hmnf20160201_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, 2016

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, 2016

 

Common stock, $0.01 par value

    4,486,299  

 

 

 
1

 

 

HMN FINANCIAL, INC.

CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION  
   

 

Item 1:

Financial Statements

 
     
 

Consolidated Balance Sheets at March 31, 2016 and December 31, 2015

3

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

4

     
 

Consolidated Statement of Stockholders' Equity for the Three Month Period Ended March 31, 2016

5

     
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2:

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

26

     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

36

     

Item 4:

Controls and Procedures

37

     

PART II – OTHER INFORMATION

 
     

Item 1:

Legal Proceedings

38

     

Item 1A:

Risk Factors

38

     

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

38

     

Item 3:

Defaults Upon Senior Securities

38

     

Item 4:

Mine Safety Disclosures

38

     

Item 5:

Other Information

38

     

Item 6:

Exhibits

38

     

Signatures

39

 

 
2

 

 

PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

                   
   

March 31,

   

December 31,

   

(Dollars in thousands)

 

2016

   

2015

   
   

(unaudited)

           

Assets

                 

Cash and cash equivalents

  $ 13,766       39,782    

Securities available for sale:

                 

Mortgage-backed and related securities (amortized cost $1,938 and $2,237)

    1,984       2,283    

Other marketable securities (amortized cost $104,016 and $110,092)

    103,844       109,691    
      105,828       111,974    
                   

Loans held for sale

    4,467       3,779    

Loans receivable, net

    490,260       463,185    

Accrued interest receivable

    2,134       2,254    

Real estate, net

    1,668       2,045    

Federal Home Loan Bank stock, at cost

    770       691    

Mortgage servicing rights, net

    1,456       1,499    

Premises and equipment, net

    7,583       7,469    

Core deposit intangible

    374       393    

Prepaid expenses and other assets

    1,268       1,417    

Deferred tax asset, net

    8,582       8,673    

Total assets

  $ 638,156       643,161    
                   

Liabilities and Stockholders’ Equity

                 

Deposits

  $ 551,506       559,387    

Other borrowings

    9,000       9,000    

Accrued interest payable

    230       242    

Customer escrows

    1,558       830    

Accrued expenses and other liabilities

    4,175       4,057    

Total liabilities

    566,469       573,516    

Commitments and contingencies

                 

Stockholders’ equity:

                 

Serial preferred stock ($.01 par value):

                 

Authorized 500,000 shares; issued shares 0

    0       0    

Common stock ($.01 par value):

                 

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

    91       91    

Additional paid-in capital

    50,380       50,388    

Retained earnings, subject to certain restrictions

    82,310       80,536    

Accumulated other comprehensive loss

    (76 )     (214 )  

Unearned employee stock ownership plan shares

    (2,368 )     (2,417 )  

Treasury stock, at cost 4,642,363 and 4,645,769 shares

    (58,650 )     (58,739 )  

Total stockholders’ equity

    71,687       69,645    

Total liabilities and stockholders’ equity

  $ 638,156       643,161    

 


 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)       2016       2015  

Interest income:

                 

Loans receivable

  $ 6,094       4,354  

Securities available for sale:

               

Mortgage-backed and related

    20       28  

Other marketable

    372       486  

Cash equivalents

    38       15  

Other

    1       1  

Total interest income

    6,525       4,884  
                   

Interest expense:

               

Deposits

    226       248  

Other borrowings

    148       78  

Total interest expense

    374       326  

Net interest income

    6,151       4,558  

Provision for loan losses

    (732 )     0  

Net interest income after provision for loan losses

    6,883       4,558  
                   

Non-interest income:

               

Fees and service charges

    779       782  

Loan servicing fees

    261       261  

Gain on sales of loans

    487       285  

Other

    228       268  

Total non-interest income

    1,755       1,596  
                   

Non-interest expense:

               

Compensation and benefits

    3,695       3,448  

Gain on real estate owned

    (349 )     (112 )

Occupancy and equipment

    990       879  

Data processing

    273       231  

Professional services

    251       217  

Other

    831       770  

Total non-interest expense

    5,691       5,433  

Income before income tax expense

    2,947       721  

Income tax expense

    1,173       260  

Net income

    1,774       461  

Preferred stock dividends

    0       (108 )

Net income available to common shareholders

  $ 1,774       353  

Other comprehensive income, net of tax

  $ 138       395  

Comprehensive income attributable to common shareholders

  $ 1,912       748  
Basic earnings per common share   $ 0.43       0.09  
Diluted earnings per common share   $ 0.38       0.08  

 

 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, 2016

(unaudited)

 

                                   

Unearned

                 
                                   

Employee

                 
                           

Accumulated

   

Stock

           

Total

 
           

Additional

           

Other

   

Ownership

           

Stock-

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Plan

   

Treasury

   

Holders’

 

(Dollars in thousands)

 

Stock

   

Capital

   

Earnings

   

Income/(Loss)

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2015

  $ 91       50,388       80,536       (214 )     (2,417 )     (58,739 )     69,645  

Net income

                    1,774                               1,774  

Other comprehensive income

                            138                       138  

Stock compensation expense

            20                                       20  

Restricted stock awards

            (89 )                             89       0  

Amortization of restricted stock awards

            49                                       49  

Earned employee stock ownership plan shares

            12                       49               61  

Balance, March 31, 2016

  $ 91       50,380       82,310       (76 )     (2,368 )     (58,650 )     71,687  

 

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)

 

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 1,774       461  

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

               

Provision for loan losses

    (732 )     0  

Depreciation

    195       161  

Amortization of (discounts) premiums, net

    (8 )     6  

Amortization of deferred loan fees

    (383 )     (31 )

Amortization of core deposit intangible

    19       0  

Amortization of other purchased loan fair value adjustments

    (171 )     0  

Amortization of mortgage servicing rights and servicing costs

    132       143  

Capitalized mortgage servicing rights

    (89 )     (84 )

Gain on sales of real estate and premises

    (349 )     (112 )

Gain on sales of loans

    (487 )     (285 )

Proceeds from sale of loans held for sale

    16,494       12,061  

Disbursements on loans held for sale

    (12,303 )     (12,027 )

Amortization of restricted stock awards

    49       67  

Amortization of unearned ESOP shares

    49       48  

Earned employee stock ownership shares priced above original cost

    12       16  

Stock option compensation expense

    20       0  

Decrease (increase) in accrued interest receivable

    120       (228 )

(Decrease) increase in accrued interest payable

    (12 )     72  

Decrease in other assets

    205       50  

Increase in other liabilities

    77       209  

Other, net

    16       9  

Net cash provided by operating activities

    4,628       536  

Cash flows from investing activities:

               

Principal collected on securities available for sale

    307       409  

Proceeds collected on maturities of securities available for sale

    56,020       18,000  

Purchases of securities available for sale

    (49,968 )     (34,070 )

Purchase of Federal Home Loan Bank stock

    (79 )     0  

Redemption of Federal Home Loan Bank stock

    0       86  

Proceeds from sales of real estate

    1,305       221  

Net (increase) decrease in loans receivable

    (30,779 )     4,431  

Purchases of premises and equipment

    (309 )     (99 )

Net cash used by investing activities

    (23,503 )     (11,022 )

Cash flows from financing activities:

               

Decrease in deposits

    (7,869 )     (13,428 )

Redemption of preferred stock

    0       (10,000 )

Dividends to preferred stockholders

    0       (225 )

Proceeds from borrowings

    0       13,000  

Repayment of borrowings

    0       (3,000 )

Increase in customer escrows

    728       441  

Net cash used by financing activities

    (7,141 )     (13,212 )

Decrease in cash and cash equivalents

    (26,016 )     (23,698 )

Cash and cash equivalents, beginning of period

    39,782       46,634  

Cash and cash equivalents, end of period

  $ 13,766       22,936  

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 387       254  

Cash paid for income taxes

    156       135  

Supplemental noncash flow disclosures:

               

Loans transferred to loans held for sale

    4,408       342  

Transfer of loans to real estate

    591       0  

 

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 is currently inactive, but has acted 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.

 

Certain amounts in the consolidated financial statements for the prior year have been reclassified to conform to the current year presentation.

 

(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, 2016 are not necessarily indicative of the results which may be expected for the entire year.

 

(3) New Accounting Standards

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require, among other things, equity investments to be measured at fair value with changes in fair value recognized in net income and that public business entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments also eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU is intended to reduce diversity in practice and is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this ASU in the first quarter of 2018 is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in the ASU create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between previous GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendment requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply that will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified. The amendments in the ASU, for public business entities, are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of this ASU in the first quarter of 2019 is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

 
7

 

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this ASU affect all entities that issue share-based payment awards to their employees. The amendments are intended to simplify the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU, for public business entities, are effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The adoption of this ASU in the first quarter of 2017 is not anticipated to have a material impact on the Company’s consolidated financial statements.

 

(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.

 

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, 2016 and December 31, 2015.

 

   

Carrying value at March 31, 2016

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 105,828       0       105,828       0  

Mortgage loan commitments

    93       0       93       0  

Total

  $ 105,921       0       105,921       0  
                                 
   

Carrying value at December 31, 2015

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 111,974       0       111,974       0  

Mortgage loan commitments

    36       0       36       0  

Total

  $ 112,010       0       112,010       0  
                                 

 

 
8

 

 

There were no transfers between Levels 1, 2, or 3 during the three months ended March 31, 2016.

 

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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.

 

               
   

Carrying value at March 31, 2016

         

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Three months ended

March 31, 2016

total gains (losses)

 

Loans held for sale

  $ 4,467       0       4,467       0       16  

Mortgage servicing rights, net

    1,456       0       1,456       0       0  

Loans(1)

    4,555       0       4,555       0       (65 )

Real estate, net(2)

    1,668       0       1,668       0       (253 )

Total

  $ 12,146       0       12,146       0       (302 )
               
   

Carrying value at December 31, 2015

         

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Year ended

December 31, 2015 total gains (losses)

 

Loans held for sale

  $ 3,779       0       3,779       0       3  

Mortgage servicing rights, net

    1,499       0       1,499       0       0  

Loans(1)

    4,790       0       4,790       0       (373 )

Real estate, net(2)

    2,045       0       2,045       0       (262 )

Total

  $ 12,113       0       12,113       0       (632 )

 

(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.

 

(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 5, have been included in the following table for March 31, 2016 and December 31, 2015. 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, 2016 and December 31, 2015 are shown below.

 

 
9

 

 

            March 31, 2016     December 31, 2015  
                    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   $ 13,766       13,766       13,766                         39,782       39,782       39,782                    

Securities available for sale

    105,828       105,828               105,828                 111,974       111,974               111,974            

Loans held for sale

    4,467       4,467               4,467                 3,779       3,779               3,779            

Loans receivable, net

    490,260       487,952               487,952                 463,185       458,539               458,539            

Federal Home Loan Bank stock

    770       770               770                 691       691               691            

Accrued interest receivable

    2,134       2,134               2,134                 2,254       2,254               2,254            

Financial liabilities:

                                                                                   

Deposits

    551,506       551,206               551,206                 559,387       558,731               558,731            

Other borrowings

    9,000       9,022               9,022                 9,000       9,000               9,000            

Accrued interest payable

    230       230               230                 242       242               242            

Off-balance sheet financial instruments:

                                                                                   
Commitments to extend credit     93       93                         199,870       36       36                         165,949  
Commitments to sell loans     (73 )     (73 )                       11,546       (26 )     (26 )                       8,071  

 

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.

 

Federal Home Loan Bank Stock

The carrying amount of Federal Home Loan Bank (FHLB) stock approximates its fair value.

 

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.

 

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.

 

 
10

 

 

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)

 

2016

   

2015

 

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

  $ 229       91       138       655       260       395  

Other comprehensive income

  $ 229       91       138       655       260       395  

 

 
11

 

  

(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, 2016 and December 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

 

March 31, 2016

                                                               

Collateralized mortgage
obligations:

                                                               

Federal National Mortgage Association (FNMA)

    1     $ 345       (3 )     0     $ 0       0     $ 345       (3 )

Other

    2       34       (7 )     0       0       0       34       (7 )

Other marketable securities:

                                                               

U.S. Government agency obligations

    2       9,996       (4 )     0       0       0       9,996       (4 )

Municipal obligations

    5       549       (3 )     0       0       0       549       (3 )

Corporate preferred stock

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

Total temporarily impaired securities

    10     $ 10,924       (17 )     1     $ 350       (350 )   $ 11,274       (367 )

 

   

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

 

December 31, 2015

                                                               

Collateralized mortgage obligations:

                                                               

Federal National Mortgage Association(FNMA)

    1     $ 346       (1 )     0     $ 0       0     $ 346       (1 )

Other

    2       34       (8 )     0       0       0       34       (8 )

Other marketable securities:

                                                               

U.S. Government agency obligations

    9       44,878       (129 )     0       0       0       44,878       (129 )

Municipal obligations

    12       2,010       (7 )     0       0       0       2,010       (7 )

Corporate obligations

    1       334       (6 )     0       0       0       334       (6 )

Corporate preferred stock

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

Total temporarily impaired securities

    25     $ 47,602       (151 )     1     $ 350       (350 )   $ 47,952       (501 )

 

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, 2016 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. Since January 2015, the issuer has deferred its scheduled interest payment as allowed by the terms of the security agreement. The issuer’s subsidiary bank has incurred operating losses in the past due to increased provisions for loan losses but had a modest net income in 2015 and continued to meet 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, 2016. 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 securities and that the decrease in the market value is primarily due to a lack of liquidity in the market for trust preferred securities and the deferral of interest by the issuer. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.

 

 
12

 

 

A summary of securities available for sale at March 31, 2016 and December 31, 2015 is as follows:

 

(Dollars in thousands)

 

Amortized

cost

   

Gross unrealized

gains

   

Gross unrealized

losses

   

Fair value

 

March 31, 2016

                               

Mortgage-backed securities:

                               

Federal Home Loan Mortgage Corporation (FHLMC)

  $ 605       18       0       623  

Federal National Mortgage Association (FNMA)

    610       26       0       636  

Collateralized mortgage obligations:

                               

FHLMC

    682       12       (3 )     691  

Other

    41       0       (7 )     34  
      1,938       56       (10 )     1,984  

Other marketable securities:

                               

U.S. Government agency obligations

    99,980       122       (4 )     100,098  

Municipal obligations

    2,962       29       ( 3 )     2,988  

Corporate obligations

    316       16       0       332  

Corporate preferred stock

    700       0       (350 )     350  

Corporate equity

    58       18       0       76  
      104,016       185       (357 )     103,844  
    $ 105,954       241       (367 )     105,828  

 

(Dollars in thousands)

 

Amortized

cost

   

Gross unrealized

gains

   

Gross unrealized

losses

   

Fair value

 

December 31, 2015

                               

Mortgage-backed securities:

                               

Federal Home Loan Mortgage Corporation (FHLMC)

  $ 728       31       0       759  

Federal National Mortgage Association (FNMA)

    725       22       0       747  

Collateralized mortgage obligations:

                               

FHLMC

    742       2       (1 )     743  

Other

    42       0       (8 )     34  
      2,237       55       (9 )     2,283  

Other marketable securities:

                               

U.S. Government agency obligations

    105,003       68       (129 )     104,942  

Municipal obligations

    3,991       18       (7 )     4,002  

Corporate obligations

    340       0       (6 )     334  

Corporate preferred stock

    700       0       (350 )     350  

Corporate equity

    58       5       0       63  
      110,092       91       (492 )     109,691  
    $ 112,329       146       (501 )     111,974  

 

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2016 based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.

 

 
13

 

 

 

(Dollars in thousands)

 

Amortized

Cost

   

Fair

Value

 

Due less than one year

  $ 20,914       20,961  

Due after one year through five years

    83,849       84,005  

Due after five years through ten years

    402       405  

Due after ten years

    731       381  

No stated maturity

    58       76  

Total

  $ 105,954       105,828  
                 

 

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, 2016 and December 31, 2015 is as follows:

 

(Dollars in thousands)

 

March 31,

2016

   

December 31, 2015

 

1-4 family

  $ 95,247       90,945  

Commercial real estate:

               

Real estate rental and leasing

    145,224       125,376  

Other

    122,241       121,977  
      267,465       247,353  

Consumer

    66,782       64,415  

Commercial business:

               

Transportation industry

    9,440       9,349  

Other

    60,551       60,757  
      69,991       70,106  

Total loans

    499,485       472,819  

Less:

               

Unamortized discounts

    18       16  

Net deferred loan costs

    (156 )     (91 )

Allowance for loan losses

    9,363       9,709  

Total loans receivable, net

  $ 490,260       463,185  

 

 
14

 

 

 

(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, 2015

  $ 990       6,078       1,200       1,441       9,709  

Provision for losses

    60       (823 )     184       (153 )     (732 )

Charge-offs

    0       0       (7 )     0       (7 )

Recoveries

    0       182       18       193       393  

Balance, March 31, 2016

  $ 1,050       5,437       1,395       1,481       9,363  
                                         

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  
                                         

Allocated to:

                                       

FAS 114 reserves

  $ 223       296       370       120       1,009  

General reserves

    767       5,782