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) | |
Registrants 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 issuers 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 |
HMN FINANCIAL, INC.
2
Part I FINANCIAL INFORMATION
HMN FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands) |
June 30, 2013 |
December 31, 2012 |
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(unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents |
$ | 29,933 | 83,660 | |||||
Securities available for sale: |
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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 | ||||||
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90,293 | 85,891 | |||||||
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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 | ||||||
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Total assets |
$ | 560,974 | 653,327 | |||||
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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 | ||||||
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Total liabilities |
499,812 | 592,493 | ||||||
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Commitments and contingencies |
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Stockholders equity: |
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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 | ) | ||||
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Total stockholders equity |
61,162 | 60,834 | ||||||
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Total liabilities and stockholders equity |
$ | 560,974 | 653,327 | |||||
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See accompanying notes to consolidated financial statements.
3
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: |
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Loans receivable |
$ | 5,503 | 7,523 | 11,531 | 15,319 | |||||||||||
Securities available for sale: |
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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 | ||||||||||||
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Total interest income |
5,787 | 7,952 | 12,110 | 16,227 | ||||||||||||
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Interest expense: |
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Deposits |
465 | 1,061 | 1,022 | 2,278 | ||||||||||||
Federal Home Loan Bank advances |
650 | 844 | 1,485 | 1,689 | ||||||||||||
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Total interest expense |
1,115 | 1,905 | 2,507 | 3,967 | ||||||||||||
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Net interest income |
4,672 | 6,047 | 9,603 | 12,260 | ||||||||||||
Provision for loan losses |
(520 | ) | 1,088 | (520 | ) | 960 | ||||||||||
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Net interest income after provision for loan losses |
5,192 | 4,959 | 10,123 | 11,300 | ||||||||||||
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Non-interest income: |
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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 | ||||||||||||
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Total non-interest income |
1,987 | 1,794 | 3,861 | 4,500 | ||||||||||||
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Non-interest expense: |
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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 | ||||||||||||
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Total non-interest expense |
5,325 | 6,358 | 11,364 | 12,601 | ||||||||||||
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Income before income tax expense |
1,854 | 395 | 2,620 | 3,199 | ||||||||||||
Income tax expense |
55 | 0 | 80 | 0 | ||||||||||||
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Net income |
1,799 | 395 | 2,540 | 3,199 | ||||||||||||
Preferred stock dividends and discount |
(547 | ) | (464 | ) | (1,023 | ) | (925 | ) | ||||||||
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Net income (loss) available to common shareholders |
$ | 1,252 | (69 | ) | 1,517 | 2,274 | ||||||||||
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Other comprehensive loss, net of tax |
$ | (1,373 | ) | (93 | ) | (1,518 | ) | (272 | ) | |||||||
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Comprehensive income (loss) attributable to common shareholders |
$ | (121 | ) | (162 | ) | (1 | ) | 2,002 | ||||||||
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Basic earnings (loss) per common share |
$ | 0.32 | (0.02 | ) | 0.38 | 0.58 | ||||||||||
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Diluted earnings (loss) per common share |
$ | 0.30 | (0.02 | ) | 0.36 | 0.57 | ||||||||||
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See accompanying notes to consolidated financial statements.
4
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 | ||||||||||||||||||||||||||||
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Balance, June 30, 2013 |
$ | 25,629 | 91 | 51,760 | 48,822 | (1,567 | ) | (2,900 | ) | (60,673 | ) | 61,162 | ||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30, |
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(Dollars in thousands) |
2013 | 2012 | ||||||
Cash flows from operating activities: |
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Net income |
$ | 2,540 | 3,199 | |||||
Adjustments to reconcile net income to cash provided by operating activities: |
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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 | ||||||
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Net cash provided by operating activities |
9,989 | 8,486 | ||||||
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Cash flows from investing activities: |
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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 | ) | ||||
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Net cash provided by investing activities |
29,520 | 70,734 | ||||||
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Cash flows from financing activities: |
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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 | ) | ||||
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Net cash used by financing activities |
(93,236 | ) | (81,442 | ) | ||||
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Decrease in cash and cash equivalents |
(53,727 | ) | (2,222 | ) | ||||
Cash and cash equivalents, beginning of period |
83,660 | 67,840 | ||||||
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Cash and cash equivalents, end of period |
$ | 29,933 | 65,618 | |||||
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Supplemental cash flow disclosures: |
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Cash paid for interest |
$ | 2,576 | 4,229 | |||||
Cash paid for income taxes |
205 | 10 | ||||||
Supplemental noncash flow disclosures: |
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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.
6
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 Companys consolidated financial statements as it has no outstanding rights of setoff.
In February 2013, the FASB issued ASU 2013-02, Other Comprehensive Income (Topic 220). The amendments in the ASU supersede and replace the presentation requirements of reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Companys 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.
7
(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 1Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access.
Level 2Valuation 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 | ||||||||||
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Total |
$ | 90,277 | 0 | 90,277 | 0 | |||||||||||
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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 | ||||||||||
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Total |
$ | 85,851 | 81 | 85,770 | 0 | |||||||||||
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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 |
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(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 | ) | ||||||||||||||||
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Total |
$ | 38,082 | 0 | 38,082 | 0 | (1,284 | ) | (5,267 | ) | |||||||||||||||
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8
Carrying value at December 31, 2012 | Year ended December 31, 2012 |
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(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 | ) | ||||||||||||||
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Total |
$ | 47,198 | 0 | 47,198 | 0 | (2,861 | ) | |||||||||||||
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(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 Companys financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimated fair value of the Companys financial instruments as of 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
9
credit and interest rate risk inherent in each loan portfolio. The fair value of the adjustable loan portfolio was estimated by grouping the loans with similar characteristics and comparing the characteristics of each group to the prices quoted for similar types of loans in the secondary market. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820, Fair Value Measurements and Disclosures.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value since it is short-term in nature and does not present unanticipated credit concerns.
Deposits
The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.
The fair value estimate for deposits does not include the benefit that results from the low cost funding provided by the Companys existing deposits and long-term customer relationships compared to the cost of obtaining different sources of funding. This benefit is commonly referred to as the core deposit intangible.
Federal Home Loan Bank Advances
The fair values of advances with fixed maturities are estimated based on discounted cash flow analysis using as discount rates the interest rates charged by the FHLB for borrowings of similar remaining maturities.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value since it is short-term in nature.
Commitments to Extend Credit
The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties.
Commitments to Sell Loans
The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.
(7) Other Comprehensive Loss
Other comprehensive loss is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income (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.
10
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 issuers subsidiary bank has incurred operating losses due to increased provisions for loan losses but still meets the regulatory requirements to be considered well capitalized based on its most recent regulatory filing. Based on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at 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 | |||||||||||
|
|
|
|
|
|
|
|
11
(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 | |||||
|
|
|
|
12
(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
(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
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 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of 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
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 | ||||||||||||
|
|
|
|
|
|
|
|
17
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.
18
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 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
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
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
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 Companys 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 Banks primary banking regulator, and the primary banking regulator for the Company became the Federal Reserve Board (the FRB).
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank entered into a written Supervisory Agreement with the OTS, effective February 22, 2011, that primarily relates to the Banks financial performance and credit quality issues. This agreement replaced the prior memorandum of understanding that the Bank entered into with its primary regulator on December 9, 2009. In accordance with the agreement, the Bank submitted a two year business plan in May of 2011 that the OCC accepted with the expectation that the Bank would be in adherence with the OCCs Notification of Establishment of Higher Minimum Capital Ratios, dated August 8, 2011, or IMCR, which required the Bank to establish and maintain a minimum core capital ratio of 8.5% by December 31, 2011. The IMCR is discussed more fully below. As required by the Supervisory Agreement, the Bank submitted updated two year business plans in January of 2012 and 2013. The Bank must operate within the parameters of the business plan and is required to monitor and submit periodic reports on its compliance with the plan. The Bank also submitted problem asset reduction plans at the same time that the business plans were submitted. The Bank must operate
22
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 Companys capital stock, enter into any new contractual arrangement or renew or extend any existing arrangement related to compensation or benefits with any director or officer, or make any golden parachute payments. The Company believes it was in compliance with all requirements of its Supervisory Agreement at 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 Banks 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 Banks 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 stockholders equity |
$ | 64,656 | ||||||||||||||||||||||||||||||
Plus: |
||||||||||||||||||||||||||||||||
Net unrealized losses on certain securities available for sale and cash flow hedges |
1,567 | |||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||
66,223 | ||||||||||||||||||||||||||||||||
|
|
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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 | |||||||||||||||||||||||||||||||
|
|
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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 Banks adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. |
23
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 Banks 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 Banks primary plan. As a result of a decrease in assets and improved financial results, the Banks core capital to adjusted total assets ratio improved to 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 Banks 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 Banks 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 Banks assets, liabilities and earnings, some of which may be material, during the period in which the action is taken or is consummated or over a longer period of time. Further, the Company may determine it prudent, or be required by supervising banking regulators, to issue capital of which there can be no assurance that, if issued, it would be on terms favorable to the Company. If the Company issues additional shares of common stock or other equity securities, it could dilute the ownership interests of existing stockholders and, given our current common stock trading price, raising additional capital could dilute the per share book value of the Companys common stock and could result in a change of control of the Company and the Bank.
The capital requirements of the Company and the Bank 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 Companys certificate of incorporation authorizes the issuance of up to 500,000 shares of preferred stock, and on December 23, 2008, the Company completed the sale of 26,000 shares of cumulative perpetual preferred stock to the United States Treasury. The preferred stock has a liquidation value of $1,000 per share and a related warrant was also issued to purchase 833,333 shares of HMN common stock at an exercise price of $4.68 per share. The transaction was part of the United States Treasurys capital purchase program under the Emergency Economic Stabilization Act of 2008. Under the terms of the sale, the preferred shares are entitled to a quarterly cumulative compounding dividend at a stated rate of 5% per annum for each of the first five years of the investment, increasing to 9% thereafter, unless HMN redeems the shares. The Company made all required dividend payments to the Treasury on the outstanding preferred stock in 2009 and 2010 but has deferred the last 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 Companys board of directors. Treasury did not exercise this right.
24
On February 8, 2013, the Treasury sold the preferred stock issued by the Company to unaffiliated third party investors in a private transaction for $18.8 million. The Company received no proceeds from the sale and it had no effect on the terms of the outstanding preferred stock, including the Companys obligation to satisfy accrued and unpaid dividends prior to the payment of any dividend or other distribution to holders of junior stock, including the Companys common stock, and an increase in the dividend rate from 5% to 9%, commencing with the dividend payment date of February 15, 2014. Further, the sale of the preferred stock had no effect on the Companys capital, financial condition or results of operations. Because of the sale, the Company generally is no longer subject to the various executive compensation and corporate governance requirements to which participants in Treasurys Capital Purchase Program were subject while Treasury held the preferred stock. In addition, the Company has been advised that the current holders of substantially all of the preferred stock have entered into agreements with the FRB pursuant to which they have each agreed not to take actions, without the consent of the FRB, which might be construed as exercising or attempting to exercise a controlling influence over the management or policies of the Company or the Bank, including exercise of any right to elect any representatives to the Companys board of directors.
Under the terms of the Companys and Banks Supervisory Agreements with their federal banking regulators as described in Note 13, neither the Company nor the Bank may declare or pay any cash dividends, or purchase or redeem any capital stock, without prior notice to, and consent of, these regulators. Subject to the foregoing, the preferred stock may be redeemed in whole or in part, at par plus accrued and unpaid dividends. The preferred stock is non-voting (except as described above in respect of the election of up to two directors when preferred stock dividends remain unpaid), other than certain class voting rights.
The sale of preferred stock did not include the sale of a warrant to purchase 833,333 shares of the Companys common stock at an exercise price of $4.68, which Treasury continues to hold and may sell in its discretion at any time, subject to applicable securities laws and the Companys right to repurchase the warrant at fair market value under the terms of the Companys agreements with Treasury. The warrant may be exercised at any time over its ten-year term and Treasury has agreed not to exercise any voting rights received by acquiring common stock on the exercise of the warrant. The discount on the common stock warrant is being amortized over five years. Both the preferred securities and the discount qualify as Tier I capital.
(15) Commitments and Contingencies
The Bank issued standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit issued and available at 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 segments net income, return on average assets and equity. Each corporation is managed separately with its own officers and board of directors, some of whom may overlap between the corporations.
25
The following table sets forth certain information about the reconciliation of reported profit or loss and assets for each of the Companys reportable segments.
(Dollars in thousands) |
Home Federal Savings Bank |
Other | Eliminations | Consolidated Total |
||||||||||||
At or for the six months ended June 30, 2013: |
||||||||||||||||
Interest incomeexternal customers |
$ | 12,110 | 0 | 0 | 12,110 | |||||||||||
Non-interest incomeexternal 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 incomeexternal customers |
$ | 16,227 | 0 | 0 | 16,227 | |||||||||||
Non-interest incomeexternal 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 |