Harvard Illinois Bancorp, Inc. (HARI) SEC Filing 10-Q Quarterly report for the period ending Sunday, June 30, 2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period of _________ to _________

Commission File Number   000-53935

Harvard Illinois Bancorp, Inc.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:  (815) 943-5261

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the Registrant has submitted electronic and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings).

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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of August 14, 2013, 829,850 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

HARVARD ILLINOIS BANCORP, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED June 30, 2013

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

See accompanying notes to the consolidated financial statements.

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME      

(Dollars in thousands)

See accompanying notes to the consolidated financial statements.

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

See accompanying notes to the consolidated financial statements.

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

HARVARD ILLINOIS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

HARVARD ILLINOIS BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) (Dollar amounts in thousands)

Note 1:        Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of Harvard Illinois Bancorp, Inc. (Company) and its wholly-owned subsidiary, Harvard Savings Bank (Bank). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Rule 10–01 of Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2013 and December 31, 2012, and the results of its operations for the three and six month periods ended June 30, 2013 and 2012. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2012 included as part of Harvard Illinois Bancorp, Inc.’s Form 10-K (File No. 000-53935) (2012 Form 10-K) filed with the Securities and Exchange Commission on March 22, 2013.

The results of operations for the six month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes thereto included in the 2012 Form 10–K.

Note 2:        New Accounting Pronouncements

Recent and Future Accounting Requirements

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting of amounts reclassified out of accumulated other comprehensive income. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. The new amendments will require the Company to present (either on the face of the statements where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. It will also require a cross-reference to other disclosures currently required. For public entities, the amendments are effective for reporting periods beginning after December 15, 2012. The Company adopted the ASU during the first quarter of 2013.

Note 3:        Stock-based Compensation

In connection with the conversion to stock form, the Bank established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 18). The ESOP borrowed funds from the Company in an amount sufficient to purchase 62,775 shares (approximately 8% of the common stock issued in the stock offering). The loan is secured by the shares purchased and is being repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions are being applied to repay interest on the loan first, then the remainder are being applied to principal. The loan is expected to be repaid over a period of up to 15 years. Shares purchased with the loan proceeds are being held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants vest 100% in their accrued benefits under the employee stock ownership plan after three vesting years, with no prorated vesting prior to reaching three vesting years. Vesting is accelerated upon retirement, death or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.

Participants receive the shares at the end of employment. Because the Company’s stock is not traded on an established market, as of June 30, 2013, it is required to provide the participants in the Plan with a put option to repurchase their shares. This repurchase obligation is reflected in the Company’s financial statements in other liabilities and reduces shareholders’ equity by the estimated fair value of the earned shares.

The Company is accounting for its ESOP in accordance with ASC Topic 718, Employers Accounting for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per shares computations. Dividends, if any, on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense for the six months ended June 30, 2013 and 2012 was $29 and $23, respectively.

A summary of ESOP shares is as follows:

The Company is obligated at the option of each beneficiary to repurchase shares of the ESOP upon the beneficiary’s termination or after retirement. At June 30, 2013, the fair value of the 14,648 allocated shares held by the ESOP is $201. The fair value of all shares subject to the repurchase obligation is $201.

On May 26, 2011, the stockholders approved the Harvard Illinois Bancorp, Inc. 2011 Equity Incentive Plan (the “Equity Incentive Plan”) for employees and directors of the Company. The Equity Incentive Plan authorizes the issuance of up to 109,856 shares of the Company’s common stock, with no more than 31,387 of shares as restricted stock awards and 78,469 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Equity Incentive Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted. Certain option awards provide for accelerated vesting if there is a change of control (as defined in the Equity Incentive Plan).

On June 23, 2011, the compensation committee of the board of directors approved the awards of 73,761 options to purchase Company stock and 31,387 shares of restricted stock. Of the 73,761 stock options granted, 63,167 were qualified stock options and 10,594 were nonqualified. The remaining 4,708 shares were awarded on November 29, 2012. Stock options and restricted stock vest over a five year period, and stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

A summary of the option activity under the Equity Incentive Plan as of June 30, 2013, and changes for the six months then ended, is presented below:

Stock-based compensation expense for stock options for the six month periods ended June 30, 2013 and 2012 was $33 and $30, respectively.

As of June 30, 2013, total unrecognized compensation costs related to nonvested stock options amounted to $205. That cost is expected to be recognized over a weighted-average period of 3.09 years.   

A summary of the status of the Company’s nonvested stock options as of June 30, 2013, and changes during the six month period then ended, is presented below:

The following table summarizes the nonvested restricted stock activity for the six months ended June 30, 2013:

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (five years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. Stock-based compensation expense for restricted stock for the six month periods ended June 30, 2013 and 2012 was $24 and $36, respectively. Unrecognized compensation expense for nonvested restricted stock awards was $145 at June 30, 2013 and is expected to be recognized over a weighted average period of 3.0 years.

Total compensation expense under the Equity Incentive Plan for the six month periods ended June 30, 2013 and 2012 was $57 and $66, respectively.

Basic and diluted earnings per common share are presented for the three-month and six-month periods ended June 30, 2013 and 2012. The factors used in the earnings per common share computation follow:

Options to purchase 73,761 shares at a weighted-average exercise price of $8.10 were outstanding at June 30, 2012, but were not included in the computation of diluted earnings per share as the options were considered antidilutive for the periods ended June 30, 2012.

Note 5:         Securities Purchased Under Agreements to Resell

The Company enters into purchases of securities under agreements to resell. The amounts advanced under these agreements were $20,909 and $19,014 at June 30, 2013 and December 31, 2012, respectively, and represent short-term cash investment alternatives. These agreements are over-collateralized by 103% with collateral consisting of securities guaranteed by the “full faith and credit” of the United States government, typically SBA securities. During the period, the securities were delivered by appropriate entry into the third-party custodian’s account designated by the Company under a written custodial agreement that explicitly recognizes the Company’s interest in the securities. At June 30, 2013 and December 31, 2012, these agreements mature by notice by the Company or 30 days by the custodian.

At June 30, 2013 and December 31, 2012, agreements to resell securities purchased were outstanding with the following entities:

Note 6:        Securities

The amortized cost and approximate fair value of securities, together with gross unrealized gains and losses, of securities are as follows:

The Company held no securities of a single issuer at June 30, 2013 or December 31, 2012 with a book value that exceeded 10% of total equity, with the exception of obligations of U.S. Treasury and other U.S. government agencies and corporations.

Available for sale equity securities consist of shares in the Shay Asset Management mutual funds, shares of FHLMC common stock, and shares in other financial institutions. Other than temporary impairments recorded for the six month periods ended June 30, 2013 and 2012 totaled $0 and $1, respectively.

As of June 30, 2013 and December 31, 2012, the Company held investments in Shay Asset Management mutual funds with a fair value of $444 and $447. The investments in mutual funds are valued using available market prices. Management performed an analysis and deemed the remaining investment in the mutual funds was not other than temporarily impaired as of June 30, 2013 and December 31, 2012.

As of June 30, 2013 and December 31, 2012, the Company held investments in FHLMC common stock with a fair value of $10 and $2, respectively. The investments in FHLMC common stock is valued using available market prices. Management performed an analysis and deemed the remaining investment in FHLMC common stock was not other than temporarily impaired as of June 30, 2013 and December 31, 2012.

As of June 30, 2013 and December 31, 2012, the Company held investments in other equity securities with a fair value of $23 and $17, respectively. The Company recorded other-than-temporary impairments on other equity securities of $0 and $1 for the six month periods ended June 30, 2013 and 2012, respectively. Management performed an analysis and deemed the remaining investment in other equity securities was not other than temporarily impaired as of June 30, 2013 and December 31, 2012.

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes was $1,136 and $934 as of June 30, 2013 and December 31, 2012, respectively.

There were no sales of available-for-sale securities for the six months ended June 30, 2013 and 2012.

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.