1016 Civic Center Drive NW
Rochester, Minnesota 55901
507.535.1200 • www.hmnf.com
2017 ANNUAL REPORT
2017_AnnualReport_full.indd 1
2/6/2018 1:02:18 PM
1
Financial Highlights ............................................................................................................................................................
2
Letter to Shareholders and Clients ......................................................................................................................................
4
Board of Directors ..............................................................................................................................................................
5
Five-year Consolidated Financial Highlights ......................................................................................................................
Management Discussion and Analysis................................................................................................................................
6
Consolidated Financial Statements ..................................................................................................................................... 25
Notes to Consolidated Financial Statements ....................................................................................................................... 29
Report of Independent Registered Public Accounting Firm ............................................................................................... 63
Other Financial Data ........................................................................................................................................................... 64
Common Stock Information................................................................................................................................................ 65
Selected Quarterly Financial Data ...................................................................................................................................... 66
Inside Back Cover
Corporate and Shareholder Information ...................................................................................................
Inside Back Cover
Directors and Officers ..............................................................................................................................
HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. Home Federal
Savings Bank operates twelve full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson (2), La Crescent,
Rochester (4), Spring Valley and Winona; one full service office in Marshalltown, Iowa; two loan origination offices in
Minnesota located in Sartell and Owatonna; and one loan origination office in Delafield, Wisconsin.
At or For the Year Ended
December 31,
Percentage
2017
2016
Change
FINANCIAL HIGHLIGHTS
Operating Results:
(Dollars in thousands, except per share data)
Total interest income ......................................................................... $
Total interest expense ........................................................................
Net interest income ....................................................................
Provision for loan losses ...................................................................
Net interest income after provision for loan losses ....................
Fees and service charges ...................................................................
Loan servicing fees ...........................................................................
Gain on sales of loans .......................................................................
Other non-interest income .................................................................
Total non-interest income ..........................................................
Total non-interest expense .........................................................
Income before income tax expense ...................................................
Income tax expense ...........................................................................
Net income ................................................................................ $
27,680
1,797
25,883
(523)
26,406
3,354
1,202
2,138
960
7,654
25,254
8,806
4,402
4,404
Per Common Share Information:
Earnings per common share and common share equivalents:
Basic ........................................................................................... $
Diluted .......................................................................................
1.04
0.90
Stock price (for the year):
High ........................................................................................... $
Low ............................................................................................
Close ..........................................................................................
Book value per common share ..........................................................
Closing price to book value ...............................................................
19.45
16.60
19.10
17.97
106.29%
Financial Ratios:
Return on average assets ...................................................................
Return on average stockholders’ equity ............................................
Net interest margin ............................................................................
Operating expenses to average assets ................................................
Average stockholders’ equity to average assets ................................
Stockholders’ equity to total assets at year end .................................
Non-performing assets to total assets ................................................
Efficiency ratio ..................................................................................
0.63%
5.52
3.86
3.62
11.43
11.18
0.52
75.30
27,349
1,593
25,756
(645 )
26,401
3,427
1,108
2,618
1,048
8,201
24,130
10,472
4,122
6,350
1.52
1.34
18.55
10.81
17.50
16.91
103.49 %
0.96 %
8.71
4.11
3.66
11.07
11.13
0.57
71.06
1.2%
12.8
0.5
18.9
0.0
(2.1)
8.5
(18.3)
(8.4)
(6.7)
4.7
(15.9)
6.8
(30.6)
(34.4)%
(36.6)
(6.1)
(1.1)
3.3
0.4
(8.8)
6.0
Balance Sheet Data:
(Dollars in thousands)
Total assets ........................................................................................ $
Securities available for sale ...............................................................
Loans held for sale ............................................................................
Loans receivable, net .........................................................................
Deposits .............................................................................................
Federal Home Loan Bank advances and other borrowings ...............
Stockholders’ equity ..........................................................................
Home Federal Savings Bank regulatory capital ratios:
Common equity Tier 1 capital ....................................................
Tier 1 leverage ...........................................................................
Tier 1 risk-based capital .............................................................
Total risk-based capital ..............................................................
December 31,
Percentage
2017
2016
Change
722,685
77,472
1,837
585,931
635,601
0
80,818
12.45%
10.68
12.45
13.71
682,023
78,477
2,009
551,171
592,811
7,000
75,919
13.42 %
11.55
13.42
14.68
6.0%
(1.3)
(8.6)
6.3
7.2
(100.0)
6.5
(7.2)%
(7.5)
(7.2)
(6.6)
1
LETTER TO SHAREHOLDERS AND CLIENTS
I am pleased to present you with our 2017 Annual Report. Our focus during the year to
improve core balance sheet and earnings growth is reflected throughout this report.
Balance Sheet
By year-end 2017, total assets had grown by $41 million. This growth was comprised
primarily of increases in our highest yielding assets- mortgage and commercial real estate
loans. By design, our investment portfolio remained level throughout the year as
management worked to deploy excess liquidity. It is important to note that this loan growth
reflects loans made and serviced directly by Home Federal, and not loans purchased from
third party originators. While we regularly participate with other community banks, the
outstanding balances of participations purchased declined $8.5 million during the year to
$20.1 million. We believe organic loan growth offers us the best opportunity to develop
long-term multi-product relationships with our clients.
Deposits also exhibited growth during the year with commercial accounts leading the way
increasing by $35.9 million. Retail accounts over the same period grew by $6.9 million.
This growth can be attributed to management’s efforts to solicit more local deposits and the improving financial condition of
our commercial clients. We have also experienced success in attracting new clients with special affiliation accounts like our
Jubilee Program, for clients 55 and older and obtaining larger deposit relationships by providing insurance coverage for
deposits over FDIC limits using the insured cash sweep (ICS) and Certificate of Deposit Account Registry Service (CDARS)
programs offered through a third party vendor.
During the year, we prepaid the remaining $7 million balance of the $10 million term loan secured in 2014 to repurchase the
remaining HMN Preferred shares issued in connection with the Troubled Asset Relief Program (TARP). At a rate of 6.5%,
this obligation represented our single most expensive source of funds and was an excellent opportunity to deploy excess
balance sheet liquidity and capital of the Company.
In spite of our growth, our capital level remains strong. While it might appear to some that we hold more capital than is
necessary, I firmly believe that our disciplined approach to capital planning will position our Company to capitalize on growth
opportunities as they arise- in good times or in bad-, prudently fund organic growth and weather adverse economic conditions
when they arise.
Income Statement
Net income for 2017 was $4.4 million, a decline of $2.0 million from 2016. The decline in income between the periods is
partially because of the $1.1 million increase in income tax expense as a result of tax reform legislation that was enacted in
the fourth quarter of 2017. The decline relating to our core operating results was centered in lower commercial loan sale
gains- a result of increased competition from conventional lenders- and a decline in gain on sale of non-performing assets. It
is important to note that as our asset quality has improved, the opportunities to recognize yield enhancements as problem
assets are collected have diminished as well. These assets include our own recession-era legacy assets as well as purchased
assets that are collected in excess of our book value.
The continuing low interest rate environment caused a 0.23% decline in our yield on average earning assets. Fortunately, the
aforementioned loan growth along with a nominal increase in our cost of funds enabled us to report higher net interest income
compared with the prior year.
Asset Quality
Non-performing asset levels remained flat during the year- further evidence of our improved asset quality and more
normalized operations. Our past due ratio as of year-end remained very low at 0.30%, while our reserve for problem loans
remained a healthy 1.57% of total loans. Our improved asset quality allowed us to record a reverse provision for loan losses
during the year of $0.5 million.
2
Markets
I continue to be pleased by our growth in nearly all of our markets. While some of this growth can be attributed to the overall
improvement in the economy, we believe it is a reflection of our approach to community banking, one which empowers
qualified managers to make local decisions in their own markets. Late in the year, we announced plans to open our first new
branch in over ten years. Located in Owatonna, Minnesota, this branch is the logical next step for our Business Development
Office we established there in 2015. We are using this opportunity to utilize the latest developments in a branch floor plan
design and technology while continuing to meet the market’s sales and service expectations.
The pricing expectations of community banks contemplating a sale increased dramatically throughout the year. While
acquisitions remain an important component of our growth strategy, we must remain disciplined in our approach to deal
pricing. During the year, our acquisitions team considered a number of potential acquisition opportunities in new markets.
Unfortunately, we were unable to negotiate the terms and conditions we felt necessary to ensure sufficient earnings accretion
and the enhancement in long-term shareholder value. We continue to aggressively look for new opportunities for growth
through acquisition.
Summary
As I review this annual report, I am particularly pleased with the increase in the core operating results of the Bank. It is a
reflection of our commitment to enhancing long-term franchise and shareholder value- a commitment to doing what is in the
long-term best interest of our Company and its shareholders. I want to thank each and every one of you for your support over
the past year and especially thank our dedicated employees and board members for their work in helping to accomplish our
mission.
Best Regards,
Brad Krehbiel
President/CEO
3
BOARD OF DIRECTORS
Dr. Hugh Smith
Chairman of the Board
Bradley Krehbiel
President and CEO
Allen Berning
Michael Bue
Bernard Nigon
Dr. Wendy Shannon
Dr. Patricia Simmons
Mark Utz
Hans Zietlow
4
FIVE-YEAR CONSOLIDATED FINANCIAL HIGHLIGHTS
Selected Operations Data:
(Dollars in thousands, except per share data)
Total interest income .......................................... $
Total interest expense .........................................
Net interest income .....................................
Provision for loan losses ....................................
Net interest income after provision for loan
losses .........................................................
Fees and service charges ....................................
Loan servicing fees ............................................
Gain on sales of loans ........................................
Other non-interest income ..................................
Total non-interest income ...........................
Total non-interest expense ..........................
Income before income tax expense ....................
Income tax expense (benefit) .............................
Net income ..................................................
Preferred stock dividends and discount .......
Net income available to common
2017
27,680
1,797
25,883
(523)
26,406
3,354
1,202
2,138
960
7,654
25,254
8,806
4,402(1)
4,404
0
Year Ended December 31,
2015
2016
2014
27,349
1,593
25,756
(645)
26,401
3,427
1,108
2,618
1,048
8,201
24,130
10,472
4,122
6,350
0
21,453
1,507
19,946
(164 )
20,110
3,316
1,046
1,964
1,327
7,653
23,196
4,567
1,611
2,956
(108 )
20,613
1,211
19,402
(6,998)
26,400
3,458
1,058
1,828
940
7,284
21,403
12,281
4,902
7,379
(1,710)
2013
22,983
3,289
19,694
(7,881 )
27,575
3,513
1,029
2,102
668
7,312
22,623
12,264
(14,406 ) (2)
26,670
(2,068 )
shareholders .............................................. $
4,404
6,350
2,848
5,669
24,602
Basic earnings per common share ............... $
Diluted earnings per common share ............
1.04
0.90
1.52
1.34
0.69
0.61
1.40
1.23
6.15
5.71
(1) Relates to the decrease in the Company’s net deferred tax asset as a result of the reduction in the corporate federal tax rate from 34% to 21% in the fourth
quarter of 2017.
(2) Relates to the elimination of the deferred tax asset valuation reserve at December 31, 2013.
Selected Financial Condition Data:
(Dollars in thousands, except per share data)
Total assets ........................................................... $ 722,685 682,023 643,161 577,426 648,622
78,477 111,974 137,834 107,956
77,472
Securities available for sale ..................................
Loans held for sale ...............................................
1,502
2,009
1,837
Loans receivable, net ............................................ 585,931 551,171 463,185 365,113 384,615
Deposits ................................................................ 635,601 592,811 559,387 496,750 553,930
Federal Home Loan Bank advances and other
December 31,
2015
2,076
3,779
2014
2016
2013
2017
borrowings .........................................................
Stockholders’ equity .............................................
Book value per common share .............................
0
80,818
17.97
7,000
75,919
16.91
9,000
69,645
15.54
0
76,013
14.77
0
85,675
13.49
Number of full service offices ..............................
Number of loan origination offices ......................
13
3
13
3
13
3
11
2
11
1
Key Ratios: (3)
Stockholders’ equity to total assets at year end ....
Average stockholders’ equity to average assets ...
Return on stockholders’ equity (ratio of net
11.18%
11.43
11.13%
11.07
10.83%
11.70
13.16%
13.25
13.21%
10.77
income to average equity) ..................................
5.52
8.71
4.27
9.12
42.22
Return on assets (ratio of net income to average
assets) .................................................................
0.63
0.96
0.50
1.21
4.55
(3) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
See accompanying notes to consolidated financial statements.
5
MANAGEMENT DISCUSSION AND ANALYSIS
This Annual Report, other reports filed by the Company
with the Securities and Exchange Commission, and the
Company’s proxy statement may contain forward-looking
statements within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995.
These statements are often identified by such forward-
looking
terminology as “expect,” “intend,” “look,”
“believe,” “anticipate,” “estimate,” “project,” “seek,”
“may,” “will,” “would,” “could,” “should,” “trend,”
“target,” and “goal” or similar statements or variations of
such terms and include, but are not limited to, those relating
to growing our core deposit relationships and loan
balances, enhancing the financial performance of our core
banking operations, maintaining credit quality, reducing
non-performing assets, and generating improved financial
results (including profitability); the extent of the positive
impact of the lower federal tax rate on future earnings; the
adequacy and amount of available liquidity and capital
resources to the Bank; the Company’s liquidity and capital
requirements; our expectations for core capital and our
strategies and potential strategies for maintenance thereof;
improvements in loan production; changes in the size of the
Bank’s loan portfolio; the amount of the Bank’s non-
performing assets and the appropriateness of the allowance
therefor; anticipated future levels of the provision for loan
losses; future losses on non-performing assets; the amount
and composition of interest-earning assets; the amount of
yield enhancements
to non-accruing and
relating
purchased loans; the amount and composition of non-
interest and interest-bearing liabilities; the availability of
alternate funding sources; the payment of dividends by
HMN; the future outlook for the Company; the amount of
deposits that will be withdrawn from checking and money
market accounts and how the withdrawn deposits will be
replaced; the projected changes in net interest income
based on rate shocks; the range that interest rates may
fluctuate over the next twelve months; the net market risk of
interest rate shocks; the future outlook for the issuer of the
trust preferred securities held by the Bank; the ability of the
Bank to pay dividends to HMN; the ability to remain well
capitalized; the impact of new accounting pronouncements,
and compliance by the Bank with regulatory standards
the Bank’s status as “well-
generally
capitalized”) and other
supervisory directives or
requirements to which the Company or the Bank are or may
become expressly subject, specifically, and possible
responses of the Office of the Comptroller of the Currency
(OCC), Board of Governors of the Federal Reserve System
(FRB), the Bank, and the Company to any failure to comply
with any
standard, directive or
requirement.
regulatory
(including
such
from
A number of factors could cause actual results to differ
materially
the Company’s assumptions and
expectations. These include but are not limited to the
adequacy and marketability of real estate and other
collateral securing loans to borrowers; federal and state
6
regulation and enforcement; possible legislative and
regulatory changes, including additional changes to
regulatory capital rules; the ability of the Bank to comply
with other applicable regulatory capital requirements;
enforcement activity of the OCC and FRB in the event of
our 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 alternate funding sources, including changes in
collateral advance rates and policies of the Federal Home
Loan Bank (FHLB); technological, computer-related or
operational difficulties; results of litigation; reduced
demand for financial services and loan products; changes
in accounting policies and guidelines, or monetary and
fiscal policies of the federal government or tax laws;
international economic developments; the Company’s
access to and adverse changes in securities markets; the
market for credit related assets; the future operating
results, financial condition, cash flow requirements and
capital spending priorities of the Company and the Bank;
the availability of internal and, as required, external
sources of funding; our ability to attract and retain
employees; or other significant uncertainties. Additional
factors that may cause actual results to differ from the
Company’s assumptions and expectations include those set
forth in the Company’s most recent filing on Forms 10-K
and 10-Q with the Securities and Exchange Commission
(SEC). All forward-looking statements are qualified by, and
should be considered in conjunction with, such cautionary
statements. For additional discussion of the risks and
uncertainties applicable to the Company, see the “Risk
Factors” sections of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2017.
All statements in this Annual Report, including forward-
looking statements, speak only as of the date hereof, and we
undertake no duty to update any of the forward-looking
statements after the date of this Annual Report.
Overview
HMN Financial, Inc. (HMN or the Company) is the stock
savings bank holding company for Home Federal Savings
Bank (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
MANAGEMENT DISCUSSION AND ANALYSIS
professional
affected by changes in interest rates, the volume and
composition of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. The
Company's net earnings are also affected by the generation
of non-interest income, which consists primarily of gains
from the sale of loans and real estate owned, fees for
servicing loans, commissions on the sale of uninsured
investment products, and service charges on deposit
accounts. The Bank incurs expenses in addition to interest
expense in the form of compensation and benefits,
occupancy and equipment expenses, provisions for loan
losses,
insurance,
services,
amortization expense on mortgage servicing assets, data
processing costs and income taxes. The earnings of
financial
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.
institutions, such as
deposit
Critical Accounting Estimates
Critical accounting policies are those policies that the
Company's management believes are the most important to
understanding the Company’s financial condition and
operating results. These critical accounting policies often
involve estimates and assumptions that could have a
material impact on the Company’s financial statements. The
Company has identified the following critical accounting
policies that management believes involve the most
difficult, subjective, and/or complex judgments that are
inherently uncertain. Therefore, actual financial results
could differ significantly depending upon the estimates,
assumptions and other factors used.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis
of the loan portfolio and is maintained at an amount
considered to be appropriate by management to provide for
probable losses inherent in the loan portfolio as of the
balance sheet dates. In this analysis, management considers
factors including, but not limited to, specific occurrences of
loan impairment, actual and anticipated changes in the size
of the portfolios, national and regional economic conditions
such as unemployment data, loan delinquencies, local
economic conditions, demand for single family homes,
demand for commercial real estate and building lots, loan
portfolio composition, historical loss experience and
observations made by the Company's ongoing internal audit
and regulatory exam processes. Loans are charged off to the
extent they are deemed to be uncollectible. The Company
7
its
for
the
loan
non-homogeneous
loss allowance for
the non-homogeneous
has established separate processes to determine the
appropriateness of
its
loan
homogeneous single family and consumer loan portfolios
and
portfolios. The
determination of the allowance on the homogeneous single
family and consumer loan portfolios is calculated on a
pooled basis with individual determination of the allowance
for all non-performing loans. The determination of the
allowance
commercial,
commercial real estate and multi-family loan portfolios
involves assigning standardized risk ratings and loss factors
that are periodically reviewed. The loss factors are
estimated based on the Company's own loss experience and
identified credit
are assigned
weaknesses. For each non-performing loan, the Company
also performs an individual analysis of impairment that is
based on the expected cash flows or the value of the assets
collateralizing the loans and establishes any necessary
reserves or charges off all loans, or portions thereof, that are
deemed uncollectible.
loans without
to all
The appropriateness of the allowance for loan losses is
dependent upon management’s estimates of variables
affecting valuation, appraisals of collateral, evaluations of
performance and status, and the amounts and timing of
future cash flows expected to be received on impaired loans.
Such estimates, appraisals, evaluations and cash flows may
be subject to adjustments due to changing economic
prospects of borrowers or properties. The fair market value
of collateral dependent loans are typically based on the
appraised value of the property less estimated selling costs.
The estimates are reviewed periodically and adjustments, if
any, are recorded in the provision for loan losses in the
periods in which the adjustments become known. Because
of the size of some loans, changes in estimates can have a
significant impact on the loan loss provision. The allowance
is allocated to individual loan categories based upon the
relative risk characteristics of the loan portfolios and the
actual
its
allowance for loan losses by charging the provision for loan
losses against income and by receiving recoveries of
previously charged off loans. The Company decreases its
allowance by crediting the provision for loan losses. The
current year activity in the allowance resulted in a credit to
the loan loss provision. The methodology for establishing
the allowance for loan losses takes into consideration
probable losses that have been identified in connection with
specific loans as well as losses in the loan portfolio that have
not been specifically identified. Although management
believes that based on current conditions the allowance for
loan losses is maintained at an appropriate amount to
provide for probable loan losses inherent in the portfolio as
of the balance sheet dates, future conditions may differ
substantially from those anticipated in determining the
allowance for loan losses and adjustments may be required
in the future.
loss experience. The Company
increases
MANAGEMENT DISCUSSION AND ANALYSIS
to
tax consequences attributable
Income Taxes
Deferred tax assets and liabilities are recognized for the
future
temporary
differences between
the financial statement carrying
amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. These calculations are based on many
complex factors including estimates of the timing of
reversals of temporary differences, the interpretation of
federal and state income tax laws, and a determination of
the differences between the tax and the financial reporting
basis of assets and liabilities. Actual results could differ
significantly from the estimates and interpretations used in
determining the current and deferred income tax assets and
liabilities.
The Company maintains significant net deferred tax assets
for deductible temporary differences, the largest of which
relates to the allowance for loan and real estate losses. For
tax purposes only the net charge-offs are deductible while
the entire provision for loan losses is used to determine
book income. A deferred tax asset is created because of the
timing difference of when the expense is recognized for
book and
tax purposes. Under generally accepted
accounting principles, 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 Company considers both positive
and negative evidence regarding the ultimate realizability of
the
deferred
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.
tax assets. Positive evidence
includes
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
those
estimated.
that are significantly different from
8
Results of Operations
Comparison of 2017 with 2016
Net income was $4.4 million for 2017, a decrease of $2.0
million compared to net income of $6.4 million for 2016.
Diluted earnings per share for the year ended December 31,
2017 was $0.90, a decrease of $0.44 per share compared to
diluted earnings per share of $1.34 for the year ended
December 31, 2016. The decrease in net income for 2017 is
due primarily to a $0.5 million decrease in the gain on sales
of loans because of a decrease in commercial government
guaranteed loan sales and a $0.5 million decrease in the
gains on real estate owned because of fewer sales between
the periods. Net income also decreased $0.4 million due to
an increase in other non-interest expenses primarily related
to advertising expenses, $0.3 million due to an increase in
income tax expense, $0.2 million because of an increase in
compensation and benefits and $0.1 million due to an
increase in the loan loss provision between the periods. The
increase in income tax expense is due primarily to the $1.1
million decrease in the Company’s net deferred tax asset as
a result of the reduction in the corporate federal tax rate in
connection with the enactment of the Tax Cuts and Jobs act
in the fourth quarter of 2017. These decreases in net income
were partially offset by an increase in net interest income of
$0.1 million as a result of an increase in the average interest-
earning assets and a change in the composition of the
average interest-earning assets held between the periods.
Net Interest Income
Net interest income was $25.9 million for 2017, an increase
of $0.1 million, or 0.5%, from $25.8 million for the same
period of 2016. Interest income was $27.7 million for 2017,
an increase of $0.4 million, or 1.2%, from $27.3 million for
the same period of 2016. Interest income increased $2.4
million because of an increase in the average interest-
earning assets and a change in the composition of the
average interest-earning assets held, which resulted in a 6
basis point increase in the average yields earned between
the periods. While the average interest-earning assets
increased $43.2 million between the periods, the average
interest-earning assets held in higher yielding loans
increased $58.8 million and the amount of average interest-
earning assets held in lower yielding cash and investments
decreased $15.6 million between the periods. The increase
in the average outstanding loans between the periods was
primarily the result of an increase in the commercial loan
portfolio, which occurred because of an increase in loan
originations and a reduction in loan payoffs between the
periods. The increase in interest income as a result of these
items was partially offset by a decrease in interest income
as a result of recognizing a lower amount of yield
income
enhancements between
decreased $2.1 million due to a decrease in the amount of
yield enhancements recognized from loan prepayment
penalties, yield adjustments on purchased loans, and the
interest payments received on non-accruing and previously
the periods. Interest
MANAGEMENT DISCUSSION AND ANALYSIS
charged off commercial real estate loans. This resulted in a
29 basis point decrease in the average yield between the
periods. It is anticipated that the yield enhancements
relating to these items will be lower in subsequent periods
as the pool of non-accruing and purchased loans continues
to decline. The average yield earned on interest-earning
assets was 4.13% for 2017, a decrease of 23 basis points
from 4.36% for 2016. The decrease in the average yield
earned on interest-earning assets is primarily related to the
decrease in yield enhancements recognized between the
periods.
accounts. This increase was partially offset by a decrease in
the interest paid on other borrowings due to a decrease in
the average borrowings outstanding between the periods.
The average non-interest and interest-bearing liabilities
increased $34.6 million between the periods, the average
amount held in lower rate checking, savings, and money
market accounts increased $10.4 million, the average
amount held in higher rate premium money market accounts
increased $22.5 million, and the average amount held in
higher rate borrowings and certificates of deposit increased
$1.7 million between the periods.
Interest expense was $1.8 million for 2017, an increase of
$0.2 million, or 12.8%, compared to $1.6 million for 2016.
The average interest rate paid on non-interest and interest-
bearing liabilities was 0.29% for 2017, an increase of 1
basis point from 0.28% for 2016. The average rate paid
increased between the periods due to an increase in the rates
paid on certain money market and certificate of deposit
The following table presents the total dollar amount of
interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and
rates. Non-accruing loans have been included in the average
outstanding loan balance in the table as loans carrying a zero
yield.
Year Ended December 31,
Average
Outstanding
Balance
2017
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2016
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2015
Interest
Earned/
Paid
Average
Yield/
Rate
(Dollars in thousands)
Interest-earning assets:
Securities available for sale:
Mortgage-backed and related securities .. $
Other marketable securities .....................
Loans held for sale ........................................
Loans receivable, net(1) (2) .............................
FHLB stock ...................................................
Other, including cash equivalents ................
Total interest-earning assets ......................... $
2,524
74,035
1,905
57
1,103
94
573,894 26,274
12
874
17,214
140
670,446 27,680
Interest-bearing liabilities:
NOW accounts .............................................. $
Passbooks ......................................................
Money market accounts ................................
Certificate accounts ......................................
FHLB advances and other borrowings .........
Total interest-bearing liabilities .................... $
Noninterest checking ....................................
Other non-interest-bearing liabilities ...........
Total interest-bearing liabilities and
noninterest-bearing deposits .................... $
Net interest income .......................................
Net interest rate spread .................................
Net earning assets ......................................... $
Net interest margin .......................................
Average interest-earning assets to average
interest-bearing liabilities and
noninterest-bearing deposits ....................
77
63
560
770
327
87,416
76,592
179,675
106,006
6,335
456,024
156,149
1,279
613,452
1,797
25,883
56,994
2.26% $
1.49
4.93
4.58
1.37
0.81
4.13
$
0.09% $
0.08
0.31
0.73
5.16
$
0.29% $
3.84%
$
3.86%
1,631
3,046
58
84,528 1,289
126
513,974 25,774
6
770
23,337
96
627,286 27,349
50
62
366
524
591
85,440
71,728
164,522
100,942
9,374
432,006
145,450
1,434
578,890 1,593
25,756
48,396
3.56% $
1.52
4.14
5.01
0.78
0.41
4.36 $
0.06% $
0.09
0.22
0.52
6.30
$
0.28% $
4.08%
$
4.11%
3,274
2,507
116
130,806 1,881
87
394,086 19,302
4
734
28,544
63
559,951 21,453
17
42
347
528
573
76,136
55,273
153,441
96,600
9,225
390,675
124,342
985
516,002 1,507
19,946
43,949
3.54 %
1.44
3.47
4.90
0.54
0.22
3.83
0.02 %
0.08
0.23
0.55
6.21
0.29 %
3.54 %
3.56 %
109.29%
108.36%
108.52%
(1) Tax exempt income was not material; therefore, the yield was not presented on a tax equivalent basis for any of the years presented.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
9
MANAGEMENT DISCUSSION AND ANALYSIS
Net interest margin decreased 25 basis points to 3.86% in
2017 from 4.11% in 2016 primarily because of a $2.1
million, or 29 basis point decrease
the yield
enhancements recognized between the periods. Average net
earning assets increased from $48.4 million in 2016 to $57.0
million in 2017. The $8.6 million increase in net earning
assets is due to the net income earned in 2017 adjusted for
non-cash items including the expenses incurred related to
deferred tax asset changes and depreciation.
in
The following table presents the dollar amount of changes
interest
to changes
income and
interest expense for major
in
components of interest-earning assets and interest-bearing
liabilities. It quantifies the changes in interest income and
interest expense related
the average
outstanding balances (volume) and those changes caused by
fluctuating interest rates. For each category of interest-
earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume
(i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by current
volume).
in
Year Ended December 31,
2017 vs. 2016
Increase
(Decrease)
Due to
2016 vs. 2015
Increase
(Decrease)
Due to
Volume (1)
Rate(1)
Total
Increase
(Decrease) Volume (1)
Total
Increase
(Decrease)
Rate(1)
(Dollars in thousands)
Interest-earning assets:
Securities available for sale:
Mortgage-backed and related securities ........... $
Other marketable securities ..............................
Loans held for sale ................................................
Loans receivable, net ............................................
Cash equivalents ...................................................
FHLB stock ...........................................................
Total interest-earning assets ............................. $
Interest-bearing liabilities:
NOW accounts ...................................................... $
Passbooks ..............................................................
Money market accounts ........................................
Certificates of deposit ...........................................
FHLB advances and other borrowings .................
Total interest-bearing liabilities .......................
Increase (decrease) in net interest income ................ $
32
(160)
(47)
3,091
(25)
1
2,892
3
4
39
77
(275)
(152)
3,044
(33)
(26)
15
(2,591)
69
5
(2,561)
24
(3)
155
169
11
356
(2,917)
(1)
(186)
(32)
500
44
6
331
27
1
194
246
(264)
204
127
(58)
(665)
19
5,824
(12)
0
5,108
1
12
18
26
16
73
5,035
0
73
20
648
45
2
788
32
8
1
(30)
2
13
775
(58)
(592)
39
6,472
33
2
5,896
33
20
19
(4)
18
86
5,810
(1) For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change
due to volume and the change due to rate.
The following table sets forth the weighted average yields
on the Company's interest-earning assets, the weighted
average interest rates on interest-bearing liabilities and the
interest rate spread between the weighted average yields
and rates as of the date indicated. Non-accruing loans have
been included in the average outstanding loan balances in
the table as loans carrying a zero yield.
Weighted average yield on:
Securities available for sale:
At December 31, 2017
Weighted average rate on:
Mortgage-backed and related securities ................................. 2.04% NOW accounts .............................................................................. 0.05%
Other marketable securities .................................................... 1.61
Loans held for sale ...................................................................... 5.06
Loans receivable, net .................................................................. 4.78
Federal Home Loan Bank stock ................................................. 1.50
Other interest-earnings assets ..................................................... 1.50
Combined weighted average yield on interest-earning assets .... 4.27
Passbooks ...................................................................................... 0.08
Money market accounts ................................................................ 0.38
Certificates of deposit ................................................................... 0.94
Combined weighted average rate on interest-bearing liabilities .. 0.30
Interest rate spread ........................................................................ 3.97
10
MANAGEMENT DISCUSSION AND ANALYSIS
Provision for Loan Losses
The provision for loan losses was ($0.5) million for the year
ended December 31, 2017, an increase of $0.1 million, from
($0.6) million for the year ended December 31, 2016. The
provision for loan losses increased between the periods
primarily because of the increase in the reserves required on
certain commercial loans due to a deterioration of their
credit quality.
A reconciliation of the allowance for loan losses for 2017 and 2016 is summarized as follows:
(Dollars in thousands)
Balance at January 1 ..................................................................................................................................................... $
Provision .......................................................................................................................................................................
Charge offs:
Commercial ..............................................................................................................................................................
Commercial real estate ............................................................................................................................................
Consumer .................................................................................................................................................................
Single family ...........................................................................................................................................................
Recoveries ....................................................................................................................................................................
Balance at December 31 ............................................................................................................................................... $
Specific allowance ........................................................................................................................................................ $
General allowance ........................................................................................................................................................
$
2017
2016
9,903
(523)
(311)
(50)
(288)
(6)
586
9,311
1,073
8,238
9,311
9,709
(645)
(180)
(67)
(108)
(66)
1,260
9,903
988
8,915
9,903
Non-Interest Income
Non-interest income was $7.7 million for the year ended December 31, 2017, a decrease of $0.5 million, from $8.2 million
for the year ended December 31, 2016. The following table presents the components of non-interest income:
(Dollars in thousands)
Fees and service charges .............................................. $
Loan servicing fees .......................................................
Gain on sales of loans ...................................................
Other non-interest income ............................................
Total non-interest income ........................................ $
Year ended December 31,
2016
2017
3,354
1,202
2,138
960
7,654
3,427
1,108
2,618
1,048
8,201
Percentage
Increase (Decrease)
2015
2017/2016
2016/2015
3,316
1,046
1,964
1,327
7,653
(2.1)%
8.5
(18.3)
(8.4)
(6.7)
3.3 %
5.9
33.3
(21.0 )
7.2
The decrease in non-interest income is primarily related to
the $0.5 million decrease in the gain on sales of loans due
to a decrease in commercial government guaranteed loan
sales between the periods. Fees and service charges
decreased $0.1 million between the periods due primarily to
a decrease in overdraft fees. Other non-interest income
decreased $0.1 million because of a decrease in the revenue
earned on the sale of uninsured investment products
between the periods. These decreases in non-interest
income were partially offset by a $0.1 million increase in
loan servicing fees earned due to an increase in the loans
being serviced for others between the periods.
Non-Interest Expense
Non-interest expense was $25.3 million for the year ended December 31, 2017, an increase of $1.2 million, from $24.1
million for the year ended December 31, 2016. The following table presents the components of non-interest expense:
(Dollars in thousands)
Compensation and benefits .......................................... $
(Gains) losses on real estate owned .............................
Occupancy and equipment ...........................................
Data processing ............................................................
Professional services ....................................................
Other .............................................................................
Total non-interest expense ........................................... $
Year ended December 31,
2016
2017
15,007
(72)
4,068
1,106
1,285
3,860
25,254
14,764
(596)
4,041
1,161
1,257
3,503
24,130
Percentage
Increase (Decrease)
2015
2017/2016
2016/2015
13,733
218
3,722
1,020
1,108
3,395
23,196
1.6%
87.9
0.7
(4.7)
2.2
10.2
4.7
7.5%
(373.4)
8.6
13.8
13.4
3.2
4.0
11
MANAGEMENT DISCUSSION AND ANALYSIS
Gains on real estate owned decreased $0.5 million between
the periods due to the gains that were recognized on the sale
of two commercial properties in 2016. Other non-interest
expense increased $0.4 million primarily due to an increase
in advertising expense between the periods. Compensation
expense increased $0.2 million between the periods due to
normal annual salary increases. Occupancy and equipment
expense increased slightly because of increased software
and equipment expenses. Professional services expense
increased slightly due to an increase in legal expenses
between the periods. These increases in non-interest
expense were partially offset by a $0.1 million decrease in
data processing expense due to a decrease in debit card costs
between the periods.
Income Taxes
The Company considers the calculation of current and
deferred income taxes to be a critical accounting policy that
is subject to significant estimates. Income tax expense was
$4.4 million for the year ended December 31, 2017, an
increase of $0.3 million, from $4.1 million for the year
ended December 31, 2016. The increase in income tax
expense is due primarily to the $1.1 million decrease in the
Company’s net deferred tax asset as result of the reduction
in the corporate federal tax rate in connection with the
enactment of the Tax Cuts and Jobs Act in the fourth quarter
of 2017. The increase in income tax expense as a result of
the tax law change was partially offset by a decrease in
income tax expense due to a decrease in pre-tax income
between the periods.
Comparison of 2016 with 2015
Net income was $6.4 million for 2016, an increase of $3.4
million compared to net income of $3.0 million for 2015.
Net income available to common shareholders was $6.4
million for 2016, an increase of $3.6 million compared to
net income available to common shareholders of $2.8
million for 2015. Diluted earnings per share for the year
ended December 31, 2016 was $1.34, an increase of $0.73
per share compared to diluted earnings per share of $0.61
for the year ended December 31, 2015. The increase in net
income for 2016 was due primarily to a $5.9 million
increase in interest income as a result of an increase in the
average interest-earning assets and a change in the
composition of the average interest-earning assets held
between the periods. Gain on sales of loans increased $0.7
million due to an increase in single family mortgage loan
production and sales between the periods. The provision for
loan losses decreased $0.5 million between the periods due
to improvements in the credit quality of the commercial
loan portfolio. These increases in income were partially
offset by a $1.0 million increase in compensation expense
due to annual increases in compensation and an increase in
the number of employees related to the increased loan
production. Income tax expense increased $2.5 million
because of the increase in pre-tax income between the
periods.
12
Net Interest Income
Net interest income was $25.8 million for 2016, an increase
of $5.9 million, or 29.1%, from $19.9 million for 2015.
Interest income was $27.3 million for 2016, an increase of
$5.8 million, or 27.5%, from $21.5 million for 2015.
Interest income increased between the periods because of
an increase in the average interest-earning assets and a
change in the composition of the average interest-earning
assets held, which resulted in an increase in the average
yields earned between the periods. While the average
interest-earning assets increased $67.3 million between the
periods, the average interest-earning assets held in higher
yielding loans increased $120.4 million and the amount of
average interest-earning assets held in lower yielding cash
and investments decreased $53.1 million between the
periods. The yield on average interest-earning assets was
also enhanced by $2.2 million, or 30 basis points, due to
loan prepayment penalties, yield adjustments recognized on
purchased loans, and interest payments received on non-
accruing and previously charged off loans during 2016. The
increase in the average outstanding loans between the
periods was primarily the result of an increase in the
commercial loan portfolio, which occurred because of an
increase in loan originations and a reduction in loan payoffs
between the periods. Average outstanding loans also
increased $18.6 million between the periods as a result of
the acquisitions that occurred in the third quarter of 2015
and the second quarter of 2016. The average yield earned
on interest-earning assets was 4.36% for 2016, an increase
of 53 basis points from 3.83% for 2015.
Interest expense was $1.6 million for 2016, an increase of
$0.1 million, or 5.7%, compared to $1.5 million for 2015.
Interest expense increased because of an increase in the
average outstanding interest-bearing liabilities. The average
rate paid on interest-bearing liabilities decreased 1 basis
point between the periods because of the change in the
composition of the average interest-bearing liabilities.
While the average interest-bearing liabilities increased
$62.9 million between the periods, the average amount held
in lower rate checking and money market accounts
increased $58.0 million and the average amount held in
higher rate certificates of deposits and other borrowings
increased $4.9 million between the periods. The increase in
the average outstanding deposits between the periods was
primarily due to the $42.9 million increase as a result of the
acquisitions that occurred in the third quarter of 2015 and
the second quarter of 2016. The average interest rate paid
on interest-bearing liabilities was 0.28% for 2016 compared
to 0.29% for 2015. Net interest margin (net interest income
divided by average interest-earning assets) for 2016 was
4.11%, an increase of 55 basis points compared to 3.56%
for 2015.
MANAGEMENT DISCUSSION AND ANALYSIS
Net interest margin increased to 4.11% in 2016 from 3.56%
in 2015 primarily because of a change in the composition of
average interest-earning assets held, which resulted in an
increase in the average yields earned between the periods.
The increase in the average yields earned was due to having
larger average balances of higher earning loans and smaller
average balances of lower earning cash and investments
during 2016 when compared to 2015. The yield on average
interest-earning assets was also enhanced $2.2 million, or
30 basis points, in 2016 due to loan prepayment penalties,
yield adjustments recognized on purchased loans, and
interest payments received on non-accruing and previously
charged off loans. Average net earning assets increased
from $43.9 million in 2015 to $48.4 million in 2016. The
$4.5 million increase in net earning assets was due primarily
to the net income earned in 2016.
The provision for loan losses was ($0.6) million for the year
ended December 31, 2016, a decrease of $0.4 million, from
($0.2) million for the year ended December 31, 2015. The
provision for loan losses decreased between the periods
primarily because of the decrease in the reserve percentages
applied to certain risk rated loan categories as a result of an
internal analysis performed.
Non-interest income was $8.2 million for the year ended
December 31, 2016, an increase of $0.5 million from $7.7
million for the year ended December 31, 2015. The increase
in non-interest income was primarily related to the $0.7
million increase in the gain on sales of loans due to an
increase in single family loan originations and sales
between the periods. Fees and service charges increased
$0.1 million between the periods due primarily to an
increase in debit card income. Loan servicing fees increased
$0.1 million due to an increase in the loans serviced for
others between the periods. These increases were partially
offset by a $0.3 million decrease in other non-interest
income because of a decrease in the gains realized on
acquisitions between the periods.
Non-interest expense was $24.1 million for the year ended
December 31, 2016, an increase of $0.9 million from $23.2
million
the year ended December 31, 2015.
Compensation expense increased $1.0 million between the
periods due to annual increases in compensation and an
increase in the number of employees between the periods
for
because of the increased loan production. Occupancy and
equipment expense increased $0.3 million because of
increased software and equipment expenses. Other non-
interest expense increased $0.1 million due primarily to an
increase in loan related expenses as a result of the increase
in loans originated between the periods. Data processing
expense increased $0.1 million between the periods due to
increased mobile and on-line banking costs. Other
professional expenses increased $0.1 million primarily due
to expenses related to the acquisition that occurred in the
second quarter of 2016. These increases in non-interest
expenses were partially offset by a $0.8 million increase in
the gains on real estate owned between the periods primarily
because of the gains that were recognized on the sale of two
commercial properties during 2016.
The Company considers the calculation of current and
deferred income taxes to be a critical accounting policy that
is subject to significant estimates. Income tax expense was
$4.1 million for the year ended December 31, 2016, an
increase of $2.5 million, from $1.6 million for the year
ended December 31, 2015. The increase in income tax
expense between the periods was primarily related to the
increase in pre-tax income in 2016 when compared to 2015.
Net income available to common shareholders was $6.4
million for 2016, an increase of $3.6 million from the $2.8
million net income available to common shareholders for
2015. Basic earnings per common share for the year ended
December 31, 2016 was $1.52, an increase of $0.83 from
the basic earnings per common share of $0.69 for the year
ended December 31, 2015. Diluted earnings per common
share for the year ended December 31, 2016 was $1.34, an
increase of $0.73 from diluted earnings per common share
of $0.61 for the year ended December 31, 2015. Net income
available to common shareholders and the basic and diluted
earnings per common share increased primarily because of
the increase in net income and a reduction in the dividends
required to be paid on the outstanding Fixed Rate
Cumulative Perpetual Preferred Stock Series A (the
“Preferred Stock”) between the periods. On February 17,
2015 the Company redeemed the final 10,000 shares of its
outstanding Preferred Stock and, as a result, no dividends
were required to be paid on the Preferred Stock after that
date.
13
MANAGEMENT DISCUSSION AND ANALYSIS
Financial Condition
Loans Receivable, Net
The following table sets forth the information on the Company's loan portfolio in dollar amounts and percentages before
deductions for deferred fees and discounts and allowances for losses as of the dates indicated:
(Dollars in thousands)
Real Estate Loans:
December 31,
2015
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
2016
2014
2013
2017
Single family .................................... $ 107,005 17.99% $103,255 18.41% $ 90,945 19.24% $ 69,841 18.70% $ 76,467 19.31%
4.81
Multi-family ..................................... 28,649
Commercial ...................................... 259,024 43.55
7.81
Construction or development ........... 46,444
Total real estate loans ............. 441,122 74.16
2.61
12,324
196,926 41.65
38,103
8.05
338,298 71.55
6.56
36,777
230,955 41.18
31,348
5.59
402,335 71.74
4.20
15,700
163,365 43.73
12,603
3.37
261,509 70.00
8,113 2.05
178,486 45.06
7,851 1.98
270,917 68.40
Other Loans:
Consumer Loans:
Automobile ..................................
2,894
Home equity line ......................... 36,869
Home equity ................................ 15,823
Recreational vehicles................... 13,181
5,000
Other ............................................
0.49
6.20
2.66
2.21
0.84
Total consumer loans .............. 73,767 12.40
Commercial business loans.............. 79,909 13.44
Total other loans ..................... 153,676 25.84
Total loans ............................... 594,798 100.00% 560,794 100.00% 472,819 100.00% 373,556 100.00% 396,049 100.00%
0.61
8.24
3.13
0.56
1.08
64,415 13.62
70,106 14.83
134,521 28.45
0.54
7.22
2.91
1.35
1.05
73,283 13.07
85,176 15.19
158,459 28.26
0.30
9.86
3.33
0.00
1.22
54,925 14.71
57,122 15.29
112,047 30.00
971 0.25
36,178 9.13
11,629 2.94
0 0.00
4,645 1.17
53,423 13.49
71,709 18.11
125,132 31.60
2,885
38,980
14,782
2,650
5,118
3,036
40,476
16,302
7,553
5,916
1,124
36,832
12,420
0
4,549
Less:
Unamortized discounts ....................
Net deferred loan (costs) fees ..........
Allowance for losses ........................
19
(463)
9,311
Total loans receivable, net ...... $ 585,931
20
(300)
9,903
$551,171
16
(91)
9,709
$463,185
14
97
8,332
$365,113
33
0
11,401
$384,615
fewer
there were
The increase in the loan portfolio in 2017 was primarily
because
than
originations. Based on current economic conditions and the
projected loan origination and prepayment amounts, it is
anticipated that our overall loan portfolio growth will be
less in 2018 than the growth experienced in 2017.
loan prepayments
Single family real estate loans were $107.0 million at
December 31, 2017, an increase of $3.7 million, compared
to $103.3 million at December 31, 2016. The mortgage loan
portfolio increased in 2017 due to an increased emphasis on
originating shorter term and adjustable rate mortgage loans
that were placed into the portfolio. The majority of the
longer term mortgage loans that were originated during the
year were sold into the secondary market and were not
placed in the loan portfolio in order to manage the
Company’s interest rate risk position.
Multi-family real estate loans were $28.6 million at
December 31, 2017, a decrease of $8.2 million, compared
to $36.8 million at December 31, 2016. The decrease in
multi-family real estate loans is primarily because newly
originated loans were less than the $15.6 million in loans
that were paid off or transferred to other loan categories
during 2017.
Commercial real estate loans were $259.0 million at
December 31, 2017, an increase of $28.0 million, compared
to $231.0 million at December 31, 2016. Commercial real
14
estate loan balances increased in 2017 as loan originations
exceeded loan payoffs during the year. Commercial
business loans were $79.9 million at December 31, 2017, a
decrease of $5.3 million, compared to $85.2 million at
December 31, 2016. The decrease in commercial business
loans is because there were more loan payoffs in 2017 when
compared to 2016.
Construction or development loans were $46.4 million at
December 31, 2017, an increase of $15.1 million, compared
to $31.3 million at December 31, 2016. The increase was
primarily related to an increase in multi-family and
commercial construction loans between the periods. The
increase was the result of the following activity during
2017: $26.8 million in new construction loans originated,
$13.2 million in paid off loans, $9.7 million in advances on
existing loans and $8.2 million of loans moved to a
permanent loan classification upon completion of a project.
Home equity lines of credit were $36.9 million at December
31, 2017, a decrease of $3.6 million, compared to $40.5
million at December 31, 2016. The open-end home equity
lines are generally written with an adjustable rate and a 10
year draw period which requires interest only payments
followed by a 10 year repayment period which fully
amortizes the outstanding balance. Closed-end home equity
loans are written with fixed or adjustable rates with terms
up to 15 years. Home equity loans were $15.8 million at
December 31, 2017, a decrease of $0.5 million, compared
MANAGEMENT DISCUSSION AND ANALYSIS
to $16.3 million at December 31, 2016. The decrease in the
open-end equity lines and closed-end equity loans is related
primarily to an increase in loan payoffs as borrowers
continued to refinance their homes and roll outstanding
equity loan balances into their first mortgage.
Recreational vehicle loans were $13.2 million at December
31, 2017, an increase of $5.6 million, compared to $7.6
million at December 31, 2016. These loans have been made
primarily to finance the recreational vehicle sales of a single
dealer within the Bank’s market area and the increase in
balances between the periods is due to an increase in
originations.
Allowance for Loan Losses
The determination of the allowance for loan losses and the
related provision is a critical accounting policy of the
Company that is subject to significant estimates. The
current level of the allowance for loan losses is a result of
management’s assessment of the risks within the portfolio
based on the information obtained through the credit
evaluation process. The Company utilizes a risk-rating
system on non-homogeneous commercial real estate and
commercial business loans that includes regular credit
reviews to identify and quantify the risk in the commercial
portfolio. Management conducts quarterly reviews of the
entire loan portfolio and evaluates the need to adjust the
allowance balance on the basis of these reviews.
Management actively monitors asset quality and, when
appropriate, charges off loans against the allowance for loan
losses. Although management believes it uses the best
information available to make determinations with respect
to the allowance for loan losses, future adjustments may be
necessary if economic conditions differ substantially from
the economic conditions in the assumptions used to
determine the size of the allowance for loan losses.
The allowance for loan losses was $9.3 million, or 1.57% of
gross loans at December 31, 2017, compared to $9.9
million, or 1.77% of gross loans at December 31, 2016. The
allowance for loan losses decreased primarily due the lower
reserve percentages used for certain risk rated commercial
loans as a result of an internal analysis of the most recent
charge-off history that was performed during the year. This
decrease was partially offset by an increase in reserves due
to a $34 million increase in the loan portfolio during the
year, as well as increased specific reserves for non-
performing commercial loans.
The following table reflects the activity in the allowance for loan losses and selected statistics:
(Dollars in thousands)
Balance at beginning of year ..................................................................... $
Provision for losses ...............................................................................
Charge-offs:
Single family ....................................................................................
Consumer ..........................................................................................
Commercial business........................................................................
Commercial real estate .....................................................................
Recoveries .............................................................................................
Net (charge-offs) recoveries .............................................................
Balance at end of year ............................................................................... $
Year end allowance for loan losses as a percent of year end gross loan
2017
2016
December 31,
2015
2014
2013
9,903
(523)
(6)
(288)
(311)
(50)
586
(69)
9,311
9,709
(645)
(66)
(108)
(180)
(67)
1,260
839
9,903
8,332
(164)
11,401
(6,998)
(19)
(105)
(69)
0
1,734
1,541
9,709
(92)
(131)
(55)
(936)
5,143
3,929
8,332
21,608
(7,881)
(200)
(484)
(651)
(3,711)
2,720
(2,326)
11,401
balance ..................................................................................................
1.57
%
1.77%
2.05%
2.23%
2.88%
Ratio of net loan recoveries (charge-offs) to average loans
outstanding ............................................................................................
(0.01)
0.16
0.36
1.02
(0.53)
15
MANAGEMENT DISCUSSION AND ANALYSIS
The following table reflects the allocation of the allowance for loan losses:
2017
2016
December 31,
2015
2014
2013
Allocated
Allowance
as a % of
Loan
Category
Percent of
Loans in
Each
Category
to Total
Loans
Allocated
Allowance
as a % of
Loan
Percent of
Loans in
Each
Category
to Total
Loans
Allocated
Allowance
as a % of
Loan
Percent of
Loans in
Each
Category
to Total
Loans
Allocated
Allowance
as a % of
Loan
Percent of
Loans in
Each
Category
to Total
Loans
Allocated
Allowance
as a % of
Loan
Percent of
Loans in
Each
Category
to Total
Loans
Category
18.41%
1.15%
53.33
1.66
13.07
2.20
2.53
15.19
1.77 100.00%
Category
19.24%
1.09%
52.31
2.46
13.62
1.86
2.05
14.83
2.05 100.00%
Category
18.70%
1.57%
51.30
2.62
14.71
1.84
2.11
15.29
2.23 100.00%
Category
2.13 %
3.32
2.07
3.08
2.88 100.00%
19.31%
49.09
13.49
18.11
Single family ........................
Commercial real estate .........
Consumer ..............................
Commercial business ............
Total .................................
0.84%
1.52
2.21
2.14
1.57
17.99%
56.17
12.40
13.44
100.00%
The allocated reserve percentages for single family,
commercial real estate, and commercial business loans
decreased in 2017 due to the general improvement in the
credit quality of these loan portfolios. The allocation of the
allowance for loan losses for consumer loans increased due
to an increase in the outstanding balances and changes in
the types of loans held in these categories between the
periods.
Allowance for Real Estate Losses
Real estate properties acquired or expected to be acquired
through loan foreclosures are initially recorded at fair value
less estimated selling costs. Management periodically
performs valuations and an allowance for losses is
established if the carrying value of a property exceeds its
fair value less estimated selling costs. There was no
allowance for real estate losses at December 31, 2017 and
the balance of the allowance was $0.7 million at December
31, 2016.
Non-performing Assets
Loans are reviewed at least quarterly and if the collectability
of any loan is doubtful, it is placed on non-accrual status.
Loans are placed on non-accrual status when either
principal or interest is 90 days or more past due, unless, in
the judgment of management, the loan is well collateralized
and in the process of collection. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either
applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the
ultimate collectability of the loan. Restructured loans
include the Bank's troubled debt restructurings (TDRs) that
involved forgiving a portion of interest or principal or
making a loan at a rate materially less than the market rate
to borrowers whose financial condition has deteriorated.
Foreclosed and repossessed assets include assets acquired
in settlement of loans. Total non-performing assets were
$3.8 million at December 31, 2017, a decrease of $0.1
million, or 3.3%, from $3.9 million at December 31, 2016.
loans decreased $0.1 million and
Non-performing
foreclosed and repossessed assets were the same between
the periods. The following table sets forth the amounts and
categories of non-performing assets (non-accrual loans and
foreclosed and repossessed assets) in the Company’s
portfolio:
16
MANAGEMENT DISCUSSION AND ANALYSIS
(Dollars in thousands)
Non-performing loans:
Single family ............................................................ $
Commercial real estate ............................................
Consumer .................................................................
Commercial business ...............................................
Total .....................................................................
Foreclosed and repossessed assets:
Single family ............................................................
Commercial real estate ............................................
Consumer .................................................................
Total .....................................................................
Total non-performing assets ......................................... $
Total as a percentage of total assets .............................
Total non-performing loans .......................................... $
Total as a percentage of total loans receivable, net .....
Allowance for loan losses to non-performing loans ....
2017
2016
December 31,
2015
2014
2013
949
1,364
553
278
3,144
0
627
0
627
3,771
0.52 %
$
3,144
0.54 %
296.11 %
916
1,384
630
343
3,273
0
611
16
627
3,900
1,655
1,694
786
46
4,181
48
1,997
0
2,045
6,226
1,564
8,750
486
120
10,920
50
3,053
0
3,103
14,023
3,273
0.57 %
$
0.59 %
302.56 %
4,181
0.97%
$
0.90%
232.22%
10,920
2.43%
$
2.99%
76.30%
1,602
14,549
737
608
17,496
0
6,898
0
6,898
24,394
3.76%
17,496
4.55%
65.17%
Gross interest income which would have been recorded had
the non-accruing loans been current in accordance with
their original terms amounted to $0.3 million, $0.6 million
and $0.4 million for the years ended December 31, 2017,
2016 and 2015, respectively. The amounts that were
included in interest income on a cash basis for these loans
were $0.1 million, $0.4 million and $0.2 million,
respectively.
At December 31, 2017, 2016 and 2015, there were loans
included in loans receivable, net, with terms that had been
modified in a TDR totaling $3.0 million, $3.3 million and
$2.5 million, respectively. Had the loans performed in
accordance with their original terms throughout 2017, 2016
and 2015, the Company would have recorded gross interest
income of $0.4 million, $0.6 million and $0.4 million,
respectively. During 2017, 2016 and 2015 the Company
recorded gross interest income of $0.2 million, $0.4 million
and $0.2 million, respectively.
For the loans that were modified in 2017, $0.6 million were
unclassified and performing and $0.4 million were non-
performing at December 31, 2017. The decrease in TDRs in
2017 relates primarily to one commercial relationship
totaling $0.5 million that had performed according to the
restructured terms and met the criteria to be upgraded to
non-TDR status during the year.
Of the loans that were modified in 2017 and outstanding at
December 31, 2017, $0.8 million related to loans secured
by first or second mortgages on a single family property and
the remaining modifications related to other consumer or
commercial business loans.
For the loans that were modified in 2016, $0.2 million were
unclassified and performing, and $1.7 million were non-
performing at December 31, 2016. The increase in TDRs in
2016 related primarily to one commercial relationship
totaling $1.3 million that was downgraded from performing
to non-performing status and was restructured during the
year. Of the loans that were modified in 2016 and
outstanding at December 31, 2016, $1.3 million related to
loans secured by commercial real estate, $0.4 million
related to first or second mortgages on a single family
property and the remaining modifications related to other
consumer or commercial business loans.
For the loans that were modified in 2015, $0.5 million were
unclassified and performing, and $0.7 million were non-
performing at December 31, 2015. The decrease in TDRs in
2015 related primarily
to a group of commercial
development loans totaling $6.0 million that were upgraded
to performing status and met the criteria to be removed from
TDR classification during the year. Of the loans that were
modified in 2015 and outstanding at December 31, 2015,
$0.8 million related to loans secured by first or second
mortgages on single family properties and the remaining
modifications related to other consumer or commercial
business loans.
17
MANAGEMENT DISCUSSION AND ANALYSIS
The following table sets forth the amount of TDRs in the Company’s portfolio:
(Dollars in thousands)
2017
2016
December 31,
2015
2014
2013
Single family ............................................................. $
Commercial real estate .............................................
Consumer ..................................................................
Commercial business ................................................
Total TDRs ........................................................... $
TDRs on accrual status ............................................. $
TDRs on non-accrual status ......................................
Total ...................................................................... $
685
1,210
758
391
3,044
1,129
1,915
3,044
448
1,774
709
369
3,300
1,297
2,003
3,300
647
725
732
415
2,519
1,618
901
2,519
368
7,956
571
555
9,450
7,414
2,036
9,450
840
14,781
697
1,074
17,392
3,780
13,612
17,392
In addition to the TDRs and the non-performing loans set
forth in the previous table of all non-performing assets, the
Company may identify other potential problem loans.
Potential problem loans are loans that are not in non-
performing status, however, there are circumstances present
to create doubt as to the ability of the borrower to comply
with present repayment terms. The decision of management
to include performing loans in potential problem loans does
not necessarily mean that the Company expects losses to
occur but that management recognized a higher degree of
risk associated with these loans. The level of potential
problem loans is another predominant factor in determining
the relative level of the allowance for loan losses. There was
one potential problem loan relationship totaling $7.5
million identified by the Company as of December 31,
2017. These loans are secured primarily by multi-family
properties and other business assets. There were no
potential problem loans identified by the Company as of
December 31, 2016. The four loan relationships that were
reported as potential problem loans at December 31, 2015
were $6.0 million in loans to two unrelated trucking
companies and $0.5 million in loans secured by agricultural
assets to two unrelated individuals.
Liquidity and Capital Resources
The Company attempts to manage its liquidity position so
that the funding needs of borrowers and depositors are met
timely and in a cost effective manner. Asset liquidity is the
ability to convert assets to cash through the maturity or sale
of the asset. Liability liquidity is the ability of the Bank to
obtain retail, internet, or brokered deposits or to borrow
funds from third parties such as the FHLB or the Federal
Reserve Bank of Minneapolis.
The primary investing activities are the origination of loans
and the purchase of securities. Principal and interest
payments on loans and securities, along with the proceeds
from the sale of loans held for sale, are the primary sources
of cash for the Bank. Additional cash can be obtained by
selling securities from the available for sale portfolio or by
selling loans or mortgage servicing rights. Unpledged
securities could also be pledged and used as collateral for
18
additional borrowings with the FHLB or Federal Reserve
Bank of Minneapolis to generate additional cash.
The primary financing activity is the attraction of retail,
commercial, and internet deposits. The Bank also has the
ability to borrow additional funds from the FHLB or Federal
Reserve Bank of Minneapolis by pledging additional
securities or loans, subject to applicable borrowing base and
collateral requirements. See “Note 12 FHLB Advances and
Other Borrowings” in the Notes to Consolidated Financial
Statements for more information on additional advances
that could be drawn based upon existing collateral levels
with the FHLB and the Federal Reserve Bank of
Minneapolis.
The Bank's most liquid assets are cash and cash equivalents,
which consist of short-term highly liquid investments with
original maturities of less than three months that are readily
convertible to known amounts of cash and interest-bearing
deposits. The level of these assets is dependent on the
operating, financing and investing activities during any
given period.
the
following major
Cash and cash equivalents at December 31, 2017 were
$37.6 million, an increase of $10.0 million, compared to
$27.6 million at December 31, 2016. Net cash provided by
operating activities during 2017 was $17.0 million. The
Company conducted
investing
activities during 2017: principal payments and maturity
proceeds received on securities available for sale and FHLB
stock were $25.0 million; purchases of securities available
for sale and FHLB stock were $24.0 million; and the
proceeds from the sale of premises and other real estate
were $0.3 million. The Company also purchased premises
and equipment of $1.0 million and net loans receivable
increased $43.2 million. Net cash used by investing
activities during 2017 was $42.9 million. The Company
conducted the following major financing activities during
2017: repaid borrowings of $106.2 million, received
proceeds from borrowings of $99.2 million, and deposits
increased $42.8 million. Net cash provided by financing
activities was $35.9 million for 2017.
MANAGEMENT DISCUSSION AND ANALYSIS
The Bank has certificates of deposits from customers with
outstanding balances of $65.6 million that mature during
2018. Based upon past experience, management anticipates
that the majority of the deposits will renew for another term.
The Company believes that deposits that do not renew will
be replaced with deposits from other customers or FHLB
advances. Proceeds from the sale of securities could also be
used to fund unanticipated outflows of deposits.
The Bank has deposits of $77.0 million in checking and
money market accounts of six customers that have
individual relationship balances greater than $5.0 million.
These funds may be withdrawn at any time, however,
management anticipates that the majority of these deposits
will remain on deposit with the Bank over the next twelve
months. If these deposits are withdrawn, it is anticipated
that they would be funded with available cash or replaced
with deposits from other customers or FHLB advances.
Proceeds from the sale of securities could also be used to
fund unanticipated outflows of deposits.
Dividends from the Bank have been the Company’s primary
source of cash. The Bank is restricted under applicable
federal banking law from paying dividends to the Company
without prior notice to and non-objection of the applicable
regulator. During 2017, the Bank paid dividends to the
Company of $6.0 million and at December 31, 2017, the
Company had $2.1 million in cash and other assets that
could readily be turned into cash.
The Company’s primary use of cash is the payment of
holding company level expenses including the payment of
director and management fees, legal expenses, and other
regulatory costs. The Company plans to continue to fund its
liquidity needs through dividends from the Bank, or if
deemed prudent, by obtaining external capital.
Contractual Obligations and Commercial Commitments
The Company has certain obligations and commitments to make future payments under existing contracts. At December 31,
2017, the aggregate contractual obligations (excluding bank deposits) and commercial commitments were as follows:
(Dollars in thousands)
Contractual Obligations:
Annual rental commitments under non-cancellable
Total
Less than
1 Year
1-3 Years
4-5 Years
More than
5 Years
Payments Due by Period
operating leases ................................................................ $
Total contractual obligations ....................................... $
5,740
5,740
888
888
1,740
1,740
1,679
1,679
1,433
1,433
Other Commercial Commitments:
Commercial lines of credit.................................................... $
Commitments to lend ............................................................
Standby letters of credit ........................................................
Total other commercial commitments ......................... $
53,691
39,965
1,867
95,523
25,433
13,691
1,546
40,670
17,175
994
321
18,490
11,033
13,110
0
24,143
50
12,170
0
12,220
Amount of Commitments Expiring by Period
Regulatory Capital Requirements
Effective January 1, 2015 the capital requirements of the
Company and the Bank were changed to implement the
regulatory requirements of the Basel III capital reforms. The
Basel III requirements, among other things, (i) apply a
strengthened set of capital requirements to the Bank (the
Company is exempt, pursuant to the Small Bank Holding
Company Policy Statement (Policy Statement) described
below), 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) revise the rules for
calculating risk-weighted assets for purposes of such
requirements. The rules made corresponding revisions to
the prompt corrective action framework and include the
capital ratios and buffer requirements which will be phased
in incrementally, with full implementation scheduled for
January 1, 2019. Failure by the Bank to meet minimum
capital requirements can initiate certain mandatory and
19
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, both the Company and the Bank must
meet specific capital guidelines that involve quantitative
measures of their 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,
factors.
Management believes that, as of December 31, 2017, the
Bank’s capital ratios were in excess of those quantitative
capital ratio standards set forth under the prompt corrective
action regulations. However, there can be no assurance that
the Bank will continue to maintain such status in the future.
The OCC has extensive discretion in its supervisory and
the
enforcement activities, and can
risk weightings
further adjust
other
and
MANAGEMENT DISCUSSION AND ANALYSIS
requirement to be “well-capitalized” in the future. See
“Note 17 Regulatory Capital” of the Notes to Consolidated
Financial Statements for a table which reflects the Bank’s
capital compared to these capital requirements.
In the second quarter of 2015, the FRB amended its Policy
Statement, which exempted small bank holding companies
from the above capital requirements, by raising the asset
size threshold for determining applicability from $500
million to $1 billion. 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 met the qualitative exemption
requirements, and therefore, is exempt from the above
capital requirements.
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, 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 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 raises capital through the issuance of
additional shares of common stock or other equity
securities, it would dilute the ownership interests of existing
stockholders and, if issued at less than the Company’s book
value would dilute the per share book value of the
Company’s common stock, dilute the Company’s earnings
per share, and could result in a change of 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 the Company’s control, and on the
Company’s financial performance and plans. Accordingly,
the Company may not be able to raise additional capital, if
deemed prudent, on favorable economic terms, or other
terms acceptable to it. If the Bank cannot satisfactorily
address its capital needs as they arise, the Bank’s ability to
maintain or expand its operations, maintain compliance
with the regulatory capital requirements, to operate without
additional regulatory or other restrictions, and its operating
results, could be materially adversely affected.
Dividends
The declaration of dividends is subject to, among other
things, the Company's financial condition and results of
regulatory
operations, the Bank's compliance with regulatory capital
requirements and other
tax
considerations, industry standards, economic conditions,
general business practices and other factors. The Company
has not made any dividend payments
to common
stockholders during the three year period ending December
31, 2017.
restrictions,
Under applicable federal banking laws and regulations, no
dividends can be declared or paid by the Bank to the
Company without notice to and non-objection from the
applicable banking regulator. There is no assurance that the
Bank and the Company would satisfy the applicable
regulatory requirements necessary to effect any such
dividends. The payment of dividends by the Company is
dependent upon the Company having adequate cash or other
assets that can be converted to cash to pay dividends to its
stockholders. Further, any determination as to whether,
when and in what amount to declare and pay any such
dividends would be subject to the discretion of the board of
directors of both the Bank and the Company and would
depend on numerous factors including the results of
operations, financial conditions, growth plans, and cash
flow requirements of the Company and the Bank.
Impact of Inflation and Changing Prices
The impact of inflation is reflected in the increased cost of
operations. Unlike most industrial companies, nearly all of
the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the prices of
goods and services.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2014-
09, Revenue from Contracts with Customers (Topic 606),
with an original effective date for annual reporting periods
beginning after December 15, 2016. In August 2015, the
FASB issued ASU 2015-14, which deferred the effective
date of ASU 2014-09 to annual and interim reporting
periods in fiscal years beginning after December 15, 2017.
This ASU is a converged standard between the FASB and
the International Accounting Standards Board (IASB) that
provides a single comprehensive revenue recognition model
for all contracts with customers across transactions and
industries. The primary objective of the ASU is revenue
recognition that represents the transfer of promised goods
or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. In March, April, May
and December of 2016 and February and September of
2017, the FASB also issued ASU 2016-08, 2016-10, 2016-
12, 2016-20, 2017-05, and 2017-13, respectively, related to
Topic 606. The amendments in these subsequently issued
20
MANAGEMENT DISCUSSION AND ANALYSIS
ASUs do not change the core principles of the previously
issued guidance, but instead provide more clarity and
implementation guidance for certain aspects of the original
ASU. The Company has completed its assessment of which
revenue sources are within the scope of this ASU and
evaluated the applicable contracts to assess and quantify
accounting methodology changes resulting from
the
adoption of the standard. Based on this assessment, the
adoption of this ASU and the related amendments in the
first quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments – Overall (Subtopic 825-10) Recognition and
Measurement of Financial Assets and Financial Liabilities.
The amendments in this ASU require, among other things,
equity investments to be measured at fair value, with
changes in fair value recognized in net income, and that
public business entities use the exit price notion when
measuring the fair value of financial instruments for
disclosure purposes. The amendments also require an entity
to present separately in other comprehensive income the
portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit
risk when the entity has elected to measure the liability at
fair value in accordance with the fair value option for
financial instruments. In addition, the amendments also
eliminate the requirement for public business entities to
disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the
balance sheet. The ASU is intended to reduce diversity in
practice and is effective for public business entities for
fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. The amendments
should be applied by means of a cumulative-effect
adjustment to the balance sheet as of the beginning of the
fiscal year of adoption. The adoption of this ASU in the first
quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842). The amendments in the ASU create Topic 842,
Leases, and supersede the lease requirements in Topic 840,
Leases. The objective of this ASU is to establish the
principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from
a lease. The main difference between previous Generally
Accepted Accounting Principles (GAAP) and this ASU is
the recognition of lease assets and lease liabilities by lessees
for those leases classified as operating leases under previous
GAAP. The amendment requires a lessee to recognize in the
statement of financial position a liability to make lease
payments (the lease liability) and the right-of-use asset
representing its right to use the underlying asset for the lease
term. The accounting applied by a lessor is largely
unchanged from that applied under previous GAAP. In
transition, lessees and lessors are required to recognize and
measure leases at the beginning of the earliest period
presented using a modified retrospective approach. The
modified retrospective approach includes a number of
optional practical expedients that entities may elect to apply
that will, in effect, continue to account for leases that
commence before the effective date in accordance with
previous GAAP unless
is modified. The
the
amendments in the ASU, for public business entities, are
effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years.
The adoption of this ASU in the first quarter of 2019 is not
anticipated to have a material impact on the Company’s
consolidated financial statements.
lease
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. The amendments
in this ASU affect all entities that measure credit losses on
financial instruments including loans, debt securities, trade
receivables, net investments in leases, off-balance sheet
credit exposures, reinsurance receivables, and any other
financial asset that has a contractual right to receive cash
that is not specifically excluded. The main objective of this
ASU is to provide financial statement users with more
decision-useful information about the expected credit losses
on financial instruments and other commitments to extend
credit held by a reporting entity at each reporting date. To
achieve this objective, the amendments in this ASU replace
the incurred loss impairment methodology required in
current GAAP with a methodology that reflects expected
credit losses that requires consideration of a broader range
of reasonable and supportable information to estimate credit
losses. The amendments in this ASU will affect entities to
varying degrees depending on the credit quality of the assets
held by the entity, the duration of the assets held, and how
the entity applies the current incurred loss methodology.
The amendments in this ASU, for public business entities
that are SEC filers, are effective for fiscal years beginning
after December 15, 2019, including interim periods within
those annual periods. All entities may adopt
the
amendments in the ASU early as of the fiscal years
beginning after December 15, 2018, including interim
periods within those fiscal years. Amendments should be
applied using a modified retrospective transition method by
means of a cumulative-effect adjustment to equity as of the
beginning of the period in which the guidance is adopted.
Management is in the process of evaluating the impact that
the adoption of this ASU in the first quarter of 2020 will
have on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. The amendments in this ASU
affect all entities that are required to present a statement of
cash flows under Topic 230 and address the following eight
21
MANAGEMENT DISCUSSION AND ANALYSIS
insurance claims; proceeds from
specific cash flow issues: debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt
instruments or other debt instruments with coupon interest
rates that are insignificant in relation to the effective interest
rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the
settlement of
the
settlement of corporate-owned life insurance policies;
distributions received from equity method investees;
transactions; and
in securitization
beneficial
separately identifiable cash flows and application of the
predominance principle. This ASU is intended to reduce
diversity in practice and is effective for public business
entities for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years with early
adoption permitted. Upon adoption, the amendments should
be applied using a retrospective transition method to each
period presented. The adoption of this ASU in the first
quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
interest
the FASB
In January 2017,
issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250)
and Investments – Equity Method and Joint Ventures (Topic
323). The amendments in the ASU add and amend SEC
paragraphs pursuant to the SEC staff announcement at the
September 22, 2016 and November 17, 2016 Emerging
Issues Task Force (EITF) meetings. The September
announcement is about the disclosure of the impact that
recently issued accounting standards will have on the
financial statements of a registrant when such standards are
adopted in a future period. The announcement applies to
ASU 2014-09, Revenue from Contracts with Customers
(Topic 606); ASU 2016-02, Leases (Topic 842); and ASU
2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial
Instruments and to any subsequent amendments to these
ASUs that are issued prior to their adoption. The November
announcement made amendments to conform the SEC
Observer comment on accounting for tax benefits resulting
from investments in qualified affordable housing projects to
the guidance issued in Accounting Standards Update No.
2014-01, Investments-Equity Method and Joint Ventures
(Topic 323); Accounting for Investments in Qualified
Affordable Housing Projects. This ASU is intended to
improve transparency and is effective for public business
entities upon issuance. The adoption of this ASU did not
have a material impact on the Company’s consolidated
financial statements other than to enhance the disclosures
on the effects of new accounting pronouncements as they
move closer to adoption.
the FASB
issued ASU 2017-04,
In January 2017,
Intangibles-Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment. The amendments in this
ASU were issued to address concerns over the cost and
22
complexity of the two-step goodwill impairment test and
resulted in the removal of the second step of the test. The
amendments require an entity
to apply a one-step
quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit’s carrying
amount over its fair value, not to exceed the total amount of
goodwill allocated to the reporting unit. The new guidance
does not amend the optional qualitative assessment of
goodwill impairment. This ASU is intended to reduce the
cost and complexity of the two-step goodwill impairment
test and is effective for public business entities for fiscal
years beginning after December 15, 2019, and interim
periods within those fiscal years with early adoption
permitted for testing performed after January 1, 2017. Upon
adoption,
the amendments should be applied on a
prospective basis and the entity is required to disclose the
nature of and reason for the change in accounting principle
upon transition. The Company early adopted this ASU in
the fourth quarter of 2017 in order to reduce the complexity
of the goodwill impairment calculation. The adoption of this
ASU in the fourth quarter of 2017 did not have any impact
on the Company’s consolidated financial statements.
the FASB
incorporated
in market pricing on
In March 2017,
issued ASU 2017-08,
Receivables – Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities. The amendments in this ASU
shorten the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments
require the premium to be amortized to the earliest call date.
The amendments do not require an accounting change for
securities held at a discount as discounts continue to be
amortized to maturity. This ASU is intended to more closely
align the amortization period of premiums and discounts to
expectations
the
underlying securities. In most cases, market participants
price securities to the call date that produces the worst yield
when the coupon is above current market rates and prices
securities to maturity when the coupon is below market
rates. As a result, the amendments more closely align
interest income recorded on bonds held at a premium or a
discount with the economics of the underlying instrument.
This ASU is intended to reduce diversity in practice and is
effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2018 with early adoption permitted. Upon
adoption, the amendments should be applied using a
modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning
of the period of adoption. Additionally, in the period of
adoption, an entity should provide disclosures about a
change in accounting principles. The adoption of this ASU
in the first quarter of 2019 is not anticipated to have a
material impact on the Company’s consolidated financial
statements.
MANAGEMENT DISCUSSION AND ANALYSIS
the FASB
issued ASU 2017-09,
In May 2017,
Compensation- Stock Compensation (Topic 718). The
amendments in this ASU provide clarity about which
changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting.
The ASU is effective for all entities for fiscal years
beginning after December 15, 2017, including interim
periods within those fiscal years with early adoption
permitted. The adoption of this ASU in the first quarter of
2018 did not have any impact on the Company’s
consolidated financial statements.
In February 2018, the FASB issued ASU 2018-01, Income
Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. The amendments in this
ASU require a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax
effects resulting from the newly enacted federal corporate
income tax rate. The amount of the reclassification is the
difference between the historical corporate income tax rate
and the newly enacted 21 percent corporate income tax rate.
This ASU is effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods
within those fiscal years. Early adoption is permitted,
including adoption in any interim period, for public
business entities such as the Company for reporting periods
for which financial statement have not yet been issued. The
Company opted to early adopt this ASU as of December 31,
2017. The impact on the December 31, 2017 financial
statements was a $157,600 reclassification between other
comprehensive income and retained earnings for the
stranded tax effects as a result of the change in the federal
corporate tax rate.
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
market value to 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 December 31, 2017.
(Dollars in thousands)
Basis point change in interest rates
Total market-risk sensitive assets ....................................................... $
Total market-risk sensitive liabilities .................................................
Off-balance sheet financial instruments .............................................
Net market risk ................................................................................... $
Percentage change from current market value ...................................
-100
0
+100
+200
726,656
625,420
(184)
101,420
714,097
584,839
0
129,258
701,330
549,618
(8)
151,720
687,808
518,471
4
169,333
(21.54%)
0.00 %
17.38%
31.00%
Market Value
(the Model Assumptions)
The preceding table was prepared utilizing the following
assumptions
regarding
prepayment and decay ratios that were determined by
management based upon its review of historical prepayment
speeds and decay rates. Fixed rate loans were assumed to
prepay at annual rates of between 2% and 42%, depending
on the note rate and the period to maturity. Adjustable rate
mortgages (ARMs) were assumed to prepay at annual rates
of between 6% and 48%, 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. All loan prepayments
vary based on the note rate and period to maturity of the
individual loans. Certificate accounts were assumed not to
be withdrawn until maturity. Retail money market and
passbook accounts were assumed to decay at annual rates of
2% and 18%, respectively. Retail non-interest checking and
negotiable order of withdrawal (NOW) accounts were
assumed to decay at annual rates of 12% and 14%,
respectively. Commercial non-interest checking and NOW
accounts were assumed to decay at annual rates of 27% and
32%, respectively. Commercial money market demand
accounts (MMDAs) were assumed to decay at annual rates
of between 1% and 31%.
23
MANAGEMENT DISCUSSION AND ANALYSIS
Certain shortcomings are inherent in the method of analysis
presented in the foregoing 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 that 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 or floors could be different from the values
calculated
liabilities, such as
table. Certain
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.
the
in
Asset/Liability Management
The Company's management reviews the impact that
changing interest rates will have on the net interest income
projected for the twelve months following December 31,
2017 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 December 31, 2018 of immediate interest rate
changes called rate shocks:
(Dollars in thousands)
Rate Shock
in Basis Points
+200
+100
0
-100
$
Net Interest
Change
Percent
Change
3,089
1,536
0
(1,644)
11.35 %
5.65
0.00
(6.04 )
The preceding table was prepared utilizing the Model
Assumptions. Certain shortcomings are inherent in the
method of analysis presented in the foregoing table. In the
event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from
those assumed in calculating the foregoing table. The ability
of many borrowers to service their debt may decrease in the
event of a substantial increase in interest rates and could
impact net interest income. The increase in interest income
in a rising rate environment is because there are more loans
that are anticipated to re-price to higher interest rates in the
next twelve months than there are deposits that would re-
price.
24
In an attempt to manage its exposure to changes in interest
rates, management closely monitors interest rate risk. The
Company has an Asset/Liability Committee that meets
frequently to discuss changes in the interest rate risk
position and projected profitability. The 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
timing and
implementation of transactions as intended to assure
attainment of the Bank's objectives in an effective manner.
In addition, the Board reviews, on a quarterly basis, the
Bank's asset/liability position, including simulations of the
effect on the Bank's capital of various interest rate
scenarios.
the
In managing its asset/liability mix, the Bank may, at times,
depending on the relationship between long 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 restructure its balance
sheet in order to better match the maturities of its assets and
liabilities. In the past, more long term fixed rate loans were
placed into the single family loan portfolio. In recent years,
the Bank has focused its 30 year fixed rate single family
residential lending program on loans that are saleable to
third parties and generally places only adjustable rate or
shorter term fixed rate loans that meet certain risk
characteristics into its loan portfolio. In addition, a
loan
significant portion of
production is in short term fixed rate loans or adjustable rate
loans that re-price every one, two, or three years.
the Bank’s commercial
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. See “Note 18 Financial Instruments
with Off-Balance Sheet Risk” in the Notes to Consolidated
information.
for
Financial
Management believes that the Company has sufficient
liquidity to satisfy its off-balance sheet obligations.
Statements
additional
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
2017
2016
ASSETS
Cash and cash equivalents ................................................................................................ $
Securities available for sale:
Mortgage-backed and related securities (amortized cost $5,148 and $993) .................
Other marketable securities (amortized cost $73,653 and $78,846) ............................
Loans held for sale ...........................................................................................................
Loans receivable, net ........................................................................................................
Accrued interest receivable ..............................................................................................
Real estate, net .................................................................................................................
Federal Home Loan Bank stock, at cost ...........................................................................
Mortgage servicing rights, net ..........................................................................................
Premises and equipment, net ............................................................................................
Goodwill ...........................................................................................................................
Core deposit intangible, net ..............................................................................................
Prepaid expenses and other assets ....................................................................................
Deferred tax asset, net ......................................................................................................
Total assets ................................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits ............................................................................................................................ $
Other borrowings .............................................................................................................
Accrued interest payable ..................................................................................................
Customer escrows ............................................................................................................
Accrued expenses and other liabilities .............................................................................
Total liabilities ..............................................................................................................
37,564
27,561
5,068
72,404
77,472
1,837
585,931
2,344
627
817
1,724
8,226
802
355
1,314
3,672
722,685
635,601
0
146
1,147
4,973
641,867
1,005
77,472
78,477
2,009
551,171
2,626
611
770
1,604
8,223
802
454
1,768
5,947
682,023
592,811
7,000
236
1,011
5,046
606,104
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock ($.01 par value):
authorized 500,000 shares; issued shares 0 ...............................................................
0
0
Common stock ($.01 par value):
authorized 16,000,000; issued shares 9,128,662 .......................................................
Additional paid-in capital .................................................................................................
Retained earnings, subject to certain restrictions .............................................................
Accumulated other comprehensive loss ...........................................................................
Unearned employee stock ownership plan shares ............................................................
Treasury stock, at cost 4,631,124 and 4,639,739 shares ..................................................
Total stockholders’ equity ............................................................................................
Total liabilities and stockholders’ equity ......................................................................... $
91
50,623
91,448
(957)
(2,030)
(58,357)
80,818
722,685
91
50,566
86,886
(820)
(2,223)
(58,581)
75,919
682,023
See accompanying notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31
(Dollars in thousands, except per share amounts)
Interest income:
Loans receivable ............................................................................. $
Securities available for sale:
Mortgage-backed and related ......................................................
Other marketable .........................................................................
Cash equivalents .............................................................................
Other ...............................................................................................
Total interest income ...................................................................
Interest expense:
Deposits ..........................................................................................
Federal Home Loan Bank advances and other borrowings ............
Total interest expense ..................................................................
Net interest income ..................................................................
Provision for loan losses ....................................................................
Net interest income after provision for loan 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 ........................................................
(Gains) losses on real estate owned .............................................
Occupancy and equipment ..........................................................
Data processing ...........................................................................
Professional services ...................................................................
Other ...........................................................................................
Total non-interest expense .......................................................
Income before income tax expense .....................................
Income tax expense ............................................................................
Net income ..............................................................................
Preferred stock dividends ...................................................................
Net income available to common shareholders ....................... $
Other comprehensive (loss) income, net of tax ..................................
Comprehensive income available to common shareholders ............... $
Basic earnings per common share ...................................................... $
Diluted earnings per common share ................................................... $
See accompanying notes to consolidated financial statements.
2017
2016
2015
26,368
25,900
19,389
57
1,103
140
12
27,680
1,470
327
1,797
25,883
(523)
26,406
3,354
1,202
2,138
960
7,654
15,007
(72)
4,068
1,106
1,285
3,860
25,254
8,806
4,402
4,404
0
4,404
(137)
4,267
1.04
0.90
58
1,289
96
6
27,349
1,002
591
1,593
25,756
(645 )
26,401
3,427
1,108
2,618
1,048
8,201
14,764
(596 )
4,041
1,161
1,257
3,503
24,130
10,472
4,122
6,350
0
6,350
(606 )
5,744
1.52
1.34
116
1,881
63
4
21,453
934
573
1,507
19,946
(164 )
20,110
3,316
1,046
1,964
1,327
7,653
13,733
218
3,722
1,020
1,108
3,395
23,196
4,567
1,611
2,956
(108 )
2,848
204
3,052
0.69
0.61
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Balance, December 31, 2014............................... $ 10,000
91
Additional
Preferred Common Paid-in
Capital
Stock
Stock
Net income ......................................................
Other comprehensive income .........................
Redemption of preferred stock ....................... (10,000)
Restricted stock awards ..................................
Restricted stock awards forfeiture ..................
Amortization of restricted stock awards .........
Preferred stock dividends ...............................
Earned employee stock ownership plan
Unearned
Accumulated Employee
Plan
Other
(Loss)
Total
Stock-
Stock
Retained Comprehensive Ownership Treasury holders’
Earnings
Equity
(2,610) (59,062) 76,013
50,207 77,805
2,956
2,956
204
(10,000)
0
0
447
(225)
(332)
9
447
332
(9)
Stock
(225)
(418)
204
shares ..........................................................
Balance, December 31, 2015............................... $
Net income ......................................................
Other comprehensive loss ...............................
Stock compensation expense ..........................
Restricted stock awards ..................................
Amortization of restricted stock awards .........
Earned employee stock ownership plan
shares ..........................................................
Balance, December 31, 2016 ............................. $
Net income .....................................................
Other comprehensive income ......................
Reclassification of certain income tax
effects from accumulated other
comprehensive income .............................
Stock compensation expense ........................
Restricted stock awards ...............................
Stock awards withheld for tax
withholding................................................
Amortization of restricted stock awards ....
Earned employee stock ownership plan
shares .........................................................
Balance, December 31, 2017 ............................. $
0
91
57
50,388 80,536
6,350
(214)
(606)
79
(158)
177
80
0
91
50,566 86,886
4,404
193
250
(2,417) (58,739) 69,645
6,350
(606)
79
0
177
158
(820)
21
194
274
(2,223) (58,581) 75,919
4,404
21
158
(158)
41
(278)
147
147
0
91
50,623 91,448
(957)
278
(54)
0
41
0
(54)
147
193
340
(2,030) (58,357) 80,818
See accompanying notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (Dollars in thousands)
Cash flows from operating activities:
2017
2016
2015
Net income .............................................................................................................................. $
Adjustments to reconcile net income to cash provided by operating activities:
4,404
6,350
Provision for loan losses ..................................................................................................
Depreciation .....................................................................................................................
Amortization of (discounts) premiums, net .....................................................................
Amortization of deferred loan fees ..................................................................................
Amortization of core deposit intangible ..........................................................................
Amortization of purchased loan fair value adjustments ..................................................
Amortization of mortgage servicing rights ......................................................................
Capitalized mortgage servicing rights .............................................................................
Deferred income tax expense ...........................................................................................
Reclassification of certain income tax effects from accumulated other comprehensive
income ..........................................................................................................................
Securities losses (gains), net ............................................................................................
Gain on sale of premises ..................................................................................................
(Gains) losses on sales of real estate owned ....................................................................
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 ESOP shares ..........................................................................
Earned ESOP shares priced above original cost ..............................................................
Stock option compensation expense ................................................................................
Decrease (increase) in accrued interest receivable ..........................................................
(Decrease) increase in accrued interest payable ..............................................................
Decrease (increase) in other assets...................................................................................
(Decrease) increase in other liabilities .............................................................................
Other, net ..........................................................................................................................
Net cash provided by operating activities ...............................................................
Cash flows from investing activities:
Proceeds from sales of securities available for sale ................................................................
Principal collected on securities available for sale ..................................................................
Proceeds collected on maturity 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 owned ................................................................................
Net increase in loans receivable .............................................................................................
Gain on acquisition ..................................................................................................................
Acquisition payment (net of cash acquired) ...........................................................................
Proceeds from sale of premises ...............................................................................................
Purchases of premises and equipment .....................................................................................
Net cash used by investing activities ......................................................................
Cash flows from financing activities:
Increase in deposits ..................................................................................................................
Redemption of preferred stock ................................................................................................
Stock awards withheld for tax withholding .............................................................................
Dividends paid to preferred stockholders ................................................................................
Proceeds from borrowings .......................................................................................................
Repayment of borrowings ........................................................................................................
Increase in customer escrows ..................................................................................................
Net cash provided by financing activities ...............................................................
Increase (decrease) in cash and cash equivalents ...................................................
Cash and cash equivalents, beginning of year .............................................................................
Cash and cash equivalents, end of year ........................................................................................ $
Supplemental cash flow disclosures:
Cash paid for interest ............................................................................................................... $
Cash paid for income taxes ......................................................................................................
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale ...................................................................................
Loans held for sale transferred to loans ...................................................................................
Transfer of loans to real estate .................................................................................................
See accompanying notes to consolidated financial statements.
(523)
949
(3)
(240)
99
(85)
555
(675)
2,105
158
0
(8)
(72)
(2,138)
90,127
(78,751)
147
193
147
41
282
(91)
417
(62)
67
17,043
0
953
20,100
(20,035)
(3,999)
3,952
309
(43,194)
0
0
8
(1,011)
(42,917)
42,794
0
(54)
0
99,200
(106,200)
137
35,877
10,003
27,561
37,564
1,887
1,879
9,211
164
253
(645)
850
47
(1,011)
92
(529)
601
(706)
3,128
0
10
0
(596)
(2,618)
99,121
(79,783)
177
194
80
79
(265)
(9)
(323)
999
270
25,513
20
1,245
136,145
(104,968)
(1,879)
1,800
2,369
(89,570)
0
6,080
0
(1,607)
(50,365)
14,468
0
0
0
45,000
(47,000)
163
12,631
(12,221)
39,782
27,561
1,599
436
15,002
0
591
2,956
(164)
706
(3)
(964)
28
(657)
555
(547)
1,722
0
(6)
0
218
(1,964)
78,278
(69,941)
447
193
57
0
(346)
137
(239)
302
52
10,820
10,951
1,694
175,070
(144,069)
(2,152)
2,238
1,127
(80,447)
(289)
4,816
0
(803)
(31,864)
15,375
(10,000)
0
(225)
65,000
(56,000)
42
14,192
(6,852)
46,634
39,782
1,358
191
8,125
0
110
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
NOTE 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 evaluated subsequent events through the
filing date of our annual 10-K with the Securities and
Exchange Commission (SEC) on March 9, 2018.
the consolidated
Use of Estimates
In preparing
financial statements,
management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ from those
estimates.
the date of
An estimate that is particularly susceptible to change relates
to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is
appropriate to cover probable losses inherent in the
portfolio at
the balance sheet. While
management uses available information to recognize losses
on loans, future additions to the allowance may be
necessary based on changes in economic conditions and
other factors. In addition, various regulatory agencies, as an
integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may
require changes to the allowance based on their judgment
about information available to them at the time of their
examination.
Cash and Cash Equivalents
The Company considers highly liquid investments with
original maturities of three months or less to be cash
equivalents.
Securities
Securities are accounted for according to their purpose and
holding period. The Company classifies its debt and equity
securities in one of three categories:
Trading Securities
Securities held principally for resale in the near term
are classified as trading securities and are recorded at
their fair values. Unrealized gains and losses on trading
securities are included in other income.
Securities Held to Maturity
Securities that the Company has the positive intent and
ability to hold to maturity are reported at cost and
adjusted for premiums and discounts
that are
recognized in interest income using the interest method
over the period to maturity. Unrealized losses on
securities held to maturity reflecting a decline in value
judged to be other than temporary are charged to
income and a new cost basis is established.
Securities Available for Sale
Securities available for sale consist of securities not
classified as trading securities or as securities held to
maturity. They include securities that management
intends to use as part of its asset/liability strategy or that
may be sold in response to changes in interest rates,
changes
in prepayment risk, or similar factors.
Unrealized gains and losses, net of income taxes, are
reported as a separate component of stockholders’
equity until realized. Gains and losses on the sale of
securities available for sale are determined using the
specific identification method and recognized on the
trade date. Premiums and discounts are recognized in
interest income using the interest method over the
period to maturity. Unrealized losses on securities
available for sale reflecting a decline in value judged to
be other than temporary are charged to income and a
new cost basis is established.
Management monitors the investment security portfolio for
impairment on an individual security basis and has a process
in place to identify securities that could potentially have a
credit impairment that is other than temporary. This process
involves analyzing the length of time and extent to which
the fair value has been less than the amortized cost basis,
the market liquidity for the security, the financial condition
and near-term prospects of the issuer, expected cash flows,
and the Company's intent and ability to hold the investment
for a period of time sufficient to recover the temporary loss,
including determining whether it is more-likely-than-not
that the Company will be required to sell the security prior
to recovery. To the extent it is determined that a security is
deemed
impaired, an
impairment loss is recognized.
to be other-than-temporarily
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Held for Sale
Mortgage loans originated or purchased which are intended
for sale in the secondary market are carried at the lower of
cost or estimated market value in the aggregate. Net fees
and costs associated with acquiring or originating loans held
for sale are deferred and included in the basis of the loan in
determining the gain or loss on the sale of the loans. Gains
on the sale of loans are recognized on the settlement date.
Net unrealized losses are recognized through a valuation
allowance by charges to income.
Loans Receivable, net
Loans receivable, net, are carried at amortized cost. Loan
origination fees received, net of certain loan origination
costs, are deferred as an adjustment to the carrying value of
the related loans, and are amortized into income using the
interest method over the estimated life of the loans.
Premiums and discounts on purchased participation loans
are amortized into interest income using the interest method
over the period to contractual maturity, adjusted for
estimated prepayments.
The allowance for loan losses is based on a periodic analysis
of the loan portfolio and is maintained at an amount
considered to be appropriate by management to provide for
probable losses inherent in the loan portfolio as of the
balance sheet dates. In this analysis, management considers
factors including, but not limited to, specific occurrences of
loan impairment, actual and anticipated changes in the size
of the portfolios, national and regional economic conditions
(such as unemployment data, loan delinquencies, local
economic conditions, demand for single family homes,
demand for commercial real estate and building lots), loan
portfolio composition, historical loss experience, and
observations made by the Company's ongoing internal audit
and regulatory exam processes. In connection with the
determination of the allowance for loan losses, management
obtains independent appraisals for significant properties or
other collateral securing classified loans. Appraisals on
collateral dependent commercial real estate and commercial
business loans are obtained when it is determined that the
borrower’s risk profile has deteriorated and the loan is
classified as
third party
impaired. Subsequent new
appraisals of properties securing impaired commercial real
estate and commercial business loans are prepared at least
every two years. For all land development loan types, a new
third party appraisal is prepared on an annual basis where
current activity is not consistent with the assumptions made
in the most recent third party appraisal. Non-performing
residential and consumer home equity loans and home
equity lines may have a third party appraisal or an internal
evaluation completed depending on the size of the loan and
location of the property. These appraisals, or internal
valuations, are generally completed when a residential or
consumer home equity loan or home equity line of credit
becomes 120 days past due and are typically updated after
the
impairment
possession of the property is obtained. Valuations are
reviewed on a quarterly basis and adjustments are made to
the allowance for loan losses for temporary impairments
and charge-offs are
is
taken when
determined to be permanent. The fair market value of the
properties for all loan types are adjusted for estimated
selling costs in order to determine the net realizable value
of the properties. The allowance for loan losses is
established for known problem loans, as well as for loans
which are not currently known to require an allowance.
Loans are charged off to the extent they are deemed to be
uncollectible. The appropriateness of the allowance for loan
losses is dependent upon management’s estimates of
variables affecting valuation, appraisals of collateral,
evaluations of performance and status, and the amounts and
timing of future cash flows expected to be received on
impaired loans. Such estimates, appraisals, evaluations and
cash flows may be subject to adjustments due to changing
economic prospects of borrowers or properties. The fair
market value of collateral dependent loans are typically
based on the appraised value of the property less estimated
selling costs. The estimates are reviewed periodically and
adjustments, if any, are recorded in the provision for loan
losses in the periods in which the adjustments become
known. The allowance is allocated to individual loan
categories based upon the relative risk characteristics of the
loan portfolios and the actual loss experience. The
Company increases its allowance for loan losses by
charging the provision for loan losses against income and
decreases its allowance by crediting the provision for loan
losses. The methodology for establishing the allowance for
loan losses takes into consideration probable losses that
have been identified in connection with specific loans as
well as losses in the loan portfolio that have not been
specifically identified.
Interest income is recognized on an accrual basis except
when collectability is in doubt. When loans are placed on a
non-accrual basis, generally when the loan is 90 days past
due, previously accrued but unpaid interest is reversed from
income. If the ultimate collectability of a loan is in doubt
and the loan is placed in nonaccrual status, the cost recovery
method is used and cash collected is applied to first reduce
the principal outstanding. Generally, the Company returns
a loan to accrual status when all delinquent interest and
principal becomes current under the terms of the loan
agreement and collectability of remaining principal and
interest is no longer doubtful. Previously collected interest
payments that were applied to principal when the loan was
classified as non-accrual are recorded as interest income
using the effective yield method over the estimated life of
the loan, including expected renewal terms.
All impaired loans are valued at the present value of
expected future cash flows discounted at the loan's initial
effective interest rate. The fair value of the collateral of an
impaired collateral-dependent loan or an observable market
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price, if one exists, may be used as an alternative to
discounting. If the value of the impaired loan is less than the
recorded investment in the loan, the impaired amount is
charged off. A loan is considered impaired when, based on
current information and events, it is probable that the
Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Impaired loans include all loans which are on non-accrual,
delinquent as to principal and interest for 90 days or more,
or restructured in a troubled debt restructuring (TDR)
involving a modification of terms. All non-accruing loans
are reviewed for impairment on an individual basis.
Included in loans receivable, net, are certain loans that have
been modified in order to maximize collection of the loan
balances. The Company evaluates all loan modifications
and if the Company, for legal or economic reasons related
to the borrower's financial difficulties, grants a concession
compared to the original terms and conditions of the loan
that the Company would not otherwise consider, the
modified loan is considered a TDR and is classified as an
impaired loan. If the TDR loan was performing (accruing)
prior to the modification, it typically will remain accruing
after the modification as long as it continues to perform
according to the modified terms. If the TDR loan was non-
performing (non-accruing) prior to the modification, it will
remain non-accruing after the modification for a minimum
of six months. If the loan performs according to the
modified terms for a minimum of six months, it typically
will be returned to accruing status. In general, there are two
conditions in which a TDR loan is no longer considered to
be a TDR and potentially not classified as impaired. The
first condition is whether the loan is refinanced with terms
that reflect normal market terms for the type of credit
involved. The second condition is whether the loan is repaid
or charged off.
Purchased Loans Acquired Through Business
Combinations
Purchased loans acquired in a business combination,
including loans that have evidence of deterioration of credit
quality since origination and for which it is probable, at
acquisition, that the Company will be unable to collect all
contractually required payments, are initially recorded at
fair value as determined by the present value of expected
future cash flows with no valuation allowance. The
difference between the undiscounted cash flows expected at
acquisition and the investment in the loan is an accretable
yield adjustment and is recognized as interest income using
the effective yield method over the life of the loan.
Contractually required payments for principal and interest
that exceed the undiscounted cash flows expected at
acquisition is a nonaccretable difference and is not
recognized as a yield adjustment, loss accrual, or a valuation
allowance. Increases in expected cash flows subsequent to
the initial investment are recognized prospectively through
an adjustment of the yield on the loan over its remaining
life. Decreases in expected cash flows after the loan is
acquired are recognized as an impairment and charged to
the provision for loan losses.
Transfers of Financial Assets and Participating Interests
Transfers of an entire financial asset or a participating
interest in an entire financial asset are accounted for as sales
when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when
(1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain
it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets
through an agreement to repurchase them before their
maturity.
The transfer of a participating interest in an entire financial
asset must also meet the definition of a participating
interest. A participating interest in a financial asset has all
of the following characteristics: (1) from the date of
transfer, it must represent a proportionate (pro rata)
ownership interest in the financial asset, (2) from the date
of transfer, all cash flows received, except any cash flows
allocated as any compensation for servicing or other
services performed, must be divided proportionately among
participating interest holders in the amount equal to their
share ownership, (3) the rights of each participating interest
holder must have the same priority, and (4) no party has the
right to pledge or exchange the entire financial asset unless
all participating interest holders agree to do so.
Real Estate, net
Real estate acquired through loan foreclosure or deed in lieu
of foreclosure, is initially recorded at its fair value less
estimated selling costs. Third party appraisals are obtained
as soon as practical after obtaining possession of the
property. Valuations are reviewed quarterly by management
and an allowance for losses is established if the carrying
value of a property exceeds its fair value less estimated
selling costs.
income. The Company evaluates
Mortgage Servicing Rights, net
Mortgage servicing rights are capitalized at fair value and
amortized in proportion to, and over the period of, estimated
net servicing
its
capitalized mortgage servicing rights for impairment each
quarter. Loan type and note rate are the predominant risk
characteristics of the underlying loans used to stratify
capitalized mortgage servicing rights for purposes of
measuring impairment. Any impairment is recognized
through a valuation allowance.
Premises and Equipment, net
Land is carried at cost. Office buildings, improvements,
furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is computed on a straight-line
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
basis over estimated useful lives of 5 to 40 years for office
buildings and improvements and 3 to 10 years for furniture
and equipment.
Goodwill
The Company records goodwill for acquisition amounts
paid in excess of the net assets purchased. Goodwill is not
amortized, but is tested for impairment at least annually or
more frequently if there are indications of impairment.
Core Deposit Intangible, net
The Company records the estimated fair value of the deposit
base acquired in an acquisition as a core deposit intangible
asset. The recorded amount is amortized on a straight line
basis over the estimated life of the deposits acquired.
Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable.
Stock Based Compensation
The Company recognizes the grant-date fair value of stock
option and restricted stock awards issued as compensation
expense, amortized over the vesting period.
Employee Stock Ownership Plan (ESOP)
The Company has an ESOP that borrowed funds from the
Company and purchased shares of HMN common stock.
The Company makes quarterly principal and interest
payments on the ESOP loan. As the debt is repaid, ESOP
shares that were pledged as collateral for the debt are
released from collateral based on the proportion of debt
service paid in the year and then allocated to eligible
employees. The Company accounts for its ESOP in
accordance with ASC 718, Employers' Accounting for
Employee Stock Ownership Plans. Accordingly, the shares
pledged as collateral are reported as unearned ESOP shares
in stockholders' equity. As shares are determined to be
ratably released from collateral, the Company reports
compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings
per share computations.
Income Taxes
Deferred tax assets and liabilities are recognized for 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 of a change in tax rates
on deferred tax assets and liabilities is recognized in income
in the period that includes the enactment date. 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 asset is
subjective and dependent upon judgment concerning
management’s evaluation of both positive and negative
evidence regarding the ultimate realizability of deferred tax
assets.
Earnings per Common Share
Basic earnings per common share excludes dilution and is
computed by dividing the income available to common
stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted
in the issuance of common stock that shared in the earnings
of the entity.
Comprehensive Income
Comprehensive income is defined as the change in equity
during a period from transactions and other events from
non-owner sources. Comprehensive income is the total of
net income and other comprehensive income (loss), which
for the Company is comprised of unrealized gains and
losses on securities available for sale.
Segment Information
The amount of each segment item reported is the measure
reported to the chief operating decision maker for purposes
of making decisions about allocating resources to the
segment and assessing its performance. Adjustments and
eliminations made in preparing an enterprise’s general-
purpose financial statements and allocations of revenues,
expenses, and gains or losses are included in determining
reported segment profit or loss if they are included in the
measure of the segment’s profit or loss that is used by the
chief operating decision maker. Similarly, only those assets
that are included in the measure of the segment’s assets that
are used by the chief operating decision maker are reported
for that segment.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update (ASU) 2014-
09, Revenue from Contracts with Customers (Topic 606),
with an original effective date for annual reporting periods
beginning after December 15, 2016. In August 2015, the
FASB issued ASU 2015-14, which deferred the effective
date of ASU 2014-09 to annual and interim reporting
periods in fiscal years beginning after December 15, 2017.
This ASU is a converged standard between the FASB and
the International Accounting Standards Board (IASB) that
provides a single comprehensive revenue recognition model
for all contracts with customers across transactions and
industries. The primary objective of the ASU is revenue
recognition that represents the transfer of promised goods
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. In March, April, May
and December of 2016 and February and September of
2017, the FASB also issued ASU 2016-08, 2016-10, 2016-
12, 2016-20, 2017-05, and 2017-13, respectively, related to
Topic 606. The amendments in these subsequently issued
ASUs do not change the core principles of the previously
issued guidance, but instead provide more clarity and
implementation guidance for certain aspects of the original
ASU. The Company has completed its assessment of which
revenue sources are within the scope of this ASU and
evaluated the applicable contracts to assess and quantify
the
accounting methodology changes resulting from
adoption of the standard. Based on this assessment, the
adoption of this ASU and the related amendments in the
first quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments – Overall (Subtopic 825-10) Recognition and
Measurement of Financial Assets and Financial Liabilities.
The amendments in this ASU require, among other things,
equity investments to be measured at fair value, with
changes in fair value recognized in net income, and that
public business entities use the exit price notion when
measuring the fair value of financial instruments for
disclosure purposes. The amendments also require an entity
to present separately in other comprehensive income the
portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit
risk when the entity has elected to measure the liability at
fair value in accordance with the fair value option for
financial instruments. In addition, the amendments also
eliminate the requirement for public business entities to
disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the
balance sheet. The ASU is intended to reduce diversity in
practice and is effective for public business entities for
fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. The amendments
should be applied by means of a cumulative-effect
adjustment to the balance sheet as of the beginning of the
fiscal year of adoption. The adoption of this ASU in the first
quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842). The amendments in the ASU create Topic 842,
Leases, and supersede the lease requirements in Topic 840,
Leases. The objective of this ASU is to establish the
principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from
a lease. The main difference between previous GAAP and
this ASU is the recognition of lease assets and lease
liabilities by lessees for those leases classified as operating
leases under previous GAAP. The amendment requires a
lessee to recognize in the statement of financial position a
liability to make lease payments (the lease liability) and the
right-of-use asset representing its right to use the underlying
asset for the lease term. The accounting applied by a lessor
is largely unchanged from that applied under previous
GAAP. In transition, lessees and lessors are required to
recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach.
The modified retrospective approach includes a number of
optional practical expedients that entities may elect to apply
that will, in effect, continue to account for leases that
commence before the effective date in accordance with
previous GAAP unless
is modified. The
the
amendments in the ASU, for public business entities, are
effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years.
The adoption of this ASU in the first quarter of 2019 is not
anticipated to have a material impact on the Company’s
consolidated financial statements.
lease
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. The amendments
in this ASU affect all entities that measure credit losses on
financial instruments including loans, debt securities, trade
receivables, net investments in leases, off-balance sheet
credit exposures, reinsurance receivables, and any other
financial asset that has a contractual right to receive cash
that is not specifically excluded. The main objective of this
ASU is to provide financial statement users with more
decision-useful information about the expected credit losses
on financial instruments and other commitments to extend
credit held by a reporting entity at each reporting date. To
achieve this objective, the amendments in this ASU replace
the incurred loss impairment methodology required in
current GAAP with a methodology that reflects expected
credit losses that requires consideration of a broader range
of reasonable and supportable information to estimate credit
losses. The amendments in this ASU will affect entities to
varying degrees depending on the credit quality of the assets
held by the entity, the duration of the assets held, and how
the entity applies the current incurred loss methodology.
The amendments in this ASU, for public business entities
that are SEC filers, are effective for fiscal years beginning
after December 15, 2019, including interim periods within
those annual periods. All entities may adopt
the
amendments in the ASU early as of the fiscal years
beginning after December 15, 2018, including interim
periods within those fiscal years. Amendments should be
applied using a modified retrospective transition method by
means of a cumulative-effect adjustment to equity as of the
beginning of the period in which the guidance is adopted.
Management is in the process of evaluating the impact that
the adoption of this ASU in the first quarter of 2020 will
have on the Company’s consolidated financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance claims; proceeds from
In August 2016, the FASB issued ASU 2016-15, Statement
of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. The amendments in this ASU
affect all entities that are required to present a statement of
cash flows under Topic 230 and address the following eight
specific cash flow issues: debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt
instruments or other debt instruments with coupon interest
rates that are insignificant in relation to the effective interest
rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the
settlement of
the
settlement of corporate-owned life insurance policies;
distributions received from equity method investees;
beneficial
transactions; and
in securitization
separately identifiable cash flows and application of the
predominance principle. This ASU is intended to reduce
diversity in practice and is effective for public business
entities for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years with early
adoption permitted. Upon adoption, the amendments should
be applied using a retrospective transition method to each
period presented. The adoption of this ASU in the first
quarter of 2018 did not have a material impact on the
Company’s consolidated financial statements.
interest
the FASB
issued ASU 2017-03,
In January 2017,
Accounting Changes and Error Corrections (Topic 250)
and Investments – Equity Method and Joint Ventures (Topic
323). The amendments in the ASU add and amend SEC
paragraphs pursuant to the SEC staff announcement at the
September 22, 2016 and November 17, 2016 Emerging
Issues Task Force (EITF) meetings. The September
announcement is about the disclosure of the impact that
recently issued accounting standards will have on the
financial statements of a registrant when such standards are
adopted in a future period. The announcement applies to
ASU 2014-09, Revenue from Contracts with Customers
(Topic 606); ASU 2016-02, Leases (Topic 842); and ASU
2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial
Instruments and to any subsequent amendments to these
ASUs that are issued prior to their adoption. The November
announcement made amendments to conform the SEC
Observer comment on accounting for tax benefits resulting
from investments in qualified affordable housing projects to
the guidance issued in Accounting Standards Update No.
2014-01, Investments-Equity Method and Joint Ventures
(Topic 323); Accounting for Investments in Qualified
Affordable Housing Projects. This ASU is intended to
improve transparency and is effective for public business
entities upon issuance. The adoption of this ASU did not
have a material impact on the Company’s consolidated
financial statements other than to enhance the disclosures
on the effects of new accounting pronouncements as they
move closer to adoption.
34
the FASB
issued ASU 2017-04,
In January 2017,
Intangibles-Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment. The amendments in this
ASU were issued to address concerns over the cost and
complexity of the two-step goodwill impairment test and
resulted in the removal of the second step of the test. The
amendments require an entity
to apply a one-step
quantitative test and record the amount of goodwill
impairment as the excess of a reporting unit’s carrying
amount over its fair value, not to exceed the total amount of
goodwill allocated to the reporting unit. The new guidance
does not amend the optional qualitative assessment of
goodwill impairment. This ASU is intended to reduce the
cost and complexity of the two-step goodwill impairment
test and is effective for public business entities for fiscal
years beginning after December 15, 2019, and interim
periods within those fiscal years with early adoption
permitted for testing performed after January 1, 2017. Upon
the amendments should be applied on a
adoption,
prospective basis and the entity is required to disclose the
nature of and reason for the change in accounting principle
upon transition. The Company early adopted this ASU in
the fourth quarter of 2017 in order to reduce the complexity
of the goodwill impairment calculation. The adoption of this
ASU in the fourth quarter of 2017 did not have any impact
on the Company’s consolidated financial statements.
the FASB
incorporated
in market pricing on
In March 2017,
issued ASU 2017-08,
Receivables – Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities. The amendments in this ASU
shorten the amortization period for certain callable debt
securities held at a premium. Specifically, the amendments
require the premium to be amortized to the earliest call date.
The amendments do not require an accounting change for
securities held at a discount as discounts continue to be
amortized to maturity. This ASU is intended to more closely
align the amortization period of premiums and discounts to
expectations
the
underlying securities. In most cases, market participants
price securities to the call date that produces the worst yield
when the coupon is above current market rates and prices
securities to maturity when the coupon is below market
rates. As a result, the amendments more closely align
interest income recorded on bonds held at a premium or a
discount with the economics of the underlying instrument.
This ASU is intended to reduce diversity in practice and is
effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after
December 15, 2018 with early adoption permitted. Upon
adoption, the amendments should be applied using a
modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning
of the period of adoption. Additionally, in the period of
adoption, an entity should provide disclosures about a
change in accounting principles. The adoption of this ASU
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the first quarter of 2019 is not anticipated to have a
material impact on the Company’s consolidated financial
statements.
the FASB
In May 2017,
issued ASU 2017-09,
Compensation- Stock Compensation (Topic 718). The
amendments in this ASU provide clarity about which
changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting.
The ASU is effective for all entities for fiscal years
beginning after December 15, 2017, including interim
periods within those fiscal years with early adoption
permitted. The adoption of this ASU in the first quarter of
2018 did not have any impact on the Company’s
consolidated financial statements.
In February 2018, the FASB issued ASU 2018-01, Income
Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. The amendments in this
ASU require a reclassification from accumulated other
comprehensive income to retained earnings for stranded tax
effects resulting from the newly enacted federal corporate
income tax rate. The amount of the reclassification is the
difference between the historical corporate income tax rate
and the newly enacted 21 percent corporate income tax rate.
This ASU is effective for all entities for fiscal years
beginning after December 15, 2018, and interim periods
within those fiscal years. Early adoption is permitted,
including adoption in any interim period, for public
business entities such as the Company for reporting periods
for which financial statement have not yet been issued. The
Company opted to early adopt this ASU as of December 31,
2017. The impact on the December 31, 2017 financial
statements was a $157,600 reclassification between other
comprehensive income and retained earnings for the
stranded tax effects as a result of the change in the federal
corporate tax rate.
Derivative Financial Instruments
The Company uses derivative financial instruments in order
to manage the interest rate risk on residential loans held for
sale and its commitments to extend credit for residential
loans. The Company may also from time to time use interest
rate swaps to manage interest rate risk. Derivative financial
instruments include commitments to extend credit and
forward mortgage loan sales commitments.
Reclassifications
Certain amounts in the consolidated financial statements for
the prior year have been reclassified to conform to the
current year presentation.
NOTE 2 Acquisitions
The Company records purchased assets and liabilities at
their fair market value at the time of purchase in accordance
- Business
requirements of ASU 805
with
the
Combinations. On April 8, 2016, the Bank completed the
acquisition of loans and assumption of liabilities of the
Deerwood Bank branch in Albert Lea, Minnesota. The
transaction increased the Bank’s assets by $19.0 million,
including increases in loans, cash, goodwill, and core
deposit intangible of $11.9 million, $6.1 million, $0.8
million, and $0.2 million, respectively. The Bank also
assumed deposit liabilities of $19.0 million. The acquired
loans and deposits are being serviced from Home Federal’s
existing branch location at 143 West Clark Street, Albert
Lea, Minnesota.
On August 14, 2015, the Bank completed the acquisition of
certain assets and assumption of certain liabilities of Kasson
State Bank. The transaction increased the Bank’s total
assets by $52.8 million including increases in loans of $24.1
million, investments of $17.5 million, cash of $10.0 million,
core deposit intangible of $0.4 million and other assets of
$0.8 million. The Bank also assumed liabilities of $49.3
million, including $47.3 million of deposits and $2.0
million in other liabilities. Consideration paid was $3.2
million and a gain on the transaction of $0.3 million was
recorded. The Bank continues to operate both of the former
Kasson State Bank locations in Kasson, Minnesota acquired
in the transaction as branches of Home Federal Savings
Bank.
Determining the estimated fair value of the acquired assets
and assumed liabilities required the Bank to estimate cash
flows expected to result from those assets and liabilities and
to discount those cash flows at appropriate rates of interest.
The most significant of those determinations related to the
fair valuation of the loans acquired. The fair value of the
loans purchased was based on the present value of the
expected cash flows. Periodic principal and interest cash
flows were adjusted for expected losses and prepayments,
then discounted to determine the present value and summed
to arrive at the estimated fair value. For such loans, the
excess of cash flows expected at acquisition over the
estimated fair value is recognized as interest income over
the remaining lives of the loans. The difference between
contractually required payments at acquisition and the cash
flows expected to be collected at acquisition reflects the
impact of estimated credit losses and other factors, such as
prepayments. In accordance with GAAP, there was no
carry-over of previously established allowances for loan
losses established on the seller’s records. As a result,
standard industry coverage ratios with regard to the
allowance for credit losses are less meaningful after the
acquisitions. The purchased loans were divided into loans
with evidence of credit quality deterioration, which are
accounted for under ASC topic 310-30 (purchased credit
impaired (PCI)) and loans that do not meet this criteria,
which are accounted for under ASC
topic 310-20
(performing). PCI loans have experienced a deterioration of
credit quality from origination to acquisition for which it is
probable that the Bank will not be able to collect all
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contractually required principal and interest payments on
the loan. Subsequent decreases in the expected cash flows
require the Bank to evaluate the need for additions to the
allowance for credit losses. Subsequent improvements in
expected cash flows generally result in a reduction of
previously established allowance for credit losses or the
recognition of additional interest income over the remaining
lives of the loans.
NOTE 3 Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income and the related tax effects were as follows:
(Dollars in thousands)
Securities available for sale:
Gross unrealized gains (losses) arising
Before
Tax
2017
Tax
Effect
For the years ended December 31,
2016
Tax
Effect
Before
Tax
Net
of Tax
Net
of Tax
Before
Tax
2015
Tax
Effect
Net
of Tax
during the period ....................................... $
33
12
21
(1,016)
(404)
(612)
344
137
207
Less reclassification of net (losses) gains
included in net income ..............................
0
0
0
(10)
(4)
(6)
6
3
3
Net unrealized gains (losses) arising during
the period ..................................................
33
12
21
(1,006)
(400)
(606)
338
134
204
Reclassification of certain income tax
effects from accumulated other
comprehensive income .............................
Other comprehensive (loss) income .............. $
0
33
(158)
170
158
(137)
0
(1,006)
0
(400)
0
(606)
0
338
0
134
0
204
NOTE 4 Securities Available for Sale
A summary of securities available for sale at December 31, 2017 and 2016 is as follows:
(Dollars in thousands)
December 31, 2017
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) ..................... $
Federal National Mortgage Association (FNMA) ...............................
Collateralized mortgage obligations:
FNMA .......................................................................................................
Other marketable securities:
U.S. Government agency obligations ....................................................
Municipal obligations .............................................................................
Corporate obligations .............................................................................
Corporate preferred stock .....................................................................
Corporate equity .....................................................................................
$
December 31, 2016
Mortgage-backed securities:
FHLMC ..................................................................................................... $
FNMA .......................................................................................................
Collateralized mortgage obligations:
FNMA .......................................................................................................
Other marketable securities:
U.S. Government agency obligations .......................................................
Municipal obligations ...............................................................................
Corporate obligations ................................................................................
Corporate preferred stock .........................................................................
Corporate equity .......................................................................................
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
91
4,834
223
5,148
69,962
2,699
234
700
58
73,653
78,801
327
295
371
993
74,979
2,819
290
700
58
78,846
79,839
2
1
0
3
0
2
0
0
99
101
104
10
7
0
17
16
0
2
0
57
75
92
0
(78)
(5)
(83)
(1,201)
(8)
(1)
(140)
0
(1,350)
(1,433)
0
0
(5)
(5)
(1,079)
(20)
0
(350)
0
(1,449)
(1,454)
93
4,757
218
5,068
68,761
2,693
233
560
157
72,404
77,472
337
302
366
1,005
73,916
2,799
292
350
115
77,472
78,477
$
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company did not sell any available for sale securities
and did not recognize any gains or losses on investments in
2017. In 2016, the Company sold $20,000 of available for
sale securities and recognized a loss of $10,000 on the sales.
In 2015, the Company sold $11.0 million of available for
sale securities and recognized a gain of $6,000 on the sales.
The following table presents the amortized cost and
estimated fair value of securities available for sale at
December 31, 2017, based upon contractual maturity
adjusted for scheduled repayments of principal and
projected prepayments of principal based upon current
economic conditions and interest rates. Actual maturities
may differ from the maturities in the following table
because obligors may have the right to call or prepay
obligations with or without call or prepayment penalties:
(Dollars in thousands)
Due one year or less ........................................ $
Due after one year through five years .............
Due after five years through ten years ............
Due after ten years ...........................................
No stated maturity ...........................................
Total ........................................................ $
Amortized
Cost
Fair
Value
1,188
73,706
1,752
669
157
77,472
1,202
74,950
1,780
811
58
78,801
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 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
December 31, 2017 and 2016:
(Dollars in thousands)
December 31, 2017
Mortgage backed securities:
Less Than Twelve Months
Fair
Value
# of
Investments
Unrealized
Losses
Twelve Months or More
Total
# of
Investments Fair Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
FNMA ...................................................
2 $
4,703
(78)
Collateralized mortgage obligations:
FNMA ...................................................
1
218
(5)
0 $
0
0
0
0 $
4,703
0
218
(78)
(5)
Other marketable securities:
U.S. Government agency
obligations .......................................
Municipal obligations .........................
Corporate obligations .........................
Corporate preferred stock .................
Total temporarily impaired
securities ..........................................
December 31, 2016
Collateralized mortgage obligations:
2
14
1
0
9,819
2,268
233
0
(163)
(8)
(1)
0
12
0
0
1
58,942
0
0
560
(1,038)
0
0
(140)
68,761
2,268
233
560
(1,201)
(8)
(1)
(140)
20 $ 17,241
(255)
13 $ 59,502
(1,178) $ 76,743
(1,433)
FNMA ...................................................
1 $
262
(3)
1 $
104
(2) $
366
(5)
Other marketable securities:
U.S. Government agency
obligations ........................................
Municipal obligations ...........................
Corporate preferred stock .....................
Total temporarily impaired
securities ...........................................
13
14
0
63,896
2,327
0
(1,079)
(19)
0
0
2
1
0
214
350
0
(1)
(350)
63,896
2,541
350
(1,079)
(20)
(350)
28 $ 66,485
(1,101)
4 $
668
(353) $ 67,153
(1,454)
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We review our investment portfolio on a quarterly basis for
indications of impairment. This review includes analyzing
the length of time and the extent to which the fair value has
been lower than the cost, the market liquidity for the
investment, the financial condition and near-term prospects
of the issuer, including any specific events which may
influence the operations of the issuer, and our intent and
ability to hold the investment for a period of time sufficient
to recover the temporary loss. The unrealized losses on U.S.
Government agency obligations are the result of changes in
interest rates. The unrealized losses reported for the
corporate preferred stock at December 31, 2017 relates to a
single trust preferred security that was issued by the holding
company of a small community bank. As of December 31,
2017 all payments were current on the trust preferred
security and the issuer’s subsidiary bank was considered to
be “well capitalized” based on its most recent regulatory
filing. Based on a review of the issuer, it was determined
that the trust preferred security was not other-than-
temporarily impaired at December 31, 2017. The Company
does not intend to sell the preferred stock and has the intent
and ability to hold it for a period of time sufficient to recover
the temporary loss. Management believes that the Company
will
interest payments
contractually due on the security and that the decrease in the
market value is primarily due to a lack of liquidity in the
market for trust preferred securities. Management will
continue to monitor the credit risk of the issuer and may be
required to recognize other-than-temporary impairment
charges on this security in future periods.
receive all principal and
NOTE 5 Loans Receivable, Net
A summary of loans receivable at December 31, 2017 and
2016, is as follows:
(Dollars in thousands)
Residential real estate loans:
Single family conventional ....................... $
Single family FHA ....................................
Single family VA ......................................
Commercial real estate:
Lodging .....................................................
Retail/office ...............................................
Nursing home/health care .........................
Land developments ...................................
Golf courses ..............................................
Restaurant/bar/café ...................................
Warehouse .................................................
Construction:
Single family ........................................
Multi-family .........................................
Commercial real estate .........................
Manufacturing ...........................................
Churches/community service ....................
Multi-family ..............................................
Other ..........................................................
Consumer:
Autos .........................................................
Home equity line .......................................
Home equity ..............................................
Other – secured .........................................
Recreational vehicles ................................
Land/lots ...................................................
Other – unsecured .....................................
Commercial business .....................................
Total loans ............................................
Less:
2017
2016
106,881
88
36
107,005
55,675
64,780
7,352
21,058
1,112
5,929
25,891
23,090
11,649
11,705
22,136
12,734
28,649
42,357
334,117
2,894
36,869
15,823
1,911
13,181
1,587
1,502
73,767
79,909
594,798
103,125
92
38
103,255
43,285
53,935
8,185
24,240
1,560
5,851
26,630
21,944
2,610
6,794
15,743
10,199
36,777
41,327
299,080
3,036
40,476
16,302
2,048
7,553
2,362
1,506
73,283
85,176
560,794
Unamortized discounts .............................
Net deferred loan costs .............................
Allowance for loan losses .........................
Total loans receivable, net .................... $
19
(463)
9,311
585,931
20
(300)
9,903
551,171
Commitments to originate or purchase
loans ............................................................ $
24,692
47,220
Commitments to deliver loans to secondary
market ......................................................... $
5,629
9,595
Weighted average contractual rate of loans
in portfolio ..................................................
4.56%
4.45%
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in total commitments to originate or purchase
loans are fixed rate loans aggregating $18.1 million and
$29.6 million as of December 31, 2017 and 2016,
respectively. The interest rates on these loan commitments
ranged from 3.375% to 5.210% at December 31, 2017 and
from 2.75% to 5.125% at December 31, 2016.
The aggregate amount of loans to executive officers and
directors of the Company was $0.1 million, $0.2 million and
$2.7 million at December 31, 2017, 2016 and 2015,
respectively. There was no activity during 2017 and 2016
on loans to executive officers and directors other than the
$0.1 million and $2.5 million in loans that were reclassified
during the respective periods due to a change in borrower
classification. During 2015, repayments on loans to
executive officers and directors were $0.1 million, new
loans to executive officers and directors totaled $0.2
million, and loans paid off were $0.2 million. All loans were
made in the ordinary course of business on normal credit
terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with
unrelated parties.
At December 31, 2017, 2016 and 2015, the Company was
servicing loans for others with aggregate unpaid principal
balances of approximately $471.4 million, $425.5 million
and $391.9 million, respectively.
The Company originates residential, commercial real estate
and other loans primarily in Minnesota, Wisconsin, and
Iowa. At December 31, 2017 and 2016, the Company had
in its portfolio single family residential loans located in the
following states:
2017
2016
Percent
of Total
(Dollars in thousands)
Amount
3,605
Iowa ................................. $
Minnesota ........................ 90,345
1,841
Missouri ...........................
9,894
Wisconsin ........................
1,320
Other states ......................
Total ............................ $ 107,005
Amount
4,470
87,135
1,206
8,779
1,665
100.0% $ 103,255
3.4% $
84.4
1.7
9.3
1.2
Percent
of Total
4.3%
84.4
1.2
8.5
1.6
100.0%
Amounts under one million dollars in both years are included in “Other
states”.
At December 31, 2017 and 2016, the Company had in its portfolio commercial real estate loans located in the following
states:
(Dollars in thousands)
Alabama ........................................................................................................ $
Florida ...........................................................................................................
Idaho .............................................................................................................
Indiana ..........................................................................................................
Iowa ..............................................................................................................
Minnesota .....................................................................................................
North Carolina ..............................................................................................
North Dakota ................................................................................................
Ohio ..............................................................................................................
Pennsylvania .................................................................................................
Tennessee .....................................................................................................
Wisconsin .....................................................................................................
Other states ...................................................................................................
Total ......................................................................................................... $
2017
Amount
Percent
of Total
2016
Amount
Percent
of Total
1,742
2,790
3,371
3,374
4,755
232,991
5,996
1,093
1,680
2,056
0
72,510
1,759
334,117
0.5 % $
0.9
1.0
1.0
1.4
69.8
1.8
0.3
0.5
0.6
0.0
21.7
0.5
100.0 % $
1,902
3,781
3,529
2,189
1,973
213,983
2,926
8,447
0
0
1,036
57,512
1,802
299,080
0.7%
1.3
1.2
0.7
0.7
71.5
1.0
2.8
0.0
0.0
0.3
19.2
0.6
100.0%
Amounts under one million dollars in both years are included in “Other states”.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 Allowance for Loan Losses and Credit Quality Information
The allowance for loan losses is summarized as follows:
8,332
(164)
(193)
1,734
9,709
(645)
(421)
1,260
9,903
(523)
(655)
586
9,311
988
8,915
9,903
1,073
8,238
9,311
4,570
556,224
560,794
4,274
590,524
594,798
(Dollars in thousands)
Balance, December 31, 2014......................................... $
Provision for losses ................................................... $
Charge-offs ...............................................................
Recoveries .................................................................
Balance, December 31, 2015......................................... $
Provision for losses ................................................... $
Charge-offs ...............................................................
Recoveries .................................................................
Balance, December 31, 2016......................................... $
Provision for losses.................................................. $
Charge-offs ..............................................................
Recoveries ................................................................
Balance, December 31, 2017 ....................................... $
Allocated to:
Specific reserves ................................................... $
General reserves ...................................................
Balance, December 31, 2016......................................... $
Allocated to:
Specific reserves .................................................. $
General reserves .................................................
Balance, December 31, 2017 ....................................... $
Loans receivable at December 31, 2016:
Single
Family
Commercial
Real Estate
Consumer
Commercial
Business
Total
1,096
5,024
1,009
1,203
(105 )
(19 )
18
990
262
(66 )
0
1,186
(280 )
(6 )
0
900
235
951
1,186
192
708
900
(427 )
0
1,481
6,078
(1,788 )
(67 )
730
4,953
(75 )
(50 )
245
5,073
248
4,705
4,953
441
4,632
5,073
254
(105)
42
1,200
481
(108)
40
1,613
263
(288)
42
1,630
434
1,179
1,613
263
1,367
1,630
114
(69)
193
1,441
400
(180)
490
2,151
(431)
(311)
299
1,708
71
2,080
2,151
177
1,531
1,708
Individually reviewed for impairment ................. $
Collectively reviewed for impairment .................
Ending balance ..................................................... $
1,107
102,148
103,255
1,880
297,200
299,080
940
72,343
73,283
643
84,533
85,176
Loans receivable at December 31, 2017:
Individually reviewed for impairment ............. $
Collectively reviewed for impairment ..............
Ending balance ................................................... $
1,523
105,482
107,005
1,364
332,753
334,117
880
72,887
73,767
507
79,402
79,909
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the amount of classified and unclassified loans at December 31, 2017 and 2016:
December 31, 2017
Classified
Unclassified
(Dollars in thousands)
Single family ............................................... $
Commercial real estate:
Special
Mention Substandard Doubtful
44
2,154
77
Loss
Total
0
2,275
Total
Total
Loans
104,730 107,005
Real estate rental and leasing ...............
Other .......................................................
Consumer ....................................................
Commercial business:
5,022
9,135
0
Transportation industry .......................
Other .......................................................
$
116
5,665
20,015
3,813
4,257
631
1,002
4,504
16,361
0
0
119
0
0
163
0
0
130
0
0
130
8,835
13,392
880
1,118
10,169
36,669
166,342 175,177
145,548 158,940
73,767
72,887
9,089
7,971
60,651
70,820
558,129 594,798
December 31, 2016
Classified
Unclassified
(Dollars in thousands)
Special
Mention Substandard Doubtful
Loss
Total
Total
457
2,130
74
0
2,661
100,594
Total Loans
103,255
Single family ................................................ $
Commercial real estate:
Real estate rental and leasing ..................
Other ........................................................
Consumer .....................................................
Commercial business:
Transportation industry ...........................
Other ........................................................
$
1,577
1,702
0
0
3,973
7,709
3,156
7,187
531
4,065
2,916
19,985
0
0
110
0
0
184
0
0
299
0
0
299
4,733
8,889
940
4,065
6,889
28,177
148,610
136,848
72,343
153,343
145,737
73,283
6,444
67,778
532,617
10,509
74,667
560,794
Classified loans represent special mention, performing
substandard, and non-performing loans categorized as
substandard, doubtful and loss. Loans classified as special
mention are loans that have potential weaknesses that, if left
uncorrected, may result in deterioration of the repayment
prospects for the asset or in the Bank’s credit position at
some future date. Loans classified as substandard are loans
that are generally inadequately protected by the current net
worth and paying capacity of the obligor, or by the collateral
pledged, if any. Loans classified as substandard have a well-
defined weakness or weaknesses that jeopardize the
liquidation of the debt. Substandard loans are characterized
by the distinct possibility that the Bank will sustain some
loss if the deficiencies are not corrected. Loans classified as
doubtful have the weaknesses of those classified as
substandard, with additional characteristics that make
collection in full on the basis of currently existing facts,
conditions and values questionable, and there is a high
possibility of loss. A loan classified as loss is considered
uncollectible and of such little value that continuance as an
asset on the balance sheet is not warranted. Loans classified
as substandard or doubtful require the Bank to perform an
analysis of the individual loan and charge off any loans, or
portion thereof, that are deemed uncollectible.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aging of past due loans at December 31, 2017 and 2016 is summarized as follows:
(Dollars in thousands)
2017
30-59
Days
60-89
Days
Past Due
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
Single family ................................................. $
Commercial real estate:
Real estate rental and leasing ................
Other ........................................................
Consumer .....................................................
Commercial business:
Transportation industry .........................
Other ........................................................
$
2016
Single family ................................................. $
Commercial real estate:
Real estate rental and leasing ....................
Other .........................................................
Consumer .......................................................
Commercial business:
Transportation industry .............................
Other .........................................................
$
727
294
669
1,690
105,315
107,005
0
0
734
0
34
1,495
0
0
117
0
0
411
0
0
235
0
0
1,086
175,177
158,940
72,681
175,177
158,940
73,767
0
180
1,084
0
214
2,990
9,089
70,606
591,808
9,089
70,820
594,798
342
158
179
679
102,576
103,255
0
0
412
0
85
839
0
0
117
0
0
275
0
0
140
0
274
593
0
0
669
153,343
145,737
72,614
153,343
145,737
73,283
0
359
1,707
10,509
74,308
559,087
10,509
74,667
560,794
0
0
0
0
0
0
0
0
0
0
0
0
0
0
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans include loans that are non-performing (non-
accruing) and loans that have been modified in a TDR. The
following table summarizes impaired loans and related
allowances for the years ended December 31, 2017 and
2016:
(Dollars in thousands)
Loans with no related allowance recorded:
December 31, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Single family ........................................................................ $
Commercial real estate:
Real estate rental and leasing ........................................
Other ................................................................................
Consumer .............................................................................
Commercial business:
Other ................................................................................
415
35
25
414
0
415
51
1,682
414
0
Loans with an allowance recorded:
Single family ........................................................................
Commercial real estate:
Real estate rental and leasing ........................................
Other ................................................................................
Consumer .............................................................................
Commercial business:
Other ................................................................................
1,108
1,108
0
1,304
466
0
1,304
483
507
1,358
0
0
0
0
0
192
0
441
263
177
414
38
26
406
100
878
155
1,715
457
443
Total:
Single family ........................................................................
Commercial real estate:
Real estate rental and leasing ........................................
Other ................................................................................
Consumer .............................................................................
Commercial business:
Other ................................................................................
$
1,523
1,523
192
1,292
35
1,329
880
507
4,274
51
2,986
897
1,358
6,815
0
441
263
177
1,073
193
1,741
863
543
4,632
24
0
96
7
0
31
0
0
14
22
55
0
96
21
22
194
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Loans with no related allowance recorded:
Single family ......................................................................... $
Commercial real estate:
Real estate rental and leasing ...........................................
Other .................................................................................
Consumer ..............................................................................
Commercial business:
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
217
217
40
26
312
122
1,771
312
0
0
0
0
0
567
40
29
449
81
Other .................................................................................
274
356
Loans with an allowance recorded:
Single family .........................................................................
Commercial real estate:
Real estate rental and leasing ...........................................
Other .................................................................................
Consumer ..............................................................................
Commercial business:
890
890
235
1,022
0
1,814
628
0
1,814
644
0
248
434
389
1,856
553
Other .................................................................................
369
921
71
423
Total:
Single family .........................................................................
Commercial real estate:
Real estate rental and leasing ...........................................
Other .................................................................................
Consumer ..............................................................................
Commercial business:
Other .................................................................................
$
1,107
1,107
235
1,589
40
1,840
940
643
4,570
122
3,585
956
1,277
7,047
0
248
434
71
988
429
1,885
1,002
504
5,409
15
0
97
13
18
17
0
229
13
57
32
0
326
26
75
459
At December 31, 2017, 2016 and 2015, non-accruing loans
totaled $3.2 million, $3.3 million and $4.2 million,
respectively, for which the related allowance for loan losses
was $0.9 million, $0.8 million and $0.7 million,
respectively. Non-accruing loans for which no specific
allowance has been
recorded because management
determined that the value of the collateral was sufficient to
repay the loan totaled $0.4 million, $0.7 million and $1.4
million at December 31, 2017, 2016 and 2015, respectively.
Had the non-accruing loans performed in accordance with
their original terms, the Company would have recorded
gross interest income on the loans of $0.3 million, $0.6
million and $0.4 million in 2017, 2016 and 2015,
respectively. For the years ended December 31, 2017, 2016
and 2015, the Company recognized interest income on these
loans of $0.1 million, $0.4 million and $0.2 million,
respectively. All of the interest income that was recognized
for non-accruing loans was recognized using the cash basis
method of income recognition. Non-accrual loans also
include some of the loans that have had terms modified in a
TDR.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes non-accrual loans at
December 31, 2017 and 2016:
The following table summarizes TDRs at December 31,
2017 and 2016:
(Dollars in thousands)
Single family ................................................... $
Commercial real estate:
Real estate rental and leasing ......................
Other............................................................
Consumer .........................................................
Commercial business:
Other............................................................
$
2017
2016
949
916
35
1,329
553
278
3,144
41
1,343
630
343
3,273
(Dollars in thousands)
Single family ................................................... $
Commercial real estate:
Other ............................................................
Consumer .........................................................
Commercial business:
Other ............................................................
$
2017
2016
685
448
1,210
758
391
3,044
1,774
709
369
3,300
Included in loans receivable, net, are certain loans that have
been modified in order to maximize collection of loan
balances. If the Company, for legal or economic reasons
related to the borrower’s financial difficulties, grants a
concession compared to the original terms and conditions
of the loan, the modified loan is considered a TDR.
At December 31, 2017, 2016 and 2015, there were loans
included in loans receivable, net, with terms that had been
modified in a TDR totaling $3.0 million, $3.3 million and
$2.5 million, respectively. Had these loans been performing
in accordance with their original terms throughout 2017,
2016 and 2015, the Company would have recorded gross
interest income of $0.4 million, $0.6 million and $0.4
million, respectively. During 2017, 2016 and 2015, the
Company recognized interest income of $0.2 million, $0.4
million and $0.2 million, respectively, on these loans. For
the loans that were modified in 2017, $0.7 million are
classified and performing and $0.4 million were non-
performing at December 31, 2017.
As of December 31, 2017, the Bank had commitments to
lend an additional $0.8 million to a borrower who has TDR
and non-accrual loans. These additional funds are for the
construction of single family homes with a maximum loan-
to-value ratio of 75%. These loans are secured by the home
under construction. There were commitments to lend
additional funds of $0.4 million to this same borrower at
December 31, 2016.
TDR concessions can include reduction of interest rates,
extension of maturity dates, forgiveness of principal and/or
interest due, or acceptance of real estate or other assets in
full or partial satisfaction of the debt. Loan modifications
are not reported as TDRs after 12 months if the loan was
modified at a market rate of interest for comparable risk
loans, and the loan is performing in accordance with the
terms of the restructured agreement. All loans classified as
TDRs are considered to be impaired.
When a loan is modified as a TDR, there may be a direct,
material impact on the loans within the Consolidated
Balance Sheets, as principal balances may be partially
forgiven. The financial effects of TDRs are presented in the
following table and represent the difference between the
outstanding recorded balance pre-modification and post-
modification, for the periods ending December 31, 2017
and 2016:
(Dollars in thousands)
Troubled debt restructurings:
Single family ...............................................
Commercial real estate:
Other........................................................
Consumer .....................................................
Commercial business:
Other........................................................
Total .............................................................
Year ended December 31, 2017
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
Number of
Contracts
Year ended December 31, 2016
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
Number of
Contracts
3 $
0
15
1
19 $
282
0
588
416
1,286
514
0
591
116
1,221
4 $
251
1
18
2
25 $
1,274
382
257
2,164
263
1,274
384
201
2,122
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans that were restructured within the 12 months preceding December 31, 2017 and 2016 and defaulted during the year are
presented in the table below:
(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted:
Commercial real estate:
Year ended December 31, 2017
Outstanding
Recorded
Investment
Number of
Contracts
Year ended December 31, 2016
Outstanding
Recorded
Investment
Number of
Contracts
Other................................................................................................
Consumer .............................................................................................
Total .....................................................................................................
0 $
1
1 $
0
65
65
1 $
1
2 $
183
4
187
between contractually required payments at acquisition and
the cash flows expected to be collected is referred to as the
non-accretable difference. This amount is not recognized as
a yield adjustment or as a loss accrual or a valuation
allowance. Furthermore, any excess of cash flows expected
at acquisition over the estimated fair value is referred to as
the accretable yield and is recognized into interest income
over the remaining life of the loans when there is a
reasonable expectation about the amount and timing of such
cash flows. Increases in expected cash flows subsequent to
the initial investment are recognized prospectively through
an adjustment of the yield on the loan over its remaining
estimated life. Decreases in expected cash flows are
recognized immediately as an impairment through the
provision for loan losses.
The following is additional information with respect to
loans acquired through acquisitions:
(Dollars in thousands)
Purchased Performing Loans:
Balance at December 31, 2014 ........... $
Contractual
Principal
Receivable
Accretable
Difference
Net
Carrying
Amount
0
0
0
Loans acquired during the period .. $
Change due to
24,215
(793) 23,422
payments/refinances ....................
Balance at December 31, 2015 ........... $
(5,676)
18,539
334 (5,342)
(459) 18,080
Loans acquired during the period .. $
Change due to
11,772
(211) 11,561
payments/refinances ....................
Change due to loan charge-off .......
Balance at December 31, 2016 ........... $
(13,413)
(156)
16,742
340 (13,073)
(158)
(332) 16,410
(2)
Change due to
payments/refinances ................. $
Transferred to foreclosed assets .
Change due to loan charge-off ....
Balance at December 31, 2017 ......... $
(6,594)
(2)
(18)
10,128
101 (6,493)
(2)
(18)
(231) 9,897
0
0
The Company considers a loan to have defaulted when it
becomes 90 or more days past due under the modified
terms, when it is placed in non-accrual status, when it
becomes other real estate owned, or when it becomes non-
compliant with some other material requirement of the
modification agreement.
Loans that were non-accrual prior to modification remain
non-accrual for at least six months following modification.
Non-accrual TDR loans that have performed according to
the modified terms for six months may be returned to
accruing status. Loans
to
modification remain on accrual status after the modification
as long as the loan continues to perform under the new
terms.
that were accruing prior
TDRs are reviewed for impairment following the same
methodology as other impaired loans. For loans that are
collateral dependent, the value of the collateral is reviewed
and additional reserves may be added as needed. Loans that
are not collateral dependent may have additional reserves
established if deemed necessary. The allocated reserves for
TDRs was $0.9 million, or 9.8%, of the total $9.3 million in
allowance for loan losses at December 31, 2017, and $0.6
million, or 6.2%, of the total $9.9 million in allowance for
loan losses at December 31, 2016.
Loans acquired in a business combination are segregated
into two types: purchased performing loans with a discount
attributable at least in part to credit quality and PCI loans
with evidence of significant credit deterioration. Purchased
performing loans are accounted for in accordance with ASC
310-20 “Nonrefundable Fees and Other Costs” as these
loans do not have evidence of credit deterioration since
origination. PCI loans are accounted for in accordance with
ASC 310-30 “Receivables – Loans and Debt Securities
Acquired with Deteriorated Credit Quality” as they display
significant credit deterioration since origination. In
accordance with ASC 310-30, for PCI loans, the difference
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Purchased Credit Impaired Loans:
Balance at December 31, 2014 ........... $
Contractual
Principal
Receivable
Non-
Accretable
Difference
Net
Carrying
Amount
0
0
0
Loans acquired during the period .. $
Change due to
payments/refinances ...................
Change due to loan charge-off .......
Balance at December 31, 2015 ........... $
1,134
(497)
637
(260)
(319)
555
48
287
(162)
(212)
(32)
393
Loans acquired during the period .. $
Change due to
payments/refinances ...................
Balance at December 31, 2016 ........... $
329
(37)
292
(449)
435
147
(52)
(302)
383
Change due to
payments/refinances ................. $
Balance at December 31, 2017 ......... $
(33)
402
13
(39)
(20)
363
As a result of acquisitions, the Company has PCI loans for
which there was, at acquisition, evidence of deterioration of
credit quality since origination and for which it was
probable at acquisition that all contractually required
payments would not be collected. The carrying amount of
those loans as of December 31, 2017 was $0.4 million.
No material provision for loan losses was recognized during
the period ended December 31, 2017 related to acquired
loans as there was no significant change to the credit quality
of the loans.
NOTE 7 Accrued Interest Receivable
Accrued interest receivable at December 31 is summarized
as follows:
(Dollars in thousands)
Securities available for sale ............................. $
Loans receivable ..............................................
$
2017
2016
352
1,992
2,344
400
2,226
2,626
NOTE 8 Intangible Assets
The Company’s intangible assets consist of core deposit
intangibles, goodwill, and mortgage servicing rights. A
summary of mortgage servicing rights activity for 2017 and
2016 is as follows:
(Dollars in thousands)
Mortgage servicing rights:
Balance, beginning of year ................................ $
Originations .......................................................
Amortization ......................................................
Balance, end of year ..........................................
Valuation reserve ...............................................
Mortgage servicing rights, net ........................... $
Fair value of mortgage servicing rights ............ $
2017
2016
1,604
675
(555)
1,724
0
1,724
3,196
1,499
706
(601)
1,604
0
1,604
2,952
All of the single family loans sold where the Company
continues to service the loans are serviced for Federal
National Mortgage Association
the
individual loan sale program. The following is a summary
of the risk characteristics of the loans being serviced for
FNMA at December 31, 2017:
(FNMA) under
Loan
Principal
Balance
Weighted
Average
Interest
Rate
Weighted
Average
Remaining
Term
(months)
Number
of
Loans
(Dollars in thousands)
Original term:
30 year fixed rate .................. $266,560
15 year fixed rate .................. 102,957
55
Adjustable rate ......................
4.07%
3.10
3.25
306 2,119
136 1,084
2
281
The gross carrying amount of intangible assets and the
associated accumulated amortization at December 31, 2017
and 2016 are presented in the following table. Amortization
expense for intangible assets was $0.7 million, $0.7 million
and $0.6 million for the years ended December 31, 2017,
2016 and 2015, respectively.
Gross
Carrying Accumulated Intangible
Amount Amortization Assets
Unamortized
(Dollars in thousands)
December 31, 2017
Mortgage servicing
rights ............................... $ 4,244
574
Core deposit intangible ...
Goodwill ............................
802
Total .................................. $ 5,620
(2,520 )
(219 )
0
(2,739 )
December 31, 2016
Mortgage servicing
rights ................................ $ 3,954
Core deposit intangible ......
574
802
Goodwill ............................
Total ................................... $ 5,330
(2,350 )
(120 )
0
(2,470 )
1,724
355
802
2,881
1,604
454
802
2,860
The following
amortization expense for amortizing intangible assets:
the estimated future
indicates
table
(Dollars in thousands)
Year ended December 31,
2018 .......................................... $
2019 ..........................................
2020 ..........................................
2021 ..........................................
2022 ..........................................
Thereafter .................................
$
Mortgage
Servicing
Rights
Core
Deposit
Intangible
Total
Amortizing
Intangible
Assets
438
378
305
256
191
156
1,724
99
99
99
47
11
0
355
537
477
404
303
202
156
2,079
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No amortization expense relating to goodwill is recorded as
generally accepted accounting principles do not allow
goodwill to be amortized, but require that it be tested for
impairment at least annually, or sooner, if there are
indications that impairment may exist.
Projections of amortization are based on asset balances and
the interest rate environment that existed at December 31,
2017. The Company’s actual experience may be
significantly different depending upon changes in mortgage
interest rates and other market conditions.
NOTE 9 Real Estate
A summary of real estate at December 31, 2017 and 2016 is as follows:
2017
2016
(Dollars in thousands)
Residential
Commercial
& Other
Total
Residential
Commercial
& Other
Total
Real estate in judgment subject to redemption ........... $
Real estate acquired through foreclosure ...................
Real estate acquired through deed in lieu of
foreclosure ..............................................................
Allowance for losses ...................................................
Real estate, net ............................................................ $
40
0
0
40
0
40
173
414
0
587
0
587
213
414
0
627
0
627
0
0
0
0
0
0
0
1,245
28
1,273
(662 )
611
0
1,245
28
1,273
(662)
611
NOTE 10 Premises and Equipment
A summary of premises and equipment at December 31,
2017 and 2016 is as follows:
(Dollars in thousands)
Land ................................................................. $
Office buildings and improvements ................
Furniture and equipment .................................
Accumulated depreciation ...............................
$
2017
2016
2,021
9,844
12,507
24,372
(16,146)
8,226
2,021
9,666
12,478
24,165
(15,942 )
8,223
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 Deposits
Deposits and their weighted average interest rates at December 31, 2017 and 2016 are summarized as follows:
(Dollars in thousands)
Noninterest checking ...................
NOW accounts ............................
Savings accounts .........................
Money market accounts ..............
Certificates by rate:
0-0.99% .......................................
1-1.99% .......................................
2-2.99% .......................................
3-3.99% .......................................
Total certificates ..........................
Total deposits ..............................
Weighted
Average
Rate
2017
Amount
Percent
of Total
Weighted
Average
Rate
2016
Amount
Percent
of Total
0.00% $
0.05
0.08
0.40
0.94
0.30
$
172,007
90,599
75,255
186,937
524,798
58,444
43,691
8,550
118
110,803
635,601
27.1 %
14.3
11.8
29.4
82.6
9.2
6.9
1.3
0.0
17.4
100.0 %
0.00 % $
0.07
0.08
0.25
0.61
0.20
$
158,024
92,670
74,238
165,179
490,111
79,628
22,958
0
114
102,700
592,811
26.7%
15.6
12.5
27.9
82.7
13.4
3.9
0.0
0.0
17.3
100.0%
At December 31, 2017 and 2016, the Company had $204.2
million and $172.6 million, respectively, of deposit
accounts with balances of $250,000 or more. At December
31, 2017 and 2016, the Company had no certificate accounts
that had been acquired through a broker.
Certificates had the following maturities at December 31, 2017 and 2016:
(Dollars in thousands)
Remaining term to maturity
1-6 months ........................................................................................... $
7-12 months .........................................................................................
13-36 months .......................................................................................
Over 36 months ...................................................................................
$
2017
2016
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
28,133
37,439
39,382
5,849
110,803
0.54% $
0.95
1.14
1.28
0.94
$
32,418
25,424
36,111
8,747
102,700
0.36%
0.45
0.81
1.18
0.61
At December 31, 2017 and 2016, the Company had pledged
mortgage loans and mortgage-backed and related securities
with an amortized cost of approximately $18.9 million and
$17.4 million, respectively, as collateral for certain
deposits. An additional $1.0 million letter of credit from the
Federal Home Loan Bank (FHLB) was pledged at
December 31, 2016 as collateral on certain Bank deposits.
This letter of credit matured in August of 2017 and was not
renewed.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits is summarized as follows for the years ended December 31, 2017, 2016 and 2015:
(Dollars in thousands)
NOW accounts ......................................................................................... $
Savings accounts ......................................................................................
Money market accounts ...........................................................................
Certificates ................................................................................................
$
2017
2016
2015
77
63
560
770
1,470
50
62
366
524
1,002
17
42
347
528
934
NOTE 12 FHLB Advances and Other Borrowings
The Bank had no outstanding advances from the FHLB or
borrowings from the Federal Reserve Bank of Minneapolis
as of December 31, 2017 or December 31, 2016. At
December 31, 2017 it had collateral pledged to the FHLB
consisting of FHLB stock, mortgage loans, and investments
with a borrowing capacity of approximately $106.3 million,
subject to a requirement to purchase FHLB stock. The Bank
also had the ability to draw additional borrowings of $77.9
million from the Federal Reserve Bank of Minneapolis,
based upon the loans that were pledged to them as of
December 31, 2017, subject to approval from the Board of
Governors of the Federal Reserve System (FRB).
At December 31, 2016 it had collateral pledged to the FHLB
consisting of FHLB stock, mortgage loans, and investments
with an available borrowing capacity of approximately
$104.7 million, subject to a requirement to purchase FHLB
stock. The Bank also had the ability to draw additional
borrowings of $85.8 million from the Federal Reserve Bank
of Minneapolis, based upon the loans that were pledged to
them as of December 31, 2016, subject to approval from the
FRB.
On December 15, 2014, the Company entered into a Loan
Agreement with an unrelated third party, providing for a
term loan of up to $10.0 million that was evidenced by a
promissory note (the Note) with an interest rate of 6.50%
per annum. The principal balance of the Note was payable
in consecutive equal annual installments of $1.0 million on
each anniversary of the date of the Loan Agreement,
commencing on December 15, 2015, with the balance due
on December 15, 2021. The Company had the option to
voluntarily prepay the Note in whole or in part without
penalty. The Company made the scheduled $1.0 million
principal payment on December 15, 2015, a $2.0 million
payment on December 15, 2016, and on August 31, 2017
paid off the remaining principal balance of $7.0 million.
There was no outstanding loan balance at December 31,
2017 and the loan balance was $7.0 million at December 31,
2016.
NOTE 13 Income Taxes
Income tax expense for the years ended December 31, 2017,
2016 and 2015 is as follows:
(Dollars in thousands)
Current:
Federal ...................................... $
State ..........................................
Total current ........................
Deferred:
Federal ......................................
State ..........................................
Total deferred ......................
Income tax expense ..................... $
2017
2016
2015
2,287
10
2,297
1,412
693
2,105
4,402
939
55
994
2,322
806
3,128
4,122
(87)
(24)
(111)
1,393
329
1,722
1,611
The reasons for the difference between the expected income
tax expense utilizing the federal corporate tax rate of 34%
and the actual income tax expense are as follows:
(Dollars in thousands)
Expected federal income tax
expense ......................................... $
Items affecting federal income tax:
State income taxes, net of federal
income tax deduction ...............
Tax exempt interest .....................
Change in federal tax rate ...........
Other, net .....................................
Income tax expense ........................ $
2017
2016
2015
2,994
3,560
1,553
529
(16)
1,062
(167)
4,402
622
(16)
0
(44)
4,122
259
(44)
0
(157)
1,611
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are as follows
at December 31:
(Dollars in thousands)
Deferred tax assets:
Allowances for loan and real estate losses ...... $
Deferred compensation costs ...........................
Deferred ESOP loan asset ................................
Nonaccruing loan interest ................................
State net operating loss carryforward ..............
Alternative minimum tax credit
2017
2016
2,602
166
487
221
824
4,186
262
704
313
1,366
carryforward ..................................................
175
118
Net unrealized loss on securities available for
sale ................................................................
Other.................................................................
Total gross deferred tax assets ....................
372
92
4,939
542
147
7,638
Deferred tax liabilities:
Deferred loan fees ............................................
Premises and equipment basis difference ........
Originated mortgage servicing rights ..............
Federal tax liability on state net operating
loss carryforwards .........................................
Other.................................................................
Total gross deferred tax liabilities ...............
Net deferred tax assets ................................ $
37
380
482
280
88
1,267
3,672
100
126
636
676
153
1,691
5,947
The Company has no
loss
carryforwards and $8.7 million of state net operating loss
carryforwards at December 31, 2017 that expire beginning
in 2023.
federal net operating
On December 22, 2017 the Tax Cuts and Jobs Act became
law. Among other things, this law reduced the corporate tax
rate for the Company from 34% to 21% effective January 1,
2018. In accordance with current accounting guidelines, this
change in the tax rate was reflected as an adjustment to the
Company’s deferred tax items at December 31, 2017. The
net result of this adjustment was to reduce the Company’s
net deferred tax asset by $1.1 million with a corresponding
increase to income tax expense in the fourth quarter of 2017.
included
Retained earnings at December 31, 2017
approximately $8.8 million for which no provision for
income taxes was made. This amount represents allocations
of income to bad debt deductions for tax purposes.
Reduction of amounts so allocated for purposes other than
absorbing losses will create income for tax purposes, which
will be subject to the then-current corporate income tax rate.
The Company considers the determination of the deferred
tax asset amount and the need for any valuation reserve to
be a critical accounting policy that requires significant
judgment. The Company has, in its judgment, made
reasonable assumptions and considered both positive and
negative evidence relating to the ultimate realization of
the
deferred
tax assets. Positive evidence
includes
cumulative net income generated over the prior three year
period and the probability that taxable income will be
generated in future periods. Based upon this evaluation, the
Company determined that no valuation allowance was
required with respect to the net deferred tax assets at
December 31, 2017 and 2016.
NOTE 14 Employee Benefits
All eligible full-time employees of the Bank that were hired
prior to 2002 were included in a noncontributory retirement
plan sponsored by the Financial Institutions Retirement
Fund (FIRF). The Home Federal Savings Bank (Employer
#8006) plan participates in the Pentegra Defined Benefit
Plan for Financial Institutions (the Pentegra DB Plan). The
Pentegra DB Plan’s Employer Identification Number is 13-
5645888 and the Plan number is 333. The Pentegra DB Plan
operates as a multi-employer plan for accounting purposes
under the Employee Retirement Income Security Act of
1974, as amended (ERISA), and the Internal Revenue Code.
There are no collective bargaining agreements in place that
require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal
Revenue Code Section 413(c) and, as a result, all of the
assets stand behind all of the liabilities. Accordingly, under
the Pentegra DB Plan, contributions made by a participating
employer may be used to provide benefits to participants of
other participating employers.
Effective September 1, 2002, the accrual of benefits for
existing participants was frozen and no new enrollments
have been permitted into the plan. The actuarial present
value of accumulated plan benefits and net assets available
for benefits relating to the Bank's employees was not
available at December 31, 2017 because such information
is not accumulated for each participating institution. As of
June 30, 2017, the Pentegra DB Plan valuation report
reflected that the Bank was obligated to make a contribution
totaling $0.1 million which was paid and expensed in 2017.
Funded status (market value of plan assets divided by
funding target) as of July 1 for the 2017, 2016, and 2015
plan years were 95.45%, 97.09% and 96.01%, respectively.
Market value of plan assets reflects contributions received
through June 30, 2017.
Total employer contributions made to the Pentegra DB
Plan, as reported on Form 5500, equal $153.2 million,
$163.1 million and $190.8 million for the plan years ended
June 30, 2017, 2016 and 2015, respectively. The Bank’s
contributions to the Pentegra DB Plan are not more than 5%
of the total contributions to the Pentegra DB Plan. There is
no funding improvement plan or rehabilitation plan as part
of this multi-employer plan.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following contributions were paid by the Bank during the fiscal years ending December 31:
(Dollars in thousands)
2017
Date Paid
1/6/2017 ......................... $
10/15/2017 .....................
12/27/2017 .....................
Total .............................. $
Amount
Date Paid
Amount
Date Paid
Amount
2016
2015
119 (1)
27
99
245
10/15/16
$
$
0
33
0
33
10/15/2015
12/30/2015
$
$
0
42
151
193
(1) The contribution relates to the 2016 plan year and was accrued at December 31, 2016.
The Company has a qualified, tax-exempt savings plan with
a deferred feature qualifying under Section 401(k) of the
Internal Revenue Code (the 401(k) Plan). All employees
who have attained 18 years of age are eligible to participate
in the 401(k) Plan. Participants are permitted to make
contributions to the 401(k) Plan equal to the lesser of 50%
of their annual salary or the maximum allowed by law,
which was $18,000 for 2017, 2016 and 2015. The Company
matches 25% of each participant’s contributions up to a
maximum of 8% of their annual salary. Participant
contributions and earnings are fully and immediately
vested. The Company’s contributions are vested on a three
year cliff basis, are expensed annually, and were $0.2
million in 2017, 2016 and 2015.
The Company has adopted an Employee Stock Ownership
Plan (the ESOP) that meets the requirements of Section
4975(e)(7) of the Internal Revenue Code and Section
407(d)(6) of ERISA and, as such, the ESOP is empowered
to borrow in order to finance purchases of the common
stock of HMN. The ESOP borrowed $6.1 million from the
Company to purchase 912,866 shares of common stock in
the initial public offering of HMN in 1994. As a result of a
merger with Marshalltown Financial Corporation (MFC),
the ESOP borrowed $1.5 million in 1998 to purchase an
additional 76,933 shares of HMN common stock to account
for the additional employees and to avoid dilution of the
benefit provided by the ESOP. The ESOP debt requires
quarterly payments of principal plus interest at 7.52%. The
Company has committed to make quarterly contributions to
the ESOP necessary to repay the loans including interest.
The Company contributed $0.5 million in 2017, 2016 and
2015.
As the debt is repaid, ESOP shares that were pledged as
collateral for the debt are released from collateral based on
the proportion of debt service paid in the year and then
allocated to eligible employees. The Company accounts for
its ESOP in accordance with ASU 718, Employers'
Accounting
for Employee Stock Ownership Plans.
Accordingly, the shares pledged as collateral are reported as
unearned ESOP shares in stockholders' equity. As shares
are determined to be ratably released from collateral, the
Company reports compensation expense equal to the
current market price of the shares and the shares become
outstanding for earnings per common share computations.
52
ESOP compensation expense was $0.4 million for 2017 and
$0.3 million for both 2016 and 2015.
All employees of the Bank are eligible to participate in the
ESOP after they attain age 18 and complete one year of
service during which they worked at least 1,000 hours. A
summary of the ESOP share allocation is as follows for the
years ended December 31:
Shares held by participants
beginning of the year .................
Shares allocated to participants ....
Shares distributed to participants .
Shares held by participants end of
2017
2016
2015
339,870 334,277 336,024
24,317
24,317
(26,064)
(7,052 )
24,377
(18,784)
year ............................................
357,135 339,870 334,277
Unreleased shares beginning of
the year ......................................
Shares released during year ..........
Unreleased shares end of year ......
Total ESOP shares end of year .....
Fair value of unreleased shares at
279,746 304,123 328,440
(24,317 )
(24,317)
(24,377)
255,429 279,746 304,123
612,564 619,616 638,400
December 31 .............................. $ 4,878,694 4,895,555 3,512,621
In March 2001, the HMN Financial, Inc. 2001 Omnibus
Stock Plan (2001 Plan) was adopted by the Company. In
April 2009, this plan was superseded by the HMN
Financial, Inc. 2009 Equity and Incentive Plan (2009 Plan)
and options or restricted shares were no longer awarded
from the 2001 Plan. As of December 31, 2017, all
outstanding options under the 2001 Plan have expired.
In April of 2017, the 2009 Plan was superseded by the HMN
Financial, Inc. 2017 Equity Incentive Plan (2017 Plan) and
options or restricted shares were no longer awarded from
the 2009 Plan. As of December 31, 2017 there were 26,409
vested and 22,820 unvested options outstanding under the
2009 Plan. These options expire 10 years from the date of
grant and have an average exercise price of $9.25. There
were also 14,881 shares of restricted stock previously
granted to current employees that as of December 31, 2017
remain unvested. The 43,712 ungranted shares remaining in
the 2009 Plan were transferred to the 2017 Plan upon its
adoption and are available for grant under that plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
their
interests with
The purpose of the 2017 Plan is to attract and retain the best
available personnel for positions of responsibility with the
Company, to provide additional incentives to them and
align
the Company’s
stockholders, and to thereby promote the Company’s long-
term business success. 375,000 shares of HMN common
stock were initially available for distribution under the 2017
Plan in either restricted stock or options, subject to
adjustment for future stock splits, stock dividends and
those of
the Company.
to capitalization of
similar changes
Additionally, shares of restricted stock that are awarded are
counted as 1.5 shares for purposes of determining the total
shares available for issuance under the 2017 Plan. As of
December 31, 2017, there were no options outstanding
under the 2017 Plan. There were 2,280 shares of restricted
stock granted to current employees during 2017 that remain
unvested at December 31, 2017.
A summary of activities under all plans for the past three years is as follows:
Shares
Available
For Grant
Unvested
Restricted
Shares
Options
Outstanding
Outstanding
Unvested options
Award
Value/
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
Vesting
Period
(in years)
Number
2001 Plan
December 31, 2014...........................................
Forfeited/expired .........................................
December 31, 2015...........................................
December 31, 2016...........................................
December 31, 2017 ..........................................
2009 Plan
December 31, 2014...........................................
Granted January 27, 2015 ............................
Granted April 28, 2015 ................................
Granted June 8, 2015 ...................................
Forfeited/expired ..........................................
Transferred from 2001 Plan .........................
Vested...........................................................
December 31, 2015...........................................
Granted January 26, 2016 ............................
Granted January 26, 2016 ............................
Granted April 26, 2016 ................................
Vested...........................................................
December 31, 2016...........................................
Granted January 31, 2017 .........................
Transferred to 2017 Plan ..........................
Vested ..........................................................
December 31, 2017 ..........................................
0
0
0
0
0
96,405
(11,903)
(3,158)
(398)
395
15,000
0
96,341
(4,087)
(34,229)
(3,149)
0
54,876
(11,164)
(43,712)
0
0
2017 Plan
April 25, 2017 ..................................................
Granted May 5, 2017 ......................................
Transferred from 2009 Plan ..........................
December 31, 2017 ..........................................
375,000
(3,420)
43,712
415,292
0
0
0
0
0
15,000 $
(15,000)
0
0
0
30.00
30.00
0.00
0.00
0.00
0
0
0
0
0
84,858
9,919
2,632
332
(329)
0
(58,526)
38,886
3,406
0
2,624
(24,320)
20,596
9,303
0
(15,018)
14,881
15,000 $
0
0
0
0
0
0
15,000
0
34,229
0
0
49,229
0
0
0
49,229 $
2,280
0
2,280
0
0
0
0
0
0
0
0
0
0
0
0
34,229
0
0
34,229
4.04
4.04
(11,409)
22,820 $
4.04
4.04
4.77
N/A
N/A
N/A
4.77
N/A
11.21
N/A
9.25
N/A
N/A
9.25
N/A
N/A
0
3
1
1
3
3
1
3
1
Total all plans ..................................................
415,292
17,161
49,229 $
9.25
22,820 $
4.04
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at December 31, 2017:
Date of Grant
May 6, 2009 ......................................... $
January 26, 2016 .................................. $
Exercise
Price
4.77
11.21
Weighted
Average
Remaining
Contractual
Life in Years
1.4
8.1
Number
Outstanding
15,000
34,229
49,229
Number
Number
Unexercisable
Unrecognized
Compensation
Expense
Exercisable
15,000
11,409
26,409
0 $
22,820
22,820 $
0
18,062
18,062
Weighted
Average
Years Over
Which
Unrecognized
Compensation
will
be Recognized
N/A
1.1
The Company will issue shares from treasury stock upon
the exercise of outstanding options.
The assumptions used in determining the fair value of the
options granted during 2016 are as follows:
In accordance with ASC 718, the Company recognizes
compensation expense relating to stock options over the
vesting period. The amount of the expense was determined
under the fair value method. The fair value for each option
grant is estimated on the date of the grant using the Black
Scholes option valuation method. There were no options
granted in 2017 or 2015.
Risk-free interest rate ............................................................
Expected life (in years) ..........................................................
Expected volatility .................................................................
Expected dividends ................................................................
2016
2.10%
10
22.83%
0.00%
NOTE 15 Earnings per Common Share
The following table reconciles the weighted average shares outstanding and net income for basic and diluted earnings per
common share:
(Dollars in thousands, except per share data)
Weighted average number of common shares outstanding used in basic earnings per
2017
Year ended December 31,
2016
2015
common share calculation .............................................................................................
4,215,899
4,180,994
4,127,453
Net dilutive effect of :
Options and warrants .....................................................................................................
Restricted stock awards .................................................................................................
640,410
11,662
553,386
13,367
513,505
34,959
Weighted average number of common shares outstanding adjusted for effect of
dilutive securities ...........................................................................................................
4,867,971
4,747,747
4,675,917
Net income .......................................................................................................................... $
Dividends on preferred stock .............................................................................................
Net income available to common shareholders ................................................................. $
Basic earnings per common share ...................................................................................... $
Diluted earnings per common share ................................................................................... $
4,404
0
4,404
1.04
0.90
6,350
0
6,350
1.52
1.34
2,956
(108)
2,848
0.69
0.61
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 Stockholders' Equity
The Company did not repurchase any shares of its common
stock in the open market or pay any dividends on its
common stock during 2017, 2016 or 2015. The Company
did purchase 2,968 shares of common stock from
employees to pay the income taxes on net exchanges of
vested restricted stock in 2017.
The Company's certificate of incorporation authorizes the
issuance of up to 500,000 shares of preferred stock, and on
December 23, 2008, the Company completed the sale of
26,000 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (Preferred Stock) to the United Stated
Department of Treasury (Treasury). The Preferred Stock
had a liquidation value of $1,000 per share and a related
warrant was also issued to purchase 833,333 shares of HMN
common stock at an exercise price of $4.68 per share (the
Warrant). The transaction was part of the Treasury’s Capital
the Emergency Economic
Purchase Program under
Stabilization Act of 2008.
On February 17, 2015, the Company redeemed the final
10,000 shares of the outstanding Preferred Stock. On May
21, 2015, the Treasury sold the Warrant at an exercise price
of $4.68 to three unaffiliated third party investors for an
aggregate purchase price of $5.7 million. Two of the
investors received a warrant to purchase 277,777.67 shares
and one investor received a warrant to purchase 277,777.66
shares. All of the warrants were still outstanding as of
December 31, 2017 and may be exercised at any time prior
to their expiration date of December 23, 2018. The
Company received no proceeds from this transaction and it
had no effect on the Company’s capital, financial condition
or results of operations.
In order to grant a priority to eligible accountholders in the
event of future liquidation, the Bank, at the time of
conversion to a stock savings bank, established a liquidation
account equal to its regulatory capital as of September 30,
1993. In the event of future liquidation of the Bank, an
eligible accountholder who continues to maintain their
deposit account shall be entitled to receive a distribution
from the liquidation account. The total amount of the
liquidation account will decrease as the balance of eligible
accountholders is reduced subsequent to the conversion,
based on an annual determination of such balance.
NOTE 17 Regulatory Capital
The Company and the Bank are subject to the regulatory
requirements of the Basel III capital reforms. The Basel III
requirements, among other things, (i) apply a strengthened
set of capital requirements to the Bank (the Company is
exempt, pursuant to the Small Bank Holding Company
Policy Statement (Policy Statement) described below),
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) revise the rules for
calculating risk-weighted assets for purposes of such
requirements. The rules made corresponding revisions to
the prompt corrective action framework and include capital
ratios and buffer requirements which are being phased in
incrementally, with full implementation scheduled for
January 1, 2019. 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 their 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.
from
The FRB amended its Policy Statement, to exempt small
the above capital
bank holding companies
requirements, by raising the asset size threshold for
determining applicability from $500 million to $1 billion.
The Policy Statement was also expanded to include savings
the Policy
and
Statement’s qualitative requirements for exemption. The
Company met the qualitative exemption requirements, and
therefore, is exempt from the above capital requirements.
loan holding companies
that meet
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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2017 and 2016, the Bank's capital amounts and ratios are presented for actual capital, required capital and
excess capital including amounts and ratios in order to qualify as being well capitalized under the prompt corrective action
regulations:
Actual
Required to be
Adequately
Capitalized
Excess Capital
To Be Well Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Percent of
Assets(1)
Amount
Percent of
Assets(1)
Amount
Percent of
Assets(1)
Amount
Percent of
Assets(1)
(Dollars in thousands)
December 31, 2017
Common equity Tier 1 capital .......... $
Tier 1 leverage ....................................
Tier 1 risk-based capital ....................
Total risk-based capital .....................
76,279
76,279
76,279
83,957
12.45% $ 27,561
28,569
10.68
36,748
12.45
48,997
13.71
4.50% $ 48,718
47,710
4.00
6.00
39,531
34,960
8.00
7.95% $ 39,810
35,711
6.68
48,997
6.45
61,246
5.71
6.50 %
5.00
8.00
10.00
December 31, 2016
Common equity Tier 1 capital .............. $
Tier 1 leverage ......................................
Tier 1 risk-based capital .......................
Total risk-based capital ........................
77,634
77,634
77,634
84,900
13.42% $ 26,032
26,876
11.55
34,709
13.42
46,278
14.68
4.50% $ 51,602
50,758
4.00
42,925
6.00
38,622
8.00
8.92% $ 37,601
33,595
7.55
46,278
7.42
57,848
6.68
6.50 %
5.00
8.00
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
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. For 2017, the capital conservation buffer
was 1.25%. The buffer amount will increase incrementally
each year until 2019 when the entire 2.50% capital
conservation buffer will be fully phased in.
Management believes that, as of December 31, 2017, the
Bank’s capital ratios were in excess of those quantitative
capital ratio standards applicable on that date, set forth
under the 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 further
adjust the requirement to be well-capitalized in the future.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 Financial Instruments with Off-Balance Sheet
Risk
The Company is a party to financial instruments with off-
balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include commitments to extend credit. These
commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts
recognized in the balance sheet. The contract amounts of
these instruments reflect the extent of involvement by the
Company.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit is represented
by the contract amount of these commitments. The
Company uses
in making
commitments as it does for on-balance sheet instruments.
the same credit policies
primarily with commercial real estate mortgages. Draws on
standby letters of credit would be initiated by the secured
party under the terms of the underlying obligation. 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.
The Company has certain obligations and commitments to
make future payments under existing contracts. At
December 31, 2017, the aggregate contractual obligations
(excluding bank deposits) and commercial commitments
were as follows:
Payments Due by Period
Less
than 1
Year
1-3
Years
4-5
Years
More
than 5
Years
Total
(Dollars in thousands)
Contractual Obligations:
Annual rental
(Dollars in thousands)
Financial instruments whose contract amount
represents credit risk:
Commitments to originate, fund or
purchase loans:
Single family .......................................... $
Commercial real estate ...........................
Non-real estate commercial ....................
Undisbursed balance of loans closed .....
Unused lines of credit .............................
Letters of credit ......................................
Total commitments to extend credit ................ $
Forward commitments ..................................... $
December 31,
Contract Amount
2016
2017
commitments under
non-cancellable
operating leases .............. $ 5,740 888 1,740 1,679 1,433
Total contractual
obligations ............. $ 5,740 888 1,740 1,679 1,433
3,792
12,968
6,495
44,712
103,811
1,867
173,645
5,629
7,587
33,953
420
39,841
100,893
1,902
184,596
9,595
Amount of Commitments
Expiring by Period
Other Commercial
Commitments:
Commercial lines of
credit ............................... $53,691 25,433 17,175 11,033
Commitments to lend ........ 39,965 13,691
Standby letters of credit .... 1,867 1,546
Total other
50
994 13,110 12,170
0
321
0
Commitments to extend credit are agreements to lend to a
customer, at the customer’s request, as long as there is no
violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since
a portion of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
the loan type and on management's credit evaluation of the
borrower. Collateral consists primarily of residential and
commercial real estate and personal property.
Forward commitments represent commitments to sell loans
to a third party following the closing of the loan and are
entered into in the normal course of business by the Bank.
The Bank issued standby letters of credit which guarantee
the performance of customers to third parties. The standby
letters of credit outstanding expire over the next 34 months
and totaled $1.9 million at December 31, 2017 and
December 31, 2016. The letters of credit are collateralized
57
commercial
commitments ......... $95,523 40,670 18,490 24,143 12,220
NOTE 19 Derivative Instruments and Hedging
Activities
The Company originates single-family residential loans for
sale into the secondary market and enters into commitments
to sell those loans in order to mitigate the interest rate risk
associated with holding the loans until they are sold. The
Company accounts for its commitments in accordance with
ASC 815, Accounting for Derivative Instruments and
Hedging Activities.
The Company had commitments outstanding to extend
credit to future borrowers that had not closed prior to the
end of the year, which is referred to as its mortgage pipeline.
As commitments to originate loans enter the mortgage
pipeline, the Company generally enters into commitments
to sell
the secondary market. The
commitments to originate and sell loans are derivatives that
are recorded at fair value. The marking of these derivatives
to fair value for the periods ended December 31, 2017 and
December 31, 2016 did not have a material impact on the
Company’s consolidated financial statements.
loans
into
the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the current
As of December 31, 2017 and 2016,
commitments to sell loans held for sale are derivatives that
do not qualify for hedge accounting. The loans held for sale
that are not hedged are recorded at the lower of cost or
market. The marking of these loans for the periods ended
December 31, 2017 and December 31, 2016 did not have a
material impact on the Company’s consolidated financial
statements.
NOTE 20 Fair Value Measurement
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 our 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 of the Company for which fair values are determined on a recurring basis as of
December 31, 2017 and 2016.
(Dollars in thousands)
Securities available for sale .............................................................. $
Mortgage loan commitments ............................................................
Total .................................................................................................... $
Total
Level 1
Level 2
Level 3
77,472
28
77,500
0
0
0
77,472
28
77,500
Carrying Value at December 31, 2017
(Dollars in thousands)
Securities available for sale ................................................................. $
Mortgage loan commitments ...............................................................
Total ..................................................................................................... $
Total
Level 1
Level 2
Level 3
78,477
66
78,543
0
0
0
78,477
66
78,543
Carrying Value at December 31, 2016
0
0
0
0
0
0
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally accepted
accounting principles. These adjustments to fair value
usually result from the application of the lower-of-cost-or-
market accounting or write downs of individual assets. For
assets measured at fair value on a nonrecurring basis in
2017 and 2016 that were still held at December 31, 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 December 31,
2017 and 2016.
Carrying Value at December 31, 2017
(Dollars in thousands)
Loans held for sale ....................................................... $
Mortgage servicing rights, net ...................................
Loans (1) .........................................................................
Real estate, net (2) ..........................................................
Total .............................................................................. $
Total
Level 1
Level 2
Level 3
1,837
1,724
3,201
627
7,389
0
0
0
0
0
1,837
1,724
3,201
627
7,389
Carrying Value at December 31, 2016
(Dollars in thousands)
Loans held for sale ........................................................ $
Mortgage servicing rights, net .......................................
Loans (1) .........................................................................
Real estate, net (2) ...........................................................
Total ............................................................................... $
Total
Level 1
Level 2
Level 3
2,009
1,604
3,582
611
7,806
0
0
0
0
0
2,009
1,604
3,582
611
7,806
Year Ended
December 31,
2017
Total gains
(losses)
0
0
0
0
0
1
0
(413)
0
(412)
Year Ended
December 31,
2016
Total gains
(losses)
0
0
0
0
0
14
0
(380)
(197)
(563)
(1) Represents carrying value and related specific reserves on loans for which adjustments are based on the appraised value of the collateral. The carrying
value of loans fully charged-off is zero.
(2) Represents the fair value and related losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial
classification as foreclosed assets.
NOTE 21 Fair Value of Financial Instruments
ASC 825, Disclosures about Fair Values of Financial
Instruments, requires 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 December 31, 2017 and 2016 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,
risk
characteristics of various financial instruments and other
conditions,
economic
current
factors. The estimates are subjective in nature and involve
uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based only on existing financial
instruments without attempting to estimate the value of
anticipated future business or the value of assets and
liabilities that are not considered financial instruments. In
addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect
on the fair value estimates and have not been considered in
any of the estimates.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the Company's financial instruments 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.
(Dollars in thousands)
Financial assets:
December 31, 2017
Fair value hierarchy
December 31, 2016
Carrying
amount
Estimated
fair value Level 1 Level 2 Level 3
Contract
amount
Carrying
amount
Estimated
fair value
Contract
amount
37,564 37,564
Cash and cash equivalents .................... $ 37,564
77,472
77,472
Securities available for sale ..................
1,837
1,837
Loans held for sale ................................
Loans receivable, net ............................ 585,931 585,494
817
FHLB stock ...........................................
2,344
Accrued interest receivable ...................
817
2,344
77,472
1,837
585,494
817
2,344
27,561
78,477
2,009
27,561
78,477
2,009
551,171 552,395
770
2,626
770
2,626
Financial liabilities:
Deposits ................................................. 635,601 635,905
0
Other borrowings ..................................
146
Accrued interest payable .......................
0
146
635,905
0
146
592,811 593,297
7,018
236
7,000
236
Off-balance sheet financial instruments:
Commitments to extend credit ..............
Commitments to sell loans....................
28
(11)
28
(11)
173,645
5,629
66
(22)
66 184,596
9,595
(22)
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.
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 values of loans receivable were estimated for
groups of loans with similar characteristics. 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.
FHLB Stock
The carrying amount of FHLB stock approximates its fair
value.
Accrued Interest Receivable
The carrying amount of accrued interest receivable
approximates its fair value since it is short-term in nature
and does not present unanticipated credit concerns.
Deposits
The fair value of demand deposits, savings accounts and
certain money market account deposits is the amount
payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining
maturities.
The fair value estimate for deposits does not include the
benefit that results from the low cost funding provided by
the Company's existing deposits and long-term customer
relationships compared to the cost of obtaining different
sources of funding. This benefit is commonly referred to as
the core deposit intangible.
FHLB Advances and Other Borrowings
The fair values of advances and borrowings with fixed
maturities are estimated based on discounted cash flow
analysis using as discount rates the interest rates charged by
the FHLB for borrowings of similar remaining maturities.
Accrued Interest Payable
The carrying amount of accrued
approximates its fair value since it is short-term in nature.
interest payable
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.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 HMN Financial, Inc. Financial Information (Parent Company Only)
The following are the condensed financial statements for the parent company only as of December 31, 2017 and 2016 and
for the years ended December 31, 2017, 2016 and 2015.
(Dollars in thousands)
Condensed Balance Sheets
Assets:
Cash and cash equivalents .......................................................................................... $
Investment in subsidiaries ...........................................................................................
Prepaid expenses and other assets ..............................................................................
Deferred tax asset, net .................................................................................................
Total assets ............................................................................................................. $
Liabilities and Stockholders' Equity:
Other borrowed money ............................................................................................... $
Accrued expenses and other liabilities .......................................................................
Total liabilities ........................................................................................................
Common stock ............................................................................................................
Additional paid-in capital ...........................................................................................
Retained earnings ........................................................................................................
Net unrealized losses on securities available for sale ................................................
Unearned employee stock ownership plan shares ......................................................
Treasury stock, at cost, 4,631,124 and 4,639,739 shares ...........................................
Total stockholders' equity ......................................................................................
Total liabilities and stockholders' equity................................................................ $
Condensed Statements of Income
Interest income ............................................................................................................ $
Interest expense ...........................................................................................................
Equity income of subsidiaries .....................................................................................
Compensation and benefits .........................................................................................
Occupancy ...................................................................................................................
Data processing ...........................................................................................................
Professional services ...................................................................................................
Other............................................................................................................................
Income before income tax benefit ..........................................................................
Income tax benefit ......................................................................................................
Net income ............................................................................................................. $
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income .................................................................................................................. $
Adjustments to reconcile net income to cash used by operating activities:
Equity income of subsidiaries ................................................................................
Deferred income tax benefit ...................................................................................
Earned employee stock ownership shares priced above original cost ...................
Stock option compensation ....................................................................................
Amortization of restricted stock awards ................................................................
Decrease in unearned ESOP shares .......................................................................
Increase in other assets ...........................................................................................
Decrease in other liabilities ....................................................................................
Other, net ................................................................................................................
Net cash used by operating activities ................................................................
Cash flows from investing activities:
Decrease in loans receivable, net ................................................................................
Net cash provided by investing activities ..............................................................
Cash flows from financing activities:
Redemption of preferred stock ...................................................................................
Dividends to preferred stockholders ...........................................................................
Stock awards withheld for tax withholding ................................................................
Proceeds from borrowings ..........................................................................................
Repayments of borrowings .........................................................................................
Dividends received from Bank ...................................................................................
Net cash (used) provided by financing activities .......................................................
(Decrease) increase in cash and cash equivalents ......................................................
Cash and cash equivalents, beginning of year ................................................................
Cash and cash equivalents, end of year ........................................................................... $
61
2017
2016
2015
2,057
77,006
1,867
141
81,071
0
253
253
91
50,623
91,448
(957)
(2,030)
(58,357)
80,818
81,071
0
(306)
4,878
(257)
(30)
(6)
(130)
(319)
3,830
(574)
4,404
3,314
78,108
1,159
756
83,337
7,000
418
7,418
91
50,566
86,886
(820 )
(2,223 )
(58,581 )
75,919
83,337
0
(589 )
7,148
(264 )
(30 )
(6 )
(138 )
(329 )
5,792
(558 )
6,350
4,404
6,350
(4,878)
615
147
41
147
193
(6)
(866)
0
(203)
0
0
0
0
(54)
0
(7,000)
6,000
(1,054)
(1,257)
3,314
2,057
(7,148 )
244
80
79
177
194
(11 )
(214 )
(1 )
(250 )
0
0
0
0
0
0
(2,000 )
3,000
1,000
750
2,564
3,314
1
(571 )
3,629
(269 )
(30 )
(6 )
(119 )
(216 )
2,419
(537 )
2,956
2,956
(3,629 )
22
57
0
447
193
(23 )
(692 )
1
(668 )
900
900
(10,000 )
(225 )
0
10,000
(1,000 )
3,000
1,775
2,007
557
2,564
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 Business Segments
The Bank has been identified as a reportable operating
segment in accordance with the provisions of ASC 280.
HMN, the holding company, did not meet the quantitative
thresholds for a reportable segment and therefore is
included in the “Other” category. The Company evaluates
performance and allocates resources based on the segment’s
net income, return on average assets and return on average
equity. Each corporation is managed separately with its own
officers and board of directors.
The following table sets forth certain information about the reconciliations of reported net income 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 year ended December 31, 2017:
Interest income – external customers .............................................. $
Non-interest income – external customers ......................................
Intersegment non-interest income ...................................................
Interest expense .................................................................................
Non-interest expense .........................................................................
Income tax expense (benefit) ............................................................
Net income .........................................................................................
Total assets .........................................................................................
At or for the year ended December 31, 2016:
Interest income – external customers .................................................. $
Non-interest income – external customers ..........................................
Intersegment interest income ..............................................................
Intersegment non-interest income .......................................................
Interest expense ...................................................................................
Non-interest expense ...........................................................................
Income tax expense (benefit) ..............................................................
Net income ..........................................................................................
Total assets ..........................................................................................
At or for the year ended December 31, 2015:
Interest income – external customers .................................................. $
Non-interest income – external customers ..........................................
Intersegment interest income ..............................................................
Intersegment non-interest income .......................................................
Interest expense ...................................................................................
Non-interest expense ...........................................................................
Income tax expense (benefit) ..............................................................
Net income ..........................................................................................
Total assets ..........................................................................................
27,680
7,654
210
1,491
24,722
4,976
4,879
722,532
27,349
8,201
0
210
1,004
23,572
4,680
7,148
681,257
21,453
7,653
0
204
937
22,760
2,148
3,629
642,151
0
0
4,879
306
742
(574)
4,404
79,254
0
0
1
7,148
589
768
(558)
6,350
82,222
0
0
1
3,629
571
640
(537)
2,956
78,162
0
0
(5,089)
0
(210)
0
(4,879)
(79,101)
0
0
(1)
(7,358)
0
(210)
0
(7,148)
(81,456)
0
0
(1)
(3,833)
(1)
(204)
0
(3,629)
(77,152)
27,680
7,654
0
1,797
25,254
4,402
4,404
722,685
27,349
8,201
0
0
1,593
24,130
4,122
6,350
682,023
21,453
7,653
0
0
1,507
23,196
1,611
2,956
643,161
62
63
OTHER FINANCIAL DATA
The following tables set forth certain information as to the Bank’s Federal Home Loan Bank (FHLB) advances.
(Dollars in thousands)
Maximum Balance:
2017
Year Ended December 31,
2016
2015
FHLB advances .......................................................................................... $
FHLB short-term advances ........................................................................
Average Balance:
FHLB advances ..........................................................................................
FHLB short-term advances ........................................................................
18,800
18,800
1,693
1,693
15,500
15,500
468
468
16,000
16,000
551
551
See “Note 12 FHLB Advances and Other Borrowings” in the Notes to Consolidated Financial Statements for more
information on the Bank’s FHLB advances and other borrowings.
64
COMMON STOCK INFORMATION
The common stock of the Company is listed on the Nasdaq Stock Market (Nasdaq) under the symbol HMNF. As of December
31, 2017, the Company had 9,128,662 shares of common stock issued and 4,631,124 shares in treasury stock. As of December
31, 2017, there were 507 stockholders of record and 1,067 estimated beneficial stockholders. The following table presents
the stock price information for the Company as furnished by Nasdaq for each quarter for the last two fiscal years. On February
9, 2018, the last reported sale price of shares of our common stock on the Nasdaq was $18.50 per share. The Company has
not paid a dividend on its common stock during the two year period ending December 31, 2017 and no common stock
dividends are anticipated to be paid in 2018. See “Liquidity and Capital Resources – Dividends” in the “Management
Discussion and Analysis” section of this annual report for a description of restrictions on the ability of the Company and the
Bank to pay dividends.
December 31,
2017
September 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
HIGH ........ $
LOW .........
CLOSE .....
19.45
17.80
19.10
18.95
16.61
17.85
18.50
16.60
17.55
18.70
17.48
18.05
18.55
13.58
17.50
15.00
13.25
14.16
14.44
11.25
13.58
11.80
10.81
11.26
For the Quarter Ended
The following graph and table compares the total cumulative stockholders’ return on the Company’s common stock to the
Nasdaq U.S. Stock Index (“Nasdaq Composite”), which includes all Nasdaq traded stocks of U.S. companies, and the SNL
Bank Nasdaq Index. The graph and table assume that $100 was invested on December 31, 2012 and that all dividends were
reinvested.
Index
HMN Financial, Inc. ....................................
Nasdaq Composite Index ............................
SNL Bank Nasdaq Index .............................
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
100.00
100.00
100.00
304.50
140.12
143.73
357.21
160.78
148.86
332.73
171.97
160.70
504.13
187.22
222.81
12/31/17
550.23
242.71
234.58
Period Ending
65
December 31, 2017
September 30, 2017
June 30, 2017
6,767
435
6,332
59
6,273
837
296
610
216
1,959
3,641
0
953
311
302
1,002
6,209
2,023
1,636
387
0.09
0.08
7,255
493
6,762
(581)
7,343
848
299
521
241
1,909
3,642
(65)
1,050
243
307
1,082
6,259
2,993
1,213
1,780
0.42
0.37
0.21%
1.88
11.43
3.64
0.99%
8.78
11.43
3.92
722,685
5,068
72,404
1,837
585,931
635,601
0
80,818
716,610
5,450
72,901
2,594
583,057
628,971
0
80,632
6,999
461
6,538
269
6,269
845
306
488
267
1,906
3,780
(1)
1,026
260
417
957
6,439
1,736
712
1,024
0.24
0.21
0.60%
5.19
11.51
3.98
725,183
613
78,034
2,061
590,259
634,101
7,000
78,723
SELECTED QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share data)
Selected Operations Data (3 months ended):
Interest income ................................................................... $
Interest expense ..................................................................
Net interest income ........................................................
Provision for loan losses ....................................................
Net interest income after provision for loan 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 ............................................
Gains on real estate owned .............................................
Occupancy and equipment .............................................
Data processing ..............................................................
Professional services ......................................................
Other ..............................................................................
Total non-interest expense .........................................
Income before income tax expense ................................
Income tax expense ............................................................
Net income ..................................................................... $
Basic earnings per common share ...................................... $
Diluted earnings per common share ................................... $
Financial Ratios:
Return on average assets(1) .................................................
Return on average common equity(1) .................................
Average equity to average assets .......................................
Net interest margin(1)(2).......................................................
(Dollars in thousands)
Selected Financial Condition Data (end of period):
Total assets .......................................................................... $
Securities available for sale:
Mortgage-backed and related securities ..........................
Other marketable securities .............................................
Loans held for sale ..............................................................
Loans receivable, net ..........................................................
Deposits ..............................................................................
FHLB advances and other borrowings ................................
Stockholders’ equity ...........................................................
(1) Annualized
(2) Net interest income divided by average interest-earning assets
66
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
7,159
395
6,764
381
6,383
873
271
705
253
2,102
3,598
(75)
1,006
281
368
855
6,033
2,452
974
1,478
0.35
0.31
0.91%
8.23
11.07
4.36
653,385
1,641
73,924
3,159
530,425
563,060
9,000
73,337
6,525
374
6,151
(732)
6,883
779
261
487
228
1,755
3,695
(349)
990
273
251
831
5,691
2,947
1,173
1,774
0.43
0.38
1.12%
10.12
11.11
4.09
638,156
1,984
103,844
4,467
490,260
551,506
9,000
71,687
6,659
408
6,251
(270)
6,521
824
301
519
236
1,880
3,944
(6)
1,039
292
259
819
6,347
2,054
841
1,213
0.29
0.25
0.73%
6.35
11.49
3.91
680,981
797
77,751
2,430
565,040
591,376
7,000
77,400
6,711
420
6,291
(374)
6,665
874
296
770
257
2,197
3,748
(161)
1,047
308
386
877
6,205
2,657
973
1,684
0.40
0.35
0.99%
8.93
11.07
3.89
682,023
1,005
77,472
2,009
551,171
592,811
7,000
75,919
6,954
404
6,550
80
6,470
901
280
656
310
2,147
3,723
(11)
998
299
252
940
6,201
2,416
1,002
1,414
0.34
0.30
0.84%
7.55
11.10
4.10
685,667
1,306
78,810
5,879
540,583
592,243
9,000
74,834
67
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HMN FINANCIAL, INC.
1016 Civic Center Drive NW
Rochester, MN 55901
(507) 535-1200
ANNUAL MEETING
The annual meeting of shareholders will be
held on Tuesday, April 24, 2018 at 10:00
a.m. (Central Time) at the Rochester Golf
and Country Club, 3100 West Country
Club Road, Rochester, Minnesota.
LEGAL COUNSEL
Faegre Baker Daniels LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402-3901
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
CliftonLarsonAllen LLP
220 South Sixth Street, Suite 300
Minneapolis, MN 55402-1436
INVESTOR INFORMATION AND FORM 10-K
HMN’s Form 10-K, filed with the
Securities and Exchange Commission, is
available without charge upon written
request from:
HMN Financial, Inc.
Attn: Cindy Hamlin, Investor Relations
1016 Civic Center Drive NW
Rochester, MN 55901
or at www.hmnf.com
TRANSFER AGENT AND REGISTRAR
Inquiries regarding change of address,
transfer requirements, and lost certificates
should be directed to HMN’s transfer
agent:
Equiniti Trust Company
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
www.shareowneronline.com
(800) 468-9716
DIRECTORS
DR. HUGH C. SMITH
Chairman of the Board
HMN and Home Federal Savings Bank
Retired Professor of Medicine, Mayo
Clinic College of Medicine and Consultant
in Cardiovascular Division, Mayo Clinic
ALLEN J. BERNING
Chief Executive Officer
Ambient Clinical Analytics
MICHAEL A. BUE
Retired President and
Chief Executive Officer
Security State Bank of Lewiston
BRADLEY C. KREHBIEL
President and Chief Executive Officer
HMN and Home Federal Savings Bank
BERNARD R. NIGON
Retired Audit Partner with RSM US LLP
(formerly McGladrey & Pullen, LLP)
DR. WENDY S. SHANNON
Assistant Professor, Winona State
University
DR. PATRICIA S. SIMMONS
Retired Professor of Pediatric and
Adolescent Medicine, Mayo Clinic
College of Medicine
MARK E. UTZ
Attorney at law, Wendland Utz, Ltd.
HANS K. ZIETLOW
Director of Real Estate for Kwik Trip, Inc.
EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS
JON J. EBERLE
Senior Vice President, Chief Financial
Officer and Treasurer of HMN and
Executive Vice President, Chief Financial
Officer and Treasurer of Home Federal
Savings Bank
LAWRENCE D. MCGRAW
Executive Vice President and
Chief Operating Officer
Home Federal Savings Bank
BRANCH OFFICES OF BANK
Albert Lea
143 West Clark Street
Albert Lea, MN 56007
(507) 379-2551
Austin
201 Oakland Avenue West
Austin, MN 55912
(507) 434-2500
Eagan
2805 Dodd Road, Suite 160
Eagan, MN 55121
(651) 405-2000
Kasson
203 West Main
Kasson, MN 55944
(507) 634-7022
502 South Mantorville Avenue
Kasson, MN 55944
(507) 634-4141
La Crescent
208 South Walnut
La Crescent, MN 55947
(507) 895-9200
Marshalltown
303 West Main Street
Marshalltown, IA 50158
(641) 754-6198
Rochester
1201 South Broadway
Rochester, MN 55901
(507) 536-2416
1016 Civic Center Drive NW
Rochester, MN 55901
(507) 535-1309
100 1st Avenue Bldg., Suite 200
Rochester, MN 55902
(507) 280-7256
2048 Superior Drive NW, Suite 400
Rochester, MN 55901
(507) 226-0800
Spring Valley
715 North Broadway
Spring Valley, MN 55975
(507) 346-9709
Winona
175 Center Street
Winona, MN 55987
(507) 453-6460
LOAN PRODUCTION OFFICES
Sartell
50 14th Ave E, Suite 100
Sartell, MN 56377
(320) 654-4020
Owatonna
1850 Austin Road, Suite 103
Owatonna, MN 55060
(507) 413-6420
Delafield
3960 Hillside Drive, Suite 206
Delafield, WI 53018
(262) 337-9511
1016 Civic Center Drive NW
Rochester, Minnesota 55901
507.535.1200 • www.hmnf.com
2017 ANNUAL REPORT
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