10-Q 1 hmnf20230930_10q.htm FORM 10-Q hmnf20230930_10q.htm
0000921183 HMN FINANCIAL INC false --12-31 Q3 2023 188,199 216,621 55,632 55,698 0.01 0.01 500,000 500,000 0 0 0.01 0.01 16,000,000 16,000,000 9,128,662 9,128,662 4,487,362 4,480,976 4,641,300 4,647,686 0.08 0.22 0.06 0.18 0 0.2 11 50 3 10 0.1 0.2 0 0.06 0.08 0.08 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. 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. Secured by second mortgages on single family housing and recreational vehicles. Secured by business equipment primarily related to the farming and trucking industries. The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under the prior accounting standard. 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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 September 30, 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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockHMNFThe 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 October 27, 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 September 30, 2023 (unaudited) and December 31, 2022         

3

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)         

4

     
 

Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)         

5

     
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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         

26

     

Item 3:

Quantitative and Qualitative Disclosures About Market Risk         

37

     

Item 4:

Controls and Procedures         

38

     

PART II  OTHER INFORMATION

     

Item 1:

Legal Proceedings         

39

     

Item 1A:

Risk Factors         

39

     

Item 2:

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities         

39

     

Item 3:

Defaults Upon Senior Securities         

39

     

Item 4:

Mine Safety Disclosures         

39

     

Item 5:

Other Information        

39

     

Item 6:

Exhibits         

40

     

Signatures         

41

 

 

 

PART I FINANCIAL INFORMATION

Item 1 :   Financial Statements

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

  

September 30,

  

December 31,

 

(Dollars in thousands)

 

2023

  

2022

 
  

(unaudited)

     

Assets

        

Cash and cash equivalents

 $46,676   36,259 

Securities available for sale:

        

Mortgage-backed and related securities (amortized cost $188,199 and $216,621)

  163,849   192,688 

Other marketable securities  (amortized cost $55,632 and $55,698)

  54,318   53,331 

Total securities available for sale

  218,167   246,019 
         

Loans held for sale

  1,898   1,314 

Loans receivable, net

  850,760   777,078 

Accrued interest receivable

  3,868   3,003 

Mortgage servicing rights, net

  2,780   2,986 

Premises and equipment, net

  16,128   16,492 

Goodwill

  802   802 

Prepaid expenses and other assets

  4,067   3,902 

Deferred tax asset, net

  9,025   8,347 

Total assets

 $1,154,171   1,096,202 
         

Liabilities and Stockholders Equity

        

Deposits

 $1,043,588   981,926 

Accrued interest payable

  2,377   298 

Customer escrows

  4,649   10,122 

Accrued expenses and other liabilities

  1,787   6,520 

Total liabilities

  1,052,401   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 4,487,362 and 4,480,976

  91   91 

Additional paid-in capital

  41,127   41,013 

Retained earnings, subject to certain restrictions

  141,175   138,409 

Accumulated other comprehensive loss

  (18,498)  (19,761)

Unearned employee stock ownership plan shares

  (918)  (1,063)

Treasury stock, at cost 4,641,300 and 4,647,686 shares

  (61,207)  (61,353)

Total stockholders’ equity

  101,770   97,336 

Total liabilities and stockholders’ equity

 $1,154,171   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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(Dollars in thousands, except per share data)

 

2023

  

2022

  

2023

  

2022

 

Interest income:

                

Loans receivable

 $10,549   7,473   29,171   21,389 

Securities available for sale:

                

Mortgage-backed and related

  566   691   1,818   2,126 

Other marketable

  269   120   612   289 

Other

  143   347   336   449 

Total interest income

  11,527   8,631   31,937   24,253 
                 

Interest expense:

                

Deposits

  3,614   340   7,966   910 

Customer escrows

  4   0   59   0 

Advances and other borrowings

  106   0   318   5 

Total interest expense

  3,724   340   8,343   915 
                 

Net interest income

  7,803   8,291   23,594   23,338 
                 

Provision for credit losses (1)

  318   579   566   941 

Net interest income after provision for credit losses

  7,485   7,712   23,028   22,397 
                 

Non-interest income:

                

Fees and service charges

  857   821   2,495   2,397 

Loan servicing fees

  390   406   1,181   1,188 

Gain on sales of loans

  463   414   1,092   2,096 

Other

  474   413   1,318   1,264 

Total non-interest income

  2,184   2,054   6,086   6,945 
                 

Non-interest expense:

                

Compensation and benefits

  4,455   4,355   13,719   12,805 

Occupancy and equipment

  893   918   2,757   2,865 

Data processing

  566   513   1,616   1,443 

Professional services

  245   306   774   1,095 

Other

  1,122   1,082   3,565   3,201 

Total non-interest expense

  7,281   7,174   22,431   21,409 

Income before income tax expense

  2,388   2,592   6,683   7,933 

Income tax expense

  890   761   2,130   2,326 

Net income

  1,498   1,831   4,553   5,607 

Other comprehensive income (loss), net of tax

  (1,688)  (7,189)  1,263   (23,458)

Comprehensive income (loss) available to common stockholders

 $(190)  (5,358)  5,816   (17,851)

Basic earnings per share

 $0.34   0.42   1.05   1.28 

Diluted earnings per share

 $0.34   0.42   1.04   1.27 
                                 

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

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
         For the Three and Nine Months Ended September 30, 2023 and 2022

(unaudited)

 

                  

Unearned

         
              

Accumulated

  

Employee

         
      

Additional

      

Other

  

Stock

      

Total

 
  

Common

  

Paid-In

  

Retained

  

Comprehensive

  

Ownership

  

Treasury

  

Stockholders’

 

(Dollars in thousands)

 

Stock

  

Capital

  

Earnings

  

Loss

  

Plan Shares

  

Stock

  

Equity

 
                             

Balance, June 30, 2023

 $91   41,019   140,025   (16,810)  (966)  (61,207)  102,152 

Net income

          1,498               1,498 

Other comprehensive income (loss)

              (1,688)        (1,688)

Dividends paid to stockholders-$0.08 per share

        (348)           (348)

Amortization of restricted stock awards

      57                   57 

Earned employee stock ownership plan shares

      51           48       99 

Balance, September 30, 2023

 $91   41,127   141,175   (18,498)  (918)  (61,207)  101,770 
                             

Balance, December 31, 2022

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

Net income

          4,553               4,553 

Other comprehensive income (loss)

              1,263           1,263 

Adoption of ASU 2016-13 (see Note 3)

          (830)              (830)

Dividends paid to stockholders-$0.22 per share

        (957)           (957)

Restricted stock awards

      (210)              210   0 

Stock awards withheld for tax withholding

                      (64)  (64)

Amortization of restricted stock awards

      168                   168 

Earned employee stock ownership plan shares

      156           145       301 

Balance, September 30, 2023

 $91   41,127   141,175   (18,498)  (918)  (61,207)  101,770 
                             

 

 

                  

Unearned

         
              

Accumulated

  

Employee

         
      

Additional

      

Other

  

Stock

      

Total

 
  

Common

  

Paid-In

  

Retained

  

Comprehensive

  

Ownership

  

Treasury

  

Stockholders’

 

(Dollars in thousands)

 

Stock

  

Capital

  

Earnings

  

Loss

  

Plan Shares

  

Stock

  

Equity

 

Balance, June 30, 2022

 $91   40,775   134,661   (17,852)  (1,159)  (60,668)  95,848 

Net income

          1,831               1,831 

Other comprehensive loss

              (7,189)          (7,189)

Dividends paid to stockholders-$0.06 per share

        (262)           (262)

Stock repurchases

                      (685)  (685)

Amortization of restricted stock awards

      55                   55 

Earned employee stock ownership plan shares

      64           48       112 

Balance, September 30, 2022

 $91   40,894   136,230   (25,041)  (1,111)  (61,353)  89,710 
                             

Balance, December 31, 2021

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

Net income

          5,607               5,607 

Other comprehensive loss

              (23,458)          (23,458)

Dividends paid to stockholders-$0.18 per share

        (790)           (790)

Stock repurchases

                 (2,134)  (2,134)

Restricted stock awards

      (225)              225   0 

Stock awards withheld for tax withholding

                      (70)  (70)

Amortization of restricted stock awards

      172                   172 

Earned employee stock ownership plan shares

      207           145       352 

Balance, September 30, 2022

 $91   40,894   136,230   (25,041)  (1,111)  (61,353)  89,710 
                             

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

  

Nine Months Ended

September 30,

 

(Dollars in thousands)

 

2023

  

2022

 

Cash flows from operating activities:

        

Net income

 $4,553   5,607 

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

        

Provision for credit losses

  566   941 

Depreciation

  843   924 

Amortization of premiums, net

  600   783 

Amortization of deferred loan fees

  (116)  (406)

Amortization of core deposit intangible

  0   10 

Amortization of mortgage servicing rights and servicing costs

  623   695 

Capitalized mortgage servicing rights

  (417)  (532)

Deferred income tax expense

  275   550 

(Gains) losses recognized on equity securities, net

  (83)  50 

Gains on sale of premises and equipment

  (19)  (6)

Gain on sale of real estate

  (17)  (113)

Gain on sales of loans

  (1,092)  (2,096)

Proceeds from sales of loans held for sale

  49,361   81,275 

Disbursements on loans held for sale

  (45,140)  (61,820)

Amortization of restricted stock awards

  168   172 

Amortization of unearned Employee Stock Ownership Plan shares

  145   145 

Earned Employee Stock Ownership Plan shares priced above original cost

  156   207 

Increase in accrued interest receivable

  (865)  (530)

Increase (decrease) in accrued interest payable

  2,079   (10)

(Increase) decrease in other assets

  (33)  178 

(Decrease) increase in other liabilities

  (4,772)  506 

Other, net

  (1)  4 

Net cash provided by operating activities

  6,814   26,534 

Cash flows from investing activities:

        

Principal collected on securities available for sale

  27,818   35,032 

Proceeds collected on maturities of securities available for sale

  10,000   5,000 

Purchases of securities available for sale

  (9,931)  (35,043)

Purchase of Federal Home Loan Bank stock

  (7,398)  (1,743)

Redemption of Federal Home Loan Bank stock

  7,365   1,552 

Proceeds from sales of real estate

  237   402 

Net increase in loans receivable

  (79,197)  (102,021)

Proceeds from sale of premises

  61   9 

Purchases of premises and equipment

  (520)  (306)

Net cash used by investing activities

  (51,565)  (97,118)

Cash flows from financing activities:

        

Increase (decrease) in deposits

  61,662   (3,109)

Purchase of treasury stock

  0   (2,134)

Stock awards withheld for tax withholding

  (64)  (70)

Dividends to stockholders

  (957)  (790)

Proceeds from borrowings

  180,120   31,000 

Repayment of borrowings

  (180,120)  (31,000)

(Decrease) increase in customer escrows

  (5,473)  1,189 

Net cash provided (used) by financing activities

  55,168   (4,914)

Increase (decrease) in cash and cash equivalents

  10,417   (75,498)

Cash and cash equivalents, beginning of period

  36,259   94,143 

Cash and cash equivalents, end of period

 $46,676   18,645 

Supplemental cash flow disclosures:

        

Cash paid for interest

 $6,264   925 

Cash paid for income taxes

  2,114   2,399 

Supplemental noncash flow disclosures:

        

Loans transferred to loans held for sale

  3,729   13,708 

Transfer of loans to real estate

  220   0 

Right to use assets obtained in exchange for lease liabilities

  0   137 
         

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

 

(1Description 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 3 - “New Accounting Standards 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 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 and nine-month periods ended September 30, 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. See Note 9 Allowance for Credit Losses and Credit Quality Information for additional disclosures for charge offs and loan modifications to borrowers experiencing financial difficulties in the first nine months of 2023.

 

7

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology 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 applied 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 negligible. 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 add 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 requires enhanced review documentation and periodic reviews of the Company’s calculation of the allowance for credit losses by a third party.

 

(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 off-balance sheet financial instruments of the Company for which fair values are determined on a recurring basis as of September 30, 2023 and December 31, 2022.

 

  

Carrying Value at September 30, 2023

 
             

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Securities available for sale

 $218,167   0   218,167   0 

Equity securities

  309   0   309   0 

Commitments to extend credit

  (37)  0   (37)  0 

Total

 $218,439   0   218,439   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 

Commitments to extend credit

  (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 September 30, 2023 and December 31, 2022.

 

  

Carrying Value at September 30, 2023

         

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Three Months Ended

September 30, 2023

Total Gains (Losses)

  

Nine Months Ended

September 30, 2023

Total Gains (Losses)

 

Loans held for sale

 $1,898   0   1,898   0   (14)  (24)

Mortgage servicing rights

  2,780   0   0   2,780   0   0 

Collateral dependent loans

  1,171   0   1,171   0   (2)  (14)

Total

 $5,849   0   3,069   2,780   (16)  (38)
                         

 

  

Carrying Value at December 31, 2022

     

(Dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

  

Year Ended

December 31, 2022

Total Gains (Losses)

 

Loans held for sale

 $1,314   0   1,314   0   3 

Mortgage servicing rights, net

  2,986   0   0   2,986   0 

Impaired loans

  1,978   0   1,978   0   (46)

Total

 $6,278   0   3,292   2,986   (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 September 30, 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 September 30, 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.

 

  

 

September 30, 2023

  

December 31, 2022

 
          

Fair Value Hierarchy

                 

(Dollars in thousands)

 

Carrying

Amount

  

Estimated

Fair Value

  

Level 1

   Level 2   

Level 3

  

Contract

Amount

  

Carrying

Amount

  

Estimated

Fair Value

  

Contract

Amount

 

Financial assets:

                                    

Cash and cash equivalents

 $46,676   46,676   46,676             36,259   36,259     

Securities available for sale

  218,167   218,167      218,167          246,019   246,019     

Equity securities

  309   309      309          225   225     

Loans held for sale

  1,898   1,898      1,898          1,314   1,314     

Loans receivable, net

  850,760   780,050      780,050          777,078   724,497     

Federal Home Loan Bank stock

  1,316   1,316      1,316          1,283   1,283     

Accrued interest receivable

  3,868   3,868      3,868          3,003   3,003     

Mortgage servicing assets

  2,780   6,624         6,624       2,986   6,344     
                                     

Financial liabilities:

                                    

Deposits

  1,043,588   977,135      977,135          981,926   983,420     

Accrued interest payable

  2,377   2,377      2,377          298   298     

Off-balance sheet financial instruments:

                                    

Commitments to extend credit

  (37)  (37)           197,776   (28)  (28)  232,940 

Commitments to sell loans

  33   33            6,941   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 non-observable 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.

 

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 Three Months Ended September 30,

 

(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

 $(2,316)  (628)  (1,688)  (9,100)  (1,911)  (7,189)

Other comprehensive income (loss)

 $(2,316)  (628)  (1,688)  (9,100)  (1,911)  (7,189)
                         

 

  

For the Nine Months Ended September 30,

 

(Dollars in thousands)

 

2023

  

2022

 

Securities available for sale:

 

Before

Tax

  

Tax

Effect (1)

  

Net of

Tax

  

Before

Tax

  

Tax

Effect

  

Net of

Tax

 

Unrealized gains (losses) arising during the period

 $636   (627)  1,263   (30,782)  (7,324)  (23,458)

Other comprehensive income (loss)

 $636   (627)  1,263   (30,782)  (7,324)  (23,458)

 

(1)The tax effect on gross unrealized gains (losses) was impacted by a change in the effective tax rate used in the second quarter of 2023 to allocate the total unrealized gains on securities between the deferred tax asset and other comprehensive income.

 

11

 

(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 September 30, 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

 

September 30, 2023

                                

Mortgage backed securities:

                                

Federal National Mortgage Association (FNMA)

  0  $0   0   34  $88,744   (13,145) $88,744   (13,145)

Federal Home Loan Mortgage Corporation (FHLMC)

  0   0   0   24   75,073   (11,202)  75,073   (11,202)

Collateralized mortgage obligations:

                                

FNMA

  0   0   0   1   32   (3)  32   (3)

Other marketable securities:

                                

U.S. Government agency obligations

  2   9,841   (92)  9   43,987   (1,012)  53,828   (1,104)

Corporate preferred stock

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

Total temporarily impaired securities

  2  $9,841   (92)  69  $208,326   (25,572) $218,167   (25,664)
                                 

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