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 |
CONTENTS
Page |
||
Item 1: |
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 |
|
5 |
||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 |
6 |
|
7 |
||
Item 2: |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
23 |
Item 3: |
31 |
|
Item 4: |
31 |
|
Item 1: |
32 |
|
Item 1A: |
32 |
|
Item 2: |
32 |
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Item 3: |
32 |
|
Item 4: |
32 |
|
Item 5: |
32 |
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Item 6: |
33 |
|
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.
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.
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 | |||||||||||||||||
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.
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 |