UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended |
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
HMN FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code: | ( |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
The |
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.
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).
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 ☐ | |
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
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 | |
HMN FINANCIAL, INC.
Page |
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Item 1: |
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Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022 |
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Item 2: |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3: |
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Item 4: |
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Item 1: |
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Item 1A: |
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Item 2: |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
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Item 3: |
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Item 4: |
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Item 5: |
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Item 6: |
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PART I – FINANCIAL INFORMATION
Consolidated Balance Sheets |
September 30, | December 31, | |||||||
(Dollars in thousands) | 2023 | 2022 | ||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | |||||||
Securities available for sale: | ||||||||
Mortgage-backed and related securities (amortized cost $ and $ ) | ||||||||
Other marketable securities (amortized cost $ and $ ) | ||||||||
Total securities available for sale | ||||||||
Loans held for sale | ||||||||
Loans receivable, net | ||||||||
Accrued interest receivable | ||||||||
Mortgage servicing rights, net | ||||||||
Premises and equipment, net | ||||||||
Goodwill | ||||||||
Prepaid expenses and other assets | ||||||||
Deferred tax asset, net | ||||||||
Total assets | $ | |||||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | $ | |||||||
Accrued interest payable | ||||||||
Customer escrows | ||||||||
Accrued expenses and other liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Serial-preferred stock ( par value): authorized shares; issued | ||||||||
Common stock ( par value): authorized shares; issued outstanding and | ||||||||
Additional paid-in capital | ||||||||
Retained earnings, subject to certain restrictions | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Unearned employee stock ownership plan shares | ( | ) | ( | ) | ||||
Treasury stock, at cost and shares | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | |||||||
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 | $ | |||||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed and related | ||||||||||||||||
Other marketable | ||||||||||||||||
Other | ||||||||||||||||
Total interest income | ||||||||||||||||
Interest expense: | ||||||||||||||||
Deposits | ||||||||||||||||
Customer escrows | ||||||||||||||||
Advances and other borrowings | ||||||||||||||||
Total interest expense | ||||||||||||||||
Net interest income | ||||||||||||||||
Provision for credit losses (1) | ||||||||||||||||
Net interest income after provision for credit losses | ||||||||||||||||
Non-interest income: | ||||||||||||||||
Fees and service charges | ||||||||||||||||
Loan servicing fees | ||||||||||||||||
Gain on sales of loans | ||||||||||||||||
Other | ||||||||||||||||
Total non-interest income | ||||||||||||||||
Non-interest expense: | ||||||||||||||||
Compensation and benefits | ||||||||||||||||
Occupancy and equipment | ||||||||||||||||
Data processing | ||||||||||||||||
Professional services | ||||||||||||||||
Other | ||||||||||||||||
Total non-interest expense | ||||||||||||||||
Income before income tax expense | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income | ||||||||||||||||
Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
Comprehensive income (loss) available to common stockholders | $ | ( | ) | ( | ) | ( | ) | |||||||||
Basic earnings per share | $ | |||||||||||||||
Diluted earnings per share | $ |
(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 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$ per share | ( | ) | ( | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | ||||||||||||||||||||||||||||
Earned employee stock ownership plan shares | ||||||||||||||||||||||||||||
Balance, September 30, 2023 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance, December 31, 2022 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||
Adoption of ASU 2016-13 (see Note 3) | ( | ) | ( | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$ per share | ( | ) | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | ||||||||||||||||||||||||||
Stock awards withheld for tax withholding | ( | ) | ( | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | ||||||||||||||||||||||||||||
Earned employee stock ownership plan shares | ||||||||||||||||||||||||||||
Balance, September 30, 2023 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
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 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$ per share | ( | ) | ( | ) | ||||||||||||||||||||||||
Stock repurchases | ( | ) | ( | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | ||||||||||||||||||||||||||||
Earned employee stock ownership plan shares | ||||||||||||||||||||||||||||
Balance, September 30, 2022 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance, December 31, 2021 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
Dividends paid to stockholders-$ per share | ( | ) | ( | ) | ||||||||||||||||||||||||
Stock repurchases | ( | ) | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | ||||||||||||||||||||||||||
Stock awards withheld for tax withholding | ( | ) | ( | ) | ||||||||||||||||||||||||
Amortization of restricted stock awards | ||||||||||||||||||||||||||||
Earned employee stock ownership plan shares | ||||||||||||||||||||||||||||
Balance, September 30, 2022 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
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 | $ | |||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Provision for credit losses | ||||||||
Depreciation | ||||||||
Amortization of premiums, net | ||||||||
Amortization of deferred loan fees | ( | ) | ( | ) | ||||
Amortization of core deposit intangible | ||||||||
Amortization of mortgage servicing rights and servicing costs | ||||||||
Capitalized mortgage servicing rights | ( | ) | ( | ) | ||||
Deferred income tax expense | ||||||||
(Gains) losses recognized on equity securities, net | ( | ) | ||||||
Gains on sale of premises and equipment | ( | ) | ( | ) | ||||
Gain on sale of real estate | ( | ) | ( | ) | ||||
Gain on sales of loans | ( | ) | ( | ) | ||||
Proceeds from sales of loans held for sale | ||||||||
Disbursements on loans held for sale | ( | ) | ( | ) | ||||
Amortization of restricted stock awards | ||||||||
Amortization of unearned Employee Stock Ownership Plan shares | ||||||||
Earned Employee Stock Ownership Plan shares priced above original cost | ||||||||
Increase in accrued interest receivable | ( | ) | ( | ) | ||||
Increase (decrease) in accrued interest payable | ( | ) | ||||||
(Increase) decrease in other assets | ( | ) | ||||||
(Decrease) increase in other liabilities | ( | ) | ||||||
Other, net | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Principal collected on securities available for sale | ||||||||
Proceeds collected on maturities of securities available for sale | ||||||||
Purchases of securities available for sale | ( | ) | ( | ) | ||||
Purchase of Federal Home Loan Bank stock | ( | ) | ( | ) | ||||
Redemption of Federal Home Loan Bank stock | ||||||||
Proceeds from sales of real estate | ||||||||
Net increase in loans receivable | ( | ) | ( | ) | ||||
Proceeds from sale of premises | ||||||||
Purchases of premises and equipment | ( | ) | ( | ) | ||||
Net cash used by investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Increase (decrease) in deposits | ( | ) | ||||||
Purchase of treasury stock | ( | ) | ||||||
Stock awards withheld for tax withholding | ( | ) | ( | ) | ||||
Dividends to stockholders | ( | ) | ( | ) | ||||
Proceeds from borrowings | ||||||||
Repayment of borrowings | ( | ) | ( | ) | ||||
(Decrease) increase in customer escrows | ( | ) | ||||||
Net cash provided (used) by financing activities | ( | ) | ||||||
Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents, beginning of period | ||||||||
Cash and cash equivalents, end of period | $ | |||||||
Supplemental cash flow disclosures: | ||||||||
Cash paid for interest | $ | |||||||
Cash paid for income taxes | ||||||||
Supplemental noncash flow disclosures: | ||||||||
Loans transferred to loans held for sale | ||||||||
Transfer of loans to real estate | ||||||||
Right to use assets obtained in exchange for lease liabilities | ||||||||
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
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.
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 $
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.
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 | $ | |||||||||||||||
Equity securities | ||||||||||||||||
Commitments to extend credit | ( | ) | ( | ) | ||||||||||||
Total | $ | |||||||||||||||
Carrying Value at December 31, 2022 | ||||||||||||||||
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Securities available for sale | $ | |||||||||||||||
Equity securities | ||||||||||||||||
Commitments to extend credit | ( | ) | ( | ) | ||||||||||||
Total | $ | |||||||||||||||
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 | $ | ( | ) | ( | ) | |||||||||||||||||||
Mortgage servicing rights | ||||||||||||||||||||||||
Collateral dependent loans | ( | ) | ( | ) | ||||||||||||||||||||
Total | $ | ( | ) | ( | ) | |||||||||||||||||||
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 | $ | |||||||||||||||||||
Mortgage servicing rights, net | ||||||||||||||||||||
Impaired loans | ( | ) | ||||||||||||||||||
Total | $ | ( | ) | |||||||||||||||||
(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.
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 | $ | |||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||||||
Loans held for sale | ||||||||||||||||||||||||||||||||||||
Loans receivable, net | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | ||||||||||||||||||||||||||||||||||||
Accrued interest receivable | ||||||||||||||||||||||||||||||||||||
Mortgage servicing assets | ||||||||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||
Accrued interest payable | ||||||||||||||||||||||||||||||||||||
Off-balance sheet financial instruments: | ||||||||||||||||||||||||||||||||||||
Commitments to extend credit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Commitments to sell loans | ||||||||||||||||||||||||||||||||||||
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.
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 | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Other comprehensive income (loss) | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
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 | $ | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income (loss) | $ | ( | ) | ( | ) | ( | ) | ( | ) |
(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. |
(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) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation (FHLMC) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
FNMA | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||
U.S. Government agency obligations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Corporate preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
Mortgage backed securities: | ||||||||||||||||||||||||||||||||
FNMA | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
FHLMC | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Collateralized mortgage obligations: | ||||||||||||||||||||||||||||||||
FNMA | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Other marketable securities: | ||||||||||||||||||||||||||||||||
U.S. government agency obligations |