UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022 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 The Nasdaq Stock Market LLC 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 If an emerging growth company, indicate by check mark 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 ☒ 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 Common stock, $0.01 par value For the quarterly period ended September 30, 2021 company,”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 ☐ 26, 202125, 2022 4,594,5754,480,976
| Page | ||
| PART I | ||
Item 1: | ||
Consolidated Balance Sheets at September 30, | ||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, | ||
Item 2: | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3: | Quantitative and Qualitative Disclosures |
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Item 4: |
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Item 1: |
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Item 1A: | ||
Item 2: |
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Item 3: |
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Item 4: |
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Item 5: |
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Item 6: |
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PartPART I – FINANCIAL INFORMATION
Item 1 1:: Financial Statements
HMN FINANCIAL, INC. AND SUBSIDIARIES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Balance Sheets
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | $ | 7,837 | 7,489 | 22,754 | 22,156 | |||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed and related | 457 | 271 | 1,288 | 825 | ||||||||||||
Other marketable | 57 | 163 | 226 | 546 | ||||||||||||
Other | 50 | 26 | 116 | 149 | ||||||||||||
Total interest income | 8,401 | 7,949 | 24,384 | 23,676 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 360 | 656 | 1,223 | 2,293 | ||||||||||||
Total interest expense | 360 | 656 | 1,223 | 2,293 | ||||||||||||
Net interest income | 8,041 | 7,293 | 23,161 | 21,383 | ||||||||||||
Provision for loan losses | (886 | ) | 770 | (2,353 | ) | 1,548 | ||||||||||
Net interest income after provision for loan losses | 8,927 | 6,523 | 25,514 | 19,835 | ||||||||||||
Non-interest income: | ||||||||||||||||
Fees and service charges | 810 | 753 | 2,332 | 2,136 | ||||||||||||
Loan servicing fees | 389 | 347 | 1,168 | 976 | ||||||||||||
Gain on sales of loans | 1,471 | 3,005 | 4,909 | 6,503 | ||||||||||||
Other | 381 | 422 | 2,639 | 975 | ||||||||||||
Total non-interest income | 3,051 | 4,527 | 11,048 | 10,590 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Compensation and benefits | 3,948 | 3,916 | 11,865 | 11,762 | ||||||||||||
Occupancy and equipment | 1,090 | 1,101 | 3,301 | 3,335 | ||||||||||||
Data processing | 384 | 334 | 1,099 | 963 | ||||||||||||
Professional services | 409 | 241 | 895 | 1,175 | ||||||||||||
Other | 1,075 | 1,135 | 3,205 | 3,144 | ||||||||||||
Total non-interest expense | 6,906 | 6,727 | 20,365 | 20,379 | ||||||||||||
Income before income tax expense | 5,072 | 4,323 | 16,197 | 10,046 | ||||||||||||
Income tax expense | 1,453 | 1,222 | 4,632 | 2,869 | ||||||||||||
Net income | 3,619 | 3,101 | 11,565 | 7,177 | ||||||||||||
Other comprehensive (loss) income, net of tax | (688 | ) | (202 | ) | (1,508 | ) | 1,297 | |||||||||
Comprehensive income available to common stockholders | $ | 2,931 | 2,899 | 10,057 | 8,474 | |||||||||||
Basic earnings per share | $ | 0.82 | 0.67 | 2.57 | 1.55 | |||||||||||
Diluted earnings per share | $ | 0.81 | 0.67 | 2.55 | 1.54 | |||||||||||
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' EquityFor the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)
Unearned | ||||||||||||||||||||||||||||
Employee | ||||||||||||||||||||||||||||
Accumulated | Stock | |||||||||||||||||||||||||||
Additional | Other | Ownership | Total | |||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Plan | Treasury | Stockholders’ | ||||||||||||||||||||||
(Dollars in thousands) | Stock | Capital | Earnings | Loss | Shares | Stock | Equity | |||||||||||||||||||||
Balance, June 30, 2021 | $ | 91 | 40,484 | 125,795 | 462 | (1,353 | ) | (57,521 | ) | 107,958 | ||||||||||||||||||
Net income | 3,619 | 3,619 | ||||||||||||||||||||||||||
Other comprehensive loss | (688 | ) | (688 | ) | ||||||||||||||||||||||||
Stock repurchases | 0 | (1,130 | ) | (1,130 | ) | |||||||||||||||||||||||
Amortization of restricted stock awards | 61 | 61 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 65 | 49 | 114 | |||||||||||||||||||||||||
Balance, September 30, 2021 | $ | 91 | 40,610 | 129,414 | (226 | ) | (1,304 | ) | (58,651 | ) | 109,934 | |||||||||||||||||
Balance, December 31, 2020 | $ | 91 | 40,480 | 117,849 | 1,282 | (1,450 | ) | (55,000 | ) | 103,252 | ||||||||||||||||||
Net income | 11,565 | 11,565 | ||||||||||||||||||||||||||
Other comprehensive loss | (1,508 | ) | (1,508 | ) | ||||||||||||||||||||||||
Stock repurchases | (3,866 | ) | (3,866 | ) | ||||||||||||||||||||||||
Restricted stock awards | (222 | ) | 222 | 0 | ||||||||||||||||||||||||
Stock awards withheld for tax withholding | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 182 | 182 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 170 | 146 | 316 | |||||||||||||||||||||||||
Balance, September 30, 2021 | $ | 91 | 40,610 | 129,414 | (226 | ) | (1,304 | ) | (58,651 | ) | 109,934 | |||||||||||||||||
Unearned | ||||||||||||||||||||||||||||
Employee | ||||||||||||||||||||||||||||
Accumulated | Stock | |||||||||||||||||||||||||||
Additional | Other | Ownership | Total | |||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Plan | Treasury | Stockholders’ | ||||||||||||||||||||||
(Dollars in thousands) | Stock | Capital | Earnings | Income | Shares | Stock | Equity | |||||||||||||||||||||
Balance, June 30, 2020 | $ | 91 | 40,312 | 111,623 | 1,545 | (1,546 | ) | (53,910 | ) | 98,115 | ||||||||||||||||||
Net income | 3,101 | 3,101 | ||||||||||||||||||||||||||
Other comprehensive loss | (202 | ) | (202 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 54 | 54 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 27 | 48 | 75 | |||||||||||||||||||||||||
Balance, September 30, 2020 | $ | 91 | 40,393 | 114,724 | 1,343 | (1,498 | ) | (53,910 | ) | 101,143 | ||||||||||||||||||
Balance, December 31, 2019 | $ | 91 | 40,365 | 107,547 | 46 | (1,643 | ) | (53,758 | ) | 92,648 | ||||||||||||||||||
Net income | 7,177 | 7,177 | ||||||||||||||||||||||||||
Other comprehensive gain | 1,297 | 1,297 | ||||||||||||||||||||||||||
Stock repurchases | (360 | ) | (360 | ) | ||||||||||||||||||||||||
Restricted stock awards | (268 | ) | 268 | 0 | ||||||||||||||||||||||||
Stock awards withheld for tax withholding | (60 | ) | (60 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 184 | 184 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 112 | 145 | 257 | |||||||||||||||||||||||||
Balance, September 30, 2020 | $ | 91 | 40,393 | 114,724 | 1,343 | (1,498 | ) | (53,910 | ) | 101,143 | ||||||||||||||||||
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) | 2021 | 2020 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 11,565 | 7,177 | |||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for loan losses | (2,353 | ) | 1,548 | |||||
Depreciation | 757 | 785 | ||||||
Amortization of premiums, net | 709 | 119 | ||||||
Amortization of deferred loan fees | (2,342 | ) | (350 | ) | ||||
Amortization of core deposit intangible | 40 | 74 | ||||||
Amortization of purchased asset fair value adjustments | (20 | ) | (26 | ) | ||||
Amortization of mortgage servicing rights | 881 | 1,002 | ||||||
Capitalized mortgage servicing rights | (1,070 | ) | (1,710 | ) | ||||
(Gains) losses recognized on equity securities, net | (69 | ) | 40 | |||||
Gain on sale of premises | (15 | ) | (6 | ) | ||||
Gain on sales of real estate | (1,492 | ) | (129 | ) | ||||
Gain on sales of loans | (4,909 | ) | (6,503 | ) | ||||
Proceeds from sales of loans held for sale | 147,153 | 202,243 | ||||||
Disbursements on loans held for sale | (133,807 | ) | (195,571 | ) | ||||
Amortization of restricted stock awards | 182 | 184 | ||||||
Amortization of unearned Employee Stock Ownership Plan shares | 146 | 145 | ||||||
Earned Employee Stock Ownership Plan shares priced above original cost | 170 | 112 | ||||||
Decrease (increase) in accrued interest receivable | 1,040 | (1,985 | ) | |||||
Decrease in accrued interest payable | (64 | ) | (195 | ) | ||||
Decrease in other assets | 842 | 1,379 | ||||||
Decrease in other liabilities | (850 | ) | (170 | ) | ||||
Other, net | 14 | 6 | ||||||
Net cash provided by operating activities | 16,508 | 8,169 | ||||||
Cash flows from investing activities: | ||||||||
Principal collected on securities available for sale | 27,739 | 11,050 | ||||||
Proceeds collected on maturities of securities available for sale | 30,762 | 30,875 | ||||||
Purchases of securities available for sale | (148,149 | ) | (51,218 | ) | ||||
Purchase of Federal Home Loan Bank stock | (159 | ) | (79 | ) | ||||
Proceeds from sales of real estate | 2,128 | 434 | ||||||
Net decrease (increase) in loans receivable | 17,323 | (79,174 | ) | |||||
Proceeds from sale of premises | 16 | 63 | ||||||
Purchases of premises and equipment | (440 | ) | (669 | ) | ||||
Net cash used by investing activities | (70,780 | ) | (88,718 | ) | ||||
Cash flows from financing activities: | ||||||||
Increase in deposits | 120,098 | 113,153 | ||||||
Purchase of treasury stock | (3,866 | ) | (360 | ) | ||||
Stock awards withheld for tax withholding | (7 | ) | (60 | ) | ||||
Increase (decrease) in customer escrows | 1,214 | (556 | ) | |||||
Net cash provided by financing activities | 117,439 | 112,177 | ||||||
Increase in cash and cash equivalents | 63,167 | 31,628 | ||||||
Cash and cash equivalents, beginning of period | 86,269 | 44,399 | ||||||
Cash and cash equivalents, end of period | $ | 149,436 | 76,027 | |||||
Supplemental cash flow disclosures: | ||||||||
Cash paid for interest | $ | 1,287 | 2,488 | |||||
Cash paid for income taxes | 5,310 | 2,041 | ||||||
Supplemental noncash flow disclosures: | ||||||||
Loans transferred to loans held for sale | 7,757 | 3,960 | ||||||
Transfer of loans to real estate | 0 | 139 | ||||||
See accompanying notes to consolidated financial statements.
September 30, | December 31, | |||||||
(Dollars in thousands, except par value) | 2022 | 2021 | ||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 18,645 | 94,143 | |||||
Securities available for sale: | ||||||||
Mortgage-backed and related securities (amortized cost $226,499 and $247,275) | 195,952 | 245,397 | ||||||
Other marketable securities (amortized cost $55,697 and $40,691) | 53,260 | 40,368 | ||||||
| 249,212 | 285,765 | |||||||
Loans held for sale | 1,934 | 5,575 | ||||||
Loans receivable, net | 740,280 | 652,502 | ||||||
Accrued interest receivable | 2,662 | 2,132 | ||||||
Mortgage servicing rights, net | 3,117 | 3,280 | ||||||
Premises and equipment, net | 16,751 | 17,373 | ||||||
Goodwill | 802 | 802 | ||||||
Core deposit intangible | 0 | 10 | ||||||
Prepaid expenses and other assets | 5,087 | 5,427 | ||||||
Deferred tax asset, net | 9,303 | 2,529 | ||||||
Total assets | $ | 1,047,793 | 1,069,538 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | $ | 947,557 | 950,666 | |||||
Accrued interest payable | 53 | 63 | ||||||
Customer escrows | 3,332 | 2,143 | ||||||
Accrued expenses and other liabilities | 7,141 | 6,635 | ||||||
Total liabilities | 958,083 | 959,507 | ||||||
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 | 40,894 | 40,740 | ||||||
Retained earnings, subject to certain restrictions | 136,230 | 131,413 | ||||||
Accumulated other comprehensive loss | (25,041 | ) | (1,583 | ) | ||||
Unearned employee stock ownership plan shares | (1,111 | ) | (1,256 | ) | ||||
Treasury stock, at cost 4,647,686 and 4,564,087 shares | (61,353 | ) | (59,374 | ) | ||||
Total stockholders’ equity | 89,710 | 110,031 | ||||||
Total liabilities and stockholders’ equity | $ | 1,047,793 | 1,069,538 | |||||
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | $ | 7,473 | 7,837 | 21,389 | 22,754 | |||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed and related | 691 | 457 | 2,126 | 1,288 | ||||||||||||
Other marketable | 120 | 57 | 289 | 226 | ||||||||||||
Other | 347 | 50 | 449 | 116 | ||||||||||||
Total interest income | 8,631 | 8,401 | 24,253 | 24,384 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 340 | 360 | 910 | 1,223 | ||||||||||||
Advances and other borrowings | 0 | 0 | 5 | 0 | ||||||||||||
Total interest expense | 340 | 360 | 915 | 1,223 | ||||||||||||
Net interest income | 8,291 | 8,041 | 23,338 | 23,161 | ||||||||||||
Provision for loan losses | 579 | (886 | ) | 941 | (2,353 | ) | ||||||||||
Net interest income after provision for loan losses | 7,712 | 8,927 | 22,397 | 25,514 | ||||||||||||
Non-interest income: | ||||||||||||||||
Fees and service charges | 821 | 810 | 2,397 | 2,332 | ||||||||||||
Loan servicing fees | 406 | 389 | 1,188 | 1,168 | ||||||||||||
Gain on sales of loans | 414 | 1,471 | 2,096 | 4,909 | ||||||||||||
Other | 413 | 381 | 1,264 | 2,639 | ||||||||||||
Total non-interest income | 2,054 | 3,051 | 6,945 | 11,048 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Compensation and benefits | 4,355 | 3,948 | 12,805 | 11,865 | ||||||||||||
Occupancy and equipment | 918 | 1,090 | 2,865 | 3,301 | ||||||||||||
Data processing | 513 | 384 | 1,443 | 1,099 | ||||||||||||
Professional services | 306 | 409 | 1,095 | 895 | ||||||||||||
Other | 1,082 | 1,075 | 3,201 | 3,205 | ||||||||||||
Total non-interest expense | 7,174 | 6,906 | 21,409 | 20,365 | ||||||||||||
Income before income tax expense | 2,592 | 5,072 | 7,933 | 16,197 | ||||||||||||
Income tax expense | 761 | 1,453 | 2,326 | 4,632 | ||||||||||||
Net income | 1,831 | 3,619 | 5,607 | 11,565 | ||||||||||||
Other comprehensive loss, net of tax | (7,189 | ) | (688 | ) | (23,458 | ) | (1,508 | ) | ||||||||
Comprehensive (loss) income available to common stockholders | $ | (5,358 | ) | 2,931 | (17,851 | ) | 10,057 | |||||||||
Basic earnings per share | $ | 0.42 | 0.82 | 1.28 | 2.57 | |||||||||||
Diluted earnings per share | $ | 0.42 | 0.81 | 1.27 | 2.55 | |||||||||||
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Three and Nine Months Ended September 30, 2022 and 2021
(unaudited)
| Unearned | ||||||||||||||||||||||||||||
| Employee | ||||||||||||||||||||||||||||
| Accumulated | Stock | |||||||||||||||||||||||||||
| Additional | Other | Ownership | Total | |||||||||||||||||||||||||
| Common | Paid-In | Retained | Comprehensive | Plan | Treasury | Stockholders’ | ||||||||||||||||||||||
| (Dollars in thousands) | Stock | Capital | Earnings | Loss | Shares | Stock | Equity | |||||||||||||||||||||
Balance, June 30, 2022 | $ | 91 | 40,775 | 134,661 | (17,852 | ) | (1,159 | ) | (60,668 | ) | 95,848 | |||||||||||||||||
Net income | 1,831 | 1,831 | ||||||||||||||||||||||||||
Other comprehensive loss | (7,189 | ) | (7,189 | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$0.06 per share | (262 | ) | (262 | ) | ||||||||||||||||||||||||
Stock repurchases | (685 | ) | (685 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 55 | 55 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 64 | �� | 48 | 112 | ||||||||||||||||||||||||
Balance, September 30, 2022 | $ | 91 | 40,894 | 136,230 | (25,041 | ) | (1,111 | ) | (61,353 | ) | 89,710 | |||||||||||||||||
Balance, December 31, 2021 | $ | 91 | 40,740 | 131,413 | (1,583 | ) | (1,256 | ) | (59,374 | ) | 110,031 | |||||||||||||||||
Net income | 5,607 | 5,607 | ||||||||||||||||||||||||||
Other comprehensive loss | (23,458 | ) | (23,458 | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$0.18 per share | (790 | ) | (790 | ) | ||||||||||||||||||||||||
Stock repurchases | (2,134 | ) | (2,134 | ) | ||||||||||||||||||||||||
Restricted stock awards | (225 | ) | 225 | 0 | ||||||||||||||||||||||||
Stock awards withheld for tax withholding | (70 | ) | (70 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 172 | 172 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 207 | 145 | 352 | |||||||||||||||||||||||||
Balance, September 30, 2022 | $ | 91 | 40,894 | 136,230 | (25,041 | ) | (1,111 | ) | (61,353 | ) | 89,710 | |||||||||||||||||
Unearned | ||||||||||||||||||||||||||||
Employee | ||||||||||||||||||||||||||||
Accumulated | Stock | |||||||||||||||||||||||||||
Additional | Other | Ownership | Total | |||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Plan | Treasury | Stockholders’ | ||||||||||||||||||||||
(Dollars in thousands) | Stock | Capital | Earnings | Loss | Shares | Stock | Equity | |||||||||||||||||||||
Balance, June 30, 2021 | $ | 91 | 40,484 | 125,795 | 462 | (1,353 | ) | (57,521 | ) | 107,958 | ||||||||||||||||||
Net income | 3,619 | 3,619 | ||||||||||||||||||||||||||
Other comprehensive loss | (688 | ) | (688 | ) | ||||||||||||||||||||||||
Stock repurchases | (1,130 | ) | (1,130 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 61 | 61 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 65 | 49 | 114 | |||||||||||||||||||||||||
Balance, September 30, 2021 | $ | 91 | 40,610 | 129,414 | (226 | ) | (1,304 | ) | (58,651 | ) | 109,934 | |||||||||||||||||
Balance, December 31, 2020 | $ | 91 | 40,480 | 117,849 | 1,282 | (1,450 | ) | (55,000 | ) | 103,252 | ||||||||||||||||||
Net income | 11,565 | 11,565 | ||||||||||||||||||||||||||
Other comprehensive loss | (1,508 | ) | (1,508 | ) | ||||||||||||||||||||||||
Stock repurchases | (3,866 | ) | (3,866 | ) | ||||||||||||||||||||||||
Restricted stock awards | (222 | ) | 222 | 0 | ||||||||||||||||||||||||
Stock awards withheld for tax withholding | (7 | ) | (7 | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | 182 | 182 | ||||||||||||||||||||||||||
Earned employee stock ownership plan shares | 170 | 146 | 316 | |||||||||||||||||||||||||
Balance, September 30, 2021 | $ | 91 | 40,610 | 129,414 | (226 | ) | (1,304 | ) | (58,651 | ) | 109,934 | |||||||||||||||||
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) | 2022 | 2021 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 5,607 | 11,565 | |||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for loan losses | 941 | (2,353 | ) | |||||
Depreciation | 924 | 757 | ||||||
Amortization of premiums, net | 783 | 709 | ||||||
Amortization of deferred loan fees | (388 | ) | (2,342 | ) | ||||
Amortization of core deposit intangible | 10 | 40 | ||||||
Amortization of purchased fair value adjustments | (18 | ) | (20 | ) | ||||
Amortization of mortgage servicing rights and servicing costs | 695 | 881 | ||||||
Capitalized mortgage servicing rights | (532 | ) | (1,070 | ) | ||||
Deferred income tax expense | 550 | 0 | ||||||
Losses (gains) recognized on equity securities | 50 | (69 | ) | |||||
Gain on sale of premises | (6 | ) | (15 | ) | ||||
Gain on sales of real estate | (113 | ) | (1,492 | ) | ||||
Gain on sales of loans | (2,096 | ) | (4,909 | ) | ||||
Proceeds from sale of loans held for sale | 81,275 | 147,153 | ||||||
Disbursements on loans held for sale | (61,820 | ) | (133,807 | ) | ||||
Amortization of restricted stock awards | 172 | 182 | ||||||
Amortization of unearned Employee Stock Ownership Plan shares | 145 | 146 | ||||||
Earned Employee Stock Ownership Plan shares priced above original cost | 207 | 170 | ||||||
(Increase) decrease in accrued interest receivable | (530 | ) | 1,040 | |||||
Decrease in accrued interest payable | (10 | ) | (64 | ) | ||||
Decrease in other assets | 178 | 842 | ||||||
Increase (decrease) in other liabilities | 506 | (850 | ) | |||||
Other, net | 4 | 14 | ||||||
Net cash provided by operating activities | 26,534 | 16,508 | ||||||
Cash flows from investing activities: | ||||||||
Principal collected on securities available for sale | 35,032 | 27,739 | ||||||
Proceeds collected on maturities of securities available for sale | 5,000 | 30,762 | ||||||
Purchases of securities available for sale | (35,043 | ) | (148,149 | ) | ||||
Purchase of Federal Home Loan Bank stock | (1,743 | ) | (159 | ) | ||||
Redemption of Federal Home Loan Bank stock | 1,552 | 0 | ||||||
Proceeds from sales of real estate | 402 | 2,128 | ||||||
Net (increase) decrease in loans receivable | (102,021 | ) | 17,323 | |||||
Proceeds from sale of premises | 9 | 16 | ||||||
Purchases of premises and equipment | (306 | ) | (440 | ) | ||||
Net cash used by investing activities | (97,118 | ) | (70,780 | ) | ||||
Cash flows from financing activities: | ||||||||
(Decrease) increase in deposits | (3,109 | ) | 120,098 | |||||
Purchase of treasury stock | (2,134 | ) | (3,866 | ) | ||||
Stock awards withheld for tax withholding | (70 | ) | (7 | ) | ||||
Dividends to stockholders | (790 | ) | 0 | |||||
Proceeds from borrowings | 31,000 | 0 | ||||||
Repayment of borrowings | (31,000 | ) | 0 | |||||
Increase in customer escrows | 1,189 | 1,214 | ||||||
Net cash (used) provided by financing activities | (4,914 | ) | 117,439 | |||||
(Decrease) increase in cash and cash equivalents | (75,498 | ) | 63,167 | |||||
Cash and cash equivalents, beginning of period | 94,143 | 86,269 | ||||||
Cash and cash equivalents, end of period | $ | 18,645 | 149,436 | |||||
Supplemental cash flow disclosures: | ||||||||
Cash paid for interest | $ | 925 | 1,287 | |||||
Cash paid for income taxes | 2,399 | 5,310 | ||||||
Supplemental noncash flow disclosures: | ||||||||
Loans transferred to loans held for sale | 13,708 | 7,757 | ||||||
Right to use assets obtained in exchange for lease liabilities | 137 | 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.
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 (loss) income, consolidated statements 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, 2022 are not necessarily indicative of the results which may be expected for the entire year.
(3) | New Accounting Standards
|
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)2022-02,Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40,Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructures by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, such as HMN, the amendments in this ASU require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20,Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The amendments in the ASU will be effective for entities, such as HMN, that have not yet adopted the amendments in ASU 2016-13 when ASU 2016-13 is adopted. The amendments in this ASU should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Management is in the process of evaluating the impact of this ASU on the Company’s financial statement amounts and disclosures when it is adopted in the first quarter of 2023.
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 filers with the Securities and Exchange Commission (SEC), were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. On November 26, 2019, the FASB issued ASU 2019-11,Codification Improvements to Topic 326, Financial Instruments – Credit Losses which delayed the implementation date of ASU 2016-13 for SEC smaller reporting companies, such as HMN, from the first quarter of 2020 to the first quarter of 2023. 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. The Company has not early adopted this ASU. 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 the Bank’s loan portfolio upon enactment, has identified some qualitative reserve metrics and amounts, and has prepared preliminary calculations using the new methodology as outlined in the ASU. Based on the preliminary calculations, it is anticipated that the adoption of this ASU will result in a 7% to 11% increase in the allowance for loan losses when it is adopted in the first quarter of 2023.
On February 6, 2020, the FASB issued ASU 2020-02,Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.2016-02, Leases (Topic 842). The amendments in this ASU related to Leases (Topic 842) did not have any impact on the Company. The amendments in this ASU related to Topic 326 adds additional guidance related to the SEC’s expectations for the documentation of the measurement, review process, and the systematic methodology used by entities to determine the current credit losses under FASB ASC Topic 326. It is anticipated that this additional guidance will require periodic third party reviews of the Company’s calculation of the allowance for credit losses in subsequent periods afterDecember 15, 2019, including interim periods within those annual periods.
On November 26, 2019, the FASB issued ASU 2019-11,Codification Improvements to Topic 326, Financial Instruments – Credit Losses which delayed the implementation date of ASU 2016-13 for SEC smaller reporting companies, such as HMN, from the first quarter of 2020 to the first quarter of 2023. 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. The Company has not early adopted this ASU. 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 the Bank’s 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 will have on the Company’s consolidated financial statements when it is adopted in the first quarter of 2023.
On February 6, 2020, the FASB issued ASU 2020-02,Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.2016-02, Leases (Topic 842). The amendments in this ASU related to Leases (Topic 842) did not have any impact on the Company. The amendments in this ASU related to Topic 326 adds additional guidance related to the SEC’s expectations for the documentation of the measurement, review process and the systematic methodology used by entities to determine the current credit losses under FASB ASC Topic 326. Management is currently in the process of reviewing how the Company’s credit loss calculation and review processes will be impacted by the additional guidance of this ASU when ASC Topic 326 is adopted in the first quarter of 2023.
(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 the Company’s 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, 2021 and December 31, 2020.
Carrying Value at September 30, 2021 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | $ | 234,939 | 0 | 234,939 | 0 | |||||||||||
Equity securities | 217 | 0 | 217 | 0 | ||||||||||||
Mortgage loan commitments | (69 | ) | 0 | (69 | ) | 0 | ||||||||||
Total | $ | 235,087 | 0 | 235,087 | 0 | |||||||||||
Carrying Value at December 31, 2020 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | $ | 148,090 | 0 | 148,090 | 0 | |||||||||||
Equity securities | 149 | 0 | 149 | 0 | ||||||||||||
Mortgage loan commitments | 261 | 0 | 261 | 0 | ||||||||||||
Total | $ | 148,500 | 0 | 148,500 | 0 | |||||||||||
There were no transfers between Levels 1,2 or 3 during the three or nine month periods ended September 30, 2021.
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. 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, 2021 and December 31, 2020.
Carrying Value at September 30, 2021 | ||||||||||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | Three Months Ended September 30, 2021 Total Losses | Nine Months Ended September 30, 2021 Total Losses | ||||||||||||||||||
Loans held for sale | $ | 5,754 | 0 | 5,754 | 0 | (91 | ) | (67 | ) | |||||||||||||||
Mortgage servicing rights, net | 3,232 | 0 | 3,232 | 0 | 0 | 0 | ||||||||||||||||||
Impaired loans | 1,585 | 0 | 1,585 | 0 | (34 | ) | (98 | ) | ||||||||||||||||
Total | $ | 10,571 | 0 | 10,571 | 0 | (125 | ) | (165 | ) | |||||||||||||||
Carrying Value at December 31, 2020 | ||||||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | Year Ended December 31, 2020 Total Gains (Losses) | |||||||||||||||
Loans held for sale | $ | 6,186 | 0 | 6,186 | 0 | 28 | ||||||||||||||
Mortgage servicing rights, net | 3,043 | 0 | 3,043 | 0 | 0 | |||||||||||||||
Impaired loans | 2,888 | 0 | 2,888 | 0 | (76 | ) | ||||||||||||||
Real estate, net | 636 | 0 | 636 | 0 | 0 | |||||||||||||||
Total | $ | 12,753 | 0 | 12,753 | 0 | (48 | ) | |||||||||||||
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 the Company’s 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, 2022 and December 31, 2021.
Carrying Value at September 30, 2022 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | $ | 249,212 | 0 | 249,212 | 0 | |||||||||||
Equity securities | 198 | 0 | 198 | 0 | ||||||||||||
Mortgage loan commitments | (49 | ) | 0 | (49 | ) | 0 | ||||||||||
Total | $ | 249,361 | 0 | 249,361 | 0 | |||||||||||
Carrying Value at December 31, 2021 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | $ | 285,765 | 0 | 285,765 | 0 | |||||||||||
Equity securities | 248 | 0 | 248 | 0 | ||||||||||||
Mortgage loan commitments | 26 | 0 | 26 | 0 | ||||||||||||
Total | $ | 286,039 | 0 | 286,039 | 0 | |||||||||||
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. 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, 2022 and December 31, 2021.
Carrying Value at September 30, 2022 | ||||||||||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | Three Months Ended September 30, 2022 Total Losses | Nine Months Ended September 30, 2022 Total Losses | ||||||||||||||||||
Loans held for sale | $ | 1,934 | 0 | 1,934 | 0 | (1 | ) | (61 | ) | |||||||||||||||
Mortgage servicing rights | 3,117 | 0 | 3,117 | 0 | 0 | 0 | ||||||||||||||||||
Impaired loans | 1,864 | 0 | 1,864 | 0 | (34 | ) | (38 | ) | ||||||||||||||||
Total | $ | 6,915 | 0 | 6,915 | 0 | (35 | ) | (99 | ) | |||||||||||||||
Carrying Value at December 31, 2021 | ||||||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | Year Ended December 31, 2021 Total Losses | |||||||||||||||
Loans held for sale | $ | 5,575 | 0 | 5,575 | 0 | (56 | ) | |||||||||||||
Mortgage servicing rights | 3,280 | 0 | 3,280 | 0 | 0 | |||||||||||||||
Impaired loans | 4,244 | 0 | 4,244 | 0 | (218 | ) | ||||||||||||||
Real estate, net | 290 | 0 | 290 | 0 | 0 | |||||||||||||||
Total | $ | 13,389 | 0 | 13,389 | 0 | (274 | ) | |||||||||||||
(5) | Fair Value of Financial Instruments |
ASC 825, Disclosures about Fair Values of Financial Instruments requires interim reporting period disclosure of the estimated fair values of the Company’s 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 September 30, 2022 and December 31, 2021and December 31, 2020 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, 2022 and December 31, 2021 are shown below. Following the table, there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments.
September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 18,645 | 18,645 | 18,645 | 94,143 | 94,143 | 94,143 | |||||||||||||||||||||||||||||||||||||||||
Securities available for sale | 249,212 | 249,212 | 249,212 | 285,765 | 285,765 | 285,765 | ||||||||||||||||||||||||||||||||||||||||||
Equity securities | 198 | 198 | 198 | 248 | 248 | 248 | ||||||||||||||||||||||||||||||||||||||||||
Loans held for sale | 1,934 | 1,934 | 1,934 | 5,575 | 5,575 | 5,575 | ||||||||||||||||||||||||||||||||||||||||||
Loans receivable, net | 740,280 | 699,301 | 699,301 | 652,502 | 661,298 | 661,298 | ||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 1,283 | 1,283 | 1,283 | 1,092 | 1,092 | 1,092 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable | 2,662 | 2,662 | 2,662 | 2,132 | 2,132 | 2,132 | ||||||||||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | 947,557 | 945,335 | 945,335 | 950,666 | 950,558 | 950,558 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest payable | 53 | 53 | 53 | 63 | 63 | 63 | ||||||||||||||||||||||||||||||||||||||||||
Off-balance sheet financial instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to extend credit | (49 | ) | (49 | ) | 251,806 | 26 | 26 | 195,141 | ||||||||||||||||||||||||||||||||||||||||
Commitments to sell loans | 73 | 73 | 6,072 | 12 | 12 | 12,340 | ||||||||||||||||||||||||||||||||||||||||||
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 similar securities.
Equity Securities
The fair values of equity securities were based upon quoted market prices for similar securities.
The estimated fair value of the Company’s financial instruments as of September 30, 2021 and December 31, 2020 are shown below. Following the table, there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments.
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 149,436 | 149,436 | 149,436 | 86,269 | 86,269 | 86,269 | |||||||||||||||||||||||||||||||||||||||||
Securities available for sale | 234,939 | 234,939 | 234,939 | 148,090 | 148,090 | 148,090 | ||||||||||||||||||||||||||||||||||||||||||
Equity securities | 217 | 217 | 217 | 149 | 149 | 149 | ||||||||||||||||||||||||||||||||||||||||||
Loans held for sale | 5,754 | 5,754 | 5,754 | 6,186 | 6,186 | 6,186 | ||||||||||||||||||||||||||||||||||||||||||
Loans receivable, net | 622,264 | 632,659 | 632,659 | 642,630 | 648,275 | 648,275 | ||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 1,092 | 1,092 | 1,092 | 932 | 932 | 932 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable | 2,062 | 2,062 | 2,062 | 3,102 | 3,102 | 3,102 | ||||||||||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | 915,302 | 915,478 | 915,478 | 795,204 | 795,927 | 795,927 | ||||||||||||||||||||||||||||||||||||||||||
Accrued interest payable | 76 | 76 | 76 | 140 | 140 | 140 | ||||||||||||||||||||||||||||||||||||||||||
Off-balance sheet financial instruments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to extend credit | (69 | ) | (69 | ) | 219,855 | 261 | 261 | 180,330 | ||||||||||||||||||||||||||||||||||||||||
Commitments to sell loans | 23 | 23 | 26,184 | (44 | ) | (44 | ) | 24,746 | ||||||||||||||||||||||||||||||||||||||||
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.
Equity Securities
The fair values of equity securities were based upon quoted market prices.
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 (FHLB) Stock
The carrying amount of 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.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)Loss
Other comprehensive income (loss)loss is defined as the change in equity during a period from transactions and other events from nonownernon-owner sources. Comprehensive incomeloss is the total of net income and other comprehensive income (loss),loss, which for the Company is comprised of unrealized gains and losses on securities available for sale. The components of other comprehensive income (loss)loss and the related tax effects were as follows:
For the Three Months Ended September 30, | For the Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale: | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | ||||||||||||||||||||||||||||||||||||
Gross unrealized losses arising during the period | $ | (957 | ) | (269 | ) | (688 | ) | (281 | ) | (79 | ) | (202 | ) | $ | (9,100 | ) | (1,911 | ) | (7,189 | ) | (957 | ) | (269 | ) | (688 | ) | ||||||||||||||||||||||
Other comprehensive loss | $ | (957 | ) | (269 | ) | (688 | ) | (281 | ) | (79 | ) | (202 | ) | $ | (9,100 | ) | (1,911 | ) | (7,189 | ) | (957 | ) | (269 | ) | (688 | ) | ||||||||||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale: | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | Before Tax | Tax Effect | Net of Tax | ||||||||||||||||||||||||||||||||||||
Gross unrealized (losses) gains arising during the period | $ | (2,092 | ) | (584 | ) | (1,508 | ) | 1,800 | 503 | 1,297 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive (loss) income | $ | (2,092 | ) | (584 | ) | (1,508 | ) | 1,800 | 503 | 1,297 | ||||||||||||||||||||||||||||||||||||||
Gross unrealized losses arising during the period | $ | (30,782 | ) | (7,324 | ) | (23,458 | ) | (2,092 | ) | (584 | ) | (1,508 | ) | |||||||||||||||||||||||||||||||||||
Other comprehensive loss | $ | (30,782 | ) | (7,324 | ) | (23,458 | ) | (2,092 | ) | (584 | ) | (1,508 | ) | |||||||||||||||||||||||||||||||||||
(7) |
|
The following table shows the gross unrealized losses and fair valuevalues 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, 20212022 and December 31, 2020.2021.
Less Than Twelve Months | Twelve Months or More | Total | 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 | # of Investments | Fair Value | Unrealized Losses | # of Investments | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal National Mortgage Association (FNMA) | 16 | $ | 72,635 | (612 | ) | 1 | $ | 3,694 | (51 | ) | $ | 76,329 | (663 | ) | 16 | $ | 47,032 | (6,069 | ) | 18 | $ | 60,019 | (10,126 | ) | $ | 107,051 | (16,195 | ) | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation (FHLMC) | 16 | 73,242 | (517 | ) | 0 | 0 | 0 | 73,242 | (517 | ) | 7 | 34,085 | (5,107 | ) | 17 | 54,779 | (9,242 | ) | 88,864 | (14,349 | ) | |||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FNMA | 1 | 37 | (3 | ) | 0 | 0 | 0 | 37 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agency obligations | 7 | 34,911 | (85 | ) | 0 | 0 | 0 | 34,911 | (85 | ) | 3 | 14,371 | (629 | ) | 7 | 33,364 | (1,633 | ) | 47,735 | (2,262 | ) | |||||||||||||||||||||||||||||||||||||||||||
Corporate preferred stock | 0 | 0 | 0 | 1 | 644 | (56 | ) | 644 | (56 | ) | 0 | 0 | 0 | 1 | 525 | (175 | ) | 525 | (175 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | 39 | $ | 180,788 | (1,214 | ) | 2 | $ | 4,338 | (107 | ) | $ | 185,126 | (1,321 | ) | 27 | $ | 95,525 | (11,808 | ) | 43 | $ | 148,687 | (21,176 | ) | $ | 244,212 | (32,984 | ) | ||||||||||||||||||||||||||||||||||||
Less Than Twelve Months | Twelve Months or More | Total | 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 | # of Investments | Fair Value | Unrealized Losses | # of Investments | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FNMA | 1 | $ | 4,956 | (3 | ) | 0 | $ | 0 | 0 | $ | 4,956 | (3 | ) | 19 | $ | 98,423 | (1,234 | ) | 2 | $ | 6,810 | (133 | ) | $ | 105,233 | (1,367 | ) | |||||||||||||||||||||||||||||||||||||
FHLMC | 17 | 85,624 | (1,038 | ) | 2 | 7,664 | (151 | ) | 93,288 | (1,189 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agency obligations | 7 | 34,659 | (337 | ) | 0 | 0 | 0 | 34,659 | (337 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate preferred stock | 0 | 0 | 0 | 1 | 630 | (70 | ) | 630 | (70 | ) | 0 | 0 | 0 | 1 | 658 | (42 | ) | 658 | (42 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | 1 | $ | 4,956 | (3 | ) | 1 | $ | 630 | (70 | ) | $ | 5,586 | (73 | ) | 43 | $ | 218,706 | (2,609 | ) | 5 | $ | 15,132 | (326 | ) | $ | 233,838 | (2,935 | ) | ||||||||||||||||||||||||||||||||||||
The Company reviews its 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 the Company’s 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 September 30, 20212022 relates to a single trust preferred security that was issued by the holding company of a small community bank. As of September 30, 20212022 all payments were current on the trust preferred security and the issuer’s subsidiary bank was considered to be “well capitalized”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, 20212022, as the Company does not intend to sell the 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. 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, 20212022 and December 31, 20202021 is as follows:
(Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
September 30, 2021: | ||||||||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
FNMA | $ | 111,267 | 751 | (663 | ) | 111,355 | $ | 123,246 | 0 | (16,195 | ) | 107,051 | ||||||||||||||||||||
FHLMC | 83,244 | 172 | (517 | ) | 82,899 | 103,213 | 0 | (14,349 | ) | 88,864 | ||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
FNMA | 51 | 2 | 0 | 53 | 40 | 0 | (3 | ) | 37 | |||||||||||||||||||||||
| 194,562 | 925 | (1,180 | ) | 194,307 | 226,499 | 0 | (30,547 | ) | 195,952 | |||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||
U.S. Government agency obligations | 39,990 | 83 | (85 | ) | 39,988 | 54,997 | 0 | (2,262 | ) | 52,735 | ||||||||||||||||||||||
Corporate preferred stock | 700 | 0 | (56 | ) | 644 | 700 | 0 | (175 | ) | 525 | ||||||||||||||||||||||
| 40,690 | 83 | (141 | ) | 40,632 | 55,697 | 0 | (2,437 | ) | 53,260 | |||||||||||||||||||||||
| $ | 235,252 | 1,008 | (1,321 | ) | 234,939 | $ | 282,196 | 0 | (32,984 | ) | 249,212 | |||||||||||||||||||||
(Dollars in thousands) | Amortized cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||||||||||
FNMA | $ | 68,699 | 1,313 | (3 | ) | 70,009 | $ | 138,628 | 550 | (1,367 | ) | 137,811 | ||||||||||||||||||||
FHLMC | 31,025 | 327 | 0 | 31,352 | 108,599 | 126 | (1,189 | ) | 107,536 | |||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
FNMA | 97 | 6 | 0 | 103 | 48 | 2 | 0 | 50 | ||||||||||||||||||||||||
| 99,821 | 1,646 | (3 | ) | 101,464 | 247,275 | 678 | (2,556 | ) | 245,397 | |||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||
U.S. Government agency obligations | 45,029 | 204 | 0 | 45,233 | 39,991 | 56 | (337 | ) | 39,710 | |||||||||||||||||||||||
Municipal obligations | 725 | 1 | 0 | 726 | ||||||||||||||||||||||||||||
Corporate obligations | 37 | 0 | 0 | 37 | ||||||||||||||||||||||||||||
Corporate preferred stock | 700 | 0 | (70 | ) | 630 | 700 | 0 | (42 | ) | 658 | ||||||||||||||||||||||
| 46,491 | 205 | (70 | ) | 46,626 | 40,691 | 56 | (379 | ) | 40,368 | |||||||||||||||||||||||
| $ | 146,312 | 1,851 | (73 | ) | 148,090 | $ | 287,966 | 734 | (2,935 | ) | 285,765 | |||||||||||||||||||||
The following table indicates amortized cost and estimated fair value of securities available for sale at September 30, 20212022 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 | $ | 85,676 | 85,595 | |||||
Due after one year through five years | 124,263 | 124,119 | ||||||
Due after five years through ten years | 24,576 | 24,544 | ||||||
Due after ten years | 737 | 681 | ||||||
Total | $ | 235,252 | 234,939 | |||||
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||
Due one year or less | $ | 59,534 | 52,442 | |||||
Due after one year through five years | 170,935 | 152,099 | ||||||
Due after five years through fifteen years | 51,723 | 44,667 | ||||||
Due after fifteen years | 4 | 4 | ||||||
Total | $ | 282,196 | 249,212 | |||||
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 September 30, 2021 and December 31, 2020 is as follows:
(Dollars in thousands) | September 30, | December 31, | ||||||
Single family | $ | 157,502 | 135,023 | |||||
Commercial real estate: | ||||||||
Real estate rental and leasing | 196,167 | 202,400 | ||||||
Other | 179,533 | 178,304 | ||||||
| 375,700 | 380,704 | |||||||
Consumer | 42,753 | 55,391 | ||||||
Commercial business | 55,743 | 82,673 | ||||||
Total loans | 631,698 | 653,791 | ||||||
Less: | ||||||||
Unamortized discounts | 11 | 12 | ||||||
Net deferred loan fees | 353 | 450 | ||||||
Allowance for loan losses | 9,070 | 10,699 | ||||||
Total loans receivable, net | $ | 622,264 | 642,630 | |||||
(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 | |||||||||||||||
For the three months ended September 30, 2021: | ||||||||||||||||||||
Balance, June 30, 2021 | $ | 929 | 7,033 | 1,039 | 914 | 9,915 | ||||||||||||||
Provision for losses | 13 | (713 | ) | (72 | ) | (114 | ) | (886 | ) | |||||||||||
Recoveries | 0 | 0 | 30 | 11 | 41 | |||||||||||||||
Balance, September 30, 2021 | $ | 942 | 6,320 | 997 | 811 | 9,070 | ||||||||||||||
For the nine months ended September 30, 2021: | ||||||||||||||||||||
Balance, December 31, 2020 | $ | 1,030 | 7,295 | 1,389 | 985 | 10,699 | ||||||||||||||
Provision for losses | (88 | ) | (1,625 | ) | (408 | ) | (232 | ) | (2,353 | ) | ||||||||||
Charge-offs | 0 | 0 | (42 | ) | 0 | (42 | ) | |||||||||||||
Recoveries | 0 | 650 | 58 | 58 | 766 | |||||||||||||||
Balance, September 30, 2021 | $ | 942 | 6,320 | 997 | 811 | 9,070 | ||||||||||||||
Allocated to: | ||||||||||||||||||||
Specific reserves | $ | 29 | 95 | 100 | 14 | 238 | ||||||||||||||
General reserves | 1,001 | 7,200 | 1,289 | 971 | 10,461 | |||||||||||||||
Balance, December 31, 2020 | $ | 1,030 | 7,295 | 1,389 | 985 | 10,699 | ||||||||||||||
Allocated to: | ||||||||||||||||||||
Specific reserves | $ | 38 | 152 | 88 | 8 | 286 | ||||||||||||||
General reserves | 904 | 6,168 | 909 | 803 | 8,784 | |||||||||||||||
Balance, September 30, 2021 | $ | 942 | 6,320 | 997 | 811 | 9,070 | ||||||||||||||
Loans receivable at December 31, 2020: | ||||||||||||||||||||
Individually reviewed for impairment | $ | 857 | 1,484 | 750 | 35 | 3,126 | ||||||||||||||
Collectively reviewed for impairment | 134,166 | 379,220 | 54,641 | 82,638 | 650,665 | |||||||||||||||
Ending balance | $ | 135,023 | 380,704 | 55,391 | 82,673 | 653,791 | ||||||||||||||
Loans receivable at September 30, 2021: | ||||||||||||||||||||
Individually reviewed for impairment | $ | 445 | 684 | 724 | 18 | 1,871 | ||||||||||||||
Collectively reviewed for impairment | 157,057 | 375,016 | 42,029 | 55,725 | 629,827 | |||||||||||||||
Ending balance | $ | 157,502 | 375,700 | 42,753 | 55,743 | 631,698 | ||||||||||||||
(8) | Loans Receivable, Net |
A summary of loans receivable at September 30, 2022 and December 31, 2021 is as follows:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2022 | 2021 | ||||||
Single family | $ | 188,045 | 163,322 | |||||
Commercial real estate: | ||||||||
Real estate rental and leasing | 241,362 | 209,666 | ||||||
Other | 213,999 | 187,202 | ||||||
| 455,361 | 396,868 | |||||||
Consumer | 44,224 | 41,645 | ||||||
Commercial business | 63,236 | 60,165 | ||||||
Total loans | 750,866 | 662,000 | ||||||
Less: | ||||||||
Unamortized discounts | 14 | 10 | ||||||
Net deferred loan fees | 431 | 209 | ||||||
Allowance for loan losses | 10,141 | 9,279 | ||||||
Total loans receivable, net | $ | 740,280 | 652,502 | |||||
(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 | |||||||||||||||
For the three months ended September 30, 2022: Balance, June 30, 2022 | $ | 1,068 | 6,586 | 1,047 | 943 | 9,644 | ||||||||||||||
Provision for losses | 77 | 505 | 12 | (15 | ) | 579 | ||||||||||||||
Charge-offs | 0 | (90 | ) | (8 | ) | 0 | (98 | ) | ||||||||||||
Recoveries | 1 | 0 | 5 | 10 | 16 | |||||||||||||||
Balance, September 30, 2022 | $ | 1,146 | 7,001 | 1,056 | 938 | 10,141 | ||||||||||||||
For the nine months ended September 30, 2022 | $ | 974 | 6,388 | 981 | 936 | 9,279 | ||||||||||||||
Provision for losses | 171 | 703 | 92 | (25 | ) | 941 | ||||||||||||||
Charge-offs | 0 | (90 | ) | (24 | ) | 0 | (114 | ) | ||||||||||||
Recoveries | 1 | 0 | 7 | 27 | 35 | |||||||||||||||
Balance, September 30, 2022 | $ | 1,146 | 7,001 | 1,056 | 938 | 10,141 | ||||||||||||||
Allocated to: | ||||||||||||||||||||
Specific reserves | $ | 36 | 280 | 83 | 7 | 406 | ||||||||||||||
General reserves | 938 | 6,108 | 898 | 929 | 8,873 | |||||||||||||||
Balance, December 31, 2021 | $ | 974 | 6,388 | 981 | 936 | 9,279 | ||||||||||||||
Allocated to: | ||||||||||||||||||||
Specific reserves | $ | 24 | 0 | 112 | 12 | 148 | ||||||||||||||
General reserves | 1,122 | 7,001 | 944 | 926 | 9,993 | |||||||||||||||
Balance, September 30, 2022 | $ | 1,146 | 7,001 | 1,056 | 938 | 10,141 | ||||||||||||||
Loans receivable at December 31, 2021: | ||||||||||||||||||||
Individually reviewed for impairment | $ | 340 | 3,757 | 546 | 7 | 4,650 | ||||||||||||||
Collectively reviewed for impairment | 162,982 | 393,111 | 41,099 | 60,158 | 657,350 | |||||||||||||||
Ending balance | $ | 163,322 | 396,868 | 41,645 | 60,165 | 662,000 | ||||||||||||||
Loans receivable at September 30, 2022: | ||||||||||||||||||||
Individually reviewed for impairment | $ | 732 | 179 | 462 | 639 | 2,012 | ||||||||||||||
Collectively reviewed for impairment | 187,313 | 455,182 | 43,762 | 62,597 | 748,854 | |||||||||||||||
Ending balance | $ | 188,045 | 455,361 | 44,224 | 63,236 | 750,866 | ||||||||||||||
(Dollars in thousands) | Single Family | Commercial Real Estate | Consumer | Commercial Business | Total | |||||||||||||||
For the three months ended September 30, 2020: | ||||||||||||||||||||
Balance, June 30, 2020 | $ | 938 | 5,382 | 1,464 | 865 | 8,649 | ||||||||||||||
Provision for losses | 27 | 878 | (64 | ) | (71 | ) | 770 | |||||||||||||
Charge-offs | 0 | 0 | (29 | ) | (8 | ) | (37 | ) | ||||||||||||
Recoveries | 0 | 0 | 5 | 145 | 150 | |||||||||||||||
Balance, September 30, 2020 | $ | 965 | 6,260 | 1,376 | 931 | 9,532 | ||||||||||||||
For the nine months ended September 30, 2020: | ||||||||||||||||||||
Balance, December 31, 2019 | $ | 857 | 5,060 | 1,507 | 1,140 | 8,564 | ||||||||||||||
Provision for losses | 108 | 1,913 | (79 | ) | (394 | ) | 1,548 | |||||||||||||
Charge-offs | 0 | (730 | ) | (74 | ) | (8 | ) | (812 | ) | |||||||||||
Recoveries | 0 | 17 | 22 | 193 | 232 | |||||||||||||||
Balance, September 30, 2020 | $ | 965 | 6,260 | 1,376 | 931 | 9,532 | ||||||||||||||
(Dollars in thousands) | Single | Commercial | Consumer | Commercial Business | Total | |||||||||||||||
For the three months ended September 30, 2021: | ||||||||||||||||||||
Balance, June 30, 2021 | $ | 929 | 7,033 | 1,039 | 914 | 9,915 | ||||||||||||||
Provision for losses | 13 | (713 | ) | (72 | ) | (114 | ) | (886 | ) | |||||||||||
Recoveries | 0 | 0 | 30 | 11 | 41 | |||||||||||||||
Balance, September 30, 2021 | $ | 942 | 6,320 | 997 | 811 | 9,070 | ||||||||||||||
For the nine months ended September 30, 2021: | ||||||||||||||||||||
Balance, December 31, 2020 | $ | 1,030 | 7,295 | 1,389 | 985 | 10,699 | ||||||||||||||
Provision for losses | (88 | ) | (1,625 | ) | (408 | ) | (232 | ) | (2,353 | ) | ||||||||||
Charge-offs | 0 | 0 | (42 | ) | 0 | (42 | ) | |||||||||||||
Recoveries | 0 | 650 | 58 | 58 | 766 | |||||||||||||||
Balance, September 30, 2021 | $ | 942 | 6,320 | 997 | 811 | 9,070 | ||||||||||||||
The following table summarizes the amount of classified and unclassified loans at September 30, 20212022 and December 31, 2020:2021:
September 30, 2021 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Classified | Unclassified | Classified | Unclassified | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Special Mention | Substandard | Doubtful | Loss | Total | Total | Total Loans | Special Mention | Substandard | Doubtful | Loss | Total | Total | Total Loans | ||||||||||||||||||||||||||||||||||||||||||
Single family | $ | 716 | 892 | 57 | 0 | 1,665 | 155,837 | 157,502 | $ | 1,364 | 1,319 | 49 | 0 | 2,732 | 185,313 | 188,045 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 8,420 | 1,768 | 0 | 0 | 10,188 | 185,979 | 196,167 | 14,878 | 3,576 | 0 | 0 | 18,454 | 222,908 | 241,362 | ||||||||||||||||||||||||||||||||||||||||||
Other | 10,716 | 6,486 | 0 | 0 | 17,202 | 162,331 | 179,533 | 12,867 | 10,079 | 0 | 0 | 22,946 | 191,053 | 213,999 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 0 | 616 | 55 | 53 | 724 | 42,029 | 42,753 | 0 | 357 | 18 | 87 | 462 | 43,762 | 44,224 | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 1,850 | 1,810 | 0 | 0 | 3,660 | 52,083 | 55,743 | 1,262 | 2,445 | 0 | 0 | 3,707 | 59,529 | 63,236 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 21,702 | 11,572 | 112 | 53 | 33,439 | 598,259 | 631,698 | $ | 30,371 | 17,776 | 67 | 87 | 48,301 | 702,565 | 750,866 | |||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||
Classified | Unclassified | |||||||||||||||||||||||||||
(Dollars in thousands) | Special Mention | Substandard | Doubtful | Loss | Total | Total | Total Loans | |||||||||||||||||||||
Single family | $ | 1,219 | 2,845 | 29 | 0 | 4,093 | 130,930 | 135,023 | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Real estate rental and leasing | 8,065 | 3,483 | 0 | 0 | 11,548 | 190,852 | 202,400 | |||||||||||||||||||||
Other | 8,774 | 9,750 | 0 | 0 | 18,524 | 159,780 | 178,304 | |||||||||||||||||||||
Consumer | 0 | 600 | 132 | 18 | 750 | 54,641 | 55,391 | |||||||||||||||||||||
Commercial business | 1,968 | 2,482 | 0 | 0 | 4,450 | 78,223 | 82,673 | |||||||||||||||||||||
| $ | 20,026 | 19,160 | 161 | 18 | 39,365 | 614,426 | 653,791 | |||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||
Classified | Unclassified | |||||||||||||||||||||||||||
(Dollars in thousands) | Special Mention | Substandard | Doubtful | Loss | Total | Total | Total Loans | |||||||||||||||||||||
Single family | $ | 410 | 791 | 56 | 0 | 1,257 | 162,065 | 163,322 | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Real estate rental and leasing | 16,012 | 4,753 | 0 | 0 | 20,765 | 188,901 | 209,666 | |||||||||||||||||||||
Other | 6,824 | 9,571 | 0 | 0 | 16,395 | 170,807 | 187,202 | |||||||||||||||||||||
Consumer | 0 | 475 | 21 | 50 | 546 | 41,099 | 41,645 | |||||||||||||||||||||
Commercial business | 1,933 | 1,813 | 0 | 0 | 3,746 | 56,419 | 60,165 | |||||||||||||||||||||
| $ | 25,179 | 17,403 | 77 | 50 | 42,709 | 619,291 | 662,000 | |||||||||||||||||||||
Classified loans represent special mention, substandard (performing and non-performing), and non-performing loans categorized as doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet may not be warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.
The aging of past due loans at September 30, 20212022 and December 31, 20202021 is summarized as follows:
(Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current Loans | Total Loans | Loans 90 Days or More Past Due and Still Accruing | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current Loans | Total Loans | Loans 90 Days or More Past Due and Still Accruing | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family | $ | 1,072 | 47 | 161 | 1,280 | 156,222 | 157,502 | 0 | $ | 1,261 | 258 | 363 | 1,882 | 186,163 | 188,045 | 0 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 0 | 0 | 325 | 325 | 195,842 | 196,167 | 0 | 0 | 0 | 0 | 0 | 241,362 | 241,362 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 179,533 | 179,533 | 0 | 0 | 0 | 0 | 0 | 213,999 | 213,999 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 219 | 39 | 238 | 496 | 42,257 | 42,753 | 0 | 255 | 95 | 92 | 442 | 43,782 | 44,224 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 0 | 0 | 0 | 0 | 55,743 | 55,743 | 0 | 0 | 0 | 633 | 633 | 62,603 | 63,236 | 0 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 1,291 | 86 | 724 | 2,101 | 629,597 | 631,698 | 0 | $ | 1,516 | 353 | 1,088 | 2,957 | 747,909 | 750,866 | 0 | |||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family | $ | 626 | 38 | 298 | 962 | 134,061 | 135,023 | 0 | $ | 864 | 65 | 153 | 1,082 | 162,240 | 163,322 | 0 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 0 | 0 | 0 | 0 | 202,400 | 202,400 | 0 | 198 | 0 | 0 | 198 | 209,468 | 209,666 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 178,304 | 178,304 | 0 | 226 | 3,402 | 0 | 3,628 | 183,574 | 187,202 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 458 | 66 | 279 | 803 | 54,588 | 55,391 | 0 | 174 | 89 | 122 | 385 | 41,260 | 41,645 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 0 | 0 | 0 | 0 | 82,673 | 82,673 | 0 | 0 | 0 | 0 | 0 | 60,165 | 60,165 | 0 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 1,084 | 104 | 577 | 1,765 | 652,026 | 653,791 | 0 | $ | 1,462 | 3,556 | 275 | 5,293 | 656,707 | 662,000 | 0 | |||||||||||||||||||||||||||||||||||||||||
Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of September 30, 20212022 and December 31, 2020:2021:
September 30, 2021 | December 31, 2020 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||||||||||||||||||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Single family | $ | 356 | 375 | 0 | 740 | 759 | 0 | $ | 684 | 702 | 0 | 253 | 272 | 0 | ||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 0 | 0 | 0 | 932 | 1,582 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Other | 192 | 192 | 0 | 211 | 211 | 0 | 179 | 179 | 0 | 189 | 189 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer | 592 | 592 | 0 | 574 | 574 | 0 | 307 | 307 | 0 | 419 | 419 | 0 | ||||||||||||||||||||||||||||||||||||
Loans with an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Single family | 89 | 89 | 38 | 117 | 117 | 29 | 48 | 48 | 24 | 87 | 87 | 36 | ||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 325 | 325 | 17 | 166 | 166 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Other | 0 | 0 | 0 | 3,568 | 3,568 | 280 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 155 | 155 | 112 | 127 | 127 | 83 | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 639 | 639 | 12 | 7 | 7 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||||||||||||||||||
Single family | 732 | 750 | 24 | 340 | 359 | 36 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 167 | 167 | 135 | 175 | 175 | 90 | 179 | 179 | 0 | 3,757 | 3,757 | 280 | ||||||||||||||||||||||||||||||||||||
Consumer | 132 | 132 | 88 | 176 | 176 | 100 | 462 | 462 | 112 | 546 | 546 | 83 | ||||||||||||||||||||||||||||||||||||
Commercial business | 18 | 18 | 8 | 35 | 586 | 14 | 639 | 639 | 12 | 7 | 7 | 7 | ||||||||||||||||||||||||||||||||||||
| $ | 2,012 | 2,030 | 148 | 4,650 | 4,669 | 406 | ||||||||||||||||||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||||||||||||||||||
Single family | 445 | 464 | 38 | 857 | 876 | 29 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate rental and leasing | 325 | 325 | 17 | 1,098 | 1,748 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Other | 359 | 359 | 135 | 386 | 386 | 90 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 724 | 724 | 88 | 750 | 750 | 100 | ||||||||||||||||||||||||||||||||||||||||||
Commercial business | 18 | 18 | 8 | 35 | 586 | 14 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 1,871 | 1,890 | 286 | 3,126 | 4,346 | 238 | ||||||||||||||||||||||||||||||||||||||||||
The following tables summarizetable summarizes the average recorded investment and interest income recognized on impaired loans during the three and nine months ended September 30, 20212022 and 2020.2021:
For the Three Months Ended September 30, 2021 | For the Nine Months Ended September 30, 2021 | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
(Dollars in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||||||||||||||||||
Single family | $ | 390 | 0 | 564 | 4 | $ | 584 | 1 | 454 | 8 | ||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 78 | 0 | 540 | 0 | ||||||||||||||||||||||||||||
Other | 193 | 0 | 199 | 0 | 180 | 5 | 183 | 7 | ||||||||||||||||||||||||
Consumer | 610 | 0 | 577 | 6 | 304 | 2 | 346 | 7 | ||||||||||||||||||||||||
Loans with an allowance recorded: | ||||||||||||||||||||||||||||||||
Single family | 122 | 0 | 119 | 0 | 65 | 0 | 75 | 0 | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 163 | 0 | 123 | 7 | ||||||||||||||||||||||||||||
Other | 1,643 | 0 | 2,555 | 0 | ||||||||||||||||||||||||||||
Consumer | 157 | 0 | 151 | 1 | ||||||||||||||||||||||||||||
Commercial business | 323 | 0 | 165 | 0 | ||||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||
Single family | 649 | 1 | 529 | 8 | ||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Other | 168 | 0 | 163 | 0 | 1,823 | 5 | 2,738 | 7 | ||||||||||||||||||||||||
Consumer | 114 | 3 | 138 | 1 | 461 | 2 | 497 | 8 | ||||||||||||||||||||||||
Commercial business | 22 | 0 | 29 | 1 | 323 | 0 | 165 | 0 | ||||||||||||||||||||||||
| $ | 3,256 | 8 | 3,929 | 23 | ||||||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||
Single family | 512 | 0 | 683 | 4 | ||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 241 | 0 | 663 | 7 | ||||||||||||||||||||||||||||
Other | 361 | 0 | 362 | 0 | ||||||||||||||||||||||||||||
Consumer | 724 | 3 | 715 | 7 | ||||||||||||||||||||||||||||
Commercial business | 22 | 0 | 29 | 1 | ||||||||||||||||||||||||||||
| $ | 1,860 | 3 | 2,452 | 19 | ||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2020 | For the Nine Months Ended September 30, 2020 | For the Three Months Ended September 30, 2021 | For the Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||
Loans with no related allowance recorded: | ||||||||||||||||||||||||||||||||
Single family | $ | 606 | 6 | 585 | 23 | $ | 390 | 0 | 564 | 4 | ||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 985 | 0 | 493 | 33 | 78 | 0 | 540 | 0 | ||||||||||||||||||||||||
Other | 401 | 0 | 340 | 2 | 193 | 0 | 199 | 0 | ||||||||||||||||||||||||
Consumer | 586 | 3 | 640 | 9 | 610 | 0 | 577 | 6 | ||||||||||||||||||||||||
Commercial business | 4 | 0 | 2 | 0 | ||||||||||||||||||||||||||||
Loans with an allowance recorded: | ||||||||||||||||||||||||||||||||
Single family | 121 | 0 | 273 | 0 | 122 | 0 | 119 | 0 | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 173 | 0 | 177 | 0 | 163 | 0 | 123 | 7 | ||||||||||||||||||||||||
Other | 0 | 0 | 487 | 0 | 168 | 0 | 163 | 0 | ||||||||||||||||||||||||
Consumer | 142 | 0 | 169 | 2 | 114 | 3 | 138 | 1 | ||||||||||||||||||||||||
Commercial business | 50 | 1 | 242 | 2 | 22 | 0 | 29 | 1 | ||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||
Single family | 727 | 6 | 858 | 23 | 512 | 0 | 683 | 4 | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate rental and leasing | 1,158 | 0 | 670 | 33 | 241 | 0 | 663 | 7 | ||||||||||||||||||||||||
Other | 401 | 0 | 827 | 2 | 361 | 0 | 362 | 0 | ||||||||||||||||||||||||
Consumer | 728 | 3 | 809 | 11 | 724 | 3 | 715 | 7 | ||||||||||||||||||||||||
Commercial business | 54 | 1 | 244 | 2 | 22 | 0 | 29 | 1 | ||||||||||||||||||||||||
| $ | 3,068 | 10 | 3,408 | 71 | $ | 1,860 | 3 | 2,452 | 19 | |||||||||||||||||||||||
At September 30, 20212022 and December 31, 2020,2021, non-accruing loans totaled $1.8 million and $2.7$4.6 million, respectively, for which the related allowance for loan losses was $0.3$0.1 million and $0.2$0.4 million, respectively. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded because management determined that the value of the collateral was sufficient to repay the loan totaled $1.1$1.0 million and $2.1$0.9 million at September 30, 20212022 and December 31, 2020,2021, respectively. Non-accrual loans also include certain loans that have had terms modified in a TDR.
The non-accrual loans at September 30, 20212022 and December 31, 20202021 are summarized as follows:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||
Single family | $ | 423 | 502 | |||||
Commercial real estate: | ||||||||
Real estate rental and leasing | 325 | 1,098 | ||||||
Other | 360 | 386 | ||||||
Consumer | 673 | 689 | ||||||
Commercial business | 7 | 9 | ||||||
| $ | 1,788 | 2,684 | ||||||
(Dollars in thousands) | September 30, 2022 | December 31, 2021 | ||||||
Single family | $ | 732 | $ | 340 | ||||
Commercial real estate: | ||||||||
Other | 0 | 3,757 | ||||||
Consumer | 440 | 517 | ||||||
Commercial business | 639 | 7 | ||||||
| $ | 1,811 | $ | 4,621 | |||||
At September 30, 20212022 and December 31, 20202021, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $1.3$0.7 million and $1.5$1.1 million, respectively. Of the loans that were restructured as TDRsin the third quarter of 2022,none were classified but performing, and the amount that was non-performing was not material at September 30, 2022. Of the loans that were restructured in the third quarter of 2021, none were classified but performing, and the amount that was non-performing was not material at September 30, 2021 2021.was not material.
The following table summarizes TDRs at September 30, 20212022 and December 31, 2020:2021:
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
(Dollars in thousands) | Accruing | Non-Accruing | Total | Accruing | Non-Accruing | Total | ||||||||||||||||||
Single family | $ | 22 | 236 | 258 | 355 | 257 | 612 | |||||||||||||||||
Commercial real estate | 0 | 359 | 359 | 0 | 211 | 211 | ||||||||||||||||||
Consumer | 51 | 588 | 639 | 62 | 568 | 630 | ||||||||||||||||||
Commercial business | 10 | 0 | 10 | 25 | 0 | 25 | ||||||||||||||||||
| $ | 83 | 1,183 | 1,266 | 442 | 1,036 | 1,478 | ||||||||||||||||||
September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Accruing | Non-Accrual | Total | Accruing | Non-Accrual | Total | ||||||||||||||||||
Single family | $ | 0 | 206 | 206 | 0 | 254 | 254 | |||||||||||||||||
Commercial real estate | 179 | 0 | 179 | 0 | 355 | 355 | ||||||||||||||||||
Consumer | 22 | 339 | 361 | 29 | 413 | 442 | ||||||||||||||||||
| $ | 201 | 545 | 746 | 29 | 1,022 | 1,051 | ||||||||||||||||||
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after 12twelve months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for the entire 12twelve month period. All loans classified as TDRs are considered to be impaired.
When a loan is modified asin a TDR, there may be a direct, material impact on the loans within the consolidated balance sheets, as principal balances may be partially forgiven. The financial effects of TDRs are presented in the following tablestable and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three month and nine month periodsmonths ended September 30, 20212022 and 2020.2021.
Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Single family | 1 | $ | 38 | 40 | 1 | $ | 38 | 40 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Other | 0 | 0 | 0 | 1 | 139 | 139 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 1 | 93 | 94 | ||||||||||||||||||
Commercial business | 0 | 0 | 0 | 1 | 14 | 14 | ||||||||||||||||||
Total | 1 | $ | 38 | 40 | 4 | $ | 284 | 287 | ||||||||||||||||
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
(Dollars in thousands) | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Other | 0 | $ | 0 | 0 | 1 | $ | 165 | 165 | ||||||||||||||||
Consumer | 1 | 19 | 19 | 1 | 19 | 19 | ||||||||||||||||||
Total | 1 | $ | 19 | 19 | 2 | $ | 184 | 184 | ||||||||||||||||
Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
(Dollars in thousands) | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | Number of Contracts | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Single family | 0 | $ | 0 | 0 | 1 | $ | 94 | 101 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Other | 0 | 0 | 0 | 2 | 293 | 293 | ||||||||||||||||||
Total | 0 | $ | 0 | 0 | 3 | $ | 387 | 394 | ||||||||||||||||
Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Single family | 1 | $ | 38 | 40 | 1 | $ | 38 | 40 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Other | 0 | 0 | 0 | 1 | 139 | 139 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 1 | 93 | 94 | ||||||||||||||||||
Commercial business | 0 | 0 | 0 | 1 | 14 | 14 | ||||||||||||||||||
Total | 1 | $ | 38 | 40 | 4 | $ | 284 | 287 | ||||||||||||||||
There were 0The following table summarizes the loans that were restructured in the 12twelve months precedingended September 30, 2022 and subsequently defaulted during the three and nine months ended September 30, 2022.
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||
(Dollars in thousands) | Number of Contracts | Outstanding Recorded Investment | Number of Contracts | Outstanding Recorded Investment | ||||||||||||
Troubled debt restructurings that subsequently defaulted: | ||||||||||||||||
Commercial real estate: | ||||||||||||||||
Other | 1 | $ | 162 | 1 | $ | 162 | ||||||||||
Total | 1 | $ | 162 | 1 | $ | 162 | ||||||||||
There were no loans that were restructured within the twelve months ended September 30, 2021 and 2020that subsequently defaulted during the three and nine months ended September 30, 2021 and 2020.2021.
The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement. Loans that were non-accrual prior to modification remain on non-accrual status for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accrual status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.
TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral-dependent, the value of the collateral is reviewed and additional reserves may be added to specific reserves as needed. Loans that are not collateral-dependent may have additional reserves established if deemed necessary. The reserves for TDRs were $0.2$0.1 million, or 2.7%0.7%, of the total $9.1$10.1 million in loan loss reserves at September 30, 20212022 and $0.1$0.2 million, or 0.9%2.6%, of the total $10.7$9.3 million in loan loss reserves at December 31, 2020.2021.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 and the Bank’s regulators issued the Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus on April 7, 2020. Section 4013 of the CARES Act temporarily allowsallowed the Bank to grant modifications of loans to borrowers that were impacted by the pandemic without classifying the modifications as TDRs if the accommodation iswas granted before December 31, 2021. In accordance with the regulatory guidance, the Bank granted accommodations on certain loans to borrowers who were negatively impacted by the COVID-19pandemic. AtSeptember 30, 2022 and September 30, 2021, the Bank had $0 and $25.5 million, respectively, of outstanding loans that had beenwere granted loan accommodations in accordance with Section 4013 of the CARES Act. These accommodations are in addition to the TDRs that are disclosed above. All of the six remaining loans that were granted accommodations are in the hospitality industry and allow the borrowers to make interest only payments for periods up to December 31, 2021. Of these loans, $5.7 million were classified but still accruing at September 30, 2021 and all of these loans were current with their agreed upon payments. The commercial credit department continues to communicate regularly with the borrowers that have been granted loan accommodations and monitors their activity closely. This information is used to analyze the performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner. It is anticipated that most of the remaining borrowers that have been granted accommodations will be in a position to resume making their regular loan payments at the end of the accommodation period. Other borrowers may need additional accommodations when their initial accommodation period ends as their operations may need more time to recover from the impact of the pandemic.
(10) | Intangible Assets |
The Company’s intangible assets consist of core deposit intangibles, goodwill and mortgage servicing rights. A summary of mortgage servicing rights activity is as follows:
(Dollars in thousands) | Nine Months Ended | Twelve Months Ended December 31, 2020 | Nine Months Ended September 30, 2020 | |||||||||
Balance, beginning of period | $ | 3,043 | 2,172 | 2,172 | ||||||||
Originations | 1,070 | 2,189 | 1,710 | |||||||||
Amortization | (881 | ) | (1,318 | ) | (1,002 | ) | ||||||
Balance, end of period | $ | 3,232 | 3,043 | 2,880 | ||||||||
Fair value of mortgage servicing rights | $ | 4,292 | 3,378 | 2,956 | ||||||||
(Dollars in thousands) | Nine Months Ended September 30, 2022 | Twelve Months Ended December 31, 2021 | Nine Months Ended September 30, 2021 | |||||||||
Balance, beginning of period | $ | 3,280 | 3,043 | 3,043 | ||||||||
Originations | 532 | 1,405 | 1,070 | |||||||||
Amortization | (695 | ) | (1,168 | ) | (881 | ) | ||||||
Balance, end of period | $ | 3,117 | 3,280 | 3,232 | ||||||||
Fair value of mortgage servicing rights | $ | 6,249 | 4,813 | 4,292 | ||||||||
All of the loans sold where the Company continues to service the loans are serviced for FNMA under the individual loan sale program. The following is a summary of the risk characteristics of the loans being serviced for FNMA at September 30, 2021.2022:
Weighted | Weighted | |||||||||||||||
Loan | Average | Average | ||||||||||||||
Principal | Interest | Remaining | Number | |||||||||||||
(Dollars in thousands) | Balance | Rate | Term (months) | of Loans | ||||||||||||
Original term 30 year fixed rate | $ | 416,090 | 3.46 | % | 312 | 2,650 | ||||||||||
Original term 15 year fixed rate | 118,843 | 2.88 | 142 | 1,068 | ||||||||||||
Weighted | Weighted | |||||||||||||||
Loan | Average | Average | ||||||||||||||
Principal | Interest | Remaining | Number | |||||||||||||
(Dollars in thousands) | Balance | Rate | Term (months) | of Loans | ||||||||||||
Original term 15 year fixed rate | $ | 111,731 | 2.89 | % | 138 | 1,040 | ||||||||||
Original term 30 year fixed rate | 429,994 | 3.51 | 309 | 2,681 | ||||||||||||
Amortization expense for amortizing intangible assets was $0.9$0.7 million and $1.1$0.9 million for the nine month periodsmonths ended September 30, 20212022 and 2020,2021, respectively. The gross carrying amount of intangible assets and the associated accumulated amortization at September 30, 20212022 and December 31, 20202021 is presented in the following tables.table.
September 30, 2022 | ||||||||||||||||||||||||
September 30, 2021 | Gross | Unamortized | ||||||||||||||||||||||
Gross | Carrying | Accumulated | Intangible | |||||||||||||||||||||
(Dollars in thousands) | Carrying Amount | Accumulated Amortization | Unamortized Amount | Amount | Amortization | Assets | ||||||||||||||||||
Mortgage servicing rights | $ | 5,775 | (2,543 | ) | 3,232 | $ | 5,953 | (2,836 | ) | 3,117 | ||||||||||||||
Core deposit intangible | 574 | (557 | ) | 17 | 154 | (154 | ) | 0 | ||||||||||||||||
Goodwill | 802 | 0 | 802 | 802 | 0 | 802 | ||||||||||||||||||
Total | $ | 7,151 | (3,100 | ) | 4,051 | $ | 6,909 | (2,990 | ) | 3,919 | ||||||||||||||
December 31, 2021 | ||||||||||||
Gross | Unamortized | |||||||||||
Carrying | Accumulated | Intangible | ||||||||||
(Dollars in thousands) | Amount | Amortization | Assets | |||||||||
Mortgage servicing rights | $ | 5,854 | (2,574 | ) | 3,280 | |||||||
Core deposit intangible | 574 | (564 | ) | 10 | ||||||||
Goodwill | 802 | 0 | 802 | |||||||||
Total | $ | 7,230 | (3,138 | ) | 4,092 | |||||||
December 31, 2020 | ||||||||||||
Gross | ||||||||||||
(Dollars in thousands) | Carrying Amount | Accumulated Amortization | Unamortized Amount | |||||||||
Mortgage servicing rights | $ | 5,691 | (2,648 | ) | 3,043 | |||||||
Core deposit intangible | 574 | (517 | ) | 57 | ||||||||
Goodwill | 802 | 0 | 802 | |||||||||
Total | $ | 7,067 | (3,165 | ) | 3,902 | |||||||
The following table indicates the estimated future amortization expense for amortizing intangible assets:mortgage servicing rights:
(Dollars in thousands) | Mortgage | Core Deposit | Total Amortizing Intangible Assets | |||||||||
Year ending December 31, | ||||||||||||
2021 | $ | 173 | 7 | 180 | ||||||||
2022 | 666 | 10 | 676 | |||||||||
2023 | 624 | 0 | 624 | |||||||||
2024 | 585 | 0 | 585 | |||||||||
2025 | 511 | 0 | 511 | |||||||||
Thereafter | 673 | 0 | 673 | |||||||||
Total | $ | 3,232 | 17 | 3,249 | ||||||||
(Dollars in thousands) | Mortgage Servicing Rights | |||
Year ending December 31, | ||||
2022 | $ | 187 | ||
2023 | 698 | |||
2024 | 663 | |||
2025 | 597 | |||
2026 | 500 | |||
Thereafter | 472 | |||
Total | $ | 3,117 | ||
No amortization expense relating to goodwill is recorded as GAAP does not allow goodwill to be amortized but requires that it be tested for impairment at least annually, or sooner, if there are indications that impairment may exist.
Projections of amortization are based on existing asset balances and the existing interest rate environment as of September 30, 2021.2022. The Company'sCompany’s actual experiencesexperience may be significantly different depending upon changes in mortgage interest rates and other market conditions.
(11) Leases
The Company accounts for its leases in accordance with ASU 2016-02, Leases (Topic 842). and as of September 30, 2021, a $2.6 million right-of-use asset and an offsetting lease payment obligation liability were recorded on the consolidated balance sheet in other assets and other liabilities, respectively.
Operating lease right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. Because the Company only has operating leases and the right-of-use asset is offset by a lease payment obligation liability, the lease payments are the only amount that is recorded in occupancy expense in the consolidated statements of comprehensive (loss) income.
The Company’s leases relate to office space and bank branches with remaining lease terms between eleventwenty-three and forty-threesixty-two months. Certain leases contain extension options which typically range from three to ten years. Because these extension options are not considered reasonably certain of exercise, they are not included in the lease term. As of September 30, 2022, operating lease right-of-use assets and liabilities were $0.6 million and recorded on the consolidated balance sheet in other assets and other liabilities, respectively.
The table below summarizes the Company’s net lease cost for the three and nine months ended September 30, 2021.2022.
(Dollars in thousands) | Three Months Ended | Nine Months Ended | ||||||
Operating lease cost | $ | 223 | 672 | |||||
(Dollars in thousands) | Three Months Ended | Nine Months Ended | ||||||
Operating lease cost | $ | 57 | 172 | |||||
The table below summarizes other information related to the Company’s operating leases:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
(Dollars in thousands) | September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||||||||
Operating cash flows from operating leases | $ | 223 | 224 | 672 | 669 | |||||||||||||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases | $ | 57 | 223 | 172 | 672 | |||||||||||||||||||||||||||
Weighted-average remaining lease term – operating leases, in years | 3.0 | 3.9 | 3.0 | 3.9 | 3.0 | 3.0 | 3.0 | 3.0 | ||||||||||||||||||||||||
Weighted-average discount rate – operating leases | 2.19 | % | 2.19 | % | 2.19 | % | 2.19 | % | 2.63 | % | 2.19 | % | 2.63 | % | 2.19 | % | ||||||||||||||||
The table below summarizes the maturities of remaining lease liabilities:
(Dollars in thousands) | September 30, 2021 | |||
2021 | $ | 229 | ||
2022 | 932 | |||
2023 | 807 | |||
2024 | 729 | |||
2025 | 15 | |||
Total lease payments | 2,712 | |||
Less: Interest | (92 | ) | ||
Present value of lease liabilities | $ | 2,620 | ||
SubsequentThe decrease in the net lease cost and operating cash flows between the periods is related to the end of the third quarter, on October 8, 2021, the Company executed the purchase option on the corporate office building and terminated the existing agreement to lease the building. The purchase of the building for $7.8 million eliminated approximately $2.3 millioncombined corporate office and branch facility in Rochester, Minnesota during the fourth quarter of 2021. This facility had previously been leased by the above right-of-use asset andCompany.
The table below summarizes the offsettingmaturity of remaining lease payment obligation liability as of the purchase date. Therefore, the reported amounts in future periods for the right-of-use asset and the offsetting lease payment obligation liability are expected to decline substantially from the amounts reportedliabilities at September 30, 2021.2022:
(Dollars in thousands) | September 30, 2022 | |||
2022 | $ | 57 | ||
2023 | 232 | |||
2024 | 212 | |||
2025 | 58 | |||
2026 | 27 | |||
2027 and thereafter | 25 | |||
Total lease payments | 611 | |||
Less: Interest | (25 | ) | ||
Present value of lease liabilities | $ | 586 | ||
(12) Earnings per Common Share
The following table reconciles the weighted average shares outstanding and the earnings available to common shareholdersstockholders used for basic and diluted earnings per common share:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Dollars in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Weighted average number of common shares outstanding used in basic earnings per share calculation | 4,432,447 | 4,628,292 | 4,494,761 | 4,624,266 | ||||||||||||
Net dilutive effect of: | ||||||||||||||||
Restricted stock awards and options | 33,421 | 22,550 | 33,122 | 25,312 | ||||||||||||
Weighted average number of shares outstanding adjusted for effect of dilutive securities | 4,465,868 | 4,650,842 | 4,527,883 | 4,649,578 | ||||||||||||
Income available to common stockholders | $ | 3,619 | 3,101 | 11,565 | 7,177 | |||||||||||
Basic earnings per common share | $ | 0.82 | 0.67 | 2.57 | 1.55 | |||||||||||
Diluted earnings per common share | $ | 0.81 | 0.67 | 2.55 | 1.54 | |||||||||||
Three Months Ended September 30, | Nine Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
Weighted average number of common shares outstanding used in basic earnings per common share calculation | 4,348,444 | 4,432,447 | 4,366,672 | 4,494,761 | ||||||||||||
Net dilutive effect of: Restricted stock awards and options | 30,652 | 33,421 | 32,651 | 33,122 | ||||||||||||
Weighted average number of shares outstanding adjusted for effect of dilutive securities | 4,379,096 | 4,465,868 | 4,399,323 | 4,527,883 | ||||||||||||
Income available to common stockholders | $ | 1,831 | 3,619 | 5,607 | 11,565 | |||||||||||
Basic earnings per common share | $ | 0.42 | 0.82 | 1.28 | 2.57 | |||||||||||
Diluted earnings per common share | $ | 0.42 | 0.81 | 1.27 | 2.55 | |||||||||||
(13) Regulatory Capital and Oversight
The Bank is subject to the Basel III regulatory capital requirements. The Basel III requirements, among other things, (i) apply a set of capital requirements to the Bank, including requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum Tier 1 capital requirement, and (iii) set forth rules for calculating risk-weighted assets for purposes of such requirements. The rules also made corresponding revisions to the prompt corrective action framework and include capital ratios and buffer requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Board of Governors of the Federal Reserve SystemFRB amended its Small Bank Holding Company Policy Statement (Policy Statement), to exempt small bank holding companies with assets less than $3 billion from the above capital requirements. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company currently meets the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table and defined in the regulation) of Common Equitycommon equity Tier 1 capital to risk weightedrisk-weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk weightedrisk-weighted assets and total capital to risk weightedrisk-weighted assets.
The Bank’s average total assets for the thirdquarter endedof September 30, 2021 2022were $992.6 million,$1.1 billion, its adjusted total assets were $991.8 million,$1.1 billion, and its risk-weighted assets were $690.2$852.5 million. The following table presents the Bank’s capital amounts and ratios at September 30, 20212022 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective actions regulations.
Actual | Required to be Adequately Capitalized | Excess Capital | To Be Well Capitalized Under Prompt Corrective Action Provisions | Actual | Required to be Adequately Capitalized | Excess Capital | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent of Assets | Amount | Percent of Assets | Amount | Percent of Assets | Amount | Percent of Assets | Amount | Percent of Assets(1) | Amount | Percent of Assets(1) | Amount | Percent of Assets(1) | Amount | Percent of Assets(1) | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common equity tier 1 capital | $ | 95,568 | 13.85 | % | $ | 31,060 | 4.50 | % | $ | 64,508 | 9.35 | % | $ | 44,865 | 6.50 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 capital leverage | 95,568 | 9.64 | 39,674 | 4.00 | 55,894 | 5.64 | 49,592 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common equity Tier 1 capital | $ | 97,772 | 11.47 | % | $ | 38,360 | 4.50 | % | $ | 59,412 | 6.97 | % | $ | 55,409 | 6.50 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 leverage | 97,772 | 8.95 | 43,690 | 4.00 | 54,082 | 4.95 | 54,612 | 5.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tier 1 risk-based capital | 95,568 | 13.85 | 41,414 | 6.00 | 54,154 | 7.85 | 55,219 | 8.00 | 97,772 | 11.47 | 51,147 | 6.00 | 46,625 | 5.47 | 68,196 | 8.00 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total risk-based capital | 104,201 | 15.10 | 55,219 | 8.00 | 48,982 | 7.10 | 69,023 | 10.00 | 107,913 | 12.66 | 68,196 | 8.00 | 39,717 | 4.66 | 85,245 | 10.00 | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) Based upon the Bank’s adjusted total assets for the purpose of the Tier 1 leverage capital ratio and risk-weighted assets for the purpose of the risk-based capital ratios.
The Bank must maintain a capital conservation buffer of 2.50% composed of common equity Tier 1 capital above its minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Management believes that, as of September 30, 2021,2022, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the current prompt corrective action regulations, including the capital conservation buffer described above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The Office of the Comptroller of the Currency (OCC) has extensive discretion in its supervisory and enforcement activities and can adjust the requirement to be “well-capitalized”well-capitalized in the future.
(14) Stockholders’ Equity
The Company was authorized to repurchase up to $4.9 million additionalrepurchased 30,000 shares of its common stock under the existing board-approved share repurchase program at September 30, 2021. The Company did not declare any dividends on its common stock but did repurchase 50,000and 90,000 shares of its common stock in the open market for $1.1a gross purchase price of $0.7 million and $2.1 million under theits share repurchase program during the third quarter and firstnine months of 2021.2022, respectively. At September 30, 2022, the Company was authorized to repurchase up to $2.0 million more of its common stock under the existing share repurchase program. The Company also declared three quarterly dividends of 6 cents per share that were paid on March 9, 2022, June 7, 2022, and September 7, 2022. The total amount of dividends paid to stockholders in the firstnine months of 2022 was $0.8 million.
(15)Commitments and Contingencies
The Bank issues standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit issued and available at September 30, 20212022 were approximately $5.6$13.8 million, expire over the next twenty-fourtwenty-six months, and are collateralized primarily with commercial real estate mortgages. Since the conditions under which the Bank is required to fund the standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments.
From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. The Company is, and expects to become, engaged in foreclosure proceedings, collection actions, and other litigation as part of its normal banking activities. Among the various current litigation matters, the Company is involved in a bankruptcy litigation claim where the bankruptcy trustee is attempting to recover $2.5 million related to the principal and interest payments made to the Bank prior to the bankruptcy filing of a former customer of the Bank.
The Company examines each legal matter, and, in those situations where it determines that a particular legal matter presents loss contingencies that are both probable and reasonably estimable, establishes an appropriate accrual. In many situations, the Company is not able to estimate reasonably possible losses due to the preliminary nature of the legal matter, as well as a variety of other factors and uncertainties. For those legal matters where the Company is able to estimate a range of reasonably possible losses, management currently estimates that the aggregate range of losses from all of the Company’s outstanding litigation is from $0 to $0.7 million in excess of the amounts accrued, if any. This estimated aggregate range is based on an assessment of the information currently available to the Company and the actual aggregate losses could be higher. However, the Company does not believe these losses are probable at this time. The Company reassesses all of its potential loss positions based on the available information each quarter and the estimated range of reasonably possible losses may change in the future. The Company typically vigorously pursues all available defenses related to litigation but may consider other alternatives, including settlement, in situations where there is an opportunity to resolve a legal matter on terms that are considered to be favorable to the Company when considering the continued expense and distraction of defending against any particular legal action.
Based on the Company’s current understanding of all of the outstanding legal matters, management does not believe that judgments or settlements arising from any pending or threatened litigation, individually or in the aggregate, would have a material adverse effect on the consolidated financial condition or results of operations. However, litigation is unpredictable and the actual results of litigation cannot be determined with any certainty. Therefore, the ultimate aggregate resolution of any, or all, of the current outstanding legal matters could have a material adverse effect on the Company’s results of operations in the future.
(16)Business Segments
The Bank has been identified as a reportable operating segment in accordance with the provisions of ASC 280. HMN, the holding company, did not meet the quantitative thresholds for a reportable segment and therefore is included in the “Other” category.
The Company evaluates performance and allocates resources based on the segment’s net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of directors.
The following table sets forth certain information about the reconciliations of reported profit and assets for each of the Company’s reportable segments.
(Dollars in thousands) | Home Federal Savings Bank | Other | Eliminations | Consolidated | Home Federal Savings Bank | Other | Eliminations | Consolidated Total | ||||||||||||||||||||||||
At or for the nine months ended September 30, 2021: | ||||||||||||||||||||||||||||||||
Interest income - external customers | $ | 24,384 | 0 | 0 | 24,384 | |||||||||||||||||||||||||||
Non-interest income - external customers | 11,047 | 1 | 0 | 11,048 | ||||||||||||||||||||||||||||
At or for the nine months ended September 30, 2022: | ||||||||||||||||||||||||||||||||
Interest income – external customers | $ | 24,253 | 0 | 0 | 24,253 | |||||||||||||||||||||||||||
Non-interest income – external customers | 6,945 | 0 | 0 | 6,945 | ||||||||||||||||||||||||||||
Intersegment interest income | 0 | 22 | (22 | ) | 0 | 0 | 27 | (27 | ) | 0 | ||||||||||||||||||||||
Intersegment non-interest income | 176 | 12,054 | (12,230 | ) | 0 | 176 | 6,052 | (6,228 | ) | 0 | ||||||||||||||||||||||
Interest expense | 1,245 | 0 | (22 | ) | 1,223 | 942 | 0 | (27 | ) | 915 | ||||||||||||||||||||||
Provision for loan losses | (2,353 | ) | 0 | 0 | (2,353 | ) | 941 | 0 | 0 | 941 | ||||||||||||||||||||||
Non-interest expense | 19,906 | 635 | (176 | ) | 20,365 | 20,972 | 613 | (176 | ) | 21,409 | ||||||||||||||||||||||
Income tax expense | 4,755 | (123 | ) | 0 | 4,632 | 2,467 | (141 | ) | 0 | 2,326 | ||||||||||||||||||||||
Net income | 12,054 | 11,565 | (12,054 | ) | 11,565 | 6,052 | 5,607 | (6,052 | ) | 5,607 | ||||||||||||||||||||||
Total assets | 1,035,945 | 110,072 | (109,402 | ) | 1,036,615 | 1,046,983 | 89,817 | (89,007 | ) | 1,047,793 | ||||||||||||||||||||||
At or for the nine months ended September 30, 2020: | ||||||||||||||||||||||||||||||||
Interest income - external customers | $ | 23,676 | 0 | 0 | 23,676 | |||||||||||||||||||||||||||
Non-interest income - external customers | 10,590 | 0 | 0 | 10,590 | ||||||||||||||||||||||||||||
At or for the nine months ended September 30, 2021: | ||||||||||||||||||||||||||||||||
Interest income – external customers | $ | 24,384 | 0 | 0 | 24,384 | |||||||||||||||||||||||||||
Non-interest income – external customers | 11,047 | 1 | 0 | 11,048 | ||||||||||||||||||||||||||||
Intersegment interest income | 0 | 22 | (22 | ) | 0 | |||||||||||||||||||||||||||
Intersegment non-interest income | 176 | 12,054 | (12,230 | ) | 0 | |||||||||||||||||||||||||||
Interest expense | 1,245 | 0 | (22 | ) | 1,223 | |||||||||||||||||||||||||||
Provision for loan losses | (2,353 | ) | 0 | 0 | (2,353 | ) | ||||||||||||||||||||||||||
Non-interest expense | 19,906 | 635 | (176 | ) | 20,365 | |||||||||||||||||||||||||||
Income tax expense | 4,755 | (123 | ) | 0 | 4,632 | |||||||||||||||||||||||||||
Net income | 12,054 | 11,565 | (12,054 | ) | 11,565 | |||||||||||||||||||||||||||
Total assets | 1,035,945 | 110,072 | (109,402 | ) | 1,036,615 | |||||||||||||||||||||||||||
At or for the quarter ended September 30, 2022: | ||||||||||||||||||||||||||||||||
Interest income – external customers | $ | 8,631 | 0 | 0 | 8,631 | |||||||||||||||||||||||||||
Non-interest income – external customers | 2,054 | 0 | 0 | 2,054 | ||||||||||||||||||||||||||||
Intersegment interest income | 0 | 32 | (32 | ) | 0 | 0 | 10 | (10 | ) | 0 | ||||||||||||||||||||||
Intersegment non-interest income | 175 | 7,609 | (7,784 | ) | 0 | 59 | 1,981 | (2,040 | ) | 0 | ||||||||||||||||||||||
Interest expense | 2,325 | 0 | (32 | ) | 2,293 | 350 | 0 | (10 | ) | 340 | ||||||||||||||||||||||
Provision for loan losses | 1,548 | 0 | 0 | 1,548 | 579 | 0 | 0 | 579 | ||||||||||||||||||||||||
Non-interest expense | 19,992 | 562 | (175 | ) | 20,379 | 7,025 | 208 | (59 | ) | 7,174 | ||||||||||||||||||||||
Income tax expense | 2,967 | (98 | ) | 0 | 2,869 | 809 | (48 | ) | 0 | 761 | ||||||||||||||||||||||
Net income | 7,609 | 7,177 | (7,609 | ) | 7,177 | 1,981 | 1,831 | (1,981 | ) | 1,831 | ||||||||||||||||||||||
Total assets | 897,694 | 101,308 | (100,550 | ) | 898,452 | 1,046,983 | 89,817 | (89,007 | ) | 1,047,793 | ||||||||||||||||||||||
At or for the quarter ended September 30, 2021: | ||||||||||||||||||||||||||||||||
Interest income - external customers | $ | 8,401 | 0 | 0 | 8,401 | |||||||||||||||||||||||||||
Non-interest income - external customers | 3,051 | 0 | 0 | 3,051 | ||||||||||||||||||||||||||||
Interest income – external customers | $ | 8,401 | 0 | 0 | 8,401 | |||||||||||||||||||||||||||
Non-interest income – external customers | 3,051 | 0 | 0 | 3,051 | ||||||||||||||||||||||||||||
Intersegment interest income | 0 | 8 | (8 | ) | 0 | 0 | 8 | (8 | ) | 0 | ||||||||||||||||||||||
Intersegment non-interest income | 59 | 3,773 | (3,832 | ) | 0 | 59 | 3,773 | (3,832 | ) | 0 | ||||||||||||||||||||||
Interest expense | 368 | 0 | (8 | ) | 360 | 368 | 0 | (8 | ) | 360 | ||||||||||||||||||||||
Provision for loan losses | (886 | ) | 0 | 0 | (886 | ) | (886 | ) | 0 | 0 | (886 | ) | ||||||||||||||||||||
Non-interest expense | 6,766 | 199 | (59 | ) | 6,906 | 6,766 | 199 | (59 | ) | 6,906 | ||||||||||||||||||||||
Income tax expense | 1,490 | (37 | ) | 0 | 1,453 | 1,490 | (37 | ) | 0 | 1,453 | ||||||||||||||||||||||
Net income | 3,773 | 3,619 | (3,773 | ) | 3,619 | 3,773 | 3,619 | (3,773 | ) | 3,619 | ||||||||||||||||||||||
Total assets | 1,035,945 | 110,072 | (109,402 | ) | 1,036,615 | 1,035,945 | 110,072 | (109,402 | ) | 1,036,615 | ||||||||||||||||||||||
At or for the quarter ended September 30, 2020: | ||||||||||||||||||||||||||||||||
Interest income - external customers | $ | 7,949 | 0 | 0 | 7,949 | |||||||||||||||||||||||||||
Non-interest income - external customers | 4,527 | 0 | 0 | 4,527 | ||||||||||||||||||||||||||||
Intersegment interest income | 0 | 9 | (9 | ) | 0 | |||||||||||||||||||||||||||
Intersegment non-interest income | 58 | 3,251 | (3,309 | ) | 0 | |||||||||||||||||||||||||||
Interest expense | 665 | 0 | (9 | ) | 656 | |||||||||||||||||||||||||||
Provision for loan losses | 770 | 0 | 0 | 770 | ||||||||||||||||||||||||||||
Non-interest expense | 6,591 | 194 | (58 | ) | 6,727 | |||||||||||||||||||||||||||
Income tax expense | 1,257 | (35 | ) | 0 | 1,222 | |||||||||||||||||||||||||||
Net income | 3,251 | 3,101 | (3,251 | ) | 3,101 | |||||||||||||||||||||||||||
Total assets | 897,694 | 101,308 | (100,550 | ) | 898,452 | |||||||||||||||||||||||||||
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Item 2: | HMN FINANCIAL, INC. | |
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||
| OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-looking Information
Safe Harbor Statement
This quarterly report on Form 10-Q and other reports filed by the Company with the SEC may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “estimate,” “intend,” “look,” “believe,” “anticipate,” “project,” “continue,” “may,” “will,” “would,” “could,” “target,” “goal,” “should,” and “trend,” or similar statements or variations of such terms and include, but are not limited to, those relating to growing the Company’s core deposit relationships and loan balances; enhancing the financial performance of its core banking operations;to: maintaining credit quality; maintaining net interest margins; reducing non-performing assets; generating improved financial results; the adequacy and amount of available liquidity and capital resources to the Bank;Home Federal Savings Bank (the Bank); the Company’s liquidity and capital requirements; expectations for core capitalenacted and strategies and potential strategies for maintenance thereof; improvements in loan production;expected changes into the size offederal funds rate; the Bank’s loan portfolio; the anticipated impacts of the COVID-19 pandemicpast and ongoing deterioration in economic conditions and efforts to mitigate the same on the general economy, the Bank’s clients, deposit balances, and the allowance for loan losses; the anticipated benefits that will be realized by clients from government assistance programs related to the COVID-19 pandemic, including the forgiveness of loans under the Paycheck Protection Program (PPP) loans, the Company’s expectations relating to repurchases of its common stock during the COVID-19 pandemic and requests for loan payment accommodation from borrowers; the amount of the Bank’s non-performing assets in future periods and the appropriateness of the allowances therefor; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and composition of interest earning assets; the amount and compositions of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends or repurchases of stock by HMN; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer of the trust preferred securities held by the Bank; the anticipated results of litigation and the Company’s assessment of the impact on its financial statements; the ability of the Bank to pay dividends to HMN; the ability to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject and possible responses of the OCC, Board of Governors of the Federal Reserve System, the Bank, and the Company due to any failure to comply with any such regulatory standard, directive or requirement.subject.
A number of factors many of which are, and may continue to be, amplified by the COVID-19 pandemic and efforts to mitigate the same, could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to potential further deterioration in economic conditions, the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCCOffice of the Comptroller of the Currency and the Federal Reserve Bank (FRB)of Minneapolis in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as continued shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with traditional and alternate funding sources, including changes in collateral advance rates and policies of the FHLBFederal Home Loan Bank and the FRB;Federal Reserve Bank; technological, computer-related or operational difficulties including those from any third party cyberattack; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; domestic and international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; ourthe Company’s ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the Company’s most recent filings on Form 10-K and 10-Q with the SEC. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 and Part II, Item 1A of its subsequently filed quarterly reports on Form 10-Q. All statements in this quarterly report on Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q.
General
HMN is the stock savings bank holding company for the Bank, which operates community banking and loan production offices in Minnesota, Iowa and Wisconsin. The earnings of the Company are primarily dependent on the Bank's net interest income, which is the difference between interest earned on loans and investments, and the interest paid on interest-bearing liabilities such as deposits and other borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the “interestinterest rate spread”.spread. Net interest income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and composition of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net earnings are also affected by the generation of non-interest income, which consists primarily of gains from the sale of loans, and real estate owned, fees for servicing loans, commissions on the sale of uninsured investment products, and service charges on deposit accounts. The Bank incurs expenses in addition to interest expense in the form of compensation and benefits, occupancy and equipment expenses, provisions for loan losses, data processing costs, professional services, deposit insurance, amortization expense on mortgage servicing assets, advertising expenses, and income taxes. The earnings of financial institutions, such as the Bank, are also significantly affected by prevailing economic and competitive conditions, particularly changes in interest rates, government monetary and fiscal policies, and regulations of various regulatory authorities. Lending activities are influenced by the demand for and supply of business credit, single family and commercial properties, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of deposits are influenced by prevailing market rates of interest on competing investments, account maturities and the levels of personal income and savings.
Critical Accounting Estimates
CriticalWhile our significant accounting policies are those policies thatdescribed in the Company's management believes arenotes to our consolidated financial statements, we believe the following discussion addresses our most important to understanding the Company’s financial condition and operating results. These critical accounting policies oftenestimates, which are those estimates made in accordance with U.S. generally accepted accounting principles (GAAP) that involve estimatesa significant level of estimation uncertainty and assumptions that couldhave had or are reasonably likely to have a material impact on the Company’sour financial statements.condition or results of operations. The Company has identified the following critical accounting policiesestimates that management believes involve the most difficult, subjective, and/or complex judgments that are inherently uncertain. Therefore, actual financial results could differ significantly depending upon the estimates, assumptions and other factors used.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national, regional and regionallocal economic conditions such as unemployment data, loan delinquencies, local economic conditions, demand for single family homes, demand for commercial real estate and building lots, loan portfolio composition, historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the appropriateness of the loan loss allowance for its homogeneous and non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single family and consumer loan portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate and multi-family loan portfolios involves assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Company's own loss experience and other qualitative factors and are assigned to all loans without identified credit weaknesses. For each non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans, or portions thereof, that are deemed uncollectible.
The appropriateness of the allowance for loan losses is dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans is typically based on the appraised value of the property less estimated selling costs. The estimates are reviewed periodically and any adjustments are recorded in the provision for loan losses in the periods in which the adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios, the actual loss experience and other qualitative factors. The Company increases its allowance for loan losses by charging the provision for loan losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for loan losses and recording loan charge-offs. Activity in the first nine months of 2021The current year-to-date activity resulted in a decreasean increase in the allowance and a creditcharge against income to the loan loss provision. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified. Although management believes that based on current conditions the allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for loan losses and adjustments may be required in the future. In addition, the Company will be required to adopt Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in the first quarter of 2023. See “Note 1 - New Accounting Pronouncements”in the Notes to Consolidated Financial Statements for further information on the estimated impact of adopting ASU 2016-13.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.
The Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relatesrelate to unrealized losses on the investment portfolio and the allowance for loan losses. ForInvestment losses on available for sale securities are only recognized for tax purposes onlywhen a loss is realized upon the sale of the investments while unrealized losses, net charge-offsof tax, are deductiblerecorded as an adjustment to equity for book purposes. Loan losses are recognized for tax purposes when the loans are charged off while the entire provision for loan losses is used to determine book income. A deferred tax asset is created because of the timing difference of when the expense is recognized for book and tax purposes. Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax planning strategies, and assessments of the current and future economic and business conditions. The positive evidence considered includes the Company’s cumulative net income in the prior three yearthree-year period, the ability to implement tax planning strategies to accelerate taxable income recognition, and the probability that taxable income will be generated in future periods. The Company could not currently identify any negative evidence. It is possible that future conditions may differ substantially from those anticipated in determining that no valuation allowance was required on deferred tax assets and adjustments may be required in the future.
Determining the ultimate settlement of any tax position requires significant estimates and judgments in arriving at the amount of tax benefits to be recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.
Litigation
Estimates related to litigation are inherently subjective and the ultimate resolution of any litigation may be different than current management estimates. See “Note 15 Commitments and Contingencies” for further information on outstanding litigation matters.
COVID-19 Pandemic
In 2020, the spread of COVID-19 slowed economic activity in many countries, including the United States. Millions of Americans were at some point ordered to stay home, including those residing in the states of Minnesota and Wisconsin, and many businesses were ordered to be closed for a period of time or to operate at reduced capacities in order to reduce the spread of COVID-19. These orders severely reduced the flow of commerce which reduced, or entirely eliminated, the revenue streams for many small businesses. This reduction in income forced many small businesses to close temporarily, furlough employees, or terminate operations entirely.
In the first quarter of 2021, vaccines began to be distributed to targeted groups. In the second quarter of 2021, the distribution of the vaccines became more widely available to the general public and business activity improved because of the lessened impact of COVID-19 pandemic resulting from the increased vaccination rates and the removal of pandemic-focused restrictions. In the third quarter of 2021, a delta variant of the COVID-19 virus appeared in the United States and COVID-19 infections increased, which resulted in the re-implementation of certain pandemic-focused restrictions.
Because of the resurgence of COVID-19 infections caused by the delta variant, the extent of the impact of COVID-19 on the Company is difficult to determine as it is not clear how effective the vaccines will be against the delta variant or any future variants of the virus, among other factors. In addition, it is not clear when, or if, businesses will re-hire those workers displaced by the pandemic or what the long-term implications will be on customer behaviors as a result of the pandemic. Up to this point, the Company has not seen a negative impact on its deposit relationships as many of its clients have been able to conduct their business with the Bank through the drive ups, ATMs, night drop, on-line banking website, or by using its mobile banking app. The impact on the Bank’s loan portfolio is also unclear for many of the same reasons.
The CARES Act was signed into law on March 27, 2020 and the Bank’s regulators issued the Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus on April 7, 2020. Section 4013 of the CARES Act temporarily allows the Bank to grant modifications of loans to borrowers that were impacted by the pandemic without classifying the modifications as TDRs if the accommodation is granted before December 31, 2021. In accordance with Section 4013 of the CARES Act, the Bank granted accommodations on certain loans to borrowers. See “Note 9 Allowance for Loan Losses and Credit Quality Information”for further information.
Paycheck Protection Program
The Bank actively participated in helping businesses that were negatively impacted by COVID-19 that applied for forgivable loans under the PPP as part of the CARES Act. The CARES Act, which was signed into law on March 27, 2020 and allocated $349 billion in funding to help small businesses that were negatively impacted by the COVID-19 pandemic. The Bank had the following activity related to the first round of the PPP during 2020 and through September 30, 2021:
(Dollars in thousands) | Number of Loans | Amount | Net Deferred Fees | |||||||||
Originated | 413 | $ | 53,153 | 1,837 | ||||||||
Repaid | (130 | ) | (19,484 | ) | - | |||||||
Net deferred fees recognized | - | - | (1,097 | ) | ||||||||
Balance, December 31, 2020 | 283 | 33,669 | 740 | |||||||||
Repaid | (243 | ) | (21,419 | ) | - | |||||||
Net deferred fees recognized | - | - | (597 | ) | ||||||||
Balance, March 31, 2021 | 40 | 12,250 | 143 | |||||||||
Repaid | (35 | ) | (11,334 | ) | - | |||||||
Net deferred fees recognized | - | - | (126 | ) | ||||||||
Balance, June 30, 2021 | 5 | 916 | 17 | |||||||||
Repaid | (5 | ) | (916 | ) | - | |||||||
Net deferred fees recognized | - | - | (17 | ) | ||||||||
Balance, September 30, 2021 | 0 | $ | 0 | 0 | ||||||||
The Consolidated Appropriations Act of 2021, which was signed into law on December 27, 2020, allocated $284 billion to the Small Business Administration (SBA) to fund a second round of the PPP. The Bank actively participated in the second round of the PPP and had the following activity through September 30, 2021:
(Dollars in thousands) | Number of Loans | Amount | Net Deferred Fees | |||||||||
Originated | 416 | $ | 26,798 | 1,476 | ||||||||
Net deferred fees recognized | - | - | (29 | ) | ||||||||
Balance, March 31, 2021 | 416 | 26,798 | 1,447 | |||||||||
Originated | 50 | 2,167 | 149 | |||||||||
Repaid | (182 | ) | (6,539 | ) | - | |||||||
Net deferred fees recognized | - | - | (522 | ) | ||||||||
Balance, June 30, 2021 | 284 | 22,426 | 1,074 | |||||||||
Repaid | (232 | ) | (15,371 | ) | - | |||||||
Net deferred fees recognized | - | - | (805 | ) | ||||||||
Balance, September 30, 2021 | 52 | $ | 7,055 | 269 | ||||||||
It is anticipated that the majority of the outstanding loans at September 30, 2021 will be forgiven by the SBA and that the remaining net deferred fees will be recognized into income when the loan is repaid.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 20212022 COMPARED TO THE SAME PERIODS ENDED SEPTEMBER 30, 20202021
Net Income
Net income was $1.8 million for the third quarter of 2022, a decrease of $1.8 million, compared to net income of $3.6 million for the third quarter of 2021, an increase of $0.5 million, compared to net income of $3.1 million for the third quarter of 2020.2021. Diluted earnings per share for the third quarter of 20212022 was $0.81, an increase$0.42, a decrease of $0.14 per share,$0.39, compared to diluted earnings per share of $0.67$0.81 for the third quarter of 2020.2021. The increasedecrease in net income between the periods was primarily because of a $1.7$1.5 million decreaseincrease in the provision for loan losses. The provision for loan losses decreasedincreased between the periods primarily because of a reduction in certain loan loss reserve percentages as a result of an internal analysis of the loan portfolio growth and economic improvements related to the COVID-19 pandemic. Net interest income also increased $0.7 million primarily because of an increase in qualitative reserves due to the yield enhancements realizedperceived negative impact on PPP loans that were repaid during the period. These increases in netborrower finances from inflation and rising interest rates. Net income between the periods were partially offsetwas also negatively impacted by a $1.5$1.1 million decrease in the gain on sales of loans due to a decrease in mortgage loan activity.originations and sales. Income tax expense also increased $0.3decreased $0.7 million as a result of the increaseddecreased pre-tax income between the periods.
Net income was $5.6 million for the nine month period ended September 30, 2022, a decrease of $6.0 million, or 51.5%, compared to net income of $11.6 million for the nine month period ended September 30, 2021, an increase of $4.4 million, or 61.1%, compared to net income of $7.2 million for the nine month period ended September 30, 2020.2021. Diluted earnings per share for the nine month period ended September 30, 20212022 was $2.55, an increase$1.27, a decrease of $1.01$1.28 per share, compared to diluted earnings per share of $1.54$2.55 for the same period in 2020.2021. The increasedecrease in net income between the periods was primarily because of a $3.9$3.3 million decreaseincrease in the provision for loan losses. The provision for loan losses decreasedincreased between the periods primarily because of the reductionloan portfolio growth and also because of an increase in the requiredqualitative reserves due to improvements in the economic environment related to the COVID-19 pandemicperceived negative impact on borrower finances from inflation and the results of an internal analysis of the loan portfolio. Other non-interestrising interest rates. Net income increased $1.8 million due primarily to an increase in the gains that were realized on the sale of real estate owned. Net interest income increased $1.8 million primarily due to an increase in the yield enhancements that were realized on PPP loans that were repaid during the period. These increases in net income were partially offsetwas also negatively impacted by a $1.6$2.8 million decrease in the gain on sales of loans due to a decrease in mortgage loan activityoriginations and sales, a $1.4 million decrease in other non-interest income primarily because of a decrease in the gains that were realized on the sale of real estate owned between the periods. Income taxperiods, and a $0.9 million increase in compensation and benefits expense also increased $1.7 millionprimarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the increaseddecreased mortgage loan originations. These decreases in net income were partially offset by a $2.3 million decrease in income tax expense as a result of the decrease in pre-tax income between the periods.
Net Interest Income
Net interest income was $8.3 million for the third quarter of 2022, an increase of $0.3 million, or 3.1%, from $8.0 million for the third quarter of 2021, an increase of $0.7 million, or 10.3%, from $7.32021. Interest income was $8.6 million for the third quarter of 2020. Interest income was2022, an increase of $0.2 million, or 2.7%, from $8.4 million for the third quarter of 2021, an increase of $0.5 million, or 5.7%, from $7.9 million for the third quarter of 2020.2021. Interest income increased primarily because of the $0.8 million in yield enhancements recognized on PPP loans that were repaid during the period. Interest income also increased because of the $107.7$89.9 million increase in the average interest-earning assets between the periods. These increases in interest income wereperiods, which was partially offset by a decrease in the average yield earned on interest-earning assets whichbetween the periods. The average yield earned on interest-earning assets was 3.26% for the third quarter of 2022, a decrease of 21 basis points from 3.47% for the third quarter of 2021, a decrease of 24 basis points from 3.71% for the third quarter of 2020.2021. The decrease in the average yield is primarily related to the $0.8 million decrease between the periods in the prime rate that occurred in the first quarter of 2020, which lowered the rateyield enhancements recognized on adjustable rate loans in the portfolio as well as any new or renewing fixed rate loans that were originated since that time.PPP loans.
Interest expense was $0.3 million for the third quarter of 2022, a decrease of $0.1 million, or 5.6%, from $0.4 million for the third quarter of 2021, a decrease of $0.3 million, or 45.1%, from $0.7 million for the third quarter of 2020.2021. Interest expense decreased, despite the $96.6$92.1 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods, primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.14% for the third quarter of 2022, a decrease of 2 basis points from 0.16% for the third quarter of 2021, a decrease of 18 basis points from 0.34% for the third quarter of 2020.2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease inrepricing of maturing certificates of deposit rates as a result of the decrease in the federal fundscontinued low interest rate in the first quarter of 2020.environment.
Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 20212022 was 3.32%3.13%, a decrease of 819 basis points, compared to 3.40%3.32% for the third quarter of 2020.2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the decrease in the prime rate that occurred in the first quarter of 2020.
Net interest income was $23.2 million for the first nine months of 2021, an increase of $1.8 million, or 8.3%, from $21.4 million for the same period in 2020. Interest income was $24.4 million for the nine month period ended September 30, 2021, an increase of $0.7 million, or 3.0%, from $23.7 million for the same nine month period in 2020. Interest income increased primarily because of the $2.1 million in yield enhancements recognized on PPP loans that were repaid during the period. Interest income also increased because of the $133.8 million increase in the average interest-earning assets between the periods. These increases in interest income were partially offset by a decrease in the average yield earned on interest-earning assets which was 3.49% for the first nine months of 2021, a decrease of 46 basis points from 3.95% for the first nine months of 2020.assets. The decrease in the average yield is primarily related to the $0.8 million decrease between the periods in the prime rate that occurred in the first quarter of 2020, which lowered the rateyield enhancements recognized on adjustable rate loans in the portfolio as well as any new or renewing fixed rate loans that were originated since that time.PPP loans.
Interest expense
Net interest income was $1.2$23.3 million for the first nine months of 2021,2022, an increase of $0.1 million, or 0.8%, from $23.2 million for the same period in 2021. Interest income was $24.3 million for the nine month period ended September 30, 2022, a decrease of $1.1$0.1 million, or 46.7%0.5%, compared to $2.3from $24.4 million for the same nine month period in 2021. Interest income decreased, despite the $85.8 million increase in the average interest-earning assets between the periods, primarily because of a decrease in the average yield earned on interest-earning assets between the periods. The average yield earned on interest-earning assets was 3.18% for the first nine months of 2020.2022, a decrease of 31 basis points from 3.49% for the first nine months of 2021. The decrease in the average yield is primarily related to the $2.0 million decrease between the periods in the yield enhancements recognized on PPP loans.
Interest expense was $0.9 million for the first nine months of 2022, a decrease of $0.3 million, or 25.2%, compared to $1.2 million for the same period of 2021. Interest expense decreased, despite the $123.8$84.8 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods, primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.13% for the first nine months of 2022, a decrease of 6 basis points from 0.19% for the first nine months of 2021, a decrease of 23 basis points from 0.42% for the first nine months of 2020.2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease inrepricing of maturing certificates of deposit rates as a result of the decrease in the federal fundscontinued low interest rate in the first quarter of 2020.environment.
Net interest margin (net interest income divided by average interest-earning assets) for the first nine months of 20212022 was 3.31%3.06%, a decrease of 2625 basis points, compared to 3.57%3.31% for the first nine months of 2020.2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of theassets. The decrease in the prime rate that occurredaverage yield is primarily related to the $2.0 million decrease between the periods in the first quarter of 2020.yield enhancements recognized on PPP loans.
A summary of the Company’s net interest margin for the three and nine month periods ended September 30, 20212022 and 20202021 is as follows:
For the Three Month Period Ended | ||||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||
(Dollars in thousands) | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Securities available for sale | $ | 215,811 | 514 | 0.94 | % | $ | 103,132 | 434 | 1.67 | % | ||||||||||||||
Loans held for sale | 5,991 | 40 | 2.63 | 9,309 | 65 | 2.76 | ||||||||||||||||||
Single family loans, net | 164,591 | 1,442 | 3.48 | 134,460 | 1,325 | 3.92 | ||||||||||||||||||
Commercial loans, net | 420,062 | 5,840 | 5.52 | 474,325 | 5,390 | 4.52 | ||||||||||||||||||
Consumer loans, net | 43,955 | 515 | 4.65 | 60,473 | 709 | 4.66 | ||||||||||||||||||
Other | 110,173 | 50 | 0.18 | 71,180 | 26 | 0.15 | ||||||||||||||||||
Total interest-earning assets | 960,583 | 8,401 | 3.47 | 852,879 | 7,949 | 3.71 | ||||||||||||||||||
Interest-bearing liabilities and non-interest-bearing deposits: | ||||||||||||||||||||||||
Checking accounts | 155,373 | 45 | 0.11 | 129,276 | 41 | 0.13 | ||||||||||||||||||
Savings accounts | 115,526 | 18 | 0.06 | 93,022 | 17 | 0.07 | ||||||||||||||||||
Money market accounts | 249,335 | 138 | 0.22 | 221,991 | 190 | 0.34 | ||||||||||||||||||
Certificate accounts | 91,595 | 159 | 0.69 | 111,847 | 408 | 1.45 | ||||||||||||||||||
Total interest-bearing liabilities | 611,829 | 556,136 | ||||||||||||||||||||||
Non-interest checking | 259,721 | 219,512 | ||||||||||||||||||||||
Other non-interest bearing deposits | 2,923 | 2,218 | ||||||||||||||||||||||
Total interest-bearing liabilities and non-interest-bearing deposits | $ | 874,473 | 360 | 0.16 | $ | 777,866 | 656 | 0.34 | ||||||||||||||||
Net interest income | $ | 8,041 | $ | 7,293 | ||||||||||||||||||||
Net interest rate spread | 3.31 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin | 3.32 | % | 3.40 | % | ||||||||||||||||||||
For the Nine Month Period Ended | ||||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||
(Dollars in thousands) | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Securities available for sale | $ | 192,877 | 1,514 | 1.05 | % | $ | 100,889 | 1,371 | 1.81 | % | ||||||||||||||
Loans held for sale | 5,303 | 114 | 2.88 | 6,942 | 156 | 2.99 | ||||||||||||||||||
Single family loans, net | 154,992 | 4,189 | 3.61 | 130,441 | 3,907 | 4.00 | ||||||||||||||||||
Commercial loans, net | 433,514 | 16,783 | 5.18 | 446,580 | 15,781 | 4.72 | ||||||||||||||||||
Consumer loans, net | 47,779 | 1,668 | 4.67 | 64,570 | 2,312 | 4.78 | ||||||||||||||||||
Other | 99,778 | 116 | 0.16 | 51,030 | 149 | 0.39 | ||||||||||||||||||
Total interest-earning assets | 934,243 | 24,384 | 3.49 | 800,452 | 23,676 | 3.95 | ||||||||||||||||||
Interest-bearing liabilities and non-interest-bearing deposits: | ||||||||||||||||||||||||
Checking accounts | 156,983 | 137 | 0.12 | 115,110 | 102 | 0.12 | ||||||||||||||||||
Savings accounts | 111,715 | 52 | 0.06 | 87,587 | 48 | 0.07 | ||||||||||||||||||
Money market accounts | 238,011 | 408 | 0.23 | 205,868 | 684 | 0.44 | ||||||||||||||||||
Certificate accounts | 95,537 | 626 | 0.88 | 118,422 | 1,459 | 1.65 | ||||||||||||||||||
Total interest-bearing liabilities | 602,246 | 526,987 | ||||||||||||||||||||||
Non-interest checking | 249,215 | 200,965 | ||||||||||||||||||||||
Other non-interest bearing deposits | 2,632 | 2,384 | ||||||||||||||||||||||
Total interest-bearing liabilities and non-interest-bearing deposits | $ | 854,093 | 1,223 | 0.19 | $ | 730,336 | 2,293 | 0.42 | ||||||||||||||||
Net interest income | $ | 23,161 | $ | 21,383 | ||||||||||||||||||||
Net interest rate spread | 3.30 | % | 3.53 | % | ||||||||||||||||||||
Net interest margin | 3.31 | % | 3.57 | % | ||||||||||||||||||||
For the three month period ended | ||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Securities available for sale | $ | 288,747 | 811 | 1.11 | % | $ | 215,811 | 514 | 0.94 | % | ||||||||||||||
Loans held for sale | 1,806 | 26 | 5.72 | 5,991 | 40 | 2.63 | ||||||||||||||||||
Single family loans, net | 187,340 | 1,646 | 3.49 | 164,591 | 1,442 | 3.48 | ||||||||||||||||||
Commercial loans, net | 465,192 | 5,270 | 4.49 | 420,062 | 5,840 | 5.52 | ||||||||||||||||||
Consumer loans, net | 43,403 | 531 | 4.86 | 43,955 | 515 | 4.65 | ||||||||||||||||||
Other | 64,022 | 347 | 2.15 | 110,173 | 50 | 0.18 | ||||||||||||||||||
Total interest-earning assets | 1,050,510 | 8,631 | 3.26 | 960,583 | 8,401 | 3.47 | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Checking accounts | 159,854 | 46 | 0.11 | 155,373 | 45 | 0.11 | ||||||||||||||||||
Savings accounts | 126,427 | 19 | 0.06 | 115,526 | 18 | 0.06 | ||||||||||||||||||
Money market accounts | 294,763 | 207 | 0.28 | 249,335 | 138 | 0.22 | ||||||||||||||||||
Certificate accounts | 73,355 | 68 | 0.37 | 91,595 | 159 | 0.69 | ||||||||||||||||||
Total interest-bearing liabilities | 654,399 | 611,829 | ||||||||||||||||||||||
Non-interest checking | 309,616 | 259,721 | ||||||||||||||||||||||
Other non-interest bearing deposits | 2,548 | 2,923 | ||||||||||||||||||||||
Total interest-bearing liabilities and non-interest bearing deposits | $ | 966,563 | 340 | 0.14 | $ | 874,473 | 360 | 0.16 | ||||||||||||||||
Net interest income | $ | 8,291 | $ | 8,041 | ||||||||||||||||||||
Net interest rate spread | 3.12 | % | 3.31 | % | ||||||||||||||||||||
Net interest margin | 3.13 | % | 3.32 | % | ||||||||||||||||||||
For the nine month period ended | ||||||||||||||||||||||||
September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | Average Outstanding Balance | Interest Earned/ Paid | Yield/ Rate | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Securities available for sale | $ | 294,394 | 2,415 | 1.10 | % | $ | 192,877 | 1,514 | 1.05 | % | ||||||||||||||
Loans held for sale | 2,820 | 91 | 4.32 | 5,303 | 114 | 2.88 | ||||||||||||||||||
Single family loans, net | 177,842 | 4,593 | 3.45 | 154,992 | 4,189 | 3.61 | ||||||||||||||||||
Commercial loans, net | 458,017 | 15,229 | 4.45 | 433,514 | 16,783 | 5.18 | ||||||||||||||||||
Consumer loans, net | 42,010 | 1,476 | 4.70 | 47,779 | 1,668 | 4.67 | ||||||||||||||||||
Other | 44,950 | 449 | 1.34 | 99,778 | 116 | 0.16 | ||||||||||||||||||
Total interest-earning assets | 1,020,033 | 24,253 | 3.18 | 934,243 | 24,384 | 3.49 | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Checking accounts | 158,665 | 126 | 0.11 | 156,983 | 137 | 0.12 | ||||||||||||||||||
Savings accounts | 123,896 | 54 | 0.06 | 111,715 | 52 | 0.06 | ||||||||||||||||||
Money market accounts | 271,005 | 497 | 0.25 | 238,011 | 408 | 0.23 | ||||||||||||||||||
Certificate accounts | 78,845 | 233 | 0.39 | 95,537 | 626 | 0.88 | ||||||||||||||||||
Advances and other borrowings | 656 | 5 | 1.04 | 0 | 0 | 0.00 | ||||||||||||||||||
Total interest-bearing liabilities | 633,067 | 602,246 | ||||||||||||||||||||||
Non-interest checking | 303,365 | 249,215 | ||||||||||||||||||||||
Other non-interest bearing deposits | 2,511 | 2,632 | ||||||||||||||||||||||
Total interest-bearing liabilities and non-interest bearing deposits | $ | 938,943 | 915 | 0.13 | $ | 854,093 | 1,223 | 0.19 | ||||||||||||||||
Net interest income | $ | 23,338 | $ | 23,161 | ||||||||||||||||||||
Net interest rate spread | 3.05 | % | 3.30 | % | ||||||||||||||||||||
Net interest margin | 3.06 | % | 3.31 | % | ||||||||||||||||||||
Provision for Loan Losses
The provision for loan losses was $0.6 million for the third quarter of 2022, an increase of $1.5 million compared to ($0.9) million for the third quarter of 2021, a decrease of $1.7 million compared to $0.8 million for the third quarter of 2020.2021. The provision for loan losses was $0.9 million for the first nine months of 2022, an increase of $3.3 million compared to ($2.4) million for the first nine months of 2021, a decrease of $3.9 million compared to $1.5 million for the first nine months of 2020.2021. The provision for loan losses decreasedincreased between the periods primarily because of the reductionloan portfolio growth and also because of an increase in the requiredqualitative reserves due to the perceived negative impact on borrowers from inflation and rising interest rates. The credit provision recorded in 2021 was primarily the result of improvements in the economic environment related to the COVID-19 pandemic and the results of an internal analysis of the loan portfolio. During 2020, the Company increased its allowance for loan losses due to the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. In 2021, significant progress was made in the vaccination of the general public and many of the pandemic-focused restrictions have been reduced or eliminated. The amount of the allowance for loan losses established in 2020 related to the economic environment was based, in part, on the amount of loans to borrowers in the hospitality, restaurant and entertainment industries that were negatively impacted by the COVID-19 pandemic. The underlying operations supporting many of the loans that were initially negatively impacted by the COVID-19 pandemic have improved and the amount of loans requiring accommodations decreased in 2021. At September 30, 2021, the Company had six loans in the hospitality industry totaling $25.5 million that had been granted loan accommodations in accordance with Section 4013 of the CARES Act. The accommodations granted allow the borrowers to make interest only payments for periods up to December 31, 2021. Of these loans, $5.7 million were classified but still accruing at September 30, 2021 and all of these loans were current with their agreed upon payments. The commercial credit department continues to communicate regularly with the borrowers that have been granted loan accommodations and monitors their activity closely. It is anticipated that most of the remaining borrowers that have been granted accommodations will be in a position to resume making their regular loan payments at the end of the initial accommodation period. However, some of the borrowers may need additional accommodations when their initial accommodation period ends as their operations may need more time to recover from the impact of the pandemic.2020.
The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on ourthe size and risk characteristics of the portfolio and past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves decreasedincreased during the third quarter and first nine months of 2022 primarily because of the loan portfolio growth and because of an increase in the required qualitative reserves. The qualitative reserves for loan losses related to the disruption in business activity as a result of the COVID-19 pandemic was reduced during the periods because of a perceived reduction in this risk due to improving conditions. The reduction in pandemic related qualitative reserves was entirely offset by an internal analysisincrease in the qualitative reserves for other economic factors. The other qualitative reserves were increased due to a perceived deterioration of economic conditions during the loan portfolio.periods, including the elevated inflation rate, and enacted and expected increases in the federal funds rate.
A reconciliation of the Company’s allowance for loan losses for the three and nine month periods ended September 30, 20212022 and 20202021 is summarized as follows:
(Dollars in thousands) | 2021 | 2020 | 2022 | 2021 | ||||||||||||
Balance at June 30, | $ | 9,915 | 8,649 | |||||||||||||
Balance at June 30 | $ | 9,644 | 9,915 | |||||||||||||
Provision | (886 | ) | 770 | 579 | (886 | ) | ||||||||||
Charge offs: | ||||||||||||||||
Commercial real estate | (90 | ) | 0 | |||||||||||||
Consumer | 0 | (29 | ) | (8 | ) | 0 | ||||||||||
Commercial business | 0 | (8 | ) | |||||||||||||
Recoveries | 41 | 150 | 16 | 41 | ||||||||||||
Balance at September 30, | $ | 9,070 | 9,532 | |||||||||||||
Balance at September 30 | $ | 10,141 | 9,070 | |||||||||||||
Allocated to: | ||||||||||||||||
General allowance | $ | 8,784 | 9,416 | $ | 9,993 | 8,784 | ||||||||||
Specific allowance | 286 | 116 | 148 | 286 | ||||||||||||
| $ | 9,070 | 9,532 | $ | 10,141 | 9,070 | |||||||||||
(Dollars in thousands) | 2022 | 2021 | ||||||
Balance at January 1 | $ | 9,279 | 10,699 | |||||
Provision | 941 | (2,353 | ) | |||||
Charge offs: | ||||||||
Consumer | (24 | ) | (42 | ) | ||||
Commercial real estate | (90 | ) | 0 | |||||
Recoveries | 35 | 766 | ||||||
Balance at September 30 | $ | 10,141 | 9,070 | |||||
(Dollars in thousands) | 2021 | 2020 | ||||||
Balance at January 1, | $ | 10,699 | 8,564 | |||||
Provision | (2,353 | ) | 1,548 | |||||
Charge offs: | ||||||||
Consumer | (42 | ) | (74 | ) | ||||
Commercial real estate | 0 | (730 | ) | |||||
Commercial business | 0 | (8 | ) | |||||
Recoveries | 766 | 232 | ||||||
Balance at September 30, | $ | 9,070 | 9,532 | |||||
Non‑InterestNon-Interest Income
Non-interest income was $2.1 million for the third quarter of 2022, a decrease of $1.0 million, or 32.7%, from $3.1 million for the third quarter of 2021, a decrease of $1.4 million, or 32.6%, from $4.5 million for the third quarter of 2020.2021. Gain on sales of loans decreased $1.5$1.1 million between the periods primarily because of a decrease in single family loan originations and sales. Other non-interest income increased slightly due primarily to an increase in the fees earned on the sale of uninsured investment products. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others. Fees and service charges increased slightly between the periods due primarily to an increase in overdraft fees.
Non-interest income was $6.9 million for the first nine months of 2022, a decrease of $4.1 million, or 37.1%, from $11.0 million for the same period of 2021. Gain on sales of loans decreased $2.8 million between the periods primarily because of a decrease in single family loan originations and sales. Other non-interest income decreased slightly$1.4 million due primarily tobecause of a decrease in the gains recognizedthat were realized on the sale of other real estate owned between the periods. Fees and service charges increased $0.1 million between the periods due primarily to an increase in debit card income.overdraft fees. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.
Non-Interest Expense
Non-interest expense was $7.2 million for the third quarter of 2022, an increase of $0.3 million, or 3.9%, from $6.9 million for the third quarter of 2021. Compensation and benefits expense increased $0.4 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the reduced mortgage loan production between the periods. Data processing expenses increased $0.1 million between the periods primarily because of the change to an outsourced data processing relationship at the end of the first quarter of 2022. Other non-interest expense increased slightly between the periods primarily because of an increase in marketing expenses. These increases in non-interest expense were partially offset by a $0.2 million decrease in occupancy and equipment expense due primarily to a decrease in rent expense between the periods as a result of purchasing the combined corporate and branch location in Rochester, Minnesota in the fourth quarter of 2021. Professional services expense decreased $0.1 million between the periods primarily because of a decrease in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022.
Non-interest incomeexpense was $11.0$21.4 million for the first nine months of 2021,2022, an increase of $0.4$1.0 million, or 4.3%5.1%, from $10.6$20.4 million for the same period of 2020. Other non-interest income increased $1.7 million due primarily to a $1.4 million increase in the gains realized on the sale of commercial real estate owned between the periods and also because of an increase in the fees earned on the sale of uninsured investment products. Fees and service charges increased $0.2 million between the periods due primarily to an increase in debit card income. Loan servicing fees increased $0.2 million between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others. These increases in non-interest income were partially offset by a $1.6 million decrease in the gain on sales of loans due to a decrease in single family loan originations and sales between the periods.
Non‑Interest Expense
Non-interest expense was $6.9 million for the third quarter of 2021, an increase of $0.2 million, or 2.7%, from $6.7 million for the third quarter of 2020. Professional services expense increased $0.2 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim. Data processing costs increased $0.1 million between the periods due to an increase in debit card processing expenses.2021. Compensation and benefits expense increased slightly between the periods$0.9 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production between the periods. Data processing expenses increased $0.3 million between the periods primarily because of the change to an outsourced data processing relationship at the end of the first quarter of 2022. Professional services expense increased $0.2 million between the periods primarily because of an increase in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022. These increases in non-interest expense were partially offset by a $0.1$0.4 million decrease in other non-interestoccupancy and equipment expense due primarily to a decrease in mortgage servicingrent expense between the periods. Occupancyperiods as a result of purchasing the combined corporate and equipmentbranch location in Rochester, Minnesota in the fourth quarter of 2021. Other non-interest expense decreased slightly between the periods due to a decrease in building related expenses.
Non-interest expense was $20.4 million for the first nine months of 2021, which is unchanged from the same period of 2020. Data processing costs increased $0.1 million between the periods due to an increase in debit card processing expenses. Compensation and benefits expense increased $0.1 million between the periods primarily because of a decrease in mortgage servicing expense due to the direct loan origination compensation costs that were deferred as a result of the decreasedreduction in prepayments on mortgage loan production between the periods. Other non-interest expense increased $0.1 million due primarily to an increase in FDIC insurance costs. These increases in non-interest expense were partially offset by a $0.3 million decrease in professional service expense between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim. Occupancy and equipment costs decreased slightly between the periods due to a decrease in depreciation and non-capitalized equipment costs.being serviced for others.
Income Taxes
Income tax expense was $0.8 million for the third quarter of 2022, a decrease of $0.7 million from $1.5 million for the third quarter of 2021, an increase of $0.3 million from $1.2 million for the third quarter of 2020.2021. Income tax expense was $4.6$2.3 million for the first nine months of 2021, an increase2022, a decrease of $1.7$2.3 million from $2.9$4.6 million for the first nine monthssame period of 2020.2021. The increasedecrease in income tax expense between the periods is primarily the result of an increasea decrease in pre-tax income.
FINANCIAL CONDITION
Non‑PerformingNon-Performing Assets
The following table summarizes the amounts and categories of non-performing assets in the Company’sBank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, 2020.2021.
September 30, | June 30, | December 31, | ||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | |||||||||
Non‑performing loans: | ||||||||||||
Single family | $ | 423 | $ | 557 | $ | 502 | ||||||
Commercial real estate | 685 | 519 | 1,484 | |||||||||
Consumer | 673 | 669 | 689 | |||||||||
Commercial | 7 | 8 | 9 | |||||||||
Total | 1,788 | 1,753 | 2,684 | |||||||||
Foreclosed and repossessed assets: | ||||||||||||
Commercial real estate | 0 | 0 | 636 | |||||||||
Total non‑performing assets | $ | 1,788 | $ | 1,753 | $ | 3,320 | ||||||
Total as a percentage of total assets | 0.17 | % | 0.18 | % | 0.37 | % | ||||||
Total as a percentage of total loans receivable, net | 0.29 | % | 0.28 | % | 0.42 | % | ||||||
Allowance for loan losses to non-performing loans | 507.15 | % | 565.75 | % | 398.72 | % | ||||||
Delinquency data: | ||||||||||||
Delinquencies (1) | ||||||||||||
30+ days | $ | 1,113 | $ | 1,255 | $ | 995 | ||||||
90+ days | 0 | 0 | 0 | |||||||||
Delinquencies as a percentage of loan portfolio (1) | ||||||||||||
30+ days | 0.17 | % | 0.19 | % | 0.15 | % | ||||||
90+ days | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
September 30, | June 30, | December 31, | ||||||||||
(Dollars in thousands) | 2022 | 2022 | 2021 | |||||||||
Non‑performing loans: | ||||||||||||
Single family | $ | 732 | $ | 565 | $ | 340 | ||||||
Commercial real estate | 0 | 3,286 | 3,757 | |||||||||
Consumer | 440 | 436 | 517 | |||||||||
Commercial | 639 | 7 | 7 | |||||||||
Total | 1,811 | 4,294 | 4,621 | |||||||||
Foreclosed and repossessed assets: | ||||||||||||
Commercial real estate | 0 | 0 | 290 | |||||||||
Total non‑performing assets | $ | 1,811 | $ | 4,294 | $ | 4,911 | ||||||
Total as a percentage of total assets | 0.17 | % | 0.40 | % | 0.46 | % | ||||||
Total as a percentage of total loans receivable | 0.24 | % | 0.62 | % | 0.70 | % | ||||||
Allowance for loan loss to non-performing loans | 559.85 | % | 224.61 | % | 200.81 | % | ||||||
Delinquency data: | ||||||||||||
Delinquencies (1) | ||||||||||||
30+ days | $ | 1,660 | $ | 2,504 | $ | 1,418 | ||||||
90+ days | 0 | 0 | 0 | |||||||||
Delinquencies as a percentage of loan portfolio (1) | ||||||||||||
30+ days | 0.22 | % | 0.36 | % | 0.21 | % | ||||||
90+ days | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
(1) Excludes non-accrual loans. |
Total non-performingnonperforming assets were $1.8 million at September 30, 2021, which is unchanged2022, a decrease of $2.5 million, or 57.8%, from $4.3 million at June 30, 20212022 and a decrease of $1.5$3.1 million, or 46.1%63.1%, from $3.3$4.9 million at December 31, 2020. Non-performing2021. Nonperforming loans decreased $0.9$2.5 million and foreclosed$2.8 million for the third quarter and repossessed assets decreased $0.6 million during the first nine months of 2021.2022, respectively. The decrease in nonperforming loans is primarily related to a decrease in nonperforming commercial real estate loans, primarily because of a $3.1 million loan in the hospitality industry that was reclassified as performing during the third quarter of 2022. The decrease in nonperforming commercial real estate loans for the periods was partially offset by increases in nonperforming mortgage loans of $0.2 million and $0.4 million for the third quarter and first nine months of 2022, respectively. Nonperforming commercial loans also increased $0.6 million for both the third quarter and first nine months of 2022.
Dividends
The Company declared three quarterly dividends of 6 cents per share in the first nine months of 2022 that were paid to stockholders on March 9, 2022, June 7, 2022, and September 7, 2022. The declaration and amount of any future cash dividends isremains subject to among other things, the Company's financial conditionsole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, the Bank's compliance with regulatoryfinancial condition, capital requirements, regulatory and contractual restrictions, business strategy and other regulatory restrictions, tax considerations, industry standards, economic conditions, general business practices and other factors. The Company has not declared any dividend payments to common stockholders duringfactors deemed relevant by the three year period ended September 30, 2021.Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2021,2022, the net cash provided by operating activities was $16.5$26.5 million. The Company received $30.8collected $40.0 million from maturing or called securities, $27.7 million fromin principal repayments and maturities on securities and $2.1purchased securities and FHLB stock for $36.8 million. The Company redeemed FHLB stock totaling $1.6 million inand received proceeds from the sale of real estate.estate of $0.4 million. The Company purchased $148.1had a net decrease in deposit balances of $3.1 million, and received and repaid $31.0 million in securities available for sale, $0.2proceeds from borrowings during the period. The Company also purchased $2.1 million of treasury stock, obtained $0.1 million in FHLBtreasury stock and paid $0.4 million for the purchasetaxes payable on stock awards, paid dividends to stockholders of $0.8 million, received additional customer escrows of $1.2 million, and purchased $0.3 million of premises and equipment. Net loansLoans receivable decreased $17.3also increased $102.0 million customer escrows increased $1.2 million andduring the Company had a net increase in deposit balances of $120.1 million. The Company also purchased $3.9 million of its common stock.period.
The Company has certificates of depositsdeposit with outstanding balances of $61.4$48.9 million that maturecome due over the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that cash outflowoutflows from certificatesdeposits that do not renew will be replaced with a combination of other customers’ deposits or FHLB advances. FRB borrowings or proceeds from the sale of securities could also be used to fund unanticipated outflows of certificates of deposits.deposit.
The Company had tenseven deposit customers that individually hadeach with aggregate deposits greater than $5.0 million as of September 30, 2021.2022. The $137.7$138.0 million in funds held by these customers may be withdrawn at any time, but management believesanticipates that the majority of these deposits will not be withdrawn from the Bank over the next twelve months. If these deposits arewere withdrawn, it is anticipated that they would be replaced with deposits from other customers or FHLB advances. FRB borrowings or proceeds from the sale of securities could also be used to replace unanticipated outflows of large checking and money market deposits.
The Company had the ability to borrow $172.4$189.4 million from the FHLB at September 30, 2021,2022 based on the collateral value of the loans pledged. The credit policy of the FHLB relating to the collateral value of the loans collateralizing the available line of credit with the FHLB may change such that the current collateral pledged to secure future advances is no longer acceptable or the formulas for determining the excess pledged collateral may change. The FHLB could also reduce the amount of funds it will lend to the Bank. It is not anticipated that the Bank will need to find alternative funding sources in the next twelve months to replace the available borrowings from the FHLB. However, if needed, the Bank could borrow an additional $52.3$72.1 million from the FRB at September 30, 2021 based on the collateral value of the loans pledged.pledged at September 30, 2022.
The Company’s primary source of cash is dividends from the Bank. At September 30, 2021,2022, the Company had $13.2$15.5 million in cash and other assets that could readily be turned into cash. The primary use of cash by the Company is the payment of operating expenseexpenses, the repurchase of Company stock, and the purchasepayment of treasury stock.dividends to stockholders.
The Company also serves as a source of capital, liquidity, and financial support to the Bank. Depending upon the operating performance of the Bank and the Company’s other liquidity and capital needs, including Company level expenses, the Company may find it prudent, subject to prevailing capital market conditions and other factors, to raise additional capital through issuance of its common stock or other equity securities. Additional capital would also potentially permit the Company to implement a strategy of growing Bank assets. Depending on the circumstances, if it were to raise capital, the Company may deploy it to the Bank for general banking purposes or may retain some or all of it for use by the Company.
If the Company were to raise capital through the issuance of additional shares of common stock or other equity securities, it would dilute the ownership interests of existing stockholders and if issued at a price less than the Company’s book value, would dilute the per share book value of the Company’s common stock, and could result in a change in control of the Company and the Bank. New investors may also have rights, preferences and privileges senior to the Company’s current stockholders which may adversely impact the Company’s current stockholders. The Company’s ability to raise additional capital through the issuance of equity securities, if deemed prudent, will depend on, among other factors, conditions in the capital markets at that time, which are outside of its control, andcontrol. Accordingly, the Company may not be able to raise additional capital, if deemed prudent, on the Company’s financial performance and plans.favorable economic terms or other terms acceptable to it.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’sCompany's market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure.
The Company’sCompany's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’sCompany's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located in the following Asset/Liability Management section of this reportManagement’s Discussion and Analysis discloses the Company’sCompany's projected changes in net interest income based upon immediate interest rate changes called rate shocks. The Company utilizes a model that uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities under different interest rate changes.
The following table discloses the projected changes in the market value toof the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis pointbasis-point changes in interest rates from interest rates in effect on September 30, 2021.2022.
(Dollars in thousands) | Market Value | |||||||||||||||
Basis point change in interest rates | ‑100 | 0 | +100 | +200 | ||||||||||||
Total market risk sensitive assets | $ | 1,046,797 | 1,035,466 | 1,014,182 | 992,002 | |||||||||||
Total market risk sensitive liabilities | 943,283 | 888,458 | 842,615 | 802,846 | ||||||||||||
Off-balance sheet financial instruments | 254 | 0 | 797 | 1,474 | ||||||||||||
Net market risk | $ | 103,260 | 147,008 | 170,770 | 187,682 | |||||||||||
Percentage change from current market value | (29.76 | %) | 0.00 | % | 16.16 | % | 27.67 | % | ||||||||
(Dollars in thousands) | Market Value | |||||||||||||||||||
Basis point change in interest rates | -200 | -100 | 0 | +100 | +200 | |||||||||||||||
Total market-risk sensitive assets | $ | 1,038,434 | 1,013,343 | 983,398 | 965,627 | 943,446 | ||||||||||||||
Total market-risk sensitive liabilities | 857,040 | 800,918 | 762,290 | 736,064 | 716,178 | |||||||||||||||
Off-balance sheet financial instruments | (38 | ) | (14 | ) | 0 | 148 | 284 | |||||||||||||
Net market risk | $ | 181,432 | 212,439 | 221,108 | 229,415 | 226,984 | ||||||||||||||
Percentage change from current market value | (17.94 | )% | (3.92 | )% | 0.00 | % | 3.76 | % | 2.66 | % | ||||||||||
The preceding table was prepared utilizing a model using the following assumptions (the Model Assumptions) regarding prepayment and decay ratios that were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 3% to 56%1% and 35%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 6%7% and 50%32%, depending on the note rate and the period to maturity. Mortgage-backed securities were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. PassbookSavings accounts and retail money market accounts were assumed to decay at an annual rate of 8%2% and 17%26%, respectively. Retail checking accounts, were assumed to decay at an annual rate of 6%. Commercialcommercial checking accounts and commercial money market accounts were assumed to decay at annual rates of 22%2%, 32% and 13%4%, respectively. Callable investments were projected to be called at the first call date where the projected interest rate on similar remaining term instruments was less than the interest rate on the callable advance or investment.
Certain shortcomings are inherent in the method of analysis presented in the above table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the Interest Spread) will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets that are approaching their lifetime interest rate caps could be different from the values disclosed in the table. Certain liabilities, such as certificates of deposit, have fixed rates that restrict interest rate changes until maturity. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may also decrease in the event of a substantial sustained increase in interest rates.
Asset/Liability Management
The Company’s management reviews the impact that changing interest rates will have on the Company’s net interest income projected for the next twelve months to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income during the twelve month period endingended September 30, 20222023 of immediate interest rate changes called rate shocks.shocks:
(Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||
Rate Shock in Basis Points | Projected Change in Net Interest Income | Percentage Change | Projected Change in Net Interest Income | Percentage Change | ||||||||||||||
+200 | $ | 2,327 | 8.96 | % | $ | 536 | 1.60 | % | ||||||||||
+100 | 1,147 | 4.42 | 273 | 0.82 | ||||||||||||||
| 0 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||
| -100 | (1,539 | ) | (5.93 | ) | (696 | ) | (2.08 | ) | ||||||||||
| -200 | (1,979 | ) | (5.90 | ) | ||||||||||||||
The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income.
The increase in interest income in a rising rate environment is primarily because there are more loans and investments that would re-price to higher interest rates than there are deposits that would re-price higher to the same extent in the next twelve months. The decrease in interest income in a declining rate environment is primarily because there are more loans and investments that would re-pricereprice to lower interest rates than there are deposits that would be able to be re-pricedrepriced lower to the same extent in the next twelve months.
In an attempt to manage its exposure to changes in interest rates, management closely monitors interest rate risk. The Bank has an Asset/Liability Committee that meets frequently to discuss changes in the interest rate risk position and projected profitability. This Committee makes adjustments to the asset/liability position of the Bank that are reviewed by the Board of Directors of the Bank. This Committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions as intended to assure attainment of the Bank's objectives in an effective manner. In addition, each quarter the Board reviews the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios.
In managing its asset/liability composition, the Bank may, at times, depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, in certain situations, provide high enough returns to justify the increased exposure to sudden and unexpected changes in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank attempts to manage its interest rate risk and has taken a number of steps to restructurestructure its balance sheet in order to better match the maturities of its assets and liabilities. In the past, more long-term fixed rate loans were placed into the single family loan portfolio. In recent years, theThe Bank has continued to focussells almost all of its 30 yearoriginated 30-year fixed rate single family residential lending program on loans that are saleable to third parties and generally places only adjustable rate or shorter-term fixed rate loans that meet certain risk characteristics into its loan portfolio. AIn addition, a significant portion of the Bank’s commercial loan production continues to be inloans that are placed into the portfolio are adjustable rate loans or fixed rate loans that reprice every one, twoin five years or three years.less.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than commitments to originate fund and sell loans in the ordinary course of business.
Item 3: Quantitative and Qualitative Disclosures aboutAbout Market Risk
Not applicable.
Item 4: Controls and Procedures
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Changes in internal controls. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
HMN FINANCIAL, INC.
Legal Proceedings. |
From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. See Note 15 – CommitmentsThe Company is, and Contingencies for more information.expects to become, engaged in a number of foreclosure proceedings and other collection actions as part of its normal operations. Based on our current understanding of these pending legal proceedings, management does not believe that judgments or settlements arising from any pending or threatened litigation matters, individually or in the aggregate, would have a material adverse effect on the Company’s consolidated financial statements.
Risk Factors. |
The risks described in the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, filed with the SEC, under “Part 1, Item 1A. Risk Factors” could affect the Company’s financial performance and could cause its actual results for future periods to differ materially from its anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q.
Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table provides information with respect to purchases made by the Company of its own stock during the third quarter of 2021:2022:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs (a) | ||||||||||||
July 1, 2021 to July 31, 2021 | 0 | $ | N/A | 0 | $ | 6,000,000 | ||||||||||
August 1, 2021 to August 31, 2021 | 50,000 | 22.59 | 50,000 | 4,870,500 | ||||||||||||
September 1, 2021 to September 30, 2021 | 0 | N/A | 0 | 4,870,500 | ||||||||||||
Total | 50,000 | $ | 22.59 | 50,000 | $ | 4,870,500 | ||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs (a) | ||||||||||||
July 1, 2022 to July 31, 2022 | 0 | $ | N/A | 0 | $ | 2,698,350 | ||||||||||
August 1, 2022 to August 31, 2022 | 0 | N/A | 0 | 2,698,350 | ||||||||||||
September 1, 2022 to September 30, 2022 | 30,000 | 22.83 | 30,000 | $ | 2,013,450 | |||||||||||
Total | 30,000 | $ | 23.83 | 30,000 | ||||||||||||
|
(a) On July 27, 2021 the Company’s Board of Directors increased the amount of shares authorized to be repurchased to $6.0 million. Subsequent to that authorization, $4.0 million of shares have been repurchased under the program. Share repurchases may be executed through various means, including through open market transactions, privately negotiated transactions or otherwise. The repurchase program does not obligate the Company to purchase any shares and has no set expiration date. |
Defaults Upon Senior Securities. |
None.
Mine Safety Disclosures. |
Not applicable.
Other Information. |
None.
Exhibits. |
INDEX TO EXHIBITS
Exhibit | Filing Status | ||||
Number | Exhibit |
| |||
3.1 | Certificate of Incorporation (Amended and Restated through July 28, 2015) | Incorporated by Reference (1) | |||
3.2 | Incorporated by Reference (2) | ||||
31.1 | Filed Electronically | ||||
31.2 | Filed Electronically | ||||
32 | Filed Electronically | ||||
101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended September 30, | Filed Electronically | |||
104 | Cover Page Interactive Data File from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, | Filed Electronically | |||
(1) | Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015. |
(2) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on August 24, 2022. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HMN FINANCIAL, INC.
| |||
| Date: | November 2, 2022 | /s/ Bradley Krehbiel | |
Bradley Krehbiel, President and Chief Executive Officer | |||
( | |||
| Date: | November 2, | /s/ Jon Eberle | |
| Jon Eberle, Senior Vice President and | |||
| Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||