HMNファイナンシャルの四半期報告

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2024

☐	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		41-1777397
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1016 Civic Center Drive N.W., Rochester, MN		55901
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:		(507) 535-1200

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	HMNF	The Nasdaq Stock Market LLC

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 ☒ 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 ☒ 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 ☒
Smaller reporting company ☒	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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

	Class		Outstanding at April 29, 2024
	Common stock, $0.01 par value		4,464,952

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HMN FINANCIAL, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		Page
Item 1:	Financial Statements	3

	Consolidated Balance Sheets at March 31, 2024 (unaudited) and December 31, 2023	3

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023 (unaudited)	4

	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2024 and 2023 (unaudited)	5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4:	Controls and Procedures	33

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	34

Item 1A:	Risk Factors	34

Item 2:	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	34

Item 3:	Defaults Upon Senior Securities	34

Item 4:	Mine Safety Disclosures	34

Item 5:	Other Information	34

Item 6:	Exhibits	35

Signatures		36

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PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	March 31,			December 31,
(Dollars in thousands)	2024			2023
	(unaudited)
Assets
Cash and cash equivalents	$	50,230			11,151
Securities available for sale:
Mortgage-backed and related securities (amortized cost $170,784 and $179,366)		152,759			161,414
Other marketable securities (amortized cost $54,221 and $54,112)		53,850			53,680
Total securities available for sale		206,609			215,094

Loans held for sale		4,146			1,006
Loans receivable, net		856,560			845,692
Accrued interest receivable		3,674			3,553
Mortgage servicing rights, net		2,631			2,709
Premises and equipment, net		15,775			15,995
Goodwill		802			802
Prepaid expenses and other assets		3,614			3,962
Deferred tax asset, net		7,174			7,171
Total assets	$	1,151,215			1,107,135

Liabilities and Stockholders’ Equity
Deposits	$	1,030,918			976,793
Federal Home Loan Bank advances and other borrowings		0			13,200
Accrued interest payable		3,730			2,399
Customer escrows		3,425			2,246
Accrued expenses and other liabilities		4,318			4,790
Total liabilities		1,042,391			999,428
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock ($.01 par value): authorized 500,000 shares; issued 0		0			0
Common stock ($.01 par value): authorized 16,000,000 shares; issued 9,128,662 outstanding 4,462,555 and 4,457,905		91			91
Additional paid-in capital		41,232			41,235
Retained earnings, subject to certain restrictions		143,248			142,278
Accumulated other comprehensive loss		(13,199	)		(13,191	)
Unearned employee stock ownership plan shares		(821	)		(870	)
Treasury stock, at cost 4,666,107 and 4,670,757 shares		(61,727	)		(61,836	)
Total stockholders’ equity		108,824			107,707
Total liabilities and stockholders’ equity	$	1,151,215			1,107,135

See accompanying notes to consolidated financial statements (unaudited).

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2024			2023
Interest income:
Loans receivable	$	10,686			9,003
Securities available for sale:
Mortgage-backed and related		514			652
Other marketable		409			143
Other		390			115
Total interest income		11,999			9,913

Interest expense:
Deposits		4,740			1,803
Customer escrows		0			32
Advances and other borrowings		3			15
Total interest expense		4,743			1,850

Net interest income		7,256			8,063

Provision for credit losses		(209	)		(8	)
Net interest income after provision for credit losses		7,465			8,071

Non-interest income:
Fees and service charges		732			807
Loan servicing fees		388			400
Gain on sales of loans		294			295
Other		493			426
Total non-interest income		1,907			1,928

Non-interest expense:
Compensation and benefits		4,697			4,805
Occupancy and equipment		852			950
Data processing		535			505
Professional services		321			237
Other		1,146			1,196
Total non-interest expense		7,551			7,693
Income before income tax expense		1,821			2,306
Income tax expense		503			672
Net income		1,318			1,634
Other comprehensive income (loss), net of tax		(8	)		2,246
Comprehensive income available to common shareholders	$	1,310			3,880
Basic earnings per share	$	0.30			0.38
Diluted earnings per share	$	0.30			0.37

See accompanying notes to consolidated financial statements (unaudited).

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(unaudited)

												Unearned
												Employee
									Accumulated			Stock						Total
			Additional						Other			Ownership						Stock-
	Common		Paid-In			Retained			Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings			Loss			Shares			Stock			Equity
Balance, December 31, 2023	$	91		41,235			142,278			(13,191	)		(870	)		(61,836	)		107,707
Net income							1,318												1,318
Other comprehensive loss										(8	)								(8	)
Dividends paid to stockholders ($0.08 per share)							(348	)											(348	)
Restricted stock awards				(110	)											110			0
Stock awards withheld for tax withholding																(1	)		(1	)
Amortization of restricted stock awards				49															49
Earned employee stock ownership plan shares				58									49						107
Balance, March 31, 2024	$	91		41,232			143,248			(13,199	)		(821	)		(61,727	)		108,824

												Unearned
												Employee
									Accumulated			Stock						Total
			Additional						Other			Ownership						Stock-
	Common		Paid-In			Retained			Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings			Loss			Shares			Stock			Equity
Balance, December 31, 2022	$	91		41,013			138,409			(19,761	)		(1,063	)		(61,353	)		97,336
Net income							1,634												1,634
Other comprehensive income										2,246									2,246
Adoption of ASU 2016-13							(830	)											(830	)
Dividends paid to stockholders ($0.06 per share)							(261	)											(261	)
Restricted stock awards				(150	)											150			0
Stock awards withheld for tax withholding																(64	)		(64	)
Amortization of restricted stock awards				54															54
Earned employee stock ownership plan shares				58									49						107
Balance, March 31, 2023	$	91		40,975			138,952			(17,515	)		(1,014	)		(61,267	)		100,222

See accompanying notes to consolidated financial statements (unaudited).

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2024			2023
Cash flows from operating activities:
Net income	$	1,318			1,634
Adjustments to reconcile net income to cash provided (used) by operating activities:
Provision for credit losses		(209	)		(8	)
Depreciation		271			282
Amortization of premiums, net		72			194
Amortization of deferred loan fees		(25	)		(60	)
Amortization of mortgage servicing rights and servicing costs		208			199
Capitalized mortgage servicing rights		(130	)		(91	)
Gains recognized on equity securities, net		(11	)		(41	)
Gains on sale of premises and equipment		0			(1	)
Gain on sales of loans		(294	)		(295	)
Proceeds from sale of loans held for sale		15,173			11,300
Disbursements on loans held for sale		(15,552	)		(9,718	)
Amortization of restricted stock awards		49			54
Amortization of unearned Employee Stock Ownership Plan shares		49			49
Earned Employee Stock Ownership Plan shares priced above original cost		58			58
Increase in accrued interest receivable		(121	)		(196	)
Increase in accrued interest payable		1,331			751
(Increase) decrease in other assets		(252	)		283
Decrease in other liabilities		(462	)		(5,399	)
Other, net		2			0
Net cash provided (used) by operating activities		1,475			(1,005	)
Cash flows from investing activities:
Principal collected on securities available for sale		8,400			8,976
Proceeds collected on maturities of securities available for sale		15,000			0
Purchases of securities available for sale		(15,000	)		0
Purchase of Federal Home Loan Bank stock		(7	)		(1,546	)
Redemption of Federal Home Loan Bank stock		594			1,421
Net increase in loans receivable		(13,086	)		(10,437	)
Proceeds from sale of premises		0			35
Purchases of premises and equipment		(52	)		(291	)
Net cash used by investing activities		(4,151	)		(1,842	)
Cash flows from financing activities:
Increase (decrease) in deposits		54,125			(23,608	)
Stock awards withheld for tax withholding		(1	)		(64	)
Dividends to stockholders		(348	)		(261	)
Proceeds from borrowings		0			37,820
Repayment of borrowings		(13,200	)		(35,520	)
Increase (decrease) in customer escrows		1,179			(1,659	)
Net cash provided (used) by financing activities		41,755			(23,292	)
Increase (decrease) in cash and cash equivalents		39,079			(26,139	)
Cash and cash equivalents, beginning of period		11,151			36,259
Cash and cash equivalents, end of period	$	50,230			10,120
Supplemental cash flow disclosures:
Cash paid for interest	$	3,411			1,099
Cash paid for income taxes		813			0
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale		2,452			555

See accompanying notes to consolidated financial statements (unaudited).

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

(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.

(2) Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with U.S. Generally Accepted Accounting Principles (GAAP). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included.

The unaudited consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2023, included in the Company's Form 10-K/A filed with the Securities and Exchange Commission (SEC) on March 19, 2024. The results of operations for the three month period ended March 31, 2024 are not necessarily indicative of the results which may be expected for the entire year.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

(3) New Accounting Standards

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.

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(4) Fair Value Measurements

ASC 820, Fair Value Measurements, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system consisting of three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following table summarizes the assets and liabilities of the Company for which fair values are determined on a recurring basis as of March 31, 2024 and December 31, 2023.

	Carrying Value at March 31, 2024
(Dollars in thousands)	Total			Level 1		Level 2			Level 3
Securities available for sale	$	206,609			0		206,609			0
Equity securities		394			0		394			0
Commitments to extend credit		(18	)		0		(18	)		0
Total	$	206,985			0		206,985			0

	Carrying Value at December 31, 2023
Securities available for sale	$	215,094	0	215,094	0
Equity securities		382	0	382	0
Commitments to extend credit		7	0	7	0
Total	$	215,483	0	215,483	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. 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 March 31, 2024 and December 31, 2023.

	Carrying Value at March 31, 2024
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Three Months Ended March 31, 2024 Total Gains
Loans held for sale	$	4,146		0		4,146		0		10
Mortgage servicing rights, net		2,631		0		0		2,631		0
Collateral dependent loans		2,841		0		2,841		0		8
Total	$	9,618		0		6,987		2,631		18

	Carrying Value at December 31, 2023
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Year Ended December 31, 2023 Total Losses
Loans held for sale	$	1,006		0		1,006		0		(26	)
Mortgage servicing rights, net		2,709		0		0		2,709		0
Collateral dependent loans		3,856		0		3,856		0		(287	)
Total	$	7,571		0		4,862		0		(313	)

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(5) Fair Value of Financial Instruments

ASC 825, Disclosures about Fair Values of Financial Instruments requires interim reporting period 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 March 31, 2024 and December 31, 2023 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 estimated fair value of the Company’s financial instruments as of March 31, 2024 and December 31, 2023 are shown below. There is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments following the table.


	March 31, 2024														December 31, 2023
							Fair Value Hierarchy
(Dollars in thousands)	Carrying Amount			Estimated Fair Value			Level 1		Level 2		Level 3		Contract Amount		Carrying Amount			Estimated Fair Value			Contract Amount
Financial assets:
Cash and cash equivalents	$	50,230			50,230			50,230								11,151			11,151
Securities available for sale		206,609			206,609					206,609						215,094			215,094
Equity securities		394			394					394						382			382
Loans held for sale		4,146			4,146					4,146						1,006			1,006
Loans receivable, net		856,560			792,017					792,017						845,692			778,952
Federal Home Loan Bank stock		665			665					665						1,252			1,252
Accrued interest receivable		3,674			3,674					3,674						3,553			3,553
Mortgage servicing assets		2,631			6,536							6,536				2,709			6,539

Financial liabilities:
Deposits		1,030,918			1,029,689					1,029,689						976,793			975,963
FHLB advances and other borrowings		0			0					0						13,200			13,200
Accrued interest payable		3,730			3,730					3,730						2,399			2,399
Off-balance sheet financial instruments:
Commitments to extend credit		(18	)		(18	)								159,183		7			7			167,447
Commitments to sell loans		(7	)		(7	)								9,376		(17	)		(17	)		3,078

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents approximates their fair value.

Securities Available for Sale

The fair values of securities were based upon quoted market prices 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, is 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.

Federal Home Loan Bank (FHLB) Stock

The carrying amount of FHLB stock approximates its fair value.

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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 unobservable 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 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.

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.

(6) Securities Available For Sale

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 March 31, 2024 and December 31, 2023.

	Less Than Twelve Months							Twelve Months or More							Total
(Dollars in thousands)	# of Investments		Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2024
Mortgage backed securities:
Federal National Mortgage Association (FNMA)		0	$	0		0			34	$	82,474		(9,625	)	$	82,474		(9,625	)
Federal Home Loan Mortgage Corporation (FHLMC)		0		0		0			24		70,254		(8,398	)		70,254		(8,398	)
Collateralized mortgage obligations:
FNMA		0		0		0			1		31		(2	)		31		(2	)
Other marketable securities:
U.S. Government agency obligations		5		24,874		(76	)		4		19,679		(321	)		44,553		(397	)
Total temporarily impaired securities		5	$	24,874		(76	)		63	$	172,438		(18,346	)	$	197,312		(18,422	)

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	Less Than Twelve Months							Twelve Months or More							Total
(Dollars in thousands)	# of Investments		Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2023
Mortgage backed securities:
FNMA		0	$	0		0			34	$	87,133		(9,704	)	$	87,133		(9,704	)
FHLMC		0		0		0			24		74,249		(8,246	)		74,249		(8,246	)
Collateralized mortgage obligations:
FNMA		0		0		0			1		32		(2	)		32		(2	)
Other marketable securities:
U.S. government agency obligations		1		5,000		(9	)		7		34,456		(543	)		39,456		(552	)
Total temporarily impaired securities		1	$	5,000		(9	)		66	$	195,870		(18,495	)	$	200,870		(18,504	)

The Company reviews its investment portfolio on a quarterly basis for indications of impairment due to credit-related factors or noncredit-related factors and the Company does not intend to sell the securities and has the intent and ability to hold them for a period of time sufficient for recovery in their amortized cost basis. 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 March 31, 2024, 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 March 31, 2024. During the three month periods ended March 31, 2024 and March 31, 2023, there were no sales of securities.

A summary of securities available for sale at March 31, 2024 and December 31, 2023 is as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2024
Mortgage-backed securities:
FNMA	$	92,099		0		(9,625	)		82,474
FHLMC		78,652		0		(8,398	)		70,254
Collateralized mortgage obligations:
FNMA		33		0		(2	)		31
		170,784		0		(18,025	)		152,759
Other marketable securities:
U.S. Government agency obligations		54,221		26		(397	)		53,850
		54,221		26		(397	)		53,850
	$	225,005		26		(18,422	)		206,609

December 31, 2023
Mortgage-backed securities:
FNMA	$	96,837		0		(9,704	)		87,133
FHLMC		82,495		0		(8,246	)		74,249
Collateralized mortgage obligations:
FNMA		34		0		(2	)		32
		179,366		0		(17,952	)		161,414
Other marketable securities:
U.S. Government agency obligations		54,112		120		(552	)		53,680
		54,112		120		(552	)		53,680
	$	233,478		120		(18,504	)		215,094

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The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2024 based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.

(Dollars in thousands)	Amortized Cost		Fair Value
Due less than one year	$	64,284		60,418
Due after one year through five years		125,539		114,722
Due after five years through fifteen years		35,179		31,466
Due after fifteen years		3		3
Total	$	225,005		206,609

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.

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 and totaled $0.5 million at both March 31, 2024 and December 31, 2023 and these amounts are excluded from the estimated credit losses.

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 at March 31, 2024 and December 31, 2023.

(7) Other Comprehensive (Loss) Income

Other comprehensive (loss) income is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive (loss) income is the total of net income and other comprehensive income or loss, which for the Company is comprised of unrealized gains or losses on securities available for sale. The components of other comprehensive (loss) income and the related tax effects were as follows:

	For the period ended March 31,
(Dollars in thousands)	2024									2023
	Before Tax			Tax Effect			Net of Tax			Before Tax		Tax (1) Effect		Net of Tax
Securities available for sale:
Unrealized (losses) gains arising during the period	$	(12	)		(4	)		(8	)		2,845		599		2,246
Other comprehensive (loss) income	$	(12	)		(4	)		(8	)		2,845		599		2,246

(1)

The tax effect on gross unrealized (losses) gains 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.

(8) Loans Receivable, Net

A summary of loans receivable at March 31, 2024 and December 31, 2023 is as follows:

(Dollars in thousands)	March 31, 2024		December 31, 2023
Single family	$	260,602		264,303
Commercial real estate:
Real estate rental and leasing		276,751		271,531
Other		226,588		218,422
		503,339		489,953
Consumer		41,110		42,734
Commercial business		63,679		61,118
Total loans		868,730		858,108
Less:
Unamortized discounts		14		15
Net deferred loan fees		570		577
Allowance for credit losses		11,586		11,824
Total loans receivable, net	$	856,560		845,692

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(9) Allowance for Credit Losses and Credit Quality Information

The allowance for credit losses is summarized as follows:

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business			Total
Balance, December 31, 2023	$	1,426			7,514			607			2,277			11,824
Provision for losses		(181	)		(94	)		(111	)		178			(208	)
Charge-offs		(30	)		0			0			0			(30	)
Recoveries		0			0			0			0			0
Balance, March 31, 2024	$	1,215			7,420			496			2,455			11,586

Balance, December 31, 2022	$	1,261			7,026			1,058			932			10,277
January 1, 2023 adoption of ASU 2016-13		(259	)		512			(485	)		1,302			1,070
Provision for losses		(44	)		23			46			(57	)		(32	)
Recoveries		1			0			1			25			27
Balance, March 31, 2023	$	959			7,561			620			2,202			11,342

Allocated to:
Individual reserves	$	28			0			103			297			428
Collective reserves		1,398			7,514			504			1,980			11,396
Balance, December 31, 2023	$	1,426			7,514			607			2,277			11,824

Allocated to:
Individual reserves	$	26			0			97			296			419
Collective reserves		1,189			7,420			399			2,159			11,167
Balance, March 31, 2024	$	1,215			7,420			496			2,455			11,586

Loans receivable at December 31, 2023:
Individually reviewed for impairment	$	979			668			425			2,212			4,284
Collectively reviewed for impairment		263,324			489,285			42,309			58,906			853,824
Ending balance	$	264,303			489,953			42,734			61,118			858,108

Loans receivable at March 31, 2024:
Individually reviewed for impairment	$	958			636			382			1,284			3,260
Collectively reviewed for impairment		259,644			502,703			40,728			62,395			865,470
Ending balance	$	260,602			503,339			41,110			63,679			868,730

The Company adopted 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. 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.

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 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 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.

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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 $3.2 million and $3.0 million at March 31, 2024 and December 31, 2023, respectively, and was excluded from the estimated credit losses.

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 reserve is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments. This amount is determined quarterly based on an estimate of the outstanding commitments that are anticipated to be funded and multiplying those amounts by the loss rate for their loan category. The allowance for unfunded commitments was not material at March 31, 2024 and was $0.1 million at March 31, 2023.

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 for the quarters ended March 31, 2024 or 2023.

The following table presents the components of the provision for credit losses for the first quarters of 2024 and 2023.

	Three months ended March 31,
(Dollars in thousands)	2024			2023
Provision for credit losses on:
Loans	$	(208	)		(32	)
Unfunded commitments		(1	)		24
Total	$	(209	)		(8	)

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The following table presents total loans by risk categories and year of origination as of March 31, 2024:

(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Single family
Pass	$	2,823		80,466		56,798		61,380		32,958		24,686		0		259,111
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		533		0		77		846		0		1,456
Doubtful		0		0		0		0		0		35		0		35
Loss		0		0		0		0		0		0		0		0
		2,823		80,466		57,331		61,380		33,035		25,567		0		260,602

Current period gross charge-offs		0		0		0		0		0		30		0		30

Commercial Real Estate
Pass		16,281		70,863		184,499		107,230		71,955		23,054		0		473,882
Special Mention		0		1,942		8,233		2,175		1,246		1,006		0		14,602
Substandard		0		462		347		910		10,948		2,188		0		14,855
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		16,281		73,267		193,079		110,315		84,149		26,248		0		503,339

Consumer
Pass		3,663		7,483		6,698		1,391		1,800		6,676		13,020		40,731
Special Mention		19		0		0		0		0		0		0		19
Substandard		0		7		29		109		0		97		28		270
Doubtful		0		14		0		0		0		0		19		33
Loss		0		7		0		13		0		0		37		57
		3,682		7,511		6,727		1,513		1,800		6,773		13,104		41,110

Commercial Business
Pass		1,776		12,060		6,376		3,198		2,960		407		33,475		60,252
Special Mention		60		0		0		0		0		0		171		231
Substandard		0		1,274		441		142		94		31		1,214		3,196
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		1,836		13,334		6,817		3,340		3,054		438		34,860		63,679

Total Loans	$	24,622		174,578		263,954		176,548		122,038		59,026		47,964		868,730

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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	$	81,070		59,474		62,690		33,637		10,915		14,635		0		262,421
Special Mention		0		511		0		0		0		0		0		511
Substandard		64		546		0		79		182		462		0		1,333
Doubtful		0		0		0		0		24		14		0		38
Loss		0		0		0		0		0		0		0		0
		81,134		60,531		62,690		33,716		11,121		15,111		0		264,303

Commercial Real Estate
Unclassified		64,688		187,320		109,729		75,754		14,531		9,603		0		461,625
Special Mention		1,026		7,756		2,188		371		0		1,016		0		12,357
Substandard		2,225		388		292		10,867		637		1,562		0		15,971
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		67,939		195,464		112,209		86,992		15,168		12,181		0		489,953

Consumer
Unclassified		9,913		7,583		1,606		1,870		2,369		4,778		14,170		42,289
Special Mention		20		0		0		0		0		0		0		20
Substandard		8		26		52		0		3		113		30		232
Doubtful		15		0		0		0		0		0		19		34
Loss		3		0		116		0		0		0		40		159
		9,959		7,609		1,774		1,870		2,372		4,891		14,259		42,734
Current period gross charge-offs		0		1		0		0		0		49		0		50

Commercial Business
Unclassified		12,404		6,967		3,539		3,317		217		288		30,160		56,892
Special Mention		0		0		0		0		0		0		0		0
Substandard		1,703		483		152		104		11		31		1,742		4,226
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		14,107		7,450		3,691		3,421		228		319		31,902		61,118
Current period gross charge offs		174		0		0		0		0		0		160		334

Total Loans	$	173,139		271,054		180,364		125,999		28,889		32,502		46,161		858,108

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.

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 on the following page to require an individual analysis that are not classified as special mention are considered to be unclassified or pass-rated loans.

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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.

The aging of past due loans at March 31, 2024 and December 31, 2023 is summarized as follows:

(Dollars in thousands)	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
March 31, 2024
Single family	$	842		103		318		1,263		259,339		260,602		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		276,751		276,751		0
Other		0		619		0		619		225,969		226,588		0
Consumer		210		42		43		295		40,815		41,110		0
Commercial business		640		702		46		1,388		62,291		63,679		0
December 31, 2023	$	1,692		1,466		407		3,565		865,165		868,730		0
Single family	$	453		71		363		887		263,416		264,303		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		271,531		271,531		0
Other		0		0		399		399		218,023		218,422		0
Consumer		361		92		57		510		42,224		42,734		0
Commercial business		0		309		812		1,121		59,997		61,118		0
	$	814		472		1,631		2,917		855,191		858,108		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.

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The following table presents the carrying value of and related allowances for collateral dependent individually analyzed loans as of March 31, 2024 and December 31, 2023:

	March 31, 2024						December 31, 2023
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance recorded:
Single family	$	744		744		0		758		758		0
Commercial real estate:
Other		636		636		0		668		668		0
Consumer		269		269		0		306		306		0
Commercial business		22		22		0		0		0		0

Loans with an allowance recorded:
Single family		214		214		26		221		221		28
Consumer		113		113		97		119		119		103
Commercial business		1,262		1,596		296		2,212		2,546		297

Total:
Single family		958		958		26		979		979		28
Commercial real estate:
Other(1)		636		636		0		668		668		0
Consumer(2)		382		382		97		425		425		103
Commercial business(3)		1,284		1,618		296		2,212		2,546		297
	$	3,260		3,594		419		4,284		4,618		428

(1) Secured by commercial land.

(2) Secured by second mortgages on single family housing and autos.

(3) Secured by business equipment.

At March 31, 2024 and December 31, 2023, non-accruing loans totaled $2.8 million and $3.8 million, respectively, for which the related allowance for credit losses was $0.4 million for both periods. All of the interest income recognized for non-accruing loans was recognized using the cash basis method of income recognition. 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 $1.2 million and $1.3 million at March 31, 2024 and December 31, 2023, respectively.

The non-accrual loans at March 31, 2024 and December 31, 2023 are summarized as follows:

(Dollars in thousands)	March 31, 2024		December 31, 2023
Single family	$	742	$	762
Commercial real estate:
Other		462		493
Consumer		334		376
Commercial business		1,262		2,187
	$	2,800	$	3,818

The reduction in non-performing assets during the first quarter of 2024 was primarily related to $0.8 million of principal payments received on a non-performing loan relationship in the agriculture industry. There were two loans secured by single family homes totaling less than $0.1 million in process of foreclosure at March 31, 2024 and no loans secured by single family homes in the process of foreclosure at December 31, 2023.

The Company accounts for loan modifications in accordance with the guidance in Accounting Standards Codification (ASC) Topic 326. Based on the guidance, 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 modification or refinancing does not result in a new loan, it is classified as a loan modification.

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The Company had no loan modifications to borrowers experiencing financial difficulties in the first quarter of 2024 or 2023. At March 31, 2024, there were no commitments to lend additional funds to borrowers experiencing financial difficulty whose loan terms have been previously restructured. During the quarter ended March 31, 2024, there were no defaults on loans that had been modified during the 12 months ended March 31, 2024 for borrowers experiencing financial difficulty.

(10) Intangible Assets

The Company’s intangible assets consist of goodwill and mortgage servicing rights. A summary of mortgage servicing rights activity is as follows:

(Dollars in thousands)	Three Months Ended March 31, 2024			Twelve Months Ended December 31, 2023			Three Months Ended March 31, 2023
Balance, beginning of period	$	2,709			2,986			2,986
Originations		130			555			91
Amortization		(208	)		(832	)		(199	)
Balance, end of period	$	2,631			2,709			2,878
Fair value of mortgage servicing rights	$	6,536			6,539			6,414

All of the 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 March 31, 2024:

Weighted

Loan

Average

Principal

Interest

Remaining

Number

(Dollars in thousands)

Balance

Rate

Term (months)

of Loans

Original term 15 year fixed rate

88,613

2.93

124

921

Original term 30 year fixed rate

445,698

3.93

302

2,662

Amortization expense for intangible assets was $0.2 million for the three month periods ended March 31, 2024 and 2023. The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2024 and December 31, 2023 is presented in the following table.

	Gross					Unamortized
	Carrying		Accumulated			Intangible
(Dollars in thousands)	Amount		Amortization			Assets
March 31, 2024
Mortgage servicing rights	$	6,288		(3,657	)		2,631
Goodwill		802		0			802
Total	$	7,090		(3,657	)		3,433

December 31, 2023
Mortgage servicing rights	$	6,226		(3,517	)		2,709
Goodwill		802		0			802
Total	$	7,028		(3,517	)		3,511

The following table indicates the estimated future amortization expense for mortgage servicing rights:

(Dollars in thousands)	Mortgage Servicing Rights
Year ending December 31,
2024	$	550
2025		672
2026		580
2027		411
2028		234
Thereafter		184
Total	$	2,631

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Projections of amortization are based on existing asset balances and the existing interest rate environment as of March 31, 2024. 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 impairment may exist. Goodwill was tested for impairment at March 31, 2024 and the Company determined that it was not permanently impaired and no write down was required.

(11) 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 date 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.

The Company’s leases relate to office space and bank branches with remaining lease terms between 5 and 44 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 March 31, 2024, a $0.3 million right-of-use asset and offsetting lease payment obligation liability were recorded on the consolidated balance sheet in other assets and other liabilities, respectively. Operating lease costs were $0.1 million for the three-month periods ended March 31, 2024 and 2023.

The table below summarizes other information related to the Company’s operating leases:

(Dollars in thousands)	Three Months Ended March 31, 2024			Three Months Ended March 31, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	58			55
Weighted-average remaining lease term – operating leases, in years		1.9			2.6
Weighted-average discount rate – operating leases		2.75	%		2.66	%

The table below summarizes the maturity of remaining lease liabilities at March 31, 2024:


(Dollars in thousands)	March 31, 2024
2024	$	154
2025		58
2026		27
2027		25
2028		0
Thereafter		0
Total lease payments		264
Less: Interest		(8	)
Present value of lease liabilities	$	256

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(12) Earnings per Common Share

The following table reconciles the weighted average shares outstanding and the earnings available to common stockholders used for basic and diluted earnings per common share:

	Three Months Ended
	March 31,		March 31,
(Dollars in thousands, except per share data)	2024		2023
Weighted average number of common shares outstanding used in basic earnings per common share calculation		4,343,720		4,338,922
Net dilutive effect of:
Restricted stock awards and options		26,324		29,112
Weighted average number of shares outstanding adjusted for effect of dilutive securities		4,370,044		4,368,034
Income available to common stockholders	$	1,318		1,634
Basic earnings per common share	$	0.30		0.38
Diluted earnings per common share	$	0.30		0.37

(13) Regulatory Capital and Oversight

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.

The Bank’s average total assets and adjusted total assets for the first quarter of 2024 were both $1.1 billion and its risk-weighted assets were $905.7 million. The following table presents the Bank’s capital amounts and ratios at March 31, 2024 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective actions regulations.

	Actual					Required to be Adequately Capitalized					Excess Capital					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Percent of Assets(1)			Amount		Percent of Assets(1)			Amount		Percent of Assets(1)			Amount		Percent of Assets(1)
March 31, 2024
Common equity Tier 1 capital	$	105,437		11.64	%	$	40,757		4.50	%	$	64,680		7.14	%	$	58,872		6.50	%
Tier 1 leverage		105,437		9.18			45,957		4.00			59,480		5.18			57,446		5.00
Tier 1 risk-based capital		105,437		11.64			54,343		6.00			51,094		5.64			72,458		8.00
Total risk-based capital		116,762		12.89			72,458		8.00			44,304		4.89			90,572		10.00

(1) Based upon the Bank’s adjusted total assets for the purpose of the Tier 1 leverage capital ratio and risk-weighted assets for the purpose of the risk-based capital ratios.

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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 March 31, 2024, 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 Office of the Comptroller of the Currency has extensive discretion in its supervisory and enforcement activities and can adjust the requirement to be well-capitalized in the future.

(14) Stockholders’ Equity

The Company did not repurchase any shares of its common stock in the open market during the first quarter of 2024. At March 31, 2024, the Company was authorized to repurchase $5.4 million of its common stock under the existing share repurchase program. The Company declared a quarterly cash dividend of 8 cents per share of common stock outstanding that was paid to stockholders on March 6, 2024.

(15) Commitments and Contingencies

The Bank issues standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit issued and available at March 31, 2024 were approximately $7.0 million, expire over the next twenty-two months, and are collateralized primarily with commercial real estate mortgages. 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.

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.

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(16) 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 profit 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 quarter ended March 31, 2024:
Interest income - external customers	$	11,999			0			0			11,999
Non-interest income - external customers		1,907			0			0			1,907
Intersegment interest income		0			88			(88	)		0
Intersegment non-interest income		71			1,432			(1,503	)		0
Interest expense		4,831			0			(88	)		4,743
Provision for credit losses		(209	)		0			0			(209	)
Non-interest expense		7,389			233			(71	)		7,551
Income tax expense (benefit)		534			(31	)		0			503
Net income		1,432			1,318			(1,432	)		1,318
Total assets		1,151,160			108,945			(108,890	)		1,151,215
At or for the quarter ended March 31, 2023:
Interest income - external customers	$	9,913			0			0			9,913
Non-interest income - external customers		1,928			0			0			1,928
Intersegment interest income		0			64			(64	)		0
Intersegment non-interest income		58			1,748			(1,806	)		0
Interest expense		1,914			0			(64	)		1,850
Provision for credit losses		(8	)		0			0			(8	)
Non-interest expense		7,542			209			(58	)		7,693
Income tax expense (benefit)		703			(31	)		0			672
Net income		1,748			1,634			(1,748	)		1,634
Total assets		1,071,577			100,231			(100,226	)		1,071,582

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Item 2:	HMN FINANCIAL, INC.
	MANAGEMENT'S DISCUSSION AND ANALYSIS
	OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Information

Safe Harbor Statement

This quarterly report on Form 10-Q 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. These statements are often identified by such forward-looking terminology as “anticipate,” “continue,” “could,” “expect,” “future,” “may,” “optimistic”, “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 (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; perceived improvements in the forecasted economic conditions; 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/A 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 quarterly report on Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q.

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General

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 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 flows and costs of deposits are influenced by prevailing market rates of interest on competing investments, account maturities and the levels of personal income and savings.

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 Company accounts for its allowance for credit losses and the related provision in accordance with ASC 326 and 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 also 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 Company has a standardized process to determine the appropriateness of the credit loss allowance for the commercial real estate, commercial business, single family, and consumer loan portfolios. The determination of the allowance for each of these portfolios is calculated on a pooled basis with individual determination of the allowance for 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 by their assigned standardized risk ratings and applying these historic loss factors to the loans in the current portfolio with similar risk rating. 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 based on certain loan and borrower risk characteristics when the loans were originated and applying these historic loss factors to the loans in the current portfolio with similar risk characteristics. 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 scope and results of loan quality reviews; level of non-accrual loans, and risk rating trends; lending policies, procedures, and staffing; and the demand for single family homes, commercial real estate, and building lots.

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The appropriateness of the allowance for credit losses 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 collateral dependent loans. Such estimates, appraisals, evaluations, and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans is typically based on the appraised value of the property less estimated selling costs. 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 provision for credit losses. 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. Although management believes that based on current conditions the allowance for credit losses is maintained at an appropriate amount to provide for the expected loan losses in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for credit losses and adjustments may be required in the future.

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 loss 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 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 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.

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RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2024 COMPARED TO THE QUARTER ENDED MARCH 31, 2023

Net Income

Net income was $1.3 million for the first quarter of 2024, a decrease of $0.3 million compared to net income of $1.6 million for the first quarter of 2023. Diluted earnings per share for the first quarter of 2024 was $0.30, a decrease of $0.07 from diluted earnings per share of $0.37 for the first quarter of 2023. The decrease in net income between the periods was due primarily to a $0.8 million decrease in net interest income because of a decline in the net interest margin as a result of funding costs increasing faster than the yields on interest earning assets. This decrease in net income was partially offset by a $0.2 million decrease in the provision for credit losses due primarily to a decrease in the general reserves as a result of updating the historical vintage loan loss analysis during the quarter. Other non-interest expenses decreased $0.1 million primarily because of a decrease in compensation and benefits expense due to a reduction in incentive accruals. Income tax expense also decreased $0.2 million primarily because of the decrease in pre-tax income.

Net Interest Income

Net interest income was $7.3 million for the first quarter of 2024, a decrease of $0.8 million, or 10.0%, compared to $8.1 million for the first quarter of 2023. Interest income was $12.0 million for the first quarter of 2024, an increase of $2.1 million, or 21.0%, from $9.9 million for the first quarter of 2023. Interest income increased primarily because of the increase in the average yield earned on interest-earning assets between the periods and also because of the $50.3 million increase in the average interest-earning assets. The average yield earned on interest-earning assets was 4.36% for the first quarter of 2024, an increase of 56 basis points from 3.80% for the first quarter of 2023. The increase in the average yield is primarily related to the increase in market interest rates as a result of the 5.00% increase in the prime interest rate over the past two years.

Interest expense was $4.7 million for the first quarter of 2024, an increase of $2.8 million, or 156.4%, compared to $1.9 million for the first quarter of 2023. 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 $44.9 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 1.88% for the first quarter of 2024, an increase of 111 basis points from 0.77% for the first quarter of 2023. The increase in the average rate paid is primarily related to the change in the types of funding sources as more brokered deposits and certificates of deposits were used as funding sources in the first quarter of 2024 than were used in the first quarter of 2023. These funding sources generally have higher interest rates than traditional checking and money market accounts. The increase in market interest rates as a result of the 5.00% increase in the federal funds rate over the past two years also contributed to the higher funding costs in the first quarter of 2024 when compared to the same period in 2023.

Net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2024 was 2.63%, a decrease of 46 basis points, compared to 3.09% for the first quarter of 2023. The decrease in the net interest margin is primarily because the increase in the average rate paid on interest-bearing liabilities and non-interest bearing deposits exceeded the increase in the average yield earned on interest-earning assets between the periods.

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A summary of the Company’s net interest margin for the three-month periods ended March 31, 2024 and 2023 is as follows:

	For the three-month period ended March 31,
	2024							2023
(Dollars in thousands)	Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
Interest-earning assets:
Securities available for sale	$	229,901		923		1.61	%	$	268,684		795		1.20	%
Loans held for sale		1,853		29		6.21			1,216		18		6.04
Single family loans, net		264,791		2,877		4.37			208,127		1,951		3.80
Commercial loans, net		541,148		7,071		5.25			522,921		6,373		4.94
Consumer loans, net		41,502		709		6.87			45,784		661		5.85
Other		28,677		390		5.46			10,814		115		4.31
Total interest-earning assets		1,107,872		11,999		4.36			1,057,546		9,913		3.80

Interest-bearing liabilities:
Checking accounts		144,848		306		0.85			161,708		188		0.47
Savings accounts		106,312		28		0.11			120,741		26		0.09
Money market accounts		272,014		1,580		2.34			258,768		655		1.03
Retail certificate accounts		134,195		1,349		4.03			75,938		223		1.19
Wholesale certificate accounts		116,422		1,477		5.09			61,048		711		4.72
Customer escrows		0		0		0.00			6,393		32		2.00
Advances and other borrowings		231		3		5.71			1,219		15		4.86
Total interest-bearing liabilities		774,022							685,815
Non-interest checking		238,329							282,136
Other non-interest bearing liabilities		2,898							2,423
Total interest-bearing liabilities and non-interest bearing deposits	$	1,015,249		4,743		1.88		$	970,374		1,850		0.77
Net interest income			$	7,256						$	8,063
Net interest rate spread						2.48	%						3.03	%
Net interest margin						2.63	%						3.09	%

Provision for Credit Losses

The provision for credit losses was ($0.2) million for the first quarter of 2024, a decrease of $0.2 million compared to the provision for credit losses in the first quarter of 2023. The provision for credit losses decreased in the first quarter of 2024 primarily because of a decrease in the general reserve percentages used to calculate the allowance for credit losses as a result of updating the annual historical vintage loan loss analysis during the quarter. The provision for credit losses was also reduced as a result of the reduction in the required qualitative reserves due to perceived improvements in the forecasted economic conditions. These reductions were partially offset by an increase in the provision as a result of an increase in the allowance for credit losses attributable to loan growth.

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 the 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.

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A reconciliation of the Company’s allowance for credit losses on loans for the first quarters of 2024 and 2023 is summarized as follows:

	Three months ended March 31,
(Dollars in thousands)	2024			2023
Balance at January 1,	$	11,824			10,277
Adoption of Accounting Standard Update (ASU) 2016-13		0			1,070
Provision		(208	)		(32	)
Charge offs:
Single family		(30	)		0
Recoveries		0			27
Balance at March 31,	$	11,586			11,342
Allocated to:
Collective allowance	$	11,167			11,139
Individual allowance		419			203
	$	11,586			11,342

On January 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The transition to this ASU resulted in a cumulative-effect adjustment to the allowance for credit losses of $1.1 million, an increase in deferred tax assets of $0.3 million, and a decrease to retained earnings of $0.8 million as of the adoption date. In addition, a liability for $0.1 million was established for projected future losses on unfunded commitments on outstanding lines of credit upon adoption. The projected liability for unfunded commitments decreased $1,000 during the first quarter of 2024 and increased $24,000 during the first quarter of 2023.

Non-Interest Income

Non-interest income was $1.9 million for the first quarter of 2024, the same as it was for the first quarter of 2023. Fees and service charges decreased $0.1 million between the periods due primarily to a decrease in overdraft fees collected as a result of changes to the Company’s overdraft policy that were implemented in the first quarter of 2024. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others. Gain on sales of loans decreased slightly between the periods because of a decrease in the margin realized on loans sold in the secondary market between the periods. These decreases were partially offset by a $0.1 million increase in other non-interest income due primarily to an increase in the income earned on the sales of uninsured investment products between the periods.

Non-Interest Expense

Non-interest expense was $7.6 million for the first quarter of 2024, a decrease of $0.1 million, or 1.8%, from $7.7 million for the first quarter of 2023. Compensation and benefits expense decreased $0.1 million primarily because of a reduction in incentive accruals between the periods. Occupancy and equipment expense decreased $0.1 million due primarily to a decrease in noncapitalized equipment costs between the periods. Other non-interest expense decreased slightly between the periods primarily because of a decrease in advertising costs. These decreases in non-interest expense were partially offset by a $0.1 million increase in professional services expense between the periods primarily because of an increase in legal and other audit related expenses. Data processing expenses increased slightly between the periods primarily because of an increase in core, mobile and on-line banking charges.

Income Taxes

Income tax expense was $0.5 million for the first quarter of 2024, a decrease of $0.2 million from $0.7 million for the first quarter of 2023. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

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FINANCIAL CONDITION

Non-Performing Assets

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters.

	March 31,			December 31,
(Dollars in thousands)	2024			2023
Non‑performing loans:
Single family	$	742		$	762
Commercial real estate		462			493
Consumer		334			376
Commercial business		1,262			2,187
Total non-performing assets	$	2,800		$	3,818
Total as a percentage of total assets		0.24	%		0.34	%
Total as a percentage of total loans receivable		0.32	%		0.44	%
Allowance for credit losses to non-performing loans		413.78	%		309.69	%

Delinquency data:
Delinquencies (1)
30+ days	$	1,632		$	715
90+ days		0			0
Delinquencies as a percentage of loan portfolio (1)
30+ days		0.19	%		0.08	%
90+ days		0.00	%		0.00	%
(1) Excludes non-accrual loans.

Total non-performing assets were $2.8 million at March 31, 2024 and $3.8 million at December 31, 2023. The reduction in non-performing assets during the quarter was primarily related to $0.8 million of principal payments received on a non-performing loan relationship in the agriculture industry.

Dividends

The Company declared a quarterly dividend of 8 cents per share of common stock that was paid on March 6, 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.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended March 31, 2024, the net cash provided by operating activities was $1.9 million. The Company collected $8.4 million in principal repayments on securities, received proceeds from maturing securities of $15.0 million, purchased securities of $15.0 million, received redemptions on FHLB stock of $0.6 million, and purchased $0.1 million of premises and equipment. Loans receivable increased $13.5 million, deposits increased $54.1 million, and customer escrows increased $1.2 million during the quarter. It also paid dividends to stockholders of $0.3 million and repaid borrowings of $13.2 million.

The Company has certificates of deposit with outstanding balances of $209.0 million that come due over the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that cash outflows from deposits that do not renew will be replaced with a combination of other customers’ deposits or FHLB advances. Federal Reserve Bank of Minneapolis borrowings could also be used to fund unanticipated outflows of certificates of deposit. Unpledged securities could also be pledged and used as collateral for additional borrowings with the FHLB or Federal Reserve Bank of Minneapolis.

The Company had seven deposit customers each with aggregate deposits greater than $5.0 million as of March 31, 2024. The $83.0 million in funds held by these customers may be withdrawn at any time, but management anticipates that the majority of these deposits will not be withdrawn from the Bank over the next twelve months. If these deposits were withdrawn, it is anticipated that they would be replaced with deposits from other customers or brokers or with FHLB advances. Federal Reserve Bank of Minneapolis borrowings could also be used to replace unanticipated outflows of large checking and money market deposits.

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The Company estimates that approximately 25.6% of total deposits exceeded the Federal Deposit Insurance limit of $250,000 at March 31, 2024. 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 withdrawn, it is anticipated that they would be replaced with deposits from other customers or brokers or with FHLB advances. Federal Reserve Bank borrowings could also be used to replace unanticipated outflows of large checking and money market deposits.

The Company had the ability to borrow $296.8 million from the FHLB at March 31, 2024 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 $89.8 million from the Federal Reserve Bank of Minneapolis at March 31, 2024 based on the collateral value of the loans pledged. The Company also has the ability to pledge securities as collateral to increase the borrowing capacity of the Company by $108.2.

The Company’s primary source of cash is dividends from the Bank. At March 31, 2024, the Company had $15.9 million in cash. The primary use of cash by the Company 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.

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 March 31, 2024.

(Dollars in thousands)	Market Value

Basis point change in interest rates	-200			-100			0			+100			+200
Total market-risk sensitive assets	$	1,118,358			1,092,797			1,067,118			1,043,259			1,018,879
Total market-risk sensitive liabilities		976,425			926,621			887,075			854,038			826,112
Off-balance sheet financial instruments		(11	)		0			0			216			418
Net market risk	$	141,944			166,176			180,043			189,005			192,349
Percentage change from current market value		(21.16	)%		(7.70	)%		0.00	%		4.98	%		6.84	%

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% to 57%, 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 48%, depending on the note rate and the period to maturity. Mortgage-backed securities were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook accounts were assumed to prepay at an annual rate of 1%. Money market accounts were assumed to decay at an annual rate of between 14% and 46%. Retail checking accounts, commercial checking accounts and commercial money market accounts were assumed to decay at annual rates of 9%, 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.

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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 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 foregoing table. The ability of many borrowers to service their debt may also decrease in the event of a substantial sustained increase in interest rates.

Asset/Liability Management

The Company’s management reviews the impact that changing interest rates will have on the Company’s net interest income projected for the next twelve months 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 March 31, 2025 of immediate interest rate changes called rate shocks:

(Dollars in thousands)
Rate Shock in Basis Points	Projected Change in Net Interest Income			Percentage Change
+200	$	(134	)		(0.40)%
+100		(42	)		(0.12)
0		0			0.00
-100		142			0.42
-200		(517	)		(1.54)

The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income. The decrease in interest income in a rising rate environment is primarily because there are more deposits that would reprice to higher interest rates than there are loans and investments that would be repriced higher in the next twelve months. The decrease in net interest income in the 200 down environment relates primarily to the anticipated prepayments on mortgage loans held in the portfolio.

In an attempt to manage its 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.

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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 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.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements other than commitments to originate and sell loans in the ordinary course of business.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were 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.

Changes in internal controls. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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HMN FINANCIAL, INC.

PART II - OTHER INFORMATION

ITEM 1.

Legal Proceedings.

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 a number of foreclosure proceedings and other collection actions as part of its normal operations. Based on our current understanding of these pending legal proceedings, management does not believe that judgments or settlements arising from any pending or threatened litigation matters, individually or in the aggregate, would have a material adverse effect on the Company’s consolidated financial statements.

ITEM 1A.

Risk Factors.

The risks described in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2023, filed with the SEC, under “Part 1, Item 1A. Risk Factors” could affect the Company’s financial performance and could cause its actual results for future periods to differ materially from its anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q.

ITEM 2.

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

The Company did not purchase any of its own stock during the first quarter of 2024. The Company announced on March 1, 2023 that the Board of Directors had authorized the repurchase of up to $6.0 million of shares and $5.4 million remained available for repurchase at March 31, 2024. 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 3.

Defaults Upon Senior Securities.

None.

ITEM 4.

Mine Safety Disclosures.

Not applicable.

ITEM 5.

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 March 31, 2024.

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ITEM 6.

Exhibits.

	INDEX TO EXHIBITS
Exhibit		Filing Status
Number	Exhibit


31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO	Filed Electronically

31.2	Rule 13a-14(a)/15d-14(a) Certification of CFO	Filed Electronically

32	Section 1350 Certifications of CEO and CFO	Filed Electronically

101	Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2024, filed with the Securities and Exchange Commission on May 7, 2024 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Consolidated Balance Sheets at March 31, 2024 and December 31, 2023, (ii) the Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2024 and 2023, (iii) the Consolidated Statements of Stockholders’ Equity for the Three Month Periods Ended March 31, 2024 and 2023, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023, and (v) Notes to Consolidated Financial Statements.	Filed Electronically

104	Cover Page Interactive Data File from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2024 (formatted as Inline XBRL and contained in Exhibit 101).	Filed Electronically

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		HMN FINANCIAL, INC.

		Registrant


Date:	May 7, 2024	/s/ Bradley Krehbiel
		Bradley Krehbiel, President and Chief Executive Officer
		(Duly Authorized Officer)



Date:	May 7, 2024	/s/ Jon Eberle
		Jon Eberle, Senior Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EX-31.1 2 ex_661404.htm EXHIBIT 31.1 ex_661404.htm

EXHIBIT 31.1

CERTIFICATIONS

I, Bradley Krehbiel, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HMN Financial, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2024	By:	/s/ Bradley Krehbiel
		Bradley Krehbiel
		President and Chief Executive Officer
		(Duly Authorized Officer)

EX-31.2 3 ex_661405.htm EXHIBIT 31.2 ex_661405.htm

EXHIBIT 31.2

CERTIFICATIONS

I, Jon J. Eberle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HMN Financial, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2024	By:	/s/Jon J. Eberle
		Jon J. Eberle
		Senior Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

EX-32 4 ex_661406.htm EXHIBIT 32 ex_661406.htm

Exhibit 32

HMN FINANCIAL, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HMN Financial, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Bradley Krehbiel, President and Chief Executive Officer of Company (Principal Executive Officer of the Company), and Jon Eberle, Senior Vice President, Chief Financial Officer and Treasurer of the Company (Principal Financial Officer of the Company), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2024	/s/ Bradley Krehbiel
	Bradley Krehbiel
	President and Chief Executive Officer
	(Duly Authorized Officer)

	/s/ Jon Eberle
	Jon Eberle
	Senior Vice President/Chief Financial Officer
	and Treasurer
	(Principal Financial and Accounting Officer)