UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
[x]
[ ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to ______.
Commission file number: 0-24100.
HMN FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
41-1777397
(I.R.S. Employer Identification No.)
1016 Civic Center Drive Northwest
Rochester, Minnesota
(Address of principal executive offices)
(507) 535-1200
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
55901
(Zip Code)
Title of each class
Common Stock, par value $.01 per share
Trading Symbol(s)
HMNF
Name of each exchange on which registered
The Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [ ] NO [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES [ ] NO [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
YES [ X ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer
Non-accelerated filer [ X ]
[ ]
Smaller reporting company [ X ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
1
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report. [ ]
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-
based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to
§240.10D-1 (b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES [ ] NO [ X ]
As of June 30, 2023, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$67.9 million based on the closing stock price of $18.74 on such date as reported on the Nasdaq Global Market.
As of February 28, 2024, the number of outstanding shares of common stock of the registrant was 4,462,555.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the registrant’s fiscal year ended December 31, 2023 are incorporated
by reference in Part III of this Annual Report on Form 10-K.
EXPLANATORY NOTE
HMN Financial, Inc. is filing this Form 10-K/A as Amendment No. 1 (the Amended Filing) to its Annual Report on Form 10-K
for the fiscal year ended December 31, 2023 (the Original Filing) that was filed with the Securities and Exchange Commission on
March 15, 2024 to correct (i) Baker Tilly US, LLP’s report of independent registered public accounting firm, as a previously
superseded version was filed due to a clerical error, and (ii) to add Exhibit 21.
This Amended Filing does not reflect any subsequent events occurring after the original filing date of the Original Filing and
does not modify or update in any way disclosures made in the Original Filing except as described above.
2
TABLE OF CONTENTS
PART I
Item 1.
Business .............................................................................................................................. 5
Item 1A. Risk Factors ........................................................................................................................ 26
Item 1B. Unresolved Staff Comments ............................................................................................... 36
Item 1C. Cybersecurity ...................................................................................................................... 36
Properties ............................................................................................................................ 38
Item 2.
Item 3.
Legal Proceedings ............................................................................................................... 38
Item 4. Mine Safety Disclosures ..................................................................................................... 38
Page
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities ................................................................................. 38
Reserved .............................................................................................................................. 39
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations .......................................................................................................... 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................ 55
Financial Statements and Supplementary Data ................................................................... 55
Item 8.
Changes in and Disagreements with Accountants on Accounting and
Item 9.
Financial Disclosure .......................................................................................................... 101
Item 9A. Controls and Procedures ................................................................................................... 101
Item 9B. Other Information ............................................................................................................. 102
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections .............................. 102
PART III
Item 10. Directors, Executive Officers and Corporate Governance ................................................ 103
Item 11. Executive Compensation .................................................................................................. 103
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................................................................ 104
Item 13. Certain Relationships and Related Transactions, and Director Independence .................. 104
Principal Accounting Fees and Services ........................................................................... 104
Item 14.
PART IV
Item 15. Exhibits, Financial Statement Schedules .......................................................................... 104
Index to Exhibits .................................................................................................................................. 105
Item 16. Form 10-K Summary ........................................................................................................ 106
Signatures ............................................................................................................................................ 107
3
Forward-Looking Statements
This Annual Report on Form 10-K and other reports filed by HMN Financial, Inc. (HMN or the
Company) with the Securities and Exchange Commission (SEC), may contain forward-looking
statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
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, net interest margin, net interest
income and related aspects of the Home Federal Savings Bank’s (HFSB or the Bank) 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; anticipated ability to maintain and grow core deposit relationships; anticipated call
dates of callable investments owned; anticipated impact of tax law changes on future taxable state
income; anticipated level of future core deposit growth; and the payment of dividends by HMN.
A number of factors, many of which may be amplified by 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
(OCC) 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 (FHLB) 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, 2023. All forward-looking statements are qualified by, and should be considered in
conjunction with, such cautionary statements.
All statements in this Annual Report on Form 10-K, including forward-looking statements, speak only as
of the date they are made, and we undertake no duty to update any of the forward-looking statements after
the date of this Annual Report on Form 10-K.
4
ITEM 1. BUSINESS
PART I
General
HMN was incorporated in Delaware in 1994 as a stock savings bank holding company. HMN owns 100
percent of Home Federal Savings 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.
As a community-oriented financial institution, the Company seeks to serve the financial needs of
communities in its market area. The Company’s business involves attracting deposits from the general
public and businesses and using such deposits to originate or purchase single family residential,
commercial real estate and multi-family mortgage loans as well as consumer, construction and
commercial business loans. The Company also invests in mortgage-backed and related securities, U.S.
government agency obligations and other permissible investments. The executive offices of the Company
are located at 1016 Civic Center Drive Northwest, Rochester, Minnesota 55901. Its telephone number at
that address is (507) 535-1200. The Company’s website is www.hmnf.com. Information contained on the
Company’s website is expressly not incorporated by reference into this Annual Report on Form 10-K.
Market Area
The Company serves the southern Minnesota counties of Dodge, Fillmore, Freeborn, Houston, Mower,
Olmsted, Steele and Winona, and portions of Goodhue and Wabasha through its corporate office located
in Rochester, Minnesota and its eleven branch offices located in Albert Lea, Austin, Kasson, La Crescent,
Owatonna, Rochester (4), Spring Valley and Winona, Minnesota. The portion of the Company’s southern
Minnesota market area consisting of Rochester and the contiguous communities is composed of primarily
urban and suburban communities, while the balance of the Company's southern Minnesota market area
consists primarily of rural areas and small towns. Primary industries in the Company's southern
Minnesota market area include health care, manufacturing, agriculture, wholesale and retail trade, service
industries and education. Major employers include the Mayo Clinic, Hormel Foods, Hormel Institute,
Quality Pork Processing, International Paper, Federated Insurance, Fastenal, Viracon, Daikin, Gopher
Sport, Life Fitness, Wenger Corporation and IBM. The Company's market area is also the home of
Winona State University, Rochester Community and Technical College, University of Minnesota -
Rochester, Winona State University - Rochester Center, Austin’s Riverland Community College, and St.
Mary’s University and South Eastern Technical College in Winona.
The Company serves Dakota County, in the southern portion of the Minneapolis and St. Paul
metropolitan area, from its office located in Eagan, Minnesota. Major employers in this market area
include Delta Airlines, Patterson Companies (dental and animal health), UTC (aerospace systems), CHS
Cooperative, Flint Hills Resources LP (oil refinery), Unisys Corp (computer software), Twin Cities
Orthopedics, Blue Cross Blue Shield of Minnesota and West Group, a Thomson Reuters business (legal
research).
The Company serves the Iowa county of Marshall through its branch office located in Marshalltown,
Iowa. Major employers in the area include JBS (pork processors), Emerson (automation solutions, and
commercial and residential solutions), Lennox Industries (furnace and air conditioner manufacturing),
Iowa Veterans Home (hospital care), Marshalltown Community School District (education) and
UnityPoint Health (hospital care).
The Company serves the Wisconsin county of Waukesha through its branch office located in Pewaukee,
Wisconsin. Major employers in the area include Kohl’s Department Stores, ProHealth Care, Quad
Graphics, Inc. (media services), Froedtert (academic medical center), General Electric Healthcare
5
(medical technologies), Ascension Healthcare, Roundy’s (supermarkets), Aurora Health Care, the School
District of Waukesha, Waukesha County Technical College, WE Energies, and Cooper Power.
Lending Activities
General. The Company originates 15 and 30 year fixed ra te mortgage loans secured by single family
residences and sells the majority of these loans into the secondary market in order to manage its interest
rate risk. However, the Company may occasionally place a portion of the 10 or 15 year fixed rate
mortgage loans that are eligible for sale in the secondary market into the loan portfolio in order to
increase the yield earned on the Bank’s interest earning assets. The Company also originates shorter term
and generally higher yielding commercial real estate, commercial business and construction loans that it
places into its loan portfolio. Some shorter term single family fixed and adjustable rate mortgage loans are
also placed into the loan portfolio. The Company also offers an array of consumer loan products that
include both open-end and closed-end home equity loans. Home equity lines of credit have adjustable
interest rates based upon the prime rate, as published in the Wall Street Journal, plus a margin. See “Note
5 Loans Receivable, Net” and “Note 6 Allowance for Credit Losses and Credit Quality Information” in
Item 8 of Part II in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K
for more information on the loan portfolio.
The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate
loans as of December 31:
(Dollars in thousands)
Fixed Rate Loans
Real estate:
Single family ............................... $
Multi-family ................................
Commercial .................................
Construction ...............................
Total real estate loans ...............
Non-real estate:
Consumer loans:
Home equity .............................
Recreational vehicle .................
Other .........................................
Total consumer loans ...............
Commercial business loans .........
Total non-real estate loans ............
Total fixed rate loans .....................
Adjustable Rate Loans
Real estate:
Single family ...............................
Multi-family ................................
Commercial .................................
Construction ................................
Total real estate loans ............
Non-real estate:
Consumer loans:
Home equity line ......................
Home equity .............................
Other .........................................
Total consumer loans ...............
Commercial business loans ..........
Total non-real estate loans ...........
Total adjustable rate loans ............
Total loans ............................
Less:
Unamortized discounts ...............
Net deferred loan fees ................
Allowance for credit losses ........
Total loans receivable, net ... $
2023
2022
Amount
Percent
Amount
Percent
15.34 %
4.49
26.82
2.84
49.49
0.84
1.00
0.57
2.41
5.02
7.43
56.92
10.79
2.35
20.26
3.07
36.47
2.23
0.54
0.51
3.28
3.33
6.61
43.08
100.00 %
116,581
42,292
210,457
23,831
393,161
6,420
5,965
6,471
18,856
34,717
53,573
446,734
147,722
18,321
152,382
42,670
361,095
13,962
5,670
4,246
23,878
26,401
50,279
411,374
858,108
15
577
11,824
845,692
13.59 %
$
4.93
24.52
2.78
45.82
0.75
0.69
0.76
2.20
4.04
6.24
52.06
17.21
2.14
17.76
4.97
42.08
1.63
0.66
0.49
2.78
3.08
5.86
47.94
100.00 %
$
6
120,843
35,348
211,307
22,371
389,869
6,587
7,870
4,489
18,946
39,575
58,521
448,390
85,047
18,537
159,608
24,174
287,366
17,551
4,278
4,042
25,871
26,260
52,131
339,497
787,887
13
519
10,277
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7
The aggregate amount of loans and extensions of credit that the Bank is permitted to make to any one
borrower is generally limited to 15% of unimpaired capital and surplus. In addition to the 15% limit, the
Bank is permitted to lend an additional amount equal to 10% of unimpaired capital and surplus if the
additional amount is fully secured by “readily marketable collateral” having a current market value of at
least 100% of the loan or extension of credit. Applicable law establishes a number of rules for combining
loans to separate borrowers. Loans or extensions of credit to one person may be attributed to other
persons if: (i) the proceeds of a loan or extension of credit are used for the direct benefit of the other
person; or (ii) a common enterprise is deemed to exist between persons. At December 31, 2023, based
upon the 15% limitation, the Bank's regulatory limit for loans to one borrower was approximately $17.1
million and no loans to any one borrower exceeded this amount. At December 31, 2023, the Bank’s
largest aggregate amount of loans to one borrower totaled $15.4 million. All of the loans for the largest
borrower were performing in accordance with their terms as of December 31, 2023 and the borrower had
no affiliation with the Bank other than their relationship as a customer.
All of the Bank's lending is subject to its written underwriting standards and to loan origination
procedures. Decisions on loan requests are made on the basis of detailed applications and property
valuations determined by an independent appraiser. The loan applications are designed primarily to
determine the borrower's ability to repay. The more significant items on the application are verified
through the use of credit reports, financial statements, tax returns or confirmations.
Single family loans are originated either for inclusion in the loan portfolio under the Bank’s Portfolio
First loan program or for sale in the secondary market. Loans not placed into the portfolio are sold in the
secondary market to the Federal National Mortgage Association (FNMA) on a servicing retained basis or
to other third party investors on a servicing released basis. The limit for a retail mortgage originated for
sale on the secondary market was $726,200 and $647,200 for 2023 and 2022, respectively, and these
loans require the approval of a designated secondary market underwriter.
Two levels of approval authority have been established for loans originated under the Portfolio First loan
program. The two levels of authority include Approved Portfolio First Lenders and Credit Administration
positions with Portfolio First approval authority. Approved Portfolio First Lenders are select mortgage
loan officers recommended for the Portfolio First program approval authority by their Market President
and are approved by the Chief Credit Officer or Chief Operating Officer. The Credit Administration
positions with Portfolio First approval authority include the Director of Retail Lending and Loan
Servicing, the Chief Credit Officer, the designated Assistant Vice President (AVP) Credit Administration
and the Chief Operating Officer.
Loans less than $750,000 require the approval of one of the two designated Credit Administration
individuals with Portfolio First approval authority. Loans over $750,000 require the approval of two
individuals with Portfolio First approval authority. Loans where the total aggregate amount of all loan
obligations owed or guaranteed to the Bank plus the new obligation is greater than $2.5 million require
the approval of a majority of the Senior Loan Committee, which is comprised of the Bank’s most
experienced lending staff.
Loans that meet the underwriting guidelines of secondary market investors are approved by designated
Credit Administration positions. The Credit Administration positions with secondary market approval
authority include Retail Loan Underwriters, the Director of Retail Lending and Servicing, the Chief
Credit Officer and the Chief Operating Officer. Resident, physician and professional loan products that
fall under the Portfolio First Policy are underwritten and approved by a Retail Loan Underwriter who has
the authority to approve these loans. Resident, physician and professional loans with exceptions require a
second approval from an individual with Portfolio First approval authority. Approval level authorities are
granted by the Chief Credit Officer or Chief Operating Officer and confirmed by the Executive Loan
Committee on an annual basis. Loans are originated based on the specific guidelines established by the
secondary market investor.
8
The Bank generally requires title insurance on its mortgage loans, as well as fire and extended coverage
casualty insurance in amounts at least equal to the principal amount of the loan or the value of
improvements on the property. The Bank also requires flood insurance to protect the property securing its
interest when the property is located in a flood plain.
Single Family Residential Real Estate Lending. At December 31, 2023, the Company's single family
real estate loans, consisting of both fixed rate and adjustable rate loans, totaled $264.3 million, an increase
of $58.4 million from $205.9 million at December 31, 2022. The single family loan portfolio increased in
2023 primarily because a higher percentage of our originated single family loans were placed into the
loan portfolio. The majority of the single family loans that were placed into the loan portfolio were
originated in non-salable loan products specific to our executive banking initiative targeting high net
worth individuals and medical professionals. The majority of the longer term loans that were originated
during the year continued to be sold into the secondary market in order to generate income and to manage
the Company’s interest rate risk position.
The Company offers conventional fixed rate single family loans that have maximum terms of 30 years. In
order to manage interest rate risk, the Company typically sells the majority of fixed rate loan originations
with terms to maturity of 15 years or greater that are eligible for sale in the secondary market. The interest
rates charged on the fixed rate loan products are based on the secondary market delivery rates, as well as
other competitive factors. The Company also originates fixed rate loans with terms up to 30 years that are
insured by the Federal Housing Administration (FHA), Veteran’s Administration (VA), Minnesota
Housing Finance Agency, Iowa Finance Authority, or the United States Department of Agriculture-
Guaranteed Housing (RD).
The Company also offers one year adjustable rate mortgages (ARMs) at a margin (generally 250 to 300
basis points) over the yield on the Average Weekly One Year U.S. Treasury Constant Maturity Index for
terms of up to 30 years. The ARMs offered by the Company allow the borrower to select (subject to
pricing) an initial period of one to fifteen years between the loan origination and the date the first interest
rate change occurs. The ARMs generally have a 150 to 200 basis point annual interest rate change cap
and a lifetime cap of 300 to 600 basis points over or under the initial rate. The Company’s originated
ARMs do not permit negative amortization of principal, generally do not contain prepayment penalties
and are not convertible into fixed rate loans. Because of the low interest rate environment that had existed
prior to the last two years, a limited number of ARM loans had been originated before 2022 as consumers
generally opted for longer term fixed rate loans. Because of the increase in mortgage interest rates during
2022 and 2023, more adjustable rate loans were originated and placed into the loan portfolio.
In underwriting single family residential real estate loans, the Company evaluates the borrower's credit
history and ability to make principal, interest and escrow payments; the value of the property that will
secure the loan; and debt-to-income ratios. Properties securing single family residential real estate loans
made by the Company are appraised by independent appraisers. The Company originates residential
mortgage loans with loan-to-value ratios up to 100% for owner-occupied homes and up to 85% for
nonowner-occupied homes; however, private mortgage insurance is generally required to reduce the
Company's exposure to 80% or less of the value on most loans. The Company generally seeks to
underwrite its loans in accordance with secondary market, FHA, VA or RD standards. However, the
Company does originate some shorter term fixed rate and adjustable rate single family loans for its
portfolio that do not meet certain secondary market guidelines.
The Company's single family mortgage loans customarily include due-on-sale clauses giving it the right
to declare the loan immediately due and payable in the event that, among other things, the borrower sells
or otherwise disposes of the property subject to the mortgage.
9
At December 31, 2023, $0.8 million of the single family residential loan portfolio was non-performing,
compared to $0.9 million at December 31, 2022.
Commercial Real Estate and Multi-Family Lending. The Company originates permanent commercial
real estate and multi-family loans secured by properties located primarily in its market area. It also
purchases a limited amount of participations in commercial real estate and multi-family loans originated
by third parties. The commercial real estate and multi-family loan portfolio includes loans secured by
motels, hotels, apartment buildings, townhomes, churches, manufacturing plants, land developments,
office buildings, movie theaters, shopping malls, nursing homes, restaurants, warehouses and other non-
residential building properties primarily located in the upper Midwestern portion of the United States. At
December 31, 2023, the Company’s commercial and multi-family real estate loans totaled $423.4 million,
a decrease of $1.4 million from $424.8 million at December 31, 2022.
Permanent commercial real estate and multi-family loans are generally originated for a maximum term of
10 years and may have longer amortization periods with balloon maturity features. The interest rates may
be fixed for the term of the loan or have adjustable features that are tied to the prime rate or another
published index. Commercial real estate and multi-family loans are generally written in amounts up to
80% of the lesser of the appraised value of the property or the purchase price and generally have a debt
service coverage ratio of at least 110%. The debt service coverage ratio is the ratio of net cash from
operations to debt service payments. The Company may originate construction loans secured by
commercial or multi-family real estate, or may purchase participation interests in third party originated
construction loans secured by commercial or multi-family real estate.
Appraisals on commercial real estate and multi-family real estate properties are performed by
independent appraisers prior to the time the loan is originated. For transactions less than $500,000, the
Company may use an internal valuation. All appraisals on commercial and multi-family real estate are
reviewed and approved by a qualified Bank employee or independent third party. The Bank's
underwriting procedures require verification of the borrower's credit history, income, financial statements,
banking relationships and income projections for the property. The commercial loan policy generally
requires personal guarantees from the proposed borrowers. An initial on-site inspection is generally
required for all collateral properties for loans with balances in excess of $250,000. Independent annual
reviews are performed for aggregate commercial lending relationships that exceed $500,000. The reviews
cover financial performance, documentation completeness and accuracy of loan risk ratings.
Multi-family and commercial real estate loans generally present a higher level of risk than loans secured
by single family residences. This greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general economic conditions on
income producing properties and the increased difficulty of evaluating and monitoring these types of
loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is
typically dependent upon the successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay
the loan may be impaired. At December 31, 2023, $0.5 million of loans in the commercial real estate
portfolio were non-performing, compared to no loans that were non-performing at December 31, 2022.
Construction Lending. The Company makes construction loans to individuals for the construction of
their residences and to builders for the construction of single family residences. It also makes loans to
builders for houses built on speculation. Construction loans also include commercial real estate loans.
Almost all loans to individuals for the construction of their residences are structured as permanent loans.
These loans are made on the same terms as residential loans, except that during the construction phase,
which typically lasts up to twelve months, the borrower pays interest only. Generally, the borrower also
pays a construction fee at the time of origination plus other costs associated with processing the loan.
10
Residential construction loans are underwritten pursuant to the same guidelines used for originating
residential loans on existing properties.
Construction loans to builders or developers of single family residences generally carry terms of one year.
Construction loans to owner occupants are generally made in amounts up to 95% of the lesser of cost or
appraised value, but no more than 90% of the loan proceeds can be disbursed until the building is
completed. The Company generally limits the loan-to-value ratios on loans to builders to 80%. Prior to
making a commitment to fund a construction loan, the Company requires a valuation of the property,
financial data and verification of the borrower's income. The Company obtains personal guarantees for
substantially all of its construction loans to builders. Personal financial statements of guarantors are also
obtained as part of the loan underwriting process. Construction loans are generally located in the
Company's market area.
Construction loans are obtained principally through continued business from builders and developers who
have previously borrowed from the Bank, as well as referrals from existing and walk-in clients. The
application process includes a submission to the Bank of accurate plans, specifications and costs of the
project to be constructed. These items are some of the factors utilized in the determination of the
appraised value of the subject property to be built.
At December 31, 2023, construction loans totaled $66.5 million, an increase of $20.0 million from $46.5
million at December 31, 2022. Total construction loans included $23.3 million and $28.4 million of single
family residential, $23.5 million and $1.7 million of multi-family residential, and $19.7 million and $16.4
million of commercial real estate loans at December 31, 2023 and 2022, respectively. The nature of
construction loans makes them more difficult to evaluate and monitor than loans on existing buildings.
The risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the
property's value upon completion of the project, experience of the builder and the estimated cost
(including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be
confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to
assure full repayment or the possibility of having to make substantial investments to complete and sell the
project. Because defaults in repayment may not occur during the construction period, it may be difficult to
identify problem loans at an early stage. In these cases, the Company may be required to modify the terms
of the loan. There were no construction loans in the commercial real estate portfolio that were non-
performing at December 31, 2023 or December 31, 2022.
Consumer Lending. The Company originates a variety of consumer loans, including home equity (open-
end and closed-end), automobile, recreational vehicle, mobile home, lot loans, loans secured by deposit
accounts and other loans for household and personal purposes. At December 31, 2023, the Company’s
consumer loans totaled $42.7 million, a decrease of $2.1 million from $44.8 million at December 31,
2022.
Consumer loan terms vary according to the type and value of collateral, length of contract and
creditworthiness of the borrower. The Company's consumer loans are made at fixed or adjustable interest
rates, with terms up to 20 years for secured loans and up to five years for unsecured loans.
The Company's home equity loans are generally written so that the total commitment amount, when
combined with the balance of any other outstanding mortgage liens, does not exceed 80% of the appraised
value of the property or an internally established market value. Internal market values are established
using current market data, including recent sales data, and are typically lower than third party appraised
values. The closed-end home equity loans are written with fixed or adjustable rates with terms up to 20
years. The open-end home equity lines are written with an adjustable rate and a 2, 5 or 10 year draw
period that requires interest only payments followed by a 10 year repayment period that fully amortizes
the outstanding balance. The consumer may access the open-end home equity line by making a
11
withdrawal at the Bank, transferring funds through our online or mobile banking products or writing a
check on the home equity line of credit account. Open and closed-end equity loans, which are generally
secured by second mortgages on the borrower’s principal residence, represented 61.0% and 63.4% of the
Company’s consumer loan portfolio at December 31, 2023 and December 31, 2022, respectively.
The underwriting standards employed by the Company for consumer loans include a determination of the
applicant's payment history on other debts and their ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if any, in relation to the
proposed loan amount. Consumer loans may entail greater credit risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets,
such as automobiles, recreational vehicles or mobile homes. In these cases, any repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of various federal and state
laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such
loans. At December 31, 2023, $0.4 million of the consumer loan portfolio was non-performing, the same
as the amount at December 31, 2022.
Commercial Business Lending. The Company maintains a portfolio of commercial business loans to
borrowers associated with the real estate industry as well as to retail, manufacturing operations,
agricultural operations and professional firms. The Company's commercial business loans generally have
terms ranging from six months to five years and may have either fixed or variable interest rates. The
Company's commercial business loans generally include personal guarantees and are usually, but not
always, secured by business assets such as inventory, equipment, leasehold interests in equipment,
fixtures, real estate and accounts receivable. The underwriting process for commercial business loans
includes consideration of the borrower's financial statements, tax returns, projections of future business
operations and inspection of the subject collateral, if any. The Company may also purchase a limited
amount of participation interests in commercial business loans originated outside of the Company’s
market area from third party originators. These loans generally have underlying collateral of inventory or
equipment and repayment periods of less than ten years. At December 31, 2023, the Company’s
commercial business loans totaled $61.1 million, a decrease of $4.7 million from $65.8 million at
December 31, 2022. The decrease in commercial business loans was primarily due to a $6.2 million
decrease in commercial secured loans and lines of credit that was partially offset by a $1.1 million
increase in agriculture production loans.
Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to
make repayment from his or her income, and which are secured by real property with more easily
ascertainable value, commercial business loans are of higher risk and typically are made on the basis of
the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the
availability of funds for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Furthermore, the collateral securing the loans may depreciate over time,
may be difficult to appraise and may fluctuate in value based on the success of the business. At
December 31, 2023, $2.2 million of loans in the commercial business portfolio were non-performing,
compared to $0.5 million at December 31, 2022.
12
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related Securities
Real estate loans are generally originated by the Company's salaried loan officers. Mortgage and
consumer loan officers may also receive a commission in addition to their base salary for meeting
production and other branch goals. Loan applications are taken in all branch and loan production offices.
The Company originates both fixed and adjustable rate loans, however, its ability to originate loans is
dependent upon the relative client demand for loans in its markets. Demand for adjustable rate loans is
affected by the interest rate environment. The amount of adjustable rate single family loans increased in
2023 due to an increase in longer term fixed rate mortgage interest rates which made adjustable rate
mortgages a more affordable option for some borrowers to purchase a home. The Company originated
$75.0 million of single family adjustable rate loans for its portfolio during 2023, an increase of $47.0
million from $28.0 million in 2022. The Company also originated $24.2 million of fixed rate single
family loans for its portfolio during 2023, a decrease of $12.1 million from $36.3 million for 2022. The
decrease in the amount of fixed rate single family loans that were placed into the loan portfolio during
2023 is primarily the result of selling almost all of the 15 year fixed rate mortgage loans, that were
eligible for sale, into the secondary market and not placing them into the loan portfolio in order to manage
the Company’s interest rate risk.
The Company typically focuses its portfolio loan origination efforts on commercial real estate,
commercial business and consumer loans because these loans have terms to maturity and adjustable
interest rate characteristics that are generally more beneficial to the Company in managing interest rate
risk than traditional single family fixed rate conventional loans. The Company originated $87.6 million of
multi-family and commercial real estate, commercial business and consumer loans (which excludes
commercial real estate loans for construction and development) during 2023, a decrease of $162.3 million
from originations of $249.9 million for 2022. The decrease in originations primarily reflects the $123.0
million decrease in originations of commercial real estate loans in 2023 compared to 2022. Commercial
business loans originated in 2023 also decreased $29.9 million from 2022. The decrease in originated
commercial real estate and commercial business loans was primarily because of the increase in interest
rates that occurred between the periods which reduced demand for commercial real estate and commercial
business loans between the periods.
In order to supplement loan demand in the Company's market area and geographically diversify its loan
portfolio, the Company purchases participations in real estate loans from selected sellers, from time to
time, with yields based upon then-current market rates. The Company reviews and underwrites all loans
purchased to ensure that they meet the Company's underwriting standards, and the seller generally
continues to service the loans. The Company has generally not experienced higher losses or credit quality
issues with purchased participations than other loans originated by the Company. The Company
purchased $3.3 million of loans during 2023, a decrease of $15.2 million from the $18.5 million
purchased during 2022. All of the loans purchased have terms and interest rates that are similar in nature
to the Company's originated single family, commercial real estate, construction and development and
commercial business portfolios.
The Company has mortgage-backed and related securities that are held, based on investment intent, in the
available for sale portfolio. The Company did not purchase any mortgage-backed securities in 2023 and
purchased $15.0 million in 2022. The decrease in the amount of mortgage-backed securities purchased in
2023 is because of the reduced non-brokered deposit balances between the periods. The Company did not
sell any mortgage-backed securities in 2023 or 2022. See “Investment Activities” section of this Annual
Report on Form 10-K for further discussion of the Company’s investment activity.
13
The following table shows the loan and mortgage-backed and related securities origination, purchase, and
sale and repayment activities of the Company for the periods indicated.
LOANS HELD FOR INVESTMENT
(Dollars in thousands)
Originations by type
Adjustable rate:
Real estate:
Single family ..................................................................................
Multi-family ...................................................................................
Commercial ...................................................................................
Construction and development .......................................................
Non-real estate:
Consumer .......................................................................................
Commercial business .....................................................................
Total adjustable rate ...........................................................................
Fixed rate:
Real estate:
Single family ..................................................................................
Multi-family ...................................................................................
Commercial ...................................................................................
Construction and development .......................................................
Non-real estate:
Consumer .......................................................................................
Commercial business .....................................................................
Total fixed rate ...................................................................................
Total loans originated ........................................................................
Purchases
Real estate:
Construction and development .......................................................
Non-real estate:
Commercial business .....................................................................
Total loans purchased ........................................................................
Sales, participations and repayments
Real estate:
Single family ..................................................................................
Commercial ...................................................................................
Construction and development .......................................................
Non-real estate:
Consumer .......................................................................................
Commercial business .....................................................................
Total sales ..........................................................................................
Transfers to loans held for sale .............................................................
Principal repayments ............................................................................
Total reductions .................................................................................
Decrease in other items, net ..................................................................
Net increase .......................................................................................
$
$
Year Ended December 31,
2022
2023
75,020
0
11,736
41,716
10,972
16,460
155,904
24,187
400
10,300
3,351
14,155
23,527
75,920
231,824
0
3,300
3,300
427
1,899
8,345
2,242
688
13,601
4,215
146,482
164,298
(605)
70,221
28,012
1,913
43,277
53,247
16,704
32,839
175,992
36,343
4,459
101,802
19,006
11,901
37,033
210,544
386,536
15,400
3,050
18,450
0
19,866
0
2,623
12,696
35,185
14,899
228,900
278,984
(115)
125,887
14
LOANS HELD FOR SALE
(Dollars in thousands)
Originations by type
Fixed rate:
Real estate:
Single family ..................................................................................
Total fixed rate loans originated ...........................................................
Sales and repayments
Real estate:
Single family ..................................................................................
Total sales .............................................................................................
Transfers from loans held for investment .............................................
Change in market value/deferred fees ...................................................
Principal repayments ............................................................................
Total reductions ....................................................................................
Net decrease ..........................................................................................
MORTGAGE-BACKED AND RELATED SECURITIES
(Dollars in thousands)
Purchases
Fixed rate mortgage-backed securities ..................................................
Total purchases .....................................................................................
Decrease in other items, net ..................................................................
Net decrease ..........................................................................................
Year Ended December 31,
2022
2023
$
60,708
60,708
71,062
71,062
62,996
62,996
(1,972)
(9)
1
61,016
(308)
76,089
76,089
(766)
(3)
3
75,323
(4,261)
Year Ended December 31,
2022
2023
0
0
(31,274)
(31,274)
15,043
15,043
(67,752)
(52,709)
$
$
$
Classified Assets and Delinquencies
Classification of Assets. Federal regulations require that each savings institution evaluate and classify its
assets on a regular basis. In addition, in connection with examinations of savings institutions, the OCC or
the Federal Deposit Insurance Corporation (FDIC) examiners may identify problem assets and, if
appropriate, require them to be classified with an adverse rating. There are three adverse classifications:
substandard, doubtful, and loss. Assets classified as substandard have one or more defined weaknesses
and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are
not corrected. Assets 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. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset on the balance sheet of the institution is
not warranted. Assets classified as substandard or doubtful require the institution to establish prudent
specific allowances for credit losses. If an asset, or portion thereof, is classified as a loss, the institution
generally charges off such amount. On the basis of management's review of its assets, at December 31,
2023, the Bank classified a total of $22.0 million of its loans and real estate as follows:
(Dollars in thousands)
Substandard ...................... $
Doubtful ...........................
Loss ..................................
Total ............................. $
Single
Family
Construction
or Development
Commercial and
Multi-family
Consumer
Commercial
Business
1,333
38
0
1,371
388
0
0
388
15,583
0
0
15,583
232
34
159
425
4,226
0
0
4,226
Total
21,762
72
159
21,993
15
The Bank's classified assets consist of non-performing loans and other assets discussed in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this
Annual Report on Form 10-K. See “Note 6 Allowance for Credit Losses and Credit Quality Information”
in Item 8 of Part II in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-
K for more information on classified assets.
Delinquency Procedures. Generally, the following procedures apply to delinquent single family real
estate loans. When a borrower fails to make a required payment on a loan, the Company attempts to cure
the delinquency by contacting the borrower. A late notice is sent on all loans over 16 days delinquent.
Additional written and verbal contacts are made with the borrower between 30 and 60 days after the due
date. If the loan is contractually delinquent 90 days, the Company sends a 30-day demand letter to the
borrower and after the loan is contractually delinquent 120 days, institutes appropriate action to foreclose
on the property. If foreclosed, the property is sold at a sheriff’s sale and may be purchased by the
Company. Delinquent commercial real estate and commercial business loans are generally handled in a
similar manner. The Company's procedures for repossession and sale of consumer collateral are subject to
various requirements under state consumer protection laws.
Real estate acquired by the Company as a result of foreclosure is typically classified as real estate in
judgment for six to twelve months and thereafter as real estate owned until it is sold. When property is
acquired by foreclosure or deed in lieu of foreclosure, it is recorded as real estate owned at the estimated
fair value less the estimated cost of disposition. After acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the property, however, are
capitalized to the extent of fair value less disposition cost.
The following table sets forth the Company's loan delinquencies by loan type, amount and percentage of
loan category at December 31, 2023 for loans past due 60 days or more.
Loans Delinquent For:
60-89 Days
90 Days and Over
Total
Number
(Dollars in thousands)
Single family ..................................
Non-residential real estate ..............
Consumer ........................................
Commercial business .....................
Total ............................................
Percent
of Loan
Category
Number Amount
363
4 $
399
1
57
4
2
812
11 $ 1,631
0.03 %
0.00
0.22
0.51
0.06 %
Amount
71
0
92
309
472
2 $
0
6
2
10 $
Percent
of Loan
Category
Number Amount
434
6 $
399
1
149
10
4
1,121
21 $ 2,103
0.14 %
0.11
0.13
1.33
0.19 %
Percent
of Loan
Category
0.17 %
0.11
0.35
1.84
0.25 %
Loans delinquent for 90 days and over are generally non-accruing and are included in the Company’s
non-performing asset total at December 31, 2023.
Investment Activities
The Company utilizes the available for sale securities portfolio in virtually all aspects of asset/liability
management. In making investment decisions, the Investment-Asset/Liability Committee considers,
among other things, the yield and interest rate objectives, the credit risk position and the Bank's liquidity
and projected cash flow requirements.
Securities. Federally-chartered savings institutions have the authority to invest in various types of liquid
assets, including United States Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, the holding company of a federally-
chartered savings institution may also invest its assets in commercial paper, investment grade corporate
16
debt securities and mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly.
The investment strategy of the Company has been directed toward a mix of high-quality government
agency obligations with short terms-to-maturity. At December 31, 2023, the Company did not own any
investment securities of a single issuer that exceeded 10% of the Company's stockholders’ equity other
than U.S. government agency obligations.
The Bank invests a portion of its liquid assets in interest-earning overnight deposits of the FHLB of Des
Moines and the Federal Reserve Bank of Minneapolis. Other investments may include high grade
municipal bonds, corporate preferred stock, corporate equity securities and medium-term (up to five
years) federal agency notes. HMN may invest in the same type of investment securities as the Bank. See
“Note 4 Securities Available For Sale” in Item 8 Part II in the Notes to Consolidated Financial
Statements of this Annual Report on Form 10-K for additional information regarding the Company's
securities portfolio.
The following table sets forth the composition of the Company's securities portfolio, excluding mortgage-
backed and related securities, at the dates indicated.
(Dollars in thousands)
Securities available for sale:
U.S. Government agency obligations ........... $
Corporate preferred stock ..............................
Subtotal ..................................................... $
Amortized Adjusted
Cost
December 31, 2023
Fair
Value
To
% of
Total
Amortized Adjusted
Cost
December 31, 2022
Fair
Value
To
% of
Total
54,112
(432)
0 0
(432)
54,112
53,680
0
53,680
95.1 % $
0.0
95.1
$
54,998
700
55,698
(2,157)
(210)
(2,367)
52,841
490
53,331
67.7 %
0.6
68.3
Average remaining life of
other marketable securities .........................
0.91 years
1.39 years
Other interest-earning assets:
Cash equivalents ........................................ $
Total ........................................................ $
2,770
56,882
0
(432)
2,770
56,450
4.9
$
100.0 % $
24,780
80,478
0
(2,367)
24,780
78,111
31.7
100.0 %
Average remaining life or term to repricing
of other marketable securities and cash
equivalents .................................................
0.86 years
0.96 years
17
The composition and maturities of the investment securities portfolio, excluding FHLB stock, equity
securities, mortgage-backed and related securities, are indicated in the following table.
(Dollars in thousands)
Securities available for sale:
U.S. government agency securities (1) ........ $
Total ......................................................... $
December 31, 2023
1 Year or
Less
After 1
through 5
Years
Over 5
Years
Amortized
Amortized
Amortized
Amortized
Total Securities
Adjusted
Cost
Cost
Cost
Cost
To
Fair
Value
25,000
25,000
29,112
29,112
0
0
54,112
54,112
(432)
(432)
53,680
53,680
Weighted average yield .................................
(1) Callable U.S. government agency securities maturity date based on first available call date that the security is anticipated to be called.
0.00 %
4.22 %
2.92 %
1.40 %
Mortgage-Backed and Related Securities. In order to supplement loan production and achieve its
asset/liability management goals, the Company invests in mortgage-backed and related securities. All of
the mortgage-backed and related securities owned by the Company are issued, insured or guaranteed
either directly or indirectly by a U.S. government agency or are rated “AA” or higher. The Company had
$161.4 million of mortgage-backed and related securities that were all classified as available for sale at
December 31, 2023, compared to $192.7 million at December 31, 2022. No mortgage-backed securities
were purchased in 2023 and $15.0 million were purchased in 2022.
The contractual maturities of the mortgage-backed and related securities portfolio without any
prepayment assumptions at December 31, 2023 are as follows:
(Dollars in thousands)
Securities available for sale:
Federal National Mortgage Association ............... $
Federal Home Loan Mortgage Corporation .........
Collateralized Mortgage Obligations ...................
Total ................................................................... $
December 31, 2023
5 Years
or Less
5 to 10
Years
10 to 20
Years
866
761
0
1,627
86,267
73,488
0
159,755
0
0
32
32
Balance
87,133
74,249
32
161,414
Weighted average yield ..........................................
2.46 %
0.85 %
3.11 %
0.87 %
At December 31, 2023, the Company did not have any non-agency mortgage-backed or related securities
in excess of 10% of its stockholders' equity.
Mortgage-backed and related securities can serve as collateral for borrowings and, through sales and
repayments, as a source of liquidity. In addition, mortgage-backed and related securities available for sale
can be sold to respond to changes in economic conditions.
Sources of Funds
General. The Bank's primary sources of funds are retail, commercial, Internet and brokered deposits,
payments of loan principal, interest earned on loans and securities, repayments and maturities of
securities, borrowings and other funds provided from operations.
Deposits. The Bank offers a variety of deposit accounts to retail and commercial clients having a wide
range of interest rates and terms. The Bank's deposits consist of savings, interest bearing checking, non-
interest bearing checking, money market and certificate accounts (including individual retirement
18
accounts). The Bank relies primarily on competitive pricing policies and client service to attract and retain
these deposits.
The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds
and to respond with flexibility to changes in consumer demand. As clients become more interest rate
conscious, the Bank may become more susceptible to short-term fluctuations in deposit flows. The Bank
manages the pricing of its deposits in keeping with its asset/liability management, profitability and growth
objectives. Based on its experience, the Bank believes that its savings and checking accounts are
relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates
of deposit and money market accounts, and the rates paid on these deposits, has been and will likely
continue to be significantly affected by market conditions. The increase in deposits in 2023 related
primarily to the $102.8 million increase in certificates of deposit that was partially offset by the $88.1
decrease in checking accounts, the $15.5 million decrease in savings accounts, and the $4.3 million
decrease in money market accounts between the periods. The decrease in these checking, savings, and
money market accounts was the result of the increase in interest rates between the periods which resulted
in many depositors seeking a higher interest rate for the funds held in these types of accounts.
The following table sets forth the deposit flows at the Bank during the periods indicated.
(Dollars in thousands)
Opening balance ........................................................................ $
Deposits .....................................................................................
Withdrawals ...............................................................................
Interest credited .........................................................................
Ending balance ..........................................................................
Net (decrease) increase ............................................................. $
Percent change ...........................................................................
Year Ended December 31,
2022
2023
950,666
6,709,342
(6,678,641)
981,926
7,339,754
(7,347,234)
2,347
976,793
(5,133)
(0.52) %
559
981,926
31,260
3.29 %
The following table shows rate and maturity information for the Bank’s certificates of deposit as of
December 31, 2023.
0.00-
0.99%
(Dollars in thousands)
Certificate accounts maturing in quarter ending:
4,090
March 31, 2024 ........................................................ $
5,088
June 30, 2024 ...........................................................
3,558
September 30, 2024 .................................................
1,314
December 31, 2024 ..................................................
890
March 31, 2025 ........................................................
773
June 30, 2025 ...........................................................
352
September 30, 2025 .................................................
370
December 31, 2025 ..................................................
222
March 31, 2026 ........................................................
200
June 30, 2026 ...........................................................
108
September 30, 2026 .................................................
262
December 31, 2026 ..................................................
Thereafter .................................................................
472
Total ...................................................................... $ 17,699
1.00-
1.99%
2.00-
2.99%
3.00-
3.99%
4.00-
4.99%
5.00-
5.99%
Total
Percent
of Total
91
502
685
1,738
591
292
442
87
0
63
101
247
325
5,164
776
481
971
83
180
0
10
0
0
0
0
0
151
2,652
5,976
4,959
2,819
1,124
430
178
1,298
348
31
0
0
0
0
17,163
9,456
26,530
12,362
25,810
4,895
800
482
6,200
1,511
249
8,511
0
0
96,806
457
19,803
42,981
16,019
3,751
0
12,198
0
0
0
0
0
0
95,209
20,846
57,363
63,376
46,088
10,737
2,043
14,782
7,005
1,764
512
8,720
509
948
234,693
8.88 %
24.44
27.00
19.65
4.57
0.87
6.30
2.98
0.75
0.22
3.72
0.22
0.40
100.00 %
Percent of total ......................................................
7.54 %
2.20 %
1.13 %
7.31 %
41.25 %
40.57 %
100.00 %
19
The following table indicates the amount of the Bank's certificates of deposit and other deposits by time
remaining until maturity as of December 31, 2023.
(Dollars in thousands)
Certificates of deposit less than $250,000 ...............................
Certificates of deposit of $250,000 or more ............................
Public funds less than $250,000(1) ...........................................
Public funds of $250,000 or more(1) ........................................
Total certificates of deposit ...................................................
Other deposit accounts of $250,000 or more ..........................
Deposit accounts of $250,000 or more ....................................
Uninsured deposits (2) ..............................................................
Maturity
$
$
$
3 Months
or Less
16,791
3,880
175
0
20,846
263,190
267,070
191,165
Over
3 to 6
Months
52,533
3,591
1,239
0
57,363
0
3,591
11,978
Over
6 to 12
Months
93,293
13,763
1,063
0
108,119
0
13,763
23,131
Over
12
Months
42,843
4,227
265
1,030
48,365
Total
205,460
25,461
2,742
1,030
234,693
0
5,257
6,656
263,190
289,681
232,930
(1) Deposits from governmental and other public entities.
(2) Estimated amount of uninsured deposits based on customer relationships.
For additional information regarding the composition of the Bank's deposits, see “Note 11 Deposits” in
Item 8 Part II in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. For
additional information on certificate maturities and the impact on the Company's liquidity see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources” in Item 7 of Part II of this Annual Report on Form 10-K.
Borrowings. The Bank's other available sources of funds include advances from the FHLB and
borrowings from the Federal Reserve Bank of Minneapolis. As a member of the FHLB of Des Moines,
the Bank is required to own capital stock in the FHLB and is authorized to apply for advances. Each
FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities.
The FHLB may prescribe the acceptable uses for these advances, as well as limitations on the size of the
advances and repayment provisions. Consistent with its asset/liability management strategy, the Bank has
utilized FHLB advances from time to time to fund loan growth and extend the term to maturity of its
liabilities. The Bank may also use short-term FHLB and Federal Reserve Bank borrowings to offset short
term cash needs due to deposit outflows or loan fundings. At December 31, 2023, the Bank had $13.2
million overnight FHLB advances and no Federal Reserve Bank borrowings outstanding. On such date,
the Bank had a collateral pledge arrangement with the FHLB pursuant to which the Bank could borrow up
to $283.5 million for liquidity purposes, subject to approval from the FHLB. The Bank also had the
ability to borrow $87.3 million from the Federal Reserve Bank of Minneapolis based upon the loans that
were pledged to it as collateral at December 31, 2023.
Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources” in Item 7 of Part II of this Annual Report on Form 10-K and “Note 12
Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in Item 8 of Part II in the Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K for more information on FHLB
advances and other borrowings.
Service Corporations of the Bank
As a federally chartered savings bank, the Bank is permitted by OCC regulations to invest up to 2% of its
assets in the stock of, or loans to, service corporation subsidiaries, and may invest an additional 1% of its
assets in service corporations where these additional funds are used for inner-city or community
development purposes. In addition to investments in service corporations, federal institutions are
20
permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities in which a
federal savings bank may engage directly.
OIA is one of two subsidiaries of the Bank. OIA is a Minnesota corporation that was organized in 1983
and operated as an insurance agency until 1986 when its assets were sold. OIA remained inactive until
1993 when it began offering credit life insurance, annuity and mutual fund products to the Bank's clients
and others. OIA currently offers a variety of financial planning products and services. HPH is the Bank’s
other subsidiary and was organized as a limited liability company in Minnesota in 2013. It was inactive in
2023 but has operated as an intermediary for the Bank in holding and operating certain foreclosed
properties.
Competition
The Bank faces strong competition both in originating real estate, commercial and consumer loans and in
attracting deposits. Competition in originating loans comes primarily from mortgage bankers, commercial
banks, credit unions and other savings institutions which have offices in the Bank's market area and those
that operate through Internet banking operations throughout the United States. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
Competition for deposits is principally from mutual funds, securities firms, commercial banks, credit
unions and other savings institutions located in the same communities and those that operate through
Internet banking operations throughout the United States. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenience and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and a
client-oriented staff.
Other Corporations Owned by the Company
The Bank was HMN’s sole direct subsidiary at December 31, 2023.
Employees
At December 31, 2023, the Company had 161 full time employees. None of the employees of the
Company are represented by any collective bargaining unit. Management considers its employee relations
to be good.
Regulation and Supervision
The banking industry is highly regulated. As a savings and loan holding company (SLHC), HMN is
subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve
Bank (FRB). The Bank, a federally-chartered savings association, is also subject to regulation,
supervision and examination by the OCC, which is the Bank’s primary federal regulator. The FDIC also
has authority to regulate the Bank. Subsidiaries of HMN and the Bank may also be subject to state
regulation and/or licensing in connection with certain insurance and investment activities. The Company
is subject to numerous laws and regulations. These laws and regulations impose restrictions on activities,
set minimum capital requirements, impose lending and deposit restrictions and establish other restrictions.
References in this section to applicable statutes and regulations are brief and incomplete summaries only.
The Company recommends consulting the statutes, regulations and related policies and interpretive
guidance for a full understanding of the details of their operation. Changes in statutes, regulations or
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regulatory policies applicable to the Company, including interpretation or implementation thereof, could
have a material effect on the Company’s business.
Holding Company Regulation. As a savings and loan holding company, HMN is subject to regulation
and supervision by the FRB. FRB regulations require holding companies to act as a source of strength to
their subsidiary depository institutions by providing capital, liquidity and other support in times of
financial stress.
Acquisitions by Savings and Loan Holding Companies. Acquisition of a savings association or a savings
and loan holding company is generally subject to FRB approval and the public must have an opportunity
to comment on the proposed acquisition. Without prior approval from the FRB, HMN may not acquire,
directly or indirectly, control of another savings association.
Examination and Reporting. Under the Home Owners’ Loan Act and FRB regulations, HMN, as a SLHC,
must file periodic reports with the FRB. In addition, HMN must comply with FRB record keeping
requirements and is subject to holding company supervision and examination by the FRB. The FRB may
take enforcement action if the activities of a SLHC constitute a risk to the financial safety, soundness or
stability of a subsidiary savings association.
Affiliate Transactions. The Bank, as a holding company subsidiary that is a depository institution, is
subject to both qualitative and quantitative limitations on transactions with the Company. See the section
“Bank Regulation - Transactions with Affiliates and Insiders”.
Capital Adequacy. The Bank is subject to various regulatory capital requirements; however, the Company
meets certain exemption requirements pursuant the FRB’s Small Bank Holding Company Policy
Statement, and therefore, is exempt from the consolidated capital requirements.
Dividends. Federal law limits the ability of a savings and loan holding company, such as HMN, to pay
dividends or make other capital distributions. FRB guidance applicable to holding companies sets out
factors that should be taken into account when considering dividends or distributions, including, among
other things, current and prospective earnings and liquidity, and the holding company’s ability to serve as
an ongoing source of financial and managerial strength to insured depository institution subsidiaries such
as the Bank.
Bank Regulation. As a federally-chartered savings association, the Bank is subject to regulation and
supervision by the OCC. Federal law authorizes the Bank, as a federal savings association, to conduct,
subject to various conditions and limitations, business activities that include: accepting deposits and
paying interest on them; making and buying loans secured by residential and other real estate; making
consumer loans; making commercial loans; investing in corporate obligations, government debt
securities, and other securities; and offering various banking, trust, securities and insurance agency
services to its clients.
Savings associations are expected to conduct lending activities in a prudent, safe and sound manner. The
OCC regulates the safety and soundness of the Bank by enforcing statutory limits on the Bank’s lending
and investment powers. OCC regulations set aggregate limits on certain types of loans including
commercial business, commercial real estate and consumer loans. OCC regulations also establish limits
on loans to a single borrower. As of December 31, 2023, the Bank’s lending limit to one borrower was
approximately $17.1 million.
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A federal savings association generally may not invest in noninvestment-grade debt securities. A federal
savings association may establish subsidiaries to conduct any activity the association is authorized to
conduct and may establish service corporation subsidiaries for limited preapproved activities.
Qualified Thrift Lender Test. Savings associations, including the Bank, must be qualified thrift lenders
(QTLs). A savings association generally satisfies the QTL requirement if at least 65% of a specified asset
base consists of assets such as loans to small businesses and loans to purchase or improve domestic
residential real estate. Savings associations may qualify as QTLs in other ways. Savings associations that
do not qualify as QTLs are subject to significant restrictions on their operations. If the Bank fails to meet
QTL requirements, the Company would face certain limitations, including potential enforcement action
by the OCC and a statutory bar to the payment by the Bank of dividends except under prescribed
conditions including approval by the OCC. As of December 31, 2023, the Bank met the QTL test.
OCC Assessments. The OCC is authorized by statute to charge assessments to cover the costs of
examining the financial institutions it regulates and to fund its operations. The Bank’s OCC assessments
for the year ended December 31, 2023 were approximately $0.2 million. The FRB does not currently
assess HMN for examination fees.
Transactions with Affiliates and Insiders. Savings associations, like banks, are subject to affiliate and
insider transaction restrictions. The restrictions prohibit or limit a savings association from extending
credit to, or entering into certain covered transactions with, affiliates, principal stockholders, directors and
executive officers of the savings association and its affiliates. The term “affiliate” generally includes a
holding company, such as HMN, and any company under common control with the savings association.
Federal law limits covered transactions between the Bank and any one affiliate to 10% of the Bank’s
capital and surplus and with all affiliates in the aggregate to 20%. In addition, the federal law governing
unitary savings and loan holding companies prohibits the Bank from making any loan to any affiliate
whose activity is not permitted for a subsidiary of a bank holding company. This law also prohibits the
Bank from making any equity investment in any affiliate that is not its subsidiary. The Bank is currently
in compliance with these requirements. Covered transactions also include derivatives and the borrowing
and lending of securities, and repurchase agreements with affiliates are subject to collateralization
requirements.
Dividend Restrictions. Federal law limits the ability of a depository institution, such as the Bank, to pay
dividends or make other capital distributions. The Bank, as a subsidiary of a savings and loan holding
company, must file a notice with the FRB before payment of a dividend or approval of a proposed capital
distribution by its board of directors and must obtain prior approval from the FRB if it fails to meet
certain regulatory conditions.
During 2023, the Bank paid dividends to HMN of $2.0 million, which were used to fund the ongoing
operating expenses of the Company, purchase treasury stock, pay dividends, and improve its cash
position. The improved cash position will potentially allow the Company to make a capital contribution
into the Bank should the Bank need additional capital to support its operations. HMN distributed $1.3
million in dividends to its common shareholders in 2023. In January 2024, the Company’s Board of
Directors declared a quarterly dividend of $0.08 per share of common stock. See the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Dividends” section of Part II,
Item 7 of this Annual Report on Form 10-K for more information on the dividend that was declared in the
first quarter of 2024.
Deposit Insurance. The FDIC insures the deposits of the Bank through the Deposit Insurance Fund (DIF).
The DIF is funded by assessments of FDIC members such as the Bank. The FDIC applies a risk-based
system for setting deposit insurance assessments. Under the risk-based assessment system, an institution’s
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insurance assessments vary according to the level of capital the institution holds and the degree to which
it is the subject of supervisory concern. During 2023, the Bank was assessed approximately $0.6 million
for the DIF.
Capital Requirements and Prompt Corrective Action Requirements. The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five capital
categories: 1) well-capitalized; 2) adequately capitalized; 3) undercapitalized; 4) significantly
undercapitalized; and 5) critically undercapitalized. The activities in which a depository institution may
engage and regulatory responsibilities of federal bank regulatory agencies vary depending upon whether
an institution is well-capitalized, adequately capitalized or undercapitalized. Undercapitalized institutions
are subject to various restrictions such as limitations on dividends and growth. A depository institution’s
prompt corrective action capital category depends upon where its capital levels are in relation to relevant
capital measures, which include risk-based capital measures and certain other factors.
Under applicable banking regulations, the failure to comply with capital rules or other applicable
requirements as they arise, could subject HMN, the Bank and their directors and officers to such
restrictions, legal actions or sanctions as the FRB or the OCC considers appropriate. Possible sanctions
include, among others, (i) the imposition of one or more cease and desist orders requiring corrective
action, which are enforceable directives that may address any aspect of the Company’s management,
operations or capital, including requirements to change management, raise equity capital, dispose of
assets or effect a change of control; (ii) civil money penalties; and (iii) downgrades in the capital
adequacy status of the Bank. These regulatory actions may significantly restrict the ability of the
Company to take operating and strategic actions that may be in the best interests of stockholders or
compel the Company to take operating and strategic actions that are not potentially in the best interests of
stockholders. See “Note 17 Regulatory Capital” in Item 8 of Part II in the Notes to Consolidated
Financial Statements of this Annual Report on Form 10-K for more information on Regulatory Capital.
Other Regulations and Examination Authority. The FDIC has adopted regulations to protect the DIF and
depositors, including regulations governing the deposit insurance of various forms of accounts. Federal
regulation of depository institutions is intended for the protection of depositors, and not for the protection
of stockholders or other creditors. In addition, federal law requires that in any liquidation or other
resolution of any FDIC-insured depository institution, claims for administrative expenses of the receiver
and for deposits in U.S. branches (including claims of the FDIC as subrogee of the insured institution)
shall have priority over the claims of general unsecured creditors.
The OCC may sanction any OCC-regulated bank that does not operate in accordance with OCC
regulations, policies and directives. The FDIC has additional authority to terminate insurance of accounts,
after a notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or
unsound practice that has not been corrected, is operating in an unsafe or unsound condition, or has
violated any applicable law, regulation, rule, or order of or condition imposed by the FDIC.
FHLB System. The Bank is a member of the FHLB of Des Moines, which is one of the 11 regional
Federal Home Loan Banks (FHBs). The primary purpose of the FHBs is to provide funding to their
financial institution members in support of the home financing credit function of the members. Each FHB
serves as a reserve or central bank for its members within its assigned region. FHBs are funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB System. FHBs make loans
or advances to members in accordance with policies and procedures established by the board of directors
of the FHB. These policies and procedures are subject to the regulation and oversight of the Federal
Housing Financing Board. All advances from a FHB are required to be fully secured by sufficient
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collateral as determined by the FHB. Long-term advances are required to be used for residential home
financing and small business and agricultural loans.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. As of
December 31, 2023, the Bank had $1.3 million in FHLB stock, which was in compliance with this
requirement. The Bank receives dividends on its FHLB stock. The FHLB’s dividend philosophy is to
differentiate dividend rates between membership and activity-based capital stock. Based on the FHLB’s
most recent quarterly filing on Form 10-Q for the nine months ended September 30, 2023, the effective
dividend rates paid on these subclasses of its capital stock at September 30, 2023 were 3.00% and 8.50%,
respectively.
Other Regulation. Numerous other regulations promulgated by the FRB, the OCC, the Consumer
Financial Protection Bureau (CFPB) and other agencies and other governmental authorities affect the
business operations of the Bank. These include but are not limited to regulations relating to privacy, equal
credit access, mortgage lending and foreclosure practices, electronic fund transfers, collection of checks,
lending and savings disclosures and availability of funds. The CFPB has broad authority to develop new
rules and interpretations with respect to consumer financial products and services, even though its
examination and enforcement authority currently do not extend to the Bank.
Community Reinvestment Act. The Community Reinvestment Act (CRA) requires financial institutions
regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their
delineated communities, including low to moderate income neighborhoods within those communities,
while maintaining safe and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institution’s CRA performance and is required to make public an institution’s rating and
written evaluation. The four possible ratings of meeting community credit needs are outstanding,
satisfactory, needs improvement and substantial non-compliance. Under regulations that apply to all
current CRA performance evaluations, many factors play a role in assessing a financial institution’s CRA
performance. The institution’s regulator must consider its financial capacity and size, legal impediments,
local economic conditions and demographics, including the competitive environment in which it operates.
The evaluation does not rely on absolute standards, and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit. The Bank maintains a CRA statement
for public viewing, as well as an annual CRA highlights document. These documents describe the Bank’s
credit programs and services, community outreach activities, public comments and other efforts to meet
community credit needs. The Bank’s last CRA exam was March 19, 2023 and the Bank received an
“outstanding” rating under the Intermediate Small Savings Association criteria.
Bank Secrecy Act. The Bank Secrecy Act (BSA) requires financial institutions to verify the identity of
clients, keep records and file reports that are determined to have a high degree of usefulness in criminal,
tax and regulatory matters, and to implement anti-money laundering programs and compliance
procedures. The impact on Bank operations from the BSA depends on the types of clients served by the
Bank.
Available Information
The Company’s website is www.hmnf.com. The Company makes available, free of charge, through its
website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act. These
reports are available as soon as reasonably practicable after it electronically files these materials with, or
furnishes them to, the Securities and Exchange Commission (SEC). Information contained on the
Company’s website is expressly not incorporated by reference into this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
Like all financial companies, the Company’s business and results of operations are subject to a number of
risks, many of which are outside of the Company’s control. In addition to the other information in this
report, readers should carefully consider that the following important factors, among others, could
materially impact the Company’s business and future results of operations.
Risks Related to our Business
Regional economic changes in the Company’s markets have in the past adversely impacted, and may in
the future adversely impact, results from operations.
Like all financial institutions, the Company is subject to the effects of any economic downturn, and in
particular a significant decline in home values and reduced commercial development in the Company’s
markets has had a negative effect on results of operations in the past. The Company’s success depends
primarily on the general economic conditions in the counties in which the Company conducts business,
and in the southern Minnesota, northern Iowa and eastern Wisconsin areas in general. Unlike larger
financial institutions that are more geographically diversified, the Company provides banking and
financial services to clients primarily in the Minnesota counties of Dakota, Dodge, Fillmore, Freeborn,
Houston, Mower, Olmsted, Steele, and Winona and portions of Goodhue and Wabasha counties, as well
as Marshall county in Iowa. The Bank also offers banking services to the Milwaukee, Wisconsin area
through a branch location in Waukesha County in Wisconsin. The local economic conditions in these
market areas have a significant impact on the Company’s ability to originate loans, the ability of the
borrowers to repay these loans, and the value of the collateral securing these loans. A significant decline
in the general economic conditions caused by inflation, recession, unemployment or other factors beyond
the Company’s control can affect, and has in the past affected, these local economic conditions and can
adversely affect, and has in the past adversely affected, the Company’s financial condition and results of
operations. The Company has a significant amount of commercial business and commercial real estate
loans and decreases in tenant occupancy and development home sales can have, and in the past have had,
a negative effect on the ability of many of the Company’s borrowers to make timely repayments of their
loans and the value of the collateral held as security for these loans, which can have, and in the past has
had, an adverse impact on the Company’s earnings.
During 2023, the U.S. economy continued to perform reasonably well despite the negative impact of
higher interest rates and inflation. However, there are continuing concerns related to a potential slowdown
in economic activity as the Federal Open Market Committee continues to maintain the federal funds rate
at a higher level than what it has been over the past several years in an effort to reduce inflation and its
effects on the financial markets and economic activity. There can be no assurance that current economic
conditions will continue or improve, and economic conditions could worsen. Economic pressure on
consumers and uncertainty regarding continuing economic improvement may result in changes in
consumer and business spending, borrowing and saving habits. A return of recessionary conditions and/or
other negative developments in the domestic or international credit markets may significantly affect the
markets in which we do business, the value of our loans and investments, and our ongoing operations,
costs and profitability. Declines in real estate value and sales volumes and high unemployment may also
result in higher than expected loan delinquencies and a decline in demand for our products and services.
These negative events may cause us to incur losses and may adversely affect our capital, liquidity and
financial condition.
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The Bank may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and its
cost of funds for banking operations may significantly increase as a result of general economic
conditions, interest rates and competitive pressures. HMN, on an unconsolidated basis, has limited
capital resources and liquidity to assist the Bank with its liquidity and capital requirements.
Liquidity is the ability to meet cash flow needs on a timely basis and at a reasonable cost. The liquidity of
the Bank is used to pay expenses, make loans and to repay deposit and borrowing liabilities as they
become due or are demanded by clients and creditors. Many factors affect the Bank’s ability to meet
liquidity needs, including variations in the markets served by its network of offices, its composition of
assets and liabilities, reputation and standing in the marketplace and general economic conditions.
The Bank’s primary source of funding is retail and commercial deposits gathered through its network of
fourteen banking offices. Wholesale funding sources principally consist of borrowing lines from the
FHLB of Des Moines and the Federal Reserve Bank of Minneapolis and brokered and internet certificates
of deposit obtained from the national market. Borrowings from the FHLB are subject to the FHLB’s
credit policies and procedures relating to the valuation of the loans securing advances as well as the
amount of funds the FHLB will loan to the Bank. The current collateral pledged to secure advances may
become unacceptable, the formulas for determining the excess pledged collateral may change or the
Bank’s credit rating with the FHLB could decrease. In these cases, the Bank may not have sufficient
collateral to pledge or have the borrowing capacity to meet its funding needs and may be required to rely
upon alternate funding sources, such as the Federal Reserve Bank, which typically bear higher borrowing
costs. The Bank’s securities and loan portfolios could also be pledged to the FHLB and Federal Reserve
Bank to increase the amount of available borrowings.
Significant changes in general economic conditions, market interest rates, competitive pressures or
otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it
would have to rely more heavily on brokered and Internet deposits or borrowings in the future, which are
typically more expensive than retail deposits.
The Bank actively manages its liquidity position and monitors it using cash flow forecasts. Changes in
economic conditions, including consumer savings habits and availability or access to borrowed funds and
the brokered and Internet deposit markets could potentially have a significant impact on the Company’s
liquidity position, which in turn could materially impact its financial condition, results of operations and
cash flows.
HMN’s primary source of cash is dividends from the Bank, and the Bank is restricted from paying
dividends to HMN unless certain conditions are met under bank regulatory requirements. At December
31, 2023, HMN had $16.3 million in cash balances. Primarily, HMN requires cash for the payment of
holding company level expenses, including director and management fees, legal expenses and regulatory
costs. HMN may also use cash for the repurchase of outstanding HMN stock and the payment of
dividends. HMN does not anticipate that it will have, on an ongoing long term stand-alone basis, adequate
liquid resources to make all of the required cash payments for these items in the future. To meet these
payment requirements or other potential HMN liquidity or capital needs would require dividends from the
Bank or external capital. Failure to meet regulatory requirements for any future dividends from the Bank
to HMN, or to receive dividends in amounts deemed satisfactory by HMN, could cause HMN to require
other sources of liquidity for its needs in 2024 and beyond. Further information about HMN’s liquidity
position is available in the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources” section in Part II, Item 7 of this Annual Report on Form
10-K.
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Changes in interest rates could negatively impact the Company’s results of operations.
The earnings of the Company are primarily dependent on net interest income, which is the difference
between interest earned on loans and investments and interest paid on interest-bearing liabilities such as
deposits and borrowings. Interest rates are highly sensitive to many factors, including government
monetary and fiscal policies and domestic and international economic and political conditions. Conditions
such as inflation, recession, unemployment, money supply, government borrowing and other factors
beyond management’s control may also affect interest rates. If the Company’s interest-earning assets
mature, reprice or prepay more quickly than interest-bearing liabilities in a given period, a decrease in
market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities
mature or reprice, or, in the case of deposits, are withdrawn by the accountholder, more quickly than
interest-earning assets in a given period, an increase in market interest rates could adversely affect net
interest income. Given the Company’s assets and liability composition as of December 31, 2023, a falling
interest rate environment would negatively impact the Company’s results of operations. The effect on our
deposits of decreases in interest rates generally lags the effect on our assets. The lagging effect of deposit
rate changes is primarily due to the Bank’s deposits that are in the form of certificates of deposit, which
do not re-price immediately when the federal funds rate changes.
Fixed rate loans increase the Company’s exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become subject to repricing.
Adjustable rate loans decrease the risks to a lender associated with changes in interest rates but involve
other risks. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, and the increased payment increases the potential for default. At the same time, for secured
loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In
a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as
the borrowers refinance their loans at lower interest rates. Under these circumstances, the Company’s
results of operations could be negatively impacted.
Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive
assets including mortgage servicing rights, and the Company’s ability to realize gains on the sale or
resolution of assets. This type of income can vary significantly from quarter-to-quarter and year-to-year
based on a number of different factors, including the interest rate environment. An increase in interest
rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an
increase in non-performing assets and increased credit loss reserve requirements that could have a
material adverse effect on the Company’s results of operations.
Changes in interest rates could continue to negatively impact the fair market value of our available for
sale securities portfolio.
The fair market value of our fixed rate available for sale securities portfolio has been negatively impacted
over the past couple of years due to an increase in market interest rates. The result has been that the
Company has recorded a $13.2 million accumulated other comprehensive loss (OCL) in equity as of
December 31, 2023. Future increases in long term interest rates will likely continue to have a negative
effect on the fair market value of our fixed rate securities portfolio and increases in OCL may occur in
future periods. Furthermore, if we are forced to liquidate any of these investments prior to maturity,
including because of a lack of liquidity, we would recognize as a charge to earnings the losses attributable
to those securities.
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Strong competition within the Company’s market area may limit profitability or generate losses.
The Company faces significant competition both in attracting deposits and in the origination of loans.
Mortgage brokers, commercial banks, credit unions and other savings institutions, which have offices in
the Bank’s market area have historically provided most of the Company’s competition for deposits and
loans; however, the Company also competes with financial institutions, mutual funds, and securities firms
that operate through Internet banking operations throughout the United States. Many competitors have
substantially greater financial and other resources than the Company. Finally, credit unions do not pay
federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a
result, they may enjoy a competitive advantage over the Company. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the
quality of services it provides to borrowers. This competitive strategy places significant competitive
pressure on the prices of loans and deposits.
Loss of large checking and money market deposit clients could increase cost of funds and have a
negative effect on results of operations.
The Company has a number of large deposit clients that maintain balances in checking and money market
accounts at the Bank. At December 31, 2023, there was $60.3 million in checking and money market
accounts of clients in the alternative energy and other industries that have individual relationship balances
greater than $5 million. The ability to attract and retain these types of deposits has a positive effect on the
Company’s net interest margin as they provide a relatively low cost of funds to the Company compared to
certificates of deposits or advances. If these depositors were to withdraw these funds and the Bank was
not able to replace them with similar types of deposits, the Banks cost of funds would increase and the
Company’s results of operation would be negatively impacted.
Because of the asset size of the Company, adverse performance affecting a few large loans or lending
relationships can cause significant volatility in earnings.
Due to the Company’s asset size, the provision for credit losses or charge-offs associated with individual
loans can be large relative to the Company’s earnings for a particular period. If one or a few relatively
large loans become non-performing in a period and the Company is required to increase its loss reserves,
or to write off principal or interest relative to such loans, the operating results for that period could be
significantly adversely affected. The effect on results of operations for any given period from a change in
the performance of a small number of loans may be disproportionately larger than the impact of such
loans on the quality of the Company’s overall loan portfolio. The Company generally limits its internal
loan originations to loans less than $7.5 million with loans over that amount approved by its Executive
Loan Committee. The Company’s regulatory lending limit was $17.1 million at December 31, 2023. The
Bank’s largest borrowing relationship had outstanding loans totaling $15.4 million and was performing at
December 31, 2023.
The Company has concentrations in commercial business and commercial real estate loans, increasing
the risk in its loan portfolio.
In order to enhance the yield and shorten the term-to-maturity of its loan portfolio, the Company
continues to maintain the balances of its commercial business and commercial real estate portfolios.
These categories of loans represented approximately 64% of the total loans receivable at December 31,
2023. Some of the Company’s commercial real estate portfolio is in land development loans, while many
of the Company’s commercial business loans are made to borrowers associated with the real estate
industry. Commercial business and commercial real estate loans generally, and land development loans in
particular, present a higher level of risk than loans secured by single family residences. This greater risk is
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due to several factors, including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing properties and the increased
difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from the project is reduced (for
example, if leases are not obtained or renewed or properties intended for resale are not developed and
sold), the borrower’s ability to repay the loan and the underlying collateral may be impaired. Commercial
business loans to businesses that are dependent on the cash flow generated by the sale or leasing of real
estate are similarly impacted. At December 31, 2023, the Company had $3.8 million of non-performing
loans, of which $2.7 million related to commercial business and commercial real estate loans. At
December 31, 2023, total classified loans included $32.6 million of commercial business and commercial
real estate loans. The Company may experience actual losses in respect of these classified loans and
further increases in the level of classified loans in our loan portfolio that may require further increases in
our provision for credit losses.
Our allowance for credit losses may prove to be insufficient to absorb losses or appropriately reflect, at
any given time, the inherent risk of loss in our loan portfolio.
Our non-performing assets were at $3.8 million, or 0.34% of total assets, at December 31, 2023.
Classified loans at December 31, 2023 were $34.9 million, or 4.1% of total loans. Classified loans
represent special mention, performing substandard and non-performing loans. The low level of our
classified loans is primarily due to the current economic environment. If the favorable economic
environment does not continue these assets may not perform according to their terms and the value of the
collateral may be insufficient to pay any remaining loan balance. If this occurs, we may experience losses
or an increased risk of loss in our loan portfolio, which could have a negative effect on our results of
operations. Like all financial institutions, we maintain an allowance for credit losses to provide for loans
in our portfolio that may not be repaid in their entirety. Our allowance for credit losses may not be
sufficient to cover actual credit losses or the inherent risk of loss in our loan portfolio, and future
provision for credit losses could materially adversely affect our operating results.
In evaluating the appropriateness of our allowance for credit losses, we consider numerous factors,
including but not limited to, specific occurrences of loan impairment, our historical charge-off experience,
actual and anticipated changes in the size of the portfolios, national, regional and local economic
conditions such as unemployment data, loan delinquencies, demand for single family homes, demand for
commercial real estate and building lots, loan portfolio composition and observations made by the
Company's ongoing internal audit and regulatory exam processes. In addition, we use information about
specific borrower situations, including their financial position and estimated collateral values, to estimate
the risk and amount of loss for those borrowers. Our estimates of the risk of loss and amount of loss on
any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to
successfully execute their business models through changing economic environments, competitive
challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to
change, our actual losses and estimates of risk of loss inherent in our loan portfolio have varied and are
likely to continue to vary from our current estimates. Such variances may materially and adversely affect
our financial condition and results of operations.
Federal regulators, as an integral part of their examination process, periodically review our allowance for
credit losses and may require us to increase our allowance for credit losses by recognizing additional
provisions for credit losses charged to expense, or to decrease our allowance for credit losses by
recognizing loan charge-offs. Any such additional provisions for credit losses or charge-offs, as required
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by these regulatory agencies, could have a material adverse effect on our financial condition and results of
operations.
Our capital may not be adequate to meet all our needs and requirements in the future and we may need
to take steps to meet our capital needs. These actions may reduce our base of earning assets and core
deposits and may dilute our shareholders or result in a change of control of the Company. There can
be no assurance that we will satisfactorily meet our required future capital needs.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our
operations and protect depositors of the Bank. Depending upon the operating performance of the Bank
and our other liquidity and capital needs, we may find it prudent, subject to prevailing market conditions
and other factors, to raise additional capital through the issuance of additional shares of our common
stock or other equity securities. Additional capital would potentially allow the Bank to grow its assets
more aggressively. Depending on circumstances, if we were to raise capital, we may deploy it to the Bank
for general banking purposes, or may retain some or all of such capital for use by the Company.
If the Company were to raise capital through the issuance of additional shares of common stock or other
equity securities, it would dilute the ownership interests of existing stockholders, dilute the Company’s
earnings per share and could result in a change in control of the Company and the Bank. New investors
may also have rights, preferences and privileges senior to our current stockholders which may adversely
impact our current stockholders. Our ability to raise additional capital through the issuance of equity
securities, if deemed prudent, would depend on conditions in the capital markets at that time, which are
outside of our control, and on our financial performance. A significant investment by a person or group
may also necessitate an amendment to our Certificate of Incorporation, which would require stockholder
approval. Accordingly, we may not be able to raise additional capital, if needed, on favorable economic
terms or other terms acceptable to us.
We may decide to grow our business through acquisitions, which may disrupt or harm our business
and dilute stockholder value.
The Company continues to regularly monitor acquisition opportunities and from time to time conducts
due diligence activities related to possible transactions with banks and other financial institutions.
Negotiations may take place and future acquisitions may occur at any time. Our ability to grow through
acquisitions will depend, in part, on the availability of suitable acquisition targets at acceptable prices,
terms and conditions; our ability to compete effectively for these acquisition candidates; and the
availability of capital and personnel to complete such acquisitions and run the acquired business
effectively. These risks could be heightened if we complete a large acquisition or multiple acquisitions
within a relatively short period of time.
The benefits of an acquisition may take more time than expected to develop or integrate into our
operations and we cannot guarantee that any acquisition will ultimately produce any benefits. Acquiring
other banks, businesses, or branches involves various risks, such as potential disruption of the Company’s
business, including diversion of management’s attention; difficulty in valuing the target company;
potential exposure to undisclosed, contingent, or other liabilities or problems, unanticipated costs
associated with an acquisition, and an inability to recover or manage such liabilities and costs; exposure
to potential asset quality issues of the target company; volatility in reported income as goodwill and other
impairment losses could occur irregularly and in varying amounts; difficulty and expense of integrating
the operations and personnel of the target company or in realizing projected efficiencies, revenue
increases, cost savings, increased market presence, or other projected benefits; potential loss of key
employees or clients of the Company or the target company; dilution to existing stockholders if securities
are issued as part of transaction consideration or to fund transaction consideration; and potential changes
31
in banking or tax laws or regulations that may affect the target company. Any of the foregoing factors
could have a material adverse effect on the Company’s financial condition and results of operations.
Risks related to the Regulation of Our Industry
The Company operates in a highly regulated environment and may be adversely affected by changes in
federal and state laws and regulations.
The Company is and will continue to be subject to extensive examination, supervision and comprehensive
regulation by federal bank regulatory agencies. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds, and the banking system and the financial system as a
whole, and not holders of our common stock. These regulations affect our lending practices, capital
structure, investment practices, dividend policy, and growth, among other things. See Item 1 “Business –
Regulation and Supervision” of this Annual Report on Form 10-K for information regarding regulation
affecting the Company.
Changes in the regulatory landscape may significantly impact the profitability of business activities,
require material changes to certain business practices, impose more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business.
The FRB assesses the condition, performance and activities of savings and loan holding companies in a
manner that is consistent with its established risk-based approach regarding bank holding company
supervision to ensure that savings and loan holding companies are effectively supervised and can serve as
a source of strength for, and do not threaten the soundness of, subsidiary depository institutions such as
the Bank.
The CFPB has broad authority to develop new rules and interpretations with respect to consumer financial
products and services even though its examination and enforcement authority do not currently extend to
the Bank.
Congress and federal regulatory agencies continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and
unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services
and products we may offer, restrict mergers and acquisitions, investments, access to capital, the location
of banking offices, or increase the ability of non-banks to offer competing financial services and products,
among other things. Failure, or alleged failure, to comply with laws, regulations or policies could result in
sanctions by regulatory agencies, civil or criminal penalties or money damages in connection with actions
or proceedings on behalf of regulators or consumers, and/or reputational damage, any of which could
have a material adverse effect on our business, financial condition and results of operations. While we
have policies and procedures designed to prevent any such violations and to reduce the likelihood of such
actions or proceedings, there can be no assurance that such violations will not occur or that such actions
or proceedings will not be brought.
Changes to laws and regulations, including changes in interpretation or implementation, may also limit
the Bank’s flexibility on financial products and fees which could result in additional operational costs and
a reduction in our non-interest income.
Further, our regulators have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws by financial institutions and holding companies in the performance of their
supervisory and enforcement duties. Examples include limits on payment of dividends by banks and
32
regulations governing compensation. Regulation of dividends may limit the liquidity of the Company and
restrictions on compensation may adversely affect our ability to attract and retain employees.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to
material penalties.
The CRA and fair lending laws and regulations impose nondiscriminatory lending requirements on
financial institutions. The Department of Justice, the CFPB and other federal agencies are responsible for
enforcing these laws and regulations. A successful challenge to an institution’s performance under the
CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the
required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on
mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the
ability to challenge an institution’s performance under fair lending laws in private class action litigation.
The Bank has implemented policies and procedures designed to ensure compliance with such laws and
regulations, but any non-compliance could lead to regulatory actions that could result in material penalties
or sanctions.
The USA PATRIOT Act and Bank Secrecy Act may subject us to large fines for non-compliance.
The USA PATRIOT Act and the Bank Secrecy Act require financial institutions to develop programs to
prevent financial institutions from being used for money laundering and terrorist activities. If these
activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S.
Treasury Department’s Office of Financial Crimes Enforcement Network. These rules require financial
institutions to establish procedures for identifying and verifying the identity of clients seeking to open
new financial accounts. Failure to comply with these regulations could result in fines or sanctions. In
recent years, several banking institutions have received large fines for non-compliance with these laws
and regulations. Although the Bank has developed policies and procedures designed to ensure
compliance, regulators may take enforcement action against the Bank in the event of non-compliance.
Technology and Cybersecurity Risks
The extended disruption or compromise of vital infrastructure, including the Company’s technology
systems, could negatively impact the Company’s results of operations and financial condition.
The Company’s business depends on its ability to process, record and monitor a large number of
transactions. The Company’s technological and physical infrastructures, which include its financial,
accounting and other data processing systems, are vital to its operation. Extended disruption or
compromise of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure,
computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or
other events outside of the Company’s control, could cause the Company to suffer regulatory
consequences, reputational damage and financial losses, any of which could have a material adverse
effect either on the financial services industry as a whole, or on the Company’s business, financial
condition and results of operations.
The Company faces cybersecurity and other external data security risks that could adversely affect the
reputation of the Company and that could have a material adverse effect on the Company’s financial
condition and results of operations.
The Company’s business is dependent upon the transmission and storage of confidential information in
digital technologies, computer and email systems, software and networks. The Company has security
systems in place and regularly monitors its computer systems and network infrastructure. The Company
33
does not believe that it has experienced a material cybersecurity incident, but it has experienced
immaterial threats to its data and systems, including computer virus and malware attacks and other
attempted unauthorized access to our systems. Cybersecurity threats are rapidly evolving and the
Company may not be able to anticipate or prevent all future attacks. Other financial institutions have
been, and continue to be, the target of various evolving and adaptive cybersecurity threats, including
malware and denial of service, as part of an effort to disrupt the operations of financial institutions,
potentially test their cybersecurity capabilities, or obtain confidential, proprietary, or other information.
As cybersecurity threats continue to evolve, the Company may incur increasing costs in an effort to
minimize these risks. In addition, the Company could be held liable for, and could suffer reputational
damage as a result of, any security breach or loss, which could have a material adverse effect on the
Company’s financial condition and results of operations.
Third parties with which the Company does business or that facilitate its business activities, including
vendors and retailers, could also be sources of operational and information security risk to the Company.
There have been increasingly sophisticated and large-scale efforts on the part of third parties to breach
data security with respect to financial transactions, including intercepting account information at locations
where clients make purchases, as well as the use of social engineering schemes such as “phishing.” For
example, large retailers have reported data breaches resulting in the loss of client information. In the event
that third parties are able to misappropriate financial information of the Bank’s clients, even if such
breaches take place due to weaknesses in other parties' internal data security procedures, the Company
could suffer reputational or financial losses which could have a material adverse effect on its financial
condition and results of operations.
Risks related to our Common Stock
The price of our common stock has been volatile and could continue to fluctuate in the future.
During the year ended December 31, 2023, the price of our common stock on The Nasdaq Global Market
ranged from $17.31 to $24.95 per share, and over the two-year period from January 1, 2022 to December
31, 2023 it ranged from $17.31 to $25.98. Our closing sale price on December 31, 2023 was $23.00 per
share and on February 16, 2024 it was $20.22 per share. Our stock generally trades in relatively low
volumes and its price may fluctuate in response to a number of events and factors, including, but not
limited to, variations in operating results, litigation or governmental and regulatory proceedings, market
perceptions of our financial reporting, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that investors may deem
comparable to us, and news reports relating to trends in our markets or general economic conditions.
We may issue additional stock, or reissue shares of treasury stock, without shareholder consent.
We have authorized 16,000,000 shares of common stock. As of December 31, 2023, 9,128,662 shares
were issued and outstanding (including 4,670,757 shares that were held as treasury stock) and 6,871,338
shares were unissued. The Company has also granted options to purchase 34,229 shares of common stock
that are currently outstanding and has 318,040 shares that are available to be awarded pursuant to our
current equity incentive plans. The board of directors has authority, without action or vote of the
stockholders, to issue all or part of the authorized but unissued shares and to reissue all of the treasury
shares. Additional shares may be issued, or treasury shares reissued, in connection with future financing,
acquisitions, employee stock plans or otherwise. Any such issuance, or reissuance, will dilute the
percentage ownership of existing stockholders. We are also currently authorized to issue up to 500,000
shares of preferred stock, however, as of December 31, 2023, there were no preferred stock shares issued
and outstanding. Under our certificate of incorporation, our board of directors can issue additional
preferred stock in one or more series and fix the terms of such stock without shareholder approval.
34
Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund provisions. The issuance of preferred
stock could adversely affect the rights of the holders of common stock and reduce the value of the
common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict
our ability to merge with or sell our assets to a third party.
Our ability to pay dividends on or repurchase our common stock is restricted.
We are a stock savings bank holding company and our operations are conducted primarily by the Bank.
Since we receive substantially all of our revenue from dividends from the Bank, our ability to pay
dividends on our common stock or repurchase common stock depends on our receipt of dividends from
the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations. The ability of
the Bank to pay dividends to us is also subject to its profitability, financial condition, capital needs and
other cash flow requirements. There is no assurance that the Bank will be able to pay dividends to us in
the future or that we will be able to generate adequate cash flow to continue to pay dividends or
repurchase our common stock in the future. The inability to receive dividends from the Bank could have
an adverse effect on our business and financial condition.
Provisions of our certificate of incorporation and bylaws, as well as Delaware and federal law, may
discourage, delay or prevent an acquisition of control of us, even in situations that may be viewed as
desirable by our stockholders.
Provisions included in our certificate of incorporation and bylaws, as well as provisions of the Delaware
General Corporation Law and federal law (including banking regulations), may discourage, delay or
prevent potential acquisitions of control of us, particularly when attempted in a transaction that is not
negotiated directly with and approved by our board of directors, despite perceived short-term benefits to
our stockholders (such as an increase in the trading price of our common stock).
Specifically, our certificate of incorporation and bylaws include provisions that:
• limit the voting power of shares held by a stockholder beneficially owning in excess of 10% of the
outstanding shares of our common stock;
• require that, with limited exceptions, business combinations between us and a stockholder
beneficially owning in excess of 10% of the voting power of the outstanding shares of our stock
entitled to vote in the election of directors, be approved by at least 80% of the total number of our
outstanding voting shares;
• require that prior to acquiring publicly traded equity securities from a stockholder that owns 5% or
more of our publicly traded voting stock, with limited exception, holders of 80% or more of our
voting stock outstanding, other than shares held by the selling stockholder, must approve the
transaction;
• divide our board of directors, other than directors who may be elected by a class or series of
preferred stock, into three classes serving staggered three-year terms and provide that a director may
only be removed prior to the expiration of a term for cause by the affirmative vote of the holders of
at least 80% of the voting power of all of the outstanding shares of capital stock entitled to vote in an
election of directors;
• require that a special meeting of stockholders be called pursuant to a resolution adopted by a
35
majority of our board of directors;
• require advance notice of nominations of directors to be made, or business to be brought, by
stockholders at our annual meetings;
• authorize the issuance of preferred stock with such designations, rights and preferences as may be
determined from time to time by our board of directors; and
• require that amendments to (i) our certificate of incorporation be approved by a two-thirds vote of
our board of directors and by a majority of the outstanding shares of our voting stock or, with respect
to the amendment of certain provisions (regarding, among other things, provisions relating to
number, classification, election and removal of directors, amendment of the bylaws, call of special
stockholder meetings, acquisitions of control, director liability, and certain business combinations),
by 80% of the outstanding shares of our voting stock, and (ii) our bylaws be approved by a majority
vote of our board of directors or the affirmative vote of at least 80% of the total votes eligible to be
voted at a duly constituted meeting of stockholders.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which
prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person
who, either alone or together with affiliates and associates, owns (or within the past three years, did own)
15% or more of the corporation’s voting stock. For purposes of Section 203, “voting stock” means stock
of any class or series entitled to vote generally in the election of directors. Furthermore, federal law
requires FRB or OCC approval prior to any direct or indirect acquisition of control (as defined in
regulations) of HMN or the Bank, respectively, including, with respect to the Bank, any indirect
acquisition of control through an acquisition of control of HMN.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
The Company recognizes the critical importance of developing, implementing, and maintaining robust
cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity,
and availability of our data and has integrated cybersecurity risk management into our broader risk
management framework to promote a company-wide culture of cybersecurity risk management. Our
information technology department continuously evaluates and addresses cybersecurity risks in alignment
with our business objectives and operational needs.
Because of the complexity and evolving nature of cybersecurity threats, the Company engages with a
range of external experts, including cybersecurity consultants and auditors in evaluating and testing our
risk management systems. These partnerships enable us to leverage their specialized knowledge and
insights, ensuring our cybersecurity strategies and processes are appropriate. Our collaboration with these
third parties includes ongoing system penetration testing, regular audits, threat assessments, and
consultation on security enhancements.
36
Because the Company is aware of the risks associated with third-party service providers, management
implements stringent processes to oversee and manage these risks. We conduct thorough security
assessments of all third-party providers before engagement and maintain ongoing monitoring to ensure
they meet our cybersecurity standards.
We are not aware of any previous cybersecurity incidents which have materially affected, or are
reasonably likely to materially affect, us to date, including our business strategy, results of operations or
financial condition. However, any future potential risks from cybersecurity threats, including but not
limited to exploitation of vulnerabilities, ransomware, denial of service, or other similar threats may
materially affect us, including our execution of business strategy, reputation, results of operations and/or
financial condition.
Governance
The Board of Directors is aware of the critical nature of managing risks associated with cybersecurity
threats and is composed of members with diverse expertise including, risk management, technology, and
finance, allowing them to effectively oversee cybersecurity risks. The Director of Information
Technology (DIT) plays a pivotal role in informing the Board on cybersecurity risks. He provides
comprehensive briefings to the Board on a quarterly basis which include updates on the results of
vulnerability testing, status of software patching installations, results of business continuity exercises, a
summary of recent cybersecurity events/articles, and an update on third-party consultant activities. In
addition, our external consultants meet with the Board on an annual basis to update them on the results of
their reviews.
Risk Management Personnel
Primary responsibility for assessing, monitoring, and managing our cybersecurity risks rests with the DIT,
Mr. Roberts Hoenisch. With over 30 years of experience in the information technology field, Mr.
Hoenisch brings a wealth of expertise to his role. He, in conjunction with his staff and external
consultants, oversees our governance programs, tests our compliance with standards, remediates known
risks, and implements our employee training program.
Monitor Cybersecurity Incidents
The DIT is continually informed about the latest developments in cybersecurity, including potential
threats and innovative risk management techniques. This ongoing knowledge acquisition is crucial for the
effective prevention, detection, mitigation, and remediation of cybersecurity incidents. The DIT, along
with his staff and third party consultants, implements and oversees processes for the regular monitoring of
our information systems. This includes the deployment of advanced security measures and regular system
audits to identify potential vulnerabilities. In the event of a cybersecurity incident, the DIT is equipped
with a well-defined incident response plan. This plan includes immediate actions to mitigate the impact
and long-term strategies for remediation and prevention of future incidents.
Reporting to Board of Directors
The DIT, in his capacity, regularly informs the Chief Financial Officer (CFO) and Chief Executive
Officer (CEO) of all aspects related to cybersecurity risks and incidents. This ensures that the highest
levels of management are kept abreast of the cybersecurity posture and potential risks facing the
Company. Furthermore, any significant cybersecurity matters, and strategic risk management decisions
would be escalated to the Board of Directors, ensuring that they have comprehensive oversight and can
provide guidance on critical cybersecurity issues.
37
ITEM 2. PROPERTIES
The Company owns its corporate office in Rochester, Minnesota and the buildings and land for eleven of
its fourteen full service branches. The remaining three full service branches and two loan production
offices are leased. These leased branches are located at: 100 1st Ave Bldg., Suite 200, Rochester,
Minnesota; 2805 Dodd Road, Suite 160, Eagan, Minnesota; and 1015 West Frontage Road, Suite 100,
Owatonna, Minnesota. The leased loan production offices are located at: 50 14th Avenue East, Suite 100,
Sartell, Minnesota and 700 North Third Street, North, Suite 204, La Crosse, Wisconsin. The Bank uses all
properties and they are all located in Minnesota, except for one full service branch located in Iowa and the
one full service branch and one loan production office that are located in Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to legal proceedings arising out of its lending and deposit
operations. See “Note 18 Commitments and Contingencies” in Item 8 of Part II in the Notes to the
Consolidated Financial Statements of this Annual Report on Form 10-K for more information.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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, 2023, the Company had 9,128,662 share of common stock issued and
outstanding (including 4,670,757 shares that were held as treasury stock), and there were 374
stockholders of record and 901 estimated beneficial owners of common stock.
Dividends
The declaration of dividends is subject to, among other things, the Company's financial condition and
results of operations, the Bank's compliance with regulatory capital requirements and other regulatory
restrictions, tax considerations, industry standards, economic conditions, anticipated asset growth, general
business practices and other factors. The Company made four quarterly dividend payments of 6 cents per
share that totaled $1.0 million during 2022 and made one quarterly dividend payment of 6 cents per share
and three quarterly dividend payments of 8 cents per share that totaled $1.3 million during 2023. The
Company will continue to evaluate the best use of the Company’s capital based on the factors identified
above.
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 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 and is subject to the
discretion of the Board of Directors of both the Bank and the Company. The payment of dividends
depends upon many factors, including the Company’s results of operations, financial condition, capital
requirements, regulatory and contractual restrictions, business strategy and other factors deemed relevant
by the Board of Directors.
38
In January 2024, the Company’s Board of Directors declared a quarterly dividend of 8 cents per share of
common stock payable on March 6, 2024 to stockholders of record at the close of business on February
13, 2024. The declaration and amount of any future cash dividends remains subject to the sole discretion
of the Board of Directors.
The following table provides information with respect to purchases made by the Company of its own
stock during the fourth quarter of 2023:
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (a)
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased under the Plans or
Programs (a)
October 1, 2023 to October 31, 2023 ...................
November 1, 2023 to November 30, 2023 ...........
December 1, 2023 to December 31, 2023............
$
0
1,414
28,043
Total ...............................................................
29,457
$
N/A
18.25
21.52
21.36
0
1,414
28,043
29,457
$
$
$
$
6,000,000
5,974,198
5,370,816
5,370,816
(a) On March 1, 2023, the Company announced that the Board of Directors had increased the authorized repurchases to $6.0 million. Share
repurchases may be executed through various means, including through open market transactions, privately negotiated transactions or otherwise.
The repurchase program does not obligate the Company to purchase any shares and has no set expiration date.
ITEM 6. RESERVED
39
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes to those financial statements included elsewhere
in this annual report on Form 10-K. This discussion contains forward-looking statements, which are
based on our assumptions about the future of our business. Our actual results will likely differ materially
from those contained in the forward-looking statements. Please read the cautionary note under the
heading “Forward-Looking Statements” included at the beginning of this Annual Report on Form 10-K
for additional information.
Overview
HMN is the stock savings bank holding company for 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 affected by changes in interest rates, the volume and composition of interest-earning assets
and interest-bearing liabilities and non-interest bearing deposits, 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, 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 credit losses, data processing costs, professional services, deposit insurance, amortization
expense on mortgage servicing assets, advertising expenses, and income taxes. The earnings of financial
institutions, such as 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 balance fluctuations 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.
Critical Accounting Estimates
While our significant accounting policies are described in the notes to our consolidated financial
statements, we believe the following discussion addresses our most critical accounting estimates, which
are those estimates made in accordance with U.S. generally accepted accounting principles (GAAP) that
involve a significant level of estimation uncertainty and have had or are reasonably likely to have a
material impact on our financial condition or results of operations. The Company has identified the
following critical accounting estimates 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 Credit Losses and Related Provision
The determination of the allowance for credit losses (ACL) is considered a critical accounting estimate by
management because it is inherently subjective and involves a high degree of judgement to determine the
appropriateness of the ACL. The determination of the ACL requires management to select an appropriate
ACL methodology, select and analyze various quantitative and qualitative loss factors, estimate maximum
loss percentages, develop appropriate calculations to estimate the impact of the various loss factors on the
40
required allowance, and use other material estimates, including forecasted economic data, to calculate the
ACL and to evaluate it for appropriateness. All of the factors used to determine the ACL are subject to
frequent adjustments that could result in material changes to the amount of the recorded ACL.
The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2023. Under
ASU 2016-13, 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 methodology for
establishing the allowance for credit losses takes into consideration probable losses that have been
identified in connection with the loans individually reviewed, in accordance with ASU 2016-13, as well
as the expected losses in each identified pool of loans that have not been individually reviewed. Although
management believes that based on current conditions the allowance for credit losses is maintained at an
appropriate amount to provide for the expected credit losses in the portfolio as of the balance sheet dates,
future conditions may differ substantially from those anticipated in determining the ACL and adjustments
may be required in the future. See “Note 1 Description of the Business and Summary of Significant
Accounting Policies – New Accounting Pronouncements” and “Note 6 Allowance for Credit Losses and
Credit Quality Information” in the Notes to Consolidated Financial Statements for further disclosures and
information on the impact on the Company when it adopted ASU 2016-13 on January 1, 2023.
Income Taxes
Deferred tax assets and liabilities are recognized for the 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 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 two
largest relating to the net unrealized losses on securities available for sale and the allowance for credit
losses. For tax purposes, the net unrealized losses on securities available for sale are not recognized unless
the securities are sold and the loss becomes realized. For book purposes, the unrealized losses, net of
income taxes, are reported as a separate component of stockholders’ equity until realized. For the
allowance for credit losses, only the net charge-offs are deductible for taxes, while the entire provision for
credit losses is used to determine book income. A deferred tax asset for both of these items is created
because of the timing difference of when the expense is recognized for book and tax purposes. Under
GAAP, 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 positive evidence considered includes the 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 only negative evidence that the Company identified was related to a change in Wisconsin
41
state tax law that was enacted in 2023. The law change allows financial institutions to claim an
exemption from state taxation loan income from loans of $5 million or less where the borrower resides or
is located in Wisconsin. The law change is anticipated to substantially reduce the Company’s effective
state income tax rate in Wisconsin, which is expected to reduce the Company’s Wisconsin state income
tax expense in future periods. A valuation allowance has been recorded to reflect the anticipated
reduction in the Company’s ability to recognize future Wisconsin state tax benefits when the timing
differences reverse on the previously recorded deferred tax assets. It is possible that future conditions
may differ substantially from those anticipated in determining that a valuation allowance is required on
deferred tax assets and adjustments may be required in the future.
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 that are
significantly different from those estimated.
Results of Operations
Comparison of 2023 with 2022
Net income was $6.0 million for 2023, a decrease of $2.0 million, or 25.4%, compared to net income of
$8.0 million for 2022. Diluted earnings per share for the year ended December 31, 2023 was $1.37, a
decrease of $0.46 per share, compared to diluted earnings per share of $1.83 for the year ended December
31, 2022. The decrease in net income between the periods was due primarily to a $1.5 million decrease in
net interest income primarily because of a decrease in the net interest margin as a result of increased
funding costs. Gain on sales of loans decreased $0.9 million between the periods because of a decrease in
mortgage loan sales. Compensation expense increased $0.9 million due primarily to annual salary
increases between the periods. These decreases in net income were partially offset by a $0.4 decrease in
the provision for credit losses between the periods. Other non-interest income increased $0.2 million
primarily because of an increase in the commissions earned on the sale of uninsured investment products
between the periods.
Net Interest Income
Net interest income was $30.8 million for 2023, a decrease of $1.5 million, or 4.6%, from $32.3 million
for 2022. Interest income was $43.5 million for 2023, an increase of $9.2 million, or 26.9%, from $34.3
million for 2022. Interest income increased because of the $54.1 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
4.02% for 2023, an increase of 69 basis points from 3.33% for 2022. The increase in the average yield
was primarily related to the increase in market interest rates as a result of the 5.25% increase in the prime
interest rate over the past two years.
Interest expense was $12.7 million for 2023, an increase of $10.7 million, or 536.3%, compared to $2.0
million for 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
$46.5 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 1.28% for 2023, an increase of 107 basis points from 0.21% for 2022. The increase in the average
rate paid was primarily related to the change in the types of funding sources used between the periods as
more brokered deposits, certificates of deposits, and Federal Home Loan Bank (FHLB) advances were
used in 2023 than in 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
42
5.25% increase in the federal funds rate over the past two years also contributed to the higher funding
costs in 2023 when compared to 2022.
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 and
non-interest bearing deposits, 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.
(Dollars in thousands)
Interest-earning assets:
Securities available for sale(1):
Mortgage-backed and
related securities ..........................................
$
Other marketable securities ..........................
Loans held for sale ...........................................
Loans receivable, net(1) (2) .................................
Cash equivalents and other earning assets .......
Total interest-earning assets ............................. $
Interest-bearing liabilities:
Checking accounts ........................................... $
Savings accounts ..............................................
Money market accounts ...................................
Certificate accounts ..........................................
Customer escrows ............................................
FHLB advances and other borrowings ............
Total interest-bearing liabilities ....................... $
Noninterest checking .......................................
Other noninterest-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 .........................
Year Ended December 31,
Average
Outstanding
Balance
2023
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2022
Interest
Earned/
Paid
Average
Yield/
Rate
198,649
55,501
2,174
2,362
966
140
816,156 39,506
503
10,351
1,082,831 43,477
1,037
110
4,577
6,566
59
371
162,685
114,074
267,939
179,546
2,923
6,807
733,974
256,294
3,170
993,438 12,720
30,757
2,801
428
115
30,333
578
34,255
220
75
882
555
16
251
$
%
238,128
1.19
52,161
1.74
2,418
6.42
699,365
4.84
4.86
36,692
4.02 $ 1,028,764
159,509
123,786
271,750
81,528
803
6,665
644,041
300,394
2,455
0.64 % $
0.10
1.71
3.66
2.00
5.45
$
1.28 %
$
2.74 %
946,890
$
1,999
32,256
89,393
$
81,874
2.84 %
109.00 %
108.65 %
%
1.18
0.82
4.75
4.34
1.58
3.33
0.14 %
0.06
0.32
0.68
2.00
3.77
0.21 %
3.12 %
3.14 %
(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 costs, loan discounts, loans in process and loss reserves.
Net interest margin (net interest income divided by average interest-earning assets) for 2023 was 2.84%, a
decrease of 30 basis points, compared to 3.14% for 2022. The decrease in the net interest margin was
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.
The following table presents the dollar amount of changes in interest income and interest expense for
major components of interest-earning assets and interest-bearing liabilities. It quantifies the changes in
interest income and interest expense related to changes in 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).
43
Year Ended December 31,
2023 vs. 2022
Increase (Decrease)
Due to
Volume (1)
(465)
27
(12)
(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 and other earning assets .............. (389)
Total interest-earning assets ................................. $
Interest-bearing liabilities:
Checking accounts ................................................... $ 3
Savings accounts ..................................................... (6)
Money market accounts .......................................... (28)
Certificate accounts ................................................. 3,688
Customer escrows.................................................... (1)
FHLB advances and other borrowings.................... 5
Total interest-bearing liabilities ........................... $ 3,661
Increase (decrease) in net interest income .................
$ 683
4,344
5,183
Total
Increase
(Decrease)
Rate(1)
26
511
37
3,990
314
4,878
(439)
538
25
9,173
(75)
9,222
814
41
3,723
2,323
44
115
7,060
(2,182)
817
35
3,695
6,011
43
120
10,721
(1,499)
(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.
At December 31, 2023
Weighted average rate on:
Weighted average yield on:
Securities available for sale:
Mortgage-backed and related securities .................................... 1.16 % Checking accounts ......................................................................... 0.85 %
Other marketable securities ........................................................ 2.86
Loans held for sale ....................................................................... 6.60
Loans receivable, net .................................................................... 4.97
Cash equivalents and other earning assets ................................... 4.61
Combined weighted average yield on
interest-earning assets ............................................................... 4.29
Savings accounts ........................................................................... 0.11
Money market accounts................................................................. 2.16
Certificate accounts ....................................................................... 4.43
FHLB advances and other borrowings .......................................... 5.64
Combined weighted average rate on interest-bearing
liabilities ..................................................................................... 1.80
Interest rate spread .................................................................... 2.49
Provision for Credit Losses
The provision for credit losses was $0.7 million for 2023, a decrease of $0.4 million from the $1.1 million
provision for credit losses for 2022. The provision for credit losses decreased between the periods
primarily because the increase in the provision due to loan growth was less in 2023 than for 2022. The
decrease in the provision because of loan growth was partially offset by an increase in the provision due
to increased charge-offs and specific reserves in 2023. The provision for credit losses also includes an
amount for unfunded commitments that decreased $0.1 million during 2023.
44
Non-Interest Income
Non-interest income was $8.3 million for 2023, a decrease of $0.6 million, or 6.8%, from $8.9 million for
the 2022.
The following table presents the components of non-interest income:
Year Ended December 31,
Percentage
(Dollars in thousands)
Fees and service charges ................................ $
Loan servicing fees .........................................
Gain on sales of loans .....................................
Other non-interest income ..............................
Total non-interest income............................ $
2023
2022
3,352
1,575
1,494
1,860
8,281
3,222
1,590
2,393
1,682
8,887
Change
4.0 %
(0.9)
(37.6)
10.6
(6.8)
Gain on sales of loans decreased $0.9 million between the periods because of a decrease in single family
loan originations that were saleable into the secondary market due primarily to an increase in mortgage
interest rates between the periods. Loan servicing fees decreased slightly between the periods due to a
decrease in the aggregate balances of single family mortgage loans that were being serviced for others.
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.
Other non-interest income increased $0.2 million primarily because of an increase in the commissions
earned on the sale of uninsured investment products between the periods.
Non-Interest Expense
Non-interest expense was $29.8 million for 2023, an increase of $1.0 million, or 3.4%, from $28.8 million
for 2022. The following table presents the components of non-interest expense:
Year Ended December 31,
Percentage
(Dollars in thousands)
Compensation and benefits ................................
Occupancy and equipment ................................
Data processing ..................................................
Professional services..........................................
Other ..................................................................
Total non-interest expense .............................. $
$
2023
2022
18,113
3,626
2,187
1,051
4,795
29,772
17,211
3,812
1,948
1,386
4,444
28,801
Change
5.2 %
(4.9)
12.3
(24.2)
7.9
3.4
Compensation and benefits expense increased $0.9 million primarily because of annual salary increases.
Other non-interest expense increased $0.4 million between the periods primarily because of an increase in
FDIC insurance expense due to an increase in assessment rates. Data processing expenses increased $0.2
million due to an increase in system processing and mobile banking charges between the periods. These
increases in non-interest expense were partially offset by a $0.3 million decrease in professional services
because of a decrease in legal expenses between the periods. Occupancy and equipment expense
decreased $0.2 million between the periods due to a decrease in building maintenance expenses.
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 $2.5 million for 2023, a decrease of
$0.7 million from $3.2 million for 2022. The decrease in income tax expense was primarily the result of a
decrease in pre-tax income between the periods.
45
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 net deferred loan fees and discounts and the allowance for credit losses
as of the dates indicated:
December 31,
2023
2022
(Dollars in thousands)
Amount
Percent
Amount
Percent
Real Estate Loans:
Single family ............................... $ 264,303
60,613
Multi-family ................................
362,839
Commercial .................................
Construction and development ...
66,501
Total real estate loans .............
754,256
Other Loans:
Consumer Loans:
13,962
Home equity line .......................
12,090
Home equity ..............................
5,965
Recreational vehicles ................
Other ..........................................
10,717
42,734
Total consumer loans ..............
61,118
Commercial business loans .........
Total other loans .....................
103,852
Total loans ............................... $ 858,108
Less:
15
Unamortized discounts ...............
577
Net deferred loan fees .................
Allowance for credit losses .........
11,824
Total loans receivable, net ....... $ 845,692
30.80 % $
7.07
42.28
7.75
87.90
1.63
1.41
0.69
1.25
4.98
7.12
12.10
100.00 % $
$
205,890
53,885
370,915
46,545
677,235
17,551
10,865
7,870
8,531
44,817
65,835
110,652
787,887
13
519
10,277
777,078
26.13 %
6.84
47.08
5.91
85.96
2.23
1.38
1.00
1.08
5.69
8.35
14.04
100.00 %
The growth in the overall loan portfolio in 2023 was primarily because of the growth experienced in
single family, multi-family, and construction and development loans. The growth in these loan categories
was partially offset by a decrease in commercial real estate loans, consumer loans, and commercial
business loans. Based on current economic conditions and the projected loan origination and prepayment
amounts, it is anticipated that the growth in the overall loan portfolio will be limited in 2024.
Single family real estate loans were $264.3 million at December 31, 2023, an increase of $58.4 million,
compared to $205.9 million at December 31, 2022. The single family loan portfolio increased in 2023
primarily because a higher percentage of our originated single family loans were placed into the loan
portfolio. The majority of the $74.3 million in single family loans that were placed into the loan portfolio
were originated in non-salable loan products specific to our executive banking initiative targeting high net
worth individuals and medical professionals.
Multi-family real estate loans were $60.6 million at December 31, 2023, an increase of $6.7 million,
compared to $53.9 million at December 31, 2022. The increase in multi-family real estate loans in 2023
was primarily the result of the $11.1 million of multi-family construction loans that were completed
during the year and transferred into this loan classification. This increase was partially offset by regular
loan principal payments and loan payoffs during the year.
Commercial real estate loans were $362.8 million at December 31, 2023, a decrease of $8.1 million,
compared to $370.9 million at December 31, 2022. The outstanding commercial real estate loans
decreased primarily because loan payoffs were more than the new loans originated during 2023. The new
46
loan originations in 2023 were less than those originated in 2022, primarily due to an increase in interest
rates between the periods.
Construction and development loans were $66.5 million at December 31, 2023, an increase of $20.0
million, compared to $46.5 million at December 31, 2022. The increase in construction and development
loans was primarily the result of the $21.8 million in new construction loans that were originated and
funded during the year and the $36.8 million in advances on previously originated construction loans.
These increases in outstanding construction and development loans were partially offset by $16.8 million
of loan payoffs and $21.8 million of loans where the projects were completed and the loans were moved
to other permanent loan classifications.
Home equity lines of credit were $14.0 million at December 31, 2023, a decrease of $3.6 million,
compared to $17.6 million at December 31, 2022. The open-end home equity lines are generally written
with an adjustable rate and a two-to-ten-year draw period which requires interest only payments followed
by a ten year repayment period which fully amortizes the outstanding balance. Home equity loans were
$12.1 million at December 31, 2023, an increase of $1.2 million, compared to $10.9 million at December
31, 2022. Closed-end home equity loans are written with fixed or adjustable rates with terms up to fifteen
years. The overall decrease in the open-end equity lines and closed-end equity loans is related primarily to
an increase in loan repayments and lower originations due to the increase in interest rates.
Recreational vehicle loans were $6.0 million at December 31, 2023, a decrease of $1.9 million, compared
to $7.9 million at December 31, 2022. These loans were made primarily to finance the recreational
vehicle sales of a single dealer within the Bank’s market area. The decrease in the outstanding balance
between the periods was primarily due to existing loans being paid off, as the recreational vehicle loan
program was discontinued in 2021 and no new recreational vehicle loans are being originated.
Commercial business loans were $61.1 million at December 31, 2023, a decrease of $4.7 million,
compared to $65.8 million at December 31, 2022. The decrease in commercial business loans was
primarily because of a decrease in new loan originations in 2023 compared to 2022, primarily due to an
increase in interest rates between the periods.
Allowance for Credit Losses
The allowance for credit losses and the related provision is a critical accounting policy of the Company
that is subject to significant estimates. The Company adopted ASU 2016-13 on January 1, 2023, and uses
a standardized process to determine the appropriateness of the allowance for credit losses (ACL). Under
ASU 2016-13, 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. Management conducts
quarterly reviews of the entire loan portfolio and evaluates the need to adjust the allowance balance on the
basis of these reviews. See “Note 1 Description of the Business and Summary of Significant Accounting
Policies – New Accounting Pronouncements” and “Note 6 Allowance for Credit Losses and Credit
Quality Information” in the Notes to Consolidated Financial Statements for further disclosures and
information on the process used to determine the ACL and the impact on the Company when it adopted
ASU 2016-13 on January 1, 2023.
Management actively monitors asset quality and, when appropriate, charges off loans against the
allowance for credit losses. Although management believes it uses the best information available to make
determinations with respect to the allowance for credit losses, future adjustments may be necessary if
47
economic conditions differ substantially from the economic conditions in the assumptions used to
determine the size of the allowance for credit losses.
The allowance for credit losses was $11.8 million, or 1.38% of gross loans at December 31, 2023,
compared to $10.3 million, or 1.30% of gross loans at December 31, 2022. The allowance for credit
losses increased in 2023 primarily because of the adoption of ASU 2016-13 on January 1, 2023.
The following table reflects the activity in the allowance for credit losses and selected statistics:
December 31,
(Dollars in thousands)
2023
Balance at beginning of year ........................................................................ $ 10,277
1,070
January 1 adjustment for the adoption of ASU 2016-13 .............................
Provision for credit losses .........................................................................
795
Charge-offs:
0
Commercial real estate ............................................................................
Consumer .................................................................................................
(50)
(334)
Commercial business ...............................................................................
66
Recoveries .................................................................................................
Net charge-offs ........................................................................................
(318)
Balance at end of year .................................................................................. $ 11,824
Year-end allowance for credit losses as a percent of year end
gross loan balance ......................................................................................
Ratio of net loan charge-offs to average loans outstanding .........................
Allowance as a percent of total assets at year end .......................................
1.38
(0.04)
1.07
2022
9,279
0
1,071
(91)
(24)
0
42
(73)
10,277
%
1.30 %
(0.01)
0.94
The following table presents information related to net (charge-offs) recoveries by loan category:
2023
2022
(Dollars in thousands)
Single family ................... $
Commercial real estate ....
Consumer ........................
Commercial business ......
Total ............................. $
Net
(Charge-offs)
Recoveries
21
0
(43)
(296)
(318)
Ratio of Net
(Charge-offs)
Recoveries to
Average Loans
Outstanding
0.01 %
0.00
(0.10)
(0.47)
(0.04)
Net
(Charge-offs)
Recoveries
1
(91)
(17)
34
(73)
$
$
Ratio of Net
(Charge-offs)
Recoveries to
Average Loans
Outstanding
0.00 %
(0.02)
(0.04)
0.05
(0.01)
The following table reflects the allocation of the allowance for credit losses by loan category:
December 31,
2023
2022
(Dollars in thousands)
Single family .........................
Commercial real estate .........
Consumer ..............................
Commercial business ............
Total ...................................
Allocated
Allowance as a
% of Loan
Category
Percent of
Loans in Each
Category to
Total Loans
Allocated
Allowance as a
% of Loan
Category(1)
Percent of
Loans in Each
Category to
Total Loans(1)
0.54 %
1.53
1.42
3.72
1.38
30.80 %
57.10
4.98
7.12
100.00 %
0.61 %
1.49
2.36
1.41
1.30
26.13 %
59.83
5.69
8.35
100.00 %
(1)The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under
the prior accounting standard.
48
The changes in the allocation of the allowance between the periods was primarily due to the adoption of
ASU 2016-13 on January 1, 2023.
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, 2023 or 2022.
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.
The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU were applied
prospectively, and therefore, loan modification and charge off information is provided for only those
items occurring after the January 1, 2023 adoption date. See “Note 1 Description of the Business and
Summary of Significant Accounting Policies – New Accounting Pronouncements” and “Note 6 Allowance
for Credit Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements for
further information on the impact on the Company when it adopted ASU 2022-02 on January 1, 2023, the
required disclosures relating to modified loans upon adoption.
Total non-performing assets were $3.8 million at December 31, 2023, an increase of $1.9 million, or
103.3%, from $1.9 million at December 31, 2022. The increase was primarily related to a $2.6 million
commercial loan relationship in the agriculture industry that was classified as non-performing during
2023.
The following table sets forth the amounts and categories of non-performing assets in the Company’s
portfolio:
(Dollars in thousands)
Non-performing loans:
Single family ................................................................ $
Commercial real estate ................................................
Consumer .....................................................................
Commercial business ...................................................
Total non-performing assets ............................................ $
Total as a percentage of total assets ................................
Total as a percentage of total loans receivable ................
Allowance for credit losses to non-performing loans .....
December 31,
2023
2022
762
493
376
2,187
3,818
0.34 %
0.44 %
309.69 %
908
0
441
529
1,878
0.17 %
0.24 %
547.24 %
Liquidity and Capital Resources
The Company manages its liquidity position so that the funding needs of borrowers and depositors are
met in a timely and 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, commercial,
internet, and brokered deposits or to borrow funds from third parties such as the FHLB or the Federal
Reserve Bank of Minneapolis.
49
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.
The primary financing activity is the attraction of retail, commercial, internet, and brokered deposits. The
Bank also has the ability to borrow funds from the FHLB or Federal Reserve Bank of Minneapolis based
on the collateral value of the loans pledged, subject to applicable borrowing base and collateral
requirements. See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the
Notes to Consolidated Financial Statements for more information on the advances that could be drawn
based upon existing collateral levels with the FHLB and the Federal Reserve Bank of Minneapolis.
Unpledged securities could also be pledged and used as collateral for additional borrowings with the
FHLB or 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.
Cash and cash equivalents for the Company at December 31, 2023 were $11.2 million, a decrease of
$25.1 million, compared to $36.3 million at December 31, 2022. Net cash provided by operating activities
during 2023 was $13.7 million. The Company conducted the following major investing activities during
2023: purchases of securities available for sale and FHLB stock were $29.2 million; principal payments
and maturity and redemption proceeds received on securities available for sale and FHLB stock were
$67.4 million; and the proceeds from the sale of premises and other real estate were $0.3 million. Net
loans receivable increased $74.8 million and the Company purchased premises and equipment of $0.7
million. Net cash used by investing activities during 2023 was $37.0 million. The Company conducted
the following major financing activities during 2023: deposits decreased $5.1 million; received proceeds
from borrowings of $251.1 million, repaid borrowings of $237.9 million, purchased treasury stock of $0.6
million; received partial stock awards for tax withholding of $0.1 million, paid dividends to stockholders
of $1.3 million, and customer escrows decreased $7.9 million. Net cash used by financing activities was
$1.8 million for 2023.
The Bank has certificates of deposits from customers with outstanding balances of $186.3 million that
mature during 2024 which includes $86.3 in wholesale certificates. 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, brokers, or
FHLB advances. Proceeds from the sale of securities could also be used to fund unanticipated outflows of
deposits. FRB borrowings could also be used to replace unanticipated outflows of non-renewing
certificates of deposits.
The Bank has deposits of $60.3 million in checking and money market accounts of five 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, replaced with deposits from other customers, brokers, or with advances from
the FHLB. Proceeds from the sale of securities could also be used to fund unanticipated outflows of
deposits. FRB borrowings could also be used to replace unanticipated outflows of large checking and
money market deposits.
50
The Company estimates that approximately 23.8% of total deposits exceeded the Federal Deposit
Insurance limit of $250,000 at December 31, 2023. While these funds may be withdrawn at any time,
management anticipates that the majority of these deposits will not be withdrawn from the Bank over the
next twelve months. If these deposits were to be withdrawn, it is anticipated that they would be replaced
with deposits from other customers, brokered deposits, or with FHLB advances. FRB borrowings could
also be used to replace unanticipated outflows of large checking and money market deposits.
The Company had the ability to borrow $283.5 million from the FHLB at December 31, 2023 based on
the collateral value of the loans pledged. The credit policy of the FHLB relating to the collateral value of
the loans collateralizing the available line of credit with the FHLB may change such that the current
collateral pledged to secure future advances is no longer acceptable or the formulas for determining the
excess pledged collateral may change. The FHLB could also reduce the amount of funds it will lend to the
Bank. It is not anticipated that the Bank will need to find alternative funding sources in the next twelve
months to replace the available borrowings from the FHLB. However, if needed, the Bank could borrow
an additional $87.3 million from the Federal Reserve Bank of Minneapolis based on the collateral value
of the loans pledged at December 31, 2023. The Company also has the ability to pledge securities as
collateral to increase the borrowing capacity of the Company by $119.1 million.
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 2023, the Bank paid dividends to the Company of $2.0
million and at December 31, 2023, the Company had an available cash balance of $16.3 million.
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 regulatory costs. The Company also uses
cash to repurchase stock and pay any declared dividends. 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 no off-balance sheet arrangements other than commitments to originate and sell loans
in the ordinary course of business. The Company does have certain obligations and commitments to make
future payments under existing contracts. See “Note 18 Commitments and Contingencies” in the Notes to
Consolidated Financial Statements for further information on the outstanding contractual obligations and
commercial commitments at December 31, 2023.
Regulatory Capital Requirements
The Bank is subject to the Basel III regulatory capital requirements. The Basel III requirements, among
other things, (i) apply a set of capital requirements to the Bank, 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) set forth rules for calculating risk-weighted
assets for purposes of such requirements. The rules also made corresponding revisions to the prompt
corrective action framework and include capital ratios and buffer requirements. 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 its 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.
51
The Board of Governors of the Federal Reserve Bank in its Small Bank Holding Company Policy
Statement (Policy Statement) has exempted small bank holding companies with assets less than $3 billion
from the above capital requirements. The Policy Statement also includes savings and loan holding
companies that meet the Policy Statement’s qualitative requirements for exemption. The Company
currently meets the qualitative exemption requirements, and therefore, is exempt from the above capital
requirements.
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.
The Bank must maintain a capital conservation buffer of at least 2.50% 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. Management believes that, as of December 31, 2023, the Bank’s capital ratios were in excess of
those quantitative capital ratio standards set forth under the current 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 OCC has extensive discretion in its
supervisory and enforcement activities and can adjust the requirement to be well-capitalized in the future.
See “Note 17 Regulatory Capital” in the Notes to Consolidated Financial Statements for a table that
reflects the Bank’s capital compared to these capital requirements.
Dividends
The declaration of dividends is subject to, among other things, the Company's financial condition and
results of operations, the Bank's compliance with regulatory capital requirements and other regulatory
restrictions, tax considerations, industry standards, economic conditions, anticipated asset growth, general
business practices and other factors. The Company paid four quarterly dividend payments that totaled
$0.30 per share with total distributions of $1.3 million in 2023. In 2022, the Company paid four quarterly
dividend payments that totaled $0.24 per share with total distributions of $1.0 million. The Company will
continue to evaluate the best use of the Company’s capital based on the factors identified above.
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 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 and is subject to the
discretion of the Board of Directors of both the Bank and the Company. The payment of dividends
depends upon many factors, including the Company’s results of operations, financial condition, capital
requirements, regulatory and contractual restrictions, business strategy and other factors deemed relevant
by the Board of Directors.
In January 2024, the Company’s Board of Directors declared a quarterly dividend of 8 cents per share of
common stock payable on March 6, 2024 to stockholders of record at the close of business on February
13, 2024. The declaration and amount of any future cash dividends remains subject to the sole discretion
of the Board of Directors.
New Accounting Pronouncements
“Note 1 Description of the Business and Summary of Significant Accounting Policies – New Accounting
Pronouncements” in the Notes to Consolidated Financial Statements discusses recently issued accounting
pronouncements that the Company has or will be required to adopt. Also discussed is management’s
52
expectation of the impact these new accounting pronouncements had or will have on the Company’s
consolidated financial statements.
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 the market value of 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, 2023.
(Dollars in thousands)
Market Value
Basis point change in interest rates
Total market-risk sensitive assets ........................ $ 1,073,493
946,469
Total market-risk sensitive liabilities ..................
Off-balance sheet financial instruments ..............
29
126,995
Net market risk .................................................... $
Percentage change from current market value ....
-200
-100
1,046,560
897,261
17
149,282
0
1,023,419
857,772
0
165,647
+100
1,000,054
825,493
64
174,497
+200
976,380
798,102
121
178,157
(23.33) %
(9.88) %
0.00 %
5.34 %
7.55 %
The preceding table was prepared utilizing a model using the following assumptions (the Model
Assumptions) regarding prepayment and decay ratios that were determined by management based upon
their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were
assumed to prepay at annual rates of between 4% and 58%, depending on the note rate and the period to
maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 7% and
45%, 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. Certificate accounts
were assumed not to be withdrawn until maturity. Savings accounts and money market accounts were
assumed to decay at an annual rate of 1% and 46%, respectively. Retail checking accounts, commercial
checking accounts and commercial money market accounts were assumed to decay at annual rates of 5%,
39% and 13%, respectively. Callable investments were projected to be called at the first call date where
the projected interest rate on similar remaining term instruments was less than the interest rate on the
callable investment.
Certain shortcomings are inherent in the method of analysis presented in the above 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
53
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 which 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 could be different from the values disclosed in
the table. Certain liabilities, such as 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 preceeding table. The ability of many
borrowers to service their debt may also decrease in the event of a substantial sustained increase in
interest rates.
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, 2023 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, 2024 of immediate interest rate changes called rate
shocks:
(Dollars in thousands)
Rate Shock
in Basis Points
+200
+100
0
-100
-200
Net Interest
Change
$
(35)
11
0
(53)
(697)
Percent
Change
(0.11) %
0.03
0.00
(0.17)
(2.20)
The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in
the method of analysis presented in the preceding 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 preceding 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 decrease in
interest income in a declining rate environment was primarily because there are more loans and
investments that would reprice to lower interest rates than there are deposits that would be able to be
repriced lower to the same extent in the next twelve months.
In an attempt to manage the Bank’s exposure to changes in interest rates, management closely monitors
interest rate risk. The Bank has an Asset/Liability Committee that meets frequently to discuss changes in
the interest rate risk position and projected profitability. This 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 the timing
and implementation of transactions as intended to assure attainment of the Bank's objectives in an
effective manner. In addition, each quarter the Board reviews the Bank's asset/liability position, including
simulations of the effect on the Bank's capital of various interest rate scenarios.
In managing its asset/liability composition, the Bank may, at times, depending on the relationship
between long-term 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 structure its balance sheet to better match the maturities of its
54
assets and liabilities. The Bank sells almost all of its originated 30-year fixed rate single family
residential 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 significant
portion of the Bank’s commercial loans that are placed into the portfolio are adjustable rate loans or fixed
rate loans that reprice in five years or less.
Other Financial Data
The following tables set forth certain information as to the Bank’s FHLB advances and other borrowings.
(Dollars in thousands)
Maximum Balance:
FHLB advances and other borrowings ...............................................................
FHLB short-term advances and other borrowings ................................................
Average Balance:
FHLB advances and other borrowings ...............................................................
FHLB short-term advances and other borrowings ................................................
Year Ended December 31,
2023
2022
$
54,100
54,100
6,859
6,859
72,500
72,500
6,762
6,762
See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to
Consolidated Financial Statements for more information on FHLB advances and other borrowings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Baker Tilly US LLP, Independent Registered Public Accounting Firm (PCAOB ID 23) ......... 56
Report of CliftonLarsonAllen LLP, Independent Registered Public Accounting Firm (PCAOB ID 655) . 59
Consolidated Balance Sheets ...................................................................................................................... 60
Consolidated Statements of Comprehensive Income (Loss) ...................................................................... 61
Consolidated Statements of Stockholders’ Equity ...................................................................................... 62
Consolidated Statements of Cash Flows ..................................................................................................... 63
Notes to Consolidated Financial Statements ............................................................................................... 64
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
HMN Financial, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of HMN Financial, Inc. and subsidiaries
(the "Company") as of December 31, 2023, the related consolidated statements of comprehensive
income (loss), stockholders’ equity, and cash flows for the year ended December 31, 2023, and the
related notes (collectively referred to as the "financial statements"). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December
31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in
conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting
for the recognition and measurement of credit losses as of January 1, 2023 due to the adoption of ASC
Topic 326, Financial Instruments – Credit Losses. Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audit. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit
we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
56
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
financial statements that was communicated or required to be communicated to the audit committee and
that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved
our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing separate opinions on the critical audit matter or
on the accounts or disclosures to which it relates.
Allowance for Credit Losses (“ACL”) - Loans – Qualitative Factors
Critical Audit Matter Description
As described in Notes 1 and 6 to the financial statements, the Company accounts for credit losses under
ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime
credit losses for financial assets measured at amortized cost at the reporting date.
Management employs a process and methodology to estimate the ACL on loans that evaluates both
quantitative and qualitative factors. The methodology for evaluating quantitative factors involves pooling
loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio
segments include single-family, commercial real estate, consumer, and commercial business loans.
For pooled loans, the Company utilizes a vintage loss analysis (vintage) methodology to estimate credit
losses over the expected life of the loan. The vintage methodology analyzes prior year losses over a full
credit cycle and applies historical loss factors to the loans in the current portfolio. The loss rates are
adjusted by current and forecasted macroeconomic assumptions (qualitative factors). The qualitative
factors reflect management's view of how losses may vary from those represented by quantitative loss
rates. Qualitative factors are applied to each portfolio segment with the amounts determined by
correlation of credit stress to the maximum loss factors determined based on historical data. Changes in
these assumptions could have a material effect on the Company’s financial results.
We identified auditing the qualitative component of the ACL on pooled loans as a critical audit matter
because the methodology to determine the estimate of credit losses uses subjective judgments by
management and is subject to material variability. Performing audit procedures to evaluate the qualitative
factors involved a high degree of auditor judgment and required significant effort, including the need to
involve more experienced audit personnel.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included, among others:
Substantively testing management’s process, including evaluating their judgments and
assumptions, for developing the ACL on loans collectively evaluated for impairment, which
included:
o Evaluation of the appropriateness of the Company’s methodology and accounting
policies involved in the application of ASC 326.
o Testing the mathematical accuracy of the calculation.
o Testing the completeness and accuracy of data used in the calculation.
57
o Evaluation of the reasonableness of management’s judgments related to qualitative
factors to determine if they are calculated to conform with management’s policies and
were consistently applied period over period. Our evaluation considered evidence from
internal and external sources and loan portfolio composition and performance.
/s/ Baker Tilly US, LLP
We have served as the Company's auditor since 2022.
Milwaukee, Wisconsin
March 15, 2024
58
CliftonLarsonAllen LLP
CLAconnect.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of HMN Financial, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of HMN Financial, Inc. and
Subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of
comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31,
2022, and the results of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on the Company’s financial statements based on our audit. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/ CliftonLarsonAllen LLP
CliftonLarsonAllen LLP
We have served as the Company’s auditor from 2014 through 2022.
Minneapolis, Minnesota
March 3, 2023
59
December 31,
2023
December 31,
2022
$
11,151
161,414
53,680
215,094
1,006
845,692
3,553
2,709
15,995
802
3,962
7,171
1,107,135
976,793
13,200
2,399
2,246
4,790
999,428
36,259
192,688
53,331
246,019
1,314
777,078
3,003
2,986
16,492
802
3,902
8,347
1,096,202
981,926
0
298
10,122
6,520
998,866
0
0
91
41,235
142,278
(13,191)
(870)
(61,836)
107,707
1,107,135
91
41,013
138,409
(19,761)
(1,063)
(61,353)
97,336
1,096,202
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
ASSETS
Cash and cash equivalents ...............................................................................................
Securities available for sale:
Mortgage-backed and related securities (amortized cost $179,366 and $216,621) .......
Other marketable securities (amortized cost $54,112 and $55,698) .............................
Total securities available for sale ...............................................................................
Loans held for sale ...........................................................................................................
Loans receivable, net .......................................................................................................
Accrued interest receivable ..............................................................................................
Mortgage servicing rights, net .........................................................................................
Premises and equipment, net ...........................................................................................
Goodwill .........................................................................................................................
Prepaid expenses and other assets ....................................................................................
Deferred tax asset, net ......................................................................................................
Total assets ..................................................................................................................
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits ...........................................................................................................................
Federal Home Loan Bank advances and other borrowings ..............................................
Accrued interest payable ..................................................................................................
Customer escrows ............................................................................................................
Accrued expenses and other liabilities .............................................................................
Total liabilities .............................................................................................................
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock: ($.01 par value) authorized 500,000 shares; issued 0 ..............
Common stock ($.01 par value): authorized 16,000,000 shares; issued 9,128,662;
outstanding 4,457,905 and 4,480,976 .......................................................................
Additional paid-in capital ................................................................................................
Retained earnings, subject to certain restrictions .............................................................
Accumulated other comprehensive loss ...........................................................................
Unearned employee stock ownership plan shares ............................................................
Treasury stock, at cost 4,670,757 and 4,647,686 shares ..................................................
Total stockholders’ equity ............................................................................................
Total liabilities and stockholders’ equity .........................................................................
See accompanying notes to consolidated financial statements.
60
$
$
$
2023
2022
39,646
30,448
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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 .......................................................................................................
Other ..............................................................................................................................
Total interest income .................................................................................................
Interest expense:
Deposits .........................................................................................................................
Customer escrows ..........................................................................................................
Advances and other borrowings ....................................................................................
Total interest expense .................................................................................................
Net interest income .....................................................................................................
Provision for credit losses (1) ..............................................................................................
Net interest income after provision for credit losses ...................................................
Non-interest income:
Fees and service charges ................................................................................................
Loan servicing fees ........................................................................................................
Gain on sales of loans ....................................................................................................
Other ..............................................................................................................................
Total non-interest income ...........................................................................................
2,362
966
503
43,477
12,290
59
371
12,720
30,757
713
30,044
3,352
1,575
1,494
1,860
8,281
Non-interest expense:
Compensation and benefits ............................................................................................
Occupancy and equipment .............................................................................................
Data processing .............................................................................................................
Professional services .....................................................................................................
Other ..............................................................................................................................
Total non-interest expense ..........................................................................................
Income before income tax expense .............................................................................
Income tax expense ...........................................................................................................
Net income ................................................................................................................
Other comprehensive income (loss), net of tax ..................................................................
Comprehensive income (loss) available to common stockholders ..................................... $
Basic earnings per share ..................................................................................................... $
18,113
3,626
2,187
1,051
4,795
29,772
8,553
2,548
6,005
6,570
12,575
1.38
Diluted earnings per share .................................................................................................. $
1.37
2,801
428
578
34,255
1,732
16
251
1,999
32,256
1,071
31,185
3,222
1,590
2,393
1,682
8,887
17,211
3,812
1,948
1,386
4,444
28,801
11,271
3,226
8,045
(18,178)
(10,133)
1.85
1.83
(1) The Company adopted Accounting Standards Update 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under the
prior accounting standard.
See accompanying notes to consolidated financial statements.
61
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Other
Unearned
Employee
Stock
Total
Retained Comprehensive
Earnings
131,413
8,045
(Loss)
(1,583)
Ownership Treasury Stockholders’
Stock
(59,374)
(1,256)
Equity
Plan
(1,049)
(18,178)
138,409
6,005
(830)
(1,306)
(19,761)
6,570
(2,134)
225
(70)
193
(1,063)
(61,353)
(629)
210
(64)
142,278
(13,191)
193
(870)
(61,836)
110,031
8,045
(18,178)
(1,049)
(2,134)
0
(70)
227
464
97,336
6,005
6,570
(830)
(1,306)
(629)
0
(64)
225
400
107,707
Common
Stock
(Dollars in thousands)
Balance, December 31, 2021 ...................................... $ 91
Net income ................................................................
Other comprehensive loss, net of tax ........................
Dividends paid to stockholders ($0.24 per share) ....
Stock repurchases ......................................................
Restricted stock awards .............................................
Stock awards withheld for tax withholding ..............
Amortization of restricted stock awards ...................
Earned employee stock ownership plan shares ........
Balance, December 31, 2022 ...................................... $ 91
Net income ................................................................
Other comprehensive income, net of tax ..................
Adoption of ASU 2016-13 (see Note 1) ...................
Dividends paid to stockholders ($0.30 per share) ....
Stock repurchases ......................................................
Restricted stock awards .............................................
Stock awards withheld for tax withholding ..............
Amortization of restricted stock awards ...................
Earned employee stock ownership plan shares ........
Balance, December 31, 2023 ...................................... $ 91
Additional
Paid-in
Capital
40,740
(225)
227
271
41,013
(210)
225
207
41,235
See accompanying notes to consolidated financial statements.
62
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
(Dollars in thousands)
Cash flows from operating activities:
Net income .................................................................................................................................... $
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses ...........................................................................................................
Depreciation ................................................................................................................................
Amortization of premiums, net....................................................................................................
Amortization of deferred loan fees ..............................................................................................
Amortization of core deposit intangible ......................................................................................
Amortization of mortgage servicing rights and servicing costs ...................................................
Capitalized mortgage servicing rights .........................................................................................
Deferred income tax expense ......................................................................................................
(Gains) losses recognized on equity securities, net .....................................................................
Gains on sale of premises and equipment ....................................................................................
Gains on sale of real estate ..........................................................................................................
Gain on sales of loans..................................................................................................................
Proceeds from sales of loans held for sale ...................................................................................
Disbursements on loans held for sale ..........................................................................................
Amortization of restricted stock awards ......................................................................................
Amortization of unearned ESOP shares ......................................................................................
Earned ESOP shares priced above original cost ..........................................................................
Increase in accrued interest receivable ........................................................................................
Increase in accrued interest payable ............................................................................................
Decrease in other assets ...............................................................................................................
Decrease in other liabilities .........................................................................................................
Other, net.....................................................................................................................................
Net cash provided by operating activities ................................................................................
Cash flows from investing activities:
Principal collected on securities available for sale ........................................................................
Proceeds collected on 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 ..................................................................................................
Net increase in loans receivable ....................................................................................................
Proceeds from sale of premises and equipment .............................................................................
Purchases of premises and equipment ...........................................................................................
Net cash used by investing activities .......................................................................................
Cash flows from financing activities:
(Decrease) increase in deposits .....................................................................................................
Treasury stock purchased ..............................................................................................................
Stock awards withheld for tax withholding ...................................................................................
Dividends to stockholders .............................................................................................................
Proceeds from borrowings ............................................................................................................
Repayment of borrowings .............................................................................................................
(Decrease) increase in customer escrows ......................................................................................
Net cash (used) provided by financing activities .....................................................................
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 .........................................................................................
Transfer of loans to real estate ......................................................................................................
Right to use assets obtained in exchange for lease obligations ......................................................
See accompanying notes to consolidated financial statements.
2023
2022
6,005
8,045
713
1,120
720
(147)
0
832
(555)
157
(157)
(18)
(17)
(1,494)
66,714
(60,708)
225
193
207
(550)
2,101
94
(1,750)
1
13,686
36,464
20,700
(19,043)
(10,158)
10,189
237
(74,769)
85
(691)
(36,986)
(5,133)
(629)
(64)
(1,306)
251,121
(237,921)
(7,876)
(1,808)
(25,108)
36,259
11,151
10,620
2,394
4,215
220
0
1,071
1,219
993
(831)
10
909
(615)
103
22
(6)
(113)
(2,393)
92,669
(71,062)
227
193
271
(871)
235
1,346
(115)
4
31,311
44,698
5,000
(35,043)
(6,819)
6,628
403
(139,715)
9
(342)
(125,181)
31,260
(2,134)
(70)
(1,049)
158,900
(158,900)
7,979
35,986
(57,884)
94,143
36,259
1,764
2,000
14,899
0
394
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023 and 2022
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 this Annual Report on Form 10-K
with the Securities and Exchange Commission (SEC) on March 7, 2024.
Use of Estimates
In preparing the consolidated 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.
An estimate that is particularly susceptible to change relates to the determination of the allowance for
credit losses. Management believes that the allowance for credit losses is appropriate to cover probable
losses that have been identified in connection with the loans individually reviewed as well as the expected
losses in each identified pool of loans that have not been individually reviewed at the date of 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 credit losses. Such agencies may require changes to the allowance based on their judgment
about information available to them at the time of their examination.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis. 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.
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 securities in one of three categories:
64
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 with discounts amortized over the period to maturity and premiums amortized to the earliest
call date. The expected credit losses on held to maturity debt securities is measured on a collective
basis by major security type and considers historical credit loss information that is adjusted for
current conditions and reasonable and supportable forecasts.
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 with discounts
amortized over the period to maturity and premiums amortized to the earliest call date. Any
unrealized credit losses on securities available for sale that are determined to be impaired as a result
of the impairment review procedures noted below will result in the securities amortized cost basis
being written down to fair value through income.
Effective January 1, 2023, the Company adopted the provisions of ASC 326 and modified its accounting
policy for the assessment of available for sale securities for impairment and reviews its investment
portfolio on a quarterly basis for indication of impairment due to credit and noncredit related factors.
Under ASC 326, for available for sale securities in an unrealized loss position, the Company first assesses
whether it intends to sell, or it is more than likely than not that it will be required to sell the security
before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell
is met, the security’s amortized cost basis is written down to fair value through income. For securities
available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair
value has resulted from credit losses or other factors. In making this assessment, the Company considers
the extent to which fair value is less than amortized cost, any changes to the rating by a rating agency, and
adverse conditions related to the security, among other factors. If this assessment indicates that a credit
loss exists, the present value of cash flows expected to be collected from the security are compared to the
amortized cost basis of the security. If the present value of the cash flows expected to be collected is less
than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the
credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that
has not been recorded through an allowance for credit losses is recognized in other comprehensive
income, net of tax. The Company elected the practical expedient of zero loss estimates for securities
issued by U.S. government entities and agencies. These securities are either explicitly or implicitly
guaranteed by the U.S. government, are highly rate by major agencies and have a long history of no credit
losses.
Under ASC 326, changes in the allowance for credit losses are recorded as provision for, or reversal of,
credit loss expense. Losses are charged against the allowance when management believes the
uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent
or requirement to sell is met.
65
The Company made an accounting policy election to exclude accrued interest receivable from the
amortized cost basis of securities available for sale. Accrued interest receivable on securities available for
sale is reported as a component of accrued interest receivable on the consolidated balance sheet, totaled
$0.5 million at December 31, 2023, and is excluded from the estimated credit losses.
Equity Securities
Equity securities are carried at their fair market value and are included in the prepaid expenses and other
assets line on the consolidated balance sheet. Any changes during the period recognized in other income
on the consolidated statements of comprehensive income (loss).
Loans Held for Sale
Mortgage loans originated 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 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 loan and are amortized
into interest income using the interest method over the estimated life of the loans.
Premiums and discounts on purchased loans are amortized into interest income using the interest method
over the period to contractual maturity, adjusted for estimated prepayments.
The Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2023, and uses
a standardized process to determine the appropriateness of the allowance for credit losses (ACL) for the
commercial real estate, commercial business, single family, and consumer loan portfolios. The
determination of the ACL for each of these portfolios is calculated on a pooled basis when similar risk
characteristics exist and on an individual basis when loans do not share risk characteristics such as all
non-performing loans. The determination of the quantitative pooled loan reserves for the commercial real
estate and commercial business loan portfolios involves analyzing prior year losses over a full credit cycle
by their assigned standardized risk ratings and applying these historic loss factors to loans in the current
portfolio with similar risk ratings. This process is referred to as a vintage loss analysis. The determination
of the quantitative pooled loan reserves for the single family and consumer loan portfolios involves
analyzing prior year losses over a full credit cycle based on certain loan and borrower risk characteristics
when the loans were originated and applying these historic loss factors to loans with similar risk ratings in
the current portfolio. Qualitative reserves are also established and reflect management’s overall estimate
of the extent to which current expected credit losses on collectively evaluated loans will differ from
historical loss experience. The determination of the qualitative reserves for all of the loan categories
involves an analysis and consideration of certain factors that are anticipated to have an impact on future
credit losses including, but not limited to: actual and anticipated changes in the size, composition, and
concentrations of the loan portfolios; national, regional, and local economic conditions including inflation
and unemployment data; loan delinquencies, the level of non-accrual loans, and risk rating trends; lending
policies, procedures, and staffing; the scope and results of loan quality reviews; and the demand for single
family homes, commercial real estate, and building lots.
Collateral dependent loans are those for which the borrower is experiencing financial difficulty and
repayment is expected to be provided substantially through the operation or sale of the collateral. These
loans do not typically share similar risk characteristics with other loans and expected credit losses are
66
evaluated on an individual basis. Loans evaluated individually are not included in the collective
evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure
is probable, are based on the fair value of the collateral, adjusted for selling costs when repayment
depends on the sale of the collateral. The appropriateness of the ACL on individually reviewed collateral
dependent loans 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 these loans. Such estimates, appraisals, evaluations, and cash flows may be
subject to adjustments due to changing economic prospects of borrowers or properties. The estimates are
reviewed periodically, and any adjustments are recorded in the provision for credit losses in the periods in
which the adjustments become known and loans are charged off to the extent they are deemed to be
uncollectible. Because of the size of some loans, changes in estimates can have a significant impact on the
credit loss provision. The Company increases its allowance for credit losses by charging the provision for
credit losses against income and by receiving recoveries of previously charged off loans. The Company
decreases its allowance by crediting the provision for credit losses and recording loan charge-offs. The
methodology for establishing the allowance for credit losses takes into consideration probable losses that
have been identified in connection with the loans individually reviewed as well as the expected losses in
each identified pool of loans that have not been individually reviewed. Collateral dependent loans include
all loans which are on non-accrual or delinquent as to principal and interest for 90 days or more.
The Company’s total expected loss estimate is based, in part, on the maximum historical credit loss
experience of each pool of loans over a full credit cycle and all available portfolio data is considered in
the analysis. When historical credit loss experience is not sufficient for a specific portfolio, the Company
may supplement its own portfolio data with external data. Assessing these numerous factors involves
significant judgement.
The Company made an accounting policy election to exclude accrued interest receivable from the
amortized cost basis of loans. Accrued interest receivable on loans is reported as a component of accrued
interest receivable on the consolidated balance sheet and totaled $3.0 million at December 31, 2023 and is
excluded from the estimated credit losses.
See the “New Accounting Pronouncements” section later in this Note 1 of the Consolidated Financial
Statements and “Note 6 Allowance for Credit Losses and Credit Quality Information” in the Notes to
Consolidated Financial Statements for further disclosures, information on the process used to determine
the ACL, and the impact on the Company when it adopted ASU 2016-13 on January 1, 2023.
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 non-accrual 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, the borrower has consistently made
the required payments for a period of six months, and the 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.
The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures on January 1, 2023. Based on the guidance in this ASU, a loan
modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to
the lender as the terms with customers with similar collection risks that are not refinancing or
restructuring their loans and the modification to the terms of the loan are more than minor. If a loan
67
modification or refinancing does not result in a new loan, it is classified as a loan modification. The
amendments in this ASU were applied prospectively, and therefore, loan modification and vintage charge
off information is provided for only those items occurring after the January 1, 2023 adoption date. See
the “New Accounting Pronouncements” section later in this Note 1 of the Consolidated Financial
Statements and “Note 6 Allowance for Credit Losses and Credit Quality Information” in the Notes to
Consolidated Financial Statements for further disclosures and information on the impact on the Company
when it adopted ASU 2022-02 on January 1, 2023.
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 of 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 it is 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.
Mortgage Servicing Rights, net
Mortgage servicing rights are capitalized at their fair value and amortized in proportion to, and over the
period of, estimated net servicing income. The Company evaluates 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, and furniture and equipment are carried at cost
less accumulated depreciation. Depreciation is computed on a straight-line basis over their 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 tested for impairment annually at December 31st or when circumstances arise indicating
impairment may have occurred. In making this assessment that impairment may have occurred,
management considers a number of factors including, but not limited to, operating results, business plans,
economic projections, anticipated future cash flows, and current market data. There are inherent
68
uncertainties related to these factors and management’s judgment in applying them to the analysis of
impairment. Changes in economic and operating conditions, as well as other factors, could result in
impairment in future periods. Any impairment losses arising from such testing would be reported in the
consolidated statement of comprehensive income (loss) as a separate line item within operations. There
were no impairment losses recognized as a result of periodic impairment testing at December 31, 2023 or
2022.
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 options 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 Accounting Standards Codification (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. The
Company is no longer subject to federal or state income tax examinations by tax authorities for years
before 2020.
Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing the income available to
common shareholders 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.
69
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and
other events from non-owner sources. Comprehensive income (loss) is the total of net income and other
comprehensive income (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 December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, Income
Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in the ASU address
investor requests for more transparency about income tax information through improvements to income
tax disclosures primarily related to the rate reconciliation and income taxes paid information. The
amendments in this ASU apply to all entities that are subject to Topic 740, Income Taxes with certain
disclosures only required by public business entities. For public business entities, such as the Company,
the amendments in this ASU are effective for annual periods beginning after December 15, 2024, with
early adoption permitted. Management is currently in the process of reviewing how the Company’s
income tax disclosure will be impacted by the additional guidance when this ASU is required to be
adopted on December 31, 2025.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to
Reportable Segment Disclosures. The amendments in the ASU address investor requests for additional,
more detailed information about a reportable segment’s expenses. The amendments in the ASU apply to
all public entities, such as the Company, that are required to report segment information in accordance
with Topic 280, Segment Reporting. The amendments in the ASU do not change the current disclosure
requirements or how a public entity identifies its operating segments. The amendments in the ASU are
effective for fiscal years beginning after December 15, 2023, and interim periods with fiscal years
beginning after December 15, 2024, with early adoption permitted. Management is currently in the
process of reviewing how the Company’s segment reporting will be impacted by the additional guidance
when this ASU is required to be adopted on December 31, 2024.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):
Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the
guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by
Creditors, while enhancing disclosure requirements for certain loan refinancing and restructures by
creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the
recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and
restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification
results in a new loan or a continuation of an existing loan. For public business entities, such as the
Company, the amendments in this ASU require that an entity disclose current period gross write-offs by
year of origination for financing receivables and net investments in leases within the scope of Subtopic
326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures
required by paragraph 326-20-50-6. The amendments in the ASU became effective for the Company
when ASU 2016-13 was adopted on January 1, 2023 and the required disclosures were applied
70
prospectively. See “Note 6 Allowance for Credit Losses and Credit Quality Information” for additional
disclosures for charge offs and loan modifications to borrowers experiencing financial difficulties in
2023.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities
that measure credit losses on financial instruments including loans, debt securities, trade receivables, net
investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial
asset that has a contractual right to receive cash that is not specifically excluded. The main objective of
this ASU is to provide financial statement users with more decision-useful information about the expected
credit losses on financial instruments and other commitments to extend credit held by a reporting entity at
each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss
impairment methodology that was previously required by Generally Accepted Accounting Principles
(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
affected entities to varying degrees depending on the credit quality of the assets held by the entity, the
duration of the assets held, and how the entity applied the previously used incurred loss methodology.
The amendments in this ASU, for public business entities that are filers with the Securities and Exchange
Commission (SEC), were originally effective for fiscal years beginning after December 15, 2019,
including interim periods within those annual periods. On November 26, 2019, the FASB issued ASU
2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which delayed
the implementation date of ASU 2016-13 for SEC smaller reporting companies, such as HMN, from the
first quarter of 2020 to the first quarter of 2023. Amendments were applied using a modified retrospective
transition method by means of a cumulative-effect adjustment to equity as of January 1, 2023 when the
guidance was adopted. The transition to the new 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 in retained earnings of $0.8 million as of the adoption date. In addition, a liability for $0.1
million was established for unfunded loan commitments as of the adoption date. The Company did not
record an allowance for available for sale securities on January 1, 2023 as the investment portfolio
consists almost entirely of debt securities implicitly backed by the U.S. Government for which credit risk
is deemed negligible. The impact of this ASU could change in the future depending on the composition,
characteristics, and credit quality of the securities portfolio as well as the economic conditions at future
reporting periods. See “Note 4 Securities Available For Sale” and “Note 6 Allowance for Credit Losses
and Credit Quality Information” for additional information and disclosures relating to the adoption of
ASU 2016-13.
On February 6, 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326)
and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02,
Leases (Topic 842). The amendments in this ASU related to Leases (Topic 842) did not have any impact
on the Company. The amendments in this ASU related to Topic 326 add additional guidance related to the
SEC’s expectations for the documentation of the measurement, review process, and the systematic
methodology used by entities to determine the current credit losses under FASB ASC Topic 326. This
additional guidance requires enhanced review documentation and periodic reviews of the Company’s
calculation of the allowance for credit losses by a third party.
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.
71
Reclassifications
Certain amounts in the consolidated financial statements for the prior year have been reclassified to
conform to the current year presentation.
NOTE 2 Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers.
The Company’s services that fall within the scope of ASC 606 are presented on the income statement
within non-interest income and are recognized as revenue as the Company satisfies its performance
obligation to the customer. Services within the scope of ASC 606 include fees and service charges on
deposit accounts, ATM and debit card interchange income, safe deposit box rental fees, check printing
charges, income earned on the sale of uninsured investment products, and gains or losses recognized on
the sale of real estate owned.
The following table presents the Company’s sources of non-interest income for the years ended December
31, 2023 and 2022. Sources of revenue outside the scope of ASC 606 are noted as such.
Year Ended December 31,
(Dollars in thousands)
Non-interest income:
Fees and service charges on deposit accounts .......... $
Other fees and service charges .................................
Debit card interchange fees ......................................
Gain on sale of loans (1) .............................................
Loan servicing fees (1) ...............................................
Uninsured investment product sales .........................
Other .........................................................................
Total non-interest income ............................................. $
2023
2022
1,099
528
1,725
1,494
1,575
1,505
355
8,281
1,095
416
1,711
2,393
1,590
1,396
286
8,887
(1)
Not within the scope of ASC 606.
A description of the Company’s revenue categories that are accounted for under ASC 606 is as follows:
Fees and Service Charges on Deposit Accounts
The Company earns fees from deposit customers for transaction-based, account maintenance, and
overdraft services. Transaction-based fees, which include services such as ATM use fees, wire transfer
fees, check cashing fees, stop payment charges, statement rendering charges, ACH fees, and other deposit
related fees, are recognized at the time the transaction is executed or when the Company fulfills the
customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned
over the course of a month, representing the period over which the Company satisfies the performance
obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on
deposit accounts are recognized when they are withdrawn from the customer’s account balance.
Other Fees and Service Charges
Other fees and service charges consist of revenues that are both within the scope of and outside the scope
of ASC 606. Other fees and service charges within the scope of ASC 606 consist of fees for the rental of
safe deposit boxes and check printing charges. Revenues for these fees are recognized over the period the
service is provided or the fee is incurred by the customer. Other fees and service charges outside the
scope of ASC 606 consist of loan commitment fees and late charges on loans.
Debit Card Interchange Fees
The Company earns interchange fees from debit card holder transactions conducted through various
payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with
the transaction processing services provided by an outsourced technology solution and are presented on a
net basis.
72
Uninsured Investment Product Sales
Commission revenues on the sale of uninsured investment products may be recognized up front on the
sale date of the investment or monthly over a period of years depending on the product being sold. The
commissions on investment sales are recognized when the product sale is completed or monthly for trailer
fees in accordance with the customer agreement. Any subsequent commission adjustments are recognized
upon our receipt of notification from the investment companies concerning matters necessitating such
adjustments. Profit-sharing contingent commissions are recognized when determinable, which is
generally when such commissions are received from the investment companies.
Other
Other non-interest income consists of revenues that are both within the scope of and outside the scope of
ASC 606. Other income within the scope of ASC 606 consists of gains and losses on asset sales and gains
and losses on the sale of real estate owned which are recognized when the asset or real estate is sold.
Other income outside the scope of ASC 606 consists of gains and losses on equity securities and rental
income on buildings.
NOTE 3 Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) and the related tax effects were as follows:
(Dollars in thousands)
Securities available for sale:
Unrealized gains (losses) arising during the period ...............
$
Other comprehensive income (loss)....................................... $
For the Years Ended December 31,
2023
Tax
Effect (1)
Before
Tax
Net
of Tax
2022
Tax
Effect
Net
of Tax
Before
Tax
7,916
7,916
1,346
1,346
6,570
6,570
(24,098) (5,920) (18,178)
(24,098) (5,920) (18,178)
(1)
The tax effect on gross unrealized gains (losses) was impacted by a change in the effective tax rate used in 2023 to allocate the
total unrealized gains on securities between the deferred tax asset and other comprehensive income.
73
NOTE 4 Securities Available for Sale
A summary of securities available for sale at December 31, 2023 and 2022 is as follows:
(Dollars in thousands)
December 31, 2023
Mortgage-backed securities:
Federal National Mortgage Association (FNMA) ...................
Federal Home Loan Mortgage Corporation (FHLMC) ...........
Collateralized mortgage obligations:
FNMA .......................................................................................
Other marketable securities:
U.S. Government agency obligations .......................................
December 31, 2022
Mortgage-backed securities:
FNMA .......................................................................................
FHLMC ....................................................................................
Collateralized mortgage obligations:
FNMA .......................................................................................
Other marketable securities:
U.S. Government agency obligations .......................................
Corporate preferred stock .........................................................
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
96,837
82,495
34
179,366
54,112
54,112
233,478
117,690
98,893
38
216,621
54,998
700
55,698
272,319
0
0
0
0
120
120
120
0
0
0
0
0
0
0
0
(9,704)
(8,246)
(2)
(17,952)
(552)
(552)
(18,504)
(12,754)
(11,177)
(2)
(23,933)
(2,157)
(210)
(2,367)
(26,300)
87,133
74,249
32
161,414
53,680
53,680
215,094
104,936
87,716
36
192,688
52,841
490
53,331
246,019
The Company did not sell any available for sale securities and did not recognize any gains or losses on
securities available for sale in 2023 or 2022. The Company had available for sale securities pledged as
collateral for customer deposits in excess of the $250,000 insurance limit of the Federal Deposit Insurance
Corporation. The securities pledged had a fair market value of $41.6 million and $45.9 million at
December 31, 2023 and 2022, respectively.
The following table presents the amortized cost and estimated fair value of securities available for sale at
December 31, 2023, 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 fifteen years ...........................
Due after fifteen years .........................................................
Total ..................................................................................
$
$
Amortized
Cost
64,814
134,875
33,786
3
233,478
Fair
Value
60,590
124,096
30,405
3
215,094
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 allocation of other marketable
securities that have call features is based on the anticipated cash flows to the expected call date if it is
anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.
74
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, 2023 and 2022:
(Dollars in thousands)
December 31, 2023
Mortgage backed securities:
FNMA ............................................................
FHLMC ..........................................................
Collateralized mortgage obligations:
FNMA ............................................................
Other marketable securities:
U.S. government and agency obligations ......
Total .............................................................
December 31, 2022
Mortgage backed securities:
FNMA ............................................................
FHLMC ..........................................................
Collateralized mortgage obligations:
FNMA ............................................................
Other marketable securities:
U.S. government and agency obligations ......
Corporate preferred stock ...............................
Total .............................................................
Less Than Twelve Months
Fair
Value
Unrealized
Losses
# of
Investments
Twelve Months or More
Fair
Value
Unrealized
Losses
# of
Investments
Total
Fair
Value
Unrealized
Losses
0
0
0
1
1
12
4
1
4
0
21
$
0
0
0
5,000
5,000
$
0
0
0
(9)
(9)
$ 19,337
10,542
(1,629)
(1,214)
36
(2)
19,334
0
$ 49,249
(667)
0
(3,512)
34
24
1
7
66
22
20
0
7
1
50
$ 87,133
74,249
(9,704) $
(8,246)
87,133
74,249
(9,704)
(8,246)
32
(2)
32
(2)
34,456
$ 195,870
(543)
(18,495) $
39,456
200,870
(552)
(18,504)
$ 85,599
77,174
(11,125) $
(9,963)
104,936
87,716
(12,754)
(11,177)
0
0
36
(2)
33,507
490
$ 196,770
(1,490)
(210)
(22,788) $
52,841
490
246,019
(2,157)
(210)
(26,300)
The Company reviews its investment portfolio on a quarterly basis for indications of impairment due to
credit and noncredit-related factors. This review includes analyzing 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 the Company’s intent and ability to hold the investment for a period of time sufficient to allow for
any anticipated recovery in fair value.
As of December 31, 2023, the Company did not consider the unrealized losses on its securities available
for sale to be attributable to credit-related factors. All of the Company’s investments are issued by U.S.
government agencies, are implicitly guaranteed by the U.S. government, and have a long history of no
credit losses. The unrealized losses on impaired securities are the result of changes in interest rates. As a
result, there was no allowance for credit losses required on available for sale debt securities in an
unrealized loss position at December 31, 2023.
For the year ended December 31, 2022, the Company did not believe any other-than-temporary
impairments existed and therefore did not recognize any losses on its investment securities.
75
NOTE 5 Loans Receivable, Net
A summary of loans receivable at December 31, 2023 and 2022, is as follows:
2023
(Dollars in thousands)
Single family real estate .................................................. $ 264,303
Commercial real estate:
Construction:
Single family ............................................................
Multi-family .............................................................
Commercial real estate .............................................
Churches/community service .......................................
Commercial buildings/storage facilities .......................
Land developments.......................................................
Lodging ........................................................................
Manufacturing ..............................................................
Movie theaters ..............................................................
Multi-family .................................................................
Nursing home/healthcare ..............................................
Office ...........................................................................
Restaurant/bar/cafe .......................................................
Retail ............................................................................
Warehouse ....................................................................
Other (1) ........................................................................
23,305
23,484
19,712
14,650
10,243
25,362
65,432
21,043
8,360
60,613
24,391
60,099
7,941
45,859
48,833
30,626
489,953
Consumer:
Home equity line .........................................................
Home equity ................................................................
Land/lot .......................................................................
Recreational vehicles ...................................................
Other (1) .......................................................................
Commercial business .......................................................
Total loans .................................................................
13,962
12,090
5,077
5,965
5,640
42,734
61,118
858,108
Less:
15
Unamortized discounts .................................................
577
Net deferred loan fees ...................................................
Allowance for credit losses (2) ......................................
11,824
Total loans receivable, net ........................................ $ 845,692
7,268
Commitments to originate or purchase loans .................. $
Commitments to deliver loans to secondary market ........ $
3,078
Weighted average contractual rate of loans in
portfolio .......................................................................
2022
205,890
28,425
1,699
16,421
11,933
12,705
30,230
59,762
23,478
8,861
53,885
24,528
59,262
8,622
47,959
51,002
32,573
471,345
17,551
10,865
4,146
7,870
4,385
44,817
65,835
787,887
13
519
10,277
777,078
24,493
6,575
4.88 %
4.51 %
(1) Amounts under four million dollars in both years are included in “Other”.
(2)
The Company adopted Accounting Standards Update 2016-13 as of January 1, 2023.
The 2022 amounts presented are calculated under the prior accounting standard.
Included in total commitments to originate or purchase loans are fixed rate loans aggregating $7.3 million
and $5.3 million as of December 31, 2023 and 2022, respectively. The interest rates on these loan
commitments ranged from 5.88% to 7.79% at December 31, 2023 and from 5.75% to 6.50% at December
31, 2022.
There were no loans to executive officers and directors of the Company as of December 31, 2023 or 2022.
During 2023, there were no new loans to executive officers and directors and no loans were paid off or
closed. Any loans to executive officers and directors are 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.
76
At December 31, 2023 and 2022, the Company was servicing loans for others with aggregate unpaid
principal balances of $588.0 million and $587.6 million, respectively.
The Company originates residential, commercial real estate and other loans primarily in Minnesota,
Wisconsin and Iowa. At December 31, 2023 and 2022, the Company had in its portfolio single family
residential loans located in the following states:
2023
2022
(Dollars in thousands)
Minnesota ..................................... $
Wisconsin .....................................
Other states (1) ...............................
Total ........................................... $
Amount
233,026
23,880
7,397
264,303
Percent of
Total
88.2 %
9.0
2.8
100.0 %
Amount
177,139
23,030
5,721
205,890
$
$
Percent
of Total
86.0 %
11.2
2.8
100.0 %
(1)Amounts under four million dollars in both years are included in “Other states”.
At December 31, 2023 and 2022, the Company had in its portfolio commercial real estate loans located in
the following states:
(Dollars in thousands)
Colorado ......................................... $
Florida.............................................
Idaho ...............................................
Iowa ................................................
Minnesota .......................................
North Carolina ................................
Wisconsin .......................................
Other states (1) .................................
Total ............................................. $
2023
Amount
Percent
of Total
5,865
6,797
4,718
10,011
285,886
3,973
162,456
10,247
489,953
1.2 %
1.4
1.0
2.0
58.3
0.8
33.2
2.1
100.0 %
2022
Amount
6,031
7,049
4,712
10,440
284,841
4,211
143,076
10,985
471,345
$
$
Percent
of Total
1.3 %
1.5
1.0
2.2
60.4
0.9
30.4
2.3
100.0 %
(1) Amounts under four million dollars in both years are included in “Other states”.
77
NOTE 6 Allowance for Credit Losses and Credit Quality Information
The allowance for credit losses is summarized as follows:
(Dollars in thousands)
Balance, December 31, 2021 .................................. $
Single
Family
974
Commercial
Real Estate
6,388
Consumer
981
Commercial
Business
936
Provision for losses ............................................... $
Charge-offs ...........................................................
Recoveries .............................................................
Balance, December 31, 2022 .................................. $
286
0
1
1,261
January 1, 2023 adoption of ASU 2016-13 .......... $
Provision for losses ...............................................
Charge-offs ...........................................................
Recoveries .............................................................
December 31, 2023 ................................................. $
(259)
403
0
21
1,426
Allocated to:
Individual reserves ............................................... $
Collective reserves ...............................................
Balance, December 31, 2022 .................................. $
Allocated to:
Individual reserves ............................................... $
Collective reserves ...............................................
Balance, December 31, 2023 .................................. $
Loans receivable at December 31, 2022:
Individually reviewed for impairment ................ $
Collectively reviewed for impairment ................
Ending balance .................................................... $
Loans receivable at December 31, 2023:
Individually reviewed for impairment ................ $
Collectively reviewed for impairment ................
Ending balance .................................................... $
33
1,228
1,261
28
1,398
1,426
908
204,982
205,890
979
263,324
264,303
729
(91)
0
7,026
512
(24)
0
0
7,514
0
7,026
7,026
0
7,514
7,514
179
471,166
471,345
668
489,285
489,953
94
(24)
7
1,058
(485)
77
(50)
7
607
112
946
1,058
103
504
607
492
44,325
44,817
425
42,309
42,734
(38)
0
34
932
1,302
339
(334)
38
2,277
17
915
932
297
1,980
2,277
561
65,274
65,835
2,212
58,906
61,118
Total
9,279
1,071
(115)
42
10,277
1,070
795
(384)
66
11,824
162
10,115
10,277
428
11,396
11,824
2,140
785,747
787,887
4,284
853,824
858,108
In addition to the ACL on loans, the Company has established an ACL on unfunded commitments that is
included in other liabilities on the consolidated balance sheets. This amount is determined based on an
estimate of outstanding commitments that are anticipated to be funded as of the balance sheet date and
multiplying those amounts by the loss rate for their loan category. The allowance for unfunded
commitments at December 31, 2023 was not material.
The provision for credit losses is determined by the Company as the amount to be added to the ACL for
various types of financial instruments including loans, investment securities, and off-balance sheet credit
exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s
judgment, is necessary to absorb expected credit losses over the lives of the respective financial
instruments. No provision for credit losses was recorded on available-for-sale investment securities at
December 31, 2023.
78
The following table presents the components of the provision for credit losses for the years ended
December 31, 2023 and December 31, 2022.
(Dollars in thousands)
2023
2022
Provision for credit losses on:
Loans (1) ..........................................................
Unfunded commitments(1) .............................
$
Total ..................................................................
$
795
(82)
713
1,071
0
1,071
(1)The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are
calculated under the prior accounting standard.
The following table presents total loans by risk categories and year of origination as of December 31,
2023:
(Dollars in thousands)
2023
2022
2021
2020
2019
Prior
Revolving
Total
Single family
Unclassified .................... $
Special Mention ..............
Substandard ....................
Doubtful ..........................
Loss .................................
Commercial Real Estate
Unclassified ....................
Special Mention ..............
Substandard ....................
Doubtful ..........................
Loss .................................
Consumer
Unclassified ....................
Special Mention ..............
Substandard ....................
Doubtful ..........................
Loss .................................
Current period gross
write offs ...........................
Commercial Business
Unclassified ....................
Special Mention ..............
Substandard ....................
Doubtful ..........................
Loss .................................
Current period gross
write offs ...........................
81,070
59,474
62,690
33,637
10,915
14,635
0
64
0
0
81,134
64,688
1,026
2,225
0
0
67,939
511
0
546
0
0
60,531
187,320
7,756
388
0
0
195,464
0
0
0
62,690
109,729
2,188
292
0
0
112,209
0
79
0
0
33,716
75,754
371
10,867
0
0
86,992
0
182
24
0
11,121
14,531
0
637
0
0
15,168
0
462
14
0
15,111
9,603
1,016
1,562
0
0
12,181
0
0
0
0
0
0
0
0
0
0
0
0
262,421
511
1,333
38
0
264,303
461,625
12,357
15,971
0
0
489,953
9,913
7,583
1,606
1,870
2,369
4,778
14,170
42,289
20
8
15
3
9,959
0
12,404
0
1,703
0
0
14,107
174
0
26
0
0
7,609
1
6,967
0
483
0
0
7,450
0
0
52
0
116
1,774
0
3,539
0
152
0
0
3,691
0
0
0
0
0
1,870
0
3,317
0
104
0
0
3,421
0
0
3
0
0
2,372
0
217
0
11
0
0
228
0
0
113
0
0
4,891
49
288
0
31
0
0
319
0
0
30
19
40
14,259
20
232
34
159
42,734
0
50
30,160
0
1,742
0
0
31,902
56,892
0
4,226
0
0
61,118
160
334
Total Loans .......................... $
173,139
271,054
180,364
125,999
28,889
32,502
46,161
858,108
79
The following table summarizes the amount of classified and unclassified loans at December 31, 2022:
December 31, 2022
Classified
Unclassified
(Dollars in thousands)
$
Single family ...................................
Commercial real estate:
Real estate rental and leasing .......
Other ............................................
Consumer .......................................
Commercial business .....................
Total ............................................ $
Special
Mention
Substandard
Doubtful
Loss
Total
Total
Total
Loans
882
2,067
9,529
11,273
0
1,000
22,684
2,241
8,592
387
1,803
15,090
47
0
0
20
0
67
0
2,996
202,894
205,890
0
0
86
0
86
11,770
19,865
493
2,803
37,927
238,013
201,697
44,324
63,032
749,960
249,783
221,562
44,817
65,835
787,887
Credit Quality Indicators
The Company categorized loans into risk categories based on relevant information about the ability of
borrowers to service their debt. The information considered includes information, such as: current
financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. The Company established a risk rating at origination for
all commercial real estate and commercial business loans and management monitors the loans on an
ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the
risk ratings for these loans on an annual basis.
The Company uses the following definitions for classifying loans:
Special Mention - 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.
Substandard - 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.
Doubtful - 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.
Loss - Loans classified as loss are essentially uncollateralized and/or considered uncollectible and of
such little value that continuance as an asset on the balance sheet may not be warranted.
Classified loans are categorized as special mention, substandard, doubtful, and loss. Loans classified as
substandard, doubtful, or loss require the Bank to perform an analysis of the individual loan and charge
off any loans, or portion thereof, that are deemed uncollectible. Loans not meeting the criteria above to
require an individual analysis that are not classified as special mention are considered to be unclassified
or pass-rated loans.
80
The aging of past due loans at December 31, 2023 and 2022 is summarized as follows:
(Dollars in thousands)
December 31, 2023
Single family .......................................$
Commercial real estate:
Real estate rental and leasing ...........
Other ................................................
Consumer ............................................
Commercial business ..........................
Total ................................................. $
December 31, 2022
Single family .......................................$
Commercial real estate:
Real estate rental and leasing ...........
Other ................................................
Consumer ............................................
Commercial business ..........................
Total ................................................. $
30-59
Days Past
Due
60-89
Days 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
453
0
0
361
0
814
380
0
578
394
0
1,352
71
363
887
263,416
264,303
0
0
92
309
472
145
0
0
123
0
268
0
399
57
812
1,631
481
0
0
88
0
569
0
399
510
1,121
2,917
271,531
218,023
42,224
59,997
855,191
271,531
218,422
42,734
61,118
858,108
1,006
204,884
205,890
0
578
605
0
2,189
249,783
220,984
44,212
65,835
785,698
249,783
221,562
44,817
65,835
787,887
0
0
0
0
0
0
0
0
0
0
0
0
The Company considers a loan to have defaulted when it becomes 90 or more days past due and the loan
is classified as non-accruing. When a loan is classified as non-accruing, any accrued interest on the loan is
reversed from interest income and any subsequent interest on the loan is recognized using the cash basis
method of income recognition. A non-accruing loan may be reclassified as an accruing loan after the loan
becomes current.
81
The following table presents the carrying value of collateral dependent individually analyzed loans and
the related allowances for the year ended December 31, 2023:
(Dollars in thousands)
Loans with no related allowance recorded:
Single family ............................................................................ $
Commercial real estate:
Other ...................................................................................
Consumer .................................................................................
Loans with an allowance recorded:
Single family ............................................................................
Consumer .................................................................................
Commercial business ...............................................................
Total:
Single family ............................................................................
Commercial real estate:
Other (1) ...............................................................................
Consumer (2) .............................................................................
Commercial business (3) ...........................................................
Total .......................................................................................
$
December 31, 2023
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
758
668
306
221
119
2,212
979
668
425
2,212
4,284
758
668
306
221
119
2,546
979
668
425
2,546
4,618
0
0
0
28
103
297
28
0
103
297
428
(1) Secured by commercial land.
(2) Secured by second mortgages on single family housing, recreational vehicles, and autos.
(3) Secured by business equipment.
The following table presents, under previously applicable GAAP, loans individually evaluated for
impairment by portfolio segment as of December 31, 2022:
(Dollars in thousands)
Loans with no related allowance recorded:
Single family ...........................................................................
Commercial real estate:
Other ...................................................................................
Consumer ...............................................................................
$
Loans with an allowance recorded:
Single family ...........................................................................
Commercial real estate:
Other ...................................................................................
Consumer ................................................................................
Commercial business ..............................................................
Total:
Single family ...........................................................................
Commercial real estate:
Other (1) ...............................................................................
Consumer (2) ............................................................................
Commercial business (3) ..........................................................
Total .......................................................................................
$
December 31, 2022
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
667
179
338
241
0
154
561
908
179
492
561
2,140
685
179
338
241
0
154
561
926
179
492
561
2,158
0
0
0
33
0
112
17
33
0
112
17
162
496
182
345
108
2,044
152
244
604
2,226
497
244
3,571
8
11
13
4
0
2
2
12
11
15
2
40
(1) Secured by commercial land.
(2) Secured by second mortgages on single family housing, recreational vehicles, and autos.
(3) Secured by business equipment primarily related to the farming and trucking industries.
82
At December 31, 2023 and 2022, non-accruing loans totaled $3.8 million and $1.9 million, respectively,
for which the related allowance for credit losses was $0.4 million and $0.2 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 $1.3 million and $1.0 million at
December 31, 2023 and 2022, 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 $0.5 million
and $0.1 million in 2023 and 2022, respectively. The amount that was included in interest income on a
cash basis for 2023 was $0.1 million, and for 2022 the amount included in interest income was not
material. 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 loans that have had terms
modified for borrowers experiencing financial difficulty.
The following table summarizes non-accrual loans at December 31, 2023 and 2022:
(Dollars in thousands)
Single family ............................................... $
Commercial real estate:
Other ........................................................
Consumer ....................................................
Commercial business ..................................
Total .......................................................... $
2023
2022
762
493
376
2,187
3,818
908
0
441
529
1,878
Occasionally, the Company provides modifications of loans to borrowers experiencing financial difficulty
that result in a direct change in the timing or amount of contractual cash flows. Additional disclosures are
applicable to situations where there is principal forgiveness, interest rate reductions, other-than-
insignificant payment delays, term extensions, or a combination of any of these items. If the Company
modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of
principal that is forgiven is charged off against the ACL. During the year ended December 31, 2023, the
Company made six loan modifications to borrowers experiencing financial difficulty. These modifications
involved payment deferral, interest rate reduction and extending the loans for periods longer than our loan
policy dictates. There was no principal forgiveness for any of these modifications. The Company has no
commitments to lend additional funds to borrowers that had any loan terms modified in 2023. The
modifications outstanding at December 31, 2023 totaled $0.4 million.
The following table summarizes the modification outstanding at December 31, 2023.
(Dollars in thousands)
Single family .........................
Number of
Loans
1
Outstanding
Balance
December 31,
2023
217
Commercial real estate ..........
Consumer .............................
1
4
$
93
54
$
364
Concessions
Granted
Rate reduction
Term extension
Number of
Loans
1
1
Payment deferral
Rate reduction
Term extension
Payment deferral
1
1
3
1
83
NOTE 7 Accrued Interest Receivable
Accrued interest receivable at December 31, 2023 and 2022 is summarized as follows:
(Dollars in thousands)
Securities available for sale .......................... $
Loans receivable ...........................................
Total ........................................................... $
2023
521
3,032
3,553
2022
418
2,585
3,003
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 2023 and 2022 is as follows:
(Dollars in thousands)
Mortgage servicing rights, net:
Balance, beginning of year ...............................................
Originations ......................................................................
Amortization .....................................................................
Balance, end of year .........................................................
Fair value of mortgage servicing rights ............................
$
$
$
2023
2022
2,986
555
(832)
2,709
6,539
3,280
615
(909)
2,986
6,344
All of the single family loans sold where the Company continues to service the loans are serviced for
FNMA under the individual loan sale program. The following is a summary of the risk characteristics of
the loans being serviced for FNMA at December 31, 2023:
(Dollars in thousands)
Original term:
15 year fixed rate .............
30 year fixed rate .............
Loan
Principal
Balance
Weighted
Average
Interest Rate
Weighted
Average
Remaining
Term (months)
Number of
Loans
$
92,569
441,889
2.92 %
3.87
127
303
948
2,721
The gross carrying amount of intangible assets and the associated accumulated amortization at December
31, 2023 and 2022 are presented in the following table. Amortization expense for intangible assets was
$0.8 million and $0.9 million for the years ended December 31, 2023 and 2022, respectively. The gross
carrying amount of intangible assets and the associated accumulated amortization at December 31, 2023
and 2022 is presented in the following table.
(Dollars in thousands)
December 31, 2023
Mortgage servicing rights .................... $
Goodwill ..............................................
Total .................................................. $
December 31, 2022
Mortgage servicing rights .................... $
Core deposit intangible ........................
Goodwill ..............................................
Total .................................................. $
Gross
Carrying
Amount
Accumulated
Amortization
Unamortized
Intangible
Assets
(3,517)
0
(3,517)
(3,009)
(574)
0
(3,583)
2,709
802
3,511
2,986
0
802
3,788
6,226
802
7,028
5,995
574
802
7,371
84
The following table indicates the estimated future amortization expense for mortgage servicing rights:
Mortgage
Servicing
Rights
(Dollars in thousands)
Year ended December 31,
2024 ................................................................ $
2025 .............................................................
2026 .............................................................
2027 .............................................................
2028 .............................................................
Thereafter .....................................................
Total
$
726
658
565
396
218
146
2,709
Projections of amortization are based on asset balances and the interest rate environment that existed at
December 31, 2023. The Company’s actual experience may be significantly different depending upon
changes in mortgage interest rates and other market conditions.
No amortization expense relating to goodwill is recorded as GAAP does not allow goodwill to be
amortized but requires that it be tested for impairment at least annually, or sooner, if there are indications
that an impairment may exist. Goodwill was tested for impairment at December 31, 2023 and the
Company determined that it was not permanently impaired and no write down was required.
NOTE 9 Premises and Equipment
A summary of premises and equipment at December 31, 2023 and 2022 is as follows:
(Dollars in thousands)
2023
2022
Land .....................................................................................
Office buildings and improvements ....................................
Furniture and equipment ......................................................
$
Accumulated depreciation ...................................................
Total ..................................................................................
$
5,156
17,623
12,055
34,834
(18,839)
15,995
5,156
17,514
12,684
35,354
(18,862)
16,492
NOTE 10 Leases
The Company accounts for its leases in accordance with ASC Topic 842. Operating lease right-of-use
assets represent the Company’s right to use an underlying asset during the lease term and operating lease
liabilities represent its obligation to make lease payments arising from the lease. Right-of-use assets and
operating lease liabilities are recognized at lease commencement based on the present value of the
remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate
at the lease commencement date. Because the Company only has operating leases and the right-of-use
asset is offset by a lease payment obligation liability, the lease payments are the only amount that is
recorded in occupancy expense in the consolidated statements of comprehensive income (loss).
The Company’s leases relate to office space and bank branches with remaining lease terms between eight
and forty-seven months. Certain leases contain extension options which typically range from three to ten
years. Because these extension options are not considered reasonably certain of exercise, they are not
included in the lease term. As of December 31, 2023 a $0.3 million right-of-use asset and an offsetting
lease payment obligation liability were recorded on the consolidated balance sheet in other assets and
other liabilities, respectively. Operating lease costs were $0.2 for both years ended December 31, 2023
and 2022.
85
The table below summarizes other information related to our operating leases for the years ended
December 31, 2023 and 2022.
(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases ............................................. $
Weighted-average remaining lease term – operating leases, in years .........
Weighted-average discount rate – operating leases .....................................
2023
2022
223
2.0
2.71 %
226
2.8
2.64 %
The table below summarizes the maturity of remaining lease liabilities:
(Dollars in thousands)
2024 ...................................................................... $
2025 ......................................................................
2026 ......................................................................
2027 ......................................................................
2028 and thereafter ...............................................
Total lease payments .............................................
Less: Interest .........................................................
Present value of lease liabilities ............................ $
December 31,
2023
212
58
27
25
0
322
(9)
313
NOTE 11 Deposits
Deposits and their weighted average interest rates at December 31, 2023 and 2022 are summarized as
follows:
2023
2022
(Dollars in thousands)
Noninterest checking ..........................
Interest checking ................................
Savings accounts ................................
Money market accounts .....................
Certificates by rate:
0-0.99% ..............................................
1-1.99% ..............................................
2-2.99% ..............................................
3-3.99% ..............................................
4-4.99% ..............................................
5-5.99% ..............................................
Total certificates .................................
Total deposits .....................................
Weighted
Average Rate
Amount
Percent
of Total
0.00 % $
0.85
0.11
2.16
4.43
1.75
$
244,015
140,975
107,864
249,246
742,100
17,699
5,164
2,652
17,163
96,806
95,209
234,693
976,793
25.0 %
14.4
11.1
25.5
76.0
1.8
0.5
0.3
1.8
9.9
9.7
24.0
100.0 %
Weighted
Average
Rate
0.00 % $
0.38
0.08
0.73
2.59
0.60
$
Amount
Percent
of Total
325,603
147,497
123,389
253,498
849,987
53,645
8,049
3,521
5,493
61,231
0
131,939
981,926
33.2 %
15.0
12.6
25.8
86.6
5.4
0.8
0.4
0.6
6.2
0.0
13.4
100.0 %
At December 31, 2023 and 2022 the Company had $414.5 million and $373.9 million, respectively, of
deposit accounts with balances of $250,000 or more. The Company had $107.0 million and $55.1 million
of certificate accounts that had been acquired through a broker at December 31, 2023 and 2022,
respectively.
86
Certificates had the following maturities at December 31, 2023 and 2022:
(Dollars in thousands)
Remaining term to maturity
2024....................................... $
2025.......................................
2026.......................................
2027.......................................
2028.......................................
2029 and hereafter ................
Total ................................... $
Amount
187,673
34,567
11,505
639
309
0
234,693
2023
Weighted
Average
Rate
4.46 % 2023 ............................. $
4.40
4.36
0.63
1.62
0.00
4.43
2024 .............................
2025 .............................
2026 .............................
2027 .............................
2028 and hereafter .......
$
2022
Amount
72,737
47,563
10,101
747
777
15
131,939
Weighted
Average
Rate
1.86 %
3.60
3.32
0.45
0.73
0.28
2.59
At December 31, 2023 and 2022, the Company had pledged mortgage-backed and related securities with
a fair market value of approximately $41.6 million and $45.9 million, respectively, as collateral for
certain deposits.
Deposits from directors, executive officers and their related parties held by the Company at December 31,
2023 and 2022 amount to $1.2 million and $0.7 million, respectively.
Interest expense on deposits is summarized as follows for the years ended December 31, 2023 and 2022:
(Dollars in thousands)
Checking accounts ...................................... $
Savings accounts .........................................
Money market accounts ..............................
Certificate accounts .....................................
Total .......................................................... $
2023
2022
1,037
110
4,577
6,566
12,290
220
75
882
555
1,732
NOTE 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings
The Bank had $13.2 million in overnight advances from the FHLB at a rate of 5.64% at December 31,
2023 and no outstanding advances from the FHLB or other borrowings as of December 31, 2022. At
December 31, 2023 and 2022 the Bank had collateral pledged to the FHLB consisting of FHLB stock and
mortgage loans with a total borrowing capacity available of approximately $283.5 million and $230.1
million, respectively, subject to a requirement to purchase FHLB stock. The Bank also had the ability to
borrow $87.3 million and $86.6 million, respectively, from the Federal Reserve Bank of Minneapolis
based upon the loans that were pledged to them as of December 31, 2023 and 2022, subject to approval
from the FRB.
NOTE 13 Income Taxes
Income tax expense for the years ended December 31, 2023 and 2022 was as follows:
(Dollars in thousands)
Current:
Federal .................................................................................... $
State ........................................................................................
Total current ........................................................................
Deferred:
Federal ....................................................................................
State ........................................................................................
Total deferred ......................................................................
Income tax expense .................................................................. $
2023
2022
2,143
815
2,958
(81)
(329)
(410)
2,548
2,123
1,000
3,123
2
101
103
3,226
87
The reasons for the difference between the expected income tax expense utilizing the federal corporate
tax rate of 21% and the actual income tax expense were as follows:
(Dollars in thousands)
Expected federal income tax expense .......................................... $
Items affecting federal income tax:
State income taxes, net of federal income tax deduction .......
Other, net ................................................................................
Income tax expense .................................................................. $
2023
1,796
557
195
2,548
2022
2,367
899
(40)
3,226
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)
2023
2022
Deferred tax assets:
Allowances for credit losses ...................................................................... $
Deferred compensation costs .....................................................................
Deferred ESOP loan asset .........................................................................
Non-accruing loan interest ........................................................................
Net unrealized loss on securities available for sale ...................................
State net operating loss carry-forward ......................................................
Other ..........................................................................................................
Total gross deferred tax assets .................................................................
Valuation allowance ..................................................................................
Deferred tax assets, net of valuation allowance ........................................
Deferred tax liabilities:
Deferred loan costs ....................................................................................
Premises and equipment basis difference..................................................
Originated mortgage servicing rights ........................................................
Other ..........................................................................................................
Total gross deferred tax liabilities ..........................................................
Net deferred tax assets ............................................................................ $
3,337
144
315
163
5,149
39
101
9,248
(283)
8,965
241
570
764
219
1,794
7,171
2,899
120
361
179
6,539
0
110
10,208
0
10,208
243
618
843
157
1,861
8,347
The Company has no federal net operating loss carryforwards at December 31, 2023.
Retained earnings at December 31, 2023 included 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 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. A valuation allowance is
required to be recognized, under GAAP, 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 positive evidence considered includes the 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 only negative evidence the Company identified was related to a change in Wisconsin state tax law
that was enacted in 2023. The law change allows financial institutions to exempt from state taxation loan
income from loans of $5 million or less where the borrower resides or is located in Wisconsin. The law
change substantially reduced the Company’s effective state income tax rate in Wisconsin. A valuation
allowance was recorded at December 31, 2023 to reflect the anticipated reduction in the Company’s
88
ability to recognize future Wisconsin state tax benefits when the timing differences reverse on the
previously recorded deferred tax assets. It is possible that future conditions may differ substantially from
those anticipated in determining that a valuation allowance was required on deferred tax assets and
adjustments may be required in the future.
NOTE 14 Employee Benefits
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB
Plan), a noncontributory multi-employer defined benefit pension plan covering Bank employees who
were hired prior to 2002 that met minimum service requirements. Effective September 1, 2002, this plan
was frozen and closed to new participants but employees that were already in the plan at the time it was
frozen continue to accrue benefits. The Pentegra DB Plan’s Employer Identification Number is 13-
5645888 and the Plan number is 333. There are no collective bargaining agreements that require
contributions to the Pentegra DB Plan, and there is no funding improvement or rehabilitation plan as part
of the Pentegra DB Plan. The Company’s policy is to fund accrued pension costs and the employer
contributions paid and expensed for each of the years ended December 31, 2023 and 2022 were $0.3
million. The Company’s contributions to the Pentegra DB Plan were not more than 5% of total
contributions to the Plan in either of those years. Funded status (market value of plan assets divided by
the funding target) as of July 1 for the 2023 and 2022 plan years were 78.4% and 80.0%, respectively.
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
$22,500 for 2023 and $20,500 for 2022, with additional catch-up contributions allowed for employees
over 50 years of age. 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 2023 and 2022.
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, 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 2023 and 2022.
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 common share computations. ESOP compensation expense was $0.5 million for 2023
and $0.6 million for 2022.
89
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 purchased with dividends received on allocated shares......
Shares distributed to participants ....................................................
Shares held by participants end of year ..........................................
2023
361,069
24,318
7,005
(19,849)
372,543
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 December 31 ............................ $
133,782
(24,318)
109,464
482,007
2,517,672
2022
353,677
24,318
3,540
(20,466)
361,069
158,100
(24,318)
133,782
494,851
2,854,908
The Company maintains two equity incentive plans, the HMN Financial, Inc. 2009 Equity and Incentive
Plan (2009 Plan) and the HMN Financial, Inc. 2017 Equity Incentive Plan (2017 Plan). The purposes of
the Company’s equity incentive plans are to attract and retain the best available personnel for positions of
responsibility with the Company, to provide additional incentives to them and align their interests with
those of the Company’s stockholders, and to thereby promote the company’s long-term business success.
The 2009 Plan was superseded in April 2017 by the 2017 Plan and options or restricted shares were no
longer awarded from the 2009 Plan. As of December 31, 2023 there were 34,229 shares reserved for
issuance pursuant to options outstanding under the 2009 Plan. These options expire 10 years from the date
of grant, have an average exercise price of $11.21 and had a grant date fair value of $4.04.
Initially there were 375,000 shares of HMN common stock available for issuance pursuant to awards
under the 2017 Plan, subject to adjustment for future stock splits, stock dividends and similar changes to
the capitalization of the Company. 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, 2023, there were no options outstanding under the 2017 Plan. There were 18,035 shares of
restricted stock previously granted to employees and directors under the 2017 Plan that remained
unvested at December 31, 2023.
90
A summary of activities under all plans for the past two years is as follows:
Shares
Available
For Grant
Unvested
Restricted
Shares
Outstanding
Award Value/
Weighted
Average
Exercise Price
Options
Outstanding
Vesting
Period
(in years)
2009 Plan
December 31, 2021 .................................
December 31, 2022 .................................
December 31, 2023 .................................
0
0
0
0
0
0
34,229 $
34,229 $
34,229 $
2017 Plan
December 31, 2021 .................................
345,907
Granted February 1, 2022 ....................
(11,286)
Granted April 26, 2022.........................
(2,616)
Vested ...................................................
0
December 31, 2022 .................................
332,005
Granted January 24, 2023 ....................
Granted April 25, 2023.........................
Vested ...................................................
(9,843)
(4,122)
0
December 31, 2023 .................................
318,040
22,841
7,524
1,744
(13,055)
19,054
6,562
2,748
(10,329)
18,035
0
0
0
0
0
0
0
0
0
11.21
11.21
11.21
N/A
N/A
N/A
Total all plans ..........................................
318,040
18,035
34,229 $
11.21
3
1
3
1
There were 34,229 vested and exercisable options outstanding at December 31, 2023. These options were
granted on January 26, 2016, have an exercise price of $11.21, and have an average remaining life of 2.1
years. The Company will issue shares from treasury stock upon the exercise of the outstanding options.
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 2023 or 2022.
NOTE 15 Earnings per Common Share
The following table reconciles the weighted average shares outstanding and 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 common share calculation .............
Net dilutive effect of:
Options .....................................................................................
Restricted stock awards ...........................................................
Weighted average number of common shares outstanding
adjusted for effect of dilutive securities ..................................
Year ended December 31,
2023
2022
4,350,215
4,358,022
14,807
12,066
17,847
13,601
4,377,088
4,389,470
Income available to common shareholders ................................
Basic earnings per common share ..............................................
Diluted earnings per common share ...........................................
$
6,005
1.38
1.37
8,045
1.85
1.83
91
NOTE 16 Stockholders' Equity
In February 2023, the Company’s Board of Directors increased the aggregate purchase price of shares
eligible to be repurchased to $6.0 million. The share repurchase program does not obligate the Company
to purchase any shares and has no set expiration date. The Company repurchased 29,457 shares in the
open market for $0.6 million in 2023 and 90,000 shares in the open market for $2.1 million in 2022. At
December 31, 2023 there was $5.4 million authorized for repurchase in the share repurchase program.
The Company paid dividends on its common stock of $0.30 per share, or $1.3 million, in 2023 and paid
dividends on its common stock of $0.24 per share, or $1.0 million in 2022.
In January 2024, the Company’s Board of Directors declared a quarterly dividend of $0.08 per share of
common stock payable on March 6, 2024 to stockholders of record at the close of business on February
13, 2024. The declaration and amount of any future cash dividends remains subject to the sole discretion
of the Board of Directors and will depend upon many factors, including the Company’s results of
operations, financial condition, capital requirements, regulatory and contractual restrictions, business
strategy and other factors deemed relevant by the Board of Directors.
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 Bank is subject to the Basel III regulatory capital requirements. The Basel III requirements, among
other things, (i) apply a set of capital requirements to the Bank, 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) set forth rules for calculating risk-weighted
assets for purposes of such requirements. The rules also made corresponding revisions to the prompt
corrective action framework and include capital ratios and buffer requirements. 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 its 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.
The Board of Governors of the Federal Reserve Bank in its Small Bank Holding Company Policy
Statement (Policy Statement) has exempted small bank holding companies with assets less than $3 billion
from the above capital requirements. The Policy Statement also includes savings and loan holding
companies that meet the Policy Statement’s qualitative requirements for exemption. The Company
currently meets the qualitative exemption requirements, and therefore, is exempt from the above capital
requirements.
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.
92
At December 31, 2023 and 2022, 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
Capital in Excess of
Minimum
Requirements
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
(Dollars in thousands)
December 31, 2023
Common equity Tier 1 capital ....... $ 104,005
104,005
Tier 1 leverage ...............................
Tier 1 risk-based capital ................
104,005
115,274
Total risk-based capital ..................
Percent of
Assets(1)
Amount
Percent of
Assets(1)
Amount
Percent of
Assets(1)
Amount
Percent of
Assets(1)
11.54 % $
9.08
11.54
12.80
40,542
45,823
54,056
72,074
4.50 % $ 63,463
58,182
4.00
49,949
6.00
43,200
8.00
7.04 % $
5.08
5.54
4.80
58,560
57,279
72,074
90,093
6.50 %
5.00
8.00
10.00
December 31, 2022
39,312
Common equity Tier 1 capital ........ $ 100,250
43,883
100,250
Tier 1 leverage ................................
Tier 1 risk-based capital .................
52,416
100,250
Total risk-based capital ...................
69,888
110,527
(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.
4.50 % $ 60,938
56,367
4.00
47,834
6.00
40,639
8.00
11.48 % $
9.14
11.48
12.65
6.98 % $
5.14
5.48
4.65
56,784
54,854
69,888
87,360
6.50 %
5.00
8.00
10.00
The Bank must maintain a capital conservation buffer of 2.50% 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. Management believes that, as of December 31, 2023, the Bank’s capital ratios were in excess of
those quantitative capital ratio standards set forth under the current 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 OCC has extensive discretion in its
supervisory and enforcement activities and can adjust the requirement to be well-capitalized in the future.
In addition, the Company must adhere to various U.S. Department of Housing and Urban Development
(HUD) regulatory guidelines including required minimum capital and liquidity amounts to maintain their
Federal Housing Administration approved status. Failure to comply with the HUD guidelines could result
in withdrawal of this certification. As of December 31, 2023, the Company was in compliance with HUD
guidelines.
NOTE 18 Commitments and Contingencies
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 all
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 consolidated 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 the same credit policies in making commitments as it does for on-balance sheet
instruments.
93
A summary of the Company’s commitments to extend credit and sell loans as of December 31, 2023 and
2022 were as follows:
(Dollars in thousands)
Contract Amount
December 31,
2023
2022
Financial instruments whose contract amount represents credit risk:
Commitments to originate, fund or purchase loans:
Single family ................................................................................ $
Commercial real estate .................................................................
Commercial business ...................................................................
Undisbursed balance of loans closed ...........................................
Unused lines of credit ..................................................................
Letters of credit ............................................................................
2,072
5,196
0
61,681
90,940
7,558
Total commitments to extend credit ................................................. $
167,447
Forward commitments ...................................................................... $
3,078
6,220
17,656
617
92,774
103,841
11,832
232,940
6,575
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 the 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 24 months and totaled $6.9 million at
December 31, 2023 and $11.4 million at December 31, 2022. The letters of credit are collateralized
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.
94
The Company has certain obligations and commitments to make future payments under existing contracts.
At December 31, 2023, the aggregate contractual obligations (excluding bank deposits) and commercial
commitments were as follows:
(Dollars in thousands)
Contractual Obligations:
Annual rental commitments under non-cancellable
operating leases ................................................................
$
Total contractual obligations ......................................... $
Payments Due by Period
Total
Less Than
1 Year
1-3 Years
4-5 Years
More Than
5 Years
322
322
212
212
110
110
0
0
0
0
Other Commercial Commitments:
Commercial lines of credit ................................................. $
Commitments to lend .........................................................
Standby letters of credit ......................................................
Total other commercial commitments ........................... $
62,225
52,319
7,558
122,102
39,582
14,485
6,951
61,018
22,643
9,342
607
32,592
0
5,729
0
5,729
0
22,763
0
22,763
Amount of Commitments Expiring by Period
From time to time, the Company is party to legal proceedings arising out of its lending and deposit
operations. The Company is, and expects to become, engaged in foreclosure proceedings, collection
actions, and other litigation as part of its normal banking activities. The Company examines each legal
matter, and, in those situations where it determines that a particular legal matter presents loss
contingencies that are both probable and reasonably estimable, establishes an appropriate accrual. In
many situations, the Company is not able to estimate reasonably possible losses due to the preliminary
nature of the legal matter, as well as a variety of other factors and uncertainties. Based on the Company’s
current understanding of all of the outstanding legal matters, management does not believe that judgments
or settlements arising from any pending or threatened litigation, individually or in the aggregate, would
have a material adverse effect on the consolidated financial condition or results of operations.
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 loans into 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, 2023 and 2022
did not have a material impact on the Company’s consolidated financial statements.
As of December 31, 2023 and 2022, the current 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, 2023 and 2022
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:
95
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 the 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, 2023 and 2022.
(Dollars in thousands)
Securities available for sale .................
Equity securities ..................................
Mortgage loan commitments ..............
Total ..................................................
(Dollars in thousands)
Securities available for sale .................
Equity securities ..................................
Mortgage loan commitments ..............
Total ..................................................
Carrying Value at December 31, 2023
Total
215,094
382
7
215,483
Level 1
0
0
0
0
Level 2
215,094
382
7
215,483
Level 3
Carrying Value at December 31, 2022
Level 1
Level 2
Level 3
0
0
0
0
246,019
225
(28)
246,216
Total
246,019
225
(28)
246,216
0
0
0
0
0
0
0
0
$
$
$
$
The Company may also be required, from time to time, to measure certain other financial assets at fair
value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result
from the application of the lower-of-cost-or-market accounting or write downs of individual assets. For
assets measured at fair value on a nonrecurring basis in 2023 and 2022 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, 2023 and 2022.
(Dollars in thousands)
Loans held for sale .......................
Mortgage servicing rights, net .....
Collateral dependent loans ...........
Total ...........................................
(Dollars in thousands)
Loans held for sale .......................
Mortgage servicing rights, net .....
Collateral dependent loans ...........
Total ...........................................
$
$
$
$
Carrying Value at December 31, 2023
Total
Level 1
Level 2
Level 3
1,006
2,709
3,856
7,571
0
0
0
0
1,006
0
3,856
4,862
0
2,709
0
2,709
Carrying Value at December 31, 2022
Total
Level 1
Level 2
Level 3
1,314
0
1,978
3,292
0
2,986
0
2,986
1,314
2,986
1,978
6,278
0
0
0
0
96
Year Ended
December 31, 2023
Total Gains (Losses)
26
0
(287)
(261)
Year Ended
December 31, 2022
Total Gains (Losses)
3
0
(46)
(43)
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, 2023 and December 31, 2022 based upon relevant market information, if available, and upon the
characteristics of the financial instruments themselves. Because no market exists for a significant portion
of the Company’s financial instruments, fair value estimates are based upon judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial
instruments and other factors. The 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.
The estimated fair value of the Company's financial instruments is 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.
December 31, 2023
Fair Value Hierarchy
Estimated
Fair Value
Level 1
Level 2
Level 3
11,151
11,151
December 31, 2022
Contract
Amount
Carrying
Amount
Estimated
Fair Value
Contract
Amount
Carrying
Amount
(Dollars in thousands)
Financial assets:
Cash and cash equivalents .......... $ 11,151
Securities available for sale ........ 215,094
Equity securities ..........................
382
Loans held for sale ......................
1,006
Loans receivable, net .................. 845,692
FHLB stock .................................
1,252
Accrued interest receivable .........
Mortgage servicing assets ...........
Financial liabilities:
Deposits ....................................... 976,793
FHLB advances and other
borrowings ..............................
Accrued interest payable .............
Off-balance sheet financial
instruments:
Commitments to extend credit ....
Commitments to sell loans ..........
13,200
3,553
2,709
2,399
7
(17)
215,094
382
1,006
778,952
1,252
3,553
975,963
13,200
2,399
215,094
382
1,006
778,952
1,252
3,553
6,539
975,963
13,200
2,399
7
(17)
6,539
36,259
246,019
225
1,314
777,078
1,283
3,003
2,986
36,259
246,019
225
1,314
724,497
1,283
3,003
6,344
981,926
983,420
0
298
(28)
8
0
298
(28)
8
232,940
6,575
167,447
3,078
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value.
97
Securities Available for Sale
The fair values of securities were determined by a third-party pricing service based upon quoted market
prices for similar securities. The fair values measurements are subject to independent verification by
another pricing source on a quarterly basis to review for reasonableness.
Equity Securities
The fair values of equity securities were based upon quoted market prices for similar securities.
Loans Held for Sale
The fair values of loans held for sale were based upon quoted market prices for loans with similar interest
rates and terms to maturity.
Loans Receivable
The fair value of the loan portfolio, with the exception of the adjustable rate portfolio, was calculated by
discounting the scheduled cash flows through the estimated maturity using anticipated prepayment speeds
and using discount rates that reflect the credit and interest rate risk inherent in each loan portfolio. The
fair value of the adjustable loan portfolio, with the exception of those loans that adjust on a daily basis,
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.
Mortgage Servicing Assets
The fair values of mortgage servicing assets were calculated by a third party using a discounted cash flow
model-based technique that uses significant assumptions both observable and non-observable in the
market. The non-observable assumptions reflect estimates of assumptions that market participants would
use in pricing the mortgage servicing asset.
Deposits
The fair value of demand deposits, savings accounts and certain money market account deposits is the
amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is
estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities
based on a discounted cash flow calculation.
FHLB Advances and Other Borrowings
The fair values of advances and borrowings with fixed maturities are estimated based on a discounted
cash flow analysis using as discount rates the interest rates charged by the FHLB for borrowing of similar
remaining terms. The carrying amount of overnight advances approximates their fair value.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value since it is short-term in
nature.
98
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.
99
NOTE 22 HMN Financial, Inc. Financial Information (Parent Company Only)
The following are the condensed financial statements for the parent company only as of and for the years
ended December 31, 2023 and 2022.
(Dollars in thousands)
Condensed Balance Sheets
Assets:
Cash and cash equivalents .......................................................................................
Investment in subsidiaries .......................................................................................
Prepaid expenses and other assets ...........................................................................
Total assets ...........................................................................................................
Liabilities and Stockholders' Equity:
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, 4,670,757 and 4,647,686 shares ........................................
Total stockholders' equity ....................................................................................
Total liabilities and stockholders' equity ..............................................................
Condensed Statements of Income
Interest income ........................................................................................................
Equity income of subsidiaries .................................................................................
Compensation and benefits .....................................................................................
Occupancy and equipment ......................................................................................
Data processing .......................................................................................................
Professional services ...............................................................................................
Other ........................................................................................................................
Income before income tax (expense) benefit .......................................................
Income tax (expense) 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 ..................................................................................
Amortization of restricted stock awards ...............................................................
Amortization of unearned ESOP shares ................................................................
Earned employee stock ownership shares priced above original cost ..................
Decrease (increase) in other assets ........................................................................
Decrease in other liabilities ...................................................................................
Other, net ...............................................................................................................
Net cash provided (used) by operating activities ...............................................
Cash flows from financing activities:
Treasury stock purchased ......................................................................................
Stock awards withheld for tax withholding ..........................................................
Dividends to stockholders .....................................................................................
Dividends received from Bank ..............................................................................
Net cash provided by financing activities ...........................................................
Increase in cash and cash equivalents ...................................................................
Cash and cash equivalents, beginning of year ...........................................................
Cash and cash equivalents, end of year ......................................................................
$
$
$
$
$
$
$
$
2023
2022
16,287
91,500
56
107,843
136
136
91
41,235
142,278
(13,191)
(870)
(61,836)
107,707
107,843
321
6,570
(273)
(32)
(8)
(129)
(433)
6,016
(11)
6,005
15,250
81,190
1,046
97,486
150
150
91
41,013
138,409
(19,761)
(1,063)
(61,353)
97,336
97,486
43
8,500
(272)
(30)
(6)
(125)
(404)
7,706
339
8,045
6,005
8,045
(6,570)
0
225
193
207
990
(14)
0
1,036
(629)
(64)
(1,306)
2,000
1
1,037
15,250
16,287
(8,500)
4
227
193
271
(261)
(13)
(1)
(35)
(2,134)
(70)
(1,049)
6,000
2,747
2,712
12,538
15,250
100
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, 2023:
Interest income – external customers ......................................
Non-interest income – external customers ..............................
Intersegment interest income ..................................................
Intersegment non-interest income ...........................................
Interest expense .......................................................................
Provision for credit losses .......................................................
Non-interest expense ...............................................................
Income tax expense .................................................................
Net income ...............................................................................
Total assets ..............................................................................
At or for the year ended December 31, 2022:
Interest income – external customers ......................................
Non-interest income – external customers ..............................
Intersegment interest income ..................................................
Intersegment non-interest income ...........................................
Interest expense .......................................................................
Provision for credit losses .......................................................
Non-interest expense ...............................................................
Income tax expense (benefit) ..................................................
Net income ...............................................................................
Total assets ..............................................................................
43,477
8,281
0
272
13,041
713
29,169
2,537
6,570
1,107,124
34,255
8,887
0
234
2,042
1,071
28,198
3,565
8,500
1,095,268
0
0
321
6,570
0
0
875
11
6,005
107,843
0
0
43
8,500
0
0
837
(339)
8,045
97,486
0
0
(321)
(6,842)
(321)
0
(272)
0
(6,570)
(107,832)
0
0
(43)
(8,734)
(43)
0
(234)
0
(8,500)
(96,552)
43,477
8,281
0
0
12,720
713
29,772
2,548
6,005
1,107,135
34,255
8,887
0
0
1,999
1,071
28,801
3,226
8,045
1,096,202
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was carried out under the supervision
and with the participation of the Company’s management, including the Bank’s President (our Principal
Executive Officer) and our Chief Financial Officer (our Principal Financial Officer) of the effectiveness
of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-
15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Principal Executive Officer and Principal Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms.
101
Changes in internal controls. No change in the Company’s internal control over financial reporting was
identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred
during the fourth quarter of the fiscal year ended December 31, 2023 and that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management's Annual Report on Internal Control over Financial Reporting. The Company’s
management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are only being made in accordance with
authorizations of management and directors of the Company; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. The design of a control system
inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally,
controls can be circumvented by the individual acts of some persons by collusion of two or more people,
or by management override of the control. Therefore, no assessment of a cost-effective system of internal
controls can provide absolute assurance that all control issues and instances of fraud, if any, will be
detected.
Under the supervision and with the participation of management, including the Principal Executive
Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of its
internal control over financial reporting based on the framework in the Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the Company’s evaluation under this framework, the Company’s management concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2023.
ITEM 9B. OTHER INFORMATION
None of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified, or
terminated any contract, instruction, or written plan for the purchase or sale of our securities that was
intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-
Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarter ended
December 31, 2023.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
Not applicable.
102
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference from the information under the
captions “Proposal 1 – Election of Directors - Board of Directors,” “Corporate Governance - Committees
of the Board of Directors” and, if applicable, “Delinquent Section 16(a) Reports” in the Company’s
definitive proxy statement to be filed with the SEC pursuant to Regulation 14A not later than 120 days
after the close of the Company’s fiscal year ended December 31, 2023 (the 2024 Proxy Statement).
Information About Our Executive Officers
Executive officers are chosen by and serve at the discretion of the Board of Directors of HMN and the
Bank. There are no family relationships among any of the directors or officers of HMN and the Bank. The
business experience of each executive officer of both HMN and the Bank is set forth below.
Bradley C. Krehbiel, age 65. Mr. Krehbiel has been a director of HMN and President of the Bank since
2009, President of HMN since 2010, and Chief Executive Officer of HMN and the Bank since 2012. Prior
to that, he had been the Executive Vice President of the Bank since 2004. Mr. Krehbiel joined the Bank as
Vice President of Business Banking in 1998. Prior to his employment at the Bank, Mr. Krehbiel held
several positions in the financial services industry.
Jon J. Eberle, age 58. Mr. Eberle is Chief Financial Officer, Senior Vice President and Treasurer of
HMN and the Chief Financial Officer, Executive Vice President and Treasurer of the Bank. Mr. Eberle
has held the Chief Financial Officer and Treasurer positions since 2003 and the Executive Vice President
position since 2012. Prior to that he served as a Vice President since 2000 and as the Controller since
1998. From 1994 to 1998, he served as the Director of Internal Audit for HMN and the Bank. Prior to his
employment at the Bank, Mr. Eberle worked as a certified public accountant for a national accounting
firm.
Lawrence D. McGraw, age 60. Mr. McGraw has served as the Chief Operating Officer and Executive
Vice President of the Bank since 2012. Prior to that he served as Chief Credit Officer and Senior Vice
President since 2010. Prior to his employment at the Bank, Mr. McGraw served as Regional President and
Chief Banking Officer of a Minnesota community bank from 2005 until 2010. From 2001 to 2005 he
served as the President and Chief Executive Officer of a branch location of the same community bank.
Prior to his tenure at the Minnesota community bank, Mr. McGraw held various positions at two other
community banks and the FDIC.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal
financial and accounting officer, controller and other persons performing similar functions. The Company
has posted the Code of Ethics on its website located at www.hmnf.com. The Company intends to post on
its website any amendment to, or a waiver from, a provision of the Code of Ethics that applies to its
principal executive officer, principal financial and accounting officer, controller or other persons
performing similar functions within four business days following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the information under the
captions “Executive Compensation” (excluding information under the caption “Pay versus Performance”)
and “Director Compensation” in the 2024 Proxy Statement.
103
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from the information under the
captions “Security Ownership of Management and Certain Beneficial Owners” and “Other Equity
Compensation Plan Information” in the 2024 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is incorporated by reference from the information under the
subheadings “Director Independence”; “Related Person Transaction Approval Policy”; and “Certain
Other Transactions” under the heading “Corporate Governance” in the 2024 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from the information under the
captions “Corporate Governance - Independent Registered Public Accounting Firm” and “Approval of
Independent Registered Public Accounting Firm Services and Fees” in the 2024 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements: The financial statements filed as a part of this Annual Report on Form
10-K are listed in Part II, Item 8.
(2) Financial Statement Schedules: The schedules are either not applicable or the required
information is presented in the consolidated financial statements or notes thereto.
(3) Exhibits: The exhibits incorporated by reference or filed as a part of this Annual Report on
Form 10-K are listed in the Exhibit Index prior to the signatures to this report.
104
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
Exhibit
Certificate of Incorporation (Amended and Restated through July 28, 2015) (incorporated by
reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended
September 30, 2015)
Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K, filed August 24, 2022)
Form of Common Stock Certificate (incorporated by reference to the same numbered exhibit to
the Company’s Registration Statement on Form S-1 dated April 1, 1994)
Description of Capital Stock (incorporated by reference to Exhibit 4.2 to the Company’s annual
report on Form 10-K for the period ended December 31, 2019)
10.1†
Form of Change in Control Agreement with executive officers (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 27, 2014, filed on June 2,
2014)
10.2†
Directors Deferred Compensation Plan (incorporated by reference to the same numbered exhibit
10.3†
10.4†
10.5†
10.6†
10.7†
to the Company’s annual report on Form 10-K for the period ended December 31, 1994)
Non-Employee Director Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015)
Description of annual awards to non-employee directors under the 2009 Equity Incentive Plan and
form of Restricted Stock Agreement (approved April 28, 2015) (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31,
2015)
HMN Financial, Inc. Employee Stock Ownership Plan (Amended and Restated January 1, 2016)
(incorporated by reference to Exhibit 10. 5 to the Company’s annual report on Form 10-K for the
period ended December 31, 2015)
HMN Financial, Inc. 2009 Equity Incentive Plan (incorporated by reference to Exhibit A to the
Company’s Proxy Statement for its Annual Meeting of Stockholders held on April 28, 2009)
Form of Incentive Stock Option Agreement under HMN Financial, Inc. 2009 Equity Incentive
Plan (Approved January 26, 2016) (incorporated by reference to Exhibit 10.9 to the Company’s
annual report on Form 10-K for the period ended December 31, 2015)
10.8†
Executive Management Incentive Plan (Amended and Restated January 31, 2017) (incorporated
by reference to Exhibit 10.11 to the Company’s annual report on Form 10-K for the period ended
December 31, 2016)
10.9†
HMN Financial, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the
10.10†
Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017)
Form of Directors’ Restricted Stock Agreement for awards granted to directors under the HMN
Financial, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2017)
10.11†
Form of Executives’ Restricted Stock Agreement for awards granted to executives under the
HMN Financial, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the
Company’s annual report on Form 10-K for the period ended December 31, 2017)
10.12†
Executive Severance Agreement, dated May 23, 2017, among the Company, the Bank and
Bradley C. Krehbiel (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K dated May 23, 2017, filed on May 30, 2017)
10.13
Form of Executive Severance Agreement (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated June 6, 2023, filed on June 9, 2023)
21
Subsidiaries of Registrant (Incorporated by reference to Exhibit 21 to the Company’s annual
23.1
23.2
24
31.1
report on Form 10-K for the period ended December 31, 2019)
Consent of Baker Tilly US LLP**
Consent of CliftonLarsonAllen LLP**
Powers of Attorney**
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
105
Exhibit
Number
31.2
32
97
101
Exhibit
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
Section 1350 Certifications*
Compensation Recovery Policy, effective as of October 2, 2023**
Financial Statements of the Company from this Annual Report on Form 10-K for the year ended
December 31, 2023, formatted in inline Extensible Business Reporting Language (iXBRL): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the
Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows
and (v) Notes to Consolidated Financial Statements.*
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*
* Filed herewith.
** Filed previously as an exhibit to the Annual Report on Form 10-K for the annual period ended December 31,
2023.
† Relates to compensation plans.
ITEM 16. FORM 10-K SUMMARY
None.
106
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Amendment No. 1 to Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Date: March 19, 2024
HMN FINANCIAL, INC.
By: /s/Bradley Krehbiel
Bradley Krehbiel,
President and CEO
107
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