HMN Financial, Inc. (NASDAQ:HMNF) has undergone a significant transformation with its recent merger with Alerus Financial Corporation (NASDAQ:ALRS). This strategic move, announced in May 2024 and completed in the fourth quarter of the same year, has reshaped the competitive dynamics within the banking and financial services industry.

Company History

HMN Financial, Inc. has a rich history dating back to its inception in 1934. Headquartered in Rochester, Minnesota, the company has established itself as a prominent community banking and loan production institution, serving customers across Minnesota, Iowa, and Wisconsin. Over the years, HMN has navigated the evolving financial landscape, adapting its business model to the changing needs of its client base. The company’s growth journey includes its conversion from a mutual to a stock savings bank holding company structure in 1994, which allowed HMN to raise capital and pursue growth opportunities more effectively. In the years following this transition, HMN made strategic acquisitions to expand its geographic footprint and service capabilities.

Throughout its history, HMN has remained committed to its community banking philosophy, providing personalized financial services and supporting the economic development of the areas it serves. The company’s long-standing relationships with customers and its involvement in local communities have been key factors in its sustained success over the decades. Despite facing challenges such as the 2008 financial crisis, which put pressure on the company’s loan portfolio and profitability, HMN navigated this difficult period by maintaining prudent risk management practices and a focus on serving its local communities. The company emerged from the crisis in a strong position to continue its growth.

Financial Performance

Financials

Pre-Merger Financials

Prior to the merger, HMN Financial reported annual net income of $6.0 million in 2023, a decrease from $8.04 million in 2022. The company’s annual revenue stood at $39.04 million in 2023, down from $41.14 million in the previous year. HMN’s annual operating cash flow and free cash flow in 2023 were $13.69 million and $12.99 million, respectively.

2024 Q1 and Q2 Results

In the first quarter of 2024, HMN reported net income of $1.32 million, down from $1.63 million in the same period of 2023. Diluted earnings per share for the quarter declined to $0.30 from $0.37 in the prior-year quarter. Net interest income decreased to $7.3 million from $8.1 million, while the net interest margin contracted by 46 basis points to 2.63%.

The second quarter of 2024 saw further challenges for HMN, with net income decreasing to $1.0 million from $1.4 million in the same quarter of 2023. Diluted earnings per share fell to $0.22 from $0.32 in the prior-year period. Net interest income declined by $0.2 million to $7.5 million, and the net interest margin contracted by 20 basis points to 2.70%. The company also recorded a goodwill impairment charge of $0.8 million during this quarter.

For Q2 2024, HMN reported revenue of $14.79 million, up 11.7% year-over-year. However, net income decreased by 31.7% to $970,000, primarily due to the $800,000 goodwill impairment charge and higher professional services expenses related to the pending merger with Alerus Financial Corporation. Operating cash flow declined significantly by 86.6% to $1.00 million, while free cash flow turned negative at -$115,000, compared to $205,000 in Q2 2023.

Liquidity

Despite these recent financial headwinds, HMN Financial’s merger with Alerus Financial Corporation presents an opportunity for the combined entity to leverage their collective strengths and capture a larger share of the market. The all-stock transaction, valued at approximately $116.4 million, is expected to provide HMN shareholders with 1.25 shares of Alerus common stock for each share of HMN common stock held.

HMN Financial maintains a strong liquidity position with a debt-to-equity ratio of 0.12 and cash reserves of $13.66 million. The company has access to a substantial credit line of $278.9 million from the Federal Home Loan Bank (FHLB) based on pledged collateral. HMN’s current ratio stands at 4.41, indicating a healthy ability to meet short-term obligations, while its quick ratio of 274.5 demonstrates exceptional liquidity.

Merger Details

The merger has received the necessary regulatory and shareholder approvals, and the transaction is anticipated to close in the fourth quarter of 2024, subject to the satisfaction of customary closing conditions. The combined company will have a stronger presence in the Midwest, with an expanded footprint and a more diverse product and service offering.

Alerus, with its long history of strategic acquisitions, brings valuable experience and resources to the table. The company’s CEO, Katie Lorenson, has expressed enthusiasm for the partnership, stating that “Home Federal has built a valuable core deposit franchise based on long-standing client relationships, and we believe their culture, vision, and purpose align remarkably well with ours.”

The merger with Alerus presents both opportunities and challenges for HMN Financial. On the one hand, the combined entity will benefit from increased scale, expanded geographic reach, and the potential for cost synergies. However, the integration process and the execution of the combined strategy will be crucial in determining the long-term success of the merger.

Future Outlook

Investors and industry observers will closely monitor the progress of the Alerus-HMN merger, as it has the potential to reshape the competitive landscape in the Midwest banking and financial services sector. The combined company’s ability to leverage its enhanced capabilities, streamline operations, and deliver value to its customers and shareholders will be a key focus in the months and years ahead.

HMN Financial operates through its wholly-owned subsidiary, Home Federal Savings Bank, providing community banking and loan services across Minnesota, Iowa, and Wisconsin. The company’s primary business segments include:

Single Family Loans: As of June 30, 2024, the single family loan portfolio totaled $265.08 million, up from $264.30 million at the end of 2023. HMN originates and services single family residential mortgage loans, including fixed-rate and adjustable-rate mortgages. The company sells the majority of its 30-year fixed-rate single family loans to third-party investors while retaining adjustable-rate and shorter-term fixed-rate single family loans that meet its risk profile.

Commercial Real Estate Loans: The commercial real estate loan portfolio stood at $502.82 million as of June 30, 2024, an increase from $489.95 million at the end of 2023. This segment includes loans for real estate rental and leasing as well as other commercial real estate purposes, with diversification across property types and both adjustable-rate and fixed-rate structures.

Consumer Loans: The consumer loan portfolio, which includes loans secured by second mortgages on single-family homes and automobiles, totaled $41.79 million as of June 30, 2024, down slightly from $42.73 million at the end of the prior year.

Commercial Business Loans: HMN’s commercial business loan portfolio reached $66.94 million as of June 30, 2024, up from $61.12 million at the end of 2023. These loans are made to a variety of commercial enterprises and are secured by business equipment, commercial land, and other collateral.

The banking industry has faced headwinds from rising interest rates, which have compressed net interest margins. However, HMN has maintained profitability through loan growth and fee income generation. The company’s net interest income for the second quarter of 2024 was $7.50 million, a decrease of 3.1% compared to the same period in 2023, primarily due to a decline in the net interest margin as funding costs increased faster than yields on interest-earning assets.

The provision for credit losses was $306,000 in Q2 2024, down from $256,000 in Q2 2023, as the company recorded lower qualitative reserves due to perceived improvements in the economic environment. Non-interest income increased 12.0% year-over-year to $2.21 million in the second quarter, driven by higher gains on loan sales. However, non-interest expense rose 16.2% to $8.70 million, largely due to the goodwill impairment charge and increased professional services expenses related to the pending merger.

In conclusion, HMN Financial, Inc.’s merger with Alerus Financial Corporation represents a significant milestone in the company’s history. The combined entity will have the opportunity to capitalize on synergies, expand its reach, and strengthen its position in the market. As the integration process unfolds, the company’s financial performance, strategic execution, and ability to navigate the evolving industry dynamics will be closely watched by investors and analysts alike. With a strong liquidity position and a diversified loan portfolio, HMN is well-positioned to leverage its strengths in the competitive Midwest banking landscape, despite recent challenges in profitability and cash flow metrics.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.