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| HARL > SEC Filings for HARL > Form 10-Q on 10-Aug-2012 | All Recent SEC Filings |
10-Aug-2012
Quarterly Report
This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
The Company's business consists of attracting deposits from the general public through a variety of deposit programs and investing such deposits principally in first mortgage loans secured by residential properties, commercial loans and commercial lines of credit in the Company's primary market area. The Company also originates a variety of consumer loans, predominately home equity loans and lines of credit also secured by residential properties in the Company's primary lending area. The Company serves its customers through its full-service branch network as well as through remote ATM locations, the internet and telephone banking.
Critical Accounting Policies and Judgments
The Company's consolidated financial statements are prepared based on the application of certain accounting policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company's reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements: allowance for loan losses, other-than-temporary security impairment and deferred income taxes.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. The Company evaluates the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
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Our methodology for assessing the appropriateness of the allowance for loan losses consists of three key elements: (1) specific allowances for certain impaired loans; (2) a general valuation allowance on certain identified problem loans; and (3) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
Specific Allowance Required for Certain Impaired Loans: We establish an allowance for certain impaired loans for the amounts by which the collateral value, present value of future cash flows or observable market price are lower than the carrying value of the loan. Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement.
General Valuation Allowance on Certain Identified Problem Loans - We also establish a general allowance for classified loans that do not have an individual allowance. We segregate these loans by loan category and assign allowance percentages to each category based on inherent losses associated with each type of lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio.
General Valuation Allowance on the Remainder of the Loan Portfolio - We establish another general allowance for loans that are not classified to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management's evaluation of the collectibility of the loan portfolio. The allowance may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are reevaluated quarterly to ensure their relevance in the current economic environment.
Other-than-Temporary Impairment of Investment Securities
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support realizable value equal to or greater than the carrying value of the investment.
Deferred Tax Assets
In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
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Changes in Financial Position for the Nine-Month Period Ended June 30, 2012
Total assets at June 30, 2012 were $822.7 million, a decrease of $13.0 million or 1.6% for the nine-month period then ended. This was primarily due to decreases in loans receivable of $17.9 million, investments held to maturity of $24.3 million, and repurchase of Federal Home Loan Bank Stock of $1.9 million. The decrease was partially offset by the growth in cash and cash equivalents of approximately $10.3 million, investments available for sale of $10.6 million, and prepaid expense and other assets of $11.0 million. The increase in other assets of $11.0 million was due to the set up of a receivable for the non-receipt of $10.0 million in called securities over month end.
Total deposits increased $25.3 million to $549.7 million or 4.8% during the nine-month period ended June 30, 2012. Advances from borrowers for taxes and insurance also increased by $4.2 million or 308.8% due to the timing of property tax payments. The increases were primarily offset by a decrease in borrowings of $46.4 million or 18.6% due to normal repayments for the period.
Comparisons of Results of Operations for the Three-Month and Nine-Month Period Ended June 30, 2012 with the Three-Month and Nine-Month Period Ended June 30, 2011
Net Income
Net income for the three-month period ended June 30, 2012 was $1.3 million compared to $2.0 million for the comparable period in 2011. Basic and diluted earnings per share for the three-month period ending June 30, 2012 was $0.35 and $0.34 compared to $0.53 and $0.53 for the 2011 period. Net income for the nine-month period ended June 30, 2012 was $3.9 million compared to $4.3 million for the comparable period in 2011. There was a onetime Bank Owned Life Insurance ("BOLI"), net death benefit claim, of $927,000 (net of $115,000 state income taxes), or $0.24 per diluted share due to the death of an officer during the comparable period in 2011. Basic and diluted earnings per share for the nine-month period ended June 30, 2012 was $1.04 and $1.03 compared to $1.16 and $1.15 for the comparable period in 2011.
Net Interest Income
Net interest income was $4.9 million for the three-month period ended June 30, 2012 compared to $4.8 million for the comparable period in 2011. Net interest income increased to $14.7 million for the nine-month period ended June 30, 2012 compared to $13.7 million for the nine-month period in 2011. Although our average balance of interest-earning assets and interest-bearing liabilities decreased our average interest rate spread increased from 2.03% to 2.26% in the respective nine-month periods ended June 30, 2011 and 2012 resulting in an overall increase of $1.0 million in net interest income when comparing the third quarter 2012 with the same period in 2011.
Non-Interest Income
Non-interest income decreased to $598,000 for the three-month period ended June 30, 2012 from $1.5 million for the comparable period in 2011. Non-interest income decreased to $1.6 million for the nine-months ended June 30, 2012 from $2.5 million for the comparable period in 2011. The decreases are primarily due to a onetime Bank Owned Life Insurance ("BOLI") benefit of $1.0 million in 2011. The decrease was partially offset by an increase in other income of $159,000 due to ATM fees, growth in commercial loans, NSF fees and a gain on the sale of a REO property.
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Non-Interest Expenses
For the three-month period ended June 30, 2012, non-interest expenses decreased by $1,000 or 0.03% to $3.4 million compared to $3.4 million for the same period in 2011. For the nine month period ended June 30, 2012, non-interest expenses increased by $207,000 or 2.1% to $10.1 million compared to $9.9 million for the same period in 2011. Salary and employee benefits increased $22,000 to $2.0 million and $279,000 to $5.8 million for the three and nine month period ended June 30, 2012. These increases are primarily due to normal salary increases and additional employee benefits expenses. Occupancy and equipment increased $26,000 and $19,000 for the three and nine month period ended June 2012. FDIC insurance expense decreased to $140,000 and $410,000 for the three and nine month period ended June 30, 2012 compared to $234,000 and $724,000 for the same periods in 2011 due to the new deposit insurance assessment calculation using assets and tier one capital. Other expenses increased by $59,000 and $190,000 for the three and nine month period ended June 30, 2012. The increase was primarily due to the growth in commercial loans, ATM processing, advertising expenses, and Reo expenses. The annualized ratio of non-interest expenses to average assets for the three and nine month periods ended June 30, 2012 and 2011 were 1.63%, 1.64% and 1.54%, 1.58%, respectively.
Income Taxes
The Company made provisions for income taxes of $555,000 and $1.6 million for the three-month and nine-month periods ended June 30, 2012, compared to $739,000 and $1.5 million for the comparable periods in 2011. These provisions are based on the levels of pre-tax income, adjusted primarily for tax-exempt interest income on investments.
Liquidity and Capital Recourses
For a financial institution, liquidity is a measure of the ability to fund customers' needs for loans and deposit withdrawals. The Bank regularly evaluates economic conditions in order to maintain a strong liquidity position. One of the most significant factors considered by management when evaluating liquidity requirements is the stability of the Bank's core deposit base. In addition to cash, the Bank maintains a portfolio of short-term investments to meet its liquidity requirements.
The Company also relies upon cash flow from operations and other financing activities, generally short-term and long-term debt. Liquidity is also provided by investing activities including the repayment and maturity of loans and investment securities as well as the management of asset sales when considered necessary. The Bank also has access to and sufficient assets to secure lines of credit and other borrowings in amounts adequate to fund any unexpected cash requirements.
As of June 30, 2012, the Company had $75.0 million in commitments to fund loan originations, disburse loans in process and meet other obligations. Management anticipates that the majority of these commitments will be funded within the next nine months by means of normal cash flows and new deposits.
The Company invests excess funds in overnight deposits and other short-term interest-earning assets, which provide liquidity to meet lending requirements. The Company also has available borrowings with the Federal Home Loan Bank of Pittsburgh up to the Company's maximum borrowing capacity, which was $329.1 million at June 30, 2012 of which $153.8 million was outstanding at June 30, 2012.
The Bank's net income for the nine-month period ended June 30, 2012 was $3.9 million compared to $4.3 million for the comparable period in 2011. This increased the Bank's stockholder's equity to $58.9 million or 7.16% of total assets. This amount is well in excess of the Bank's minimum regulatory capital requirement.
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