hmnf20150331_10q.htm

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2015

OR

 

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

 

For the transition period from _________ to _________

 

Commission File Number 0-24100

 

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 No.)

     

1016 Civic Center Drive N.W., Rochester, MN

 

55901

(Address of principal executive offices)

 

(ZIP Code)

     

Registrant's telephone number, including area code:

 

(507) 535-1200

 

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

Yes ☒          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 ☒          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.

 

 Large accelerated filer ☐

 Accelerated filer ☐

 Non-accelerated filer ☐

 Smaller reporting company ☒

 

(Do not check if a smaller reporting company)

 

 

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

Yes ☐          No ☒

 

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

 

Class

 

Outstanding at April 21, 2015

Common stock, $0.01 par value

 

4,480,258

     

 

 
1

 

 

HMN FINANCIAL, INC.

CONTENTS

 

PART I – FINANCIAL INFORMATION Page
   

 

Item 1:

Financial Statements (unaudited)

 
     
 

Consolidated Balance Sheets at March 31, 2015 and December 31, 2014

3

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014

4

     
 

Consolidated Statement of Stockholders' Equity for the Three Month Period Ended March 31, 2015

5

     
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2:

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

24

     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

34

     

Item 4:

Controls and Procedures

34

     

PART II – OTHER INFORMATION

   
     

Item 1:

Legal Proceedings

35

     

Item 1A:

Risk Factors

35

     

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

35

     

Item 3:

Defaults Upon Senior Securities

35

     

Item 4:

Mine Safety Disclosures

36

     

Item 5:

Other Information

36

     

Item 6:

Exhibits

36

     

Signatures

37

 

 
2

 

 

PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 

(Dollars in thousands)

 

2015

   

2014

 
   

(unaudited)

         

Assets

               

Cash and cash equivalents

  $ 22,936       46,634  

Securities available for sale:

               

Mortgage-backed and related securities (amortized cost $2,348 and $2,755)

    2,471       2,909  

Other marketable securities (amortized cost $151,835 and $135,772)

    151,674       134,925  
      154,145       137,834  
                 

Loans held for sale

    2,663       2,076  

Loans receivable, net

    360,370       365,113  

Accrued interest receivable

    1,941       1,713  

Real estate, net

    2,966       3,103  

Federal Home Loan Bank stock, at cost

    691       777  

Mortgage servicing rights, net

    1,448       1,507  

Premises and equipment, net

    6,919       6,982  

Prepaid expenses and other assets

    1,139       1,157  

Deferred tax asset, net

    10,269       10,530  

Total assets

  $ 565,487       577,426  
                 
                 

Liabilities and Stockholders’ Equity

               

Deposits

  $ 483,323       496,750  

Other borrowings

    10,000       0  

Accrued interest payable

    166       93  

Customer escrows

    1,228       788  

Accrued expenses and other liabilities

    3,995       3,782  

Total liabilities

    498,712       501,413  

Commitments and contingencies

               

Stockholders’ equity:

               

Serial preferred stock ($.01 par value):

               

Authorized 500,000 shares; issued shares 0 and 10,000

    0       10,000  

Common stock ($.01 par value):

               

Authorized 16,000,000; issued shares 9,128,662

    91       91  

Additional paid-in capital

    50,035       50,207  

Retained earnings, subject to certain restrictions

    78,041       77,805  

Accumulated other comprehensive loss

    (23 )     (418 )

Unearned employee stock ownership plan shares

    (2,562 )     (2,610 )

Treasury stock, at cost 4,648,404 and 4,658,323 shares

    (58,807 )     (59,062 )

Total stockholders’ equity

    66,775       76,013  

Total liabilities and stockholders’ equity

  $ 565,487       577,426  
                 

 

See accompanying notes to consolidated financial statements.

 

 

 
3

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income 

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands, except per share data)

    2015       2014   

Interest income:

               

Loans receivable

  $ 4,354       5,070  

Securities available for sale:

         

Mortgage-backed and related

    28       50  

Other marketable

    486       254  

Cash equivalents

    15       52  

Other

    1       1  

Total interest income

    4,884       5,427  
                 

Interest expense:

         

Deposits

    248       334  

Other borrowings

    78       0  

Total interest expense

    326       334  

Net interest income

    4,558       5,093  

Provision for loan losses

    0       (1,610 )

Net interest income after provision for loan losses

    4,558       6,703  
                 

Non-interest income:

         

Fees and service charges

    782       823  

Loan servicing fees

    261       261  

Gain on sales of loans

    285       346  

Other

    268       258  

Total non-interest income

    1,596       1,688  
                 

Non-interest expense:

         

Compensation and benefits

    3,448       3,478  

(Gain) loss on real estate owned

    (112 )     68  

Occupancy

    879       882  

Deposit insurance

    70       157  

Data processing

    231       246  

Other

    917       866  

Total non-interest expense

    5,433       5,697  

Income before income tax expense

    721       2,694  

Income tax expense

    260       1,062  

Net income

    461       1,632  

Preferred stock dividends

    (108 )     (532 )

Net income available to common shareholders

  $ 353       1,100  

Other comprehensive income, net of tax

  $ 395       181  

Comprehensive income attributable to common shareholders

  $ 748       1,281  

Basic earnings per common share

  $ 0.09       0.27  

Diluted earnings per common share

  $ 0.08       0.24  

 


 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

 HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

For the Three Month Period Ended March 31, 2015

(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/(Loss)

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2014

  $ 10,000       91       50,207       77,805       (418 )     (2,610 )     (59,062 )     76,013  

Net income

                            461                               461  

Other comprehensive income

                                    395                       395  

Redemption of preferred stock

    (10,000 )                                                     (10,000 )

Restricted stock awards

                    (255 )                             255       0  

Amortization of restricted stock awards

                    67                                       67  

Preferred stock dividends

                            (225 )                             (225 )

Earned employee stock ownership plan shares

                    16                       48               64  

Balance, March 31, 2015

  $ 0       91       50,035       78,041       (23 )     (2,562 )     (58,807 )     66,775  

 


 

See accompanying notes to consolidated financial statements. 

 

 
5

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 461       1,632  

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

               

Provision for loan losses

    0       (1,610 )

Depreciation

    161       131  

Amortization of premiums, net

    6       7  

Amortization of deferred loan (fees) costs

    (31 )     5  

Amortization of mortgage servicing rights

    143       116  

Capitalized mortgage servicing rights

    (84 )     (38 )

(Gain) loss on sales of real estate and premises

    (112 )     68  

Gain on sales of loans

    (285 )     (346 )

Proceeds from sale of loans held for sale

    12,061       9,053  

Disbursements on loans held for sale

    (12,027 )     (4,890 )

Amortization of restricted stock awards

    67       56  

Amortization of unearned ESOP shares

    48       49  

Earned employee stock ownership shares priced above original cost

    16       11  

(Increase) decrease in accrued interest receivable

    (228 )     61  

Increase (decrease) in accrued interest payable

    72       (39 )

Decrease (increase) in other assets

    50       (575 )

Increase in other liabilities

    209       1,299  

Other, net

    9       293  

Net cash provided by operating activities

    536       5,283  

Cash flows from investing activities:

               

Principal collected on securities available for sale

    409       699  

Proceeds collected on maturities of securities available for sale

    18,000       10,000  

Purchases of securities available for sale

    (34,070 )     (5,003 )

Redemption of Federal Home Loan Bank stock

    86       7  

Proceeds from sales of real estate and premises

    221       136  

Net decrease (increase) in loans receivable

    4,431       (542 )

Purchases of premises and equipment

    (99 )     (205 )

Net cash (used) provided by investing activities

    (11,022 )     5,092  

Cash flows from financing activities:

               

Decrease in deposits

    (13,428 )     (31,550 )

Redemption of preferred stock

    (10,000 )     0  

Dividends to preferred stockholders

    (225 )     0  

Proceeds from borrowings

    13,000       0  

Repayment of borrowings

    (3,000 )     0  

Increase in customer escrows

    441       505  

Net cash used by financing activities

    (13,212 )     (31,045 )

Decrease in cash and cash equivalents

    (23,698 )     (20,670 )

Cash and cash equivalents, beginning of period

    46,634       120,686  

Cash and cash equivalents, end of period

  $ 22,936       100,016  

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 254       373  

Cash paid for income taxes

    135       0  

Supplemental noncash flow disclosures:

               

Loans transferred to loans held for sale

    342       3,742  

 


 

See accompanying notes to consolidated financial statements

 
6

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

 

(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 facilities in Minnesota, Iowa, and Wisconsin. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA), which offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which acts as an intermediary for the Bank in holding and operating certain foreclosed properties.

 

The consolidated financial statements included herein are for HMN, the Bank, OIA and HPH. 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 three-month period ended March 31, 2015 are not necessarily indicative of the results which may be expected for the entire year.

 

(3) Derivative Instruments and Hedging Activities

The Company had commitments outstanding to extend credit to future borrowers that had 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 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 or sell loans on a firm commitment basis are derivatives and are recorded at market value. As a result of marking these derivatives to market for the period ended March 31, 2015, the Company recorded an increase in other assets of $32,000, an increase in other liabilities of $25,000 and a gain included in the gain on sales of loans of $7,000. As a result of marking these derivatives to market for the period ended March 31, 2014, the Company recorded an increase in other assets of $9,000, an increase in other liabilities of $5,000 and a gain 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 an increase in other liabilities of $3,000 and a loss included in the gain on sales of loans of $3,000 for both the periods ended March 31, 2015 and March 31, 2014.

 

(4) Fair Value Measurements

ASC 820, Fair Value Measurements, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system consisting of three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access.

 

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which significant assumptions are observable in the market.

 

 
7

 

 

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 of the Company for which fair values are determined on a recurring basis as of March 31, 2015 and December 31, 2014.

 

   

Carrying value at March 31, 2015

 
       

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 154,145       0       154,145       0  

Mortgage loan commitments

    48       0       48       0  

Total

  $ 154,193       0       154,193       0  
                                 

 

   

Carrying value at December 31, 2014

 
       

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 137,834       0       137,834       0  

Mortgage loan commitments

    16       0       16       0  

Total

  $ 137,850       0       137,850       0  
                                 

 

There were no transfers between Levels 1, 2, or 3 during the three months ended March 31, 2015.

 

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 that were still held at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.

 

   

Carrying value at March 31, 2015

         

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Three months ended

March 31, 2015

total gains (losses)

 

Loans held for sale

  $ 2,663       0       2,663       0       25  

Mortgage servicing rights, net

    1,448       0       1,448       0       0  

Loans(1)

    10,812       0       10,812       0       (43 )

Real estate, net(2)

    2,966       0       2,966       0       0  

Total

  $ 17,889       0       17,889       0       (18 )
                                         

 

 

   

Carrying value at December 31, 2014

         

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Year ended

December 31, 2014 total gains (losses)

 

Loans held for sale

  $ 2,076       0       2,076       0       (1 )

Mortgage servicing rights, net

    1,507       0       1,507       0       0  

Loans(1)

    11,882       0       11,882       0       532  

Real estate, net(2)

    3,103       0       3,103       0       (134 )

Total

  $ 18,568       0       18,568       0       397  
                                         

(1)     Represents carrying value and related write-downs of 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.

 

 
8

 

 

(5) 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 4, have been included in the following table for March 31, 2015 and December 31, 2014. The fair value estimates are made based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. The estimated fair value of the Company’s financial instruments as of March 31, 2015 and December 31, 2014 are shown below.

 

             
   

March 31, 2015

   

December 31, 2014

 
                   

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

  $ 22,936       22,936       22,936                               46,634       46,634       46,634                          

Securities available for sale

    154,145       154,145               154,145                       137,834       137,834               137,834                  

Loans held for sale

    2,663       2,663               2,663                       2,076       2,076               2,076                  

Loans receivable, net

    360,370       360,346               360,346                       365,113       364,509               364,509                  

Federal Home Loan Bank stock

    691       691               691                       777       777               777                  

Accrued interest receivable

    1,941       1,941               1,941                       1,713       1,713               1,713                  

Financial liabilities:

                                                                                               

Deposits

    483,323       483,152               483,152                       496,750       496,494               496,494                  

Other borrowings

    10,000       10,025               10,025                       0       0                                  

Accrued interest payable

    166       166               166                       93       93               93                  

Off-balance sheet financial instruments:

                                                                                               

Commitments to extend credit

    48       48                               205,050       16       16                               141,578  

Commitments to sell loans

    (58 )     (58 )                             6,673       (30 )     (30 )                             3,279  

 

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, net

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 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.

 

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.

 

 
9

 

 

The fair value estimate for deposits does not include the benefit that results from the low cost funding provided by the Company's existing deposits and long-term customer relationships compared to the cost of obtaining different sources of funding. This benefit is commonly referred to as the core deposit intangible.

 

Other Borrowings

The fair values of other borrowings 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.

 

(6) Other Comprehensive Income

Other comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised of unrealized gains and losses on securities available for sale. The components of other comprehensive income and the related tax effects were as follows:

 

   

For the period ended March 31,

 

(Dollars in thousands)

 

2015

   

2014

 

Securities available for sale:

 

Before tax

   

Tax effect

   

Net of tax

   

Before tax

   

Tax effect

   

Net of tax

 

Net unrealized gains arising during the period

  $ 655       260       395       239       58       181  

Other comprehensive income

  $ 655       260       395       239       58       181  

 

 

 
10

 

  

(7) Securities Available For Sale

The following table shows the gross unrealized losses and fair values 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 March 31, 2015 and December 31, 2014.

 

   

March 31, 2015

   

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

    5     $ 23,915       (85 )     1     $ 5,011       (8 )   $ 28,926       (93 )

Corporate preferred stock

    0       0       0       1       350       (350 )     350       (350 )

Corporate equity

    1       57       (1 )     0       0       0       57       (1 )

Total temporarily impaired securities

    6     $ 23,972       (86 )     2     $ 5,361       (358 )   $ 29,333       (444 )

 

   

December 31, 2014

   

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

    22     $ 104,453       (551 )     1     $ 4,970       (50 )   $ 109,423       (601 )

Corporate preferred stock

    0       0       0       1       420       (280 )     420       (280 )

Total temporarily impaired securities

    22     $ 104,453       (551 )     2     $ 5,390       (330 )   $ 109,843       (881 )

  

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 over twelve months at March 31, 2015 relates 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 September 2014, the issuer paid all previously deferred interest that was due and all payments were current as of September 30, 2014. In January 2015, the issuer deferred its scheduled interest payment as allowed by the terms of the security agreement. The issuer’s subsidiary bank has incurred operating losses due to increased provisions for loan losses but still met 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 March 31, 2015. The Company does not intend to sell the trust preferred security 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 security 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 March 31, 2015 and December 31, 2014 is as follows:

 

(Dollars in thousands)

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

 

March 31, 2015:

                               

Mortgage-backed securities:

                               

Federal Home Loan Mortgage Corporation (FHLMC)

  $ 1,186       70       0       1,256  

Federal National Mortgage Association (FNMA)

    1,162       53       0       1,215  
      2,348       123       0       2,471  

Other marketable securities:

                               

U.S. Government agency obligations

    151,077       283       (93 )     151,267  

Corporate preferred stock

    700       0       (350 )     350  

Corporate equity

    58       0       (1 )     57  
      151,835       283       (444 )     151,674  
    $ 154,183       406       (444 )     154,145  

  

 
11

 

 

(Dollars in thousands)

 

Amortized cost

   

Gross unrealized gains

   

Gross unrealized losses

   

Fair value

 

December 31, 2014:

                               

Mortgage-backed securities:

                               

FHLMC

  $ 1,418       90       0       1,508  

FNMA

    1,337       64       0       1,401  
      2,755       154       0       2,909  

Other marketable securities:

                               

U.S. Government agency obligations

    135,014       31       (601 )     134,444  

Corporate preferred stock

    700       0       (280 )     420  

Corporate equity

    58       3       0       61  
      135,772       34       (881 )     134,925  
    $ 138,527       188       (881 )     137,834  

 


 

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2015 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

  $ 137,052       137,275  

Due after one year through five years

    16,373       16,463  

Due after five years through ten years

    0       0  

Due after ten years

    700       350  

No stated maturity

    58       57  

Total

  $ 154,183       154,145  
                 

 

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 if it is anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.

 

(8) Loans Receivable, Net

A summary of loans receivable at March 31, 2015 and December 31, 2014 is as follows:

 

(Dollars in thousands)

 

March 31,

2015

   

December 31,

2014

 

1-4 family

  $ 70,062       69,841  

Commercial real estate:

               

Residential developments

    19,772       19,960  

Other

    172,154       171,708  
      191,926       191,668  

Consumer

    52,503       54,925  

Commercial business:

               

Construction industry

    5,102       7,121  

Other

    49,253       50,001  
      54,355       57,122  

Total loans

    368,846       373,556  

Less:

               

Unamortized discounts

    13       14  

Net deferred loan fees

    45       97  

Allowance for loan losses

    8,418       8,332  

Total loans receivable, net

  $ 360,370       365,113  

 

 
12

 

 

(9) Allowance for Loan Losses and Credit Quality Information

The allowance for loan losses is summarized as follows:

 

(Dollars in thousands)

 

1-4 Family

   

Commercial

Real Estate

   

Consumer

   

Commercial Business

   

Total

 

Balance, December 31, 2014

  $ 1,096       5,024       1,009       1,203       8,332  

Provision for losses

    (5 )     34       23       (52 )     0  

Charge-offs

    0       0       (18 )     0       (18 )

Recoveries

    0       64       8       32       104  

Balance, March 31, 2015

  $ 1,091       5,122       1,022       1,183       8,418  
                                         

Balance, December 31, 2013

  $ 1,628       6,458       1,106       2,209       11,401  

Provision for losses

    84       (1,194 )     101       (601 )     (1,610 )

Charge-offs

    0       (935 )     (31 )     (1 )     (967 )

Recoveries

    0       214       10       42       266  

Balance, March 31, 2014

  $ 1,712       4,543       1,186       1,649       9,090  
                                         

Allocated to:

                                       

Specific reserves

  $ 270       370       307       127       1,074  

General reserves

    826       4,654       702       1,076       7,258  

Balance, December 31, 2014

  $ 1,096       5,024       1,009       1,203       8,332  
                                         

Allocated to:

                                       

Specific reserves

  $ 280       226       299       124       929  

General reserves

    811       4,896       723       1,059       7,489  

Balance, March 31, 2015

  $ 1,091       5,122       1,022       1,183       8,418  
                                         

Loans receivable at December 31, 2014:

                                       

Individually reviewed for impairment

  $ 1,867       9,728       806       555       12,956  

Collectively reviewed for impairment

    67,974       181,940       54,119       56,567       360,600  

Ending balance

  $ 69,841       191,668       54,925       57,122       373,556  
                                         

Loans receivable at March 31, 2015:

                                       

Individually reviewed for impairment

  $ 1,960       8,664       601       515       11,740  

Collectively reviewed for impairment

    68,102       183,262       51,902       53,840       357,106  

Ending balance

  $ 70,062       191,926       52,503       54,355       368,846  

 

 
13

 

 

The following table summarizes the amount of classified and unclassified loans at March 31, 2015 and December 31, 2014:

 

   

March 31, 2015

 
   

Classified

   

Unclassified

         

(Dollars in thousands)

 

Special Mention