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HMN FINANCIAL INC - Quarter Report: 2023 March (Form 10-Q)

hmnf20230331_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, 2023

 

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 28, 2023

Common stock, $0.01 par value

 

4,487,362

 

 

 

HMN FINANCIAL, INC.

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

   

Page

Item 1:

Financial Statements

3
     
 

Consolidated Balance Sheets at March 31, 2023 (unaudited) and December 31, 2022

3
     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022 (unaudited)

4
     
 

Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2023 and 2022 (unaudited)

5
     
 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (unaudited)

6
     
 

Notes to Consolidated Financial Statements (unaudited)

7
     

Item 2:

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

25
     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

33
     

Item 4:

Controls and Procedures

33
 

PART II OTHER INFORMATION

 

Item 1:

Legal Proceedings

34
     

Item 1A:

Risk Factors

34
     

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

34
     

Item 3:

Defaults Upon Senior Securities

34
     

Item 4:

Mine Safety Disclosures

34
     

Item 5:

Other Information

34
     

Item 6:

Exhibits

35
   

Signatures

36

 

 

 

PART I FINANCIAL INFORMATION

Item 1 :   Financial Statements

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

  

March 31,

  

December 31,

 

(Dollars in thousands, except share and per share data)

 

2023

  

2022

 
  

(unaudited)

     

Assets

        

Cash and cash equivalents

 $10,120   36,259 

Securities available for sale:

        

Mortgage-backed and related securities (amortized cost $207,450 and $216,621)

  185,836   192,688 

Other marketable securities (amortized cost $55,698 and $55,698)

  53,857   53,331 

Total securities available for sale (at fair value)

  239,693   246,019 
         

Loans held for sale (at fair value)

  567   1,314 

Loans receivable, net

  785,982   777,078 

Accrued interest receivable

  3,199   3,003 

Mortgage servicing rights, net

  2,878   2,986 

Premises and equipment, net

  16,467   16,492 

Goodwill

  802   802 

Prepaid expenses and other assets

  3,800   3,902 

Deferred tax asset, net

  8,074   8,347 

Total assets

 $1,071,582   1,096,202 
         

Liabilities and Stockholders Equity

        

Deposits

 $958,318   981,926 

Federal Home Loan Bank advances and Federal Reserve borrowings

  2,300   0 

Accrued interest payable

  1,049   298 

Customer escrows

  8,463   10,122 

Accrued expenses and other liabilities

  1,230   6,520 

Total liabilities

  971,360   998,866 

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 outstanding 4,484,614 and 4,480,976

  91   91 

Additional paid-in capital

  40,975   41,013 

Retained earnings, subject to certain restrictions

  138,952   138,409 

Accumulated other comprehensive loss

  (17,515)  (19,761)

Unearned employee stock ownership plan shares

  (1,014)  (1,063)

Treasury stock, at cost 4,644,048 and 4,647,686 shares

  (61,267)  (61,353)

Total stockholders’ equity

  100,222   97,336 

Total liabilities and stockholders’ equity

 $1,071,582   1,096,202 

 


 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands, except per share data)

 

2023

   

2022

 

Interest income:

               

Loans receivable

  $ 9,003       6,751  

Securities available for sale:

               

Mortgage-backed and related

    652       727  

Other marketable

    143       61  

Other

    115       26  

Total interest income

    9,913       7,565  
                 

Interest expense:

               

Deposits

    1,803       283  

Customer escrows

    32       0  

Advances and other borrowings

    15       0  

Total interest expense

    1,850       283  
                 

Net interest income

    8,063       7,282  
                 

Provision for credit losses (1)

    (8 )     296  

Net interest income after provision for credit losses

    8,071       6,986  
                 

Non-interest income:

               

Fees and service charges

    807       766  

Loan servicing fees

    400       386  

Gain on sales of loans

    295       868  

Other

    426       355  

Total non-interest income

    1,928       2,375  
                 

Non-interest expense:

               

Compensation and benefits

    4,805       4,288  

Occupancy and equipment

    950       1,050  

Data processing

    505       354  

Professional services

    237       529  

Other

    1,196       1,031  

Total non-interest expense

    7,693       7,252  

Income before income tax expense

    2,306       2,109  

Income tax expense

    672       622  

Net income

    1,634       1,487  

Other comprehensive income (loss), net of tax

    2,246       (10,018 )

Comprehensive income (loss) available to common stockholders

  $ 3,880       (8,531 )

Basic earnings per share

  $ 0.38       0.34  

Diluted earnings per share

  $ 0.37       0.34  

 


 

(1)

The Company adopted Accounting Standard Update (ASU) 2016-13 as of January 1, 2023. The 2022 amount presented is calculated under the prior accounting standard.

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

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, 2022

 $91   41,013   138,409   (19,761)  (1,063)  (61,353)  97,336 

Net income

          1,634               1,634 

Other comprehensive income

           2,246         2,246 

Adoption of ASU 2016-13 (see Note 3)

        (830)           (830)

Dividends paid to stockholders ($0.06 per share)

        (261)           (261)

Restricted stock awards

      (150)              150   0 

Stock awards withheld for tax withholding

                      (64)  (64)

Amortization of restricted stock awards

      54                   54 

Earned employee stock ownership plan shares

      58           49       107 

Balance, March 31, 2023

 $91   40,975   138,952   (17,515)  (1,014)  (61,267)  100,222 

 


 

                  

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 ($0.06 per share)

        (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 

 


 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

   

Three Months Ended

March 31,

 

(Dollars in thousands)

 

2023

   

2022

 

Cash flows from operating activities:

               

Net income

  $ 1,634       1,487  

Adjustments to reconcile net income to cash (used) provided by operating activities:

               

Provision for credit losses

    (8 )     296  

Depreciation

    282       315  

Amortization of premiums, net

    194       282  

Amortization of deferred loan fees

    (60 )     (93 )

Amortization of core deposit intangible

    0       6  

Amortization of mortgage servicing rights

    199       225  

Capitalized mortgage servicing rights

    (91 )     (215 )

(Gains) losses recognized on equity securities, net

    (41 )     31  

Gains on sale of premises and equipment

    (1 )     0  

Gain on sales of loans

    (295 )     (868 )

Proceeds from sale of loans held for sale

    11,300       33,877  

Disbursements on loans held for sale

    (9,718 )     (23,739 )

Amortization of restricted stock awards

    54       62  

Amortization of unearned Employee Stock Ownership Plan shares

    49       48  

Earned Employee Stock Ownership Plan shares priced above original cost

    58       75  

Increase in accrued interest receivable

    (196 )     (137 )

Increase (decrease) in accrued interest payable

    751       (5 )

Decrease in other assets

    283       720  

Decrease in other liabilities

    (5,399 )     (1,270 )

Other, net

    0       1  

Net cash (used) provided by operating activities

    (1,005 )     11,098  

Cash flows from investing activities:

               

Principal collected on securities available for sale

    8,976       12,132  

Purchases of securities available for sale

    0       (25,043 )

Purchase of Federal Home Loan Bank stock

    (1,546 )     (191 )

Redemption of Federal Home Loan Bank stock

    1,421       0  

Net increase in loans receivable

    (10,437 )     (32,276 )

Proceeds from sale of premises and equipment

    35       4  

Purchases of premises and equipment

    (291 )     (172 )

Net cash used by investing activities

    (1,842 )     (45,546 )

Cash flows from financing activities:

               

Decrease in deposits

    (23,608 )     (30,268 )

Purchase of treasury stock

    0       (743 )

Stock awards withheld for tax withholding

    (64 )     (53 )

Dividends to stockholders

    (261 )     (266 )

Proceeds from borrowings

    37,820       0  

Repayment of borrowings

    (35,520 )     0  

(Decrease) increase in customer escrows

    (1,659 )     811  

Net cash used by financing activities

    (23,292 )     (30,519 )

Decrease in cash and cash equivalents

    (26,139 )     (64,967 )

Cash and cash equivalents, beginning of period

    36,259       94,143  

Cash and cash equivalents, end of period

  $ 10,120       29,176  

Supplemental cash flow disclosures:

               

Cash paid for interest

  $ 1,099       288  

Supplemental noncash flow disclosures:

               

Loans transferred to loans held for sale

    555       5,451  

 


 

See accompanying notes to consolidated financial statements (unaudited).

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

 

 

(1)

Description of the Business and Summary of Significant Accounting Policies 

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.

 

The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2023, which changed the methodology used to estimate the allowance for credit losses on various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures. See Note 3 - “New Accounting Standards, Note 7 - “Securities Available for Sale, and Note 9 - “Allowance for Credit Losses and Credit Quality Information” for more information on the changes in certain policies as a result of the adoption of ASU 2016-13.

 

The Company adopted 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. See Note 3New Accounting Standards and Note 9Allowance for Credit Losses and Credit Quality Information” for more information on the changes in certain policies as a result of the adoption of ASU 2022-02.

 

 

(2)

Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive income (loss), 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 unaudited consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2022, included in the Company's Form 10-K filed with the Securities and Exchange Commission (SEC) on March 3, 2023. The results of operations for the three month period ended March 31, 2023 are not necessarily indicative of the results which may be expected for the entire year.

 

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

 

(3)

New Accounting Standards

In March 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructures by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, such as HMN, the amendments in this ASU require that an entity disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The amendments in the ASU became effective for HMN when ASU 2016-13 was adopted on January 1, 2023 and the required disclosures were applied prospectively. Because there were no loan modifications to borrowers experiencing financial difficulties or charge offs in the first quarter of 2023, no additional disclosures were required in this Quarterly Report on Form 10-Q.

 

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 that was previously required by 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 previously used 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. 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 adopted this ASU on January 1, 2023. The transition to the new ASU resulted in a cumulative-effect adjustment to the allowance for credit losses of $1.1 million, an increase in deferred tax assets of $0.3 million, and a decrease in retained earnings of $0.8 million as of the adoption date. In addition, a liability for $0.1 million was established for unfunded loan commitments as of the adoption date. The Company did not record an allowance for available for sale securities on January 1, 2023 as the investment portfolio consists almost entirely of debt securities implicitly backed by the U.S. Government for which credit risk is deemed minimal. The impact of this ASU could change in the future depending on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods. See Note 7 Securities Available For Sale and Note 9 Allowance for Credit Losses and Credit Quality Information.

 

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. This additional guidance will require periodic reviews of the Company’s calculation of the allowance for credit losses by a third party subsequent to the adoption date.

 

(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.

 

8

 

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, 2023 and December 31, 2022.

 

  

Carrying Value at March 31, 2023

 

(Dollars in thousands)

 

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Securities available for sale

 $239,693   0   239,693   0 

Equity securities

  266   0   266   0 

Mortgage loan commitments

  (10)  0   (10)  0 

Total

 $239,949   0   239,949   0 

 


 

  

Carrying Value at December 31, 2022

 

(Dollars in thousands)

 

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Securities available for sale

 $246,019   0   246,019   0 

Equity securities

  225   0   225   0 

Mortgage loan commitments

  (28)  0   (28)  0 

Total

 $246,216   0   246,216   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, 2023 and December 31, 2022.

 

  

Carrying Value at March 31, 2023

     

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Three Months

Ended

March 31, 2023

Total Losses

 

Loans held for sale

 $567   0   567   0   4 

Mortgage servicing rights, net

  2,878   0   2,878   0   0 

Collateral dependent loans

  1,915   0   1,915   0   (43)

Total

 $5,360   0   5,360   0   (39)

 


 

  

Carrying Value at December 31, 2022

     

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Year Ended

December 31, 2022

Total Losses

 

Loans held for sale

 $1,314   0   1,314   0   3 

Mortgage servicing rights, net

  2,986   0   2,986   0   0 

Impaired loans

  1,978   0   1,978   0   (46)

Total

 $6,278   0   6,278   0   (43)

 


 

 

(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, 2023 and December 31, 2022 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, 2023 and December 31, 2022 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, 2023

  

December 31, 2022

 
          

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

 $10,120   10,120   10,120             36,259   36,259   36,259           

Securities available for sale

  239,693   239,693      239,693          246,019   246,019      246,019        

Equity securities

  266   266      266          225   225      225        

Loans held for sale

  567   567      567          1,314   1,314      1,314        

Loans receivable, net

  785,982   724,482      724,482          777,078   724,497      724,497        

Federal Home Loan Bank stock

  1,408   1,408      1,408          1,283   1,283      1,283        

Accrued interest receivable

  3,199   3,199      3,199          3,003   3,003      3,003        

Mortgage servicing assets

  2,878   6,414         6,414       2,986   6,344         6,344     
                                                 

Financial liabilities:

                                                

Deposits

  958,318   892,622      892,622          981,926   983,420      983,420        

Other borrowings

  2,300   2,300      2,300          0   0      0        

Accrued interest payable

  1,049   1,049      1,049          298   298      298        

Off-balance sheet financial instruments:

                                                

Commitments to extend credit

  (10)  (10)           224,037   (28)  (28)           232,940 

Commitments to sell loans

  4   4            4,140   8   8            6,575 

 


 

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.

 

Mortgage Servicing Assets

The fair values of mortgage servicing assets were calculated by a third party using a discounted cash flow model-based technique that uses significant assumptions both observable and non-observable in the market. The unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the mortgage servicing asset.

 

10

 

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.

 

Other Borrowings

The carrying amount of other borrowings approximates its fair value since it is short-term in nature.

 

Accrued Interest Payable

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

 

Commitments to Extend Credit

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

 

Commitments to Sell Loans

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

 

(6)

Other Comprehensive Income (Loss)

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

 

  

For the period ended March 31,

 

(Dollars in thousands)

 

2023

  

2022

 

Securities available for sale:

 

Before

Tax

  

Tax

Effect

  

Net of

Tax

  

Before

Tax

  

Tax

Effect

  

Net of

Tax

 

Unrealized gains (losses) arising during the period

 $2,845   599   2,246   (13,746)  (3,728)  (10,018)

Other comprehensive income (loss)

 $2,845   599   2,246   (13,746)  (3,728)  (10,018)

 


 

 

(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, 2023 and December 31, 2022.

 

  

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, 2023

                                

Mortgage backed securities:

                                

Federal National Mortgage Association
(FNMA)

  0  $0   0   34  $101,000   (11,599) $101,000   (11,599)

Federal Home Loan Mortgage
Corporation (FHLMC)

  0   0   0   24   84,800   (10,013)  84,800   (10,013)

Collateralized mortgage obligations:

                                

FNMA

  0   0   0   1   36   (2)  36   (2)

Other marketable securities:

                                

U.S. Government agency obligations

  2   9,839   (161)  9   43,563   (1,435)  53,402   (1,596)

Corporate preferred stock

  0   0   0   1   455   (245)  455   (245)

Total temporarily impaired securities

  2  $9,839   (161)  69  $229,854   (23,294) $239,693   (23,455)

 

11

 
  

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, 2022

                                

Mortgage backed securities:

                                

FNMA

  12  $19,337   (1,629)  22  $85,599   (11,125) $104,936   (12,754)

FHLMC

  4   10,542   (1,214)  20   77,174   (9,963)  87,716   (11,177)

Collateralized mortgage obligations:

                                

FNMA

  1   36   (2)  0   0   0   36   (2)

Other marketable securities:

                                

U.S. government agency obligations

  4   19,334   (667)  7   33,507   (1,490)  52,841   (2,157)

Corporate preferred stock

  0   0   0   1   490   (210)  490   (210)

Total temporarily impaired securities

  21  $49,249   (3,512)  50  $196,770   (22,788) $246,019   (26,300)

 


 

The Company reviews its investment portfolio on a quarterly basis for indications of impairment due to credit-related factors or noncredit-related factors and the Company does not intend to sell the securities and has the intent and ability to hold them for a period of time sufficient for recovery in their amortized cost basis. This review includes analyzing 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 allow for any anticipated recovery in fair value.

 

As of March 31, 2023, the Company does not consider its unrealized losses on its securities available for sale to be attributable to credit-related factors. All of the Company’s investments, with the exception of the corporate preferred stock, are issued by U.S. government agencies, are implicitly guaranteed by the U.S. government, and have a long history of no credit losses. 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, 2023 relates to a single trust preferred security that was issued by the holding company of a community bank. As of March 31, 2023 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 impaired as a result of credit-related factors at March 31, 2023 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 for recovery in amortized cost. 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 an other-than temporary impairment on this security in future periods by recording an allowance for credit losses. There were no other-than-temporary impairments charged to earning during 2022. During the three months ended March 31, 2023 and March 31, 2022, there were no sales of securities.

 

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of securities available for sale. Accrued interest receivable on securities available for sale is reported as a component of accrued interest receivable on the consolidated balance sheet and totaled $0.4 million at March 31, 2023 and is excluded from the estimated credit losses.

 

A summary of securities available for sale at March 31, 2023 and December 31, 2022 is as follows:

 

(Dollars in thousands)

 

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 

March 31, 2023

                

Mortgage-backed securities:

                

FNMA

 $112,599   0   (11,599)  101,000 

FHLMC

  94,813   0   (10,013)  84,800 

Collateralized mortgage obligations:

                

FNMA

  38   0   (2)  36 
   207,450   0   (21,614)  185,836 

Other marketable securities:

                

U.S. Government agency obligations

  54,998   0   (1,596)  53,402 

Corporate preferred stock

  700   0   (245)  455 
   55,698   0   (1,841)  53,857 
  $263,148   0   (23,455)  239,693 

 


 

12

 

(Dollars in thousands)

 

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 

December 31, 2022

                

Mortgage-backed securities:

                

FNMA

 $117,690   0   (12,754)  104,936 

FHLMC

  98,893   0   (11,177)  87,716 

Collateralized mortgage obligations:

                

FNMA

  38   0   (2)  36 
   216,621   0   (23,933)  192,688 

Other marketable securities:

                

U.S. Government agency obligations

  54,998   0   (2,157)  52,841 

Corporate preferred stock

  700   0   (210)  490 
   55,698   0   (2,367)  53,331 
  $272,319   0   (26,300)  246,019 

 


 

The Company had available for sale securities pledged as collateral for customer deposits in excess of the $250,000 insurance limit of the Federal Deposit Insurance Corporation. The securities pledged had a fair market value of $44.0 million and $45.9 million at March 31, 2023 and December 31, 2022, respectively.

 

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2023 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

 $78,761   73,186 

Due after one year through five years

  136,725   123,983 

Due after five years through fifteen years

  47,658   42,521 

Due after fifteen years

  4   3 

Total

 $263,148   239,693 

 


 

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, 2023 and December 31, 2022 is as follows:

 

(Dollars in thousands)

 

March 31,

2023

  

December 31,

2022

 

Single family

 $208,321   205,890 

Commercial real estate:

        

Real estate rental and leasing

  252,339   249,783 

Other

  222,384   221,562 
   474,723   471,345 

Consumer

  47,852   44,817 

Commercial business

  66,929   65,835 

Total loans

  797,825   787,887 

Less:

        

Unamortized discounts

  14   13 

Net deferred loan fees

  487   519 

Allowance for credit losses

  11,342   10,277 

Total loans receivable, net

 $785,982   777,078 

 


 

13

 
 

(9)

Allowance for Credit Losses and Credit Quality Information

The allowance for credit losses is summarized as follows:

 

(Dollars in thousands)

 

Single

Family

  

Commercial

Real Estate

  

Consumer

  

Commercial Business

  

Total

 

Balance, December 31, 2022

 $1,261   7,026   1,058   932   10,277 

January 1, 2023 adoption of ASU 2016-13

  (259)  512   (485)  1,302   1,070 

Provision for losses

  (44)  23   46   (57)  (32)

Recoveries

  1   0   1   25   27 

Balance, March 31, 2023

 $959   7,561   620   2,202   11,342 
                     

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 
                     

Allocated to:

                    

Individual allowance

 $33   0   112   17   162 

Collective allowance

  1,228   7,026   946   915   10,115 

Balance, December 31, 2022

 $1,261   7,026   1,058   932   10,277 
                     

Allocated to:

                    

Individual allowance

 $31   0   133   39   203 

Collective allowance

  928   7,561   487   2,163   11,139 

Balance, March 31, 2023

 $959   7,561   620   2,202   11,342 
                     

Loans receivable at December 31, 2022:

                    

Individually reviewed for impairment

 $908   179   492   561   2,140 

Collectively reviewed for impairment

  204,982   471,166   44,325   65,274   785,747 

Ending balance

 $205,890   471,345   44,817   65,835   787,887 
                     

Loans receivable at March 31, 2023:

                    

Individually reviewed for impairment

 $890   178   544   505   2,117 

Collectively reviewed for impairment

  207,431   474,545   47,308   66,424   795,708 

Ending balance

 $208,321   474,723   47,852   66,929   797,825 

 


 

The Company adopted ASU 2016-13 on January 1, 2023, and uses a standardized process to determine the appropriateness of the allowance for credit losses (ACL) for the commercial real estate, commercial business, single family, and consumer loan portfolios. The determination of the ACL for each of these portfolios is calculated on a pooled basis when similar risk characteristics exist and on an individual basis when loans do not share risk characteristics such as all non-performing loans. The determination of the quantitative pooled loan reserves for the commercial real estate and commercial business loan portfolios involves analyzing prior year losses over a full credit cycle by their assigned standardized risk ratings and applying these historic loss factors to the loans in the current portfolio with similar risk ratings. This process is referred to as a Vintage Loss Analysis. The determination of the quantitative pooled loan reserves for the single family and consumer loan portfolios involves analyzing prior year losses over a full credit cycle based on certain loan and borrower risk characteristics when the loans were originated and applying these historic loss factors to the loans in the current portfolio with similar risk characteristics. Qualitative reserves are also established and reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The determination of the qualitative reserves for all of the loan categories involves an analysis and consideration of certain factors that are anticipated to have an impact on future credit losses including, but not limited to: actual and anticipated changes in the size, composition, and concentrations of the loan portfolios; national, regional, and local economic conditions including inflation and unemployment data; loan delinquencies, the level of non-accrual loans, and risk rating trends; lending policies, procedures, and staffing; the scope and results of loan quality reviews; and the demand for single family homes, commercial real estate, and building lots.

 

The Company’s total expected loss estimate is based, in part, on the maximum historical credit loss experience of each of pool of loans over a full credit cycle and all available portfolio data is considered in the analysis. When historical credit loss experience is not sufficient for a specific portfolio, the Company may supplement its own portfolio data with external data. Assessing these numerous factors involves significant judgement.

 

14

 

Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral, adjusted for selling costs when repayment depends on the sale of the collateral. The appropriateness of the ACL on individually reviewed collateral dependent loans 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 these 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 credit losses in the periods in which the adjustments become known and loans are charged off to the extent they are deemed to be uncollectible. Because of the size of some loans, changes in estimates can have a significant impact on the credit loss provision. The Company increases its allowance for credit losses by charging the provision for credit losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for credit losses and recording loan charge-offs. The methodology for establishing the allowance for credit losses takes into consideration probable losses that have been identified in connection with the loans individually reviewed as well as the expected losses in each identified pool of loans that have not been individually reviewed.

 

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the consolidated balance sheet and totaled $2.8 million at March 31, 2023 and is excluded from the estimated credit losses.

 

In addition to the ACL on loans, the Company has established an ACL on unfunded commitments that is included in other liabilities on the consolidated balance sheets. This reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on an estimate of the amount of the outstanding commitments that will be funded and multiplying the anticipated outstanding loan balance by the loss rate for the loan category. The allowance for unfunded commitments at March 31, 2023 was $0.1 million.

 

The provision for credit losses is determined by the Company as the amount to be added to the ACL for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments. No provision for credit losses was recorded on available-for-sale investment securities in the first quarter of 2023.

 

The following table present the components of the provision for credit losses.

 

  

Three months ended

 

(Dollars in thousands)

 

 

March 31, 2023

  

March 31, 2022

 

Provision for credit losses on:

        

Loans (1)

 $(32)  296 

Unfunded commitments

  24   0 

Total

 $(8)  296 

 


 

(1)The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under the prior accounting standard.

 

15

 

The following table presents total loans by risk categories and year of origination as of March 31, 2023:

 

(Dollars in thousands)

 

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving

  

Total

 

Single family

                                

Pass

 $7,493   63,226   66,964   38,104   11,775   18,332   0   205,894 

Special Mention

  0   394   335   0   0   0   0   729 

Substandard

  0   661   148   83   191   572   0   1,655 

Doubtful

  0   0   0   0   26   17   0   43 

Loss

  0   0   0   0   0   0   0   0 
   7,493   64,281   67,447   38,187   11,992   18,921   0   208,321 
                                 

Commercial Real Estate

                                

Pass

  16,071   202,842   121,182   74,731   15,640   13,117   0   443,583 

Special Mention

  0   948   874   11,251   0   2,156   0   15,229 

Substandard

  1,251   1,989   292   11,228   656   495   0   15,911 

Doubtful

  0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0 
   17,322   205,779   122,348   97,210   16,296   15,768   0   474,723 
                                 

Consumer

                                

Pass

  6,740   10,031   2,124   2,553   3,226   6,171   16,400   47,245 

Special Mention

  20   0   0   0   0   0   0   20 

Substandard

  0   30   139   0   4   172   113   458 

Doubtful

  0   17   0   0   0   0   0   17 

Loss

  0   1   36   0   0   26   49   112 
   6,760   10,079   2,299   2,553   3,230   6,369   16,562   47,852 
                                 

Commercial Business

                                

Pass

  7,456   10,858   4,749   4,578   332   1,053   32,051   61,077 

Special Mention

  0   1,555   0   0   0   0   1,620   3,175 

Substandard

  81   731   293   667   42   42   821   2,677 

Doubtful

  0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0 
   7,537   13,144   5,042   5,245   374   1,095   34,492   66,929 
                                 

Total Loans

 $39,112   293,283   197,136   143,195   31,892   42,153   51,054   797,825 

 


 

The Company had no loans that were charged off in the first quarter of 2023 and therefore no gross charge-off information is presented in the above table.  

 

Credit Quality Indicators

The Company categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt. The information considered includes information, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company established a risk rating at origination for all commercial real estate and commercial business loans and management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for these loans on an annual basis. The Company uses the following definitions for classifying loans:

 

Special Mention - 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.

 

Substandard - 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.

 

16

 

Doubtful - 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.

 

Loss - Loans classified as loss are essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet may not be warranted.

 

Classified loans are categorized as special mention, substandard, doubtful, and loss. Loans classified as substandard, doubtful, or loss require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible. Loans not meeting the criteria above to require an individual analysis that are not classified as special mention are considered to be unclassified or pass-rated loans.

 

The aging of past due loans at March 31, 2023 and December 31, 2022 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, 2023

                            

Single family

 $340   0   453   793   207,528   208,321   0 

Commercial real estate:

                            

Real estate rental and leasing

  0   0   0   0   252,339   252,339   0 

Other

  0   0   0   0   222,384   222,384   0 

Consumer

  270   0   163   433   47,419   47,852   0 

Commercial business

  0   0   0   0   66,929   66,929   0 

 

 $610   0   616   1,226   796,599   797,825   0 
December 31, 2022                            

Single family

 $380   145   481   1,006   204,884   205,890   0 

Commercial real estate:

                            

Real estate rental and leasing

  0   0   0   0   249,783   249,783   0 

Other

  578   0   0   578   220,984   221,562   0 

Consumer

  394   123   88   605   44,212   44,817   0 

Commercial business

  0   0   0   0   65,835   65,835   0 
  $1,352   268   569   2,189   785,698   787,887   0 

 


 

The Company considers a loan to have defaulted when it becomes 90 or more days past due and the loan is classified as non-accruing. When a loan is classified as non-accruing, any accrued interest on the loan is reversed from interest income and any subsequent interest on the loan is recognized using the cash basis method of income recognition. A non-accruing loan may be reclassified as an accruing loan after the loan becomes current.

 

17

 

The following table presents the carrying value of collateral dependent individually analyzed loans as of March 31, 2023:

 

  

March 31, 2023

 

(Dollars in thousands)

 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

 

Loans with no related allowance recorded:

            

Single family

 $655   673   0 

Commercial real estate:

            

Other

  178   178   0 

Consumer

  371   371   0 
             

Loans with an allowance recorded:

            

Single family

  235   235   31 

Consumer

  173   173   133 

Commercial business

  505   505   39 
             

Total:

            

Single family

  890   908   31 

Commercial real estate:

            

Other (1)

  178   178   0 

Consumer (2)

  544   544   133 

Commercial business (3)

  505   505   39 
  $2,117   2,135   203 

 


(1) Secured by commercial land.

(2) Secured by second mortgages on single family housing and recreational vehicles.

(3) Secured by business equipment primarily related to the farming and trucking industries.

 

The following table presents, under previously applicable GAAP, loans individually evaluated for impairment by portfolio segment as of December 31, 2022:

 

  

December 31, 2022

 

(Dollars in thousands)

 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

 

Loans with no related allowance recorded:

            

Single family

 $667   685   0 

Commercial real estate:

            

Other

  179   179   0 

Consumer

  338   338   0 
             

Loans with an allowance recorded:

            

Single family

  241   241   33 

Consumer

  154   154   112 

Commercial business

  561   561   17 
             

Total:

            

Single family

  908   926   33 

Commercial real estate:

            

Other (1)

  179   179   0 

Consumer (2)

  492   492   112 

Commercial business (3)

  561   561   17 
  $2,140   2,158   162 

 


(1) Secured by commercial land.

(2) Secured by second mortgages on single family housing and recreational vehicles.

(3) Secured by business equipment primarily related to the farming and trucking industries.

 

18

 

The following table summarizes the average recorded investment and interest income recognized on loans individually evaluated for impairment under previously applicable GAAP during the three months ended March 31, 2022:

 

  

March 31, 2022

 

(Dollars in thousands)

 

Average

Recorded

Investment

  

Interest Income

Recognized

 

Loans with no related allowance recorded:

        

Single family

 $324   2 

Commercial real estate:

        

Other

  187   0 

Consumer

  389   2 
         

Loans with an allowance recorded:

        

Single family

  86   0 

Commercial real estate:

        

Other

  3,467   0 

Consumer

  146   1 

Commercial business

  7   0 
         

Total:

        

Single family

  410   2 

Commercial real estate:

        

Other

  3,654   0 

Consumer

  535   3 

Commercial business

  7   0 
  $4,606   5 

 


 

At March 31, 2023 and December 31, 2022, non-accruing loans totaled $1.9 million and $1.9 million, respectively, for which the related allowance for credit losses was $0.2 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 $1.0 million at both March 31, 2023 and December 31, 2022.

 

19

 

The non-accrual loans at March 31, 2023 and December 31, 2022 are summarized as follows:

 

(Dollars in thousands)

 

March 31,

2023

  

December 31,

2022

 
         

Single family

 $890  $908 

Consumer

  494   441 

Commercial business

  474   529 
  $1,858  $1,878 

 


 

Single family loans that were in process of foreclosure were $0.2 million at both March 31, 2023 and December 31, 2022.

 

The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU were applied prospectively, and therefore, loan modification and charge off information is provided for only those items occurring after the January 1, 2023 adoption date.

 

Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loan are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification.

 

There are additional disclosures for modification of loans with borrowers experience financial difficulty that result in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or a combination of any of these items. If the Company modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of principal that is forgiven is charged off against the ACL. The Company had no loan modifications to borrowers experiencing financial difficulties in the first quarter of 2023 and there were no modifications to borrowers experiencing financial difficulties that were outstanding at March 31, 2023.

 

(10)

Intangible Assets

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

 

(Dollars in thousands)

 

Three Months Ended

March 31, 2023

  

Twelve Months Ended

December 31, 2022

  

Three Months Ended

March 31, 2022

 

Balance, beginning of period

 $2,986   3,280   3,280 

Originations

  91   615   215 

Amortization

  (199)  (909)  (225)

Balance, end of period

 $2,878   2,986   3,270 

Fair value of mortgage servicing rights

 $6,414   6,344   5,469 

 


 

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, 2023:

 

      

Weighted

  

Weighted

     
  

Loan

  

Average

  

Average

     
  

Principal

  

Interest

  

Remaining

  

Number

 

(Dollars in thousands)

 

Balance

  

Rate

  

Term (months)

  

of Loans

 

Original term 15 year fixed rate

 $104,278   2.89

%

  133   1,006 

Original term 30 year fixed rate

  428,481   3.60   306   2,678 

 


 

20

 

Amortization expense for intangible assets was $0.2 million for the three month periods ended March 31, 2023 and 2022. The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2023 and December 31, 2022 is presented in the following table.

 

  

March 31, 2023

 
  

Gross

      

Unamortized

 
  

Carrying

  

Accumulated

  

Intangible

 

(Dollars in thousands)

 

Amount

  

Amortization

  

Assets

 

Mortgage servicing rights

 $6,026   (3,148)  2,878 

Goodwill

  802   0   802 

Total

 $6,828   (3,148)  3,680 

 


 

  

December 31, 2022

 
  

Gross

      

Unamortized

 
  

Carrying

  

Accumulated

  

Intangible

 

(Dollars in thousands)

 

Amount

  

Amortization

  

Assets

 

Mortgage servicing rights

 $5,995   (3,009)  2,986 

Goodwill

  802   0   802 

Total

 $6,797   (3,009)  3,788 

 


 

The following table indicates the estimated future amortization expense for mortgage servicing rights:

 

(Dollars in thousands)

 

Mortgage

Servicing

Rights

 

Year ending December 31,

    

2023

 $537 

2024

  676 

2025

  611 

2026

  515 

2027

  339 

Thereafter

  200 

Total

 $2,878 

 


 

Projections of amortization are based on existing asset balances and the existing interest rate environment as of March 31, 2023. The Company’s actual experience may be significantly different depending upon changes in mortgage interest rates and other market conditions.

 

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.

 

Goodwill was tested for impairment at March 31, 2023 due to the Company’s stock price being less than its book value and the Company determined that it was not permanently impaired and no write down was required.

 

(11)

Leases

The Company accounts for its leases in accordance with ASC Topic 842. 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 income (loss).

 

The Company’s leases relate to office space and bank branches with remaining lease terms between seventeen and fifty-six months. Certain leases contain extension options which typically range from three to ten years. Because these extension options are not considered reasonably certain of exercise, they are not included in the lease term. As of March 31, 2023 a $0.5 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 costs were $0.1 million for the three-month periods ended March 31, 2023 and 2022.

 

21

 

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

 

(Dollars in thousands)

 

Three Months

Ended
March 31, 2023

  

Three Months

Ended
March 31, 2022

 

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

        

Operating cash flows from operating leases

 $55   57 

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

  2.6   2.2 

Weighted-average discount rate – operating leases

  2.66

%

  1.83

%

 


 

The table below summarizes the maturity of remaining lease liabilities at March 31, 2023:

 

(Dollars in thousands)

 

 

March 31, 2023

 

2023

 $175 

2024

  212 

2025

  58 

2026

  27 

2027

  25 

Total lease payments

  497 

Less: Interest

  (18)

Present value of lease liabilities

 $479 

 


 

 

(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
March 31, March 31,

 

(Dollars in thousands, except per share data)

 

2023

  

2022

 

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

  4,338,922   4,391,325 

Net dilutive effect of:

        

Restricted stock awards and options

  29,112   33,878 

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

  4,368,034   4,425,203 

Income available to common stockholders

 $1,634   1,487 

Basic earnings per common share

 $0.38   0.34 

Diluted earnings per common share

 $0.37   0.34 

 


 

 

(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.

 

22

 

The Bank’s average total assets and adjusted total assets for the first quarter of 2023 were both $1.1 billion and its risk-weighted assets were $872.8 million. The following table presents the Bank’s capital amounts and ratios at March 31, 2023 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective actions regulations.

 

  

Actual

  

Required to be

Adequately Capitalized

  

Excess Capital

  

To Be Well Capitalized

Under Prompt

Corrective Action

Provisions

 

(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, 2023

                                

Common equity Tier 1 capital

 $101,168   11.59

%

 $39,274   4.50

%

 $61,894   7.09

%

 $56,730   6.50

%

Tier 1 leverage

  101,168   9.20   43,977   4.00   57,191   5.20   54,971   5.00 

Tier 1 risk-based capital

  101,168   11.59   52,366   6.00   48,802   5.59   69,821   8.00 

Total risk-based capital

  112,084   12.84   69,821   8.00   42,263   4.84   87,276   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, 2023, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the current prompt corrective action regulations, including the capital conservation buffer described above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The Office of the Comptroller of the Currency 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 did not repurchase any shares of its common stock in the open market during the first quarter of 2023. At March 31, 2023, the Company was authorized to repurchase up to $6.0 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 8, 2023.

 

(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, 2023 were approximately $9.2 million, expire over the next twenty 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.

 

23

 

The Company evaluates performance and allocates resources based on the segment’s net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of directors. The following table sets forth certain information about the reconciliations of reported profit and assets for each of the Company’s reportable segments.

 

(Dollars in thousands)

 

Home Federal

Savings Bank

  

Other

  

Eliminations

  

Consolidated

Total

 

At or for the quarter ended March 31, 2023:

                

Interest income - external customers

 $9,913   0   0   9,913 

Non-interest income - external customers

  1,928   0   0   1,928 

Intersegment interest income

  0   64   (64)  0 

Intersegment non-interest income

  58   1,748   (1,806)  0 

Interest expense

  1,914   0   (64)  1,850 

Provision for credit losses

  (8)  0   0   (8)

Non-interest expense

  7,542   209   (58)  7,693 

Income tax expense (benefit)

  703   (31)  0   672 

Net income

  1,748   1,634   (1,748)  1,634 

Total assets

  1,071,577   100,231   (100,226)  1,071,582 

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 credit 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 

 

24

 
 

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 HMN Financial, Inc (HMN or the Company) with the Securities and Exchange Commission (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 “anticipate,” “continue,” “could,” “estimate,” “expect,” “future,” “may,” “project” and “will,” or similar statements or variations of such terms and include, but are not limited to, those relating to: enacted and expected changes to the federal funds rate; the anticipated impacts of inflation and rising interest rates on the general economy, the Bank’s clients, and the allowance for credit losses; anticipated future levels of the provision for credit losses; and the payment of dividends by HMN.

 

A number of factors, many of which may be amplified by the deterioration in economic conditions, 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, including management’s estimates of variable affecting valuation and appraisals of collateral; 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 and the Federal Reserve Bank of Minneapolis in the event of non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as 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 and the Federal Reserve Bank; technological, computer-related or operational difficulties including those from any third party cyberattack; reduced demand for financial services and loan products; adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity; 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; the Company’s ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. 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 credit 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 Credit Losses and Related Provision

The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2023. Under ASU 2016-13, the allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluations. The collective reserve amount is assessed based on size and risk characteristics of the various portfolio segments, past loss history and other adjustments determined to have a potential impact on future credit losses.

 

The Company has a standardized process to determine the appropriateness of the credit loss allowance for the commercial real estate, commercial business, single family, and consumer loan portfolios. The determination of the allowance for each of these portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the quantitative pooled loan reserves for the commercial real estate and commercial business loan portfolios involves analyzing prior year losses by their assigned standardized risk ratings and applying these historic loss factors to the loans in the current portfolio with similar risk rating. This process is referred to as a Vintage Loss Analysis. The determination of the quantitative pooled loan reserves for the single family and consumer loan portfolios involves analyzing prior year losses based on certain loan and borrower risk characteristics when the loans were originated and applying these historic loss factors to the loans in the current portfolio with similar risk characteristics. Qualitative reserves are also established and reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The determination of the qualitative reserves for all of the loan categories involves an analysis and consideration of certain factors that are anticipated to have an impact on future credit losses including, but not limited to: actual and anticipated changes in the size, composition, and concentrations of the loan portfolios; national, regional, and local economic conditions including inflation and unemployment data; loan delinquencies; the scope and results of loan quality reviews; level of non-accrual loans, and risk rating trends; lending policies, procedures, and staffing; and the demand for single family homes, commercial real estate, and building lots.

 

The appropriateness of the allowance for credit losses on individually reviewed collateral dependent loans 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 credit losses in the periods in which the adjustments become known and loans are charged off to the extent they are deemed to be uncollectible. Because of the size of some loans, changes in estimates can have a significant impact on the credit loss provision. The Company increases its allowance for credit losses by charging the provision for credit losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for credit losses and recording loan charge-offs. The methodology for establishing the allowance for credit losses takes into consideration probable losses that have been identified in connection with the loans individually reviewed as well as the expected losses in each identified pool of loans that have not been individually reviewed. Although management believes that based on current conditions the allowance for credit losses is maintained at an appropriate amount to provide for the expected loan losses in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for credit losses and adjustments may be required in the future. See “Note 3 - New Accounting Pronouncements in the Notes to Consolidated Financial Statements for further information on the impact to the Company’s financial statements when ASU 2016-13 was adopted on January 1, 2023.

 

 

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 two largest relating to the net unrealized loss on securities available for sale and the allowance for credit losses. For tax purposes, the net unrealized losses on securities available for sale are not recognized unless the securities are sold and the loss becomes realized. For book purposes, the unrealized losses, net of income taxes, are reported as a separate component of stockholders’ equity until realized. For the allowance for credit losses, only the net charge-offs are deductible while the entire provision for credit losses is used to determine book income. A deferred tax asset for both of these items 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, 2023 COMPARED TO THE QUARTER ENDED MARCH 31, 2022

 

Net Income

Net income was $1.6 million for the first quarter of 2023, an increase of $0.1 million compared to net income of $1.5 million for the first quarter of 2022. Diluted earnings per share for the first quarter of 2023 was $0.37, an increase of $0.03 from diluted earnings per share of $0.34 for the first quarter of 2022. The increase in net income between the periods was primarily because of a $0.8 million increase in net interest income due to an increase in interest earning assets and higher yields earned on those assets and a $0.3 million decrease in the provision for credit losses. These increases in net income were partially offset by a $0.6 million decrease in the gain on sales of loans because of a decrease in mortgage loan originations and sales due primarily to an increase in mortgage interest rates between the periods. Total non-interest expenses also increased $0.4 million between the periods primarily because of an increase in compensation and benefits expenses.

 

 

Net Interest Income

Net interest income was $8.1 million for the first quarter of 2023, an increase of $0.8 million, or 10.7%, compared to $7.3 million for the first quarter of 2022. Interest income was $9.9 million for the first quarter of 2023, an increase of $2.3 million, or 31.0%, from $7.6 million for the first quarter of 2022. Interest income increased because of the $54.6 million increase in the average interest-earning assets between the periods and also because of the increase in the average yield earned on interest-earning assets between the periods. The average yield earned on interest-earning assets was 3.80% for the first quarter of 2023, an increase of 74 basis points from 3.06% for the first quarter of 2022. The increase in the average yield is primarily related to the increase in market interest rates as a result of the 4.50% increase in the prime interest rate between the periods.

 

Interest expense was $1.9 million for the first quarter of 2023, an increase of $1.6 million, or 553.7%, compared to $0.3 million for the first quarter of 2022. Interest expense increased primarily because of the increase in the average interest rate paid on interest-bearing liabilities between the periods. Interest expense also increased because of the $47.6 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.77% for the first quarter of 2023, an increase of 64 basis points from 0.13% for the first quarter of 2022. The increase in the average rate paid is primarily related to the increase in market interest rates as a result of the 4.50% increase in the federal funds rate between the periods.

 

Net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2023 was 3.09%, an increase of 15 basis points, compared to 2.94% for the first quarter of 2022. The increase in the net interest margin is primarily because the increase in the average yield earned on interest-earning assets as a result of the increase in the prime rate was higher than the increase in the average rate paid on interest-bearing liabilities and non-interest bearing deposits between the periods.

 

A summary of the Company’s net interest margin for the three-month periods ended March 31, 2023 and 2022 is as follows:

 

   

For the three-month period ended

 
   

March 31, 2023

   

March 31, 2022

 

(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

  $ 268,684       795       1.20

%

  $ 295,370       788       1.08

%

Loans held for sale

    1,216       18       6.04       3,967       34       3.52  

Single family loans, net

    208,127       1,951       3.80       170,047       1,437       3.43  

Commercial loans, net

    522,921       6,373       4.94       449,279       4,809       4.34  

Consumer loans, net

    45,784       661       5.85       40,727       471       4.69  

Other

    10,814       115       4.31       43,593       26       0.24  

Total interest-earning assets

    1,057,546       9,913       3.80       1,002,983       7,565       3.06  
                                                 

Interest-bearing liabilities:

                                               

Checking accounts

    161,708       188       0.47       160,315       41       0.10  

Savings accounts

    120,741       26       0.09       121,033       18       0.06  

Money market accounts

    258,768       655       1.03       250,745       132       0.21  

Certificate accounts

    136,986       934       2.77       84,343       92       0.44  

Customer escrows

    6,393       32       2.00       0       0       0.00  

Advances and other borrowings

    1,219       15       4.86       0       0       0.00  

Total interest-bearing liabilities

    685,815                       616,436                  

Non-interest checking

    282,136                       303,697                  

Other non-interest bearing liabilities

    2,423                       2,636                  

Total interest-bearing liabilities and non-interest bearing deposits

  $ 970,374       1,850       0.77     $ 922,769       283       0.13  

Net interest income

          $ 8,063                     $ 7,282          

Net interest rate spread

                    3.03

%

                    2.93

%

Net interest margin

                    3.09

%

                    2.94

%

 


 

 

Provision for Credit Losses

There was a small recapture in the provision for credit losses in the first quarter of 2023, a decrease of $0.3 million compared to $0.3 million for the first quarter of 2022. The provision for credit losses decreased primarily because of a decrease in the loan growth that was experienced between the periods. The small recapture in the provision recorded in the first quarter of 2023 is because of a decrease in the required collective reserves as a result of updating our projected losses associated with our historical loss calculation. This decrease was partially offset by an increase in the provision related to loan growth.

 

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluations. The collective reserve amount is assessed based on size and risk characteristics of the various portfolio segments, past loss history and other adjustments determined to have a potential impact on future credit losses. The collective reserve amount decreased from the January 1, 2023 adoption amount based on projected losses associated with the quantitative historical loss calculation and this decrease was partially offset by growth in the loan portfolio. The Company’s qualitative reserve adjustments did not materially change during the quarter due to management’s perception that economic conditions had not materially changed, including those related to the elevated inflation rate, and enacted and expected increases in the federal funds rate.

 

A reconciliation of the Company’s allowance for credit losses for the first quarters of 2023 and 2022 is summarized as follows:

 

(Dollars in thousands)

 

 

2023

   

2022

 

Balance at January 1,

  $ 10,277       9,279  

Adoption of ASU 2016-13

    1,070       0  

Provision

    (32 )     296  

Charge offs:

               

Consumer

    0       (1 )

Recoveries

    27       10  

Balance at March 31,

  $ 11,342       9,584  
                 

Allocated to:

               

Collective allowance

  $ 11,139       9,142  

Individual allowance

    203       442  

Total

  $ 11,342       9,584  

 

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The transition to this ASU resulted in a cumulative-effect adjustment to the allowance for credit losses of $1.1 million, an increase in deferred tax assets of $0.3 million, and a decrease to retained earnings of $0.8 million as of the adoption date. In addition, a liability for $0.1 million was established for projected future losses on unfunded commitments on outstanding lines of credit upon adoption. The projected liability for unfunded commitments increased $24,000 during the first quarter of 2023 and the provision for credit losses was increased to reflect the change.

 

Non-Interest Income

Non-interest income was $1.9 million for the first quarter of 2023, a decrease of $0.5 million, or 18.8%, from $2.4 million for the first quarter of 2022. Gain on sales of loans decreased $0.6 million between the periods because of a decrease in single family loan originations and sales due primarily to an increase in mortgage interest rates between the periods. This decrease was partially offset by a $0.1 million increase in other non-interest income due primarily to an increase in the gains recognized on equity securities between the periods. Fees and service charges increased slightly between the periods due primarily to an increase in the commitment fees earned on unused commercial lines of credit. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of commercial loans that were being serviced for others.

 

 

Non-Interest Expense

Non-interest expense was $7.7 million for the first quarter of 2023, an increase of $0.4 million, or 6.1%, from $7.3 million for the first quarter of 2022. Compensation and benefits expense increased $0.5 million primarily because of annual salary increases and also because of a decrease in the direct loan origination compensation costs that were deferred as a result of the reduced mortgage loan production between the periods. Data processing expenses increased $0.2 million between the periods primarily because of the change to an outsourced data processing relationship at the end of the first quarter of 2022. Other non-interest expense increased $0.2 million between the periods primarily because of an increase in advertising costs and an increase in FDIC insurance costs between the periods due to an increase in rates. These increases in non-interest expense were partially offset by a $0.3 million decrease in professional services expense between the periods primarily because of a decrease in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022. Occupancy and equipment expense decreased $0.1 million due primarily to a decrease in noncapitalized software costs between the periods.

 

Income Taxes

Income tax expense was $0.7 million for the first quarter of 2023, an increase of $0.1 million from $0.6 million for the first quarter of 2022. The increase in income tax expense between the periods is primarily the result of an increase 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)

 

2023

   

2022

 

Non‑performing loans:

               

Single family

  $ 890     $ 908  

Consumer

    494       441  

Commercial business

    474       529  

Total non‑performing assets

  $ 1,858     $ 1,878  

Total as a percentage of total assets

    0.17

%

    0.17

%

Total as a percentage of total loans receivable

    0.23

%

    0.24

%

Allowance for credit losses to non-performing loans

    610.45

%

    547.24

%

                 

Delinquency data:

               

Delinquencies (1)

               

30+ days

  $ 271     $ 1,405  

90+ days

    0       0  

Delinquencies as a percentage of loan portfolio (1)

               

30+ days

    0.03

%

    0.18

%

90+ days

    0.00

%

    0.00

%

 

(1) Excludes non-accrual loans.

 

 

Total non-performing assets were $1.9 million at March 31, 2023 and December 31, 2022.

 

Dividends

The Company declared a quarterly dividend of 6 cents per share of common stock that was paid on March 8, 2023. 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, 2023, the net cash used by operating activities was $1.0 million. The Company collected $9.0 million in principal repayments on securities, purchased FHLB stock for $1.5 million, and received redemptions on FHLB stock of $1.4 million. The Company had a net decrease in deposit balances of $23.6 million and a decrease of customer escrows of $1.7 million during the quarter. It also obtained $0.1 million in treasury stock for the taxes payable on stock awards, paid dividends to stockholders of $0.3 million, purchased $0.3 million of premises and equipment, received proceeds from borrowings of $37.8 million and repaid borrowings of $35.5 million. Loans receivable also increased $10.4 million during the quarter.

 

 

The Company has certificates of deposit with outstanding balances of $75.4 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 seven deposit customers each with aggregate deposits greater than $5.0 million as of March 31, 2023. The $85.9 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 brokers or with FHLB advances. FRB borrowings could also be used to replace unanticipated outflows of large checking and money market deposits.

 

The Company estimates that approximately 25% of total deposits exceeded the Federal Deposit Insurance limit of $250,000 at March 31, 2023. While these funds may be withdrawn at any time, 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 brokers or with 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 $241.9 million from the FHLB at March 31, 2023 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 $92.7 million from the FRB at March 31, 2023 based on the collateral value of the loans pledged. The Company also has unpledged securities with a fair market value of $193.1 million that could be pledged as collateral to increase the borrowing capacity of the Company.

 

The Company’s primary source of cash is dividends from the Bank. At March 31, 2023, the Company had $15.8 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, 2023.

 

(Dollars in thousands)

 

Market Value

 

Basis point change in interest rates

 

 

-200

   

-100

   

0

   

+100

   

+200

 

Total market-risk sensitive assets

  $ 1,041,782       1,017,435       991,633       970,025       947,863  

Total market-risk sensitive liabilities

    888,972       841,649       808,306       783,749       764,773  

Off-balance sheet financial instruments

    67       36       0       63       120  

Net market risk

  $ 152,743       175,750       183,327       186,213       182,970  

Percentage change from current market value

    (16.68 )%     (4.13 )%     0.00

%

    1.57

%

    (0.19 )%

 


 

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 7% and 38%, 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 2% and 26%, respectively. Retail checking accounts, commercial checking accounts and commercial money market accounts were assumed to decay at annual rates of 21%, 16% and 18%, 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 ending March 31, 2024 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

    $ 906       2.69 %

+100

      468       1.39  
0       0       0.00  
-100       (325 )     (0.97 )
-200       (969 )     (2.88 )

 

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 five years or less.

 

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, 2022, 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 2023:

 

Period

 

Total Number

of Shares

Purchased

   

Average Price

Paid per Share

   

Total Number of Shares

Purchased as Part of

Publicly Announced Plans

or Programs

   

Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be

Purchased under the Plans or

Programs (a)

 

January 1, 2023 to January 31, 2023

    0     $ N/A       0     $ 2,013,450  

February 1, 2023 to February 28, 2023

    0       N/A       0       2,013,450  

March 1, 2023 to March 31, 2023

    0       N/A       0       6,000,000  

Total

    0     $ N/A       0     $ 6,000,000  

 

(a) On March 1, 2023, the Company announced that the Board of Directors increased the amount of shares authorized to be repurchased to $6.0 million. 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, 2023, filed with the Securities and Exchange Commission on May 4, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Consolidated Balance Sheets at March 31, 2023 and December 31, 2022, (ii) the Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022, (iii) the Consolidated Statements of Stockholders’ Equity for the Three Month Periods Ended March 31, 2023 and 2022, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022, 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, 2023 (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, 2023

 

/s/ Bradley Krehbiel

 

   

Bradley Krehbiel, President and Chief Executive Officer

 

   

(Duly Authorized Officer)

       
       

Date:

   May 4, 2023

 

/s/ Jon Eberle

 

   

Jon Eberle, Senior Vice President and

 

   

Chief Financial Officer

 

   

(Principal Financial and Accounting Officer)

 

 

36