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HMN FINANCIAL INC - Quarter Report: 2022 March (Form 10-Q)

hmnf20220331_10q.htm
 
 

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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 company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by 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 April 29, 2022

Common stock, $0.01 par value

 

4,540,976

 

 
 

 

HMN FINANCIAL, INC.

TABLE OF CONTENTS

 

    Page
     
PART I  FINANCIAL INFORMATION  
     

Item 1:

Financial Statements

3

     
 

Consolidated Balance Sheets at March 31, 2022 and December 31, 2021

3

     
 

Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021

4

     
 

Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2022 and 2021

5

     
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2:

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

23

     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

31

     

Item 4:

Controls and Procedures

31

     

PART II  OTHER INFORMATION

     

Item 1:

Legal Proceedings

32

     

Item 1A:

Risk Factors

32

     

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

32

     

Item 3:

Defaults Upon Senior Securities

32

     

Item 4:

Mine Safety Disclosures

32

     

Item 5:

Other Information

32

     

Item 6:

Exhibits

33

     

Signatures

34

 

 

 

PART I FINANCIAL INFORMATION

Item 1 : Financial Statements

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

  

March 31,

 

December 31,

 

(Dollars in thousands, except par value)

 

2022

 

2021

 
  

(unaudited)

    

Assets

       

Cash and cash equivalents

 $29,176  94,143 

Securities available for sale:

       

Mortgage-backed and related securities (amortized cost $249,903 and $247,275)

  235,349  245,397 

Other marketable securities (amortized cost $50,693 and $40,691)

  49,299  40,368 

Total securities available for sale

  284,648  285,765 
        

Loans held for sale

  1,882  5,575 

Loans receivable, net

  679,124  652,502 

Accrued interest receivable

  2,269  2,132 

Mortgage servicing rights, net

  3,270  3,280 

Premises and equipment, net

  17,225  17,373 

Goodwill

  802  802 

Core deposit intangible

  4  10 

Prepaid expenses and other assets

  4,741  5,427 

Deferred tax asset, net

  6,257  2,529 

Total assets

 $1,029,398  1,069,538 
        

Liabilities and Stockholders Equity

       

Deposits

 $920,398  950,666 

Accrued interest payable

  58  63 

Customer escrows

  2,954  2,143 

Accrued expenses and other liabilities

  5,365  6,635 

Total liabilities

  928,775  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

  40,695  40,740 

Retained earnings, subject to certain restrictions

  132,634  131,413 

Accumulated other comprehensive loss

  (11,601) (1,583)

Unearned employee stock ownership plan shares

  (1,208) (1,256)

Treasury stock, at cost 4,588,712 and 4,564,087 shares

  (59,988) (59,374)

Total stockholders’ equity

  100,623  110,031 

Total liabilities and stockholders’ equity

 $1,029,398  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

March 31,

 

(Dollars in thousands, except per share data)

 

2022

   

2021

 

Interest income:

               

Loans receivable

  $ 6,751       7,360  

Securities available for sale:

               

Mortgage-backed and related

    727       391  

Other marketable

    61       107  

Other

    26       31  

Total interest income

    7,565       7,889  
                 

Interest expense:

               

Deposits

    283       453  

Total interest expense

    283       453  

Net interest income

    7,282       7,436  

Provision for loan losses

    296       (576 )

Net interest income after provision for loan losses

    6,986       8,012  
                 

Non-interest income:

               

Fees and service charges

    766       739  

Loan servicing fees

    386       395  

Gain on sales of loans

    868       1,773  

Other

    355       348  

Total non-interest income

    2,375       3,255  
                 

Non-interest expense:

               

Compensation and benefits

    4,288       3,821  

Occupancy and equipment

    1,050       1,107  

Data processing

    354       347  

Professional services

    529       203  

Other

    1,031       1,001  

Total non-interest expense

    7,252       6,479  

Income before income tax expense

    2,109       4,788  

Income tax expense

    622       1,370  

Net income

    1,487       3,418  

Other comprehensive loss, net of tax

    (10,018 )     (1,241 )

Comprehensive (loss) income available to common shareholders

  $ (8,531 )     2,177  

Basic earnings per share

  $ 0.34       0.75  

Diluted earnings per share

  $ 0.34       0.74  

 


 

See accompanying notes to consolidated financial statements.

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(unaudited)

 

                                   

Unearned

                 
                                   

Employee

                 
                           

Accumulated

   

Stock

           

Total

 
           

Additional

           

Other

   

Ownership

           

Stock-

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Plan

   

Treasury

   

Holders’

 

(Dollars in thousands)

 

Stock

   

Capital

   

Earnings

   

Loss

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2021

  $ 91       40,740       131,413       (1,583 )     (1,256 )     (59,374 )     110,031  

Net income

                    1,487                               1,487  

Other comprehensive loss

                            (10,018 )                     (10,018 )

Dividends paid to stockholders

                (266 )                       (266 )

Stock repurchases

                                          (743 )     (743 )

Restricted stock awards

            (182 )                             182       0  

Stock awards withheld for tax withholding

                                            (53 )     (53 )

Amortization of restricted stock awards

            62                                       62  

Earned employee stock ownership plan shares

            75                       48               123  

Balance, March 31, 2022

  $ 91       40,695       132,634       (11,601 )     (1,208 )     (59,988 )     100,623  

 


 

 

                                   

Unearned

                 
                                   

Employee

                 
                           

Accumulated

   

Stock

           

Total

 
           

Additional

           

Other

   

Ownership

           

Stock-

 
   

Common

   

Paid-In

   

Retained

   

Comprehensive

   

Plan

   

Treasury

   

Holders’

 

(Dollars in thousands)

 

Stock

   

Capital

   

Earnings

   

Income

   

Shares

   

Stock

   

Equity

 

Balance, December 31, 2020

  $ 91       40,480       117,849       1,282       (1,450 )     (55,000 )     103,252  

Net income

                    3,418                               3,418  

Other comprehensive loss

                            (1,241 )                     (1,241 )

Stock repurchases

                                          (523 )     (523 )

Restricted stock awards

            (184 )                             184       0  

Amortization of restricted stock awards

            60                                       60  

Earned employee stock ownership plan shares

            49                       49               98  

Balance, March 31, 2021

  $ 91       40,405       121,267       41       (1,401 )     (55,339 )     105,064  

 


 

See accompanying notes to consolidated financial statements.

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2022

   

2021

 

Cash flows from operating activities:

               

Net income

  $ 1,487       3,418  

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

               

Provision for loan losses

    296       (576 )

Depreciation

    315       254  

Amortization of premiums, net

    282       181  

Amortization of deferred loan fees

    (82 )     (625 )

Amortization of core deposit intangible

    6       25  

Amortization of purchased loan fair value adjustments

    (11 )     (5 )

Amortization of mortgage servicing rights

    225       297  

Capitalized mortgage servicing rights

    (215 )     (368 )

Losses (gains) recognized on equity securities

    31       (53 )

Gain on sales of loans

    (868 )     (1,773 )

Proceeds from sale of loans held for sale

    33,877       50,040  

Disbursements on loans held for sale

    (23,739 )     (46,156 )

Amortization of restricted stock awards

    62       60  

Amortization of unearned Employee Stock Ownership Plan shares

    48       49  

Earned Employee Stock Ownership Plan shares priced above original cost

    75       49  

(Increase) decrease in accrued interest receivable

    (137 )     728  

(Decrease) increase in accrued interest payable

    (5 )     5  

Decrease (increase) in other assets

    720       (1,586 )

Decrease in other liabilities

    (1,270 )     (1,295 )

Other, net

    1       2  

Net cash provided by operating activities

    11,098       2,671  

Cash flows from investing activities:

               

Principal collected on securities available for sale

    12,132       7,498  

Proceeds collected on maturities of securities available for sale

    0       25,682  

Purchases of securities available for sale

    (25,043 )     (66,268 )

Purchase of Federal Home Loan Bank stock

    (191 )     (159 )

Net increase in loans receivable

    (32,276 )     (960 )

Proceeds from sale of premises

    4       0  

Purchases of premises and equipment

    (172 )     (66 )

Net cash used by investing activities

    (45,546 )     (34,273 )

Cash flows from financing activities:

               

(Decrease) increase in deposits

    (30,268 )     60,274  

Purchase of treasury stock

    (743 )     (523 )

Stock awards withheld for tax withholding

    (53 )     0  

Dividends to stockholders

    (266 )     0  

Increase in customer escrows

    811       973  

Net cash (used) provided by financing activities

    (30,519 )     60,724  

(Decrease) increase in cash and cash equivalents

    (64,967 )     29,122  

Cash and cash equivalents, beginning of period

    94,143       86,269  

Cash and cash equivalents, end of period

  $ 29,176       115,391  

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 288       448  

Cash paid for income taxes

    0       1,921  

Supplemental noncash flow disclosures:

               

Loans transferred to loans held for sale

    5,451       3,008  

 


 

See accompanying notes to consolidated financial statements.

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

 

 

(1HMN Financial, Inc. 

HMN Financial, Inc. (HMN or the Company) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank). The Bank has a community banking philosophy and operates retail banking and loan production facilities in Minnesota, Iowa and Wisconsin. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA), which does business as Home Federal Investment Services and offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which is currently inactive, but has acted in the past as an intermediary for the Bank in holding and operating certain foreclosed properties.

 

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

 

 

(2) Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive (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 three month period ended March 31, 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 writeoffs 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.

 

7

 

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 not anticipated that the adoption of this ASU will have a material impact 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. 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 after 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 March 31, 2022 and December 31, 2021.

 

  

Carrying Value at March 31, 2022

 

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Securities available for sale

 $284,648   0   284,648   0 

Equity securities

  217   0   217   0 

Mortgage loan commitments

  (131)  0   (131)  0 

Total

 $284,734   0   284,734   0 
                 

 

8

 
  

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 March 31, 2022 and December 31, 2021.

 

  

Carrying Value at March 31, 2022

     

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Three Months
Ended

March 31, 2022

Total Losses

 

Loans held for sale

 $1,882   0   1,882   0   (31)

Mortgage servicing rights

  3,270   0   3,270   0   0 

Impaired loans

  4,117   0   4,117   0   (42)

Real estate, net

  290   0   290   0   0 

Total

 $9,559   0   9,559   0   (73)
                     

 

  

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 March 31, 2022 and December 31, 2021 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.

 

9

 

The estimated fair value of the Company’s financial instruments as of March 31, 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.

 

       
  

March 31, 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

 $29,176   29,176   29,176             94,143   94,143   94,143           

Securities available for sale

  284,648   284,648      284,648          285,765   285,765      285,765        

Equity securities

  217   217      217          248   248      248        

Loans held for sale

  1,882   1,882      1,882          5,575   5,575      5,575        

Loans receivable, net

  679,124   672,369      672,369          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

  2,269   2,269      2,269          2,132   2,132      2,132        
                                                 

Financial liabilities:

                                                

Deposits

  920,398   919,450      919,450          950,666   950,558      950,558        

Accrued interest payable

  58   58      58          63   63      63        

Off-balance sheet financial instruments:

                                                

Commitments to extend credit

  (131)  (131)            195,861   26   26             195,141 

Commitments to sell loans

  43   43             13,345   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.

 

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

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.

 

10

 

Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value since it is short-term in nature.

 

Commitments to Extend Credit

The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties.

 

Commitments to Sell Loans

The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.

 

 

(6) Other Comprehensive (Loss) Income

Other comprehensive (loss) income is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive (loss) income is the total of net income and other comprehensive loss or income, which for the Company is comprised of unrealized losses or gains on securities available for sale. The components of other comprehensive (loss) income and the related tax effects were as follows:

 

  

For the period ended March 31,

 

(Dollars in thousands)

 

2022

  

2021

 

 

 

Before Tax

  

Tax Effect

  

Net of Tax

  

Before Tax

  

Tax Effect

  

Net of Tax

 
Securities available for sale:                        

Gross unrealized losses arising during the period

 $(13,746)  (3,728)  (10,018)  (1,721)  (480)  (1,241)

Other comprehensive loss

 $(13,746)  (3,728)  (10,018)  (1,721)  (480)  (1,241)
                         

 

 

(7) Securities Available For Sale

The following table shows the gross unrealized losses and fair values for the securities available for sale portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021.

 

  

Less Than Twelve Months

  

Twelve Months or More

  Total 

(Dollars in thousands)

 

# of

Investments

  

Fair

Value

  

Unrealized

Losses

  

# of

Investments

  

Fair

Value

  Unrealized
Losses
  

Fair

Value

  

Unrealized

Losses

 

March 31, 2022

                                

Mortgage backed securities:

                                

Federal National Mortgage Association (FNMA)

  24  $94,362   (5,167)  10  $34,367   (2,504) $128,729   (7,671)

Federal Home Loan Mortgage Corporation (FHLMC)

  15   77,184   (4,769)  8   27,878   (2,114)  105,062   (6,883)

Other marketable securities:

                                

U.S. Government agency obligations

  6   29,129   (869)  2   9,594   (404)  38,723   (1,273)

Corporate preferred stock

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

Total temporarily impaired securities

  45  $200,675   (10,805)  21  $72,399   (5,162) $273,074   (15,967)

 

  

Less Than Twelve Months

  

Twelve Months or More

  

Total

 

(Dollars in thousands)

 

# of
Investments

  

Fair

Value

  

Unrealized
Losses

  

# of

Investments

  

Fair

Value

  

Unrealized
Losses

  

Fair

Value

  

Unrealized
Losses

 

December 31, 2021

                                

Mortgage backed securities:

                                

FNMA

  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   658   (42)  658   (42)

Total temporarily impaired securities

  43  $218,706   (2,609)  5  $15,132   (326) $233,838   (2,935)
                                 

 

11

 

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 March 31, 2022 relates to a single trust preferred security that was issued by the holding company of a small community bank. As of March 31, 2022 all payments were current on the trust preferred security and the issuer’s subsidiary bank was considered to be well-capitalized based on its most recent regulatory filing. Based on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at March 31, 2022 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 March 31, 2022 and December 31, 2021 is as follows:

 

(Dollars in thousands)

 

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 

March 31, 2022

                

Mortgage-backed securities:

                

FNMA

 $136,400   0   (7,671)  128,729 

FHLMC

  113,459   0   (6,883)  106,576 

Collateralized mortgage obligations:

                

FNMA

  44   0   0   44 
   249,903   0   (14,554)  235,349 

Other marketable securities:

                

U.S. Government agency obligations

  49,993   19   (1,273)  48,739 

Corporate preferred stock

  700   0   (140)  560 
   50,693   19   (1,413)  49,299 
  $300,596   19   (15,967)  284,648 
                 

 

(Dollars in thousands)

 

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 

December 31, 2021

                

Mortgage-backed securities:

                

FNMA

 $138,628   550   (1,367)  137,811 

FHLMC

  108,599   126   (1,189)  107,536 

Collateralized mortgage obligations:

                

FNMA

  48   2   0   50 
   247,275   678   (2,556)  245,397 

Other marketable securities:

                

U.S. Government agency obligations

  39,991   56   (337)  39,710 

Corporate preferred stock

  700   0   (42)  658 
   40,691   56   (379)  40,368 
  $287,966   734   (2,935)  285,765 
                 

 

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2022 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

 $65,173   61,542 

Due after one year through five years

  184,049   174,822 

Due after five years through fifteen years

  51,371   48,281 

Due after fifteen years

  3   3 

Total

 $300,596   284,648 
         

 

12

 

The allocation of mortgage-backed securities in the table above is based upon the anticipated future cash flow of the securities using estimated mortgage prepayment speeds. The allocation of other marketable securities that have call features is based on the anticipated cash flows to the expected call date if it is anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.

 

 

(8) Loans Receivable, Net

A summary of loans receivable at March 31, 2022 and December 31, 2021 is as follows:

 

(Dollars in thousands)

 

March 31,

2022

  

December 31,
2021

 

Single family

 $168,481   163,322 

Commercial real estate:

        

Real estate rental and leasing

  213,559   209,666 

Other

  193,895   187,202 
   407,454   396,868 

Consumer

  41,031   41,645 

Commercial business

  71,960   60,165 

Total loans

  688,926   662,000 

Less:

        

Unamortized discounts

  12   10 

Net deferred loan fees

  206   209 

Allowance for loan losses

  9,584   9,279 

Total loans receivable, net

 $679,124   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

 

Balance, December 31, 2021

 $974   6,388   981   936   9,279 

Provision for losses

  28   107   10   151   296 

Charge-offs

  0   0   (1)  0   (1)

Recoveries

  0   0   1   9   10 

Balance, March 31, 2022

 $1,002   6,495   991   1,096   9,584 
                     

Balance, December 31, 2020

 $1,030   7,295   1,389   985   10,699 

Provision for losses

  (191)  (222)  (171)  8   (576)

Charge-offs

  0   0   (31)  0   (31)

Recoveries

  0   0   2   38   40 

Balance, March 31, 2021

 $839   7,073   1,189   1,031   10,132 
                     

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

 $34   280   121   7   442 

General reserves

  968   6,215   870   1,089   9,142 

Balance, March 31, 2022

 $1,002   6,495   991   1,096   9,584 
                     

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 March 31, 2022:

                    

Individually reviewed for impairment

 $478   3,551   523   7   4,559 

Collectively reviewed for impairment

  168,003   403,903   40,508   71,953   684,367 

Ending balance

 $168,481   407,454   41,031   71,960   688,926 
                     

 

13

 

The following table summarizes the amount of classified and unclassified loans at March 31, 2022 and December 31, 2021:

 

  

March 31, 2022

 
  

Classified

  

Unclassified

     

(Dollars in thousands)

 

Special

Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

  

Total

  

Total

Loans

 

Single family

 $134   935   54   0   1,123   167,358   168,481 

Commercial real estate:

                            

Real estate rental and leasing

  15,470   4,731   0   0   20,201   193,358   213,559 

Other

  6,296   9,318   0   0   15,614   178,281   193,895 

Consumer

  0   413   20   90   523   40,508   41,031 

Commercial business

  1,893   1,739   0   0   3,632   68,328   71,960 
  $23,793   17,136   74   90   41,093   647,833   688,926 
                             

 

  

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.

 

14

 

The aging of past due loans at March 31, 2022 and December 31, 2021 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

 

March 31, 2022

                            

Single family

 $679   0   265   944   167,537   168,481   0 

Commercial real estate:

                            

Real estate rental and leasing

  0   0   0   0   213,559   213,559   0 

Other

  0   0   0   0   193,895   193,895   0 

Consumer

  393   34   122   549   40,482   41,031   0 

Commercial business

  0   0   0   0   71,960   71,960   0 

 

 $1,072   34   387   1,493   687,433   688,926   0 
December 31, 2021                            

Single family

 $864   65   153   1,082   162,240   163,322   0 

Commercial real estate:

                            

Real estate rental and leasing

  198   0   0   198   209,468   209,666   0 

Other

  226   3,402   0   3,628   183,574   187,202   0 

Consumer

  174   89   122   385   41,260   41,645   0 

Commercial business

  0   0   0   0   60,165   60,165   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 March 31, 2022 and December 31, 2021:

 

  

March 31, 2022

  

December 31, 2021

 

(Dollars in thousands)

 

Recorded
Investment

  

Unpaid
Principal
Balance

  

Related
Allowance

  

Recorded
Investment

  

Unpaid
Principal
Balance

  

Related
Allowance

 

Loans with no related allowance recorded:

                        

Single family

 $394   413   0   253   272   0 

Commercial real estate:

                        

Other

  185   185   0   189   189   0 

Consumer

  359   359   0   419   419   0 
                         

Loans with an allowance recorded:

                        

Single family

  84   84   34   87   87   36 

Commercial real estate:

                        

Other

  3,366   3,366   280   3,568   3,568   280 

Consumer

  164   164   121   127   127   83 

Commercial business

  7   7   7   7   7   7 
                         

Total:

                        

Single family

  478   497   34   340   359   36 

Commercial real estate:

                        

Other

  3,551   3,551   280   3,757   3,757   280 

Consumer

  523   523   121   546   546   83 

Commercial business

  7   7   7   7   7   7 
  $4,559   4,578   442   4,650   4,669   406 
                         

 

15

 

The following table summarizes the average recorded investment and interest income recognized on impaired loans during the three months ended March 31, 2022 and 2021:

 

  

March 31, 2022

  

March 31, 2021

 

(Dollars in thousands)

 

Average

Recorded

Investment

  

Interest Income
Recognized

  

Average

Recorded

Investment

  

Interest Income
Recognized

 

Loans with no related allowance recorded:

                

Single family

 $324   2   739   6 

Commercial real estate:

                

Real estate rental and leasing

  0   0   1,002   0 

Other

  187   0   205   0 

Consumer

  389   2   543   1 
                 

Loans with an allowance recorded:

                

Single family

  86   0   116   0 

Commercial real estate:

                

Real estate rental and leasing

  0   0   83   0 

Other

  3,467   0   157   0 

Consumer

  146   1   162   0 

Commercial business

  7   0   36   0 
                 

Total:

                

Single family

  410   2   855   6 

Commercial real estate:

                

Real estate rental and leasing

  0   0   1,085   0 

Other

  3,654   0   362   0 

Consumer

  535   3   705   1 

Commercial business

  7   0   36   0 
  $4,606   5   3,043   7 
                 

 

At March 31, 2022 and December 31, 2021, non-accruing loans totaled $4.5 million and $4.6 million, respectively, for which the related allowance for loan losses was $0.4 million for both periods. All of the interest income 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 $0.9 million at both March 31, 2022 and December 31, 2021. Non-accrual loans also include certain loans that have had terms modified in a TDR.

 

The non-accrual loans at March 31, 2022 and December 31, 2021 are summarized as follows:

 

(Dollars in thousands)

 

March 31,
2022

  

December 31,
2021

 
         

Single family

 $478  $340 

Commercial real estate:

        

Other

  3,551   3,757 

Consumer

  500   517 

Commercial business

  7   7 
  $4,536  $4,621 
         

 

At March 31, 2022 and December 31, 2021, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $1.0 million and $1.1 million, respectively. Of the loans that were restructured in the first quarter of 2022, none were classified but performing, and $0.2 were non-performing at March 31, 2022.

 

16

 

The following table summarizes TDRs at March 31, 2022 and December 31, 2021:

 

  

March 31, 2022

  

December, 31, 2021

 

(Dollars in thousands)

 

Accruing

  

Non-Accrual

  

Total

  

Accruing

  

Non-Accrual

  

Total

 

Single family

 $0   250   250   0   254   254 

Commercial real estate

  0   349   349   0   355   355 

Consumer

  23   375   398   29   413   442 
  $23   974   997   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 twelve 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 twelve month period. All loans classified as TDRs are considered to be impaired.

 

When a loan is modified in 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 table and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three months ended March 31, 2022 and March 31, 2021.

 

  

   Three Months Ended

March 31, 2022

  

Three Months Ended

March 31, 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:

                        

Commercial real estate:

                        

Other

  1  $165   165   1  $139   139 

Commercial business

  0   0   0   1   14   14 

Total

  1  $165   165   2  $153   153 
                         

 

There were no loans that were restructured within the twelve months preceding March 31, 2022 and March 31, 2021 that subsequently defaulted during the three months ended March 31, 2022 and March 31, 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 as needed. Loans that are not collateral-dependent may have additional reserves established if deemed necessary. The reserves for TDRs were $0.2 million, or 2.4%, of the total $9.6 million in loan loss reserves at March 31, 2022 and $0.2 million, or 2.6%, of the total $9.3 million in loan loss reserves at December 31, 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 allowed the Bank to grant modifications of loans to borrowers that were impacted by the pandemic without classifying the modifications as TDRs if the accommodation was 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-19 pandemic. At March 31, 2022 and March 31, 2021, the Bank had $0 and $34.5 million, respectively, of outstanding loans that were granted loan accommodations in accordance with Section 4013 of the CARES Act.

 

17

 

 

 

(10) Intangible Assets

The Company’s intangible assets consist of core deposit intangibles, goodwill and mortgage servicing rights. A summary of mortgage servicing activity is as follows:

 

(Dollars in thousands)

 

Three Months Ended

March 31, 2022

  

Twelve Months Ended

December 31, 2021

  

Three Months Ended

March 31, 2021

 

Balance, beginning of period

 $3,280   3,043   3,043 

Originations

  215   1,405   368 

Amortization

  (225)  (1,168)  (297)

Balance, end of period

 $3,270   3,280   3,114 

Fair value of mortgage servicing rights

 $5,469   4,813   4,073 
             

 

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 March 31, 2022:

 

      

Weighted

  

Weighted

     
  

Loan

  

Average

  

Average

     
  

Principal

  

Interest

  

Remaining

  

Number

 

(Dollars in thousands)

 

Balance

  

Rate

  

Term (months)

  

of Loans

 

Original term 15 year fixed rate

 $117,268   2.85

%

  141   1,066 

Original term 30 year fixed rate

  428,532   3.43   312   2,671 
                 

 

Amortization expense for intangible assets was $0.2 million and $0.3 million for the three month periods ended March 31, 2022 and March 31, 2021, respectively. The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2022 and December 31, 2021 is presented in the following table.

 

  

March 31, 2022

 
  

Gross

      

Unamortized

 
  

Carrying

  

Accumulated

  

Intangible

 

(Dollars in thousands)

 

Amount

  

Amortization

  

Assets

 

Mortgage servicing rights

 $5,931   (2,661)  3,270 

Core deposit intangible

  154   (150)  4 

Goodwill

  802   0   802 

Total

 $6,887   (2,811)  4,076 
             

 

  

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 
             

 

18

 

The following table indicates the estimated future amortization expense for intangible assets:

 

(Dollars in thousands)

 

Mortgage
Servicing
Rights

  

Core
Deposit
Intangible

  

Total
Intangible
Assets

 

Year ending December 31,

            

2022

 $535   4   539 

2023

  672   0   672 

2024

  637   0   637 

2025

  569   0   569 

2026

  469   0   469 

Thereafter

  388   0   388 

Total

 $3,270   4   3,274 
             

 

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 March 31, 2022. The Company’s actual experience 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 March 31, 2022 a $0.3 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 five and thirty-seven 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.

 

The table below summarizes the Company’s net lease cost for the three months ended March 31, 2022 and 2021.

 

(Dollars in thousands)

 

Three Months Ended
March 31, 2022

  

Three Months Ended
March 31, 2021

 

Operating lease cost

 $57   225 
         

 

The table below summarizes other information related to the Company’s operating leases:

 

(Dollars in thousands)

 

Three Months
Ended
March 31, 2022

  

Three Months
Ended
March 31, 2021

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows from operating leases

 $57   225 

Weighted-average remaining lease term – operating leases, in years

  2.2   3.5 

Weighted-average discount rate – operating leases

  1.83

%

  2.19

%

         

 

The decrease in the net lease cost and operating cash flows between the periods is related to the purchase of the combined corporate office and branch facility in Rochester, Minnesota during the fourth quarter of 2021. This facility had previously been leased by the Company.

 

19

 

The table below summarizes the maturity of remaining lease liabilities at March 31, 2022:

 

(Dollars in thousands)

 

March 31, 2022

 

2022

 $155 

2023

  92 

2024

  77 

2025

  15 

2026 and thereafter

  0 

Total lease payments

  339 

Less: Interest

  (7)

Present value of lease liabilities

 $332 
     

 

 

(12) Earnings per Common Share

The following table reconciles the weighted average shares outstanding and the earnings available to common stockholders used for basic and diluted earnings per common share:

 

  

Three Months Ended

 

(Dollars in thousands, except per share data)

 

March 31,
2022

  

March 31,
2021

 

Weighted average number of common shares outstanding used in basic earnings per common share calculation

  4,391,325   4,560,743 

Net dilutive effect of:

        

Restricted stock awards and options

  33,878   28,681 

Weighted average number of shares outstanding adjusted for effect of dilutive securities

  4,425,203   4,589,424 

Income available to common stockholders

 $1,487   3,418 

Basic earnings per common share

 $0.34   0.75 

Diluted earnings per common share

 $0.34   0.74 
         

 

 

(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 FRB 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 equity Tier 1 capital to risk-weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets.

 

The Bank’s average total assets for the first quarter of 2022 were $1.0 billion, its adjusted total assets were $1.0 billion, and its risk-weighted assets were $778.7 million. The following table presents the Bank’s capital amounts and ratios at March 31, 2022 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective actions regulations.

 

20

 
  

Actual

  

Required to be
Adequately Capitalized

  

Excess Capital

  

To Be Well Capitalized
Under Prompt
Corrective Action
Provisions

 

(Dollars in thousands)

 

Amount

  

Percent of Assets(1)

  

Amount

  

Percent of Assets(1)

  

Amount

  

Percent of Assets(1)

  

Amount

  

Percent of Assets(1)

 

March 31, 2022

                                

Common equity Tier 1 capital

 $99,354   12.76

%

 $35,040   4.50

%

 $64,314   8.26

%

 $50,614   6.50

%

Tier 1 leverage

  99,354   9.55   41,633   4.00   57,721   5.55   52,042   5.00 

Tier 1 risk-based capital

  99,354   12.76   46,720   6.00   52,634   6.76   62,294   8.00 

Total risk-based capital

  108,938   13.99   62,294   8.00   46,644   5.99   77,867   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 March 31, 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 OCC has extensive discretion in its supervisory and enforcement activities and can adjust the requirement to be well-capitalized in the future.

 

 

(14) Stockholders Equity

The Company repurchased 30,000 shares of its common stock in the open market for a gross purchase price of $0.7 million under its share repurchase program during the first quarter of 2022. At March 31, 2022, the Company was authorized to repurchase up to $3.4 million more of its common stock under the existing share repurchase program. The Company also declared a quarterly dividend of 6 cents per share that was paid to stockholders as of the record date on March 9, 2022.

 

 

(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 March 31, 2022 were approximately $10.5 million, expire over the next twenty-three 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. 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. 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.

 

 

(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.

 

21

 

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

Total

 

At or for the quarter ended March 31, 2022:

                

Interest income - external customers

 $7,565   0   0   7,565 

Non-interest income - external customers

  2,375   0   0   2,375 

Intersegment interest income

  0   9   (9)  0 

Intersegment non-interest income

  59   1,638   (1,697)  0 

Interest expense

  292   0   (9)  283 

Provision for loan losses

  296   0   0   296 

Non-interest expense

  7,106   205   (59)  7,252 

Income tax expense (benefit)

  667   (45)  0   622 

Net income

  1,638   1,487   (1,638)  1,487 

Total assets

  1,028,627   100,755   (99,984)  1,029,398 

At or for the quarter ended March 31, 2021:

                

Interest income - external customers

 $7,889   0   0   7,889 

Non-interest income - external customers

  3,254   1   0   3,255 

Intersegment interest income

  0   8   (8)  0 

Intersegment non-interest income

  58   3,594   (3,652)  0 

Interest expense

  461   0   (8)  453 

Provision for loan losses

  (576)  0   0   (576)

Non-interest expense

  6,309   228   (58)  6,479 

Income tax expense (benefit)

  1,413   (43)  0   1,370 

Net income

  3,594   3,418   (3,594)  3,418 

Total assets

  970,641   105,195   (104,531)  971,305 

 

22

 

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 maintaining credit quality; maintaining net interest margins; the adequacy and amount of available liquidity and capital resources to Home Federal Savings Bank (the Bank); the Company’s liquidity and capital requirements; the anticipated impacts of the COVID-19 Pandemic and efforts to mitigate the same on the general economy, our clients, and the allowance for loan losses; 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 our assessment of the impact on our 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.

 

A number of factors, many of which may 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 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 Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank 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 Federal Home Loan Bank (FHLB) and the 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; our 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 “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021and 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 interest rate 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, 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

While our significant accounting policies are described in the notes to our consolidated financial statements, we believe the following discussion addresses our most critical accounting estimates, which are those estimates made in accordance with U.S. generally accepted accounting principles (GAAP) that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The Company has identified the following critical accounting estimates 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 local economic conditions such as unemployment data, loan delinquencies, 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. The current year activity resulted in a decrease in the allowance and a credit 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 potential 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 relate to unrealized losses on the investment portfolio and the allowance for loan losses. For tax purposes only the net charge-offs are deductible 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-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.

 

RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2022 COMPARED TO THE QUARTER ENDED MARCH 31, 2021

 

Net Income

Net income was $1.5 million for the first quarter of 2022, a decrease of $1.9 million compared to net income of $3.4 million for the first quarter of 2021. Diluted earnings per share for the first quarter of 2022 was $0.34, a decrease of $0.40 from diluted earnings per share of $0.74 for the first quarter of 2021. The decrease in net income between the periods was primarily because of a $0.9 million increase in the provision for loan losses due to an increase in the balance of the loan portfolio, a $0.9 million decrease in the gain on sales of loans due to a decrease in mortgage loan originations and sales and a $0.5 million increase in compensation and benefits expense primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production. These decreases in net income were partially offset by a $0.8 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 $7.3 million for the first quarter of 2022, a decrease of $0.1 million, or 2.1%, compared to $7.4 million for the first quarter of 2021. Interest income was $7.6 million for the first quarter of 2022, a decrease of $0.3 million, or 4.1%, from $7.9 million for the first quarter of 2021. Interest income decreased despite the $105.1 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 3.06% for the first quarter of 2022, a decrease of 50 basis points from 3.56% for the first quarter of 2021. The decrease in the average yield is primarily related to the $0.6 million decrease in the yield enhancements recognized on Paycheck Protection Program (PPP) loans that were repaid between the periods and a decrease in the yields earned on loans and investments due to the continued low interest rate environment. This trend is expected to continue throughout 2022 as all of the PPP loans have been repaid as of March 31, 2022.

 

Interest expense was $0.3 million for the first quarter of 2022, a decrease of $0.2 million, or 37.5%, compared to $0.5 million for the first quarter of 2021. Interest expense decreased despite the $100.3 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 quarter of 2022, a decrease of 9 basis points from 0.22% for the first quarter of 2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the repricing of maturing certificates of deposit in the continued low interest rate environment.

 

Net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2022 was 2.94%, a decrease of 42 basis points, compared to 3.36% for the first quarter of 2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets. The decrease in the average yield is primarily related to the $0.6 million decrease in the yield enhancements recognized on PPP loans that were repaid between the periods and a decrease in the yields earned on loans and investments due to the continued low interest rate environment.

 

A summary of the Company’s net interest margin for the three-month periods ended March 31, 2022 and 2021 is as follows:

 

   

For the Three-Month Period Ended

 
   

March 31, 2022

   

March 31, 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

  $ 295,370       788       1.08

%

  $ 164,518       498       1.23

%

Loans held for sale

    3,967       34       3.52       5,087       37       2.95  

Single family loans, net

    170,047       1,437       3.43       144,965       1,329       3.72  

Commercial loans, net

    449,279       4,809       4.34       437,881       5,372       4.98  

Consumer loans, net

    40,727       471       4.69       52,238       622       4.83  

Other

    43,593       26       0.24       93,225       31       0.13  

Total interest-earning assets

    1,002,983       7,565       3.06       897,914       7,889       3.56  
                                                 

Interest-bearing liabilities:

                                               

Checking accounts

    160,315       41       0.10       154,277       44       0.12  

Savings accounts

    121,033       18       0.06       105,795       16       0.06  

Money market accounts

    250,745       132       0.21       223,563       129       0.23  

Certificate accounts

    84,343       92       0.44       99,801       264       1.07  

Total interest-bearing liabilities

    616,436                       583,436                  

Non-interest checking

    303,697                       236,471                  

Other non-interest bearing liabilities

    2,636                       2,544                  

Total interest-bearing liabilities and non-interest bearing deposits

  $ 922,769       283       0.13     $ 822,451       453       0.22  

Net interest income

          $ 7,282                     $ 7,436          

Net interest rate spread

                    2.93

%

                    3.34

%

Net interest margin

                    2.94

%

                    3.36

%

                                                 

 

 

Provision for Loan Losses

The provision for loan losses was $0.3 million for the first quarter of 2022, an increase of $0.9 million compared to ($0.6) million for the first quarter of 2021. The provision for loan losses increased between the periods primarily because of the growth in the loan portfolio during the first quarter of 2022. The credit provision recorded in 2021 was primarily the result of improvements in the underlying operations supporting many of the loans that were initially negatively impacted by the COVID-19 pandemic in 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 the size of the portfolio and our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter as a result of an increase in the required quantitative reserves due to an increase in the loan portfolio. The qualitative allowance for loan losses related to the disruption in business activity as a result of the COVID-19 pandemic was reduced during the quarter because of a perceived reduction in this risk due to improving conditions. The reduction in pandemic related qualitative reserves was partially offset by an increase in the qualitative reserves for other economic factors. The other qualitative reserves were increased due to a perceived deterioration of economic condition during the quarter, including an increase in the rate of inflation, and enacted and expected increases in the federal funds rate.

 

A reconciliation of the Company’s allowance for loan losses for the first quarters of 2022 and 2021 is summarized as follows:

 

(Dollars in thousands)

 

2022

   

2021

 

Balance at January 1,

  $ 9,279       10,699  

Provision

    296       (576 )

Charge offs:

               

Consumer

    (1 )     (31 )

Recoveries

    10       40  

Balance at March 31,

  $ 9,584       10,132  
                 

Allocated to:

               

General allowance

  $ 9,142       9,927  

Specific allowance

    442       205  
    $ 9,584       10,132  
                 

 

Non-Interest Income

Non-interest income was $2.4 million for the first quarter of 2022, a decrease of $0.9 million, or 27.0%, from $3.3 million for the first quarter of 2021. Gain on sales of loans decreased $0.9 million between the periods primarily because of a decrease in single family loan originations and sales. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of Small Business Administration loans that were being serviced for others. These decreases were partially offset by a slight increase in fees and service charges between the periods due primarily to an increase in retail overdraft fees. Other non-interest income increased slightly due primarily to an increase in the sale of uninsured investment products between the periods.          

 

Non-Interest Expense

Non-interest expense was $7.3 million for the first quarter of 2022, an increase of $0.8 million, or 11.9%, from $6.5 million for the first quarter of 2021. Compensation and benefits expense increased $0.5 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. Professional services expense increased $0.3 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. Other non-interest expense increased slightly between the periods due primarily to a decrease in the printing and supply costs that were deferred as a result of the decreased mortgage loan production and an increase in deposit insurance costs due to asset growth. Data processing expenses increased slightly between the periods due to an increase in debit card and mobile banking costs. These increases in non-interest expense were partially offset by a $0.1 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.

 

 

Income Taxes

Income tax expense was $0.6 million for the first quarter of 2022, a decrease of $0.8 million from $1.4 million for the first quarter of 2021. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

 

FINANCIAL CONDITION

 

Non-Performing Assets

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters.

 

   

March 31,

   

December 31,

 

(Dollars in thousands)

 

2022

   

2021

 

Non‑performing loans:

               

Single family

  $ 478     $ 340  

Commercial real estate

    3,551       3,757  

Consumer

    500       517  

Commercial business

    7       7  

Total

    4,536       4,621  
                 

Foreclosed and repossessed assets:

               

Commercial real estate

    290       290  

Total non‑performing assets

  $ 4,826     $ 4,911  

Total as a percentage of total assets

    0.47

%

    0.46

%

Total as a percentage of total loans receivable

    0.66

%

    0.70

%

Allowance for loan losses to non-performing loans

    211.31

%

    200.81

%

                 

Delinquency data:

               

Delinquencies (1)

               

30+ days

  $ 913     $ 1,418  

90+ days

    0       0  

Delinquencies as a percentage of loan portfolio (1)

               

30+ days

    0.13

%

    0.21

%

90+ days

    0.00

%

    0.00

%

                 
(1)

 Excludes non-accrual loans.

 

Total non-performing assets were $4.8 million at March 31, 2022, a decrease of $0.1 million, or 1.8%, from $4.9 million at December 31, 2021. Non-performing loans decreased $0.1 million and foreclosed and repossessed assets remained the same during the first quarter of 2022.

 

Dividends

The Company declared a quarterly dividend of 6 cents per share of common stock that was paid on March 9, 2022. The declaration and amount of any future cash dividends remains subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions, business strategy and other factors deemed relevant by the Board of Directors.

 

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended March 31, 2022, the net cash provided by operating activities was $11.1 million. The Company collected $12.1 million in principal repayments and maturities on securities and purchased securities and FHLB stock for $25.2 million. The Company had a net decrease in deposit balances of $30.3 million and an increase of customer escrows of $0.8 million during the quarter. It also purchased $0.7 million of treasury stock, obtained $0.1 million in treasury stock for the taxes payable on stock awards, paid dividends to stockholders of $0.3 million, and purchased $0.2 million of premises and equipment. Loans receivable also increased $32.3 million during the quarter.

 

The Company has certificates of deposit with outstanding balances of $54.8 million that come 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 outflows from deposits that do not renew will be replaced with a combination of other customers’ deposits or FHLB advances. FRB borrowings could also be used to fund unanticipated outflows of certificates of deposit.

 

 

The Company had eleven deposit customers each with aggregate deposits greater than $5.0 million as of March 31, 2022. The $101.2 million in funds held by these customers may be withdrawn at any time, but management anticipates that the majority of these deposits will not be withdrawn from the Bank over the next twelve months. If these deposits were withdrawn, it is anticipated that they would be replaced with deposits from other customers or FHLB advances. FRB borrowings could also be used to replace unanticipated outflows of large checking and money market deposits.

 

The Company had the ability to borrow $182.6 million from the FHLB at March 31, 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 $72.7 million from the FRB at March 31, 2022 based on the collateral value of the loans pledged.

 

The Company’s primary source of cash is dividends from the Bank. At March 31, 2022, the Company had $11.4 million in cash. The primary use of cash by the Company is the payment of operating expenses, the repurchase of Company stock, and the payment of 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 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. Accordingly, the Company may not be able to raise additional capital, if deemed prudent, on 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'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's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company'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 Management’s Discussion and Analysis discloses the Company'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 of the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis-point changes in interest rates from interest rates in effect on March 31, 2022.

 

(Dollars in thousands)

 

Market Value

 

Basis point change in interest rates

  -100     0    

+100

   

+200

 

Total market-risk sensitive assets

  $ 1,026,342       1,001,596       979,280       956,377  

Total market-risk sensitive liabilities

    884,967       832,107       789,265       752,326  

Off-balance sheet financial instruments

    112       0       265       496  

Net market risk

  $ 141,263       169,489       189,750       203,555  

Percentage change from current market value

    (16.65

)%

    0.00

%

    11.95

%

    20.10

%

                                 

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 2% to 44%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 6% and 44%, 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. Passbook accounts and money market accounts were assumed to decay at an annual rate of 7% and 17%, respectively. Retail checking accounts, commercial checking accounts and commercial money market accounts were assumed to decay at annual rates of 6%, 22% and 13%, 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 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 ended March 31, 2023 of immediate interest rate changes called rate shocks:

 

(Dollars in thousands)

 

Rate Shock in
Basis Points

   

Projected
Change in Net
Interest Income

   

Percentage
Change

 

+200

    $ 1,785       6.11 %

+100

      860       2.94  
0       0       0.00  
-100       (1,321 )     (4.52 )

 

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 decrease in interest income in a declining rate environment is primarily because there are more loans and investments that would reprice to lower interest rates than there are deposits that would be able to be repriced 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 structure its balance sheet to better match the maturities of its assets and liabilities. The Bank sells almost all of its originated 30-year fixed rate single family residential 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. In addition, a significant portion of the Bank’s commercial loans that are placed into the portfolio are adjustable rate loans or fixed rate loans that reprice in less than five years.

 

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than commitments to originate and sell loans in the ordinary course of business.

 

Item 3: Quantitative and Qualitative Disclosures About 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.

 

PART II - OTHER INFORMATION

 

ITEM 1.

Legal Proceedings.

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 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.

 

ITEM 1A.

Risk Factors.

The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 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.

 

ITEM 2.

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 first quarter of 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)

 

January 1, 2022 to January 31, 2022

    0     $ N/A       0     $ 4,147,650  

February 1, 2022 to February 28, 2022

    0       N/A       0     $ 4,147,650  

March 1, 2022 to March 31, 2022

    30,000       24.78       743,400     $ 3,404,250  

Total

    30,000     $ 24.78       743,400     $ 3,404,250  

 

(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, $2.6 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.

 

ITEM 3.

Defaults Upon Senior Securities.

None.

 

ITEM 4.

Mine Safety Disclosures.

Not applicable.

 

ITEM 5.

Other Information.

None.

 

 

ITEM 6.

Exhibits.

 

INDEX TO EXHIBITS

Exhibit

     

Filing Status

Number

 

Exhibit

   
         

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of CEO

 

Filed Electronically

         

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of CFO

 

Filed Electronically

         

32

 

Section 1350 Certifications of CEO and CFO

 

Filed Electronically

         

101

 

Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2022, filed with the Securities and Exchange Commission on May 4, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021, (ii) the Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021, (iii) the Consolidated Statements of Stockholders’ Equity for the Three Month Periods Ended March 31, 2022 and 2021, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021, and (v) Notes to Consolidated Financial Statements.

 

Filed Electronically

         
104  

Cover Page Interactive Data File from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 (formatted as Inline XBRL and contained in Exhibit 101).

 

Filed Electronically

 

 

SIGNATURES

 

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.

       
      Registrant

 

   

 

 

   

 

Date:

May 4, 2022  

/s/ Bradley Krehbiel

 

   

Bradley Krehbiel, President and Chief Executive Officer

 

   

(Duly Authorized Officer)

       
Date: May 4, 2022   /s/ Jon Eberle
      Jon Eberle, Senior Vice President and
      Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

34