HMN Financial, Inc. (NASDAQ:HMNF) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank, a community bank with a strong presence in Minnesota, Iowa, and Wisconsin. The bank operates retail banking and loan production facilities in these three Midwest states, catering to the financial needs of individuals and businesses in the region.
Business Overview
Home Federal Savings Bank has a long history dating back to its founding in 1934. Over the decades, the bank has evolved to meet the changing needs of its customers, while maintaining a steadfast commitment to community banking. Today, the bank offers a comprehensive suite of financial products and services, including deposit accounts, residential and commercial loans, and wealth management solutions.The bank's loan portfolio is diversified across several key segments, including single-family residential, commercial real estate, consumer, and commercial business. This diversification helps to mitigate risk and provides the bank with a well-balanced revenue stream. In the first quarter of 2024, the bank's total loans stood at $868.7 million, up from $858.1 million at the end of 2023.
The bank's deposit base is also well-diversified, with a mix of checking, savings, and certificate of deposit accounts. As of March 31, 2024, the bank had total deposits of $1.03 billion, an increase from $976.8 million at the end of 2023. The bank's strong deposit base provides a stable source of funding for its lending activities.
Financial Performance
HMN Financial, Inc. reported annual net income of $6.0 million in 2023, with annual revenue of $43.5 million. The company's annual operating cash flow was $7.7 million, and its annual free cash flow was $7.0 million.In the first quarter of 2024, the company reported net income of $1.3 million, a decrease of $0.3 million compared to the first quarter of 2023. This decrease was primarily due to a $0.8 million decline in net interest income, as the increase in funding costs outpaced the rise in yields on interest-earning assets. The company's net interest margin decreased from 3.09% in the first quarter of 2023 to 2.63% in the first quarter of 2024.
The provision for credit losses in the first quarter of 2024 was ($0.2) million, a decrease of $0.2 million compared to the first quarter of 2023. This decrease was primarily due to a reduction in the general reserve percentages used to calculate the allowance for credit losses, as well as perceived improvements in the forecasted economic conditions.
Non-interest income remained relatively stable at $1.9 million in both the first quarter of 2024 and the first quarter of 2023. Non-interest expense decreased slightly from $7.7 million in the first quarter of 2023 to $7.6 million in the first quarter of 2024, primarily due to a decrease in compensation and benefits expense.
Asset Quality and Liquidity
HMN Financial, Inc. maintains a strong asset quality profile, with non-performing assets totaling $2.8 million, or 0.24% of total assets, as of March 31, 2024. This represents a decrease from $3.8 million, or 0.34% of total assets, as of December 31, 2023. The allowance for credit losses stood at $11.6 million, or 413.78% of non-performing loans, as of March 31, 2024.The company's liquidity position remains robust, with cash and cash equivalents of $50.2 million as of March 31, 2024, up from $11.2 million at the end of 2023. The company also has access to additional liquidity through its borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Bank of Minneapolis.
Regulatory Capital and Oversight
Home Federal Savings Bank is subject to the Basel III regulatory capital requirements and maintains capital ratios well above the well-capitalized thresholds. As of March 31, 2024, the bank's common equity Tier 1 capital ratio was 11.64%, its Tier 1 leverage ratio was 9.18%, and its total risk-based capital ratio was 12.89%.The bank's strong capital position provides a solid foundation for growth and allows it to withstand potential economic downturns. The Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank of Minneapolis closely monitor the bank's compliance with regulatory standards and capital requirements.
Risks and Challenges
Like any financial institution, HMN Financial, Inc. faces a variety of risks and challenges, including interest rate risk, credit risk, and operational risk. The company's profitability is sensitive to changes in interest rates, and it actively manages its asset-liability composition to mitigate interest rate risk.The company's loan portfolio is also subject to credit risk, and it closely monitors the creditworthiness of its borrowers. The allowance for credit losses is regularly reviewed and adjusted to reflect changes in the economic environment and the risk profile of the loan portfolio.
Operational risks, such as cybersecurity threats and regulatory changes, are also a concern for the company. HMN Financial, Inc. has implemented robust risk management practices and internal controls to mitigate these risks and ensure the continued safe and sound operation of the bank.
Outlook and Growth Strategies
HMN Financial, Inc. remains focused on its core community banking business, leveraging its strong deposit base and diversified loan portfolio to drive sustainable growth. The company is also exploring opportunities to expand its wealth management and commercial banking services, which could provide additional revenue streams and diversify its income sources.The company's management team is committed to maintaining a prudent and disciplined approach to growth, with a focus on risk management and regulatory compliance. As the economic environment continues to evolve, HMN Financial, Inc. is well-positioned to navigate the challenges and capitalize on the opportunities that arise.