, respectively. The increase in the related allowances is due primarily to increased reserves on several development loans as a result of a decrease in the estimated value of the
underlying collateral. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded, because management
determined that the value of the collateral was sufficient to repay the loan, totaled $7.7 million and $10.3 million, respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.
17
The non-accrual loans at March 31, 2013 and December 31, 2012 are summarized as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
1-4 family
|
|
$
|
2,127
|
|
|
$
|
2,492
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
23,073
|
|
|
|
23,652
|
|
Other
|
|
|
1,517
|
|
|
|
1,891
|
|
Consumer
|
|
|
334
|
|
|
|
300
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
Construction/development
|
|
|
131
|
|
|
|
176
|
|
Other
|
|
|
1,580
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,762
|
|
|
$
|
29,975
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2013 and December 31, 2012, there were loans included in loans receivable, net, with terms that had been
modified in a TDR totaling $31.6 million and $33.1 million, respectively. For the loans that were restructured in the first quarter of 2013, no loans were classified but performing and $0.2 million were non-performing at March 31, 2013. For the
loans that were restructured in the first quarter of 2012, $12.3 million were classified but performing and $4.0 million were non-performing at March 31, 2012.
The following table summarizes troubled debt restructurings at March 31, 2013 and December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
(Dollars in thousands)
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
1-4 Family
|
|
$
|
2,182
|
|
|
|
1,031
|
|
|
|
3,213
|
|
|
|
2,196
|
|
|
|
1,404
|
|
|
|
3,600
|
|
Commercial real estate
|
|
|
2,639
|
|
|
|
22,440
|
|
|
|
25,079
|
|
|
|
2,653
|
|
|
|
23,222
|
|
|
|
25,875
|
|
Consumer
|
|
|
1,377
|
|
|
|
309
|
|
|
|
1,686
|
|
|
|
1,522
|
|
|
|
292
|
|
|
|
1,814
|
|
Commercial business
|
|
|
739
|
|
|
|
841
|
|
|
|
1,580
|
|
|
|
754
|
|
|
|
1,012
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,937
|
|
|
|
24,621
|
|
|
|
31,558
|
|
|
|
7,125
|
|
|
|
25,930
|
|
|
|
33,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no material commitments to lend additional funds to customers whose loans were restructured or classified as non-accrual at
March 31, 2013 or December 31, 2012.
TDR concessions can include reduction of interest rates, extension of maturity dates,
forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after 12 months if the loan was modified at a market rate of
interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for the entire 12 month period. All loans classified as TDRs are considered to be impaired.
When a loan is modified as a TDR, there may be a direct, material impact on the loans within the balance sheet, as principal balances may be partially
forgiven. The financial effects of TDRs are presented in the following table and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three month periods ending March 31, 2013
and March 31, 2012.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
2013
|
|
|
Three Months Ended
March 31, 2012
|
|
(Dollars in thousands)
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
27
|
|
|
$
|
3,204
|
|
|
|
3,204
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7
|
|
|
|
11,479
|
|
|
|
9,823
|
|
Other
|
|
|
2
|
|
|
|
75
|
|
|
|
75
|
|
|
|
6
|
|
|
|
2,815
|
|
|
|
2,758
|
|
Consumer
|
|
|
4
|
|
|
|
114
|
|
|
|
115
|
|
|
|
8
|
|
|
|
268
|
|
|
|
268
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
244
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
$
|
189
|
|
|
|
190
|
|
|
|
50
|
|
|
$
|
18,010
|
|
|
|
16,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans that were restructured within the 12 months preceding March 31, 2013 and March 31, 2012 and defaulted during the three
months ended March 31, 2013 and March 31, 2012 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Three Months Ended
March 31, 2012
|
|
(Dollars in thousands)
|
|
Number of
Contracts
|
|
|
Outstanding
Recorded
Investment
|
|
|
Number of
Contracts
|
|
|
Outstanding
Recorded
Investment
|
|
Troubled debt restructurings that subsequently defaulted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
|
|
|
0
|
|
|
$
|
0
|
|
|
|
1
|
|
|
$
|
93
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential developments
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
510
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction industry
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0
|
|
|
$
|
0
|
|
|
|
7
|
|
|
$
|
3,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in
non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement.
Loans that were non-accrual prior to modification remain on non-accrual status for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for
six months may be returned to accrual status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.
TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral dependent, the value of the
collateral is reviewed and additional reserves may be added as needed. Loans that are not collateral dependent may have additional reserves established if deemed necessary. The reserves for TDRs was $6.9 million, or 31.5%, of the total $21.9
million in loan loss reserves at March 31, 2013 and $3.7 million, or 17.2%, of the total $21.6 million in loan loss reserves at December 31, 2012.
19
(11)
Investment in Mortgage Servicing Rights
A summary of mortgage servicing activity is as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Three months ended
March 31,
2013
|
|
|
Three months ended
March 31,
2012
|
|
Balance, beginning of period
|
|
$
|
1,732
|
|
|
|
1,485
|
|
Originations
|
|
|
212
|
|
|
|
187
|
|
Amortization
|
|
|
(161
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
1,783
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
Fair value of mortgage servicing rights
|
|
$
|
2,395
|
|
|
|
1,887
|
|
|
|
|
|
|
|
|
|
|
All of the loans being serviced were single family loans under the FNMA mortgage-backed security program or the individual loan sale
program. The following is a summary of the risk characteristics of the loans being serviced at March 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Loan
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Remaining
|
|
|
Number
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Rate
|
|
|
Term (months)
|
|
|
of Loans
|
|
Original term 30 year fixed rate
|
|
$
|
203,176
|
|
|
|
4.45
|
%
|
|
|
303
|
|
|
|
1,742
|
|
Original term 15 year fixed rate
|
|
|
123,189
|
|
|
|
3.54
|
|
|
|
147
|
|
|
|
1,404
|
|
Adjustable rate
|
|
|
314
|
|
|
|
3.53
|
|
|
|
300
|
|
|
|
6
|
|
The gross carrying amount of mortgage servicing rights and the associated accumulated amortization at March 31, 2013 is presented
in the following table. Amortization expense was $161,000 and $175,000 for the three months ended March 31, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
Gross
|
|
|
|
|
|
Unamortized
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Mortgage
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Servicing Rights
|
|
Mortgage servicing rights
|
|
$
|
2,494
|
|
|
|
(711
|
)
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,494
|
|
|
|
(711
|
)
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
Gross
|
|
|
|
|
|
Unamortized
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Mortgage
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Amortization
|
|
|
Servicing Rights
|
|
Mortgage servicing rights
|
|
$
|
2,135
|
|
|
|
(638
|
)
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,135
|
|
|
|
(638
|
)
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table indicates the estimated future amortization expense for amortized mortgage servicing rights:
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Year ending December 31,
|
|
|
|
|
2013
|
|
$
|
410
|
|
2014
|
|
|
391
|
|
2015
|
|
|
363
|
|
2016
|
|
|
292
|
|
2017
|
|
|
185
|
|
Thereafter
|
|
|
142
|
|
Projections of amortization are based on existing asset balances and the existing interest rate environment as of March 31, 2013.
The Companys actual experience may be significantly different depending upon changes in mortgage interest rates and other market conditions.
20
(12)
Earnings per Common Share
The following table reconciles the weighted average shares outstanding and the earnings available to common shareholders used for basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
(Dollars in thousands, except per share data)
|
|
2013
|
|
|
2012
|
|
Weighted average number of common shares outstanding used in basic earnings per common share calculation
|
|
|
3,996,297
|
|
|
|
3,914,220
|
|
Net dilutive effect of:
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
115,507
|
|
|
|
99,513
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding adjusted for effect of dilutive securities
|
|
|
4,111,804
|
|
|
|
4,013,733
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$
|
265
|
|
|
|
2,343
|
|
Basic earnings per common share
|
|
$
|
0.07
|
|
|
|
0.60
|
|
Diluted earnings per common share
|
|
$
|
0.06
|
|
|
|
0.58
|
|
(13)
Regulatory Capital and Oversight
On July 21, 2011, the Office of Thrift Supervision (the OTS) was integrated into the Office of the Comptroller of the Currency
(the OCC), which became the Banks primary banking regulator, and the primary banking regulator for the Company became the Federal Reserve Board (the FRB).
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank
entered into a written Supervisory Agreement with the OTS, effective February 22, 2011, that primarily relates to the Banks financial performance and credit quality issues. This agreement replaced the prior memorandum of understanding
that the Bank entered into with its primary regulator on December 9, 2009. In accordance with the agreement, the Bank submitted a two year business plan in May of 2011 that the OCC accepted with the expectation that the Bank would be in
adherence with the OCCs Notification of Establishment of Higher Minimum Capital Ratios, dated August 8, 2011, or IMCR, which required the Bank to establish and maintain a minimum core capital ratio of 8.5% by December 31, 2011. The
IMCR is discussed more fully below. As required by the Supervisory Agreement, the Bank submitted updated two year business plans in January of 2012 and 2013. The Bank must operate within the parameters of the business plan and is required to monitor
and submit periodic reports on its compliance with the plan. The Bank also submitted problem asset reduction plans at the same time that the business plans were submitted. The Bank must operate within the parameters of the problem asset plan and is
required to monitor and submit periodic reports on its compliance with the plan. The Bank has also revised its loan modification policies and its program for identifying, monitoring and controlling risk associated with concentrations of credit, and
improved the documentation relating to the allowance for loan and lease losses as required by the agreement. In addition, without the consent of the OCC, the Bank may not declare or pay any cash dividends, increase its total assets during any
quarter in excess of the amount of the net interest credited on deposit liabilities during the prior quarter, enter into any new contractual arrangement or renew or extend any existing arrangement related to compensation or benefits with any
directors or officer, make any golden parachute payments, or enter into any significant contracts with a third party service provider. The Bank believes it was in compliance with all requirements of the Supervisory Agreement at March 31, 2013.
The Company also entered into a written Supervisory Agreement with the OTS effective February 22, 2011. This agreement replaced the
prior memorandum of understanding that the Company entered into with its primary regulator on December 9, 2009. As required by the Supervisory Agreement, the Company submitted updated two year consolidated capital plans in January of 2012 and
2013. The Company must operate within the parameters of
21
the capital plan and is required to monitor and submit periodic reports on its compliance with the plan. In addition, without the consent of the FRB, the Company may not incur or issue any debt,
guarantee the debt of any entity, declare or pay any cash dividends or repurchase any of the Companys capital stock, enter into any new contractual arrangement or renew or extend any existing arrangement related to compensation or benefits
with any director or officer, or make any golden parachute payments. The Company believes it was in compliance with all requirements of its Supervisory Agreement at March 31, 2013.
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier I (Core) capital, and
Risk-based capital (as defined in the regulations) to total assets (as defined).
On March 31, 2013, the Banks tangible assets were
$626.6 million, its adjusted total assets were $626.7 million and its risk-weighted assets were $425.7 million. The following table presents the Banks capital amounts and ratios at March 31, 2013 for actual capital, required capital and
excess capital including ratios required to qualify as a well capitalized institution under the Prompt Corrective Actions regulations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Required to be
Adequately
Capitalized
|
|
|
Excess Capital
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Percent
of
Assets
(1)
|
|
|
Amount
|
|
|
Percent
of
Assets
(1)
|
|
|
Amount
|
|
|
Percent
of
Assets
(1)
|
|
|
Amount
|
|
|
Percent
of
Assets
(1)
|
|
Bank stockholders equity
|
|
$
|
64,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on certain securities available for sale
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disallowed servicing and tax assets
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I or core capital
|
|
|
64,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to adjusted total assets
|
|
|
|
|
|
|
10.24
|
%
|
|
$
|
25,071
|
|
|
|
4.00
|
%
|
|
$
|
39,126
|
|
|
|
6.24
|
%
|
|
$
|
31,339
|
|
|
|
5.00
|
%
|
Tier I capital to risk-weighted assets
|
|
|
|
|
|
|
15.08
|
%
|
|
$
|
17,029
|
|
|
|
4.00
|
%
|
|
$
|
47,168
|
|
|
|
11.08
|
%
|
|
$
|
25,543
|
|
|
|
6.00
|
%
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowable allowance for loan losses
|
|
|
5,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital
|
|
$
|
69,718
|
|
|
|
|
|
|
$
|
34,057
|
|
|
|
|
|
|
$
|
35,661
|
|
|
|
|
|
|
$
|
42,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital to risk- weighted assets
|
|
|
|
|
|
|
16.38
|
%
|
|
|
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
8.38
|
%
|
|
|
|
|
|
|
10.00
|
%
|
(1)
|
Based upon the Banks adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based
capital ratio.
|
The OCC has established an IMCR for the Bank. An IMCR requires a bank to establish and maintain levels of capital greater than those
generally required for a bank to be classified as well-capitalized. Effective December 31, 2011, the Bank was required to establish, and subsequently maintain, core capital at least equal to 8.5% of adjusted total assets, which was
in excess of the Banks 7.14% core capital to adjusted total assets ratio at December 31, 2011. In February 2012, the Bank received a notice from the OCC arising out of its failure to establish and maintain its IMCR of 8.5% core capital to
adjusted total assets at December 31, 2011. In April 2012, the Bank submitted to the OCC a written capital plan of how it would maintain its IMCR and a contingency plan in the event the IMCR was not maintained through the Banks primary
plan. As a result of a decrease in assets and improved financial results, the Banks core capital to adjusted total assets ratio improved to 10.24% at March 31, 2013.
Management believes that, as of March 31, 2013, the Banks capital ratios were in excess of those quantitative capital ratio standards set forth under the prompt corrective action regulations
referenced above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The OCC has extensive discretion in its supervisory and enforcement activities, and can adjust the requirement to be
well-capitalized in the future.
22
In order to improve its capital ratios and comply with its IMCR, the Bank has, among
other things, improved its financial results, reduced non-performing assets, and decreased the asset size of the Bank. In 2012, the Bank sold substantially all of the assets and deposit liabilities associated with its Toledo, Iowa branch, and in
March 2013 the Banks 55
th
street branch office in
Rochester, Minnesota was closed to further reduce costs. In light of its continued focus on complying with the IMCR, the Bank may also determine that is is necessary or prudent to dispose of other non-strategic assets. These actions have resulted,
and may result, in changes in the Banks assets, liabilities and earnings, some of which may be material, during the period in which the action is taken or is consummated or over a longer period of time. Further, the Company may determine it
prudent, or be required by supervising banking regulators, to issue capital of which there can be no assurance that, if issued, it would be on terms favorable to the Company. If the Company issues additional shares of common stock or other equity
securities, it could dilute the ownership interests of existing stockholders and, given our current common stock trading price, raising additional capital could dilute the per share book value of the Companys common stock and could result in a
change of control of the Company and the Bank.
The capital requirements of the Company and the Bank may be affected in the future by
regulatory changes proposed in June 2012 by the FRB, the Federal Deposit Insurance Corporation (the FDIC) and the OCC to establish an integrated regulatory capital framework for implementing the Basel Committee on Banking Supervisions Basel
III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The proposals would, among other things, apply a strengthened set of capital requirements to both the Bank and the
Company and revise the rules for calculating risk-weighted assets for purposes of such requirements. These federal agencies have received comments on the proposed rules but have not issued final rules, so the details and the timetable for
implementation of these rules remain uncertain.
(14)
Preferred Stock
The Companys certificate of incorporation authorizes the issuance of up to 500,000 shares of preferred stock, and on
December 23, 2008, the Company completed the sale of 26,000 shares of cumulative perpetual preferred stock to the United States Treasury. The preferred stock has a liquidation value of $1,000 per share and a related warrant was also issued to
purchase 833,333 shares of HMN common stock at an exercise price of $4.68 per share. The transaction was part of the United States Treasurys capital purchase program under the Emergency Economic Stabilization Act of 2008. Under the terms of
the sale, the preferred shares are entitled to a quarterly cumulative compounding dividend at a stated rate of 5% per annum for each of the first five years of the investment, increasing to 9% thereafter, unless HMN redeems the shares. The
Company made all required dividend payments to the Treasury on the outstanding preferred stock in 2009 and 2010 but has deferred the last nine quarterly dividend payments, beginning with the February 15, 2011 dividend payment. The deferred
dividend payments of $3.1 million have been accrued for payment in the future and are being reported for the deferral period as a preferred dividend requirement that is deducted from income for financial statement purposes to arrive at the net
income available to common shareholders. Under the terms of the certificate of designations for the preferred stock, dividend payments may be deferred but the dividend is cumulative and compounds quarterly while unpaid. In addition, since the
Company failed to pay dividends for six quarters, the Treasury had the right to appoint two representatives to the Companys board of directors. Treasury did not exercise this right.
On February 8, 2013, the Treasury sold the preferred stock issued by the Company to unaffiliated third party investors in a private transaction for $18.8 million. The Company received no proceeds
from the sale and it had no effect on the terms of the outstanding preferred stock, including the Companys obligation to satisfy accrued and unpaid dividends prior to the payment of any dividend or other distribution to holders of junior
stock, including the Companys common stock, and an increase in the dividend rate from 5% to 9%, commencing with the dividend payment date of February 15, 2014. Further, the sale of the preferred stock had no effect on the Companys
capital, financial condition or results of operations. Because of the sale, the Company generally is no longer subject to the various executive compensation and corporate governance requirements to which participants in Treasurys Capital
Purchase Program were subject while Treasury held the preferred stock. In addition, the Company has been advised that the current holders of substantially all of the preferred stock have entered into agreements with the FRB pursuant to which they
have each agreed not to take actions, without the consent of the FRB, which might be construed as exercising or attempting to exercise a controlling influence over the management or policies of the Company or the Bank, including exercise of any
right to elect any representatives to the Companys board of directors.
23
Under the terms of the Companys and Banks Supervisory Agreements with their federal banking
regulators as described in Note 13, neither the Company nor the Bank may declare or pay any cash dividends, or purchase or redeem any capital stock, without prior notice to, and consent of, these regulators. Subject to the foregoing, the preferred
stock may be redeemed in whole or in part, at par plus accrued and unpaid dividends. The preferred stock is non-voting (except as described above in respect of the election of up to two directors when preferred stock dividends remain unpaid), other
than certain class voting rights.
The sale of preferred stock did not include the sale of a warrant to purchase 833,333 shares of the
Companys common stock at an exercise price of $4.68, which Treasury continues to hold and may sell in its discretion at any time, subject to applicable securities laws and the Companys right to repurchase the warrant at fair market value
under the terms of the Companys agreements with Treasury. The warrant may be exercised at any time over its ten-year term and Treasury has agreed not to exercise any voting rights received by acquiring common stock on the exercise of the
warrant. The discount on the common stock warrant is being amortized over five years. Both the preferred securities and the discount qualify as Tier I capital.
(15)
Commitments and Contingencies
The Bank issued standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit
issued and available at March 31, 2013 were approximately $1.5 million, expire over the next two years, and are collateralized primarily with commercial real estate mortgages. Since the conditions under which the Bank is required to fund the
standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments.
(16)
Business Segments
The Bank has been identified as a reportable operating segment in accordance with the provisions of
ASC 280. SFC and HMN did not meet the quantitative thresholds for determining reportable segments and, therefore, are included in the Other category.
The Company evaluates performance and allocates resources based on the segments net income, return on average assets and
equity. Each corporation is managed separately with its own officers and board of directors, some of whom may overlap between the corporations.
24
The following table sets forth certain information about the reconciliations of reported profit and assets
for each of the Companys reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Home Federal
Savings Bank
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
Total
|
|
At or for the quarter ended March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - external customers
|
|
$
|
6,323
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,323
|
|
Non-interest income - external customers
|
|
|
1,874
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,874
|
|
Intersegment interest income
|
|
|
0
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
0
|
|
Intersegment non-interest income
|
|
|
46
|
|
|
|
983
|
|
|
|
(1,029
|
)
|
|
|
0
|
|
Interest expense
|
|
|
1,393
|
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
1,392
|
|
Amortization of mortgage servicing rights, net
|
|
|
161
|
|
|
|
0
|
|
|
|
0
|
|
|
|
161
|
|
Other non-interest expense
|
|
|
5,704
|
|
|
|
220
|
|
|
|
(46
|
)
|
|
|
5,878
|
|
Income tax expense
|
|
|
0
|
|
|
|
25
|
|
|
|
0
|
|
|
|
25
|
|
Net income
|
|
|
985
|
|
|
|
739
|
|
|
|
(983
|
)
|
|
|
741
|
|
Total assets
|
|
|
626,896
|
|
|
|
64,746
|
|
|
|
(64,556
|
)
|
|
|
627,086
|
|
At or for the quarter ended March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - external customers
|
|
$
|
8,275
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,275
|
|
Non-interest income - external customers
|
|
|
2,706
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,706
|
|
Intersegment interest income
|
|
|
0
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
0
|
|
Intersegment non-interest income
|
|
|
47
|
|
|
|
3,024
|
|
|
|
(3,071
|
)
|
|
|
0
|
|
Interest expense
|
|
|
2,063
|
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
2,062
|
|
Amortization of mortgage servicing rights, net
|
|
|
175
|
|
|
|
0
|
|
|
|
0
|
|
|
|
175
|
|
Other non-interest expense
|
|
|
5,892
|
|
|
|
223
|
|
|
|
(47
|
)
|
|
|
6,068
|
|
Income tax expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net income
|
|
|
3,026
|
|
|
|
2,802
|
|
|
|
(3,024
|
)
|
|
|
2,804
|
|
Total assets
|
|
|
706,328
|
|
|
|
61,739
|
|
|
|
(61,658
|
)
|
|
|
706,409
|
|
25
|
|
|
|
|
|
|
HMN FINANCIAL, INC.
|
|
|
|
|
|
Item 2:
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
Forward-looking Information
This quarterly report and other reports filed by the Company with the Securities and Exchange Commission may contain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are often identified by such forward-looking terminology as expect, intend, look, believe, anticipate, estimate, project,
seek, may, will, would, could, should, trend, target, and goal or similar statements or variations of such terms and include, but are not
limited to, those relating to increasing our core deposit relationships, reducing non-performing assets, reducing expense and generating improved financial results; the adequacy and amount of available liquidity and capital resources to the Bank;
the Companys liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for improvement thereof; our pursuit of alternatives to restructure or reacquire Preferred Stock; changes in the
size of the Banks loan portfolio; the recovery of the valuation allowance on deferred tax assets; the amount and mix of the Banks non-performing assets and the appropriateness of the allowance therefor; future losses on non-performing
assets; the amount of interest-earning assets; the amount and mix of brokered and other deposits (including the Companys ability to renew brokered deposits); the availability and use of alternate funding sources; including FHLB advances, the
payment of dividends; the future outlook for the Company; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on
rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer trust preferred securities held by the Bank; and the Banks compliance with
regulatory standards generally (including the Banks status as well-capitalized), and supervisory agreements, individual minimum capital requirements or other supervisory directives or requirements to which the Company or the Bank
are or may become expressly subject, specifically, and possible responses of the OCC and FRB and the Bank and the Company to any failure to comply with any such regulatory standard, agreement or requirement. A number of factors could cause actual
results to differ materially from the Companys assumptions and expectations. These include, but are not limited to, the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation
and enforcement, including restrictions set forth in the supervisory agreements between each of the Company and the Bank and the OCC and the FRB; possible legislative and regulatory changes, including changes in the degree and manner of regulatory
supervision, the ability of the Company and the Bank to establish and adhere to plans and policies relating to, among other things, capital, business, non-performing assets, loan modifications, documentation of loan loss allowance and concentrations
of credit that are satisfactory to the OCC and the FRB, as applicable, in accordance with the terms of the Company and the Bank supervisory agreements and to otherwise manage the operations of the Company and the Bank to ensure compliance with other
requirements set forth in the supervisory agreements; the ability of the Company and the Bank to obtain required consents from the OCC and the FRB, as applicable, under the supervisory agreements or other directives; the ability of the Bank to
comply with its individual minimum capital requirement and other applicable regulatory capital requirements; enforcement activity of the OCC and the FRB in the event of our non-compliance with any applicable regulatory standard, agreement or
requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, cash inflows and deposit outflows, changes in credit or other risks posed by the Companys loan and investment
portfolios, relative costs associated with alternate funding sources, technological, computer-related or operational difficulties, results of litigation, and reduced demand for financial services and loan products; changes in accounting policies and
guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Companys access to and adverse changes in securities markets and the investment expectations of holders of our capital
stock; the market for credit related assets; or other significant uncertainties. Additional factors that may cause actual results to differ from the Companys assumptions and expectations include those set forth in the Companys most
recent filings on Forms 10-K and 10-Q with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and
uncertainties applicable to the Company, see the Risk Factors sections of the Companys Annual Report on Form 10-K for the year ended December 31, 2012 and Part II, Item 1A of its Quarterly Reports on Form 10-Q.
26
General
The earnings of the Company are primarily dependent on the Banks net interest income, which is the difference between interest earned on loans and investments, and the interest paid on
interest-bearing liabilities such as deposits, FHLB advances, and FRB borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the interest rate spread. Net interest
income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and mix
of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Companys net income is also affected by the generation of non-interest income, which consists primarily of gains or losses from the sale
of securities, gains from the sale of loans, fees for servicing mortgage loans, and the generation of fees and service charges on deposit accounts. The Bank incurs expenses in addition to interest expense in the form of salaries and benefits,
occupancy expenses, provisions for loan losses, and amortization of mortgage servicing assets. The earnings of financial institutions, such as the Bank, are also significantly affected by prevailing economic and competitive conditions, particularly
changes in interest rates, government monetary and fiscal policies, and regulations of various regulatory authorities. Lending activities are influenced by the demand for and supply of business credit, single family and commercial properties,
competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of deposits are influenced by prevailing market rates of interest on competing investments, account maturities and the levels of personal
income and savings.
Between 2008 and 2011, the Companys commercial business and commercial real estate loan portfolios required
significant charge-offs due primarily to decreases in the estimated value of the underlying collateral supporting the loans, as many of these loans were made to borrowers in or associated with the real estate industry. The decrease in the estimated
collateral value was primarily the result of reduced demand for real estate, particularly as it relates to single-family and commercial land developments. More stringent lending standards implemented by the mortgage industry in recent years have
made it more difficult for some borrowers with marginal credit to qualify for a mortgage. This decrease in available credit and the overall weakness in the economy reduced the demand for single family homes and the values of existing properties and
developments where the Companys commercial loan portfolio has concentrations. Consequently, our level of non-performing assets and the related provision for loan losses increased significantly in the past several years, relative to periods
before 2008. The increased levels of non-performing assets, related provisions for loan losses and loan charge-offs and expenses associated with real estate owned, and the allowances against deferred taxes arising from adverse results of operations,
were the primary reasons for the net losses incurred by the Company in each of the years 2008 through 2011. In 2012 and to date in 2013, commercial real estate values began to stabilize and fewer charge-offs were recorded than in the previous four
years.
Between December 31, 2008 and December 31, 2012, the total assets of the Company decreased $492 million and in the first
quarter of 2013 total assets declined an additional $26 million. The decrease in assets was primarily in the commercial loan portfolio, which occurred because of limited loan demand and the Companys focus on improving credit quality, reducing
loan concentrations, managing interest rate risk, and improving capital ratios. The proceeds received from loan payments were primarily used to reduce the outstanding brokered deposits and FHLB advances and these funding sources decreased $364
million between December 31, 2008 and March 31, 2013. It is anticipated that assets will continue to decrease in the second quarter of 2013 as maturing FHLB advances are anticipated to be repaid with existing cash.
Critical Accounting Policies
Critical accounting policies are those policies that the Companys management believes are the most important to understanding the Companys
financial condition and operating results. These critical accounting policies often involve estimates and assumptions that could have a material impact on the Companys financial statements. The Company has identified the following critical
accounting policies that management believes involve the most difficult, subjective, and/or complex judgments that are inherently uncertain. Therefore, actual financial results could differ significantly depending upon the estimates, assumptions and
other factors used.
27
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis of the loan portfolio. In this analysis, management considers factors including, but not
limited to, specific occurrences of loan impairment, changes in the size of the portfolios, national and regional economic conditions such as unemployment data, loan portfolio composition, loan delinquencies, local economic growth rates, historical
experience and observations made by the Companys ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the
appropriateness of the loan loss allowance for its homogeneous single-family and consumer loan portfolios and its non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single-family and consumer loan portfolios is
calculated on a pooled basis with individual determination of the allowance of all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate, and multi-family loan portfolios involves
assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Companys own loss experience and are assigned to all loans without identified credit weaknesses. For each
non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans or
portion thereof that are deemed uncollectable.
The appropriateness of the allowance for loan losses is dependent upon managements
estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash
flows may be subject to frequent adjustments due to changing economic prospects of borrowers or properties. The estimates are reviewed periodically and adjustments, if any, are recorded in the provision for loan losses in the periods in which the
adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the
loan portfolios and the actual loss experience. The Company increases its allowance for loan losses by charging the provision for loan losses against income. The methodology for establishing the allowance for loan losses takes into consideration
probable losses that have been identified in connection with specific loans as well as probable losses in the loan portfolio for which additional specific reserves are not required. Although management believes that based on current conditions the
allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet date, future conditions may differ substantially from those anticipated in determining the
allowance for loan losses and adjustments may be required in the future.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including
estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results
could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities.
The
Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relates to the allowance for loan and real estate losses and net operating loss carry forwards. For income tax purposes, only net
charge-offs are deductible, not the entire provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is more likely than not that the deferred tax asset will not
be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon managements judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax
planning strategies and assessments of the current and future economic and business conditions. The Company considers both positive and negative evidence regarding
28
the ultimate realizability of deferred tax assets. Positive evidence includes current financial performance, the ability to implement tax planning strategies to accelerate taxable income
recognition and the probability that taxable income will be generated in future periods. Negative evidence includes the Companys cumulative loss in the prior three year period and the general business and economic environment. In the second
quarter of 2010, the Company recorded a valuation allowance against the entire deferred tax asset balance and the Company continued to maintain a valuation reserve against the entire deferred tax asset balance at March 31, 2013. This
determination was based primarily upon the existence of a three year cumulative loss position that is primarily attributable to significant provisions for loan losses incurred during the last three years. The creation of the valuation allowance,
although it increased tax expense and similarly reduced tangible book value, does not have an effect on the Companys cash flows, and may be recoverable in subsequent periods if the Company were to realize certain sustained future taxable
income. It is possible that future conditions may differ substantially from those anticipated in determining the need for a valuation allowance on deferred tax assets and adjustments may be required in the future.
Determining the ultimate settlement of any tax position requires significant estimates and judgments in arriving at the amount of tax benefits to be
recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.
RESULTS OF OPERATIONS FOR FIRST QUARTER ENDED MARCH 31, 2013 COMPARED TO FIRST QUARTER ENDED MARCH 31, 2012
Net Income
Net income was $0.7
million for the first quarter of 2013, a decrease of $2.1 million, compared to net income of $2.8 million for the first quarter of 2012. Net income available to common shareholders was $0.3 million for the first quarter of 2013, a decrease of $2.0
million from the net income available to common shareholders of $2.3 million for the first quarter of 2012. Diluted earnings per common share for the first quarter of 2013 were $0.06, a decrease of $0.52 from the diluted earnings per common share of
$0.58 for the first quarter of 2012. The decrease in net income between the periods was due primarily to a $1.3 million decrease in net interest income as a result of a decrease in interest earning assets, a $0.6 million decrease in the gain
recognized on the sales of branch offices, and a $0.2 million decrease in the gains recognized on loan sales due to a decrease in the sale of commercial government guaranteed loans.
Net Interest Income
Net interest income was $4.9 million for the first quarter of
2013, a decrease of $1.3 million, or 20.6%, compared to $6.2 million for the first quarter of 2012. Interest income was $6.3 million for the first quarter of 2013, a decrease of $2.0 million, or 23.6%, from $8.3 million for the first quarter of
2012. Interest income decreased between the periods primarily because of a $109 million decrease in the average interest-earning assets between the periods. Average interest-earning assets decreased between the periods primarily because of a
decrease in the commercial loan portfolio, which occurred because of limited loan demand and the Companys focus on improving credit quality, reducing loan concentrations, managing interest rate risk and improving capital ratios. Interest
income also decreased because of lower average yields on loans and investment securities. The average yield earned on interest-earning assets was 4.28% for the first quarter of 2013, a decrease of 42 basis points from the 4.70% average yield for the
first quarter of 2012.
Interest expense was $1.4 million for the first quarter of 2013, a decrease of $0.7 million, or 32.5%, compared to
$2.1 million for the first quarter of 2012. Interest expense decreased primarily because of a $124 million decrease in the average interest-bearing liabilities between the periods. The decrease in average interest-bearing liabilities is primarily
the result of a decrease in the outstanding brokered and retail certificates of deposits between the periods. The decrease in brokered and retail certificates of deposits between the periods was the result of using the proceeds from loan principal
payments to fund maturing certificates. Interest expense also decreased because of the lower average interest rates paid on money market accounts and certificates of deposits. The decreased rates were the result of the low interest rate environment
that continued to exist during the first quarter of 2013. The average interest rate paid on interest-bearing liabilities was 1.01% for the first quarter of 2013, a decrease of 21 basis points from the 1.22% average interest rate paid in the first
quarter of 2012.
29
Net interest margin (net interest income divided by average interest earning assets) for the first quarter
of 2013 was 3.34%, a decrease of 19 basis points compared to 3.53% for the first quarter of 2012. Net interest margin declined between the periods primarily because the yield on interest-earning assets decreased more than the rates paid on
interest-bearing liabilities. The decrease in the yield earned on interest-earning assets is a result of the continued decline in market interest rates on loans and investments between the periods. The rates paid on deposit accounts reflected a
smaller decrease because the entire change in market rate could not be reflected in the deposit rates due to the already low interest rates being paid on deposit accounts.
A summary of the Companys net interest margin for the three month periods ended March 31, 2013 and 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three month period ended
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
(Dollars in thousands)
|
|
Average
Outstanding
Balance
|
|
|
Interest
Earned/
Paid
|
|
|
Yield/
Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
Earned/
Paid
|
|
|
Yield/
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
$
|
90,862
|
|
|
|
233
|
|
|
|
1.04
|
%
|
|
$
|
105,257
|
|
|
|
442
|
|
|
|
1.69
|
%
|
Loans held for sale
|
|
|
2,428
|
|
|
|
19
|
|
|
|
3.17
|
|
|
|
2,784
|
|
|
|
21
|
|
|
|
3.11
|
|
Mortgage loans, net
|
|
|
93,612
|
|
|
|
1,109
|
|
|
|
4.80
|
|
|
|
117,583
|
|
|
|
1,497
|
|
|
|
5.12
|
|
Commercial loans, net
|
|
|
294,981
|
|
|
|
4,173
|
|
|
|
5.75
|
|
|
|
367,760
|
|
|
|
5,425
|
|
|
|
5.93
|
|
Consumer loans, net
|
|
|
53,128
|
|
|
|
717
|
|
|
|
5.47
|
|
|
|
60,769
|
|
|
|
853
|
|
|
|
5.65
|
|
Cash equivalents
|
|
|
59,838
|
|
|
|
33
|
|
|
|
0.23
|
|
|
|
49,948
|
|
|
|
27
|
|
|
|
0.21
|
|
Federal Home Loan Bank stock
|
|
|
4,063
|
|
|
|
29
|
|
|
|
2.79
|
|
|
|
4,174
|
|
|
|
10
|
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
598,912
|
|
|
|
6,323
|
|
|
|
4.28
|
|
|
|
708,275
|
|
|
|
8,275
|
|
|
|
4.70
|
|
Interest-bearing liabilities and noninterest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
70,398
|
|
|
|
4
|
|
|
|
0.02
|
|
|
|
69,405
|
|
|
|
11
|
|
|
|
0.06
|
|
Savings accounts
|
|
|
43,920
|
|
|
|
11
|
|
|
|
0.10
|
|
|
|
39,051
|
|
|
|
17
|
|
|
|
0.18
|
|
Money market accounts
|
|
|
113,595
|
|
|
|
95
|
|
|
|
0.34
|
|
|
|
111,336
|
|
|
|
129
|
|
|
|
0.47
|
|
Certificates
|
|
|
160,653
|
|
|
|
398
|
|
|
|
1.00
|
|
|
|
224,357
|
|
|
|
707
|
|
|
|
1.27
|
|
Brokered deposits
|
|
|
14,822
|
|
|
|
49
|
|
|
|
1.34
|
|
|
|
56,918
|
|
|
|
353
|
|
|
|
2.50
|
|
Federal Home Loan Bank advances
|
|
|
70,000
|
|
|
|
835
|
|
|
|
4.84
|
|
|
|
70,000
|
|
|
|
845
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
473,388
|
|
|
|
|
|
|
|
|
|
|
|
571,067
|
|
|
|
|
|
|
|
|
|
Non-interest checking
|
|
|
81,548
|
|
|
|
|
|
|
|
|
|
|
|
108,028
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing escrow deposits
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
|
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities and non-interest bearing deposits
|
|
$
|
556,200
|
|
|
|
1,392
|
|
|
|
1.01
|
|
|
$
|
680,435
|
|
|
|
2,062
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
4,931
|
|
|
|
|
|
|
|
|
|
|
$
|
6,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
The provision for loan losses was $0 for the first quarter of 2013, an increase of $0.1 million compared to ($0.1 million) for the first quarter of 2012. The provision for loan losses remained low in the
first quarter of 2013 primarily because of a decrease in the required reserves for certain risk rated commercial loans. This decrease, however, was entirely offset by additional reserves on certain development loans. The additional reserves were the
result of a decrease in the estimated value of the underlying collateral supporting these loans.
30
A reconciliation of the Companys allowance for loan losses for the first quarters of 2013 and 2012 is
summarized as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Balance at January 1,
|
|
$
|
21,608
|
|
|
$
|
23,888
|
|
Provision
|
|
|
0
|
|
|
|
(128
|
)
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
(46
|
)
|
|
|
(265
|
)
|
Commercial business
|
|
|
0
|
|
|
|
(8
|
)
|
Commercial real estate
|
|
|
(337
|
)
|
|
|
(2,630
|
)
|
Recoveries
|
|
|
716
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
21,941
|
|
|
$
|
21,424
|
|
|
|
|
|
|
|
|
|
|
General allowance
|
|
$
|
13,614
|
|
|
$
|
13,913
|
|
Specific allowance
|
|
|
8,327
|
|
|
|
7,511
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,941
|
|
|
$
|
21,424
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income
Non-interest income was $1.9 million for the first quarter of 2013, a decrease of $0.8 million, or 30.7%, from $2.7 million for the first quarter of 2012. Gain on sale of branch office decreased $0.6
million as a gain was realized on the sale of the Toledo, Iowa branch in the first quarter of 2012. Gain on sales of loans decreased $0.2 million between the periods due to a $0.3 million decrease in the gains recognized on the sale of commercial
government guaranteed loans between the periods that was partially offset by a $0.1 million increase in the gains recognized on the sale of single family loans. The increase in the gains recognized on single family loans was due to an increase in
loan originations and sales as a result of the low interest rate environment that continued to exist during the first quarter of 2013. Fees and service charges decreased $40,000 between the periods primarily because of a decrease in debit card and
overdraft charges. Other non-interest income decreased $25,000 between the periods primarily because of a decrease in rental income realized on other real estate owned. Loan servicing fees increased $16,000 between the periods because of an increase
in the number of single family loans that are being serviced for others.
Non-Interest Expense
Non-interest expense was $6.0 million for the first quarter of 2013, a decrease of $0.2 million, or 3.3%, from $6.2 million for the first quarter of 2012.
Compensation expense decreased $0.2 million primarily because of a decrease in the number of employees between the periods. Other non-interest expense decreased $57,000 between the periods primarily because of decreased expenses related to
non-performing assets. Deposit insurance expense increased $48,000 between the periods primarily because of an increase in FDIC insurance rates between the periods. The gain on real estate owned decreased $58,000 between the periods because fewer
properties were sold. Occupancy expense decreased $32,000 primarily because of a decrease in rent and depreciation expense as a result of having fewer branch facilities.
Income Taxes
Income tax expense was $25,000 for the first quarter of 2013, an
increase of $25,000 from the first quarter of 2012 when no income tax expense was recorded. In the second quarter of 2010, the Company recorded a deferred tax asset valuation reserve against its entire deferred tax asset balance and the Company
continued to maintain a valuation reserve against the entire deferred tax asset balance at March 31, 2013. Since the valuation reserve is established against the entire deferred tax asset balance, no regular income tax expense was recorded for
the first quarter of 2013. The income tax expense that was recorded in the first quarter of 2013 relates to alternative minimum tax amounts that are due since only a portion of the outstanding net operating loss carry forwards can be used to offset
current income under the current alternative minimum tax rules.
Net Income Available to Common Shareholders
The net income available to common shareholders was $0.3 million for the first quarter of 2013, a decrease of $2.0 million from the $2.3 million income
available to common shareholders for the first quarter of 2012. The net income available to common shareholders decreased primarily because of the change in the net income between
31
the periods. The Company has deferred the last nine quarterly dividend payments, beginning with the February 15, 2011 dividend payment, on its Fixed Rate, Series A, Cumulative Perpetual
Preferred Stock that was originally issued to the United States Treasury Department as part of the TARP Capital Purchase Program (the Preferred Stock). The deferred dividend payments have been accrued for payment in the future and are
being reported for the deferral period as a preferred dividend requirement that is deducted from net income for financial statement purposes to arrive at the net income available to common shareholders.
FINANCIAL CONDITION
Non-Performing Assets
The
following table summarizes the amounts and categories of non-performing assets in the Banks portfolio and loan delinquency information as of the end of the two most recently completed quarters.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Non-Performing Loans:
|
|
|
|
|
|
|
|
|
One-to-four family real estate
|
|
$
|
2,127
|
|
|
$
|
2,492
|
|
Commercial real estate
|
|
|
24,590
|
|
|
|
25,543
|
|
Consumer
|
|
|
334
|
|
|
|
300
|
|
Commercial business
|
|
|
1,711
|
|
|
|
1,640
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,762
|
|
|
|
29,975
|
|
Foreclosed and Repossessed Assets:
|
|
|
|
|
|
|
|
|
One-to-four family real estate
|
|
|
1,114
|
|
|
|
1,595
|
|
Commercial real estate
|
|
|
8,804
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
38,680
|
|
|
$
|
40,570
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total assets
|
|
|
6.17
|
%
|
|
|
6.21
|
%
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
28,762
|
|
|
$
|
29,975
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total loans receivable, net
|
|
|
6.62
|
%
|
|
|
6.60
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss to non-performing loans
|
|
|
76.29
|
%
|
|
|
72.09
|
%
|
|
|
|
|
|
|
|
|
|
Delinquency Data:
|
|
|
|
|
|
|
|
|
Delinquencies
(1)
|
|
|
|
|
|
|
|
|
30+ days
|
|
$
|
3,613
|
|
|
$
|
2,739
|
|
90+ days
(2)
|
|
|
0
|
|
|
|
7,423
|
|
Delinquencies as a percentage of Loan and lease portfolio
(1)
|
|
|
|
|
|
|
|
|
30+ days
|
|
|
0.76
|
%
|
|
|
0.57
|
%
|
90+ days
|
|
|
0.00
|
%
|
|
|
1.55
|
%
|
(1)
|
Excludes non-accrual loans.
|
(2)
|
Loans delinquent for 90 days and over are generally non-accruing and are included in the Companys non-performing asset total unless they are well
secured and in the process of collection.
|
Total non-performing assets were $38.7 million at March 31, 2013, a decrease
of $1.9 million, or 4.6%, from $40.6 million at December 31, 2012. Non-performing loans decreased $1.2 million and foreclosed and repossessed assets decreased $0.7 million during the first quarter of 2013. The non-performing loan and foreclosed
and repossessed asset activity for the first quarter of 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Non-performing loans
|
|
|
|
|
|
Foreclosed and repossessed assets
|
|
|
|
|
January 1, 2013
|
|
$
|
29,975
|
|
|
January 1, 2013
|
|
$
|
10,595
|
|
Classified as non-performing
|
|
|
861
|
|
|
Transferred from non-performing loans
|
|
|
0
|
|
Charge-offs
|
|
|
(346
|
)
|
|
Other payments received
|
|
|
(68
|
)
|
Principal payments received
|
|
|
(1,355
|
)
|
|
Real estate sold
|
|
|
(628
|
)
|
Classified as accruing
|
|
|
(373
|
)
|
|
Net gain on sale of assets
|
|
|
136
|
|
Transferred to real estate owned
|
|
|
0
|
|
|
Write downs
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
$
|
28,762
|
|
|
March 31, 2013
|
|
$
|
9,918
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in non-performing assets during the quarter relates primarily to principal payments received. The largest
non-performing loan relationship at March 31, 2013 was for $7.2 million and is secured by a residential development located in the Banks market area.
32
The following table summarizes the number and types of commercial real estate loans (the largest category of
non-performing loans) that were non-performing as of the end of the two most recently completed quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Property Type
|
|
# of
relationships
|
|
|
Principal Amount of
Loans
at
March 31,
2013
|
|
|
# of
relationships
|
|
|
Principal Amount of
Loans
at
December 31,
2012
|
|
Developments/land
|
|
|
10
|
|
|
$
|
23,854
|
|
|
|
9
|
|
|
$
|
24,339
|
|
Shopping centers/retail
|
|
|
1
|
|
|
|
69
|
|
|
|
2
|
|
|
|
386
|
|
Restaurants/bar
|
|
|
1
|
|
|
|
526
|
|
|
|
1
|
|
|
|
547
|
|
Other buildings
|
|
|
1
|
|
|
|
141
|
|
|
|
3
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
24,590
|
|
|
|
15
|
|
|
$
|
25,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the number of lending relationships and industry of commercial business loans that were
non-performing as of the end of the two most recently completed quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Industry Type
|
|
# of
relationships
|
|
|
Principal Amount of
Loans
at
March 31,
2013
|
|
|
# of
relationships
|
|
|
Principal Amount of
Loans
at
December 31,
2012
|
|
Construction/development
|
|
|
7
|
|
|
$
|
1,007
|
|
|
|
6
|
|
|
$
|
1,074
|
|
Retail
|
|
|
2
|
|
|
|
406
|
|
|
|
2
|
|
|
|
239
|
|
Restaurant
|
|
|
1
|
|
|
|
124
|
|
|
|
1
|
|
|
|
129
|
|
Other
|
|
|
3
|
|
|
|
174
|
|
|
|
3
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
1,711
|
|
|
|
12
|
|
|
$
|
1,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
The declaration of dividends is subject to, among other things, the Companys financial condition and results of operations, the Banks compliance with its regulatory capital requirements, tax
considerations, industry standards, economic conditions, regulatory restrictions, general business practices and other factors. Under the Bank Supervisory Agreement, no dividends can be declared or paid by the Bank to the Company without prior
regulatory approval. The payment of dividends by the Company is dependent upon the Company having adequate cash or other assets that can be converted to cash to pay dividends to its stockholders. In addition, under the terms of the Companys
Supervisory Agreement, the Company may not declare or pay any cash dividends, or purchase or redeem any capital stock, without prior notice to, and consent of its regulator. The Company suspended the dividend payments to common stockholders in the
fourth quarter of 2008 due to the net operating losses experienced and the challenging economic environment. The Company has deferred the last nine quarterly dividend payments, beginning with the February 15, 2011 dividend payment, on its
Preferred Stock. The deferred dividend payments have been accrued for payment in the future and are being reported for the deferral period as a preferred dividend requirement that is deducted from income for financial statement purposes to arrive at
the net income available to common shareholders.
Under the terms of the certificate of designations for the Preferred Stock, dividend
payments may be deferred, but the dividend is cumulative and compounds quarterly during the deferral period. In addition, if the Company fails to pay dividends for six quarters, whether or not consecutive, the holders of the Preferred Stock have the
right to appoint two representatives to the Companys board of directors. On February 8, 2013, the Treasury sold the Preferred Stock to unaffiliated third party investors in a private transaction. The Company has been advised that the
current holders of substantially all of the Preferred Stock have entered into agreements with the FRB pursuant to which they have each agreed not to exercise or attempt to exercise a controlling influence over the management or policies of the
Company or the Bank, including exercise of any right to elect any representative to the Companys board of directors. Further, while dividends on the Preferred Stock are in arrears ($3.1 million at February 15, 2013), no dividend may be
paid on the common stock of the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended March 31, 2013, the net cash provided by operating activities was $2.0 million. The Company collected $4.7 million in principal repayments and maturities on securities during
the quarter. It received $0.6 million in proceeds from the sale of real estate, and received $19.0 million related to a decrease in
33
net loans receivable. The Company had a net decrease in deposit balances of $27.3 million during the quarter and received $0.5 million in customer escrows. It also purchased $10.0 million in
securities during the quarter and paid out $0.1 million for premises and equipment.
The Company has certificates of deposits with outstanding
balances of $107.1 million that come due over the next 12 months, of which $11.0 million were obtained from brokers. Based upon past experience, management anticipates that the majority of the deposits will renew for another term, with the exception
of the brokered deposits that are not anticipated to renew due to the Companys desire to reduce the amount of outstanding brokered deposits. In addition, based on a regulatory directive, the Bank may not renew existing brokered deposits, or
accept new brokered deposits without the prior consent of the OCC. The Company believes that deposits that do not renew will be replaced with proceeds from loan principal payments or replaced with a combination of other customers deposits or
FHLB advances. Proceeds from the sale of securities could also be used to fund unanticipated outflows of deposits.
The Company has deposits
of $9.4 million in checking and money market accounts with a customer that has an individual balance greater than $5.0 million. These funds may be withdrawn at any time; however, management does not anticipate that these deposits will be withdrawn
from the Bank over the next twelve months. If these deposits were to be withdrawn, the Company believes they would be replaced with deposits from other customers or with FHLB advances. Proceeds from the sale of securities could also be used to
replace unanticipated outflows of large checking and money market deposits.
The Company has $70.0 million in advances with the FHLB that
mature during the next twelve months which have call features. If the call features are exercised, the Company has the option of requesting any advance otherwise available to it pursuant to the credit policy of the FHLB. Under the Companys
Supervisory Agreement, the Company may not incur or issue any debt without prior notice to, and the consent of, the FRB. Because FHLB advances are debt of the Bank, they are not affected by the Companys restriction on incurring debt.
The credit policy of the FHLB relating to the collateral value of the loans collateralizing the outstanding advances with the FHLB may change
such that the current collateral pledged to secure the advances is no longer acceptable or the formulas for determining the excess pledged collateral may change. If this were to happen, the Bank may not have additional collateral to pledge to secure
the existing advances and the Bank may have to find alternative funding sources to replace some of the FHLB advances maturing in 2013. The FHLB could also reduce the amount of funds it will lend to the Bank. It is not anticipated that the Bank will
need to find alternative funding sources in 2013 to replace the outstanding FHLB advances as it is anticipated that the maturing advances will be paid with existing cash balances. However, if needed, excess collateral currently pledged to the FHLB
could be pledged to the FRB and the Bank could borrow additional funds from the FRB based on the increased collateral levels or obtain additional deposits.
The Companys primary source of cash is dividends from the Bank and the Bank is restricted under the Bank Supervisory Agreement from paying dividends to the Company without obtaining prior regulatory
approval. At March 31, 2013, the Company had $0.7 million in cash and other assets that could readily be turned into cash. The primary use of cash by the Company is the payment of expenses and dividends on the Preferred Stock. The Company
has deferred the last nine quarterly dividend payments, beginning with the February 15, 2011 dividend payment on the Preferred Stock and has determined that it will defer the May 15, 2013 payment. The deferred dividend payments have been
accrued for payment in the future and are being reported for the deferral period as a preferred dividend requirement that is deducted from income for financial statement purposes to arrive at the net income available to common shareholders. The
amount of the compounding dividend on the preferred stock accumulates at the rate of $325,000 per quarter through February 14, 2014 and $585,000 per quarter thereafter, if the shares of preferred stock are not redeemed or otherwise reacquired.
Under the terms of the certificate of designations for the Preferred Stock, dividend payments may be deferred, but the dividend is cumulative and compounds quarterly during the deferral period. In addition, if the Company fails to pay dividends for
six quarters, whether or not consecutive, the holders of the Preferred Stock have the right to appoint two representatives to the Companys board of directors.
34
On February 8, 2013, the Treasury sold the Preferred Stock to unaffiliated third party investors in a
private transaction. The Company has been advised that the current holders of substantially all of the Preferred Stock have entered into agreements with the FRB pursuant to which they have each agreed not to exercise or attempt to exercise a
controlling influence over the management or policies of the Company or the Bank, including exercise of any right to elect any representative to the Companys board of directors. Further, while dividends on the Preferred Stock are in arrears,
no dividend may be paid on the common stock of the Company. Under the terms of the Companys and Banks Supervisory Agreements with their federal banking regulators, neither the Company nor the Bank may declare or pay any cash dividends,
or purchase or redeem any capital stock, without prior notice to, and consent of these regulators.
As required by the Companys, the
Company submitted an updated two-year capital plan in January of 2013 that the FRB may make comments on, and to which it may require revisions. The Company must operate within the parameters of the final capital plan and is required to monitor and
submit periodic reports on its compliance with the plan. In addition, the OCC has established an IMCR for the Bank. An IMCR requires a bank to establish and maintain levels of capital greater than those generally required for a bank to be classified
as well-capitalized. Effective December 31, 2011, the Bank was required to establish, and subsequently maintain, core capital at least equal to 8.5% of adjusted total assets, which was in excess of the Banks 7.14% core capital
to adjusted total assets ratio at December 31, 2011. In February 2012, the Bank received a notice from the OCC arising out of its failure to establish and maintain its IMCR of 8.5% core capital to adjusted total assets at December 31,
2011. In accordance with this notice, by April 30, 2012, the OCC required the Bank to submit a further written capital plan of how it intended to achieve and maintain its IMCR, and a contingency plan in the event the IMCR was not achieved
through the Banks primary plan. Because of the improved financial results and the decrease in assets experienced since December 31, 2011, the Banks core capital ratio improved to 10.24% at March 31, 2013.
In order to improve its capital ratios and maintain compliance with its IMCR, the Bank is, among other things, working to improve its financial results,
reduce non-performing assets, and decrease the asset size of the Bank. These actions have resulted, and may result in changes in the Banks assets, liabilities and earnings, some of which may be material, during the period in which the action
is taken or is consummated or over a longer period of time.
The Company also serves as a source of capital, liquidity and financial support
to the Bank. In light of the operating performance of the Bank, the need for continued compliance with the Bank and Company Supervisory Agreements and the Bank IMCR and the Companys other liquidity and capital needs, including expenses and
accumulating and unpaid dividends on the Preferred Stock, the stated rate of which increases in February 2014 from 5% to 9% per annum, compounding quarterly, the Company, subject to prevailing capital market conditions, applicable regulatory
approvals and other factors, may find it prudent or be required by supervising bank regulators to raise additional capital, and intends to pursue alternatives to restructure, reacquire or recapitalize outstanding Preferred Stock, in each case
through, in whole or in part, issuance of its common stock or other equity securities. In addition to the requirements of the Supervisory Agreements and the IMCR, regulators have placed increasing emphasis on the amount of common equity as a
component of core bank capital, and proposed capital regulations (described below) incorporating specific levels of common equity capital. Regulations would also require regulatory capital to meet required levels on a consolidated basis. Further,
additional capital would also potentially permit the Company to return to a strategy of growing Bank assets. Depending on circumstances, if it were to raise capital, the Company may deploy it to the Bank for general banking purposes, or may retain
some or all capital for use at the holding company level.
If the Company issues additional shares of common stock or other equity securities,
it could dilute the ownership interests of existing stockholders and, given our current common stock trading price, raising additional capital could dilute the per share book value of the Companys common stock, could dilute the Companys
earnings per share and could result in a change of control of the Company and the Bank. Investors in newly issued securities may also have rights, preferences and privileges senior to the Companys current stockholders, which may adversely
impact the Companys current stockholders. The Companys ability to issue equity securities will depend on, among other factors, conditions in the capital markets at that time, which are outside of its control, and on the Companys
financial performance. Accordingly, the Company may not be able to issue capital on favorable economic terms, or other terms acceptable to it.
35
If the Company or the Bank cannot satisfactorily address their respective capital needs as they arise, the
Companys ability to maintain or expand its operations, their ability to meet the Companys capital plan, otherwise maintain compliance with the Supervisory Agreements and maintain the core capital ratio in the Bank IMCR, the
Companys ability to limit or reverse the accumulation of and increased rate of unpaid preferred stock dividends, and to operate without additional regulatory or other restrictions, and its operating results, could be materially adversely
affected.
The capital requirements of the Company and the Bank may be affected in the future by regulatory changes proposed in June 2012 by
the FRB, the FDIC and the OCC to establish an integrated regulatory capital framework for implementing the Basel Committee on Banking Supervisions Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010. The proposals would, among other things, apply a strengthened set of capital requirements to both the Bank and the Company and revise the rules for calculating risk-weighted assets for purposes of such
requirements. These federal agencies have received comments on the proposed rules but have not issued final rules, so the details and the timetable for implementation of these rules remain uncertain.
Market Risk
Market risk is the
risk of loss from adverse changes in market prices and rates. The Companys market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its
interest rate risk exposure.
The Companys profitability is affected by fluctuations in interest rates. A sudden and substantial change
in interest rates may adversely impact the Companys earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the projected
changes in net interest income that occur if interest rates were to suddenly change up or down. The
Rate Shock Table
located in the Asset/Liability Management section of this report, which follows, discloses the Companys projected
changes in net interest income based upon immediate interest rate changes called rate shocks.
The Company utilizes a model that uses the
discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets
and interest-bearing liabilities under different interest rate changes.
The following table discloses the projected changes in the market
value to the Companys interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on March 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Market Value
|
|
Basis point change in interest rates
|
|
-100
|
|
|
0
|
|
|
+100
|
|
|
+200
|
|
Total market risk sensitive assets
|
|
$
|
640,047
|
|
|
|
633,094
|
|
|
|
624,345
|
|
|
|
612,811
|
|
Total market risk sensitive liabilities
|
|
|
563,870
|
|
|
|
542,968
|
|
|
|
528,375
|
|
|
|
513,070
|
|
Off-balance sheet financial instruments
|
|
|
(224
|
)
|
|
|
0
|
|
|
|
31
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net market risk
|
|
$
|
76,401
|
|
|
|
90,126
|
|
|
|
95,939
|
|
|
|
99,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change from current market value
|
|
|
(15.23
|
)%
|
|
|
0.00
|
%
|
|
|
6.45
|
%
|
|
|
10.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The preceding table was prepared utilizing a model using the following assumptions (the Model Assumptions)
regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 4% to 50%,
depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 18% and 138%, depending on the note rate and the period to maturity. Mortgage-backed securities and
collateralized mortgage obligations (CMOs) were projected to have prepayments based upon the underlying collateral securing the instrument and the related cash flow priority of the CMO tranche owned. Certificate accounts were assumed not to be
withdrawn until maturity. Passbook accounts were assumed to decay at an annual rate of 13% and money market accounts were assumed to decay at an annual rate of 9%. Retail non-interest checking accounts were assumed to decay at an annual rate of 6%
and NOW accounts were assumed to decay at an annual rate of 6%. Commercial NOW accounts and MMDA accounts were assumed to decay at annual rates of 13% and 16%, respectively. Commercial non-interest checking accounts were assumed to decay at an
annual rate of 13%. FHLB advances and callable investments were projected to be called at the first call date where the projected interest rate on similar remaining term instruments exceeded the interest rate on the callable advance or investment.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current
interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the Interest Spread) will remain constant over the interest changes disclosed in the table. Changes in Interest Spread
could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets which are
approaching their lifetime interest rate caps could be different from the values disclosed in the table. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating
the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial sustained interest rate increase.
Asset/Liability Management
The Companys management reviews the impact that
changing interest rates will have on its net interest income projected for the twelve months following March 31, 2013 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on
net interest income during the 12 month period ending March 31, 2014 of immediate interest rate changes called rate shocks.
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Rate Shock
in Basis
Points
|
|
Projected
Change in Net
Interest
Income
|
|
|
Percentage
Change
|
|
+200
|
|
$
|
2,504
|
|
|
|
12.97
|
%
|
+100
|
|
|
1,337
|
|
|
|
6.92
|
|
0
|
|
|
0
|
|
|
|
0.00
|
|
-100
|
|
|
(1,709
|
)
|
|
|
(8.85
|
)
|
The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in the method of
analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to
service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income. The increase in interest income in a rising rate environment is primarily because more loans than deposits are scheduled
to reprice in the next twelve months.
In an attempt to manage its exposure to changes in interest rates, management closely monitors interest
rate risk. The Bank has an Asset/Liability Committee which meets frequently to discuss changes in the interest rate risk position and projected profitability. This Committee makes adjustments to the asset-liability position of the Bank,
37
which are reviewed by the board of directors of the Bank. This Committee also reviews the Banks portfolio, formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Boards objectives in the most effective manner. In addition, each quarter the board reviews the Banks asset/liability position, including simulations of the effect on the Banks capital of
various interest rate scenarios.
In managing its asset/liability mix, the Bank may, at times, depending on the relationship between long and
short-term interest rates, market conditions and consumer preference, place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest
income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, in certain situations, provide high enough returns to justify the increased exposure to sudden
and unexpected changes in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank attempts to manage its
interest rate risk and has taken a number of steps to restructure its balance sheet in order to better match the maturities of its assets and liabilities. In the past, more fixed rate loans were placed into the single family loan portfolio. Over the
past several years, the Bank has primarily focused its fixed rate one-to-four family residential lending program on loans that are saleable to third parties and generally placed only those fixed rate loans that met certain risk characteristics into
its loan portfolio. The Banks commercial loan production continued to be primarily in adjustable rate loans with minimum interest rate floors; however, more of these loans were structured to reprice every one, two, or three years.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than commitments to originate and sell loans in the ordinary course of business.
Item 3:
|
Quantitative and Qualitative Disclosures About Market Risk
|
Included in Part I, Item 2 under Market Risk.
Item 4:
|
Controls and Procedures
|
Evaluation of
disclosure controls and procedures.
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act). Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in
internal controls.
There was no change in the Companys internal controls over financial reporting during the Companys most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the Companys internal controls over financial reporting.
38
HMN FINANCIAL, INC.