Annual Reports

 
Quarterly Reports

  • 10-Q (Feb 7, 2014)
  • 10-Q (Nov 8, 2013)
  • 10-Q (May 3, 2013)
  • 10-Q (Feb 1, 2013)
  • 10-Q (Nov 9, 2012)
  • 10-Q (May 4, 2012)

 
8-K

 
Other

HF Financial 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

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 March 31, 2009

 

OR

 

o

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

 

For the transition period from              to

 

Commission file number 0-19972

 


 

HF FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

46-0418532

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

225 South Main Avenue,
Sioux Falls, SD

 

57104

(Address of principal executive offices)

 

(ZIP Code)

 

(605) 333-7556

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 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  o

 

Indicate by check mark whether the Registrant (1) 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  o    No  o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

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  o     No x

 

As of May 8, 2009, there were 4,025,982 shares of the Registrant’s common stock outstanding.

 

 

 



Table of Contents

 

Quarterly Report on Form 10-Q

Table of Contents

 

 

 

Page Number

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Consolidated Statements of Financial Condition At March 31, 2009 and June 30, 2008

1

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2009 and 2008

2

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2009 and 2008

3

 

 

 

 

Notes to Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 6.

Exhibits

40

 

 

 

Form 10-Q

Signature Page

41

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands)

 

 

 

 

March 31, 2009

 

June 30, 2008

 

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

13,732

 

$

21,170

 

Securities available for sale

 

250,045

 

225,004

 

Federal Home Loan Bank stock

 

12,476

 

11,245

 

Loans held for sale

 

21,193

 

8,796

 

 

 

 

 

 

 

Loans and leases receivable

 

819,530

 

783,710

 

Allowance for loan and lease losses

 

(8,140

)

(5,933

)

Net loans and leases receivable

 

811,390

 

777,777

 

 

 

 

 

 

 

Accrued interest receivable

 

7,764

 

7,540

 

Office properties and equipment, net of accumulated depreciation

 

15,522

 

14,849

 

Foreclosed real estate and other properties

 

695

 

643

 

Cash value of life insurance

 

14,457

 

14,050

 

Servicing rights

 

11,374

 

11,189

 

Goodwill, net

 

4,951

 

4,951

 

Other assets

 

8,392

 

6,280

 

Total assets

 

$

1,171,991

 

$

1,103,494

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Deposits

 

$

804,208

 

$

784,237

 

Advances from Federal Home Loan Bank and other borrowings

 

210,335

 

198,454

 

Subordinated debentures payable to trusts

 

27,837

 

27,837

 

Advances by borrowers for taxes and insurance

 

18,147

 

10,795

 

Accrued expenses and other liabilities

 

17,370

 

17,968

 

Total liabilities

 

1,077,897

 

1,039,291

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, $.01 par value, 500,000 shares authorized, 25,000 shares issued at March 31, 2009

 

 

 

Series A Junior Participating Preferred Stock, $1.00 stated value, 50,000 shares authorized, none outstanding

 

 

 

Common stock, $.01 par value, 10,000,000 shares authorized, 6,109,437 and 6,035,447 shares issued at March 31, 2009 and June 30, 2008, respectively

 

61

 

60

 

Common stock subscribed for but not issued

 

 

95

 

Additional paid-in capital

 

48,028

 

21,905

 

Retained earnings, substantially restricted

 

80,341

 

76,041

 

Accumulated other comprehensive (loss), net of related deferred tax effect

 

(3,439

)

(3,001

)

Less cost of treasury stock, 2,083,455 and 2,083,455 shares at March 31, 2009 and June 30, 2008, respectively

 

(30,897

)

(30,897

)

Total stockholders’ equity

 

94,094

 

64,203

 

Total liabilities and stockholders’ equity

 

$

1,171,991

 

$

1,103,494

 

 

See accompanying notes to unaudited consolidated financial statements.

 

1



Table of Contents

 

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in Thousands, except share data)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Interest, dividend and loan fee income:

 

 

 

 

 

 

 

 

 

Loans and leases receivable

 

$

12,045

 

$

13,188

 

$

37,709

 

$

41,187

 

Investment securities and interest-earning deposits

 

2,963

 

2,354

 

8,696

 

6,425

 

 

 

15,008

 

15,542

 

46,405

 

47,612

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,515

 

5,693

 

12,224

 

20,104

 

Advances from Federal Home Loan Bank and other borrowings

 

2,343

 

2,154

 

7,335

 

6,149

 

 

 

5,858

 

7,847

 

19,559

 

26,253

 

Net interest income

 

9,150

 

7,695

 

26,846

 

21,359

 

 

 

 

 

 

 

 

 

 

 

Provision for losses on loans and leases

 

414

 

551

 

801

 

1,171

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for losses on loans and leases

 

8,736

 

7,144

 

26,045

 

20,188

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees on deposits

 

1,304

 

1,290

 

4,373

 

4,058

 

Loan servicing income

 

617

 

589

 

1,708

 

1,636

 

Gain on sale of loans, net

 

543

 

257

 

1,079

 

955

 

Trust income

 

158

 

229

 

533

 

727

 

Gain on sale of securities, net

 

387

 

 

512

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(3,158

)

 

(3,158

)

 

Portion of loss recognized in other comprehensive income (before taxes)

 

2,797

 

 

2,797

 

 

Net impairment losses recognized in earnings

 

(361

)

 

(361

)

 

 

 

 

 

 

 

 

 

 

 

Other

 

356

 

442

 

1,138

 

1,212

 

 

 

3,004

 

2,807

 

8,982

 

8,588

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

5,232

 

4,987

 

16,181

 

14,218

 

Occupancy and equipment

 

1,034

 

941

 

3,023

 

2,859

 

FDIC insurance

 

272

 

23

 

535

 

70

 

Check and data processing expense

 

671

 

594

 

1,945

 

1,815

 

Marketing

 

225

 

221

 

892

 

783

 

Foreclosed real estate and other properties, net

 

6

 

33

 

219

 

113

 

Other

 

968

 

755

 

3,192

 

2,548

 

 

 

8,408

 

7,554

 

25,987

 

22,406

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

3,332

 

2,397

 

9,040

 

6,370

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

1,161

 

774

 

3,048

 

2,149

 

Net income

 

2,171

 

1,623

 

5,992

 

4,221

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends and accretion

 

340

 

 

340

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders

 

$

1,831

 

$

1,623

 

$

5,652

 

$

4,221

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,640

 

$

1,681

 

$

5,214

 

$

5,284

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.1125

 

$

0.1075

 

$

0.3375

 

$

0.3225

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.41

 

$

1.41

 

$

1.06

 

Diluted

 

$

0.45

 

$

0.40

 

$

1.40

 

$

1.05

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

HF FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

 

 

Nine Months Ended March 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

5,992

 

$

4,221

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Provision for losses on loans and leases

 

801

 

1,171

 

Depreciation

 

1,292

 

1,241

 

Amortization of discounts and premiums on securities and other

 

1,255

 

1,177

 

Stock based compensation

 

303

 

483

 

Net change in loans held for resale

 

(11,318

)

(196

)

(Gain) on sale of loans, net

 

(1,079

)

(955

)

Realized (gain) on sale of securities, net

 

(512

)

(219

)

Other-than-temporary impairments recognized in non-interest income

 

361

 

 

Losses and provision for losses on sales of foreclosed real estate and other properties, net

 

19

 

31

 

Change in other assets and liabilities

 

(4,562

)

(1,504

)

Net cash provided by (used in) operating activities:

 

(7,448

)

5,450

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Loan participations purchased

 

(969

)

(5,477

)

Net change in loans outstanding

 

(34,385

)

10,832

 

Securities available for sale:

 

 

 

 

 

Sales and maturities and repayments

 

74,921

 

52,206

 

Purchases

 

(99,288

)

(123,419

)

Purchase of Federal Home Loan Bank stock

 

(5,565

)

(7,365

)

Redemption of Federal Home Loan Bank stock

 

4,334

 

1,871

 

Proceeds from sale of office properties and equipment

 

 

1,274

 

Purchase of office properties and equipment

 

(1,965

)

(1,020

)

Purchase of servicing rights

 

(857

)

(1,170

)

Proceeds from sale of foreclosed real estate and other properties, net

 

451

 

449

 

Net cash (used in) investing activities:

 

(63,323

)

(71,819

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net increase (decrease) in deposit accounts

 

19,971

 

(71,645

)

Proceeds of advances from Federal Home Loan Bank and other borrowings

 

4,054,528

 

1,311,434

 

Payments on advances from Federal Home Loan Bank and other borrowings

 

(4,042,647

)

(1,179,779

)

Proceeds from issuance of subordinated debentures

 

 

5,000

 

Redemption of subordinated debentures

 

 

(5,000

)

Increase in advances by borrowers

 

7,352

 

5,087

 

Purchase of treasury stock

 

 

(1,618

)

Proceeds from issuance of preferred stock

 

25,000

 

 

Proceeds from issuance of common stock

 

821

 

470

 

Cash dividends paid

 

(1,692

)

(1,275

)

Net cash provided by financing activities:

 

63,333

 

62,674

 

(Decrease) in cash and cash equivalents

 

(7,438

)

(3,695

)

Cash and cash equivalents

 

 

 

 

 

Beginning

 

21,170

 

22,476

 

Ending

 

$

13,732

 

$

18,781

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flows Information

 

 

 

 

 

Cash payments for interest

 

$

21,054

 

$

25,999

 

Cash payments for income and franchise taxes, net

 

2,795

 

2,638

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

HF FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Nine Months Ended March 31, 2009 and 2008

(Unaudited)

 

NOTE 1.                SELECTED ACCOUNTING POLICIES

 

Basis of presentation:

 

The consolidated financial information of HF Financial Corp. (the “Company”) and its wholly-owned subsidiaries included in this Quarterly Report on Form 10-Q is unaudited.  However, in the opinion of management, adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for the interim periods have been included.  Results for any interim period are not necessarily indicative of results to be expected for the fiscal year.  Interim consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (“Fiscal 2008”), filed with the Securities and Exchange Commission.  The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the industry.

 

The interim consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, Home Federal Bank (the “Bank”), HF Financial Group, Inc. (“HF Group”) and HomeFirst Mortgage Corp. (the “Mortgage Corp.”), and the Bank’s wholly-owned subsidiaries, Mid America Capital Services, Inc. (“Mid America Capital”), Hometown Investment Services, Inc. (“Hometown”), Home Federal Securitization Corp. (“HFSC”), Mid-America Service Corporation and PMD, Inc.  The interim consolidated financial statements reflect the deconsolidation of the wholly-owned subsidiary trusts of the Company: HF Financial Capital Trust III (“Trust III”), HF Financial Capital Trust IV (“Trust IV”), HF Financial Capital Trust V (“Trust V”) and HF Financial Capital Trust VI (“Trust VI”). See Note 10 of “Notes to Consolidated Financial Statements.”  All intercompany balances and transactions have been eliminated in consolidation.

 

NOTE 2.                REGULATORY CAPITAL

 

The following table sets forth the Bank’s compliance with its minimum capital requirements for a well-capitalized institution at March 31, 2009:

 

 

 

Amount

 

Percent

 

 

 

(Dollars in Thousands)

 

Tier I (core) capital (to adjusted total assets):

 

 

 

 

 

Required

 

$

58,420

 

5.00

%

Actual

 

96,371

 

8.25

 

Excess over required

 

37,951

 

3.25

 

 

 

 

 

 

 

Total Risk-based capital (to risk-weighted assets):

 

 

 

 

 

Required

 

$

94,645

 

10.00

%

Actual

 

104,255

 

11.02

 

Excess over required

 

9,610

 

1.02

 

 

NOTE 3.                EARNINGS PER COMMON SHARE

 

Basic earnings per common share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period.  Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. The weighted average number of basic common shares outstanding for the three months ended March 31, 2009 and 2008 was 4,024,335 and 3,960,315, respectively.   The weighted average number of basic common shares outstanding for the nine months ended March 31, 2009 and 2008 was 4,000,456 and 3,976,414, respectively.

 

4



Table of Contents

 

Dilutive earnings per common share is similar to the computation of basic earnings per common share except the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive options outstanding had been exercised. The weighted average number of common and dilutive potential common shares outstanding for the three months ended March 31, 2009 and 2008 was 4,034,659 and 4,014,770, respectively.  The weighted average number of common and dilutive potential common shares outstanding for the nine months ended March 31, 2009 and 2008 was 4,025,426 and 4,035,416, respectively.

 

NOTE 4.                INVESTMENTS IN SECURITIES

 

The amortized cost and fair values of investments in securities, all of which are classified as available for sale according to management’s intent, are as follows

 

 

 

March 31, 2009

 

June 30, 2008

 

 

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Fair

 

 

   

Cost

   

   Gains    

   

(Losses)

   

Value

   

Cost

   

   Gains   

   

(Losses)

   

Value

  

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,117

 

$

46

 

$

 

$

1,163

 

$

8,490

 

$

173

 

$

 

$

8,663

 

Federal Home Loan Bank

 

1,500

 

8

 

 

1,508

 

3,944

 

87

 

 

4,031

 

Municipal bonds

 

14,419

 

389

 

(136

)

14,672

 

12,319

 

51

 

(189

)

12,181

 

Trust preferred securities

 

11,934

 

 

(5,647

)

6,287

 

12,372

 

 

(2,080

)

10,292

 

 

 

28,970

 

443

 

(5,783

)

23,630

 

37,125

 

311

 

(2,269

)

35,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA-common

 

8

 

 

(8

)

 

8

 

 

 

8

 

Farmer Mac-common

 

7

 

 

(7

)

 

7

 

2

 

 

9

 

Other investments

 

253

 

 

 

253

 

253

 

 

 

253

 

 

 

268

 

 

(15

)

253

 

268

 

2

 

 

270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

223,771

 

3,625

 

(1,234

)

226,162

 

190,947

 

558

 

(1,938

)

189,567

 

 

 

$

253,009

 

$

4,068

 

$

(7,032

)

$

250,045

 

$

228,340

 

$

871

 

$

(4,207

)

$

225,004

 

 

During the third quarter of Fiscal 2009, the Company early adopted FASB Staff Position(“FSP”) No. FAS 115-2, The Recognition and Presentation of Other-Than-Temporary Impairments, which changes the recognition and presentation of other-than-temporary impairments.  Management has implemented a process to identify securities that could potentially have a credit impairment that is other than temporary.  This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.  To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

 

For all securities that are considered temporarily impaired, the Company does not intend to sell these securities (has not made a decision to sell) and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity.  The Company believes that it will collect all principal and interest due on all investments that have amortized cost in excess of fair value that are considered only temporarily impaired.

 

5



Table of Contents

 

The following table presents the fair value and age of gross unrealized losses by investment category at March 31, 2009, in accordance with FSP FAS 115-2:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

(Losses)

 

Value

 

(Losses)

 

Value

 

(Losses)

 

 

 

(Dollars in Thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

1,969

 

$

(66

)

$

1,199

 

$

(70

)

$

3,168

 

$

(136

)

Trust preferred securities

 

 

 

6,287

 

(5,647

)

6,287

 

(5,647

)

 

 

1,969

 

(66

)

7,486

 

(5,717

)

9,455

 

(5,783

)

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA-common

 

 

(8

)

 

 

 

(8

)

Farmer Mac-common

 

 

(7

)

 

 

 

(7

)

 

 

 

(15

)

 

 

 

(15

)

Residential mortgage- backed securities

 

52,993

 

(356

)

25,083

 

(878

)

78,076

 

(1,234

)

 

 

$

54,962

 

$

(437

)

$

32,569

 

$

(6,595

)

$

87,531

 

$

(7,032

)

 

The unrealized losses reported for municipal bonds relate to 21 municipal general obligation or revenue bonds.  The unrealized losses are primarily attributed to changes in credit spreads or market interest rate increases since the securities were originally acquired, rather than due to credit or other causes.  Management does not believe any individual unrealized losses as of March 31, 2009, represent an other-than-temporary impairment for these investments.  The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

 

The unrealized losses reported for residential mortgage-backed securities relate to 68 securities issued by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), or the Federal Home Loan Mortgage Corporation (“FHLMC”).  These unrealized losses are primarily attributable to changes in interest rates and the contractual cash flows of those investments which are guaranteed by an agency of the U.S. government.  Residential mortgage-backed securities also include one “private-label” collateralized mortgage obligation with an amortized amount of $2.1 million, which has maintained its AAA rating as of March 31, 2009.  Management does not believe any of these unrealized losses as of March 31, 2009, represent an other-than-temporary impairment for those investments.  The Company does not have the intent to sell these securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.

 

The unrealized losses reported for trust preferred securities are attributable to six rated pooled securities.  Rating downgrades regarding these investments have occurred during the current fiscal year placing each in a below investment grade rating.  The securities have an amortized cost of $3.7 million rated B3, $2.5 million rated Caa1, and $5.7 million rated Ca.  The market for these securities is currently inactive.  The Company performed assessments of available information for each security during the third quarter ended March 31, 2009, and also considered factors such as overall deal structure and its position within the structure, quality of underlying issuers within each pool, defaults and recoveries, loss severities and prepayments.  Based upon scenarios developed in regard to this information, management compared the present value of best estimates of cash flows expected to be collected from each security at the security’s effective interest rate to the amortized cost basis of each security.  Management determined that three securities exhibited an other-than-temporary impairment.  The difference between the present value of cash flows and the amortized cost basis for each of the three securities was recorded as credit loss impairment and recognized in earnings in the amount of $361,000.  The amortized cost basis of the three securities was reduced by the amount of credit loss.  The remaining impairment amount related to other factors of $2.8 million was recognized in other comprehensive income, net of applicable taxes.  The unrealized losses on these trust preferred securities can primarily be attributed to changes in credit spreads since the securities were acquired.  See Note 6 “Fair Value Measurement” for additional information related to the determination of fair value.  The Company does not have the intent to sell these six securities (has not made a decision to sell) and has assessed that it is not more likely than not that the Company will be required to sell these securities before anticipated recovery of fair value.  Within this segment, five securities with amortized cost of $9.9 million are quarterly variable-rate securities tied to 3-month LIBOR.

 

6



Table of Contents

 

The following table presents the amounts recognized in the Consolidated Statements of Income for other-than-temporary impairments related to credit losses:

 

 

 

Three Months Ended

 

 

 

March 31, 2009

 

 

 

(Dollars in Thousands)

 

 

 

 

 

Beginning balance of credit losses on securities held as of January 1 for which a portion of other-than-temporary impairment was recognized in other comprehensive income

 

$

 

 

 

 

 

Credit losses for which an other-than-temporary impairment was not previously recognized

 

361

 

 

 

 

 

Ending balance of credit losses on securities held as of March 31 for which a portion of other-than-temporary impairment was recognized in other comprehensive income 

 

$

361 

 

 

NOTE 5.                SEGMENT REPORTING

 

Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance.  The Company’s reportable segments are “banking” (including leasing activities) and “other.”  The “banking” segment is conducted through the Bank and Mid America Capital and the “other” segment is composed of smaller non-reportable segments, the Company and inter-segment eliminations.

 

The management approach is used as the conceptual basis for identifying reportable segments and is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources and monitoring performance, which is primarily based on products.

 

 

 

Three Months Ended March 31,

 

 

 

2009

 

2008

 

 

 

Banking

 

Other

 

Total

 

Banking

 

Other

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

9,574

 

$

(424

)

$

9,150

 

$

8,165

 

$

(470

)

$

7,695

 

Provision for losses on loans and leases

 

(414

)

 

(414

)

(551

)

 

(551

)

Non-interest income

 

2,968

 

36

 

3,004

 

2,717

 

90

 

2,807

 

Intersegment non-interest income

 

(21

)

(40

)

(61

)

(28

)

(16

)

(44

)

Non-interest expense

 

(8,105

)

(303

)

(8,408

)

(7,394

)

(160

)

(7,554

)

Intersegment non-interest expense

 

 

61

 

61

 

 

44

 

44

 

Income (loss) before income taxes

 

$

4,002

 

$

(670

)

$

3,332

 

$

2,909

 

$

(512

)

$

2,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at March 31

 

$

1,146,675

 

$

25,316

 

$

1,171,991

 

$

1,064,393

 

$

3,496

 

$

1,067,889

 

 

 

7



Table of Contents

 

 

 

Nine Months Ended March 31,

 

 

 

2009

 

2008

 

 

 

Banking

 

Other

 

Total

 

Banking

 

Other

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

28,152

 

$

(1,306

)

$

26,846

 

$

22,962

 

$

(1,603

)

$

21,359

 

Provision for losses on loans and leases

 

(801

)

 

(801

)

(1,171

)

 

(1,171

)

Non-interest income

 

8,746

 

236

 

8,982

 

8,409

 

179

 

8,588

 

Intersegment non-interest income

 

(85

)

(97

)

(182

)

(82

)

(50

)

(132

)

Non-interest expense

 

(24,878

)

(1,109

)

(25,987

)

(21,707

)

(699

)

(22,406

)

Intersegment non-interest expense

 

 

182

 

182

 

 

132

 

132

 

Income (loss) before income taxes

 

$

11,134

 

$

(2,094

)

$

9,040

 

$

8,411

 

$

(2,041

)

$

6,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at March 31

 

$

1,146,675

 

$

25,316

 

$

1,171,991

 

$

1,064,393

 

$

3,496

 

$

1,067,889

 

 

NOTE 6.                FAIR VALUE MEASUREMENT

 

Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. In accordance with the FASB Staff Position 157-2, Effective Date of SFAS No. 157, the Company has not applied the provisions of this statement to non-financial assets and liabilities.  The Company early adopted FASB Staff Position 157-4, dated April 9, 2009, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, during the third quarter of Fiscal 2009 which amended FASB Staff Postion 157-3, dated October 10, 2008, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.  SFAS 157 defines fair value and establishes a consistent framework for measuring fair value under GAAP and expands disclosure requirements for fair value measurements.  Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.  The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

The table below presents the Company’s balances of financial instruments measured at fair value on a recurring basis by level within the hierarchy at March 31, 2009:

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

In Active

 

Observable

 

Unobservable

 

 

 

 

 

Markets

 

Inputs

 

Inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

 

$

243,758

 

$

6,287

 

$

250,045

 

Interest rate swap contracts

 

 

(1,134

)

 

(1,134

)

 

8



Table of Contents

 

The Company used the following methods and significant assumptions to estimate the fair value of items:

 

Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).  The Company outsources this valuation primarily to a third party provider which utilizes several sources for valuing fixed-income securities.  Sources utilized by the third party provider include pricing models that vary based by asset class and include available trade, bid, and other market information.  This methodology includes broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs.  As further valuation sources, the third party provider uses a proprietary valuation model and capital markets trading staff.  This proprietary valuation model is used for valuing municipal securities. This model includes a separate curve structure for Bank-Qualified municipal securities. The grouping of municipal securities is further broken down according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves.

 

The securities shown in Level 3 relate to trust preferred securities which are currently part of an inactive market.  The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade, and then by a significant decrease in the volume of trades relative to historical levels.  The new issue market for pooled trust preferred securities have been issued since 2007.  Given conditions in the debt markets and the absence of observable orderly transactions in the secondary and new issue markets, management determined that an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique.

 

During the third quarter of Fiscal 2009, the Company modified the valuation technique used to measure fair value of trust preferred securities.  In addition to the previous valuation approach utilizing trust preferred security valuations prepared by an independent third party, management derived valuations under various cash flow scenarios.  The results of the third party valuation and the valuation derived by management were weighted each at 50% and used to measure fair value for each security.  If the Company had not modified the valuation technique, other comprehensive income would have decreased by an additional $1.3 million, net of taxes.  The approaches to determining fair value included the following factors:

 

1.               The credit quality of the collateral estimated using average probability of default values.

 

2.               The loss given default was assumed to be 95% (i.e. a 5% recovery) for third party valuations.  Management utilized a range of loss given default based upon a review of the financial condition of underlying issuers in each pool.

 

3.               The cash flows were forecasted for the underlying collateral and applied to each tranche to determine the resulting distribution among the securities.

 

4.               The best estimates of expected cash flows were discounted to calculate the present value of the security.  Management considered a range of discount rates based upon three factors:  (1) a risk-free rate based on the rate of return on government debt securities, (2) the credit spread for AA or A Bank Corporate Debt Indices, and (3) a liquidity or “risk premium” of 200 basis points.

 

5.               The calculations were modeled in several thousand scenarios and the average price was used for the third party valuations.  Management utilized an average price derived from various cash flow scenarios.

 

Interest Rate Swaps:  The fair values of interest rate swaps relate to cash flow hedges of trust preferred debt securities issued by the Company.  The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. These fair value estimations include primarily market observable inputs, such as yield curves, and include the value associated with counterparty credit risk.

 

The following table reconciles the beginning and ending balances of the assets or liabilities of the Company that are measured at fair value on a recurring basis using significant unobservable inputs.

 

9



Table of Contents

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3) - Securities Available for Sale

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 2009

 

March 31, 2009

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Beginning balance

 

$

6,974

 

$

 

Total realized/unrealized gains (losses)

 

 

 

 

 

Included in earnings

 

(361

)

(361

)

Included in other comprehensive loss

 

(326

)

(2,788

)

Purchases, issuances, (paydowns) and (sales)

 

 

(62

)

Transfers into or (out) of Level 3

 

 

9,498

 

Ending balance

 

$

6,287

 

$

6,287

 

 

The table below presents the Company’s balances of financial instruments measured at fair value on a nonrecurring basis by level within the hierarchy at March 31, 2009:

 

 

 

Quoted Prices

 

Significant Other

 

Significant

 

 

 

 

 

In Active

 

Observable

 

Unobservable

 

 

 

 

 

Markets

 

Inputs

 

Inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

628

 

$

 

$

628

 

 

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans.  Collateral is primarily real estate and its fair value is generally determined based on real estate appraisals or other evaluations by qualified professionals. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans that are collateral dependent are written down to their fair value, less costs to sell, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeds the fair value. Valuation techniques consistent with the market approach, income approach, and/or cost approach were used to measure fair value and primarily included observable inputs such as recent sales of similar assets or observable market data for operational or carrying costs.

 

NOTE 7.                DEFINED BENEFIT PLAN

 

The Company has a noncontributory (cash balance) defined benefit pension plan covering all employees of the Company and its wholly-owned subsidiaries who have attained the age of 21 and have completed 1,000 hours of service in a plan year.  The benefits are based on 6% of each eligible participant’s annual compensation, plus income earned in the accounts at a rate determined annually based on 30-year Treasury note rates.  The Company’s funding policy is to make the minimum annual required contribution plus such amounts as the Company may determine to be appropriate from time to time.  The Company has adopted all plan provisions required by the Pension Protection Act of 2006.  These provisions are effective with the plan year beginning July 1, 2008.  Information relative to the components of net periodic benefit cost for the Company’s defined benefit plan is presented below:

 

10



Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

119

 

$

112

 

$

356

 

$

335

 

Interest cost

 

120

 

109

 

360

 

328

 

Amortization of prior losses

 

16

 

 

46

 

 

Expected return on plan assets

 

(115

)

(122

)

(368

)

(365

)

Total costs recognized in expense

 

$

140

 

$

99

 

$

394

 

$

298

 

 

The Company previously disclosed in its consolidated financial statements for Fiscal 2008, which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for Fiscal 2008, that it contributed $532,000 to fund its qualified pension plan.  During the second quarter of the fiscal year ending June 30, 2009 (“Fiscal 2009”), the Company made contributions of $2.35 million to fund its qualified pension plan.  The Company anticipates no additional contributions for Fiscal 2009.

 

NOTE 8.                SELF-INSURED HEALTHCARE PLAN

 

The Company has had a self-insured health plan for its employees, subject to certain limits, since January 1994.  The Bank is named the plan administrator for this plan and has retained the services of an independent third party administrator to process claims and handle other duties for this plan.  The third party administrator does not assume liability for benefits payable under this plan.

 

The Company assumes the responsibility for funding the plan benefits out of general assets; however, employees cover some of the costs of covered benefits through contributions, deductibles, co-pays and participation amounts.  An employee is eligible for coverage upon completion of 30 calendar days of regular employment.  The plan, which is on a calendar year basis, is intended to comply with, and be governed by, the Employee Retirement Income Security Act of 1974, as amended.

 

The accrual estimate for pending and incurred but not reported health claims is based upon a pending claims lag report provided by a third party provider.  Although management believes that it uses the best information available to determine the accrual, unforeseen health claims could result in adjustments and net earnings being significantly affected if circumstances differ substantially from the assumptions used in estimating the accrual.  Net healthcare costs are inclusive of health claims expenses and administration fees offset by stop loss and employee reimbursement.

 

Reported below is a summary of net healthcare costs by quarter during Fiscal 2009 and Fiscal 2008:

 

 

 

Fiscal Years Ended June 30,

 

 

 

2009

 

2008

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

Quarter ended September 30

 

$

358

 

$

221

 

Quarter ended December 31

 

945

 

409

 

Quarter ended March 31

 

704

 

328

 

Quarter ended June 30

 

 

524