HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $1.1
billion holding company for Home Federal Savings Bank (the Bank),
today reported net income of $1.4 million for the second quarter of
2023, a decrease of $0.9 million compared to net income of $2.3
million for the second quarter of 2022. Diluted earnings per share
for the second quarter of 2023 was $0.32, a decrease of $0.20 from
diluted earnings per share of $0.52 for the second quarter of 2022.
The decrease in net income between the periods was primarily
because of a $0.5 million decrease in the gain on sales of loans
due to a decrease in mortgage loan sales, a $0.3 million increase
in compensation expense due to annual salary increases, a $0.2
million increase in the provision for credit losses, and a $0.2
million increase in other expenses primarily because of an increase
in Federal Deposit Insurance Corporation (FDIC) insurance expense.
These decreases in net income were partially offset by a reduction
in income tax expense between the periods as a result of the
reduced pretax income.
President’s Statement“The gain on sales of
mortgage loans decreased during the quarter as fewer loans were
sold in the secondary market,” said Bradley Krehbiel, President and
Chief Executive Officer of HMN. “In addition, deposit outflows
increased our use of higher rate wholesale funding sources which
increased our cost of funds during the quarter. Despite these
challenges, we will continue to focus our effort on expanding our
core customer deposit relationships.”
Second Quarter ResultsNet
Interest IncomeNet interest income was $7.7 million for the second
quarter of 2023, a decrease of $0.1 million, or 0.5%, compared to
$7.8 million for the second quarter of 2022. Interest income was
$10.5 million for the second quarter of 2023, an increase of $2.4
million, or 30.3%, from $8.1 million for the second quarter of
2022. Interest income increased because of the $62.1 million
increase in the average interest-earning assets between the periods
and also because of the increase in the average yield earned on
interest-earning assets between the periods. The average yield
earned on interest-earning assets was 3.94% for the second quarter
of 2023, an increase of 72 basis points from 3.22% for the second
quarter of 2022. The increase in the average yield is primarily
related to the increase in market interest rates as a result of the
3.50% increase in the prime interest rate between the periods.
Interest expense was $2.8 million for the second
quarter of 2023, an increase of $2.5 million, or 848.3%, compared
to $0.3 million for the second quarter of 2022. Interest expense
increased primarily because of the increase in the average interest
rate paid on interest-bearing liabilities between the periods.
Interest expense also increased because of the $52.2 million
increase in the average interest-bearing liabilities and
non-interest bearing deposits between the periods. The average
interest rate paid on interest-bearing liabilities and non-interest
bearing deposits was 1.13% for the second quarter of 2023, an
increase of 100 basis points from 0.13% for the second quarter of
2022. The increase in the average rate paid is primarily related to
the change in the types of funding sources as more brokered
deposits, certificates of deposit, and Federal Home Loan Bank
(FHLB) advances were used in the second quarter of 2023 than in the
second quarter of 2022. These funding sources generally have higher
interest rates than traditional checking and money market accounts.
The increase in market interest rates as a result of the 3.50%
increase in the federal funds rate between the periods also
contributed to higher funding costs in the second quarter of 2023
when compared to the same period in 2022. Net interest margin (net
interest income divided by average interest-earning assets) for the
second quarter of 2023 was 2.90%, a decrease of 20 basis points,
compared to 3.10% for the second quarter of 2022. The decrease in
the net interest margin is primarily because the increase in the
average rate paid on interest-bearing liabilities and non-interest
bearing deposits exceeded the increase in the average yield earned
on interest-earning assets between the periods.
A summary of the Company’s net interest margin
for the three and six-month periods ended June 30, 2023 and 2022 is
as follows:
|
|
For the three-month period ended |
|
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
(Dollars in thousands) |
|
AverageOutstandingBalance |
|
InterestEarned/Paid |
|
Yield/Rate |
|
|
AverageOutstandingBalance |
|
InterestEarned/Paid |
|
Yield/Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
$ |
259,187 |
|
800 |
|
1.24 |
% |
$ |
299,138 |
|
816 |
|
1.09 |
% |
Loans held for sale |
|
1,872 |
|
29 |
|
6.24 |
|
|
2,710 |
|
30 |
|
4.53 |
|
Single family loans, net |
|
225,065 |
|
2,195 |
|
3.91 |
|
|
175,948 |
|
1,511 |
|
3.44 |
|
Commercial loans, net |
|
527,900 |
|
6,663 |
|
5.06 |
|
|
459,406 |
|
5,151 |
|
4.50 |
|
Consumer loans, net |
|
47,518 |
|
732 |
|
6.18 |
|
|
41,869 |
|
473 |
|
4.53 |
|
Other |
|
6,661 |
|
78 |
|
4.70 |
|
|
27,012 |
|
76 |
|
1.13 |
|
Total interest-earning assets |
|
1,068,203 |
|
10,497 |
|
3.94 |
|
|
1,006,083 |
|
8,057 |
|
3.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts |
|
169,870 |
|
253 |
|
0.60 |
|
|
155,832 |
|
38 |
|
0.10 |
|
Savings accounts |
|
115,658 |
|
28 |
|
0.10 |
|
|
124,170 |
|
18 |
|
0.06 |
|
Money market accounts |
|
267,075 |
|
1,049 |
|
1.58 |
|
|
267,024 |
|
158 |
|
0.24 |
|
Certificate accounts |
|
152,414 |
|
1,219 |
|
3.21 |
|
|
78,956 |
|
73 |
|
0.37 |
|
Customer escrows |
|
4,737 |
|
23 |
|
2.00 |
|
|
0 |
|
0 |
|
0.00 |
|
Advances and other borrowings |
|
14,419 |
|
197 |
|
5.48 |
|
|
1,968 |
|
5 |
|
1.04 |
|
Total interest-bearing liabilities |
|
724,173 |
|
|
|
|
|
|
627,950 |
|
|
|
|
|
Non-interest checking |
|
252,008 |
|
|
|
|
|
|
296,715 |
|
|
|
|
|
Other non-interest bearing liabilities |
|
3,043 |
|
|
|
|
|
|
2,350 |
|
|
|
|
|
Total interest-bearing liabilities and non-interest bearing
deposits |
$ |
979,224 |
|
2,769 |
|
1.13 |
|
$ |
927,015 |
|
292 |
|
0.13 |
|
Net interest income |
|
|
$ |
7,728 |
|
|
|
|
|
$ |
7,765 |
|
|
|
Net interest rate spread |
|
|
|
|
|
2.81 |
% |
|
|
|
|
|
3.09 |
% |
Net interest margin |
|
|
|
|
|
2.90 |
% |
|
|
|
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six-month period ended |
|
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
(Dollars in thousands) |
|
AverageOutstandingBalance |
|
InterestEarned/Paid |
|
Yield/Rate |
|
|
AverageOutstandingBalance |
|
InterestEarned/Paid |
|
Yield/Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
$ |
263,909 |
|
1,595 |
|
1.22 |
% |
$ |
297,264 |
|
1,604 |
|
1.09 |
% |
Loans held for sale |
|
1,546 |
|
47 |
|
6.16 |
|
|
3,335 |
|
65 |
|
3.93 |
|
Single family loans, net |
|
216,643 |
|
4,146 |
|
3.86 |
|
|
173,014 |
|
2,947 |
|
3.43 |
|
Commercial loans, net |
|
525,425 |
|
13,036 |
|
5.00 |
|
|
454,371 |
|
9,959 |
|
4.42 |
|
Consumer loans, net |
|
46,655 |
|
1,393 |
|
6.02 |
|
|
41,301 |
|
945 |
|
4.61 |
|
Other |
|
8,726 |
|
193 |
|
4.46 |
|
|
35,256 |
|
102 |
|
0.58 |
|
Total interest-earning assets |
|
1,062,904 |
|
20,410 |
|
3.87 |
|
|
1,004,541 |
|
15,622 |
|
3.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking accounts |
|
165,811 |
|
441 |
|
0.54 |
|
|
158,061 |
|
79 |
|
0.10 |
|
Savings accounts |
|
118,185 |
|
54 |
|
0.09 |
|
|
122,610 |
|
36 |
|
0.06 |
|
Money market accounts |
|
262,944 |
|
1,704 |
|
1.31 |
|
|
258,929 |
|
290 |
|
0.23 |
|
Certificate accounts |
|
144,743 |
|
2,153 |
|
3.00 |
|
|
81,635 |
|
165 |
|
0.41 |
|
Customer escrows |
|
5,560 |
|
55 |
|
2.00 |
|
|
0 |
|
0 |
|
0.00 |
|
Advances and other borrowings |
|
7,856 |
|
212 |
|
5.44 |
|
|
990 |
|
5 |
|
1.04 |
|
Total interest-bearing liabilities |
|
705,099 |
|
|
|
|
|
|
622,225 |
|
|
|
|
|
Non-interest checking |
|
266,989 |
|
|
|
|
|
|
300,187 |
|
|
|
|
|
Other non-interest bearing liabilities |
|
2,735 |
|
|
|
|
|
|
2,492 |
|
|
|
|
|
Total interest-bearing liabilities and non-interest bearing
deposits |
$ |
974,823 |
|
4,619 |
|
0.96 |
|
$ |
924,904 |
|
575 |
|
0.13 |
|
Net interest income |
|
|
$ |
15,791 |
|
|
|
|
|
$ |
15,047 |
|
|
|
Net interest rate spread |
|
|
|
|
|
2.91 |
% |
|
|
|
|
|
3.01 |
% |
Net interest margin |
|
|
|
|
|
3.00 |
% |
|
|
|
|
|
3.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit LossesThe provision for
credit losses was $0.3 million for the second quarter of 2023, an
increase of $0.2 million compared to $0.1 million for the second
quarter of 2022. The provision for credit losses increased
primarily because of the additional loan growth that was
experienced in the second quarter of 2023 when compared to the same
period in 2022.
The allowance for credit losses is measured on a
collective (pool) basis when similar risk characteristics exist.
Loans that do not share risk characteristics are evaluated on an
individual basis. Loans evaluated individually are not included in
the collective evaluations. The collective reserve amount is
assessed based on size and risk characteristics of the various
portfolio segments, past loss history and other adjustments
determined to have a potential impact on future credit losses. The
collective reserve amount increased from March 31, 2023 primarily
because of the loan growth that was experienced during the quarter.
The Company’s qualitative reserve adjustments did not materially
change during the quarter due to management’s perception that
economic conditions had not materially changed, including those
related to the elevated inflation rate, and enacted and expected
increases in the federal funds rate. Total non-performing assets
were $1.8 million at June 30, 2023 compared to $1.9 million at
March 31, 2023.
A reconciliation of the Company’s allowance for
credit losses for the second quarters of 2023 and 2022 is
summarized as follows:
|
|
|
|
|
(Dollars in thousands) |
|
2023 |
|
|
2022 (1) |
Balance at March 31, |
$ |
11,342 |
|
|
9,584 |
|
Provision |
|
200 |
|
|
66 |
|
Charge offs: |
|
|
|
|
Consumer |
|
(27 |
) |
|
(15 |
) |
Recoveries |
|
2 |
|
|
9 |
|
Balance at June 30, |
$ |
11,517 |
|
|
9,644 |
|
Allocated to: |
|
|
|
|
Collective allowance |
$ |
11,345 |
|
|
9,240 |
|
Individual allowance |
|
172 |
|
|
404 |
|
|
$ |
11,517 |
|
|
9,644 |
|
|
|
|
|
|
(1) The 2022 amounts presented are calculated under prior
accounting standard.The following table summarizes the amounts and
categories of non-performing assets in the Bank’s portfolio and
loan delinquency information as of the end of the two most recently
completed quarters.
|
|
June 30, |
|
|
March 31, |
|
(Dollars in thousands) |
|
2023 |
|
|
2023 |
|
Non-performing loans: |
|
|
|
|
|
|
Single family |
$ |
653 |
|
$ |
890 |
|
Consumer |
|
407 |
|
|
494 |
|
Commercial business |
|
471 |
|
|
474 |
|
Foreclosed and repossessed assets: |
|
|
|
|
|
|
Single family |
|
220 |
|
|
0 |
|
Total non-performing assets |
$ |
1,751 |
|
$ |
1,858 |
|
Total as a percentage of total assets |
|
0.16 |
% |
|
0.17 |
% |
Total as a percentage of total loans receivable |
|
0.18 |
% |
|
0.23 |
% |
Allowance for credit losses to non-performing loans |
|
752.44 |
% |
|
610.45 |
% |
|
|
|
|
|
|
|
Delinquency data: |
|
|
|
|
|
|
Delinquencies (1) |
|
|
|
|
|
|
30+ days |
$ |
1,480 |
|
$ |
271 |
|
90+ days |
|
0 |
|
|
0 |
|
Delinquencies as a percentage of loan portfolio (1) |
|
|
|
|
|
|
30+ days |
|
0.18 |
% |
|
0.03 |
% |
90+ days |
|
0.00 |
% |
|
0.00 |
% |
(1) Excludes non-accrual loans. |
|
|
|
|
|
|
Non-Interest Income and ExpenseNon-interest
income was $2.0 million for the second quarter of 2023, a decrease
of $0.5 million, or 21.5%, from $2.5 million for the second quarter
of 2022. Gain on sales of loans decreased $0.5 million between the
periods because of a decrease in single family loan sales due
primarily to an increase in the amount of originated mortgage loans
that were placed into the loan portfolio. The increase in mortgage
loans that were placed into the portfolio was the result of a
targeted effort to originate loans to our executive banking
clients. Other non-interest income decreased $0.1 million due
primarily to a decrease in the gains realized on the sale of real
estate owned between the periods. Fees and service charges
increased slightly between the periods due primarily to an increase
in the commitment fees earned on unused commercial lines of credit.
Loan servicing fees decreased slightly between the periods due to a
decrease in the aggregate balances of single family loans that were
being serviced for others as more serviced loans were paid off than
were added to the servicing portfolio during the period.
Non-interest expense was $7.5 million for the
second quarter of 2023, an increase of $0.5 million, or 6.8%, from
$7.0 million for the second quarter of 2022. Compensation and
benefits expense increased $0.3 million primarily because of annual
salary increases and also because of a decrease in the direct loan
origination compensation costs that were deferred as a result of
the reduced commercial loan production between the periods. Other
non-interest expense increased $0.2 million between the periods
primarily because of an increase in FDIC insurance expense due to
an increase in assessment rates. Occupancy and equipment expense
increased slightly due primarily to an increase in building
expenses between the periods. Professional services increased
slightly between the periods primarily because of an increase in
legal expenses. These increases in non-interest expense were
partially offset by a slight decrease in data processing expenses
due to a decrease in system processing charges between the
periods.
Income tax expense was $0.6 million for the
second quarter of 2023, a decrease of $0.3 million from $0.9
million for the second quarter of 2022. The decrease in income tax
expense between the periods is primarily the result of a decrease
in pre-tax income.
Return on Assets and EquityReturn on average
assets (annualized) for the second quarter of 2023 was 0.52%,
compared to 0.88% for the second quarter of 2022. Return on average
equity (annualized) was 4.81% for the second quarter of 2023,
compared to 8.09% for the same period in 2022. Book value per
common share at June 30, 2023 was $22.76, compared to $21.25 at
June 30, 2022.
Six-Month Period Results
Net IncomeNet income was $3.1 million for the
six-month period ended June 30, 2023, a decrease of $0.7 million,
or 19.1%, compared to net income of $3.8 million for the six-month
period ended June 30, 2022. Diluted earnings per share for the
six-month period ended June 30, 2023 was $0.70, a decrease of $0.16
per share compared to diluted earnings per share of $0.86 for the
same period in 2022. The decrease in net income between the periods
was because of a $1.1 million decrease in the gain on sales of
loans because of a decrease in mortgage loan sales, a $0.8 million
increase in compensation expense due to annual salary increases,
and a $0.3 million increase in other expenses primarily because of
an increase in FDIC insurance expense. These decreases in net
income were partially offset by a $0.8 million increase in net
interest income due to an increase in interest rates and the amount
of average interest earning assets outstanding, a $0.4 million
reduction in income tax expense as a result of the reduced pretax
income between the periods, and a $0.3 million decrease in
professional expenses due to a decrease in legal fees.
Net Interest IncomeNet interest income was $15.8
million for the first six months of 2023, an increase of $0.8
million, or 4.9%, compared to $15.0 million for the same period of
2022. Interest income was $20.4 million for the first six months of
2023, an increase of $4.8 million, or 30.6%, from $15.6 million for
the first six months of 2022. Interest income increased because of
the $58.4 million increase in the average interest-earning assets
between the periods and also because of the increase in the average
yield earned on interest-earning assets between the periods. The
average yield earned on interest-earning assets was 3.87% for the
first six months of 2023, an increase of 73 basis points from 3.14%
for the first six months of 2022. The increase in the average yield
is primarily related to the increase in market interest rates as a
result of the 3.50% increase in the prime interest rate between the
periods.
Interest expense was $4.6 million for the first
six months of 2023, an increase of $4.0 million, or 703.3%,
compared to $0.6 million for the same period of 2022. Interest
expense increased primarily because of the increase in the average
interest rate paid on interest-bearing liabilities between the
periods. Interest expense also increased because of the $49.9
million increase in the average interest-bearing liabilities and
non-interest bearing deposits between the periods. The average
interest rate paid on interest-bearing liabilities and non-interest
bearing deposits was 0.96% for the first six months of 2023, an
increase of 83 basis points from 0.13% for the first six months of
2022. The increase in the average rate paid is primarily related to
the change in the types of funding sources used between the periods
as more brokered deposits, certificates of deposits, and FHLB
advances were used in the first six months of 2023 than in the
first six months of 2022. These funding sources generally have
interest rates that are higher than traditional checking and money
market accounts. The increase in market interest rates as a result
of the 3.50% increase in the federal funds rate between the periods
also contributed to the higher funding costs in the first six
months of 2023 when compared to the same period in 2022. Net
interest margin (net interest income divided by average
interest-earning assets) for the first six months of 2023 was
3.00%, a decrease of 2 basis points, compared to 3.02% for the
first six months of 2022. The decrease in the net interest margin
is primarily because the increase in the average rate paid on
interest-bearing liabilities and non-interest bearing deposits
exceeded the increase in the average yield earned on
interest-earning assets as a result of the increase in the prime
rate between the periods.
Provision for Credit LossesThe provision for
credit losses was $0.2 million in the first six months of 2023, a
decrease of $0.2 million compared to $0.4 million for the first six
months of 2022. The provision for credit losses decreased between
the periods primarily because the impact on the provision of the
additional loan growth that was experienced in the first six months
of 2023 was less than it was for the same period in 2022 under the
prior accounting standard.
The allowance for credit losses is measured on a
collective (pool) basis when similar risk characteristics exist.
Loans that do not share risk characteristics are evaluated on an
individual basis. Loans evaluated individually are not included in
the collective evaluations. The collective reserve amount is
assessed based on size and risk characteristics of the various
portfolio segments, past loss history and other adjustments
determined to have a potential impact on future credit losses. The
collective reserve amount increased from December 31, 2022
primarily because of the adoption of Accounting Standard Update
(ASU) 2016-13 on January 1, 2023 and also because of the loan
growth that was experienced during the first six months of 2023.
The Company’s qualitative reserve adjustments did not materially
change during the first six months of 2023 due to management’s
perception that economic conditions had not materially changed,
including those related to the elevated inflation rate, and enacted
and expected increases in the federal funds rate. Total
non-performing assets were $1.8 million at June 30, 2023 compared
to $1.9 million at December 31, 2022.
A reconciliation of the Company’s allowance for
credit losses for the six-month periods ending June 30, 2023 and
2022 is summarized as follows:
|
|
|
|
|
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
Balance at January 1, |
$ |
10,277 |
|
|
9,279 |
|
Adoption of Accounting Standard Update (ASU) 2016-13 |
|
1,070 |
|
|
0 |
|
Provision |
|
168 |
|
|
362 |
|
Charge offs: |
|
|
|
|
Consumer |
|
(27 |
) |
|
(16 |
) |
Recoveries |
|
29 |
|
|
19 |
|
Balance at June 30, |
$ |
11,517 |
|
|
9,644 |
|
|
|
|
|
|
On January 1, 2023, the Company adopted
Accounting Standards Update (ASU) 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. The transition to this ASU resulted in a
cumulative-effect adjustment to the allowance for credit losses of
$1.1 million, an increase in deferred tax assets of $0.3 million,
and a decrease to retained earnings of $0.8 million as of the
adoption date. In addition, a liability of $0.1 million was
established for projected future losses on unfunded commitments on
outstanding lines of credit upon adoption. The projected liability
for unfunded commitments increased $0.1 million during the first
six months of 2023 and the provision for credit losses was
increased to reflect the change.
The following table summarizes the amounts and
categories of non-performing assets in the Bank’s portfolio and
loan delinquency information as of the end of the most recently
completed quarter and December 31, 2022.
|
|
June 30, |
|
|
December 31, |
|
(Dollars in thousands) |
|
2023 |
|
|
2022 |
|
Non-performing loans: |
|
|
|
|
|
|
Single family |
$ |
653 |
|
$ |
908 |
|
Consumer |
|
407 |
|
|
441 |
|
Commercial business |
|
471 |
|
|
529 |
|
Foreclosed and repossessed assets: |
|
|
|
|
|
|
Single family |
|
220 |
|
|
0 |
|
Total non-performing assets |
$ |
1,751 |
|
$ |
1,878 |
|
Total as a percentage of total assets |
|
0.16 |
% |
|
0.17 |
% |
Total as a percentage of total loans receivable |
|
0.18 |
% |
|
0.24 |
% |
Allowance for credit losses to non-performing loans |
|
752.44 |
% |
|
547.24 |
% |
|
|
|
|
|
|
|
Delinquency data: |
|
|
|
|
|
|
Delinquencies (1) |
|
|
|
|
|
|
30+ days |
$ |
1,480 |
|
$ |
1,405 |
|
90+ days |
|
0 |
|
|
0 |
|
Delinquencies as a percentage of loan portfolio (1) |
|
|
|
|
|
|
30+ days |
|
0.18 |
% |
|
0.18 |
% |
90+ days |
|
0.00 |
% |
|
0.00 |
% |
(1) Excludes non-accrual loans. |
|
|
|
|
|
|
Non-Interest Income and ExpenseNon-interest
income was $3.9 million for the first six months of 2023, a
decrease of $1.0 million, or 20.2%, from $4.9 million for the first
six months of 2022. Gain on sales of loans decreased $1.1 million
between the periods because of a decrease in single family loan
sales due primarily to an increase in the amount of originated
mortgage loans that were placed into the loan portfolio. The
increase in mortgage loans that were placed into the portfolio was
the result of a targeted effort to originate loans to our executive
banking clients. Other non-interest income decreased slightly
between the periods due primarily to a decrease in the gains
realized on the sale of real estate owned. These decreases were
partially offset by a $0.1 million increase in fees and service
charges between the periods due primarily to an increase in the
commitment fees earned on unused commercial lines of credit. Loan
servicing fees increased slightly between the periods due to an
increase in the aggregate balances of commercial loans that were
being serviced for others.
Non-interest expense was $15.2 million for the
first six months of 2023, an increase of $1.0 million, or 6.4%,
from $14.2 million for the first six months of 2022. Compensation
and benefits expense increased $0.8 million primarily because of
annual salary increases and also because of a decrease in the
direct loan origination compensation costs that were deferred as a
result of the reduced commercial loan production between the
periods. Other non-interest expense increased $0.3 million
primarily because of an increase in advertising costs and an
increase in FDIC insurance expense due to an increase in assessment
rates between the periods. Data processing expenses increased $0.1
million between the periods primarily because of the change to an
outsourced data processing relationship at the end of the first
quarter of 2022. These increases in non-interest expense were
partially offset by a $0.3 million decrease in professional
services expense between the periods primarily because of a
decrease in legal expenses relating to a bankruptcy litigation
claim that was settled in the first quarter of 2022. Occupancy and
equipment expense decreased $0.1 million due primarily to a
decrease in noncapitalized software costs between the periods.
Income tax expense was $1.2 million for the
first six months of 2023, a decrease of $0.4 million from $1.6
million for the first six months of 2022. The decrease in income
tax expense between the periods is primarily the result of a
decrease in pre-tax income.
Return on Assets and EquityReturn on average
assets (annualized) for the first six months of 2023 was 0.56%,
compared to 0.73% for the first six months of 2022. Return on
average equity (annualized) was 5.22% for the first six months of
2023, compared to 6.73% for the same period in 2022. Book value per
common share at June 30, 2023 was $22.76, compared to $21.25 at
June 30, 2022.
General InformationHMN Financial, Inc. and the
Bank are headquartered in Rochester, Minnesota. Home Federal
Savings Bank operates twelve full service offices in Minnesota
located in Albert Lea, Austin, Eagan, Kasson, La Crescent,
Owatonna, Rochester (4), Spring Valley and Winona, one full service
office in Marshalltown, Iowa, and one full service office in
Pewaukee, Wisconsin. The Bank also operates two loan origination
offices located in Sartell, Minnesota and La Crosse, Wisconsin.
Safe Harbor StatementThis press release may
contain forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. These statements are often identified by such
forward-looking terminology as “anticipate,” “continue,” “could,”
“expect,” “future,” “may,” “project” and “will,” or similar
statements or variations of such terms and include, but are not
limited to, those relating to: enacted and expected changes to the
federal funds rate and the resulting impacts on consumer deposits,
loan originations, and related aspects of the Bank’s business; the
anticipated impacts of inflation and rising interest rates on the
general economy, the Bank’s clients, and the allowance for credit
losses; anticipated future levels of the provision for credit
losses; anticipated level of future asset growth; and the payment
of dividends by HMN.
A number of factors, many of which may be
amplified by the deterioration in economic conditions, could cause
actual results to differ materially from the Company’s assumptions
and expectations. These include but are not limited to the adequacy
and marketability of real estate and other collateral securing
loans to borrowers; federal and state regulation and enforcement;
possible legislative and regulatory changes, including changes to
regulatory capital rules; the ability of the Bank to comply with
other applicable regulatory capital requirements; enforcement
activity of the Office of the Comptroller of the Currency and the
Federal Reserve Bank of Minneapolis in the event of non-compliance
with any applicable regulatory standard or requirement; adverse
economic, business and competitive developments such as shrinking
interest margins, reduced collateral values, deposit outflows,
changes in credit or other risks posed by the Company’s loan and
investment portfolios; changes in costs associated with traditional
and alternate funding sources, including changes in collateral
advance rates and policies of the Federal Home Loan Bank and the
Federal Reserve Bank; technological, computer-related or
operational difficulties including those from any third party
cyberattack; reduced demand for financial services and loan
products; adverse developments affecting the financial services
industry, such as recent bank failures or concerns involving
liquidity; changes in accounting policies and guidelines, or
monetary and fiscal policies of the federal government or tax laws;
domestic and international economic developments; the Company’s
access to and adverse changes in securities markets; the market for
credit related assets; the future operating results, financial
condition, cash flow requirements and capital spending priorities
of the Company and the Bank; the availability of internal and, as
required, external sources of funding; the Company’s ability to
attract and retain employees; or other significant uncertainties.
Additional factors that may cause actual results to differ from the
Company’s assumptions and expectations include those set forth in
the “Risk Factors” section of the Company’s Annual Report on Form
10-K for the year ended December 31, 2022 and Part II, Item 1A of
its subsequently filed quarterly reports on Form 10-Q. All
forward-looking statements are qualified by, and should be
considered in conjunction with, such cautionary statements. All
statements in this press release, including forward-looking
statements, speak only as of the date they are made, and the
Company undertakes no duty to update any of the forward-looking
statements after the date of this press release.
(Three pages of selected consolidated financial
information are included with this release.)
HMN FINANCIAL, INC. AND SUBSIDIARIES |
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
(Dollars in thousands) |
|
2023 |
|
2022 |
|
|
|
(unaudited) |
|
|
|
Assets |
|
|
|
|
|
Cash and cash equivalents |
$ |
13,234 |
|
|
36,259 |
|
|
Securities available for sale: |
|
|
|
|
|
Mortgage-backed and related securities (amortized cost $197,666 and
$216,621) |
|
176,027 |
|
|
192,688 |
|
|
Other marketable securities (amortized cost $55,709 and
$55,698) |
|
54,000 |
|
|
53,331 |
|
|
Total securities available for sale |
|
230,027 |
|
|
246,019 |
|
|
|
|
|
|
|
|
Loans held for sale |
|
1,916 |
|
|
1,314 |
|
|
Loans receivable, net |
|
826,932 |
|
|
777,078 |
|
|
Accrued interest receivable |
|
3,395 |
|
|
3,003 |
|
|
Mortgage servicing rights, net |
|
2,789 |
|
|
2,986 |
|
|
Premises and equipment, net |
|
16,282 |
|
|
16,492 |
|
|
Goodwill |
|
802 |
|
|
802 |
|
|
Prepaid expenses and other assets |
|
5,317 |
|
|
3,902 |
|
|
Deferred tax asset, net |
|
8,673 |
|
|
8,347 |
|
|
Total assets |
$ |
1,109,367 |
|
|
1,096,202 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
Deposits |
$ |
970,712 |
|
|
981,926 |
|
|
Federal Home Loan Bank advances and Federal Reserve borrowings |
|
24,700 |
|
|
0 |
|
|
Accrued interest payable |
|
1,115 |
|
|
298 |
|
|
Customer escrows |
|
5,861 |
|
|
10,122 |
|
|
Accrued expenses and other liabilities |
|
4,827 |
|
|
6,520 |
|
|
Total liabilities |
|
1,007,215 |
|
|
998,866 |
|
|
Commitments and contingencies |
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
Serial-preferred stock ($.01 par value): |
|
|
|
|
|
authorized 500,000 shares; issued 0 |
|
0 |
|
|
0 |
|
|
Common stock ($.01 par value): authorized 16,000,000 shares; issued
9,128,662 |
|
|
|
|
|
outstanding 4,487,362 and 4,480,976 |
|
91 |
|
|
91 |
|
|
Additional paid-in capital |
|
41,019 |
|
|
41,013 |
|
|
Retained earnings, subject to certain restrictions |
|
140,025 |
|
|
138,409 |
|
|
Accumulated other comprehensive loss |
|
(16,810 |
) |
|
(19,761 |
) |
|
Unearned employee stock ownership plan shares |
|
(966 |
) |
|
(1,063 |
) |
|
Treasury stock, at cost 4,641,300 and 4,647,686 shares |
|
(61,207 |
) |
|
(61,353 |
) |
|
Total stockholders’ equity |
|
102,152 |
|
|
97,336 |
|
|
Total liabilities and stockholders’ equity |
$ |
1,109,367 |
|
|
1,096,202 |
|
|
|
|
|
|
|
|
HMN FINANCIAL, INC. AND SUBSIDIARIES |
Consolidated Statements of Comprehensive Income
(Loss) |
(unaudited) |
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands, except per share data) |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
Interest income: |
|
|
|
|
|
|
|
|
Loans receivable |
$ |
9,619 |
|
7,165 |
|
|
18,622 |
|
13,916 |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Mortgage-backed and related |
|
600 |
|
708 |
|
|
1,252 |
|
1,435 |
|
Other marketable |
|
200 |
|
108 |
|
|
343 |
|
169 |
|
Other |
|
78 |
|
76 |
|
|
193 |
|
102 |
|
Total interest income |
|
10,497 |
|
8,057 |
|
|
20,410 |
|
15,622 |
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
|
2,549 |
|
287 |
|
|
4,352 |
|
570 |
|
Customer escrows |
|
23 |
|
0 |
|
|
55 |
|
0 |
|
Advances and other borrowings |
|
197 |
|
5 |
|
|
212 |
|
5 |
|
Total interest expense |
|
2,769 |
|
292 |
|
|
4,619 |
|
575 |
|
|
|
|
|
|
|
|
|
|
Net
interest income |
|
7,728 |
|
7,765 |
|
|
15,791 |
|
15,047 |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses (1) |
|
256 |
|
66 |
|
|
248 |
|
362 |
|
Net interest income after provision for credit losses |
|
7,472 |
|
7,699 |
|
|
15,543 |
|
14,685 |
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
Fees and service charges |
|
831 |
|
810 |
|
|
1,638 |
|
1,576 |
|
Loan servicing fees |
|
391 |
|
396 |
|
|
791 |
|
782 |
|
Gain on sales of loans |
|
334 |
|
814 |
|
|
629 |
|
1,682 |
|
Other |
|
418 |
|
496 |
|
|
844 |
|
851 |
|
Total non-interest income |
|
1,974 |
|
2,516 |
|
|
3,902 |
|
4,891 |
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
Compensation and benefits |
|
4,459 |
|
4,162 |
|
|
9,264 |
|
8,450 |
|
Occupancy and equipment |
|
914 |
|
897 |
|
|
1,864 |
|
1,947 |
|
Data processing |
|
545 |
|
576 |
|
|
1,050 |
|
930 |
|
Professional services |
|
292 |
|
260 |
|
|
529 |
|
789 |
|
Other |
|
1,247 |
|
1,088 |
|
|
2,443 |
|
2,119 |
|
Total non-interest expense |
|
7,457 |
|
6,983 |
|
|
15,150 |
|
14,235 |
|
Income before income tax expense |
|
1,989 |
|
3,232 |
|
|
4,295 |
|
5,341 |
|
Income tax
expense |
|
568 |
|
943 |
|
|
1,240 |
|
1,565 |
|
Net income |
|
1,421 |
|
2,289 |
|
|
3,055 |
|
3,776 |
|
Other comprehensive income (loss), net of tax |
|
705 |
|
(6,251 |
) |
|
2,951 |
|
(16,269 |
) |
Comprehensive income (loss) available to common stockholders |
$ |
2,126 |
|
(3,962 |
) |
|
6,006 |
|
(12,493 |
) |
Basic earnings per share |
$ |
0.33 |
|
0.52 |
|
|
0.70 |
|
0.86 |
|
Diluted earnings per share |
$ |
0.32 |
|
0.52 |
|
|
0.70 |
|
0.86 |
|
|
|
|
|
|
|
|
|
|
(1) The Company adopted ASU 2016-13 as of January 1, 2023. The
2022 amounts presented are calculated under the prior accounting
standard.
HMN FINANCIAL, INC. AND SUBSIDIARIES |
|
Selected Consolidated Financial Information |
|
(unaudited) |
|
SELECTED FINANCIAL DATA: |
|
Three Months EndedJune 30, |
|
Six Months EndedJune 30, |
|
(Dollars in thousands, except per share data) |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
I. OPERATING DATA: |
|
|
|
|
|
|
|
|
|
Interest income |
$ |
10,497 |
|
8,057 |
|
20,410 |
|
15,622 |
|
Interest expense |
|
2,769 |
|
292 |
|
4,619 |
|
575 |
|
Net interest income |
|
7,728 |
|
7,765 |
|
15,791 |
|
15,047 |
|
|
|
|
|
|
|
|
|
|
|
II.
AVERAGE BALANCES: |
|
|
|
|
|
|
|
|
|
Assets (1) |
|
1,105,130 |
|
1,044,524 |
|
1,099,675 |
|
1,042,629 |
|
Loans receivable, net |
|
800,483 |
|
677,223 |
|
788,723 |
|
668,686 |
|
Securities available for sale (1) |
|
259,187 |
|
299,138 |
|
263,909 |
|
297,264 |
|
Interest-earning assets (1) |
|
1,068,203 |
|
1,006,083 |
|
1,062,904 |
|
1,004,541 |
|
Interest-bearing liabilities and non-interest bearing deposits |
|
979,224 |
|
927,015 |
|
974,823 |
|
924,904 |
|
Equity (1) |
|
118,568 |
|
113,541 |
|
118,021 |
|
113,072 |
|
|
|
|
|
|
|
|
|
|
|
III. PERFORMANCE RATIOS: (1) |
|
|
|
|
|
|
|
|
|
Return on average assets (annualized) |
|
0.52 |
% |
0.88 |
% |
0.56 |
% |
0.73 |
% |
Interest rate spread information: |
|
|
|
|
|
|
|
|
|
Average during period |
|
2.81 |
|
3.09 |
|
2.91 |
|
3.01 |
|
End of period |
|
2.78 |
|
2.98 |
|
2.78 |
|
2.98 |
|
Net interest margin |
|
2.90 |
|
3.10 |
|
3.00 |
|
3.02 |
|
Ratio of operating expense to average total assets
(annualized) |
|
2.71 |
|
2.68 |
|
2.78 |
|
2.75 |
|
Return on average common equity (annualized) |
|
4.81 |
|
8.09 |
|
5.22 |
|
6.73 |
|
Efficiency |
|
76.86 |
|
67.92 |
|
76.93 |
|
71.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
|
|
|
2023 |
|
2022 |
|
2022 |
|
|
|
IV.
EMPLOYEE DATA: |
|
|
|
|
|
|
|
|
|
Number of full time equivalent employees |
|
167 |
|
165 |
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
V.
ASSET QUALITY: |
|
|
|
|
|
|
|
|
|
Total non-performing assets |
$ |
1,751 |
|
1,878 |
|
4,294 |
|
|
|
Non-performing assets to total assets |
|
0.16 |
% |
0.17 |
% |
0.40 |
% |
|
|
Non-performing loans to total loans receivable |
|
0.18 |
|
0.24 |
|
0.62 |
|
|
|
Allowance for credit losses (2) |
$ |
11,517 |
|
10,277 |
|
9,644 |
|
|
|
Allowance for credit losses to total assets (2) |
|
1.04 |
% |
0.94 |
% |
0.89 |
% |
|
|
Allowance for credit losses to total loans receivable (2) |
|
1.37 |
|
1.30 |
|
1.40 |
|
|
|
Allowance for credit losses to non-performing loans (2) |
|
752.44 |
|
547.24 |
|
224.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
VI.
BOOK VALUE PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
Book value per common share |
$ |
22.76 |
|
21.72 |
|
21.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months EndedJune 31, 2023 |
|
Year EndedDecember 31,2022 |
|
Six Months EndedJune 30, 2022 |
|
|
|
VII. CAPITAL RATIOS: |
|
|
|
|
|
|
|
|
|
Stockholders’ equity to total assets, at end of period |
|
9.21 |
% |
8.88 |
% |
8.86 |
% |
|
|
Average stockholders’ equity to average assets (1) |
|
10.73 |
|
10.73 |
|
10.84 |
|
|
|
Ratio of average interest-earning assets to average interest-
bearing liabilities and non-interest bearing deposits (1) |
|
109.04 |
|
108.65 |
|
108.61 |
|
|
|
Home Federal Savings Bank regulatory capital ratios: |
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio |
|
11.36 |
|
11.48 |
|
12.85 |
|
|
|
Tier 1 capital leverage ratio |
|
9.25 |
|
9.14 |
|
9.71 |
|
|
|
Tier 1 capital ratio |
|
11.36 |
|
11.48 |
|
12.85 |
|
|
|
Risk-based capital |
|
12.61 |
|
12.65 |
|
14.06 |
|
|
|
|
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(1) Average balances were calculated based upon amortized
cost without the market value impact of ASC 320.(2) The
Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts
presented are calculated under the prior accounting standard.
CONTACT: |
Bradley Krehbiel, |
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Chief Executive Officer, President |
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HMN Financial, Inc. (507) 252-7169 |
HMN Financial (NASDAQ:HMNF)
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