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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 June 30, 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 July 29, 2024
Common stock, $0.01 par value		4,464,952

Table of Contents

HMN FINANCIAL, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

		Page
Item 1:	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2024 (unaudited) and December 31, 2023	3

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	4

	Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	25

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4:	Controls and Procedures	37

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	38

Item 1A:	Risk Factors	38

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3:	Defaults Upon Senior Securities	41

Item 4:	Mine Safety Disclosures	42

Item 5:	Other Information	42

Item 6:	Exhibits	42

Signatures		43

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	June 30,			December 31,
(Dollars in thousands, except share and per share data)	2024			2023
	(unaudited)
Assets
Cash and cash equivalents	$	13,663			11,151
Securities available for sale:
Mortgage-backed and related securities (amortized cost $161,951 and $179,366)		144,991			161,414
Other marketable securities (amortized cost $54,330 and $54,112)		54,031			53,680
Total securities available for sale		199,022			215,094

Loans held for sale		2,861			1,006
Loans receivable, net		864,698			845,692
Accrued interest receivable		3,982			3,553
Mortgage servicing rights, net		2,643			2,709
Premises and equipment, net		15,623			15,995
Goodwill		0			802
Prepaid expenses and other assets		3,967			3,962
Deferred tax asset, net		7,088			7,171
Total assets	$	1,113,547			1,107,135

Liabilities and Stockholders’ Equity
Deposits	$	983,244			976,793
Federal Home Loan Bank advances and Federal Reserve borrowings		10,800			13,200
Accrued interest payable		3,903			2,399
Customer escrows		1,993			2,246
Accrued expenses and other liabilities		3,264			4,790
Total liabilities		1,003,204			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 4,464,952 and 4,457,905		91			91
Additional paid-in capital		41,280			41,235
Retained earnings, subject to certain restrictions		143,782			142,278
Accumulated other comprehensive loss		(12,367	)		(13,191	)
Unearned employee stock ownership plan shares		(772	)		(870	)
Treasury stock, at cost 4,663,710 and 4,670,757 shares		(61,671	)		(61,836	)
Total stockholders’ equity		110,343			107,707
Total liabilities and stockholders’ equity	$	1,113,547			1,107,135

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
(Dollars in thousands, except per share data)	2024			2023		2024			2023
Interest income:
Loans receivable	$	11,104			9,619		21,790			18,622
Securities available for sale:
Mortgage-backed and related		473			600		987			1,252
Other marketable		558			200		967			343
Other		445			78		835			193
Total interest income		12,580			10,497		24,579			20,410

Interest expense:
Deposits		5,070			2,549		9,810			4,352
Customer escrows		0			23		0			55
Advances and other borrowings		18			197		21			212
Total interest expense		5,088			2,769		9,831			4,619

Net interest income		7,492			7,728		14,748			15,791

Provision for credit losses		(306	)		256		(515	)		248
Net interest income after provision for credit losses		7,798			7,472		15,263			15,543

Non-interest income:
Fees and service charges		764			831		1,496			1,638
Loan servicing fees		386			391		774			791
Gain on sales of loans		633			334		927			629
Other		427			418		920			844
Total non-interest income		2,210			1,974		4,117			3,902

Non-interest expense:
Compensation and benefits		4,420			4,459		9,117			9,264
Occupancy and equipment		880			914		1,732			1,864
Data processing		579			545		1,114			1,050
Professional services		750			292		1,071			529
Goodwill impairment charge		802			0		802			0
Other		1,234			1,247		2,380			2,443
Total non-interest expense		8,665			7,457		16,216			15,150
Income before income tax expense		1,343			1,989		3,164			4,295
Income tax expense		373			568		876			1,240
Net income		970			1,421		2,288			3,055
Other comprehensive income, net of tax		832			705		824			2,951
Comprehensive income available to common stockholders	$	1,802			2,126		3,112			6,006
Basic earnings per share	$	0.22			0.33		0.53			0.70
Diluted earnings per share	$	0.22			0.32		0.52			0.70

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
For the Three and Six Months Ended June 30, 2024 and 2023

(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, March 31, 2024	$	91		41,232			143,248			(13,199	)		(821	)		(61,727	)		108,824
Net income							970												970
Other comprehensive income										832									832
Dividends paid to stockholders ($0.10 per share)							(436	)											(436	)
Restricted stock awards				(56	)											56			0
Amortization of restricted stock awards				47															47
Earned employee stock ownership plan shares				57									49						106
Balance, June 30, 2024	$	91		41,280			143,782			(12,367	)		(772	)		(61,671	)		110,343

Balance, December 31, 2023	$	91		41,235			142,278			(13,191	)		(870	)		(61,836	)		107,707
Net income							2,288												2,288
Other comprehensive income										824									824
Dividends paid to stockholders ($0.18 per share)							(784	)											(784	)
Restricted stock awards				(166	)											166			0
Stock awards withheld for tax withholding																(1	)		(1	)
Amortization of restricted stock awards				96															96
Earned employee stock ownership plan shares				115									98						213
Balance, June 30, 2024	$	91		41,280			143,782			(12,367	)		(772	)		(61,671	)		110,343

												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, March 31, 2023	$	91		40,975			138,952			(17,515	)		(1,014	)		(61,267	)		100,222
Net income							1,421												1,421
Other comprehensive income										705									705
Dividends paid to stockholders ($0.08 per share)							(348	)											(348	)
Restricted stock awards				(60	)											60			0
Amortization of restricted stock awards				57															57
Earned employee stock ownership plan shares				47									48						95
Balance, June 30, 2023	$	91		41,019			140,025			(16,810	)		(966	)		(61,207	)		102,152

Balance, December 31, 2022	$	91		41,013			138,409			(19,761	)		(1,063	)		(61,353	)		97,336
Net income							3,055												3,055
Other comprehensive income										2,951									2,951
Adoption of ASU 2016-13 (see Note 3)							(830	)											(830	)
Dividends paid to stockholders ($0.14 per share)							(609	)											(609	)
Restricted stock awards				(210	)											210			0
Stock awards withheld for tax withholding																(64	)		(64	)
Amortization of restricted stock awards				111															111
Earned employee stock ownership plan shares				105									97						202
Balance, June 30, 2023	$	91		41,019			140,025			(16,810	)		(966	)		(61,207	)		102,152

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended June 30,
(Dollars in thousands)	2024			2023
Cash flows from operating activities:
Net income	$	2,288			3,055
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses		(515	)		248
Depreciation		540			563
Amortization of premiums, net		150			402
Amortization of deferred loan fees		(74	)		(90	)
Amortization of mortgage servicing rights and servicing costs		422			412
Capitalized mortgage servicing rights		(356	)		(215	)
Deferred income tax expense		(219	)		0
Losses (gains) recognized on equity securities, net		21			(62	)
Gains on sale of premises and equipment		0			(9	)
Gain on sales of loans		(927	)		(629	)
Proceeds from sales of loans held for sale		40,841			25,550
Disbursements on loans held for sale		(37,418	)		(23,232	)
Amortization of restricted stock awards		96			111
Amortization of unearned Employee Stock Ownership Plan shares		98			97
Earned Employee Stock Ownership Plan shares priced above original cost		115			105
Increase in accrued interest receivable		(429	)		(392	)
Increase in accrued interest payable		1,504			817
Goodwill impairment charge		802			0
Increase in other assets		(150	)		(82	)
Decrease in other liabilities		(1,509	)		(1,858	)
Other, net		(2	)		(1	)
Net cash provided by operating activities		5,278			4,790
Cash flows from investing activities:
Principal collected on securities available for sale		17,047			18,554
Proceeds collected on maturities of securities available for sale		20,000			5,000
Purchases of securities available for sale		(20,000	)		(5,013	)
Purchase of Federal Home Loan Bank stock		(817	)		(5,318	)
Redemption of Federal Home Loan Bank stock		918			4,297
Net increase in loans receivable		(22,759	)		(53,543	)
Proceeds from sale of premises		0			42
Purchases of premises and equipment		(168	)		(386	)
Net cash used by investing activities		(5,779	)		(36,367	)
Cash flows from financing activities:
Increase (decrease) in deposits		6,451			(11,214	)
Stock awards withheld for tax withholding		(1	)		(64	)
Dividends to stockholders		(784	)		(609	)
Proceeds from borrowings		18,000			128,120
Repayment of borrowings		(20,400	)		(103,420	)
Decrease in customer escrows		(253	)		(4,261	)
Net cash provided by financing activities		3,013			8,552
Increase (decrease) in cash and cash equivalents		2,512			(23,025	)
Cash and cash equivalents, beginning of period		11,151			36,259
Cash and cash equivalents, end of period	$	13,663			13,234
Supplemental cash flow disclosures:
Cash paid for interest	$	8,327			3,803
Cash paid for income taxes		1,216			1,702
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale		4,343			2,320
Transfer of loans to real estate		0			220

See accompanying notes to consolidated financial statements (unaudited).

Table of Contents

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- and six-month periods ended June 30, 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) Proposed Merger with Alerus Financial Corporation (Nasdaq: ALRS)

On May 14, 2024, HMN entered into an Agreement and Plan of Merger (the merger agreement) with Alerus Financial Corporation, a Delaware corporation (Alerus), pursuant to which HMN will merge into Alerus, with Alerus as the surviving corporation (the merger). Subject to the terms and conditions of the merger Agreement, at the effective time of the merger, HMN stockholders will have the right to receive 1.25 (the exchange ratio) shares of common stock of Alerus for each share of common stock of HMN. The exchange ratio is subject to potential downward adjustment if HMN’s stockholders’ equity as of the closing date of the merger is less than a specified stockholders’ equity threshold, as described in the merger agreement. Holders of options to purchase shares of HMN common stock and holders of restricted HMN common stock will have such options or restricted stock vest immediately prior to the merger. The shares of HMN common stock issued upon exercise of such stock options and the shares of HMN common stock that are vested will receive the same exchange ratio consideration as the HMN stockholders, as described in the merger agreement. It is anticipated that Home Federal Savings Bank will be merged with and into Alerus’ banking subsidiary, Alerus Financial, National Association, immediately following the completion of the merger. The merger agreement was unanimously approved by the Board of Directors of each of HMN and Alerus.

The merger agreement contains customary representations and warranties of both parties and customary conditions to the parties’ obligations to close the transaction, as well as agreements to cooperate in the process of consummating the transaction. The parties expect the merger to be completed in the fourth quarter of 2024, subject to the satisfaction of customary closing conditions in the merger agreement and the approval of the appropriate regulatory authorities and of the stockholders of each of HMN and Alerus.

The Company has incurred $0.5 million of merger related expenses for the three months ended June 30, 2024, primarily related to legal, accounting, and other professional service costs, which are included in the Consolidated Statements of Comprehensive Income. The Company expects to incur additional merger related costs through the closing of the merger.

Table of Contents

(4) 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.

(5) Fair Value Measurements

Accounting Standards Codification (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 non-observable 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.

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The following table summarizes the assets and off balance sheet financial instruments of the Company for which fair values are determined on a recurring basis as of June 30, 2024 and December 31, 2023.

	Carrying Value at June 30, 2024
(Dollars in thousands)	Total			Level 1		Level 2			Level 3
Securities available for sale	$	199,022			0		199,022			0
Equity securities		362			0		362			0
Commitments to extend credit		(18	)		0		(18	)		0
Total	$	199,366			0		199,366			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 June 30, 2024 and December 31, 2023.

	Carrying Value at June 30, 2024
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Three Months Ended June 30, 2024 Total Gains		Six Months Ended June 30, 2024 Total Gains
Loans held for sale	$	2,861		0		2,861		0		8		18
Mortgage servicing rights, net		2,643		0		0		2,643		0		0
Collateral dependent loans		3,172		0		3,172		0		4		12
Total	$	8,676		0		6,033		2,643		12		30

	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		2,709		(313	)

(6) 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 June 30, 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 June 30, 2024 and December 31, 2023 are shown below. Following the table there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments.

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	June 30, 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	$	13,663			13,663			13,663								11,151			11,151
Securities available for sale		199,022			199,022					199,022						215,094			215,094
Equity securities		362			362					362						382			382
Loans held for sale		2,861			2,861					2,861						1,006			1,006
Loans receivable, net		864,698			801,215					801,215						845,692			778,952
Federal Home Loan Bank stock		1,151			1,151					1,151						1,252			1,252
Accrued interest receivable		3,982			3,982					3,982						3,553			3,553
Mortgage servicing assets		2,643			6,692							6,692				2,709			6,539

Financial liabilities:
Deposits		983,244			982,021					982,021						976,793			975,963
FHLB advances and other borrowings		10,800			10,800					10,800						13,200			13,200
Accrued interest payable		3,903			3,903					3,903						2,399			2,399

Off-balance sheet financial instruments:
Commitments to extend credit		(18	)		(18	)								149,438		7			7			167,447
Commitments to sell loans		1			1									9,371		(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.

Accrued Interest Receivable

The carrying amount of accrued interest receivable approximates its fair value since it is short-term in nature and does not present unanticipated credit concerns.

Mortgage Servicing Assets

The fair values of mortgage servicing assets were calculated by a third party using a discounted cash flow model-based technique that uses significant assumptions both observable and non-observable in the market. The non-observable assumptions reflect estimates of assumptions that market participants would use in pricing the mortgage servicing asset.

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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. The fair value disclosures for all of the deposits were adjusted to reflect the exit price amount anticipated to be received from the sale of the deposits in an open market transaction.

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.

(7) Other Comprehensive Income

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

	For the Three Months Ended June 30,
(Dollars in thousands)	2024						2023
Securities available for sale:	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect⁽¹⁾			Net of Tax
Unrealized gains arising during the period	$	1,137		305		832		106		(599	)		705
Other comprehensive income	$	1,137		305		832		106		(599	)		705

	For the Six Months Ended June 30,
(Dollars in thousands)	2024						2023
Securities available for sale:	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect⁽¹⁾		Net of Tax
Unrealized gains arising during the period	$	1,125		301		824		2,952		1		2,951
Other comprehensive income	$	1,125		301		824		2,952		1		2,951

(1)

The tax effect on gross unrealized gains was impacted by a change in the effective tax rate used in the second quarter of 2023 to allocate the total unrealized gains on securities between the deferred tax asset and other comprehensive income.

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(8)

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 June 30, 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
June 30, 2024
Mortgage backed securities:
Federal National Mortgage Association (FNMA)		0	$	0		0			34	$	78,291		(8,882	)	$	78,291		(8,882	)
Federal Home Loan Mortgage Corporation (FHLMC)		0		0		0			24		66,672		(8,076	)		66,672		(8,076	)
Collateralized mortgage obligations:
FNMA		0		0		0			1		28		(2	)		28		(2	)
Other marketable securities:
U.S. Government agency obligations		6		29,587		(82	)		4		19,783		(222	)		49,370		(304	)
Total temporarily impaired securities		6	$	29,587		(82	)		63	$	164,774		(17,182	)	$	194,361		(17,264	)

	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 June 30, 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 June 30, 2024. During the three- and six-month periods ended June 30, 2024 and June 30, 2023, there were no sales of securities.

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A summary of securities available for sale at June 30, 2024 and December 31, 2023 is as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2024
Mortgage-backed securities:
FNMA	$	87,173		0		(8,882	)		78,291
FHLMC		74,748		0		(8,076	)		66,672
Collateralized mortgage obligations:
FNMA		30		0		(2	)		28
		161,951		0		(16,960	)		144,991
Other marketable securities:
U.S. Government agency obligations		54,330		5		(304	)		54,031
		54,330		5		(304	)		54,031
	$	216,281		5		(17,264	)		199,022

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

The following table indicates amortized cost and estimated fair value of securities available for sale at June 30, 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	$	58,325		54,654
Due after one year through five years		127,436		117,044
Due after five years through fifteen years		30,518		27,322
Due after fifteen years		2		2
Total	$	216,281		199,022

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 was reported as a component of accrued interest receivable on the consolidated balance sheet, totaled $0.7 million at June 30, 2024 and $0.5 million at December 31, 2023, and was 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 $39.5 million and $41.6 million at June 30, 2024 and December 31, 2023, respectively.

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(9) Loans Receivable, Net

A summary of loans receivable at June 30, 2024 and December 31, 2023 is as follows:

(Dollars in thousands)	June 30, 2024		December 31, 2023
Single family	$	265,077		264,303
Commercial real estate:
Real estate rental and leasing		279,734		271,531
Other		223,087		218,422
		502,821		489,953
Consumer		41,792		42,734
Commercial business		66,943		61,118
Total loans		876,633		858,108
Less:
Unamortized discounts		14		15
Net deferred loan fees		629		577
Allowance for credit losses		11,292		11,824
Total loans receivable, net	$	864,698		845,692

(10) 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
For the three months ended June 30, 2024:
Balance, March 31, 2024	$	1,215			7,420			496			2,455			11,586
Provision for losses		(83	)		(94	)		(56	)		(74	)		(307	)
Charge-offs		0			0			(8	)		(9	)		(17	)
Recoveries		30			0			0			0			30
Balance, June 30, 2024	$	1,162			7,326			432			2,372			11,292

For the six months ended June 30, 2024:
Balance, December 31, 2023	$	1,426			7,514			607			2,277			11,824
Provision for losses		(264	)		(188	)		(167	)		104			(515	)
Charge-offs		(30	)		0			(8	)		(9	)		(47	)
Recoveries		30			0			0			0			30
Balance, June 30, 2024	$	1,162			7,326			432			2,372			11,292

Allocated to:
Individual allowance	$	28			0			103			297			428
Collective allowance		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 allowance	$	26			2			88			292			408
Collective allowance		1,136			7,324			344			2,080			10,884
Balance, June 30, 2024	$	1,162			7,326			432			2,372			11,292

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 June 30, 2024:
Individually reviewed for impairment	$	806			1,199			320			1,255			3,580
Collectively reviewed for impairment		264,271			501,622			41,472			65,688			873,053
Ending balance	$	265,077			502,821			41,792			66,943			876,633

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(Dollars in thousands)	Single Family			Commercial Real Estate		Consumer			Commercial Business			Total
For the three months ended June 30, 2023:
Balance, March 31, 2023	$	959			7,561		620			2,202			11,342
Provision for losses		284			304		(12	)		(376	)		200
Charge-offs		0			0		(27	)		0			(27	)
Recoveries		0			0		1			1			2
Balance, June 30, 2023	$	1,243			7,865		582			1,827			11,517

For the six months ended June 30, 2023:
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		240			327		35			(434	)		168
Charge-offs		0			0		(27	)		0			(27	)
Recoveries		1			0		1			27			29
Balance, June 30, 2023	$	1,243			7,865		582			1,827			11,517

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.

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 $3.3 million at June 30, 2024 and $3.0 million at December 31, 2023 and is 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 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 June 30, 2024 and was $0.1 million at December 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 in the three- or six-month periods ended June 30, 2024 and 2023.

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The following table presents the components of the provision for credit losses for the three- and six-month periods ended June 30, 2024 and 2023.

(Dollars in thousands)	Three months ended June 30, 2024			Six months ended June 30, 2024
Provision for credit losses on:
Loans	$	(307	)		(515	)
Unfunded commitments		1			0
Total	$	(306	)		(515	)

(Dollars in thousands)	Three months ended June 30, 2023		Six month ended June 30, 2023
Provision for credit losses on:
Loans	$	200		168
Unfunded commitments		56		80
Total	$	256		248

The following table presents total loans by risk categories and year of origination as of June 30, 2024:

(Dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		Total
Single family
Unclassified	$	16,747		79,057		55,049		59,804		29,750		23,060		0		263,467
Special Mention		0		0		285		0		0		0		0		285
Substandard		0		0		519		0		76		696		0		1,291
Doubtful		0		0		0		0		0		34		0		34
Loss		0		0		0		0		0		0.		0		0
		16,747		79,057		55,853		59,804		29,826		23,790		0		265,077

Current period gross write offs		0		0		0		0		0		30		0		30

Commercial Real Estate
Unclassified		31,221		66,869		178,156		98,204		62,177		21,131		0		457,758
Special Mention		691		1,930		14,871		2,162		6,934		997		0		27,585
Substandard		999		90		214		857		13,777		1,541		0		17,478
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		32,911		68,889		193,241		101,223		82,888		23,669		0		502,821

Consumer
Unclassified		6,562		6,875		6,053		1,219		1,692		5,800		13,253		41,454
Special Mention		40		0		0		0		0		0		0		40
Substandard		0		7		0		106		0		87		17		217
Doubtful		0		13		0		0		0		0		19		32
Loss		0		3		0		12		0		0		34		49
		6,602		6,898		6,053		1,337		1,692		5,887		13,323		41,792
Current period gross write offs		0		6		2		0		0		0		0		8

Commercial Business
Unclassified		2,716		11,118		5,970		2,702		2,317		339		35,910		61,072
Special Mention		202		876		0		0		393		0		1,800		3,271
Substandard		1,673		113		425		132		4		22		231		2,600
Doubtful		0		0		0		0		0		0		0		0
Loss		0		0		0		0		0		0		0		0
		4,591		12,107		6,395		2,834		2,714		361		37,941		66,943

Current period gross write offs		0		0		0		0		0		9		0		9

Total Loans	$	60,851		166,951		261,542		165,198		117,120		53,707		51,264		876,633

Table of Contents

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 write 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 write 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

HMN FINANCIAL INC 10-Q