hmnf20190331_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

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

  For the quarterly period ended March 31, 2019

 

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


Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock

HMNF

NASDAQ

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐      Accelerated filer ☐  Non-accelerated filer ☐     
Smaller reporting company ☒    Emerging growth company ☐  

                            

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐               

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐       No ☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐       No ☐


APPLICABLE ONLY TO CORPORATE ISSUERS
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 24, 2019

Common stock, $0.01 par value

 

4,843,822

 

 

 

HMN FINANCIAL, INC.

CONTENTS

 

PART I – FINANCIAL INFORMATION

   

Page

Item 1:

Financial Statements

3

     
 

Consolidated Balance Sheets at March 31, 2019 and December 31, 2018

3

     
 

Consolidated Statements of Comprehensive Income for the Three Months  Ended March 31, 2019 and 2018

4

     
 

Consolidated Statement of Stockholders' Equity for the Three Month Periods Ended March 31, 2019 and 2018

5

     
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2:

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

23

     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

31

     

Item 4:

Controls and Procedures

31

     

PART II – OTHER INFORMATION

 
     

Item 1:

Legal Proceedings

32

     

Item 1A:

Risk Factors

32

     

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

32

     

Item 3:

Defaults Upon Senior Securities

32

     

Item 4:

Mine Safety Disclosures

32

     

Item 5:

Other Information

32

     

Item 6:

Exhibits

33

     

Signatures 

34

 

 

 

PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 

(Dollars in thousands)

 

2019

   

2018

 
   

(unaudited)

         

Assets

               

Cash and cash equivalents

  $ 15,121       20,709  

Securities available for sale:

               

Mortgage-backed and related securities (amortized cost $7,748 and $8,159)

    7,743       8,023  

Other marketable securities (amortized cost $73,035 and $73,343)

    72,189       71,957  
      79,932       79,980  
                 

Loans held for sale

    3,292       3,444  

Loans receivable, net

    599,462       586,688  

Accrued interest receivable

    2,326       2,356  

Real estate, net

    444       414  

Federal Home Loan Bank stock, at cost

    853       867  

Mortgage servicing rights, net

    1,831       1,855  

Premises and equipment, net

    9,551       9,635  

Goodwill

    802       802  

Core deposit intangible

    231       255  

Prepaid expenses and other assets

    6,446       2,668  

Deferred tax asset, net

    2,454       2,642  

Total assets

  $ 722,745       712,315  
                 

Liabilities and Stockholders’ Equity

               

Deposits

  $ 626,592       623,352  

Accrued interest payable

    332       346  

Customer escrows

    2,637       1,448  

Accrued expenses and other liabilities

    7,834       4,022  

Total liabilities

    637,395       629,168  

Commitments and contingencies

               

Stockholders’ equity:

               

Serial-preferred stock: ($.01 par value) authorized 500,000 shares; issued 0

    0       0  

Common stock ($.01 par value): authorized 16,000,000 shares; issued 9,128,662

    91       91  

Additional paid-in capital

    40,076       40,090  

Retained earnings, subject to certain restrictions

    101,374       99,754  

Accumulated other comprehensive loss

    (612 )     (1,096 )

Unearned employee stock ownership plan shares

    (1,788 )     (1,836 )

Treasury stock, at cost 4,286,516 and 4,292,838 shares

    (53,791 )     (53,856 )

Total stockholders’ equity

    85,350       83,147  

Total liabilities and stockholders’ equity

  $ 722,745       712,315  
                 

 

 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)   2019     2018  
Interest income:                

Loans receivable

  $ 7,268       6,778  

Securities available for sale:

               

Mortgage-backed and related

    46       42  

Other marketable

    292       272  

Other

    126       66  

Total interest income

    7,732       7,158  
                 

Interest expense:

               

Deposits

    690       468  

Advances and other borrowings

    0       2  

Total interest expense

    690       470  

Net interest income

    7,042       6,688  

Provision for loan losses

    27       (125 )

Net interest income after provision for loan losses

    7,015       6,813  
                 

Non-interest income:

               

Fees and service charges

    700       766  

Loan servicing fees

    315       301  

Gain on sales of loans

    379       444  

Other

    297       265  

Total non-interest income

    1,691       1,776  
                 

Non-interest expense:

               

Compensation and benefits

    3,910       3,824  

Occupancy and equipment

    1,060       1,097  

Data processing

    301       295  

Professional services

    272       249  

Other

    903       1,089  

Total non-interest expense

    6,446       6,554  

Income before income tax expense

    2,260       2,035  

Income tax expense

    640       590  

Net income

    1,620       1,445  

Other comprehensive income (loss), net of tax

    484       (346 )

Comprehensive income available to common shareholders

  $ 2,104       1,099  

Basic earnings per share

  $ 0.35       0.34  

Diluted earnings per share

  $ 0.35       0.29  
                 

 

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, 2019 and 2018

(unaudited)

 

                                   

Unearned

                 
                                   

Employee

                 
                           

Accumulated

   

Stock

           

Total

 
           

Additional

           

Other

   

Ownership

           

Stock-

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Plan

   

Treasury

   

Holders’

 

(Dollars in thousands)

 

Stock

   

Capital

   

Earnings

   

Loss

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2018

  $ 91       40,090       99,754       (1,096 )     (1,836 )     (53,856 )     83,147  

Net income

                    1,620                               1,620  

Other comprehensive income

                            484                       484  

Restricted stock awards

            (110 )                             110       0  

Stock awards withheld for tax withholding

                                            (45 )     (45 )

Amortization of restricted stock awards

            42                                       42  

Earned employee stock ownership plan shares

            54                       48               102  

Balance, March 31, 2019

  $ 91       40,076       101,374       (612 )     (1,788 )     (53,791 )     85,350  
                                                         

 

See accompanying notes to consolidated financial statements.

 

                                   

Unearned

                 
                                   

Employee

                 
                           

Accumulated

   

Stock

           

Total

 
           

Additional

           

Other

   

Ownership

           

Stock-

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Plan

   

Treasury

   

Holders’

 

(Dollars in thousands)

 

Stock

   

Capital

   

Earnings

   

Loss

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2017

  $ 91       50,623       91,448       (957 )     (2,030 )     (58,357 )     80,818  

Amounts reclassified from accumulated other comprehensive loss

                    71       (71 )                     0  

Net income

                    1,445                               1,445  

Other comprehensive loss

                            (346 )                     (346 )

Stock compensation expense

            4                                       4  

Restricted stock awards

            (174 )                             174       0  

Amortization of restricted stock awards

            39                                       39  

Earned employee stock ownership plan shares

            48                       48               96  

Balance, March 31, 2018

  $ 91       50,540       92,964       (1,374 )     (1,982 )     (58,183 )     82,056  
                                                         

 

5

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2019

   

2018

 

Cash flows from operating activities:

               

Net income

  $ 1,620       1,445  

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

               

Provision for loan losses

    27       (125 )

Depreciation

    273       258  

Amortization of (discounts) premiums, net

    (4 )     28  

Amortization of deferred loan fees

    13       19  

Amortization of core deposit intangible

    24       25  

Amortization of purchased loan fair value adjustments

    (8 )     (12 )

Amortization of mortgage servicing rights

    140       126  

Capitalized mortgage servicing rights

    (116 )     (126 )

Securities gains

    (24 )     (18 )

Gain on sales of loans

    (379 )     (444 )

Proceeds from sale of loans held for sale

    13,599       17,291  

Disbursements on loans held for sale

    (12,370 )     (13,558 )

Amortization of restricted stock awards

    42       39  

Amortization of unearned employee stock ownership plan shares

    48       48  

Earned employee stock ownership plan shares priced above original cost

    54       48  

Stock option compensation expense

    0       4  

Decrease in accrued interest receivable

    30       240  

(Decrease) increase in accrued interest payable

    (14 )     51  

Decrease (increase) in other assets

    668       (457 )

Decrease in other liabilities

    (572 )     (616 )

Other, net

    1       (4 )

Net cash provided by operating activities

    3,052       4,262  

Cash flows from investing activities:

               

Principal collected on securities available for sale

    443       384  

Proceeds collected on maturities of securities available for sale

    300       310  

Purchases of securities available for sale

    0       (4,888 )

Purchase of Federal Home Loan Bank stock

    0       (322 )

Redemption of Federal Home Loan Bank stock

    14       272  

Net increase in loans receivable

    (13,592 )     (9,580 )

Purchases of premises and equipment

    (189 )     (378 )

Net cash used by investing activities

    (13,024 )     (14,202 )

Cash flows from financing activities:

               

Increase (decrease) in deposits

    3,240       (1,796 )

Stock awards withheld for tax withholding

    (45 )     0  

Proceeds from borrowings

    0       6,800  

Repayment of borrowings

    0       (6,800 )

Increase in customer escrows

    1,189       748  

Net cash provided (used) by financing activities

    4,384       (1,048 )

Decrease in cash and cash equivalents

    (5,588 )     (10,988 )

Cash and cash equivalents, beginning of period

    20,709       37,564  

Cash and cash equivalents, end of period

  $ 15,121       26,576  

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 704       420  

Cash paid for income taxes

    0       427  

Supplemental noncash flow disclosures:

               

Loans transferred to loans held for sale

    759       3,719  

Transfer of loans to real estate

    30       74  

Right to use assets and lease obligations

    4,387       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 does business as Home Federal Investment Services and offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which is currently inactive but has acted in the past as an intermediary for the Bank in holding and operating certain foreclosed properties.

 

The consolidated financial statements included herein are for HMN, the Bank, OIA and HPH. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 

(2)  Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statement of stockholders' equity and consolidated statements of cash flows in conformity with U.S. Generally Accepted Accounting Principles (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 three month period ended March 31, 2019 are not necessarily indicative of the results which may be expected for the entire year.

 

 

(3)  New Accounting Standards

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 filers with the Securities and Exchange Commission (SEC), 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 has accumulated the charge off information necessary to calculate the appropriate life of loan loss percentages for the various loan categories, has identified several key metrics to help identify and project anticipated changes in the credit quality of our loan portfolio upon enactment, and is in the process of evaluating the determination of potential qualitative reserve amounts and 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 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The Amendments in this ASU apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, including the consideration of costs and benefits. The ASU removed, modified, and added various disclosure requirements in Topic 820. The amendments also eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditor when evaluating disclosure requirements. The amendments in the ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the implementation of any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. The Company has not opted to early adopt any portion of this ASU and the adoption in the first quarter of 2020 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, 2019 and December 31, 2018.

 

   

Carrying value at March 31, 2019

 

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 79,932       0       79,932       0  

Mortgage loan commitments

    99       0       99       0  

Total

  $ 80,031       0       80,031       0  
                                 

 

   

Carrying value at December 31, 2018

 

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Securities available for sale

  $ 79,980       0       79,980       0  

Mortgage loan commitments

    40       0       40       0  

Total

  $ 80,020       0       80,020       0  
                                 

 

There were no transfers between Levels 1, 2, or 3 during the three months ended March 31, 2019.

 

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 that were still held at March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.

 

   

Carrying value at March 31, 2019

         

 

 

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Three months ended

March 31, 2019

Total losses

 

Loans held for sale

  $ 3,292       0       3,292       0       (2 )

Mortgage servicing rights, net

    1,831       0       1,831       0       0  

Loans(1)

    2,671       0       2,671       0       (87 )

Real estate, net(2)

    444       0       444       0       0  

Total

  $ 8,238       0       8,238       0       (89 )
                                         

 

 

   

Carrying value at December 31, 2018

         

 

 

(Dollars in thousands)

 

Total

   

Level 1

   

Level 2

   

Level 3

   

Year ended

December 31, 2018

Total gains (losses)

 

Loans held for sale

  $ 3,444       0       3,444       0       45  

Mortgage servicing rights, net

    1,855       0       1,855       0       0  

Loans(1)

    2,902       0       2,902       0       (97 )

Real estate, net(2)

    414       0       414       0       0  

Total

  $ 8,615       0       8,615       0       (52 )
                                         

(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

ASC 825, Disclosures about Fair Values of Financial Instruments 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 estimates are made as of March 31, 2019 and December 31, 2018 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, 2019 and December 31, 2018 are shown below.

 

   

March 31, 2019

   

December 31, 2018

 
                   

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

  $ 15,121       15,121       15,121                               20,709       20,709       20,709                          

Securities available for sale

    79,932       79,932               79,932                       79,980       79,980               79,980                  

Loans held for sale

    3,292       3,292               3,292                       3,444       3,444               3,444                  

Loans receivable, net

    599,462       593,230               593,230                       586,688       578,978               578,978                  

Federal Home Loan Bank stock

    853       853               853                       867       867               867                  

Accrued interest receivable

    2,326       2,326               2,326                       2,356       2,356               2,356                  

Financial liabilities:

                                                                                               

Deposits

    626,592       620,967               620,967                       623,352       617,722               617,722                  

Accrued interest payable

    332       332               332                       346       346               346                  

Off-balance sheet financial instruments:

                                                                                               

Commitments to extend credit

    99       99                               157,000       40       40                               146,978  

Commitments to sell loans

    (54 )     (54 )                             9,757       (56 )     (56 )                             7,289  

 

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. The fair value disclosures for both the fixed and adjustable rate portfolios were adjusted to reflect the exit price amount anticipated to be received from the sale of the portfolio in an open market transaction.

 

 

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 disclosures for all of the deposits were adjusted to reflect the exit price amount anticipated to be received from the sale of the deposits in an open market transaction.

 

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 nonowner 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 were as follows:

 

   

For the period ended March 31,

 

(Dollars in thousands)

 

2019

   

2018

 

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

  $ 671       187       484       (479 )     (133 )     (346 )

Other comprehensive income (loss)

  $ 671       187       484       (479 )     (133 )     (346 )
                                                 

  

 

 

(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, 2019 and December 31, 2018.

 

   

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, 2019

                                                               

Mortgage backed securities:

                                                               

Federal National Mortgage Association (FNMA)

    0     $ 0       0       2     $ 3,657       (37 )   $ 3,657       (37 )

Collateralized mortgage obligations:

                                                               

FNMA

    0       0       0       1       191       (3 )     191       (3 )

Other marketable securities:

                                                               

U.S. Government agency obligations

    0       0       0       14       69,233       (740 )     69,233       (740 )

Municipal obligations

    0       0       0       6       1,240       (4 )     1,240       (4 )

Corporate obligations

    0       0       0       1       140       (1 )     140       (1 )

Corporate preferred stock

    0       0       0       1       595       (105 )     595       (105 )

Total temporarily impaired securities

    0     $ 0       0       25     $ 75,056       (890 )   $ 75,056       (890 )

 

   

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, 2018

                                                               

Mortgage backed securities:

                                                               

FNMA

    0     $ 0       0       2     $ 3,769       (117 )   $ 3,769       (117 )

Federal Home Loan Mortgage Corporation (FHLMC)

    1       4,060       (10 )     0       0       0       4,060       (10 )

Collateralized mortgage obligations:

                                                               

FNMA

    0       0       0       1       190       (9 )     190       (9 )

Other marketable securities:

                                                               

U.S. Government agency obligations

    0       0       0       14       68,735       (1,236 )     68,735       (1,236 )

Municipal obligations

    3       498       (2 )     8       1,467       (8 )     1,965       (10 )

Corporate obligations

    0       0       0       1       172       (1 )     172       (1 )

Corporate preferred stock

    0       0       0       1       560       (140 )     560       (140 )

Total temporarily impaired securities

    4     $ 4,558       (12 )     27     $ 74,893       (1,511 )   $ 79,451       (1,523 )
                                                                 

 

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 on impaired securities other than the corporate preferred stock are the result of changes in interest rates. The unrealized losses reported for the corporate preferred stock at March 31, 2019 relates to a single trust preferred security that was issued by the holding company of a small community bank. As of March 31, 2019 all payments were current on the trust preferred security and the issuer’s subsidiary bank was considered to be “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, 2019 as the Company does not intend to sell 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. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.

 

 

A summary of securities available for sale at March 31, 2019 and December 31, 2018 is as follows:

 

 

(Dollars in thousands)

 

Amortized

cost

   

Gross unrealized

gains

   

Gross unrealized

losses

   

Fair value

 

March 31, 2019

                               

Mortgage-backed securities:

                               

FNMA

  $ 3,694       0       (37 )     3,657  

FHLMC

    3,860       35       0       3,895  

Collateralized mortgage obligations:

                               

FNMA

    194       0       (3 )     191  
      7,748       35       (40 )     7,743  

Other marketable securities:

                               

U.S. Government agency obligations

    69,973       0       (740 )     69,233  

Municipal obligations

    2,075       4       (4 )     2,075  

Corporate obligations

    142       0       (1 )     141  

Corporate preferred stock

    700       0       (105 )     595  

Corporate equity

    145       0       0       145  
      73,035       4       (850 )     72,189  
    $ 80,783       39       (890 )     79,932  
                                 
                                 

December 31, 2018

                               

Mortgage-backed securities:

                               

FNMA

  $ 3,886       0       (117 )     3,769  

FHLMC

    4,074       0       (10 )     4,064  

Collateralized mortgage obligations:

                               

FNMA

    199       0       (9 )     190  
      8,159       0       (136 )     8,023  

Other marketable securities:

                               

U.S. Government agency obligations

    69,971       0       (1,236 )     68,735  

Municipal obligations

    2,378       1       (10 )     2,369  

Corporate obligations

    173       0       (1 )     172  

Corporate preferred stock

    700       0       (140 )     560  

Corporate equity

    121       0       0       121  
      73,343       1       (1,387 )     71,957  
    $ 81,502       1       (1,523 )     79,980  
                                 

 

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2019 based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.

 

(Dollars in thousands)

 

Amortized

Cost

   

Fair

Value

 

Due less than one year

  $ 7,356       7,303  

Due after one year through five years

    70,258       69,568  

Due after five years through ten years

    2,257       2,255  

Due after ten years

    767       661  

No stated maturity

    145       145  
                 

Total

  $ 80,783       79,932  
                 

 

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 expected 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, 2019 and December 31, 2018 is as follows:

 

 

(Dollars in thousands)

 

March 31,

2019

   

December 31,

2018

 

Single family

  $ 109,210       110,698  

Commercial real estate:

               

Real estate rental and leasing

    198,379       195,564  

Other

    151,485       140,566  
      349,864       336,130  

Consumer

    73,085       72,532  

Commercial business

    75,485       75,496  

Total loans

    607,644       594,856  

Less:

               

Unamortized discounts

    16       17  

Net deferred loan costs

    (507 )     (535 )

Allowance for loan losses

    8,673       8,686  

Total loans receivable, net

  $ 599,462       586,688  
                 

 

 

(9) Allowance for Loan Losses and Credit Quality Information

The allowance for loan losses is summarized as follows:

 

 

(Dollars in thousands)

 

Single

Family

   

Commercial

Real Estate

   

Consumer

   

Commercial

Business

   

 

Total

 

Balance, December 31, 2018

  $ 833       4,869       1,622       1,362       8,686  

Provision for losses

    100       13       3       (89 )     27  

Charge-offs

    0       0       (39 )     (43 )     (82 )

Recoveries

    0       10       2       30       42  

Balance, March 31, 2019

  $ 933       4,892       1,588       1,260       8,673  
                                         

Balance, December 31, 2017

  $ 900       5,073       1,630       1,708       9,311  

Provision for losses

    (68 )     118       (145 )     (30 )     (125 )

Charge-offs

    (23 )     0       (69 )     0       (92 )

Recoveries

    0       7       7       21       35  

Balance, March 31, 2018

  $ 809       5,198       1,423       1,699       9,129  
                                         

Allocated to:

                                       

Specific reserves

  $ 98       451       172       73       794  

General reserves

    735       4,418       1,450       1,289       7,892  

Balance, December 31, 2018

  $ 833       4,869       1,622       1,362       8,686  
                                         

Allocated to:

                                       

Specific reserves

  $ 123       453       153       90       819  

General reserves

    810       4,439       1,435       1,170       7,854  

Balance, March 31, 2019

  $ 933       4,892       1,588       1,260       8,673  
                                         

Loans receivable at December 31, 2018:

                                       

Individually reviewed for impairment

  $ 1,226       1,311       856       303       3,696  

Collectively reviewed for impairment

    109,472       334,819       71,676       75,193       591,160  

Ending balance

  $ 110,698       336,130       72,532       75,496       594,856  
                                         

Loans receivable at March 31, 2019:

                                       

Individually reviewed for impairment

  $ 1,247       1,276       620       347       3,490  

Collectively reviewed for impairment

    107,963       348,588       72,465       75,138       604,154  

Ending balance

  $ 109,210       349,864       73,085       75,485       607,644  
                                         

 

 

The following table summarizes the amount of classified and unclassified loans at March 31, 2019 and December 31, 2018:

 

   

March 31, 2019

 
   

Classified

           

Unclassified

         

 

(Dollars in thousands)

 

Special

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

   

Total

   

Total

Loans

 

Single family

  $ 571       1,152       95       0       1,818       107,392       109,210  

Commercial real estate:

                                                       

Real estate rental and leasing

    8,101       2,730       0       0       10,831       187,548       198,379  

Other

    5,201       5,039       0       0       10,240       141,245       151,485  

Consumer

    0       476       36       105       617       72,468       73,085  

Commercial business

    5,639       2,670       0       0       8,309       67,176       75,485  
    $ 19,512       12,067       131       105       31,815       575,829       607,644  
                                                         

 

   

December 31, 2018

 
   

Classified

           

Unclassified

         

 

(Dollars in thousands)

 

Special

Mention

   

Substandard

   

Doubtful

   

Loss

   

Total

   

Total

   

Total

Loans

 

Single family

  $ 150       1,771       40       0       1,961       108,737       110,698  

Commercial real estate:

                                                       

Real estate rental and leasing

    5,564       4,805       0       0       10,369       185,195       195,564  

Other

    4,879       5,118       0       0       9,997       130,569       140,566  

Consumer

    0       709       41       106       856       71,676       72,532  

Commercial business

    6,647       2,761       0       0       9,408       66,088       75,496  
    $ 17,240       15,164       81       106       32,591       562,265