Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-24100

 

 

HMN FINANCIAL, INC.

(Exact name of Registrant as specified in its Charter)

 

 

 

Delaware   41-1777397

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1016 Civic Center Drive N.W., Rochester, MN   55901
(Address of principal executive offices)   (ZIP Code)
Registrant’s telephone number, including area code:   (507) 535-1200

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class

   Outstanding at July 19, 2013  

Common stock, $0.01 par value

     4,393,073   


Table of Contents

HMN FINANCIAL, INC.

CONTENTS

 

     Page  

PART I—FINANCIAL INFORMATION

  

Item 1: Financial Statements (unaudited)

  

Consolidated Balance Sheets at June 30, 2013 and December 31, 2012

     3   

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended and Six Months Ended June 30, 2013 and 2012

     4   

Consolidated Statement of Stockholders’ Equity for the Six Month Period Ended June 30, 2013

     5   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012

     6   

Notes to Consolidated Financial Statements

     7   

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3:Quantitative and Qualitative Disclosures about Market Risk (Included in Item 2 under Market Risk)

     41   

Item 4: Controls and Procedures

     41   

PART II—OTHER INFORMATION

  

Item 1: Legal Proceedings

     42   

Item 1A: Risk Factors

     44   

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

     46   

Item 3: Defaults Upon Senior Securities

     46   

Item 4: Mine Safety Disclosures

     46   

Item 5: Other Information

     46   

Item 6: Exhibits

     46   

Signatures

     47   

 

2


Table of Contents

Part I – FINANCIAL INFORMATION

Item 1: Financial Statements

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

(Dollars in thousands)

   June 30,
2013
    December 31,
2012
 
     (unaudited)        
Assets     

Cash and cash equivalents

   $ 29,933        83,660   

Securities available for sale:

    

Mortgage-backed and related securities (amortized cost $6,694 and $9,825)

     7,042        10,421   

Other marketable securities (amortized cost $84,811 and $75,759)

     83,251        75,470   
  

 

 

   

 

 

 
     90,293        85,891   
  

 

 

   

 

 

 

Loans held for sale

     3,212        2,584   

Loans receivable, net

     415,534        454,045   

Accrued interest receivable

     2,004        2,018   

Real estate, net

     9,423        10,595   

Federal Home Loan Bank stock, at cost

     784        4,063   

Mortgage servicing rights, net

     1,795        1,732   

Premises and equipment, net

     6,883        7,173   

Prepaid expenses and other assets

     1,113        1,566   
  

 

 

   

 

 

 

Total assets

   $ 560,974        653,327   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits

   $ 491,753        514,951   

Federal Home Loan Bank advances

     0        70,000   

Accrued interest payable

     178        247   

Customer escrows

     808        830   

Accrued expenses and other liabilities

     7,073        6,465   
  

 

 

   

 

 

 

Total liabilities

     499,812        592,493   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Serial preferred stock ($.01 par value): authorized 500,000 shares; issued shares 26,000

     25,629        25,336   

Common stock ($.01 par value): authorized 16,000,000; issued shares 9,128,662

     91        91   

Additional paid-in capital

     51,760        51,795   

Retained earnings, subject to certain restrictions

     48,822        47,004   

Accumulated other comprehensive loss

     (1,567     (49

Unearned employee stock ownership plan shares

     (2,900     (2,997

Treasury stock, at cost 4,735,589 and 4,705,073 shares

     (60,673     (60,346
  

 

 

   

 

 

 

Total stockholders’ equity

     61,162        60,834   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 560,974        653,327   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(Dollars in thousands, except per share data)

   2013     2012     2013     2012  

Interest income:

        

Loans receivable

   $ 5,503        7,523        11,531        15,319   

Securities available for sale:

        

Mortgage-backed and related

     82        164        176        357   

Other marketable

     148        192        287        441   

Cash equivalents

     35        19        68        46   

Other

     19        54        48        64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     5,787        7,952        12,110        16,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     465        1,061        1,022        2,278   

Federal Home Loan Bank advances

     650        844        1,485        1,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,115        1,905        2,507        3,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,672        6,047        9,603        12,260   

Provision for loan losses

     (520     1,088        (520     960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,192        4,959        10,123        11,300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income:

        

Fees and service charges

     883        834        1,672        1,663   

Mortgage servicing fees

     257        236        505        468   

Gain on sales of loans

     702        620        1,380        1,529   

Gain on sale of branch office

     0        0        0        552   

Other

     145        104        304        288   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,987        1,794        3,861        4,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Compensation and benefits

     2,980        3,219        6,179        6,632   

(Gain) loss on real estate owned

     (306     174        (325     97   

Occupancy

     826        839        1,676        1,721   

Deposit insurance

     190        305        508        575   

Data processing

     325        336        655        673   

Other

     1,310        1,485        2,671        2,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     5,325        6,358        11,364        12,601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,854        395        2,620        3,199   

Income tax expense

     55        0        80        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,799        395        2,540        3,199   

Preferred stock dividends and discount

     (547     (464     (1,023     (925
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 1,252        (69     1,517        2,274   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

   $ (1,373     (93     (1,518     (272
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to common shareholders

   $ (121     (162     (1     2,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ 0.32        (0.02     0.38        0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ 0.30        (0.02     0.36        0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six-Month Period Ended June 30, 2013

(unaudited)

 

                                     Unearned              
                                     Employee              
                               Accumulated     Stock           Total  
                   Additional           Other     Ownership           Stock-  
     Preferred      Common      Paid-in     Retained     Comprehensive     Plan     Treasury     Holders’  

(Dollars in thousands)

   Stock      Stock      Capital     Earnings     Income     Shares     Stock     Equity  

Balance, December 31, 2012

   $ 25,336         91         51,795        47,004        (49     (2,997     (60,346     60,834   

Net income

             2,540              2,540   

Other comprehensive loss

               (1,518         (1,518

Preferred stock discount amortization

     293            (293             0   

Stock compensation tax benefits

           2                2   

Restricted stock awards forfeited

           207              (327     (120

Amortization of restricted stock awards

           72                72   

Preferred stock dividends accrued

             (722           (722

Earned employee stock ownership plan shares

           (23         97          74   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ 25,629         91         51,760        48,822        (1,567     (2,900     (60,673     61,162   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

     Six Months Ended
June 30,
 

(Dollars in thousands)

   2013     2012  

Cash flows from operating activities:

    

Net income

   $ 2,540        3,199   

Adjustments to reconcile net income to cash provided by operating activities:

    

Provision for loan losses

     (520     960   

Depreciation

     518        570   

Amortization of premiums, net

     51        65   

Amortization of deferred loan fees

     (117     (169

Amortization of mortgage servicing rights

     331        348   

Capitalized mortgage servicing rights

     (394     (396

(Gain) loss on sales of real estate owned

     (325     97   

Gains on sales of loans

     (1,380     (1,529

Proceeds from sale of loans held for sale

     56,136        55,066   

Disbursements on loans held for sale

     (47,341     (48,390

Amortization of restricted stock awards

     72        133   

Amortization of unearned ESOP shares

     97        97   

Cancellation of vested restricted stock awards

     (120     0   

Earned employee stock ownership shares priced below original cost

     (23     (41

Stock option compensation

     2        4   

Decrease in accrued interest receivable

     14        469   

Decrease in accrued interest payable

     (69     (262

Decrease in other assets

     462        521   

Decrease in other liabilities

     (90     (2,355

Other, net

     145        99   
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,989        8,486   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Principal collected on securities available for sale

     3,135        5,556   

Proceeds collected on maturities of securities available for sale

     6,000        60,000   

Purchases of securities available for sale

     (15,092     (16,000

Redemption of Federal Home Loan Bank Stock

     3,279        159   

Proceeds from sales of real estate and premises

     2,279        4,219   

Net decrease in loans receivable

     30,147        54,508   

Gain on sale of branch office

     0        (552

Payment on sale of branch office

     0        (36,981

Purchases of premises and equipment

     (228     (175
  

 

 

   

 

 

 

Net cash provided by investing activities

     29,520        70,734   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Decrease in deposits

     (23,214     (81,222

Proceeds from borrowings

     10,000        0   

Repayment of borrowings

     (80,000     0   

Decrease in customer escrows

     (22     (220
  

 

 

   

 

 

 

Net cash used by financing activities

     (93,236     (81,442
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (53,727     (2,222

Cash and cash equivalents, beginning of period

     83,660        67,840   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 29,933        65,618   
  

 

 

   

 

 

 

Supplemental cash flow disclosures:

    

Cash paid for interest

   $ 2,576        4,229   

Cash paid for income taxes

     205        10   

Supplemental noncash flow disclosures:

    

Transfer of loans to real estate

     924        525   

Loans transferred to loans held for sale

     8,078        4,073   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

June 30, 2013 and 2012

(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 six-month period ended June 30, 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 did not have any impact on the Company’s 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 ASU’s 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 did not have a material impact on the Company’s consolidated financial statements.

(4) Derivative Instruments and Hedging Activities

The Company has commitments outstanding to extend credit to future borrowers that have 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. As a result of marking these derivatives to market for the period ended June 30, 2013, the Company recorded a decrease in other assets of $14,000, a decrease in other liabilities of $10,000 and a loss included in the gain on sales of loans of $4,000.

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 a decrease in loans held for sale of $24,000 and an increase in other assets of $24,000.

 

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(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 and liabilities of the Company for which fair values are determined on a recurring basis as of June 30, 2013 and December 31, 2012.

 

     Carrying value at June 30, 2013  
(Dollars in thousands)    Total     Level 1      Level 2     Level 3  

Securities available for sale

   $ 90,293        0         90,293        0   

Mortgage loan commitments

     (16     0         (16     0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 90,277        0         90,277        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 or six month periods ended June 30, 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 in the second quarter of 2013 that were still held at June 30, 2013, 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 June 30, 2013 and December 31, 2012.

 

     Carrying value at June 30, 2013     

Three months ended

June 30, 2013

Total Losses

   

Six months ended

June 30, 2013

Total Losses

 
(Dollars in thousands)    Total      Level 1      Level 2      Level 3       

Loans held for sale

   $ 3,212         0         3,212         0         (35     (24

Mortgage servicing rights

     1,795         0         1,795         0         0        0   

Loans (1)

     23,652         0         23,652         0         (989     (4,866

Real estate, net (2)

     9,423         0         9,423         0         (260     (377
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 38,082         0         38,082         0         (1,284     (5,267
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

 

     Carrying value at December 31, 2012     

Year ended

December 31, 2012
Total Gains (Losses)

 

(Dollars in thousands)

   Total      Level 1      Level 2      Level 3     

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 the carrying value and related specific reserves on 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 June 30, 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 Company’s 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 Company’s financial instruments as of June 30, 2013 and December 31, 2012 are shown below.

 

     June 30, 2013      December 31, 2012  
                 Fair value hierarchy                       Fair value hierarchy       

(Dollars in thousands)

   Carrying
amount
    Estimated
fair value
    Level 1      Level 2      Level 3    Contract
amount
     Carrying
amount
    Estimated
fair value
    Level 1      Level 2      Level 3    Contract
amount
 

Financial assets:

                               

Cash and cash equivalents

   $ 29,933        29,933        29,933                  83,660        83,660        83,660            

Securities available for sale

     90,293        90,293           90,293               85,891        85,891        81         85,810         

Loans held for sale

     3,212        3,212           3,212               2,584        2,584           2,584         

Loans receivable, net

     415,534        419,483           419,483               454,045        459,177           459,177         

Accrued interest receivable

     2,004        2,004           2,004               2,018        2,018           2,018         

Financial liabilities:

                               

Deposits

     491,753        491,753           491,753               514,951        514,951           514,951         

Federal Home Loan Bank

advances

     0        0           0               70,000        71,623           71,623         

Accrued interest payable

     178        178           178               247        247           247         

Off-balance sheet financial instruments:

                               

Commitments to extend credit

     37        37                 113,885         27        27                 84,877   

Commitments to sell loans

     (16     (16              6,114         (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.

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

 

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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 Company’s 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 (loss) is the total of net income and other comprehensive income (loss), which for the Company is comprised of unrealized gains and losses on securities available for sale. The components of other comprehensive loss and the related tax effects were as follows:

 

     For the three months ended June 30,  
     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

   $ (1,373     0         (1,373     (93     0         (93
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive loss

   $ (1,373     0         (1,373     (93     0         (93
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     For the six months ended June 30,  
     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

   $ (1,518     0         (1,518     (272     0         (272
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive loss

   $ (1,518     0         (1,518     (272     0         (272
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

(8) Securities Available For Sale

The following table shows the gross unrealized losses and fair value 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 June 30, 2013 and December 31, 2012.

 

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Table of Contents
     June 30, 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

     16       $ 72,922         (1,131     0       $ 0         0      $ 72,922         (1,131

Corporate preferred stock

     0         0         0        1         245         (455     245         (455
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

     16       $ 72,922         (1,131     1       $ 245         (455   $ 73,167         (1,586
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     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 June 30, 2013 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 issuer’s 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 June 30, 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.

A summary of securities available for sale at June 30, 2013 and December 31, 2012 is as follows:

 

(Dollars in thousands)

   Amortized cost      Gross unrealized
gains
     Gross unrealized
losses
    Fair value  

June 30, 2013:

          

Mortgage-backed securities:

          

FHLMC

   $ 3,859         178         0        4,037   

FNMA

     2,835         170         0        3,005   
  

 

 

    

 

 

    

 

 

   

 

 

 
     6,694         348         0        7,042   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other marketable securities:

          

U.S. Government agency obligations

     84,053         26         (1,131     82,948   

Common stock

     58         0         0        58   

Corporate preferred stock

     700         0         (455     245   
  

 

 

    

 

 

    

 

 

   

 

 

 
     84,811         26         (1,586     83,251   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 91,505         374         (1,586     90,293   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

(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 June 30, 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

   $ 12,665         12,815   

Due after one year through five years

     68,051         67,313   

Due after five years through ten years

     10,031         9,862   

Due after ten years

     758         303   
  

 

 

    

 

 

 

Total

   $ 91,505         90,293   
  

 

 

    

 

 

 

The allocation of mortgage-backed securities 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 that it is anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.

(9) Loans Receivable, Net

A summary of loans receivable at June 30, 2013 and December 31, 2012 is as follows:

 

(Dollars in thousands)

   June 30,
2013
     December 31,
2012
 

1-4 family

   $ 85,154         97,037   

Commercial real estate:

     

Residential developments

     41,196         46,343   

Other

     178,375         198,564   
  

 

 

    

 

 

 
     219,571         244,907   

Consumer

     53,710         53,975   

Commercial business:

     

Construction/development

     7,121         2,666   

Other

     70,401         77,188   
  

 

 

    

 

 

 
     77,522         79,854   
  

 

 

    

 

 

 

Total loans

     435,957         475,773   

Less:

     

Unamortized discounts

     20         33   

Net deferred loan fees

     44         87   

Allowance for loan losses

     20,359         21,608   
  

 

 

    

 

 

 

Total loans receivable, net

   $ 415,534         454,045   
  

 

 

    

 

 

 

 

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Table of Contents

(10) Allowance for Loan Losses and Credit Quality Information

The following tables summarize the allowance for loan losses for the periods ending June 30, 2013 and 2012:

 

(Dollars in thousands)

   1-4
Family
    Commercial
Real Estate
    Consumer     Commercial
Business
    Total  

For the three months ended June 30, 2013:

          

Balance, March 31, 2013

   $ 2,352        14,581        1,344        3,664        21,941   

Provision for losses

     (293     85        133        (445     (520

Charge-offs

     (13     (759     (55     (556     (1,383

Recoveries

     13        182        9        117        321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ 2,059        14,089        1,431        2,780        20,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2013:

          

Balance, December 31, 2012

     2,821        13,588        1,146        4,053        21,608   

Provision for losses

     (575     866        315        (1,126     (520

Charge-offs

     (200     (910     (101     (556     (1,767

Recoveries

     13        545        71        409        1,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ 2,059        14,089        1,431        2,780        20,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 469        6,123        775        732        8,099   

General reserves

     1,590        7,966        656        2,048        12,260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ 2,059        14,089        1,431        2,780        20,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2013:

          

Individually reviewed for impairment

   $ 4,298        24,127        1,866        1,460        31,751   

Collectively reviewed for impairment

     80,856        195,444        51,844        76,062        404,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 85,154        219,571        53,710        77,522        435,957   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

(Dollars in thousands)

   1-4
Family
    Commercial
Real Estate
    Consumer     Commercial
Business
    Total  

For the three months ended June 30, 2012:

          

Balance, March 31, 2012

   $ 3,748        11,049        1,122        5,505        21,424   

Provision for losses

     (83     975        628        (432     1,088   

Charge-offs

     0        (1,554     (493     (1,820     (3,867

Recoveries

     0        1,083        11        780        1,874   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 3,665        11,553        1,268        4,033        20,519   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2012:

          

Balance, December 31, 2011

     3,718        13,622        1,159        5,389        23,888   

Provision for losses

     (53     792        847        (626     960   

Charge-offs

     0        (4,184     (758     (1,828     (6,770

Recoveries

     0        1,323        20        1,098        2,441   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 3,665        11,553        1,268        4,033        20,519   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the amount of classified and unclassified loans at June 30, 2013 and December 31, 2012:

 

     June 30, 2013  
     Classified      Unclassified         

(Dollars in thousands)

   Special
Mention
     Substandard      Doubtful      Loss      Total      Total      Total
Loans
 

1-4 family

   $ 1,499         11,405         38         0         12,942         72,212         85,154   

Commercial real estate:

                    

Residential developments

     0         30,337         0         0         30,337         10,859         41,196   

Other

     16,872         24,981         0         0         41,853         136,522         178,375   

Consumer

     0         1,486         155         225         1,866         51,844         53,710   

Commercial business:

                    

Construction industry

     0         403         0         0         403         6,718         7,121   

Other

     446         9,092         0         0         9,538         60,863         70,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 18,817         77,704         193         225         96,939         339,018         435,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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

 

14


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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.

The aging of past due loans at June 30, 2013 and December 31, 2012 is 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
 

June 30, 2013

                    

1-4 family

   $ 1,779         121         0         1,900         83,254         85,154         0   

Commercial real estate:

                 

Residential developments

     0         0         0         0         41,196         41,196         0   

Other

     1,358         0         0         1,358         177,017         178,375         0   

Consumer

     458         233         1,095         1,786         51,924         53,710         0   

Commercial business:

                 

Construction industry

     2,023         0         0         2,023         5,098         7,121         0   

Other

     86         0         0         86         70,315         70,401         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,704         354         1,095         7,153         428,804         435,957         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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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 June 30, 2013 and December 31, 2012:

 

     June 30, 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

   $ 1,595         1,595         0         1,617         1,617         0   

Commercial real estate:

                 

Residential developments

     9,499         15,181         0         10,714         15,530         0   

Other

     335         335         0         640         640         0   

Consumer

     330         336         0         393         400         0   

Commercial business:

                 

Construction industry

     100         175         0         102         1,038         0   

Other

     0         0         0         34         534         0   

Loans with an allowance recorded:

                 

1-4 family

     2,703         2,747         469         3,070         3,114         571   

Commercial real estate:

                 

Residential developments

     11,953         14,245         4,931         14,061         16,545         1,669   

Other

     2,340         2,843         1,192         2,780         3,133         921   

Consumer

     1,536         1,536         775         1,430         1,430         537   

Commercial business:

                 

Construction industry

     0         0         0         74         74         62   

Other

     1,360         2,212         732         2,185         2,936         1,053   

Total:

                 

1-4 family

     4,298         4,342         469         4,687         4,731         571   

Commercial real estate:

                 

Residential developments

     21,452         29,426         4,931         24,775         32,075         1,669   

Other

     2,675         3,178         1,192         3,420         3,773         921   

Consumer

     1,866         1,872         775         1,823         1,830         537   

Commercial business:

                 

Construction industry

     100         175         0         176         1,112         62   

Other

     1,360         2,212         732         2,219         3,470         1,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,751         41,205         8,099         37,100         46,991         4,813   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

The following table summarizes the average recorded investment and interest income recognized on impaired loans for the three and six months ended June 30, 2013 and 2012:

 

     For the three months ended
June 30, 2013
     For the six months ended
June 30, 2013
 

(Dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no related allowance recorded:

           

1-4 family

   $ 1,617         15         1,617         31   

Commercial real estate:

           

Residential developments

     8,942         14         9,533         29   

Other

     361         4         454         7   

Consumer

     291         2         325         5   

Commercial business:

           

Construction industry

     82         0         88         0   

Other

     2         0         12         0   

Loans with an allowance recorded:

           

1-4 family

     2,687         8         2,815         16   

Commercial real estate:

           

Residential developments

     13,953         14         13,989         27   

Other

     2,422         1         2,541         4   

Consumer

     1,498         3         1,475         13   

Commercial business:

           

Construction industry

     35         0         48         0   

Other

     1,838         11         1,953         19   

Total:

           

1-4 family

     4,304         23         4,432         47   

Commercial real estate:

           

Residential developments

     22,895         28         23,522         56   

Other

     2,783         5         2,995         11   

Consumer

     1,789         5         1,800         18   

Commercial business:

           

Construction industry

     117         0         136         0   

Other

     1,840         11         1,965         19   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,728         72         34,850         151   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     For the three months ended
June 30, 2012
     For the six months ended
June 30, 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

   $ 4,092         21         3,611         48   

Commercial real estate:

           

Residential developments

     12,085         83         10,356         320   

Other

     3,972         5         3,896         18   

Consumer

     339         2         389         2   

Commercial business:

           

Construction industry

     217         0         323         0   

Other

     1,521         2         1,530         5   

Loans with an allowance recorded:

           

1-4 family

     4,148         18         3,962         41   

Commercial real estate:

           

Residential developments

     15,679         37         15,082         74   

Other

     4,013         1         4,662         3   

Consumer

     1,356         19         1,142         42   

Commercial business:

           

Construction industry

     189         0         154         0   

Other

     4,146         8         4,325         29   

Total:

           

1-4 family

     8,240         39         7,573         89   

Commercial real estate:

           

Residential developments

     27,764         120         25,438         394   

Other

     7,985         6         8,558         21   

Consumer

     1,695         21         1,531         44   

Commercial business:

           

Construction industry

     406         0         477         0   

Other

     5,667         10         5,855         34   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,757         196         49,432         582   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2013 and December 31, 2012, non-accruing loans totaled $25.8 million and $30.0 million, respectively, for which the related allowance for loan losses was $7.5 million and $3.2 million, respectively. The increase in the related allowances is due primarily to the decline in estimated values of collateral securing several non-accruing loans. 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 $8.8 million and $10.3 million, respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.

The non-accrual loans at June 30, 2013 and December 31, 2012 are summarized as follows:

 

(Dollars in thousands)    June 30,
2013
     December 31,
2012
 

1-4 family

   $ 2,091       $ 2,492   

Commercial real estate:

     

Residential developments

     20,228         23,652   

Other

     1,305         1,891   

Consumer

     1,462         300   

Commercial business:

     

Construction industry

     100         176   

Other

     655         1,464   
  

 

 

    

 

 

 
   $ 25,841       $ 29,975   
  

 

 

    

 

 

 

At June 30, 2013 and December 31, 2012 there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $28.0 million and $33.1 million, respectively. For the loans that were restructured in the second quarter of 2013, $0.0 million were classified but performing and $0.2 million were non-performing at June 30, 2013.

 

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Table of Contents

The following table summarizes TDRs at June 30, 2013 and December 31, 2012:

 

     June 30, 2013      December 31, 2012  

(Dollars in thousands)

   Accrual      Non-Accrual      Total      Accrual      Non-Accrual      Total  

1-4 Family

   $ 2,207         1,004         3,211         2,196         1,404         3,600   

Commercial real estate

     2,594         20,408         23,002         2,653         23,222         25,875   

Consumer

     404         163         567         1,522         292         1,814   

Commercial business

     705         544         1,249         754         1,012         1,766   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,910         22,119         28,029         7,125         25,930         33,055   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no material commitments to lend additional funds to customers whose loans were restructured or classified as nonaccrual at June 30, 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 and six month periods ending June 30, 2013 and June 30, 2012.

 

     Three Months Ended
June 30, 2013
     Six Months Ended
June 30, 2013
 

(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

     1       $ 193         200         1       $ 193         200   

Commercial real estate:

                 

Other

     0         0         0         2         75         75   

Consumer

     1         3         3         5         117         118   

Commercial business:

                 

Construction industry

     1         41         41         1         41         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 237         244         9       $ 426         434   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
    Three Months Ended
June 30, 2012
    Six Months Ended
June 30, 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

    1        321        150        6        2,814        2,586   

Consumer

    4        1,057        1,057        12        1,326        1,326   

Commercial business:

           

Other

    1        80        80        3        324        324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    6      $ 1,458        1,287        55      $ 19,147        17,263   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans that were restructured within the 12 months preceding June 30, 2013 and June 30, 2012 and defaulted during the three and six months ended June 30, 2013 and June 30, 2012 are presented in the table below.

 

     Three Months Ended
June 30, 2013
     Six Months Ended
June 30, 2013
 

(Dollars in thousands)

   Number of
Contracts
     Outstanding
Recorded
Investment
     Number of
Contracts
     Outstanding
Recorded
Investment
 

Troubled debt restructurings that subsequently defaulted:

        

1-4 family

     2       $ 187         2       $ 187   

Commercial real estate:

        

Residential developments

     2         608         2         608   

Other

     0         0         0         0   

Consumer

     0         0         0         0   

Commercial business:

        

Construction industry

     0         0         0         0   

Other

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 795         4       $ 795   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
June 30, 2012
     Six Months Ended
June 30, 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

     1       $ 846         2       $ 940   

Commercial real estate:

        

Residential developments

     0         0         0         0   

Other

     0         0         2         159   

Consumer

     0         0         0         0   

Commercial business:

           

Construction industry

     0         0         0         0   

Other

     0         0         3         2,777   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 846         7       $ 3,876   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

20


Table of Contents

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 $6.8 million, or 33.2%, of the total $20.4 million in loan loss reserves at June 30, 2013 and $3.7 million, or 17.2%, of the total $21.6 million in loan loss reserves at December 31, 2012.

(11) Investment in Mortgage Servicing Rights

A summary of mortgage servicing activity is as follows:

 

(Dollars in thousands)

   Six Months ended
June 30, 2013
    Twelve Months ended
December 31, 2012
    Six Months ended
June 30, 2012
 

Mortgage servicing rights:

      

Balance, beginning of period

   $ 1,732        1,485        1,485   

Originations

     394        979        396   

Amortization

     (331     (732     (348
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 1,795        1,732        1,533   
  

 

 

   

 

 

   

 

 

 

Fair value of mortgage servicing rights

   $ 2,620        2,126        1,929   
  

 

 

   

 

 

   

 

 

 

All of the loans being serviced are single family loans serviced for the FNMA under the 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 June 30, 2013.

 

(Dollars in thousands)

   Loan Principal
Balance
     Weighted
Average

Interest Rate
    Weighted
Average
Remaining Term
     Number of
Loans
 

Original term 30 year fixed rate

   $ 205,191         4.40     304         1,751   

Original term 15 year fixed rate

     122,465         3.46     147         1,383   

Adjustable rate

     309         3.53     297         6   
  

 

 

    

 

 

   

 

 

    

 

 

 

The gross carrying amount of mortgage servicing rights and the associated accumulated amortization at June 30, 2013 is presented in the following table. Amortization expense for mortgage servicing rights was $331,000 and $348,000 for the six months ended June 30, 2013 and 2012, respectively.

 

     June 30, 2013  
     Gross            Unamortized  

(Dollars in thousands)

   Carrying
Amount
     Accumulated
Amortization
    Mortgage
Servicing Rights
 

Mortgage servicing rights

   $ 2,541         (746     1,795   
  

 

 

    

 

 

   

 

 

 

Total

   $ 2,541         (746     1,795   
  

 

 

    

 

 

   

 

 

 

 

     June 30, 2012  
     Gross            Unamortized  

(Dollars in thousands)

   Carrying
Amount
     Accumulated
Amortization
    Mortgage
Servicing Rights
 

Mortgage servicing rights

   $ 2,191         (658     1,533   
  

 

 

    

 

 

   

 

 

 

Total

   $ 2,191         (658     1,533   
  

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

The following table indicates the estimated future amortization expense for amortized mortgage servicing rights:

 

     Mortgage  

(Dollars in thousands)

   Servicing Rights  

Year ended December 31,

  

2013

   $ 416   

2014

     397   

2015

     366   

2016

     288   

2017

     181   

Thereafter

     147   
  

 

 

 
   $ 1,795   
  

 

 

 

Projections of amortization are based on existing asset balances and the existing interest rate environment as of June 30, 2013. The Company’s actual experiences may be significantly different depending upon changes in mortgage interest rates and other market conditions.

(12) Earnings (Loss) per Common Share

The following table reconciles the weighted average shares outstanding and the earnings (loss) available to common shareholders used for basic and diluted earnings (loss) per share:

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(Dollars in thousands, except per share data)

   2013      2012     2013      2012  

Weighted average number of common shares outstanding used in basic loss per common share calculation

     3,991         3,936        3,993         3,925   

Net dilutive effect of:

          

Options

     285         0        176         0   

Restricted stock awards

     40         0        45         97   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of shares outstanding adjusted for effect of dilutive securities

     4,316         3,936        4,214         4,022   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) available to common shareholders

   $ 1,252         (69     1,517         2,274   

Basic earnings (loss) per common share

   $ 0.32         (0.02     0.38         0.58   

Diluted earnings (loss) per common share

   $ 0.30         (0.02     0.36         0.57   

For the three months ended June 30, 2013 and June 30, 2012, there were 0 and 94,432 common share equivalents outstanding, respectively, that are not included in the calculation of diluted earnings per share as they are anti-dilutive. For the six months ended June 30, 2013 and June 30, 2012, there were no common share equivalents outstanding, respectively, that are not included in the calculation of diluted earnings per share as they are anti-dilutive.

(13) Regulatory Capital and Regulatory 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 Bank’s 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 Company’s 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 Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s 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 Bank’s 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 OCC’s 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

 

22


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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 June 30, 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 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 Company’s 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 June 30, 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 June 30, 2013, the Bank’s tangible assets were $560.6 million, its adjusted total assets were $562.2 million, and its risk-weighted assets were $413.5 million. The following table presents the Bank’s capital amounts and ratios at June 30, 2013 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations.

 

     Actual     Required to be
Adequately
Capitalized
    Excess Capital     To Be Well Capitalized
Under Prompt Corrective
Actions Provisions(1)
 

(Dollars in thousands)

   Amount      Percent  of
Assets(2)
    Amount      Percent of
Assets (2)
    Amount      Percent  of
Assets(2)
    Amount      Percent  of
Assets(2)
 

Bank stockholder’s equity

   $ 64,656                     

Plus:

                    

Net unrealized losses on certain securities available for sale and cash flow hedges

     1,567                     
  

 

 

                   
     66,223                     
  

 

 

                   

Tier I or core capital

                    

Tier I capital to adjusted total assets

        11.78   $ 22,488         4.00   $ 43,735         7.78   $ 28,110         5.00

Tier I capital to risk-weighted assets

        16.01   $ 16,541         4.00   $ 49,682         12.01   $ 24,811         6.00

Plus:

                    

Allowable allowance for loan losses

     5,357                     
  

 

 

                   

Risk-based capital

   $ 71,580         $ 33,081         $ 38,498         $ 41,352      
  

 

 

                   

Risk-based capital to risk-weighted assets

        17.31        8.00        9.31        10.00

 

(1) Under recently issued final rules, revised requirements will be phased in commencing January 1, 2015, as described below.
(2) Based upon the Bank’s 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.

 

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The OCC 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 8.50% of adjusted total assets, which was in excess of the Bank’s 7.14% core capital to adjusted total assets ratio at December 31, 2011. In February 2012, the Bank received a Notice of Failure to Maintain Minimum Capital Ratios from the OCC arising out of its failure to establish and maintain its IMCR of 8.50% 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 Bank’s primary plan. As a result of a decrease in assets and improved financial results, the Bank’s core capital to adjusted total assets ratio improved to 11.78% at June 30, 2013 which equates to core capital being $18.4 million in excess of the IMCR capital requirement at June 30, 2013.

Management believes that, as of June 30, 2013, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the current prompt corrective action regulations described above. However, there can be no assurance that the Bank will continue to maintain such status in the future, under the current rules or new rules described below. The OCC has extensive discretion in its supervisory and enforcement activities, and can adjust the requirement to be “well-capitalized” in the future.

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. In March 2012, the Bank sold substantially all of the assets and liabilities associated with its Toledo, Iowa branch, and in March 2013 the Bank’s 55th 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 it is necessary or prudent to dispose of other non-strategic assets. These actions have resulted, and may result in changes in the Bank’s 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 Company’s 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 will be affected in the future by regulatory changes approved in the final rules issued in July 2013 by the FRB and the OCC to establish an integrated regulatory capital framework for implementing the Basel III reforms of the Basel Committee on Banking Supervision for the Bank of International Settlements. The new requirements, which will be effective January 1, 2015, among other things, apply a strengthened set of capital requirements to both the Bank and the Company, including new requirements relating to common equity as a component of core capital and as a “capital conservation buffer” against risk, and a higher minimum core capital requirement, and will revise the rules for calculating risk-weighted assets for purposes of such requirements. The final rules make corresponding revisions to the prompt corrective action framework. Under the final rules, certain changes including the new capital ratio and buffer requirements will be phased in incrementally, with full implementation scheduled for January 1, 2019.

(14) Preferred Stock

The Company’s 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 Treasury’s 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 ten quarterly dividend payments, beginning with the February 15, 2011 dividend payment. The deferred dividend payments of $3.4 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 Company’s board of directors. Treasury did not exercise this right.

 

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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 Company’s obligation to satisfy accrued and unpaid dividends prior to the payment of any dividend or other distribution to holders of junior stock, including the Company’s 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 Company’s 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 Treasury’s 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 Company’s board of directors.

Under the terms of the Company’s and Bank’s 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 Company’s 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 Company’s right to repurchase the warrant at fair market value under the terms of the Company’s 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 June 30, 2013 were approximately $1.6 million, expire over the next fifteen months, 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 segment’s 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.

 

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The following table sets forth certain information about the reconciliation of reported profit or loss and assets for each of the Company’s reportable segments.

 

(Dollars in thousands)

   Home Federal
Savings Bank
     Other      Eliminations     Consolidated
Total
 

At or for the six months ended June 30, 2013:

          

Interest income—external customers

   $ 12,110         0         0        12,110   

Non-interest income—external customers

     3,861         0         0        3,861   

Intersegment interest income

     0         1         (1     0   

Intersegment non-interest income

     92         3,009         (3,101     0   

Interest expense

     2,508         0         (1     2,507   

Other non-interest expense

     11,064         392         (92     11,364   

Income tax expense

     0         80         0        80   

Net income

     3,011         2,538         (3,009     2,540   

Total assets

     560,908         65,021         (64,955     560,974   

At or for the six months ended June 30, 2012:

          

Interest income—external customers

   $ 16,227         0         0        16,227   

Non-interest income—external customers

     4,500         0         0        4,500   

Intersegment interest income

     0         2         (2     0   

Intersegment non-interest income

     93         3,582         (3,675     0   

Interest expense

     3,969         0         (2     3,967   

Other non-interest expense

     12,305         389         (93     12,601   

Net income

     3,586         3,195         (3,582     3,199   

Total assets

     670,2