UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2015 |
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 Northwest |
55901 |
Rochester, Minnesota |
(Zip Code) |
(Address of principal executive offices) |
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(507) 535-1200 |
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Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
Common Stock, par value $.01 per share |
NASDAQ Global Market |
Securities registered pursuant to section 12(g) of the Act:
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None |
|
|
(Title of class) |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [ ] NO [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES [ ] NO [ X ]
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 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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
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 |
[ X ] |
(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 [ X ]
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $36.0 million based on the closing stock price of $11.79 on such date as reported on the NASDAQ Global Market.
As of February 22, 2016, the number of outstanding shares of common stock of the registrant was 4,486,299.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s annual report to stockholders for the year ended December 31, 2015 (Annual Report), are incorporated by reference in Parts I and II of this Form 10-K. Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year ended December 31, 2015 are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I | ||
Page | ||
Item 1. |
Business |
5 |
Item 1A. |
Risk Factors |
31 |
Item 1B. |
Unresolved Staff Comments |
41 |
Item 2. |
Properties |
41 |
Item 3. |
Legal Proceedings |
42 |
Item 4. |
Mine Safety Disclosures |
42 |
PART II | ||
Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
42 |
Item 6. |
Selected Financial Data |
42 |
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
42 |
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
42 |
Item 8. |
Financial Statements and Supplementary Data |
42 |
Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
42 |
Item 9A. |
Controls and Procedures |
43 |
Item 9B. |
Other Information |
43 |
PART III | ||
Item 10. |
Directors, Executive Officers and Corporate Governance |
44 |
Item 11. |
Executive Compensation |
44 |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
44 |
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
44 |
Item 14. |
Principal Accounting Fees and Services |
44 |
PART IV | ||
Item 15. |
Exhibits, Financial Statement Schedules |
45 |
Signatures |
46 | |
Index to Exhibits |
47 |
Forward-Looking Statements
The information presented or incorporated by reference in this Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to increasing our core deposit relationships, improving credit quality, reducing non-performing assets, growing earning assets, generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for improvement thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; our ability to complete the acquisition of certain assets from Deerwood Bank and integrate its operations; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and mix of interest-earning assets; the amount and mix of interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of dividends paid by the Federal Home Loan Bank (FHLB) on its stock; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer trust preferred securities held by the Bank; the ability of the Bank to pay dividends to HMN; the ability of HMN to pay the principal and interest payments on its third party note payable; the ability to remain well capitalized; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.
A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including additional changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with alternate funding sources, including changes in collateral advance rates and policies of the FHLB; technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company; the availability of internal and, as required, external sources of funding; acquisition integration costs; our ability to attract and retain employees; or other significant uncertainties. For additional discussion of these and certain other risks and uncertainties applicable to the Company, see the “Risk Factors” sections of this Form 10-K. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements.
Any forward-looking statement speaks only as of the date hereof and we undertake no duty to update any of the forward-looking statements after the date of this Form 10-K.
PART I
ITEM 1. |
BUSINESS |
General
HMN Financial, Inc. (HMN and, together with its subsidiaries, 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 was inactive in 2015, but has acted as an intermediary for the Bank in holding and operating certain foreclosed properties. HMN was incorporated in Delaware in 1994.
As a community-oriented financial institution, the Company seeks to serve the financial needs of communities in its market area. The Company’s business involves attracting deposits from the general public and businesses and using such deposits to originate or purchase one-to-four family residential, commercial real estate, and multi-family mortgage loans as well as consumer, construction, and commercial business loans. The Company also invests in mortgage-backed and related securities, U.S. government agency obligations and other permissible investments. The executive offices of the Company are located at 1016 Civic Center Drive Northwest, Rochester, Minnesota 55901. Its telephone number at that address is (507) 535-1200. The Company’s website is www.hmnf.com. Information contained on the Company’s website is expressly not incorporated by reference into this Form 10-K.
Market Area
The Company serves the southern Minnesota counties of Dodge, Fillmore, Freeborn, Houston, Mower, Olmsted and Winona and portions of Steele, Goodhue and Wabasha through its corporate office located in Rochester, Minnesota and its eleven branch offices located in Albert Lea, Austin, Kasson (2), La Crescent, Rochester (4), Spring Valley and Winona, Minnesota. The portion of the Company’s southern Minnesota market area consisting of Rochester and the contiguous communities is composed of primarily urban and suburban communities, while the balance of the Company's southern Minnesota market area consists primarily of rural areas and small towns. Primary industries in the Company's southern Minnesota market area include manufacturing, agriculture, health care, wholesale and retail trade, service industries and education. Major employers include the Mayo Clinic, Hormel Foods (a food processing company), and IBM. The Company's market area is also the home of Winona State University, Rochester Community and Technical College, University of Minnesota - Rochester, Winona State University - Rochester Center and Austin’s Riverland Community College.
The Company serves Dakota County, in the southern portion of the Minneapolis and St. Paul metropolitan area, from its office located in Eagan, Minnesota. Major employers in this market area include Delta Airlines, CHS Cooperative, Flint Hills Resources LP (oil refinery), Unisys Corp (computer software), Blue Cross Blue Shield of Minnesota, and West Group, a Thomson Reuters business (legal research).
The Company serves the Iowa county of Marshall through its branch office located in Marshalltown, Iowa. Major employers in the area are Swift & Company (pork processors), Fisher Controls International (valve and regulator manufacturing), Lennox Industries (furnace and air conditioner manufacturing), Iowa Veterans Home (hospital care), Marshall Community School District (education), and Marshall Medical & Surgical Center (hospital care).
Based upon information obtained from the U.S. Census Bureau for 2014 (the last year for which information is available), the population of the seven primary counties in the Company’s southern Minnesota market area was estimated as follows: Dodge – 20,353; Fillmore – 20,776; Freeborn – 30,840; Houston – 18,738; Mower – 39,323; Olmsted – 150,287; and Winona – 51,097. For these same seven counties, the median household income from the U.S. Census Bureau for 2010-2014 ranged from $45,569 to $68,587. The population of Dakota County was 412,529 and the median household income was $74,995. With respect to Iowa, the population of Marshall County was 40,866 and the median household income was $52,354.
Lending Activities
General. Historically, the Company has originated 15 and 30 year fixed rate mortgage loans secured by one-to-four family residences for its loan portfolio. Over the past 15 years, the Company has focused on managing interest rate risk and increasing interest income by increasing its investment in shorter term and generally higher yielding commercial real estate, commercial business and construction loans, while reducing its investment in longer term one-to-four family real estate loans. The Company continues to originate 15 and 30 year fixed rate mortgage loans and some shorter term fixed rate loans. The shorter term fixed rate loans and adjustable rate loans are generally placed into portfolio, while the majority of the 15 and 30 year fixed rate mortgage loans are sold in the secondary mortgage market. Mortgage interest rates continued to be at relatively low levels in 2015 and very few 15 and 30 year loans were placed into portfolio as most were sold into the secondary market in order to manage the Company’s interest rate risk position. The Company also offers an array of consumer loan products that include both open and closed end home equity loans. Home equity lines of credit have adjustable interest rates based upon the prime rate, as published in the Wall Street Journal, plus a margin. Refer to “Note 5 Loans Receivable, Net” and “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements in the Annual Report for more information on the loan portfolio (incorporated by reference in Item 8 of Part II of this Form 10-K).
The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate loans as of December 31:
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
||||||||||||||||||||||||||||||
Fixed rate Loans |
||||||||||||||||||||||||||||||||||||||||
Real estate: |
||||||||||||||||||||||||||||||||||||||||
One-to-four family |
$ | 55,226 | 11.68 |
% |
$ | 46,288 | 12.39 |
% |
$ | 47,377 | 11.96 |
% |
$ | 57,463 | 12.08 |
% |
$ | 69,426 | 11.96 |
% | ||||||||||||||||||||
Multi-family |
8,045 | 1.70 | 10,919 | 2.92 | 7,687 | 1.94 | 9,608 | 2.02 | 26,132 | 4.50 | ||||||||||||||||||||||||||||||
Commercial |
117,790 | 24.91 | 104,178 | 27.89 | 109,387 | 27.62 | 115,519 | 24.28 | 94,535 | 16.29 | ||||||||||||||||||||||||||||||
Construction |
27,381 | 5.79 | 7,361 | 1.97 | 2,645 | 0.67 | 8,430 | 1.77 | 5,145 | 0.89 | ||||||||||||||||||||||||||||||
Total real estate loans |
208,442 | 44.08 | 168,746 | 45.17 | 167,096 | 42.19 | 191,020 | 40.15 | 195,238 | 33.64 | ||||||||||||||||||||||||||||||
Consumer loans: |
||||||||||||||||||||||||||||||||||||||||
Automobile |
2,885 | 0.61 | 1,124 | 0.30 | 971 | 0.25 | 623 | 0.13 | 404 | 0.07 | ||||||||||||||||||||||||||||||
Home equity |
10,231 | 2.16 | 10,711 | 2.87 | 11,629 | 2.94 | 11,390 | 2.39 | 13,426 | 2.31 | ||||||||||||||||||||||||||||||
Recreational vehicle |
2,650 | 0.56 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||||||||||||||||||
Other |
4,635 | 0.99 | 4,091 | 1.09 | 4,174 | 1.05 | 4,827 | 1.02 | 6,156 | 1.06 | ||||||||||||||||||||||||||||||
Total consumer loans |
20,401 | 4.32 | 15,926 | 4.26 | 16,774 | 4.24 | 16,840 | 3.54 | 19,986 | 3.44 | ||||||||||||||||||||||||||||||
Commercial business loans |
39,197 | 8.29 | 32,147 | 8.61 | 40,122 | 10.13 | 32,769 | 6.89 | 54,604 | 9.41 | ||||||||||||||||||||||||||||||
Total non-real estate loans |
59,598 | 12.61 | 48,073 | 12.87 | 56,896 | 14.37 | 49,609 | 10.43 | 74,590 | 12.85 | ||||||||||||||||||||||||||||||
Total fixed rate loans |
268,040 | 56.69 | 216,819 | 58.04 | 223,992 | 56.56 | 240,629 | 50.58 | 269,828 | 46.49 | ||||||||||||||||||||||||||||||
Adjustable rate Loans |
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Real estate: |
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One-to-four family |
35,719 | 7.55 | 23,553 | 6.31 | 29,090 | 7.34 | 39,574 | 8.32 | 49,640 | 8.55 | ||||||||||||||||||||||||||||||
Multi-family |
4,279 | 0.90 | 4,781 | 1.28 | 426 | 0.11 | 2,148 | 0.45 | 9,385 | 1.62 | ||||||||||||||||||||||||||||||
Commercial |
79,136 | 16.74 | 59,187 | 15.84 | 69,099 | 17.45 | 105,202 | 22.11 | 148,940 | 25.66 | ||||||||||||||||||||||||||||||
Construction |
10,722 | 2.27 | 5,242 | 1.40 | 5,206 | 1.31 | 4,000 | 0.84 | 5,777 | 1.00 | ||||||||||||||||||||||||||||||
Total real estate loans |
129,856 | 27.46 | 92,763 | 24.83 | 103,821 | 26.21 | 150,924 | 31.72 | 213,742 | 36.83 | ||||||||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||||||||||
Home equity line |
38,561 | 8.16 | 36,832 | 9.86 | 36,178 | 9.13 | 36,521 | 7.68 | 41,429 | 7.14 | ||||||||||||||||||||||||||||||
Home equity |
4,970 | 1.05 | 1,709 | 0.46 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||||||||||||||||||
Other |
483 | 0.10 | 458 | 0.12 | 471 | 0.12 | 614 | 0.12 | 746 | 0.13 | ||||||||||||||||||||||||||||||
Total consumer loans |
44,014 | 9.31 | 38,999 | 10.44 | 36,649 | 9.25 | 37,135 | 7.80 | 42,175 | 7.27 | ||||||||||||||||||||||||||||||
Commercial business loans |
30,909 | 6.54 | 24,975 | 6.69 | 31,587 | 7.98 | 47,085 | 9.90 | 54,655 | 9.41 | ||||||||||||||||||||||||||||||
Total non-real estate loans |
74,923 | 15.85 | 63,974 | 17.13 | 68,236 | 17.23 | 84,220 | 17.70 | 96,830 | 16.68 | ||||||||||||||||||||||||||||||
Total adjustable rate loans |
204,779 | 43.31 | 156,737 | 41.96 | 172,057 | 43.44 | 235,144 | 49.42 | 310,572 | 53.51 | ||||||||||||||||||||||||||||||
Total loans |
472,819 | 100.00 |
% |
373,556 | 100.00 |
% |
396,049 | 100.00 |
% |
475,773 | 100.00 |
% |
580,400 | 100.00 |
% | |||||||||||||||||||||||||
Less |
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Unamortized discounts |
16 | 14 | 33 | 33 | 93 | |||||||||||||||||||||||||||||||||||
Net deferred loan (costs) fees |
(91 | ) | 97 | 0 | 87 | 511 | ||||||||||||||||||||||||||||||||||
Allowance for losses on loans |
9,709 | 8,332 | 11,401 | 21,608 | 23,888 | |||||||||||||||||||||||||||||||||||
Total loans receivable, net |
$ | 463,185 | $ | 365,113 | $ | 384,615 | $ | 454,045 | $ | 555,908 |
The following table illustrates the interest rate maturities of the Company's loan portfolio at December 31, 2015. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Scheduled repayments of principal are reflected in the year in which they are scheduled to be paid. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate |
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(Dollars in thousands) |
One-to-four family |
Multi-family and Commercial |
Construction |
Consumer |
Commercial Business |
Total |
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Due During Years Ending December 31, |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
|||||||||||||||||||||||||||||||||||||
2016 (1) | $ | 38,608 | 3.84 |
% |
$ | 69,152 | 4.66 |
% |
$ | 19,718 | 3.77 |
% |
$ | 50,358 | 4.81 |
% |
$ | 47,193 | 4.36 |
% |
$ | 225,029 | 4.41 |
% | |||||||||||||||||||||||||
2017 |
14,592 | 4.20 | 41,090 | 4.45 | 7,868 | 4.67 | 5,900 | 5.64 | 13,232 | 4.98 | 82,682 | 4.60 | |||||||||||||||||||||||||||||||||||||
2018 |
10,468 | 4.16 | 42,707 | 4.37 | 5,232 | 4.33 | 3,455 | 5.53 | 3,722 | 4.63 | 65,584 | 4.41 | |||||||||||||||||||||||||||||||||||||
2019 through 2020 |
19,694 | 4.12 | 45,566 | 4.34 | 4,163 | 4.33 | 3,856 | 5.38 | 5,707 | 4.45 | 78,986 | 4.34 | |||||||||||||||||||||||||||||||||||||
2021 through 2025 |
6,859 | 3.96 | 9,382 | 3.88 | 1,122 | 4.44 | 767 | 5.55 | 252 | 5.00 | 18,382 | 4.03 | |||||||||||||||||||||||||||||||||||||
2026 through 2040 |
723 | 4.75 | 1,352 | 3.23 | 0 | 0.00 | 79 | 5.72 | 0 | 0.00 | 2,154 | 3.83 | |||||||||||||||||||||||||||||||||||||
2041 and thereafter |
1 | 4.53 | 1 | 4.50 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 2 | 4.51 | |||||||||||||||||||||||||||||||||||||
$ | 90,945 | $ | 209,250 | $ | 38,103 | $ | 64,415 | $ | 70,106 | $ | 472,819 |
|
(1) |
Includes demand loans, loans having no stated maturity and overdraft loans. |
The total amount of loans due after December 31, 2016 which have predetermined interest rates is $178.0 million, while the total amount of amount of loans due after such date which have floating or adjustable interest rates is $69.8 million. At December 31, 2015, construction loans were $15.1 million for one-to-four family dwellings, $18.9 million for multi-family and $4.1 million for nonresidential.
The aggregate amount of loans and extensions of credit that the Bank is permitted to make to any one borrower is generally limited to 15% of unimpaired capital and surplus. In addition to the 15% limit, the Bank is permitted to lend an additional amount equal to 10% of unimpaired capital and surplus if the additional amount is fully secured by “readily marketable collateral” having a current market value of at least 100% of the loan or extension of credit. Similarly, the Bank is permitted to lend additional amounts equal to the lesser of 30% of unimpaired capital and surplus, or $30 million, for certain residential development loans. Applicable law establishes a number of rules for combining loans to separate borrowers. Loans or extensions of credit to one person may be attributed to other persons if: (i) the proceeds of a loan or extension of credit are used for the direct benefit of the other person; or (ii) a common enterprise is deemed to exist between persons. At December 31, 2015, based upon the 15% limitation, the Bank's regulatory limit for loans to one borrower was approximately $12.2 million and no loans to any one borrower exceeded this amount. At December 31, 2015, the Bank’s largest aggregate amount of loans to one borrower totaled $10.1 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with the Bank other than its relationship as a borrower.
All of the Bank's lending is subject to its written underwriting standards and to loan origination procedures. Decisions on loan applications are made on the basis of detailed applications and property valuations determined by an independent appraiser. The loan applications are designed primarily to determine the borrower's ability to repay. The more significant items on the application are verified through the use of credit reports, financial statements, tax returns, or confirmations.
One-to-four family loans that are equal to or less than the conforming/saleable loan dollar limits as established by the Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA) may be approved by a designated underwriter. This limit was $417,000 for both 2015 and 2014. Loans up to $500,000 may be approved by one of the Bank’s retail lending underwriters, the Rochester Market President, the Rochester Market Vice President, or the Bank’s Director of Business Banking. The approval limit for these individuals varies depending on their authority level and includes the total aggregate amount of all retail loan obligations owed or guaranteed to the Bank, plus the new obligation. Loans up to $1.0 million may be approved by the Bank’s Director of Retail Lending and Loan Servicing or the Vice President of Credit Administration. The Bank’s Chief Credit Officer and Chief Operating Officer may approve loans up to $1.75 million and $2.0 million, respectively. The approval limit for these individuals includes the total aggregate amount of all loan obligations owed or guaranteed to the Bank, plus the new obligation. Loans greater than $2.0 million require the approval of a majority of the Executive Loan Committee.
The Bank's individual commercial loan officers have the authority to approve loans that meet the guidelines established by the Bank’s commercial loan policy for loans up to their individual delegated aggregate relationship authority. Individual delegated aggregate relationship authority varies by loan officer, with the highest individual authorities being $400,000. The aggregate relationship amount is determined by the total customer credit commitments outstanding, plus the new loan request amount. The Director of Business Banking can approve loans up to a $500,000 aggregate relationship. The Vice President of Credit Administration, Chief Credit Officer and the Chief Operating Officer have approval authorities up to $1.0 million aggregate, $1.75 million aggregate and $2.0 million aggregate, respectively. Existing loan relationship requests that, in aggregate, are greater than $2.0 million to $7.5 million, or a new relationship loan request of greater than $2.0 million up to $4.5 million, are approved by the Senior Loan Committee. Any loan request greater than these limits must be approved by the Bank’s Executive Loan Committee.
The Bank generally requires title insurance on its mortgage loans, as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property. The Bank also requires flood insurance to protect the property securing its interest when the property is located in a flood plain.
One-to-Four Family Residential Real Estate Lending. At December 31, 2015, the Company's one-to-four family real estate loans, consisting of both fixed rate and adjustable rate loans, totaled $90.9 million, an increase of $21.1 million, from $69.8 million at December 31, 2014. The increase in the one-to-four family loans in 2015 is the result of additional mortgage lending staff and an increased emphasis on originating shorter term fixed rate and adjustable rate mortgage loans that were placed into the portfolio during 2015. The majority of the longer term loans that were originated during the year continued to be sold into the secondary market in order to manage the Company’s interest rate risk position.
The Company offers conventional fixed rate one-to-four family loans that have maximum terms of 30 years. In order to manage interest rate risk, the Company typically sells the majority of fixed rate loan originations with terms to maturity of 15 years or greater that are eligible for sale in the secondary market. The interest rates charged on the fixed rate loan products are based on the secondary market delivery rates, as well as other competitive factors. The Company also originates fixed rate loans with terms up to 30 years that are insured by the Federal Housing Authority (FHA), Veteran’s Administration (VA), Minnesota Housing Finance Agency, Iowa Finance Authority, or United States Department of Agriculture-Guaranteed Housing.
The Company also offers one-year adjustable rate mortgages (ARMs) at a margin (generally 350 to 450 basis points) over the yield on the Average Weekly One Year U.S. Treasury Constant Maturity Index for terms of up to 30 years. The ARM loans offered by the Company allow the borrower to select (subject to pricing) an initial period of one year, three years, or five years between the loan origination and the date the first interest rate change occurs. The ARMs generally have a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over or under the initial rate. The Company’s originated ARMs do not permit negative amortization of principal, generally do not contain prepayment penalties and are not convertible into fixed rate loans. Because of the low interest rate environment that has existed over the last few years, a limited number of ARM loans have been originated as consumers have generally opted for the longer term fixed rate loans.
In underwriting one-to-four family residential real estate loans, the Company evaluates the borrower's credit history, ability to make principal, interest and escrow payments, the value of the property that will secure the loan, and debt to income ratios. Properties securing one-to-four family residential real estate loans made by the Company are appraised by independent appraisers. The Company originates residential mortgage loans with loan-to-value ratios up to 100% for owner-occupied homes and up to 85% for non-owner-occupied homes; however, private mortgage insurance is generally required to reduce the Company's exposure to 80% or less of the value on most loans. The Company generally seeks to underwrite its loans in accordance with secondary market, FHA or VA standards. However, the Company does originate shorter term fixed rate and adjustable rate one-to-four family loans for its portfolio that do not meet certain secondary market guidelines.
The Company's residential mortgage loans customarily include due-on-sale clauses giving it the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage.
Fixed rate loans in the Company's portfolio represent conventional fixed rate loans. At December 31, 2015, $1.7 million of the one-to-four family residential loan portfolio was non-performing compared to $1.6 million at December 31, 2014.
Commercial Real Estate and Multi-Family Lending. The Company originates permanent commercial real estate and multi-family loans secured by properties located primarily in its market area. It also purchases a limited amount of participations in commercial real estate and multi-family loans originated by third parties. The commercial real estate and multi-family loan portfolio includes loans secured by motels, hotels, apartment buildings, churches, ethanol plants, manufacturing plants, land developments, office buildings, business facilities, shopping malls, nursing homes, golf courses, restaurants, warehouses, convenience stores, and other non-residential building properties primarily located in the upper Midwestern portion of the United States. At December 31, 2015, the Company’s commercial and multi-family real estate loans totaled $209.3 million, an increase of $30.2 million, from $179.1 million at December 31, 2014.
Permanent commercial real estate and multi-family loans are generally originated for a maximum term of 10 years and may have longer amortization periods with balloon maturity features. The interest rates may be fixed for the term of the loan or have adjustable features that are tied to the prime rate or another published index. Commercial real estate and multi-family loans are generally written in amounts up to 80% of the lesser of the appraised value of the property or the purchase price and generally have a debt service coverage ratio of at least 120%. The debt service coverage ratio is the ratio of net cash from operations to debt service payments. The Company may originate construction loans secured by commercial or multi-family real estate, or may purchase participation interests in third party originated construction loans secured by commercial or multi-family real estate.
Appraisals on commercial real estate and multi-family real estate properties are performed by independent appraisers prior to the time the loan is made. For transactions less than $250,000, the Company may use an internal valuation. All appraisals on commercial and multi-family real estate are reviewed and approved by a qualified third party or credit department employee. The Bank's underwriting procedures require verification of the borrower's credit history, income and financial statements, banking relationships, and income projections for the property. The commercial loan policy generally requires personal guarantees from the proposed borrowers. An initial on-site inspection is generally required for all collateral properties for loans with balances in excess of $250,000. Independent annual reviews are performed for aggregate commercial lending relationships that exceed $500,000. The reviews cover financial performance, documentation completeness, and accuracy of loan risk ratings.
Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one-to-four family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the loan may be impaired. At December 31, 2015, $0.3 million of loans in the commercial real estate portfolio were non-performing, compared to $7.2 million at December 31, 2014. The largest non-performing lending relationship in this category as of December 31, 2015 is a $0.2 million loan secured by farm land located in the Bank’s primary market area.
Construction Lending. The Company makes construction loans to individuals for the construction of their residences and to builders for the construction of one-to-four family residences. It also makes a limited number of loans to builders for houses built on speculation. Construction loans also include commercial real estate loans.
Almost all loans to individuals for the construction of their residences are structured as permanent loans. These loans are made on the same terms as residential loans, except that during the construction phase, which typically lasts up to twelve months, the borrower pays interest only. Generally, the borrower also pays a construction fee at the time of origination plus other costs associated with processing the loan. Residential construction loans are underwritten pursuant to the same guidelines used for originating residential loans on existing properties.
Construction loans to builders or developers of one-to-four family residences generally carry terms of one year or less.
Construction loans to owner occupants are generally made in amounts up to 95% of the lesser of cost or appraised value, but no more than 90% of the loan proceeds can be disbursed until the building is completed. The Company generally limits the loan-to-value ratios on loans to builders to 80%. Prior to making a commitment to fund a construction loan, the Company requires a valuation of the property, financial data, and verification of the borrower's income. The Company obtains personal guarantees for substantially all of its construction loans to builders. Personal financial statements of guarantors are also obtained as part of the loan underwriting process. Construction loans are generally located in the Company's market area.
Construction loans are obtained principally through continued business from builders and developers who have previously borrowed from the Bank, as well as referrals from existing customers and walk-in customers. The application process includes a submission to the Bank of accurate plans, specifications and costs of the project to be constructed. These items are one factor utilized in the determination of the appraised value of the subject property to be built.
At December 31, 2015, construction loans totaled $38.1 million, an increase of $25.5 million from $12.6 million at December 31, 2014. Total construction loans included $15.1 million and $6.4 million of one-to-four family residential, $18.9 million and $1.1 million of multi-family residential, and $4.1 million and $5.1 million of commercial real estate loans at December 31, 2015 and December 31, 2014, respectively. The nature of construction loans makes them more difficult to evaluate and monitor than loans on existing buildings. The risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value upon completion of the project, experience of the builder, and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment or the possibility of having to make substantial investments to complete and sell the project. Because defaults in repayment may not occur during the construction period, it may be difficult to identify problem loans at an early stage. In these cases, the Company may be required to modify the terms of the loan. At December 31, 2015, $1.4 million of construction loans in the commercial real estate portfolio were non-performing compared to $1.5 million at December 31, 2014. The non-performing construction loans are loans to parties related through common ownership to construct model homes that when sold, or have a purchase agreement, are converted to performing loans and the interest is recognized.
Consumer Lending. The Company originates a variety of consumer loans, including home equity loans (open-end and closed-end), automobile, recreational vehicles, mobile home, lot loans, loans secured by deposit accounts and other loans for household and personal purposes. At December 31, 2015, the Company’s consumer loans totaled $64.4 million, an increase of $9.5 million from $54.9 million at December 31, 2014.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The Company's consumer loans are made at fixed or adjustable interest rates, with terms up to 20 years for secured loans and up to five years for unsecured loans.
The Company's home equity loans are written so that the total commitment amount, when combined with the balance of any other outstanding mortgage liens, generally do not exceed 90% of the appraised value of the property or an internally established market value. Internal market values are established using current market data, including recent sales data, and are typically lower than third party appraised values. The closed-end home equity loans are written with fixed or adjustable rates with terms up to 15 years. The open-end home equity lines are written with an adjustable rate and a 2-or 10-year draw period that requires interest only payments followed by a 10-year repayment period that fully amortizes the outstanding balance. The consumer may access the open-end home equity line by making a withdrawal at the Bank, transferring funds through our online or mobile banking products, or writing a check on the home equity line of credit account. Open and closed-end equity loans, which are generally secured by second mortgages on the borrower’s principal residence, represented 83.5% of the Company’s consumer loan portfolio at December 31, 2015.
The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and their ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles, recreational vehicles, or mobile homes. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. At December 31, 2015, $0.8 million of the consumer loan portfolio was non-performing, compared to $0.5 million at December 31, 2014.
Commercial Business Lending. The Company maintains a portfolio of commercial business loans to borrowers associated with the real estate industry as well as to retail, manufacturing operations, and professional firms. The Company's commercial business loans generally have terms ranging from six months to five years and may have either fixed or variable interest rates. The Company's commercial business loans generally include personal guarantees and are usually, but not always, secured by business assets such as inventory, equipment, leasehold interests in equipment, fixtures, real estate and accounts receivable. The underwriting process for commercial business loans includes consideration of the borrower's financial statements, tax returns, projections of future business operations, and inspection of the subject collateral, if any. The Company also purchases participation interests in commercial business loans originated outside of the Company’s market area from third party originators. These loans generally have underlying collateral of inventory or equipment and repayment periods of less than ten years. At December 31, 2015, the Company’s commercial business loans totaled $70.1 million, an increase of $13.0 million, from $57.1 million at December 31, 2014.
Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her income, and which are secured by real property with more easily ascertainable value, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Furthermore, the collateral securing the loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. At December 31, 2015 and December 31, 2014, there were $0.1 million of loans in the commercial business loan portfolio that were non-performing.
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related Securities
Real estate loans are generally originated by the Company's salaried loan officers. Mortgage and consumer loan officers may also receive a commission in addition to their base salary for meeting production and other branch goals. Loan applications are taken in all branch and loan production offices.
The Company originates both fixed and adjustable rate loans, however, its ability to originate loans is dependent upon the relative customer demand for loans in its markets. Demand for adjustable rate loans is affected by the interest rate environment. The number of adjustable rate loans remained low in 2015 due to the low long term fixed mortgage rates that existed during the year. The Company originated for its portfolio $12.1 million of one-to-four family adjustable rate loans during 2015, an increase of $10.1 million, from $2.0 million in 2014. The Company also originated for its portfolio $27.6 million of fixed rate one-to-four family loans during 2015, an increase of $16.0 million, from $11.6 million for 2014. The increase in the fixed and adjustable rate one-to-four family loans that were placed into the loan portfolio in 2015 is the result of the Bank offering more adjustable and short term fixed rate loan options to borrowers that did not meet certain secondary market criteria but did meet internal underwriting guidelines. This increased the amount of loans that were originated and placed into the Bank’s portfolio.
During the past several years, the Company has focused its portfolio loan origination efforts on commercial real estate, commercial business and consumer loans because these loans have terms to maturity and adjustable interest rate characteristics that are generally more beneficial to the Company in managing interest rate risk than traditional one-to-four family fixed rate conventional loans. The Company originated $141.1 million of multi-family and commercial real estate, commercial business and consumer loans (which excludes commercial real estate loans for construction or development) during 2015, an increase of $40.6 million, from originations of $100.5 million for 2014. The increase in originations primarily reflects the $17.6 million and $17.3 million increase in commercial business and commercial real estate loans, respectively, in 2015 compared to 2014. Consumer loan origination also increased $11.6 million between the periods, while multi-family loan origination decreased $5.9 million.
In order to supplement loan demand in the Company's market area and geographically diversify its loan portfolio, the Company, from time to time, purchases participations in real estate loans from selected sellers, with yields based upon then-current market rates. The Company reviews and underwrites all loans purchased to ensure that they meet the Company's underwriting standards and the seller generally continues to service the loans. The Company has generally not experienced higher losses or credit quality issues with purchased participations than other loans originated by the Company. The Company purchased $18.4 million of loans during 2015, an increase of $7.2 million, from $11.2 million during 2014. The commercial real estate and commercial business loans that were purchased have terms and interest rates that are similar in nature to the Company's originated commercial and business portfolio. See “Note 5 Loans Receivable, Net” and “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements in the Annual Report for more information on purchased loans (incorporated by reference in Item 8 of Part II of this Form 10-K).
The Company also acquired loans totaling $24.1 million in the acquisition of Kasson State Bank that was completed in the third quarter of 2015.
The Company has some mortgage-backed and related securities that are held, based on investment intent, in the "available for sale" portfolio. The Company acquired $5.5 million of mortgage-backed and related securities in 2015 in connection with the Kasson State Bank acquisition and did not acquire any mortgage-backed securities in 2014. No mortgage-backed securities were purchased in 2015, other than those acquired in the Kasson State Bank acquisition, because debt instruments issued by federal agencies, such as FNMA and FHLMC, continued to be more appealing to purchase due to their shorter duration given the low interest rate environment that continued to exist in 2015. In 2015, the Company sold $4.2 million of mortgage-backed securities that were acquired in the Kasson State Bank acquisition, due primarily to the small lot size of the individual securities. The Company did not sell any mortgage-backed securities in 2014. See – “Investment Activities” below.
The following table shows the loan and mortgage-backed and related securities origination, purchase, acquisition, sale and repayment activities of the Company for the periods indicated.
LOANS HELD FOR INVESTMENT
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Originations by type: |
||||||||||||
Adjustable rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
$ | 12,111 | 2,009 | 2,808 | ||||||||
- multi-family |
0 | 4,400 | 0 | |||||||||
- commercial |
21,489 | 28,181 | 831 | |||||||||
- construction or development |
19,920 | 9,812 | 10,971 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
18,852 | 10,487 | 15,348 | |||||||||
- commercial business |
19,538 | 8,123 | 18,319 | |||||||||
Total adjustable rate |
91,910 | 63,012 | 48,277 | |||||||||
Fixed rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
27,612 | 11,550 | 8,345 | |||||||||
- multi-family |
4,042 | 5,576 | 850 | |||||||||
- commercial |
47,306 | 23,316 | 24,555 | |||||||||
- construction or development |
38,299 | 39,274 | 6,368 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
11,610 | 8,331 | 8,731 | |||||||||
- commercial business |
18,281 | 12,130 | 21,541 | |||||||||
Total fixed rate |
147,150 | 100,177 | 70,390 | |||||||||
Total loans originated |
239,060 | 163,189 | 118,667 | |||||||||
Purchases: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
2,800 | 0 | 0 | |||||||||
- commercial |
7,501 | 6,003 | 1,550 | |||||||||
- construction or development |
5,500 | 0 | 150 | |||||||||
Non-real estate - |
||||||||||||
- commercial business |
2,600 | 5,196 | 1,437 | |||||||||
Total loans purchased |
18,401 | 11,199 | 3,137 | |||||||||
Acquisition: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
4,985 | 0 | 0 | |||||||||
- multi-family |
100 | 0 | 0 | |||||||||
- commercial |
7,712 | 0 | 0 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
5,226 | 0 | 0 | |||||||||
- commercial business |
6,037 | 0 | 0 | |||||||||
Total loans acquired |
24,060 | 0 | 0 | |||||||||
Sales, participations and repayments: |
||||||||||||
Real estate - |
||||||||||||
- commercial |
4,504 | 22,098 | 2,887 | |||||||||
- construction or development |
14,602 | 19,796 | 0 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
516 | 982 | 910 | |||||||||
- commercial business |
154 | 2,201 | 17,937 | |||||||||
Total sales |
19,776 | 45,077 | 21,734 | |||||||||
Transfers to loans held for sale |
8,125 | 13,243 | 12,183 | |||||||||
Principal repayments |
154,054 | 137,205 | 161,002 | |||||||||
Total reductions |
181,955 | 195,525 | 194,919 | |||||||||
Decrease in other items, net |
(303 | ) | (1,356 | ) | (6,609 | ) | ||||||
Net increase (decrease) |
$ | 99,263 | (22,493 | ) | (79,724 | ) |
LOANS HELD FOR SALE
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Originations by type: |
||||||||||||
Adjustable rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
$ | 0 | 0 | 0 | ||||||||
Total adjustable rate |
0 | 0 | 0 | |||||||||
Fixed rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
69,941 | 41,557 | 69,347 | |||||||||
Total fixed rate |
69,941 | 41,557 | 69,347 | |||||||||
Total loans originated |
69,941 | 41,557 | 69,347 | |||||||||
Sales and repayments: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
71,992 | 41,533 | 71,261 | |||||||||
Total sales |
71,992 | 41,533 | 71,261 | |||||||||
Transfers from loans held for investment |
(3,778 | ) | (557 | ) | (832 | ) | ||||||
Principal repayments |
24 | 7 | 0 | |||||||||
Total reductions |
68,238 | 40,983 | 70,429 | |||||||||
Net increase (decrease) |
$ | 1,703 | 574 | (1,082 | ) |
MORTGAGE-BACKED AND RELATED SECURITIES
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Purchases: |
||||||||||||
Fixed rate mortgage-backed securities |
2,343 | 0 | 0 | |||||||||
CMOs and REMICs (1) |
3,116 | 0 | 0 | |||||||||
Total purchases |
5,459 | 0 | 0 | |||||||||
Sales: |
||||||||||||
Fixed rate mortgage-backed securities |
2,174 | 0 | 0 | |||||||||
CMOs and REMICs |
2,021 | |||||||||||
Total sales |
4,195 | 0 | 0 | |||||||||
Principal repayments |
(1,890 | ) | (2,304 | ) | (5,208 | ) | ||||||
Net decrease |
$ | (626 | ) | (2,304 | ) | (5,208 | ) |
(1) Collateralized mortgage obligations and real estate mortgage investment conduits
Classified Assets and Delinquencies
Classification of Assets. Federal regulations require that each savings institution evaluate and classify its assets on a regular basis. In addition, in connection with examinations of savings institutions, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) examiners may identify problem assets and, if appropriate, require them to be classified with an adverse rating. There are three adverse classifications: substandard, doubtful, and loss. Assets classified as substandard have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have the weaknesses of those 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. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet of the institution is not warranted. Assets classified as substandard or doubtful require the institution to establish prudent specific allowances for loan losses. If an asset, or portion thereof, is classified as a loss, the institution charges off such amount. If an institution does not agree with an OCC or FDIC examiner's classification of an asset, it may appeal the determination to the OCC District Director or the appropriate FDIC personnel. On the basis of management's review of its assets, at December 31, 2015, the Bank classified a total of $21.8 million of its loans and real estate as follows:
(Dollars in thousands) |
One-to-Four Family |
Real Estate Construction or Development |
Commercial and Multi-family |
Consumer |
Commercial Business |
Real Estate |
Total |
|||||||||||||||||||||
Substandard |
$ | 2,889 | 1,436 | 12,864 | 639 | 1,533 | 2,045 | 21,406 | ||||||||||||||||||||
Doubtful |
55 | 0 | 0 | 52 | 0 | 0 | 107 | |||||||||||||||||||||
Loss |
0 | 0 | 0 | 286 | 0 | 0 | 286 | |||||||||||||||||||||
Total |
$ | 2,944 | 1,436 | 12,864 | 977 | 1,533 | 2,045 | 21,799 |
The Bank's classified assets consist of non-performing loans and loans and other assets of concern discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (incorporated by reference in Item 7 of Part II of this Form 10-K). See “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements in the Annual Report (incorporated by reference in Item 8 of Part II of this Form 10-K) for more information on classified assets. At December 31, 2015, these asset classifications were materially consistent with those of the OCC and FDIC.
Delinquency Procedures. Generally, the following procedures apply to delinquent one-to-four family real estate loans. When a borrower fails to make a required payment on a loan, the Company attempts to cure the delinquency by contacting the borrower. A late notice is sent on all loans over 16 days delinquent. Additional written and verbal contacts are made with the borrower between 30 and 60 days after the due date. If the loan is contractually delinquent 90 days, the Company sends a 30-day demand letter to the borrower and after the loan is contractually delinquent 120 days, institutes appropriate action to foreclose on the property. If foreclosed, the property is sold at a sheriff’s sale and may be purchased by the Company. Delinquent commercial real estate and commercial business loans are generally handled in a similar manner. The Company's procedures for repossession and sale of consumer collateral are subject to various requirements under state consumer protection laws.
Real estate acquired by the Company as a result of foreclosure is typically classified as real estate in judgment for six to twelve months and thereafter as real estate owned until it is sold. When property is acquired by foreclosure or deed in lieu of foreclosure, it is recorded as real estate owned at the estimated fair value less the estimated cost of disposition. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of fair value less disposition cost.
The following table sets forth the Company's loan delinquencies by loan type, amount and percentage of type at December 31, 2015 for loans past due 60 days or more.
Loans Delinquent For: |
Total Delinquent |
|||||||||||||||||||||||||||||||||||
60-89 Days |
90 Days and Over | Loans | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Number |
Amount |
Percent of Loan Category |
Number |
Amount |
Percent of Loan Category |
Number |
Amount |
Percent of Loan Category |
|||||||||||||||||||||||||||
One-to-four family real estate |
2 | $ | 130 | 0.14 | % | 5 | $ | 799 | 0.88 | % | 7 | 929 | 1.02 | % | ||||||||||||||||||||||
Non-residential real estate |
2 | 289 | 0.15 | 0 | 0 | 0.00 | 2 | 289 | 0.15 | |||||||||||||||||||||||||||
Consumer |
9 | 262 | 0.41 | 8 | 119 | 0.18 | 17 | 381 | 0.59 | |||||||||||||||||||||||||||
Total |
13 | $ | 681 | 0.14 | % | 13 | $ | 918 | 0.19 | % | 26 | $ | 1,599 | 0.34 | % |
Loans delinquent for 90 days and over are generally non-accruing and are included in the Company’s non-performing asset total at December 31, 2015.
Investment Activities
The Company utilizes the available for sale securities portfolio in virtually all aspects of asset/liability management. In making investment decisions, the Investment-Asset/Liability Committee considers, among other things, the yield and interest rate objectives, the credit risk position, and the Bank's liquidity and projected cash flow requirements.
Securities. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, the holding company of a federally chartered savings institution may also invest its assets in commercial paper, investment grade corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly.
The investment strategy of the Company has been directed toward a mix of high-quality assets (primarily government agency obligations) with short and intermediate terms to maturity. At December 31, 2015, the Company did not own any investment securities of a single issuer that exceeded 10% of the Company's stockholders’ equity other than U.S. government agency obligations.
The Bank invests a portion of its liquid assets in interest-earning overnight deposits of the Federal Home Loan Bank of Des Moines (FHLB) and the Federal Reserve Bank of Minneapolis. Other investments include high grade municipal bonds, corporate preferred stock, corporate equity securities, and medium-term (up to five years) federal agency notes. HMN invests in the same type of investment securities as the Bank. See “Note 4 Securities Available For Sale” in the Notes to Consolidated Financial Statements in the Annual Report for additional information regarding the Company's securities portfolio (incorporated by reference in Item 8 of Part II of this Form 10-K).
The following table sets forth the composition of the Company's securities portfolio, excluding mortgage-backed and related securities, at the dates indicated.
December 31, 2015 |
December 31, 2014 |
December 31, 2013 |
||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
||||||||||||||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agency obligations |
$ | 105,003 | (61 | ) | 104,942 | 71.4 |
% |
$ | 135,014 | (570 | ) | 134,444 | 75.1 |
% |
$ | 103,030 | (636 | ) | 102,394 | 46.4 |
% | |||||||||||||||||||||||||||
Municipal obligations |
3,991 | 11 | 4,002 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||
Corporate obligations |
340 | (6 | ) | 334 | 0.2 | |||||||||||||||||||||||||||||||||||||||||||
Corporate preferred stock |
700 | (350 | ) | 350 | 0.2 | 700 | (280 | ) | 420 | 0.2 | 700 | (420 | ) | 280 | 0.1 | |||||||||||||||||||||||||||||||||
Corporate equity (1) |
58 | 5 | 63 | 0.0 | 58 | 3 | 61 | 0.0 | 58 | 11 | 69 | 0.0 | ||||||||||||||||||||||||||||||||||||
Subtotal |
110,092 | 109,691 | 74.6 | 135,772 | 134,925 | 75.3 | 103,788 | 102,743 | 46.5 | |||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock (1) |
691 | 691 | 0.5 | 777 | 777 | 0.4 | 784 | 784 | 0.4 | |||||||||||||||||||||||||||||||||||||||
Total investment securities and Federal Home Loan Bank stock |
110,783 | 110,382 | 75.1 | 136,549 | 135,702 | 75.7 | 104,572 | 103,527 | 46.9 | |||||||||||||||||||||||||||||||||||||||
Average remaining life of investment securities excluding Federal Home Loan Bank stock (years) |
1.48 | 1.77 | 1.20 | |||||||||||||||||||||||||||||||||||||||||||||
Other interest earning assets: |
||||||||||||||||||||||||||||||||||||||||||||||||
Cash equivalents |
36,570 | 36,570 | 24.9 | 43,455 | 43,455 | 24.3 | 117,304 | 117,304 | 53.1 | |||||||||||||||||||||||||||||||||||||||
Total |
$ | 147,353 | 146,952 | 100.0 |
% |
$ | 180,004 | 179,157 | 100.0 |
% |
$ | 221,876 | 220,831 | 100.0 |
% | |||||||||||||||||||||||||||||||||
Average remaining life or term to repricing of investment securities and other interest earning assets, excluding Federal Home Loan Bank stock (years) |
1.11 | 1.34 | 0.56 |
(1)Average life assigned to corporate equity holdings is five years.
The composition and maturities of the investment securities portfolio, excluding FHLB stock, mortgage-backed and related securities, are indicated in the following table.
December 31, 2015 | ||||||||||||||||||||||||||||||||
1 Year or Less |
After 1 through 5 Years |
After 5 through 10 Years |
Over 10 Years |
No stated maturity |
Total Securities | |||||||||||||||||||||||||||
(Dollars in thousands) |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Adjusted To |
Fair Value |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||
U.S. government agency securities(1) |
$ | 39,995 | 65,008 | 0 | 0 | 0 | 105,003 | (61 | ) | 104,942 | ||||||||||||||||||||||
Municipal obligations |
1,023 | 2,232 | 736 | 0 | 0 | 3,991 | 11 | 4,002 | ||||||||||||||||||||||||
Corporate obligations |
0 | 0 | 340 | 0 | 0 | 340 | (6 | ) | 334 | |||||||||||||||||||||||
Corporate preferred stock |
0 | 0 | 0 | 700 | 0 | 700 | (350 | ) | 350 | |||||||||||||||||||||||
Corporate equity |
0 | 0 | 0 | 0 | 58 | 58 | 5 | 63 | ||||||||||||||||||||||||
Total |
$ | 41,018 | 67,240 | 1,076 | 700 | 58 | 110,092 | (401 | ) | 109,691 | ||||||||||||||||||||||
Weighted average yield (2) |
1.52 |
% |
1.41 |
% |
3.11 |
% |
4.73 |
% |
1.80 |
% |
1.49 |
% |
(1) |
Callable U.S. government agency securities maturity date based on first available call date that the security is anticipated to be called. |
(2) |
Yields are computed on a tax equivalent basis. . |
Mortgage-Backed and Related Securities. In order to supplement loan production and achieve its asset/liability management goals, the Company invests in mortgage-backed and related securities. All of the mortgage-backed and related securities owned by the Company are issued, insured or guaranteed either directly or indirectly by a U.S. Government Agency and are considered to be investment grade securities. The Company had $2.3 million of mortgage-backed and related securities classified as available for sale at December 31, 2015, compared to $2.9 million at December 31, 2014 and $5.2 million at December 31, 2013. The decrease in mortgage-backed securities in 2015 and 2014 is the result of fewer purchases by the Company and normal repayments. No mortgage-backed securities were purchased in 2015, other than those acquired in the Kasson State Bank acquisition, and none were purchased in 2014. Few mortgage-backed securities were purchased because debt instruments issued by federal agencies, such as FNMA and FHLMC, continued to be more appealing to purchase due to their shorter duration given the low interest rate environment that existed in 2015 and 2014.
The contractual maturities of the mortgage-backed and related securities portfolio without any prepayment assumptions at December 31, 2015 are as follows:
(Dollars in thousands) |
5 Years or Less |
5 to 10 Years |
10 to 20 Years |
Over 20 Years |
Dec. 31, 2015 Balance Outstanding |
|||||||||||||||
Securities available for sale: |
||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
$ | 759 | 0 | 0 | 0 | 759 | ||||||||||||||
Federal National Mortgage Association |
747 | 0 | 0 | 0 | 747 | |||||||||||||||
Collateralized Mortgage Obligations |
0 |