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 September 30, 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 October 26, 2016 | |
Common stock, $0.01 par value |
4,488,923 |
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION |
| ||
|
|
|
|
|
|
|
Page |
|
|
|
|
|
Item 1: |
Financial Statements |
|
|
|
|
|
|
|
Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 |
3 |
|
|
Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2016 and 2015 |
4 |
|
|
Consolidated Statement of Stockholders' Equity for the Nine-Month Period Ended September 30, 2016 |
5 |
|
|
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 |
6 |
|
|
Notes to Consolidated Financial Statements |
7 |
|
Item 2: |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
25 |
|
Item 3: |
Quantitative and Qualitative Disclosures about Market Risk |
36 |
|
Item 4: |
Controls and Procedures |
36 |
|
|
|
|
PART II - OTHER INFORMATION |
| ||
|
Item 1: |
Legal Proceedings |
37 |
|
Item 1A: |
Risk Factors |
37 |
|
Item 2: |
Unregistered Sales of Equity Securities and Use of Proceeds |
37 |
|
Item 3: |
Defaults Upon Senior Securities |
37 |
Item 4: | Mine Safety Disclosures | 37 | |
Item 5: | Other Information | 37 | |
Item 6: | Exhibits | 37 | |
Signatures | 38 |
Part I – FINANCIAL INFORMATION |
Item 1: Financial Statements |
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, |
December 31, |
|||||||
(Dollars in thousands) |
2016 |
2015 |
||||||
(unaudited) |
||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 34,594 | 39,782 | |||||
Securities available for sale: |
||||||||
Mortgage-backed and related securities (amortized cost $1,274 and $2,237) |
1,306 | 2,283 | ||||||
Other marketable securities (amortized cost $78,979 and $110,092) |
78,810 | 109,691 | ||||||
80,116 | 111,974 | |||||||
Loans held for sale |
5,879 | 3,779 | ||||||
Loans receivable, net |
540,583 | 463,185 | ||||||
Accrued interest receivable |
2,235 | 2,254 | ||||||
Real estate, net |
815 | 2,045 | ||||||
Federal Home Loan Bank stock, at cost |
770 | 691 | ||||||
Mortgage servicing rights, net |
1,537 | 1,499 | ||||||
Premises and equipment, net |
8,119 | 7,469 | ||||||
Goodwill |
802 | 0 | ||||||
Core deposit intangible |
478 | 393 | ||||||
Prepaid expenses and other assets |
1,153 | 1,417 | ||||||
Deferred tax asset, net |
8,586 | 8,673 | ||||||
Total assets |
$ | 685,667 | 643,161 | |||||
Liabilities and Stockholders’ Equity |
||||||||
Deposits |
$ | 592,243 | 559,387 | |||||
Other borrowings |
9,000 | 9,000 | ||||||
Accrued interest payable |
238 | 242 | ||||||
Customer escrows |
1,878 | 830 | ||||||
Accrued expenses and other liabilities |
7,474 | 4,057 | ||||||
Total liabilities |
610,833 | 573,516 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Serial preferred stock ($.01 par value): authorized 500,000 shares; issued and outstanding shares 0 |
0 | 0 | ||||||
Common stock ($.01 par value): authorized 16,000,000; issued shares 9,128,662 |
91 | 91 | ||||||
Additional paid-in capital |
50,476 | 50,388 | ||||||
Retained earnings, subject to certain restrictions |
85,202 | 80,536 | ||||||
Accumulated other comprehensive loss |
(83 | ) | (214 | ) | ||||
Unearned employee stock ownership plan shares |
(2,271 | ) | (2,417 | ) | ||||
Treasury stock, at cost 4,639,739 and 4,645,769 shares |
(58,581 | ) | (58,739 | ) | ||||
Total stockholders’ equity |
74,834 | 69,645 | ||||||
Total liabilities and stockholders’ equity |
$ | 685,667 | 643,161 |
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(Dollars in thousands, except per share data) |
2016 |
2015 |
2016 |
2015 |
||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | $ | 6,627 | 4,860 | 19,495 | 13,751 | |||||||||||
Securities available for sale: |
||||||||||||||||
Mortgage-backed and related |
12 | 35 | 48 | 87 | ||||||||||||
Other marketable |
295 | 468 | 1,018 | 1,455 | ||||||||||||
Cash equivalents |
18 | 26 | 73 | 48 | ||||||||||||
Other |
2 | 1 | 4 | 3 | ||||||||||||
Total interest income |
6,954 | 5,390 | 20,638 | 15,344 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
255 | 231 | 727 | 705 | ||||||||||||
Advances and other borrowings |
149 | 166 | 446 | 409 | ||||||||||||
Total interest expense |
404 | 397 | 1,173 | 1,114 | ||||||||||||
Net interest income |
6,550 | 4,993 | 19,465 | 14,230 | ||||||||||||
Provision for loan losses |
80 | (56 | ) | (271 | ) | (239 | ) | |||||||||
Net interest income after provision for loan losses |
6,470 | 5,049 | 19,736 | 14,469 | ||||||||||||
Non-interest income: |
||||||||||||||||
Fees and service charges |
901 | 863 | 2,553 | 2,489 | ||||||||||||
Loan servicing fees |
280 | 262 | 812 | 778 | ||||||||||||
Gain on sales of loans |
656 | 613 | 1,848 | 1,428 | ||||||||||||
Other |
310 | 493 | 791 | 997 | ||||||||||||
Total non-interest income |
2,147 | 2,231 | 6,004 | 5,692 | ||||||||||||
Non-interest expense: |
||||||||||||||||
Compensation and benefits |
3,723 | 3,299 | 11,016 | 10,285 | ||||||||||||
(Gains) losses on real estate owned |
(11 | ) | 168 | (435 | ) | 121 | ||||||||||
Occupancy and equipment |
998 | 936 | 2,994 | 2,741 | ||||||||||||
Data processing |
299 | 254 | 853 | 753 | ||||||||||||
Professional services |
252 | 273 | 871 | 782 | ||||||||||||
Other |
940 | 1,039 | 2,626 | 2,518 | ||||||||||||
Total non-interest expense |
6,201 | 5,969 | 17,925 | 17,200 | ||||||||||||
Income before income tax expense |
2,416 | 1,311 | 7,815 | 2,961 | ||||||||||||
Income tax expense |
1,002 | 491 | 3,149 | 1,095 | ||||||||||||
Net income |
1,414 | 820 | 4,666 | 1,866 | ||||||||||||
Preferred stock dividends |
0 | 0 | 0 | (108 | ) | |||||||||||
Net income available to common shareholders |
1,414 | 820 | 4,666 | 1,758 | ||||||||||||
Other comprehensive income (loss), net of tax |
(51 | ) | 275 | 131 | 481 | |||||||||||
Comprehensive income available to common shareholders |
$ | 1,363 | 1,095 | 4,797 | 2,239 | |||||||||||
Basic earnings per share |
$ | 0.34 | 0.20 | 1.12 | 0.43 | |||||||||||
Diluted earnings per share |
$ | 0.30 | 0.18 | 0.99 | 0.38 | |||||||||||
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine-Month Period Ended September 30, 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 |
4,666 | 4,666 | ||||||||||||||||||||||||||
Other comprehensive income |
131 | 131 | ||||||||||||||||||||||||||
Stock compensation expense |
59 | 59 | ||||||||||||||||||||||||||
Restricted stock awards |
(158 | ) | 158 | 0 | ||||||||||||||||||||||||
Amortization of restricted stock awards |
134 | 134 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares |
53 | 146 | 199 | |||||||||||||||||||||||||
Balance, September 30, 2016 |
$ | 91 | 50,476 | 85,202 | (83 | ) | (2,271 | ) | (58,581 | ) | 74,834 |
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30, |
||||||||
(Dollars in thousands) |
2016 |
2015 |
||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 4,666 | 1,866 | |||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Provision for loan losses |
(271 | ) | (239 | ) | ||||
Depreciation |
619 | 516 | ||||||
Amortization of discounts, net |
(9 | ) | (10 | ) | ||||
Amortization of deferred loan fees |
(906 | ) | (194 | ) | ||||
Amortization of core deposit intangible |
68 | 9 | ||||||
Amortization of other purchased fair value adjustments |
(430 | ) | (112 | ) | ||||
Amortization of mortgage servicing rights and servicing costs |
437 | 427 | ||||||
Capitalized mortgage servicing rights |
(475 | ) | (366 | ) | ||||
Losses on sales of investments |
9 | 0 | ||||||
(Gain) loss on sales of real estate |
(435 | ) | 121 | |||||
Gain on sales of loans |
(1,848 | ) | (1,428 | ) | ||||
Proceeds from sale of loans held for sale |
68,442 | 55,995 | ||||||
Disbursements on loans held for sale |
(56,644 | ) | (50,952 | ) | ||||
Amortization of restricted stock awards |
134 | 387 | ||||||
Amortization of unearned ESOP shares |
146 | 145 | ||||||
Earned employee stock ownership shares priced above original cost |
53 | 43 | ||||||
Stock option compensation expense |
59 | 0 | ||||||
Decrease (increase) in accrued interest receivable |
127 | (254 | ) | |||||
(Decrease) increase in accrued interest payable |
(7 | ) | 148 | |||||
Decrease in other assets |
395 | 195 | ||||||
Increase in other liabilities |
3,312 | 3,252 | ||||||
Other, net |
15 | 33 | ||||||
Net cash provided by operating activities |
17,457 | 9,582 | ||||||
Cash flows from investing activities: |
||||||||
Principal collected on securities available for sale |
986 | 1,257 | ||||||
Proceeds collected on maturities of securities available for sale |
136,020 | 118,570 | ||||||
Purchases of securities available for sale |
(104,968 | ) | (109,070 | ) | ||||
Purchase of Federal Home Loan Bank Stock |
(1,079 | ) | (119 | ) | ||||
Redemption of Federal Home Loan Bank Stock |
1,000 | 205 | ||||||
Proceeds from sales of real estate |
2,250 | 772 | ||||||
Net increase in loans receivable |
(76,593 | ) | (49,252 | ) | ||||
Gain on acquisition |
0 | (289 | ) | |||||
Acquisition payment (net of cash acquired) |
6,080 | 4,816 | ||||||
Purchases of premises and equipment |
(1,269 | ) | (570 | ) | ||||
Net cash used by investing activities |
(37,573 | ) | (33,680 | ) | ||||
Cash flows from financing activities: |
||||||||
Increase (decrease) in deposits |
13,898 | (12,438 | ) | |||||
Redemption of preferred stock |
0 | (10,000 | ) | |||||
Dividends to preferred stockholders |
0 | (225 | ) | |||||
Proceeds from borrowings |
25,000 | 41,000 | ||||||
Repayment of borrowings |
(25,000 | ) | (31,000 | ) | ||||
Increase in customer escrows |
1,030 | 486 | ||||||
Net cash provided (used) by financing activities |
14,928 | (12,177 | ) | |||||
Decrease in cash and cash equivalents |
(5,188 | ) | (36,275 | ) | ||||
Cash and cash equivalents, beginning of period |
39,782 | 46,634 | ||||||
Cash and cash equivalents, end of period |
$ | 34,594 | 10,359 | |||||
Supplemental cash flow disclosures: |
||||||||
Cash paid for interest |
$ | 1,176 | 954 | |||||
Cash paid for income taxes |
436 | 191 | ||||||
Supplemental noncash flow disclosures: |
||||||||
Loans transferred to loans held for sale |
12,085 | 6,701 | ||||||
Transfer of loans to real estate |
591 | 110 |
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
September 30, 2016 and 2015
(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 (GAAP). 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 nine-month period ended September 30, 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 lease 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.
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.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. The amendments in this ASU, for public business entities that are U. S. Securities and Exchange Commission (SEC) filers, are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. 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. Management is still in the process of evaluating the impact that the adoption of this ASU in the first quarter of 2020 will have on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU affect all entities that are required to present a statement of cash flows under Topic 230 and address the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interest in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This ASU is intended to reduce diversity in practice and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. Upon adoption, the amendments should be applied using a retrospective transition method to each period presented. 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.
(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 and liabilities of the Company for which fair values are determined on a recurring basis as of September 30, 2016 and December 31, 2015.
Carrying value at September 30, 2016 |
||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Securities available for sale |
$ | 80,116 | 0 | 80,116 | 0 | |||||||||||
Mortgage loan commitments |
167 | 0 | 167 | 0 | ||||||||||||
Total |
$ | 80,283 | 0 | 80,283 | 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 | |||||||||||
There were no transfers between Levels 1, 2, or 3 during the three or nine-month periods ended September 30, 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 GAAP. These adjustments to fair value usually result from the application of the lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in the third quarter of 2016 that were still held at September 30, 2016, 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 September 30, 2016 and December 31, 2015.
Carrying value at September 30, 2016 |
||||||||||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
Three months ended September 30, 2016 Total gains (losses) |
Nine months ended September 30, 2016 Total gains (losses) |
||||||||||||||||||
Loans held for sale |
$ | 5,879 | 0 | 5,879 | 0 | 24 | 72 | |||||||||||||||||
Mortgage servicing rights |
1,537 | 0 | 1,537 | 0 | 0 | 0 | ||||||||||||||||||
Loans (1) |
5,091 | 0 | 5,091 | 0 | (371 | ) | (553 | ) | ||||||||||||||||
Real estate, net (2) |
815 | 0 | 815 | 0 | 0 | (241 | ) | |||||||||||||||||
Total |
$ | 13,322 | 0 | 13,322 | 0 | (347 | ) | (722 | ) | |||||||||||||||
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 |
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 the carrying value and related specific reserves on loans for which adjustments are based on the appraised value of the collateral. The carrying value of loans fully charged-off is zero. |
(2) |
Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. |
(5) Fair Value of Financial Instruments
GAAP requires interim reporting period disclosure about the fair value of financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value hierarchy level for each asset and liability, as defined in note 4, have been included in the following table for September 30, 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 September 30, 2016 and December 31, 2015 are shown in the following table.
September 30, 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 |
$ | 34,594 | 34,594 | 34,594 | 39,782 | 39,782 | 39,782 | |||||||||||||||||||||||||||||||||||
Securities available for sale |
80,116 | 80,116 | 80,116 | 111,974 | 111,974 | 111,974 | ||||||||||||||||||||||||||||||||||||
Loans held for sale |
5,879 | 5,879 | 5,879 | 3,779 | 3,779 | 3,779 | ||||||||||||||||||||||||||||||||||||
Loans receivable, net |
540,583 | 542,779 | 542,779 | 463,185 | 458,539 | 458,539 | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock |
770 | 770 | 770 | 691 | 691 | 691 | ||||||||||||||||||||||||||||||||||||
Accrued interest receivable |
2,235 | 2,235 | 2,235 | 2,254 | 2,254 | 2,254 | ||||||||||||||||||||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||||||||||||||||||||||||
Deposits |
592,243 | 592,565 | 592,565 | 559,387 | 558,731 | 558,731 | ||||||||||||||||||||||||||||||||||||
Other borrowings |
9,000 | 9,010 | 9,010 | 9,000 | 9,000 | 9,000 | ||||||||||||||||||||||||||||||||||||
Accrued interest payable |
238 | 238 | 238 | 242 | 242 | 242 | ||||||||||||||||||||||||||||||||||||
Off-balance sheet financial |
||||||||||||||||||||||||||||||||||||||||||
Commitments to extend credit |
167 | 167 | 237,879 | 36 | 36 | 165,949 | ||||||||||||||||||||||||||||||||||||
Commitments to sell loans |
(138 | ) | (138 | ) | 18,251 | (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.
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 (Loss)
Other comprehensive income (loss) is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income is the total of net income and other comprehensive income (loss), which for the Company is comprised of unrealized gains and losses on securities available for sale. The components of other comprehensive income (loss) and the related tax effects for the three and nine-months ended September 30, 2016 and 2015 were as follows:
|
||||||||||||||||||||||||
For the three months ended September 30, | ||||||||||||||||||||||||
(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 (losses) arising during the period |
$ | (85 | ) | (34 | ) | (51 | ) | 458 | 183 | 275 | ||||||||||||||
Other comprehensive income (loss) |
$ | (85 | ) | (34 | ) | (51 | ) | 458 | 183 | 275 |
For the nine months ended September 30, |
||||||||||||||||||||||||
(Dollars in thousands) |
2016 |
2015 |
||||||||||||||||||||||
Securities available for sale: |
Before tax |
Tax effect |
Net of tax |
Before tax |
Tax effect |
Net of tax |
||||||||||||||||||
Gross unrealized gains arising during the period |
209 | 84 | 125 | 798 | 317 | 481 | ||||||||||||||||||
Less reclassification of net losses included in net income |
(9 | ) | (3 | ) | (6 | ) | 0 | 0 | 0 | |||||||||||||||
Net unrealized gains arising during the period |
$ | 218 | 87 | 131 | 798 | 317 | 481 | |||||||||||||||||
Other comprehensive income |
$ | 218 | 87 | 131 | 798 | 317 | 481 | |||||||||||||||||
(7) Securities Available For Sale
The following table shows the gross unrealized losses and fair value for the securities available for sale portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 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 |
||||||||||||||||||||||||
September 30, 2016 |
||||||||||||||||||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||||||||||
Federal National Mortgage Association (FNMA) |
1 | $ | 168 | (4 | ) | 0 | $ | 0 | 0 | $ | 168 | (4 | ) | |||||||||||||||||||
Other |
1 | 8 | (1 | ) | 0 | 0 | 0 | 8 | (1 | ) | ||||||||||||||||||||||
Other marketable securities: |
||||||||||||||||||||||||||||||||
U.S. Government and agency obigations |
2 | 9,995 | (5 | ) | 0 | 0 | 0 | 9,995 | (5 | ) | ||||||||||||||||||||||
Municipal obligations |
0 | 0 | 0 | 3 | 341 | (2 | ) | 341 | (2 | ) | ||||||||||||||||||||||
Corporate preferred stock |
0 | 0 | 0 | 1 | 350 | (350 | ) | 350 | (350 | ) | ||||||||||||||||||||||
Total temporarily impaired securities |
4 | $ | 10,171 | (10 | ) | 4 | $ | 691 | (352 | ) | $ | 10,862 | (362 | ) |
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: |
||||||||||||||||||||||||||||||||
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 September 30, 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 has generated a modest amount of net income over the past twelve months and continues 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 September 30, 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 security and that the decrease in the market value is primarily due to a lack of liquidity in the market for trust preferred securities and the deferral of interest by the issuer. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.
A summary of securities available for sale at September 30, 2016 and December 31, 2015 is as follows:
(Dollars in thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
||||||||||||
September 30, 2016: |
||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation (FHLMC) |
$ | 400 | 14 | 0 | 414 | |||||||||||
FNMA |
386 | 8 | 0 | 394 | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
FNMA |
466 | 14 | (4 | ) | 476 | |||||||||||
Other |
22 | 1 | (1 | ) | 22 | |||||||||||
1,274 | 37 | (5 | ) | 1,306 | ||||||||||||
Other marketable securities: |
||||||||||||||||
U.S. Government agency obligations |
74,979 | 122 | (5 | ) | 75,096 | |||||||||||
Municipal obligations |
2,952 | 30 | (2 | ) | 2,980 | |||||||||||
Corporate debt |
290 | 15 | 0 | 305 | ||||||||||||
Corporate preferred stock |
700 | 0 | (350 | ) | 350 | |||||||||||
Corporate equity |
58 | 21 | 0 | 79 | ||||||||||||
78,979 | 188 | (357 | ) | 78,810 | ||||||||||||
$ | 80,253 | 225 | (362 | ) | 80,116 | |||||||||||
(Dollars in thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
||||||||||||
December 31, 2015 |
||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||
FHLMC |
$ | 728 | 31 | 0 | 759 | |||||||||||
FNMA |
725 | 22 | 0 | 747 | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
FNMA |
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 |