HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates twelve full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson, La Crescent, Owatonna, Rochester (4), Spring Valley and Winona, one full service office in Marshalltown, Iowa, and one full service office in Pewaukee, Wisconsin. The Bank also operates a loan origination office in Sartell, Minnesota.

 

 

Financial Highlights

 

		At or For the Year Ended
Operating Results:		December 31,								Percentage
(Dollars in thousands, except per share data)		2020				2019				Change
Total interest income		$	31,959				31,890				0.2	%
Total interest expense			2,851				3,339				(14.6	)
Net interest income			29,108				28,551				2.0
Provision for loan losses			2,699				(1,216	)			322.0
Net interest income after provision for loan losses			26,409				29,767				(11.3	)
Fees and service charges			2,877				3,100				(7.2	)
Loan servicing fees			1,356				1,278				6.1
Gain on sales of loans			9,531				2,941				224.1
Other non-interest income			1,190				1,136				4.8
Total non-interest income			14,954				8,455				76.9
Total non-interest expense			26,993				27,105				(0.4	)
Income before income tax expense			14,370				11,117				29.3
Income tax expense			4,068				3,324				22.4
Net income		$	10,302				7,793				32.2
Per Common Share Information:
Earnings per common share and common share equivalents:
Basic		$	2.23				1.69
Diluted			2.22				1.68
Stock price (for the year):
High		$	21.76				23.34
Low			13.06				19.01
Close			17.20				21.01
Book value per common share			21.65				19.13
Closing price to book value			79.45	%			109.83	%
Financial Ratios:
Return on average assets			1.21	%			1.05	%			15.2	%
Return on average stockholders’ equity			10.56				8.74				20.8
Net interest margin			3.55				4.04				(12.1	)
Operating expenses to average assets			3.16				3.67				(13.9	)
Average stockholders’ equity to average assets			11.43				12.06				(5.2	)
Stockholders’ equity to total assets at year end			11.35				11.91				(4.7	)
Non-performing assets to total assets			0.37				0.34				8.8
Efficiency ratio			61.26				73.25				(16.4	)

 

Balance Sheet Data:		December 31,								Percentage
(Dollars in thousands)		2020				2019				Change
Total assets		$	909,580				777,639				17.0	%
Securities available for sale			148,090				107,592				37.6
Loans held for sale			6,186				3,606				71.5
Loans receivable, net			642,630				596,392				7.8
Deposits			795,204				673,870				18.0
Stockholders’ equity			103,252				92,648				11.4
Home Federal Savings Bank regulatory capital ratios:
Common equity Tier 1 capital			13.62	%			13.21	%			3.1	%
Tier 1 leverage			9.85				10.89				(9.5	)
Tier 1 risk-based capital			13.62				13.21				3.1
Total risk-based capital			14.87				14.46				2.8

 

 

Letter to Shareholders and Clients

 

I am proud to present you with our 2020 Annual Report. The past year was marked by many unexpected challenges and opportunities.

 

We began the year by closely monitoring the news from China of a novel respiratory virus, and the discovery of what we now know as COVID-19. We are fortunate to have a retired Mayo Clinic physician on our Board of Directors as well as numerous contacts within the Mayo Clinic, who recognized how serious the situation in China was, and encouraged us to take important early steps to prepare for the impact the virus would unfortunately have on our organization, our clients and our communities.

 

During the year, we closely monitored and complied with numerous health directives and executive orders in the three states where we operate. Our branch lobbies were closed and reopened several times during the year as state and local government agencies adjusted restrictions to flatten spikes in the virus transmission levels. Approximately 80% of our production and support staff worked remotely during the year. Some employees, whose duties required them to work on site, were divided into teams and placed on rotating schedules to reduce the chance of department wide outbreaks of the virus. Our information technology staff worked tirelessly throughout the year to ensure connectivity for our remote employees and the seamless delivery of our products and services to our clients. Our Human Resources and Operations departments developed and amended workplace policies and procedures to ensure continued regulatory compliance and employee safety.

 

We were fortunate that we entered the year in a strong asset quality position, with only 0.34% of our assets classified as non-performing at the beginning of 2020. This was made possible by a strong economy, prudent underwriting, and a well-timed decision to move our weakest credits out of the Bank during 2019. Our strong asset quality position enabled us to offer our commercial clients the flexibility they would need to deal with the impact that COVID-19 would have on their businesses.

 

We also began the year with a very strong capital position, no wholesale funding, and no corporate debt. These factors, combined with our strong core deposit base and liquidity levels, allowed us to generate positive financial results in 2020 despite the effects of the pandemic.

 

Declines in mortgage rates during the year fueled a significant increase in demand for loans to purchase and construct new homes and to refinance existing home loans. Our Home Mortgage department originated over $310 million in new loans during the year and we realized $9.5 million in gains on the loans that were sold into the secondary market, both of which were record highs for the Bank.

 

Our Business Banking and Small Business Administration (SBA) Loan departments worked together to originate over $53 million in loans under the Paycheck Protection Program (PPP), a federal program to help businesses keep employees on their payrolls as businesses were forced to shut down due to the pandemic. By year end, approximately 36% of these loans had been forgiven by the SBA, a testament to our prudent review and underwriting of the PPP loan applications and our ability to assist our clients in navigating the SBA forgiveness application process. By year end, $1.1 million of the net fees generated by these loans had been recognized into income. Our business banking staff also underwrote and approved deferral agreements covering over $123 million in commercial and consumer loans during the year to help our clients deal with COVID-19 related disruptions in cash flow. Fortunately, by year end most of these loans had resumed making their scheduled payments and there remained only $35 million in loans with modified payment terms as of December 31, 2020.

 

 

Our wealth management area, Home Federal Investment Services, also posted strong results in terms of assets under management and total recurring revenue. We are proud to have been ahead of the curve in moving from a transaction fee based delivery model to one more based on advisory fees. This advisory fee model is designed to assure our clients that they are investing in the most appropriate products to meet their individual investment goals and objectives.

 

During the year, deposits grew to over $795 million, up 18% from the previous year, while total assets increased to nearly $910 million. This growth, combined with the increased production mentioned earlier, resulted in net income for the year of $10.3 million, or $2.22 per share, compared to $7.8 million, or $1.68 per share in 2019.

 

As I write this letter, new daily positive test results, as well as daily deaths attributed to the virus have fallen considerably. We are optimistic that the rate of vaccinations to prevent COVID-19 will increase substantially during the first half of 2021, encourage herd resistance and enable our economy to gradually reopen. We will remain vigilant and do our part to ensure the safety of our employees, our valued clients and the communities we serve.

 

I am very proud of the commitment our employees have demonstrated to the success of our company, and thank them for the flexibility they have shown our organization this past year in balancing the demands that the pandemic has had on their lives both at home and at work.

 

I wish you all the best of health this coming year and thank you for your continued support of HMN Financial Inc. and Home Federal Savings Bank. Together we can build a stronger, more profitable Company.

 

Best Regards,

 

 

Bradley Krehbiel
President and Chief Executive Officer

 

 

 

Board of Directors

 

Dr. Wendy Shannon Board Chair	Bradley Krehbiel President and CEO

         

Allen Berning	Sequoya Borgman	Michael Bue	Bernard Nigon

                           

Dr. Hugh Smith	Mark Utz	Hans Zietlow

 

 

Five-Year Consolidated Financial Highlights

 

Selected Operations Data:		Year Ended December 31,
(Dollars in thousands, except per share data)		2020				2019				2018				2017				2016
Total interest income		$	31,959				31,890				30,381				27,680				27,349
Total interest expense			2,851				3,339				2,233				1,797				1,593
Net interest income			29,108				28,551				28,148				25,883				25,756
Provision for loan losses			2,699				(1,216	)			(649	)			(523	)			(645	)
Net interest income after provision for loan losses			26,409				29,767				28,797				26,406				26,401
Fees and service charges			2,877				3,100				3,330				3,354				3,427
Loan servicing fees			1,356				1,278				1,255				1,202				1,108
Gain on sales of loans			9,531				2,941				2,095				2,138				2,618
Other non-interest income			1,190				1,136				1,034				960				1,048
Total non-interest income			14,954				8,455				7,714				7,654				8,201
Total non-interest expense			26,993				27,105				25,387				25,254				24,130
Income before income tax expense			14,370				11,117				11,124				8,806				10,472
Income tax expense			4,068				3,324				2,888				4,402		(1)		4,122
Net income		$	10,302				7,793				8,236				4,404				6,350
Basic earnings per common share		$	2.23				1.69				1.89				1.04				1.52
Diluted earnings per common share			2.22				1.68				1.71				0.90				1.34

 

(1) Relates to the decrease in the Company’s net deferred tax asset as a result of the reduction in the corporate federal tax rate from 34% to 21% in the fourth quarter of 2017.

 

Selected Financial Condition Data:		At December 31,
(Dollars in thousands, except per share data)		2020				2019				2018				2017				2016
Total assets		$	909,580				777,639				712,315				722,685				682,023
Securities available for sale			148,090				107,592				79,859				77,472				78,477
Loans held for sale			6,186				3,606				3,444				1,837				2,009
Loans receivable, net			642,630				596,392				586,688				585,931				551,171
Deposits			795,204				673,870				623,352				635,601				592,811
Federal Home Loan Bank advances and other borrowings			0				0				0				0				7,000
Stockholders’ equity			103,252				92,648				83,147				80,818				75,919
Book value per common share			21.65				19.13				17.19				17.97				16.91
Number of full service offices			14				14		(2)		14				13				13
Number of loan origination offices			1				1		(2)		2				3				3
Key Ratios: (3)
Stockholders’ equity to total assets at year end			11.35	%			11.91	%			11.67	%			11.18	%			11.13	%
Average stockholders’ equity to average assets			11.43				12.06				11.52				11.43				11.07
Return on stockholders’ equity (ratio of net income to average equity)			10.56				8.74				9.88				5.52				8.71
Return on assets (ratio of net income to average assets)			1.21				1.05				1.14				0.63				0.96

 

(2) In 2019, converted Wisconsin loan origination office to a full service office and consolidated the two Kasson offices into one location.

(3) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.

 

See accompanying notes to consolidated financial statements.

 

 

Management Discussion and Analysis

 

This Annual Report, other reports filed by HMN Financial, Inc. (HMN or the Company) with the Securities and Exchange Commission (SEC), and the Company’s proxy statement 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 “expect,” “estimate,” “intend,” “look,” “believe,” “anticipate,” “project,” “continue,” “may,” “will,” “would,” “could,” “target,” “goal,” “should,” and “trend,” or similar statements or variations of such terms and include, but are not limited to, those relating to growing our core deposit relationships and loan balances; enhancing the financial performance of our core banking operations; maintaining credit quality; maintaining net interest margins; reducing non-performing assets and generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to Home Federal Savings Bank (the Bank); the Company’s liquidity and capital requirements; the anticipated impacts of the COVID-19 pandemic and efforts to mitigate the same on the general economy, our clients, and the allowance for loan losses; the anticipated benefits that will be realized by our clients from government assistance programs related to the COVID-19 pandemic; the amount of anticipated loans to be originated under the second round of the Paycheck Protection Plan (PPP), the amount of the Bank’s non-performing assets in future periods and the appropriateness of the allowances therefor; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and composition of interest earning assets; the amount of yield enhancements relating to non-accruing and purchased loans; the amount and compositions of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends or repurchases of stock by HMN; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer of the trust preferred securities held by the Bank; the anticipated results of litigation and our assessment of the impact on our financial statements; the ability of the Bank to pay dividends to HMN; the ability to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject.

 

A number of factors, many of which may be amplified by the COVID-19 pandemic and efforts to mitigate the same, 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 our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as continued 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; results of litigation; reduced demand for financial services and loan products; 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; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements.

All statements in this Annual Report, including forward-looking statements, speak only as of the date hereof, and we undertake no duty to update any of the forward-looking statements after the date of this Annual Report.

 

 

Overview

HMN is the stock savings bank holding company for the Bank, which operates community banking and loan production offices in Minnesota, Iowa and Wisconsin. The earnings of the Company are primarily dependent on the Bank's net interest income, which is the difference between interest earned on loans and investments, and the interest paid on interest-bearing liabilities such as deposits and other borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the "interest rate spread". Net interest income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and composition of interest-earning assets and interest-bearing liabilities, and 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 and real estate owned, 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 loan 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

Critical accounting policies are those policies that the Company's management believes are the most important to understanding the Company’s financial condition and operating results. These critical accounting policies often involve estimates and assumptions that could have a material impact on the Company’s financial statements. The Company has identified the following critical accounting policies 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 Loan Losses and Related Provision

The allowance for loan losses is based on periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national and regional economic conditions such as unemployment data, loan delinquencies, local economic conditions, demand for single family homes, demand for commercial real estate and building lots, loan portfolio composition, historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the appropriateness of the loan loss allowance for its homogeneous and non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single family and consumer loan portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate and multi-family loan portfolios involves assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Company's own loss experience and other qualitative factors and are assigned to all loans without identified credit weaknesses. For each non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans, or portions thereof, that are deemed uncollectible.

 

The appropriateness of the allowance for loan losses 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 impaired 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 loan losses in the periods in which the adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios, the actual loss experience and other qualitative factors. The Company increases its allowance for loan losses by charging the provision for loan losses against income and by receiving recoveries of previously charged off loans. The Company decreases its allowance by crediting the provision for loan losses and recording loan charge-offs. The current year activity resulted in an increase in the allowance and a charge to the loan loss provision. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified. Although management believes that based on current conditions the allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for loan 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 largest of which relates to the allowance for loan losses. For tax purposes only the net charge-offs are deductible while the entire provision for loan losses is used to determine book income. A deferred tax asset is created because of the timing difference of when the expense is recognized for book and tax purposes. Under U.S. generally accepted accounting principles (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 Company could not currently identify any negative evidence. It is possible that future conditions may differ substantially from those anticipated in determining that no valuation allowance was 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.

Litigation
Estimates related to litigation are inherently subjective and the ultimate resolution of any litigation may be different than current management estimates. See “Note 18 Commitments and Contingencies” in the Notes to Consolidated Financial Statements for further information on outstanding litigation matters.

 

COVID-19 Pandemic

In 2020, the spread of COVID-19 slowed economic activity in many countries, including the United States. Millions of Americans were at some point ordered to stay home, including those residing in the states of Minnesota and Wisconsin, and many businesses were ordered to be closed for a period of time or to operate at reduced capacities in order to reduce the spread of COVID-19. These orders have severely reduced the flow of commerce which has reduced, or entirely eliminated, the revenue streams for many small businesses. This reduction in income has forced many small businesses to close temporarily, furlough employees, or terminate operations entirely.

 

The Bank has also been impacted by the disruption in economic activity that has occurred. During 2020, it temporarily closed the lobbies in all of its locations and for a period of time conducted business entirely through the drive-ups at the branches that have that capability. Branches without drive-up facilities were closed for a period of time in order to meet the social distancing guidelines recommended by health officials. Beginning on January 11, 2021 the Bank re-opened all of its lobbies to walk-in services during limited hours while continuing to offer drive-up service during normal business hours. The Bank continues to encourage its customers to conduct business through its on-line loan and deposit account services, as well as through ATM and night drop facilities available at its branches.

 

As of the date of this report, none of the Bank’s market areas were under a stay-at-home order. However, Bank employees who are able to perform their duties remotely are encouraged to do so.

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 and the Bank’s regulators issued the Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus on April 7, 2020. In accordance with regulatory guidance, the Bank offered loan payment accommodations to certain customers by deferring the loan payments on their outstanding loans with the Bank for up to six months. After the initial deferral period was over, the Bank granted additional accommodations on certain loans to borrowers in accordance with Section 4013 of the CARES Act on a case-by-case basis. See “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements for further information.

 

 

The extent of the impact of COVID-19 on the Company is difficult to determine as it is not clear how long the reduced economic activity will persist, how long it will take to administer the COVID-19 vaccines, how many people will take the vaccines, the effectiveness of the vaccine, if businesses will re-hire workers displaced by the pandemic, or what the long-term implications will be on customer behavior as a result of the pandemic, among other factors. The impact on the Bank’s loan portfolio is also unclear for many of the same reasons. At this time, the Company has not seen a negative impact on its deposit relationships as many of its clients have been able to conduct their business with the Bank through the drive-ups, ATMs, night drop, on-line banking website, or by using its mobile banking application.

 

Paycheck Protection Program

The Bank actively participated in helping businesses that applied for forgivable loans under the PPP as part of the CARES Act. The CARES Act allocated $349 billion in funding to help small businesses that were negatively impacted by the COVID-19 pandemic. The Bank had the following PPP loan activity during 2020:

 

Dollars in thousands		Number of Loans				Amount				Net Deferred Fees
Originated			413			$	53,153			$	1,837
Repaid			(130	)			(19,484	)			-
Net deferred fees recognized			-				-				(1,097	)
Balance, December 31, 2020			283			$	33,669			$	740

 

The Bank continues to submit applications for forgiveness on the PPP loans that were still outstanding at December 31, 2020 and, based on our experience with previously submitted applications, it is anticipated that the majority of these loans will be forgiven by the Small Business Administration (SBA). To the extent a portion of the loans are not forgiven or repaid in full, the remaining net deferred fees will be recognized into income over the remaining lives of the loans.

 

The Consolidated Appropriations Act of 2021, which was signed into law on December 27, 2020, allocated $284 billion to the SBA to fund a second round of the PPP and extended the application period for the program to March 31, 2021. The Bank is actively participating in the second round of the program and began submitting applications for borrowers on January 15, 2021 when the application window officially opened for financial institutions with under $1 billion in assets. The second round of the program allows applications from first time borrowers as well as those that obtained loans during the first round of the program. The revised program, among other things, requires that borrowers demonstrate or certify that they experienced a 25% or greater reduction in gross receipts from a quarter in 2020 compared to the same quarter in 2019 and certify that current economic uncertainty makes the loan request necessary to support their ongoing operations. For various reasons, including the increased requirements to qualify for a second loan, it is anticipated that the Bank will originate fewer loans in the second round of the program.

 

Results of Operations

 

Comparison of 2020 with 2019

Net income was $10.3 million for 2020, an increase of $2.5 million, or 32.2%, compared to net income of $7.8 million for 2019. Diluted earnings per share for the year ended December 31, 2020 was $2.22, an increase of $0.54 per share compared to diluted earnings per share of $1.68 for the year ended December 31, 2019. The increase in net income between the periods was primarily because of a $6.6 million increase in the gain on sales of loans due to the increase in mortgage loan originations and sales between the periods, a $0.5 million increase in net interest income due primarily to an increase in the earning assets between the periods and a $0.1 million decrease in non-interest expenses primarily related to a decrease in legal expenses. These increases in net income were partially offset by a $3.9 million increase in the provision for loan losses due primarily to the increase in qualitative reserves that were established as a result of the stressed economic environment caused by the COVID-19 pandemic. Income tax expense increased $0.7 million as a result of the increase in pre-tax income between the periods.

 

 

Net Interest Income

Net interest income was $29.1 million for 2020, an increase of $0.5 million, or 2.0%, from $28.6 million for 2019. Interest income was $32.0 million for 2020, an increase of $0.1 million, or 0.2%, from $31.9 million for 2019. Interest income increased primarily because of the $112.8 million increase in the average interest-earning assets between the periods. However, the majority of that increase was offset by a decrease in the average yield earned on interest-earning assets. The average yield earned on interest-earning assets was 3.90% for 2020, a decrease of 61 basis points from 4.51% for 2019. The decrease in the average yield is primarily related to the decrease in loan yields as a result of the decrease in the average prime rate between the periods.

 

Interest expense was $2.9 million for 2020, a decrease of $0.4 million, or 14.6%, from $3.3 million for 2019. Interest expense decreased despite the $105.9 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.38% for 2020, a decrease of 14 basis points from 0.52% for 2019. The decrease in the average interest rate paid on interest-bearing liabilities was primarily because of the decrease in deposit rates as a result of the decrease in the average federal funds rate between the periods.

 

The following table presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Non-accruing loans have been included in the average outstanding loan balance in the table as loans carrying a zero yield.

 

		Year Ended December 31,
		2020												2019												2018
(Dollars in thousands)		Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate				Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate				Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate
Interest-earning assets:
Securities available for sale:
Mortgage-backed and related securities		$	61,364				1,155				1.88	%		$	15,308				343				2.24	%		$	8,550				197				2.30	%
Other marketable securities			46,407				702				1.51				67,075				1,157				1.72				70,827				1,138				1.61
Loans held for sale			7,292				215				2.95				2,959				125				4.22				1,765				89				5.04
Loans receivable, net(1) (2)			644,912				29,709				4.61				589,521				29,662				5.03				586,664				28,446				4.85
FHLB stock and other earning assets including cash equivalents			59,321				178				0.30				31,679				603				1.90				30,567				511				1.67
Total interest-earning assets		$	819,296				31,959				3.90			$	706,542				31,890				4.51			$	698,373				30,381				4.35
Interest-bearing liabilities:
Checking accounts		$	122,781				151				0.12	%		$	96,387				103				0.11	%		$	86,750				62				0.07	%
Savings accounts			90,064				65				0.07				79,587				63				0.08				77,630				61				0.08
Money market accounts			209,522				840				0.40				177,587				1,171				0.66				199,202				865				0.43
Certificate accounts			115,079				1,795				1.56				121,914				1,995				1.64				114,243				1,243				1.09
FHLB advances and other borrowings			0				0				0.00				287				7				2.54				140				2				1.71
Total interest-bearing liabilities		$	537,446											$	475,762											$	477,965
Noninterest checking			207,456												163,420												156,482
Other noninterest-bearing liabilities			2,251												2,057												1,534
Total interest-bearing liabilities and noninterest-bearing deposits		$	747,153				2,851				0.38	%		$	641,239				3,339				0.52	%		$	635,981				2,233				0.35	%
Net interest income							29,108											$	28,551											$	28,148
Net interest rate spread											3.52	%											3.99	%											4.00	%
Net earning assets		$	72,143											$	65,303											$	62,392
Net interest margin											3.55	%											4.04	%											4.03	%
Average interest-earning assets to average interest-bearing liabilities and noninterest-bearing deposits							109.66	%											110.18	%											109.81	%

 

(1) Tax exempt income was not material; therefore, the yield was not presented on a tax equivalent basis for any of the years presented.

(2) Calculated net of deferred loan costs, loan discounts, loans in process and loss reserves.

 

Net interest margin (net interest income divided by average interest-earning assets) for 2020 was 3.55%, a decrease of 49 basis points, compared to 4.04% for 2019. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods. Average net earning assets increased from $65.3 million in 2019 to $72.1 million in 2020. The $6.8 million increase in the net earning assets in 2020 is due primarily to the net income earned in 2020 that was partially offset by the purchase of premises, equipment and treasury stock.

 

 

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It quantifies the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by current volume).

 

		Year Ended December 31,
		2020 vs. 2019												2019 vs. 2018
		Increase (Decrease) Due to												Increase (Decrease) Due to
(Dollars in thousands)		Volume (1)				Rate(1)				Total Increase (Decrease)				Volume (1)				Rate(1)				Total Increase (Decrease)
Interest-earning assets:
Securities available for sale:
Mortgage-backed and related securities		$	1,033				(221	)			812				156				(10	)			146
Other marketable securities			(356	)			(99	)			(455	)			(60	)			79				19
Loans held for sale			183				(93	)			90				60				(24	)			36
Loans receivable, net			2,744				(2,697	)			47				105				1,111				1,216
Other			518				(943	)			(425	)			17				75				92
Total interest-earning assets		$	4,122				(4,053	)			69				278				1,231				1,509
Interest-bearing liabilities:
Checking accounts		$	53				(5	)			48				1				40				41
Savings accounts			7				(5	)			2				2				0				2
Money market accounts			372				(703	)			(331	)			(21	)			327				306
Certificates of deposit			(111	)			(89	)			(200	)			53				699				752
FHLB advances and other borrowings			(7	)			0				(7	)			3				2				5
Total interest-bearing liabilities		$	314				(802	)			(488	)			38				1,068				1,106
Increase (decrease) in net interest income		$	3,808				(3,251	)			557				240				163				403

 

(1) For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

 

The following table sets forth the weighted average yields on the Company's interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates as of the date indicated. Non-accruing loans have been included in the average outstanding loan balances in the table as loans carrying a zero yield.

 

At December 31, 2020
Weighted average yield on:					Weighted average rate on:
Securities available for sale:
Mortgage-backed and related securities			1.51	%	Checking accounts			0.12	%
Other marketable securities			1.29		Savings accounts			0.06
Loans held for sale			3.03		Money market accounts			0.25
Loans receivable, net			4.69		Certificates of deposit			1.14
FHLB stock and other interest-earning assets			0.14		Combined weighted average rate on interest-bearing liabilities			0.25
Combined weighted average yield on interest-earning assets			3.73		Interest rate spread			3.48

 

---

Provision for Loan Losses

The provision for loan losses was $2.7 million for 2020, an increase of $3.9 million from the ($1.2) million provision for loan losses for 2019. The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and also because of a reduction in the recoveries received on previously charged off loans. The amount of the increase in the allowance for loan losses related to the economic environment is based, in part, on the amount of loans to borrowers in the hospitality, restaurant and entertainment industries that continue to be negatively impacted by the COVID-19 pandemic. See “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements for additional information related to deferrals and loan modifications to borrowers impacted by the COVID-19 pandemic.

 

 

Non-Interest Income

Non-interest income was $15.0 million for 2020, an increase of $6.5 million, or 76.9%, from $8.5 million for 2019. The following table presents the components of non-interest income:

 

		Year ended December 31,												Percentage Increase (Decrease)
(Dollars in thousands)		2020				2019				2018				2020/2019				2019/2018
Fees and service charges		$	2,877				3,100				3,330				(7.2	)%			(6.9	)%
Loan servicing fees			1,356				1,278				1,255				6.1				1.8
Gain on sales of loans			9,531				2,941				2,095				224.1				40.4
Other non-interest income			1,190				1,136				1,034				4.8				9.9
Total non-interest income		$	14,954				8,455				7,714				76.9				9.6

 

Gain on sales of loans increased $6.6 million between the periods primarily because of an increase in single family loan originations and sales. Other non-interest income increased $0.1 million due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. Loan servicing fees increased $0.1 million between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others. These increases in non-interest income were partially offset by a decrease of $0.2 million in fees and service charges earned between the periods due primarily to a decrease in overdraft fees collected.

 

Non-Interest Expense

Non-interest expense was $27.0 million for 2020, a decrease of $0.1 million, or 0.4%, from $27.1 million for 2019. The following table presents the components of non-interest expense:

 

		Year ended December 31,												Percentage Increase (Decrease)
(Dollars in thousands)		2020				2019				2018				2020/2019				2019/2018
Compensation and benefits		$	15,646				15,659				14,728				(0.1	)%			6.3	%
Occupancy and equipment			4,429				4,442				4,304				(0.3	)			3.2
Data processing			1,314				1,263				1,270				4.0				(0.6	)
Professional services			1,405				1,573				1,137				(10.7	)			38.3
Other			4,199				4,168				3,948				0.7				5.6
Total non-interest expense		$	26,993				27,105				25,387				(0.4	)			6.8

 

Professional services expense decreased $0.2 million between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim. Compensation and benefits expense decreased slightly because of an increase in the direct loan origination compensation costs that were deferred as a result of the increased mortgage loan production between the periods. Occupancy and equipment expense decreased slightly between the periods due to a decrease in building expenses as a result of having more staff working remotely in 2020. These decreases in non-interest expense were partially offset by a $0.1 million increase in data processing expenses between the periods due to an increase in internet and mobile banking costs. Other non-interest expense increased slightly due primarily to an increase in mortgage servicing expenses between the periods.

 

Income Taxes

The Company considers the calculation of current and deferred income taxes to be a critical accounting policy that is subject to significant estimates. Income tax expense was $4.1 million for 2020, an increase of $0.8 million from $3.3 million for 2019. The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.

 

 

Financial Condition 

Loans Receivable, Net

The following table sets forth the information on the Company's loan portfolio in dollar amounts and percentages before deductions for deferred costs/fees and discounts and the allowance for losses as of the dates indicated:

 

										December 31,
		2020								2019								2018								2017								2016
(Dollars in thousands)		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Real Estate Loans:
Single family		$	135,023				20.65	%		$	120,064				19.86	%		$	110,698				18.61	%		$	107,005				17.99	%		$	103,255				18.41	%
Multi-family			41,456				6.34				48,663				8.05				50,150				8.43				28,649				4.81				36,777				6.56
Commercial			307,755				47.07				270,410				44.74				257,036				43.21				259,024				43.55				230,955				41.18
Construction or development			31,493				4.82				31,122				5.15				28,944				4.87				46,444				7.81				31,348				5.59
Total real estate loans			515,727				78.88				470,259				77.80				446,828				75.12				441,122				74.16				402,335				71.74
Other Loans:
Consumer Loans:
Automobile			1,937				0.30				2,608				0.43				2,483				0.42				2,894				0.49				3,036				0.54
Home equity line			21,308				3.26				28,004				4.63				32,273				5.42				36,869				6.20				40,476				7.22
Home equity			11,549				1.76				16,422				2.72				16,733				2.81				15,823				2.66				16,302				2.91
Recreational vehicles			15,645				2.39				17,266				2.86				16,226				2.73				13,181				2.21				7,553				1.35
Other			4,952				0.76				5,649				0.93				4,817				0.81				5,000				0.84				5,916				1.05
Total consumer loans			55,391				8.47				69,949				11.57				72,532				12.19				73,767				12.40				73,283				13.07
Commercial business loans			82,673				12.65				64,227				10.63				75,496				12.69				79,909				13.44				85,176				15.19
Total other loans			138,064				21.12				134,176				22.20				148,028				24.88				153,676				25.84				158,459				28.26
Total loans		$	653,791				100.00	%		$	604,435				100.00	%		$	594,856				100.00	%		$	594,798				100.00	%		$	560,794				100.00	%
Less:
Unamortized discounts			12								15								17								19								20
Net deferred loan fees (costs)			450								(536	)							(535	)							(463	)							(300	)
Allowance for losses			10,699								8,564								8,686								9,311								9,903
Total loans receivable, net		$	642,630							$	596,392							$	586,688							$	585,931							$	551,171

   

The growth in the loan portfolio in 2020 was primarily because of the growth experienced in commercial real estate, single family real estate and commercial business loans that was partially offset by a decrease in multi-family and consumer loans. Based on current economic conditions and the projected loan origination and prepayment amounts, it is anticipated that the overall growth in the loan portfolio will be limited in 2021.

 

Single family real estate loans were $135.0 million at December 31, 2020, an increase of $14.9 million, compared to $120.1 million at December 31, 2019. The single family loan portfolio increased in 2020 because of an increase in the single family loans that were originated due to the low interest rate environment and a continued emphasis on placing shorter term fixed rate and adjustable rate mortgage loans into the portfolio. The majority of the longer term mortgage loans that were originated during the year were not placed in the loan portfolio, but were sold into the secondary market in order to manage the Company’s interest rate risk position.

 

Multi-family real estate loans were $41.5 million at December 31, 2020, a decrease of $7.2 million, compared to $48.7 million at December 31, 2019. The decrease in multi-family real estate loans in 2020 is primarily the result of having more loans that paid off during the period than there were new loan originations.

 

Commercial real estate loans were $307.8 million at December 31, 2020, an increase of $37.4 million, compared to $270.4 million at December 31, 2019. The increase in commercial real estate loans is primarily due to an increase in the originations of these types of loans in 2020.

 

Construction or development loans were $31.5 million at December 31, 2020, an increase of $0.4 million, compared to $31.1 million at December 31, 2019. The increase in construction loans is primarily related to the $16.0 million in new construction loans and the $8.7 million in advances on existing loans. These increases were partially offset by the $15.1 million in paid off loans and the $9.2 million of loans on construction projects that were completed during the year and were moved to another loan category.

 

 

Home equity lines of credit were $21.3 million at December 31, 2020, a decrease of $6.7 million, compared to $28.0 million at December 31, 2019. The open-end home equity lines are generally written with an adjustable rate and a two to ten year draw period which requires interest only payments followed by a ten year repayment period which fully amortizes the outstanding balance. Home equity loans were $11.5 million at December 31, 2020, a decrease of $4.9 million, compared to $16.4 million at December 31, 2019. Closed-end home equity loans are written with fixed or adjustable rates with terms up to fifteen years. The overall decrease in the open-end equity lines and closed-end equity loans is related primarily to an increase in loan payoffs and other principal reductions as borrowers refinanced their homes and rolled outstanding equity loan balances into their first mortgage.

 

Recreational vehicle loans were $15.6 million at December 31, 2020, a decrease of $1.7 million, compared to $17.3 million at December 31, 2019. These loans have been made primarily to finance the recreational vehicle sales of a single dealer within the Bank’s market area and the decrease in the balance between the periods is primarily due to a decrease in originations as a result of increasing the credit standards required to obtain a recreational vehicle loan in 2020.

 

Commercial business loans were $82.7 million at December 31, 2020, an increase of $18.5 million, compared to $64.2 million at December 31, 2019. The increase in commercial business loans in 2020 is primarily because of the $33.7 million in PPP loans that were outstanding at December 31, 2020. The $15.2 million decrease in non-PPP commercial business loans is because loan payoffs exceeded loan originations during the year, with some of the payoffs related to the Bank’s initiative to maintain the credit quality of the loan portfolio.

 

Allowance for Loan Losses 

The determination of the allowance for loan losses and the related provision is a critical accounting policy of the Company that is subject to significant estimates. The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The current level of the allowance for loan losses is a result of management’s assessment of the risks within the portfolio based on the information obtained through the credit evaluation process. The Company utilizes a risk-rating system on non-homogeneous commercial real estate and commercial business loans that includes regular credit reviews to identify and quantify the risk in the commercial portfolio. Management conducts quarterly reviews of the entire loan portfolio and evaluates the need to adjust the allowance balance on the basis of these reviews.

 

Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used to determine the size of the allowance for loan losses.

 

The allowance for loan losses was $10.7 million, or 1.64% of gross loans at December 31, 2020, compared to $8.6 million, or 1.42% of gross loans at December 31, 2019. The allowance increased in 2020 as a result of an increase in the general qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the COVID-19 pandemic.

 

The following table reflects the activity in the allowance for loan losses and selected statistics:

 

		December 31,
(Dollars in thousands)		2020				2019				2018				2017				2016
Balance at beginning of year		$	8,564				8,686				9,311				9,903				9,709
Provision for losses			2,699				(1,216	)			(649	)			(523	)			(645	)
Charge-offs:
Single family			0				(1	)			(24	)			(6	)			(66	)
Commercial real estate			(730	)			0				0				(50	)			(67	)
Consumer			(84	)			(107	)			(226	)			(288	)			(108	)
Commercial business			(8	)			(880	)			(270	)			(311	)			(180	)
Recoveries			258				2,082				544				586				1,260
Net (charge-offs) recoveries			(564	)			1,094				24				(69	)			839
Balance at end of year		$	10,699				8,564				8,686				9,311				9,903
Year end allowance for loan losses as a percent of year end gross loan balance			1.64	%			1.42	%			1.46	%			1.57	%			1.77	%
Ratio of net loan (charge-offs) recoveries to average loans outstanding			(0.09	)			0.18				0.00				(0.01	)			0.16
Allowance as a percent of total assets at year end			1.18				1.10				1.22				1.29				1.45

 

 

The following table reflects the allocation of the allowance for loan losses:

 

		December 31,
		2020								2019								2018								2017								2016
		Allocated Allowance as a % of Loan Category				Percent of Loans in Each Category to Total Loans				Allocated Allowance as a % of Loan Category				Percent of Loans in Each Category to Total Loans				Allocated Allowance as a % of Loan Category				Percent of Loans in Each Category to Total Loans				Allocated Allowance as a % of Loan Category				Percent of Loans in Each Category to Total Loans				Allocated Allowance as a % of Loan Category				Percent of Loans in Each Category to Total Loans
Single family			0.76	%			20.65	%			0.71	%			19.86	%			0.75	%			18.61	%			0.84	%			17.99	%			1.15	%			18.41	%
Commercial real estate			1.92				58.23				1.44				57.94				1.45				56.51				1.52				56.17				1.66				53.33
Consumer			2.51				8.47				2.15				11.57				2.24				12.19				2.21				12.40				2.20				13.07
Commercial business			1.19				12.65				1.78				10.63				1.80				12.69				2.14				13.44				2.53				15.19
Total			1.64				100.00	%			1.42				100.00	%			1.46				100.00	%			1.57				100.00	%			1.77				100.00	%

 

The allocated allowance percentages for all loan categories, except commercial business loans, increased in 2020 primarily because of the current economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The decrease in the allowance percentage for commercial business loans is due to the $33.7 million of PPP loans that are included in this category at December 31, 2020 that are guaranteed by the SBA and have no allocated allowance amount.

 

Allowance for Real Estate Losses

Real estate properties acquired or expected to be acquired through loan foreclosures are initially recorded at fair value less estimated selling costs. Management periodically performs valuations and an allowance for losses is established if the carrying value of a property exceeds its fair value less estimated selling costs. There was no allowance for real estate losses at December 31, 2020 or 2019.

 

Non-performing Assets

Loans are reviewed at least quarterly and if the collectability of any loan is doubtful, it is placed on non-accrual status. Loans are placed on non-accrual status when either principal or interest is 90 days or more past due, unless, in the judgment of management, the loan is well collateralized and in the process of collection. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectability of the loan. Restructured loans include the Bank's troubled debt restructurings (TDRs) that involved forgiving a portion of interest or principal or making a loan at a rate materially less than the market rate to borrowers whose financial condition has deteriorated. Foreclosed and repossessed assets include assets acquired in settlement of loans. Total non-performing assets were $3.3 million at December 31, 2020, an increase of $0.6 million, or 24.7%, from $2.7 million at December 31, 2019. Non-performing loans increased $0.6 million and foreclosed and repossessed assets remained the same between the periods.

 

The following table sets forth the amounts and categories of non-performing assets in the Company’s portfolio:

 

		December 31,
(Dollars in thousands)		2020				2019				2018				2017				2016
Non-performing loans:
Single family		$	502				617				730				949				916
Commercial real estate			1,484				184				1,311				1,364				1,384
Consumer			689				659				489				553				630
Commercial business			9				621				148				278				343
Total			2,684				2,081				2,678				3,144				3,273
Foreclosed and repossessed assets:
Single family			0				166				0				0				0
Commercial real estate			636				414				414				627				611
Consumer			0				0				0				0				16
Total			636				580				414				627				627
Total non-performing assets		$	3,320				2,661				3,092				3,771				3,900
Total as a percentage of total assets			0.37	%			0.34	%			0.43	%			0.52	%			0.57	%
Total non-performing loans		$	2,684			$	2,081			$	2,678			$	3,144			$	3,273
Total as a percentage of total loans receivable, net			0.42	%			0.35	%			0.46	%			0.54	%			0.59	%
Allowance for loan losses to non-performing loans			398.72	%			411.25	%			324.27	%			296.11	%			302.56	%

 

 

Gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $0.2 million, $0.2 million and $0.3 million in 2020, 2019 and 2018, respectively. The amounts that were included in interest income on a cash basis for these loans were $0.1 million for each of the three years.

 

At December 31, 2020, 2019 and 2018, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $1.5 million, $2.5 million and $2.5 million, respectively. Had these loans been performing in accordance with their original terms throughout 2020, 2019 and 2018, the Company would have recorded gross interest income of $0.1 million, $0.2 million and $0.3 million, respectively. During 2020 the amount of interest income received on these loans was not material. During 2019 and 2018, the Company recognized interest income of $0.1 million and $0.2 million, respectively, on these loans.

 

For the loans that were modified in a TDR in 2020, none were classified and performing and $0.3 million were non-performing at December 31, 2020. The decrease in TDRs in 2020 was primarily due to two related commercial loans that had performed according to their restructured terms and met the criteria to be upgraded to non-TDR status during the year. Of the loans that were modified in 2020 and outstanding at December 31, 2020, $0.2 million related to a loan secured by commercial real estate and $0.1 million related to a loan secured by a first mortgage on a single family property.

 

For the loans that were modified in a TDR in 2019, $0.1 million were classified and performing and $0.5 million were non-performing at December 31, 2019. Total TDRs of $2.5 million remained the same at December 31, 2019 when compared to December 31, 2018. During 2019, several single family and retail consumer TDRs paid off and were replaced by new TDRs. Of the loans that were modified in 2019 and outstanding at December 31, 2019, $0.5 million related to first or second mortgages on single-family properties, and the remaining modifications related to other consumer loans.

 

For the loans that were modified in a TDR in 2018, $0.4 million were classified and performing and $1.2 million were non-performing at December 31, 2018. The decrease in TDRs in 2018 related primarily to several retail consumer TDRs that were paid or charged off during the year, as well as one commercial business loan that was charged off. Of the loans that were modified in 2018 and outstanding at December 31, 2018, $1.1 million related to loans secured by commercial real estate, $0.4 million related to first or second mortgages on single family properties and the remaining modifications related to other consumer or commercial business loans.

 

The following table sets forth the amount of TDRs in the Company’s portfolio:

 

		December 31,
(Dollars in thousands)		2020				2019				2018				2017				2016
Single family		$	612				623				636				685				448
Commercial real estate			211				983				1,110				1,210				1,774
Consumer			630				745				522				758				709
Commercial business			25				114				208				391				369
Total TDRs		$	1,478				2,465				2,476				3,044				3,300
TDRs on accrual status		$	442				1,770				1,018				1,129				1,297
TDRs on non-accrual status			1,036				695				1,458				1,915				2,003
Total		$	1,478				2,465				2,476				3,044				3,300

 

This TDR table does not include loan accommodations that were granted during 2020 to borrowers in accordance with the Interagency Statement on Loan Modification and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus or Section 4013 of the CARES Act. See “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements for further information on accommodations that were granted to borrowers in 2020.

 

Liquidity and Capital Resources 

The Company manages its liquidity position so that the funding needs of borrowers and depositors are met in a timely and cost-effective manner. Asset liquidity is the ability to convert assets to cash through the maturity or sale of the asset. Liability liquidity is the ability of the Bank to obtain retail, internet, or brokered deposits or to borrow funds from third parties such as the FHLB or the Federal Reserve Bank of Minneapolis.

 

 

The primary investing activities are the origination of loans and the purchase of securities. Principal and interest payments on loans and securities, along with the proceeds from the sale of loans held for sale, are the primary sources of cash for the Bank. Additional cash can be obtained by selling securities from the available for sale portfolio or by selling loans or mortgage servicing rights.

 

The primary financing activity is the attraction of retail, commercial and internet deposits. The Bank also has the ability to borrow funds from the FHLB or Federal Reserve Bank of Minneapolis based on the collateral value of the loans pledged, subject to applicable borrowing base and collateral requirements. See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to Consolidated Financial Statements for more information on the advances that could be drawn based upon existing collateral levels with the FHLB and the Federal Reserve Bank of Minneapolis. Unpledged securities could also be pledged and used as collateral for additional borrowings with the FHLB or Federal Reserve Bank of Minneapolis.

 

The Bank's most liquid assets are cash and cash equivalents, which consist of short-term highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash and interest-bearing deposits. The level of these assets is dependent on the operating, financing and investing activities during any given period.

 

Cash and cash equivalents for the Company at December 31, 2020 were $86.3 million, an increase of $41.9 million, compared to $44.4 million at December 31, 2019. Net cash provided by operating activities during 2020 was $16.9 million. The Company conducted the following major investing activities during 2020: purchases of securities available for sale and FHLB stock were $97.3 million; principal payments and maturity proceeds received on securities available for sale were $58.3 million; and the proceeds from the sale of premises and other real estate were $0.4 million. Net loans receivable increased $55.1 million and the Company purchased premises and equipment of $0.7 million. Net cash used by investing activities during 2020 was $94.5 million. The Company conducted the following major financing activities during 2020: deposits increased $121.3 million; purchased treasury stock of $1.4 million; customer escrows decreased $0.4 million; and withheld stock of $0.1 million to cover taxes due on vested stock awards. Net cash provided by financing activities was $119.4 million for 2020.

 

The Bank has certificates of deposits from customers with outstanding balances of $76.2 million that mature during 2021. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that deposits that do not renew will be replaced with deposits from other customers or FHLB advances. Proceeds from the sale of securities could also be used to fund unanticipated outflows of deposits.

 

The Bank has deposits of $84.5 million in checking and money market accounts of seven customers that have individual relationship balances greater than $5.0 million. These funds may be withdrawn at any time, however, management anticipates that the majority of these deposits will remain on deposit with the Bank over the next twelve months. If these deposits are withdrawn, it is anticipated that they would be funded with available cash or replaced with deposits from other customers or advances from the FHLB. Proceeds from the sale of securities could also be used to fund unanticipated outflows of deposits.

 

Dividends from the Bank have been the Company’s primary source of cash. The Bank is restricted under applicable federal banking law from paying dividends to the Company without prior notice to and non-objection of the applicable regulator. During 2020, the Bank paid dividends to the Company of $5.0 million and at December 31, 2020, the Company had an available cash balance of $11.0 million.

 

The Company’s primary use of cash is the payment of holding company level expenses including the payment of director and management fees, legal expenses and regulatory costs. The Company may also use cash to repurchase stock or pay any declared dividends. The Company plans to continue to fund its liquidity needs through dividends from the Bank, or if deemed prudent, by obtaining external capital.

 

Contractual Obligations and Commercial Commitments

The Company has certain obligations and commitments to make future payments under existing contracts. See “Note 18 Commitments and Contingencies” in the Notes to Consolidated Financial Statements for further information on the outstanding contractual obligations and commercial commitments at December 31, 2020.

 

 

Regulatory Capital Requirements

The Company and the Bank are 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 (the Company is exempt, pursuant to the Small Bank Holding Company Policy Statement (Policy Statement) described below), including requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a minimum Tier 1 capital requirement, and (iii) set forth rules for calculating risk-weighted assets for purposes of such requirements. The rules 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 FRB amended its Policy Statement, to exempt small bank and savings and loan holding companies with assets less than $3 billion from the above capital requirements. 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 of common equity Tier 1 capital to risk weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk weighted assets and total capital to risk weighted assets.

 

The Bank must maintain a capital conservation buffer of at least 2.50% composed of common equity Tier 1 capital above its minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Management believes that, as of December 31, 2020, 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. See “Note 17 Regulatory Capital” in the Notes to Consolidated Financial Statements for a table that reflects the Bank’s capital compared to these capital requirements.

 

The Company also serves as a source of capital, liquidity and financial support to the Bank. Depending upon the operating performance of the Bank and the Company’s other liquidity and capital needs, the Company may find it prudent, subject to prevailing capital market conditions and other factors, to raise additional capital through issuance of its common stock or other equity securities. Additional capital would potentially permit the Company to implement a strategy of growing Bank assets. Depending on the circumstances, if it were to raise capital, the Company may deploy it to the Bank for general banking purposes, or may retain some or all of it for use by the Company.

 

If the Company raises capital through the issuance of additional shares of common stock or other equity securities, it would dilute the ownership interests of existing stockholders and, if issued at less than the Company’s book value would dilute the per share book value of the Company’s common stock, dilute the Company’s earnings per share and could result in a change in control of the Company and the Bank. New investors may also have rights, preferences and privileges senior to the Company’s current stockholders which may adversely impact the Company’s current stockholders. The Company’s ability to raise additional capital through the issuance of equity securities, if deemed prudent, will depend on, among other factors, conditions in the capital markets at that time, which are outside of the Company’s control, and on the Company’s financial performance and plans. Accordingly, the Company may not be able to raise additional capital, if deemed prudent, on favorable economic terms, or other terms acceptable to it. If the Bank cannot satisfactorily address its capital needs as they arise, the Bank’s ability to maintain or expand its operations, maintain compliance with the regulatory capital requirements, to operate without additional regulatory or other restrictions, and its operating results, could be materially adversely affected.

 

Dividends

The declaration of dividends is subject to, among other things, the Company's financial condition and results of operations, the Bank's compliance with regulatory capital requirements and other regulatory restrictions, tax considerations, industry standards, economic conditions, anticipated asset growth, general business practices and other factors. The Company has not made any dividend payments to common stockholders during the three year period ending December 31, 2020 but will continue to evaluate the best use of the Company’s capital based on the factors identified above.

 

 

Under applicable federal banking laws and regulations, no dividends can be declared or paid by the Bank to the Company without notice to and non-objection from the applicable banking regulator. There is no assurance that the Bank and the Company would satisfy the applicable regulatory requirements necessary to effect any such dividends. The payment of dividends by the Company is dependent upon the Company having adequate cash or other assets that can be converted to cash to pay dividends to its stockholders. Further, any determination as to whether, when and in what amount to declare and pay any such dividends would be subject to the discretion of the board of directors of both the Bank and the Company and would depend on numerous factors including the results of operations, financial conditions, asset growth plans, planned stock repurchases, and the cash flow requirements of the Company and the Bank.

 

New Accounting Pronouncements

“Note 1 Description of the Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements discusses recently issued accounting pronouncements that the Company will be required to adopt. Also discussed is management’s expectation of the impact these new accounting pronouncements will have on the Company’s consolidated financial statements.

 

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure.

 

The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located in the following Asset/Liability Management section of this Management’s Discussion and Analysis discloses the Company's projected changes in net interest income based upon immediate interest rate changes called rate shocks. The Company utilizes a model that uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities under different interest rate changes.

 

The following table discloses the projected changes in market value to the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on December 31, 2020.

 

(Dollars in thousands)		Market Value
Basis point change in interest rates			-100				0			+100				+200
Total market-risk sensitive assets		$	905,104				901,316				885,247				867,615
Total market-risk sensitive liabilities			850,665				800,961				757,987				720,856
Off-balance sheet financial instruments			685				0				1,128				2,176
Net market risk		$	53,754				100,355				126,132				144,583
Percentage change from current market value			(46.44)	%			0.00	%			25.69	%			44.07	%

 

The preceding table was prepared utilizing the following assumptions (the Model Assumptions) regarding prepayment and decay ratios that were determined by management based upon its review of historical prepayment speeds and decay rates. Fixed rate loans were assumed to prepay at annual rates of between 4% and 59%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 5% and 52%, 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. All loan prepayments vary based on the note rate and period to maturity of the individual loans. Certificate accounts were assumed not to be withdrawn until maturity. Retail money market demand accounts (MMDAs) and passbook accounts were assumed to decay at annual rates of 17% and 9%, respectively. Retail non-interest and interest-bearing checking accounts were assumed to decay at annual rates of 19% and 6%, respectively. Commercial non-interest and interest-bearing checking accounts were assumed to decay at annual rates of 16% and 22%, respectively. Commercial MMDAs were assumed to decay at annual rates of between 13% and 25%.

 

 

Certain shortcomings are inherent in the method of analysis presented in the foregoing 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 that 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 or floors could be different from the values calculated 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 increase in interest rates.

 

Asset/Liability Management

The Company's management reviews the impact that changing interest rates will have on the net interest income projected for the twelve months following December 31, 2020 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income during the twelve month period ending December 31, 2021 of immediate interest rate changes called rate shocks:

 

(Dollars in thousands)
Rate Shock in Basis Points			Net Interest Change				Percent Change
+200			$	3,007				10.51	%
+100				1,441				5.04
0				0				0.00
-100				(1,582	)			(5.53	)

 

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

 

In managing the Company’s exposure to changes in interest rates, management closely monitors interest rate risk. The Company has an Asset/Liability Committee that meets frequently to discuss changes in the interest rate risk position and projected profitability. The Committee makes adjustments to the asset/liability position of the Bank that are reviewed by the Board of Directors of the Bank. This Committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions as intended to assure attainment of the Bank's objectives in an effective manner. In addition, each quarter the Board reviews the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios.

 

In managing its asset/liability composition, the Bank may, at times, depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, in certain situations, provide high enough returns to justify the increased exposure to sudden and unexpected changes in interest rates.

 

To the extent consistent with its interest rate spread objectives, the Bank attempts to manage its interest rate risk and has taken a number of steps to structure its balance sheet to better match the maturities of its 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 less than five years.

 

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. See “Note 18 Commitments and Contingencies” in the Notes to Consolidated Financial Statements for additional information on loan commitments. Management believes that the Company has sufficient liquidity to satisfy the resulting off-balance sheet obligations.

 

 

Consolidated Balance Sheets

 

 

See accompanying notes to consolidated financial statements.

 

 

Consolidated Statements of Comprehensive Income

 

 

See accompanying notes to consolidated financial statements.

 

 

Consolidated Statements of Stockholders’ Equity

 

 

See accompanying notes to consolidated financial statements.

 

 

Consolidated Statements of Cash Flows

 

See accompanying notes to consolidated financial statements.

 

 

Notes to Consolidated Financial Statements

---

December 31, 2020, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

To the Stockholders and the Board of Directors of HMN Financial, Inc.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of HMN Financial, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for loan losses

 

As described in Notes 1 and 6 to the financial statements, the Company’s allowance for loan losses is a valuation account that reflects the Company’s estimate of incurred losses in its loan portfolio to the extent they are both probable and reasonable to estimate. The allowance for loan losses was $10.7 million at December 31, 2020, which consists of two components (i) specific reserves based on probable losses on specific loans (specific reserves), representing $0.2 million, and (ii) a general allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors, both internal and external to the Company (general reserves), representing $10.5 million. The general component of the allowance for loan losses is based on a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, risk ratings, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area and national economic factors. The qualitative adjustment for the general reserve includes management’s consideration of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio.

 

The qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. Management’s identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. We identified the estimate of the qualitative adjustment of the general reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which required especially subjective auditor judgment.

 

The primary procedures we performed to address this critical audit matter included:

 

●

Performing substantive testing, including evaluating management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, including:

o

Evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the information gathered.

o

Assessing the accuracy of management’s risk ratings for commercial real estate and commercial business loans. Our evaluation considered evidence from management’s credit presentations and annual reviews, including review of borrower financial information, collateral values, payment history, and other credit specific information.

 

 

 

o

Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data.

o

Assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period.

o

Analytically evaluating the qualitative adjustment in the current year compared to prior year for directional consistency and reasonableness.

o

Testing the calculations used by management to translate the assumptions and key factors into the calculation.

 

 

 

CliftonLarsonAllen LLP

 

We have served as the Company’s auditor since 2014.

 

Minneapolis, Minnesota

March 5, 2021

 

 

Other Financial Data

 

The following tables set forth certain information as to the Bank’s FHLB advances and other borrowings.

 

		Year Ended December 31,
(Dollars in thousands)		2020				2019				2018
Maximum Balance:
FHLB advances and other borrowings		$	2				13,800				6,800
FHLB short-term advances and other borrowings			2				13,800				6,800
Average Balance:
FHLB advances and other borrowings			0				287				140
FHLB short-term advances and other borrowings			0				287				140

 

See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to Consolidated Financial Statements for more information on the Bank’s FHLB advances and other borrowings.

 

 

Selected Quarterly Financial Data 

 

(Dollars in thousands, except per share data)		December 31, 2020				September 30, 2020				June 30, 2020
Selected Operations Data (3 months ended):
Interest income		$	8,283				7,949				7,883
Interest expense			558				656				745
Net interest income			7,725				7,293				7,138
Provision for loan losses			1,151				770				318
Net interest income after provision for loan losses			6,574				6,523				6,820
Non-interest income:
Fees and service charges			741				753				669
Loan servicing fees			380				347				297
Gain on sales of loans			3,028				3,005				2,364
Other			344				291				264
Total non-interest income			4,493				4,396				3,594
Non-interest expense:
Compensation and benefits			3,884				3,916				3,799
Occupancy and equipment			1,094				1,101				1,111
Data processing			351				334				321
Professional services			230				241				447
Other			1,184				1,004				975
Total non-interest expense			6,743				6,596				6,653
Income before income tax expense			4,324				4,323				3,761
Income tax expense			1,199				1,222				1,070
Net income		$	3,125				3,101				2,691
Basic earnings per common share		$	0.68				0.67				0.58
Diluted earnings per common share		$	0.67				0.67				0.58
Financial Ratios:
Return on average assets(1)			1.37	%			1.39	%			1.29	%
Return on average common equity(1)			12.18				12.50				11.31
Average equity to average assets			11.43				11.50				11.72
Net interest margin(1)(2)			3.51				3.40				3.57

 

(Dollars in thousands)
Selected Financial Condition Data (end of period):
Total assets		$	909,580				898,452				862,783
Securities available for sale:
Mortgage-backed and related securities			101,464				71,458				50,593
Other marketable securities			46,626				47,106				47,200
Loans held for sale			6,186				7,225				5,167
Loans receivable, net			642,630				670,297				668,432
Deposits			795,204				787,023				752,759
Stockholders’ equity			103,252				101,143				98,115

 

⁽¹⁾ Annualized

⁽²⁾ Net interest income divided by average interest-earning assets

 

 

	March 31, 2020				December 31, 2019				September 30, 2019				June 30, 2019				March 31, 2019
		7,844				7,861				7,998				8,299				7,732
		892				914				906				829				690
		6,952				6,947				7,092				7,470				7,042
		460				236				(420	)			(1,059	)			27
		6,492				6,711				7,512				8,529				7,015
		714				795				820				785				700
		332				321				324				318				315
		1,134				1,106				845				611				379
		291				294				238				307				297
		2,471				2,516				2,227				2,021				1,691
		4,047				4,163				3,849				3,737				3,910
		1,123				1,158				1,142				1,081				1,061
		308				338				319				305				301
		487				492				428				381				272
		1,036				1,193				1,009				1,063				903
		7,001				7,344				6,747				6,567				6,447
		1,962				1,883				2,992				3,983				2,259
		577				647				916				1,121				640
		1,385				1,236				2,076				2,862				1,619
		0.30				0.27				0.45				0.62				0.35
		0.30				0.27				0.45				0.62				0.35
		0.72	%			0.64	%			1.11	%			1.60	%			0.91	%
		5.93				5.29				9.10				13.10				7.67
		12.07				12.06				12.07				12.01				11.82
		3.76				3.76				3.97				4.35				4.11
		784,200				777,639				763,228				722,767				722,745
		53,687				54,851				22,187				7,435				7,743
		47,252				52,741				62,665				72,469				72,044
		4,884				3,606				7,819				5,912				3,292
		617,645				596,392				583,102				595,757				599,462
		677,519				673,870				659,608				623,510				626,592
		95,035				92,648				91,190				88,811				85,350

 

 

Common Stock Information

 

The common stock of the Company is listed on the Nasdaq Stock Market (Nasdaq) under the symbol HMNF. As of December 31, 2020, there were 451 stockholders of record and 946 estimated beneficial stockholders. The Company has not paid a dividend on its common stock during the two year period ending December 31, 2020. See “Liquidity and Capital Resources – Dividends” in the “Management Discussion and Analysis” section of this annual report for a description of restrictions on the ability of the Company and the Bank to pay dividends.

The following graph and table compare the total cumulative stockholders’ return on the Company’s common stock to the Nasdaq U.S. Stock Index (“Nasdaq Composite”), which includes all Nasdaq traded stocks of U.S. companies, and the Nasdaq Bank Index. The graph and table assume that $100 was invested on December 31, 2015 and that any dividends were reinvested.

 

 

Index		12/31/15				12/31/16				12/31/17				12/31/18				12/31/19				12/31/20
HMN Financial, Inc.		$	100.00			$	151.12			$	165.37			$	169.87			$	181.90			$	148.92
Nasdaq Composite		$	100.00			$	108.87			$	141.13			$	137.12			$	187.44			$	271.64
Nasdaq Bank		$	100.00			$	137.14			$	145.21			$	120.76			$	150.06			$	138.59

 

 

HMN Financial, Inc. 1016 Civic Center Drive NW Rochester, MN 55901 (507) 535-1200   Annual Meeting The annual meeting of shareholders will be held virtually on Tuesday, April 27, 2021 at 10:00 a.m. (Central Time).   Legal Counsel Faegre Drinker Biddle & Reath LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-3901   Independent Registered Public Accounting Firm CliftonLarsonAllen LLP 220 South Sixth Street, Suite 300 Minneapolis, MN 55402-1436   Investor Information and Form 10-K HMN’s Form 10-K, filed with the Securities and Exchange Commission, is available without charge upon written request from: HMN Financial, Inc. Attn: Cindy Hamlin, Investor Relations 1016 Civic Center Drive NW Rochester, MN 55901 or at www.hmnf.com   Transfer Agent and Registrar Inquiries regarding change of address, transfer requirements, and lost certificates should be directed to HMN’s transfer agent: Equiniti Trust Company EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120 www.shareowneronline.com (800) 468-9716		Directors Dr. Wendy S. Shannon Chair of the Board HMN and Home Federal Savings Bank Educational consultant, PTECH in Minnesota, Former Assistant Professor, Winona State University   Allen J. Berning Chief Executive Officer Ambient Clinical Analytics, a provider of clinical decision support products   Sequoya S. Borgman Borgman Capital LLC, Founder and Managing Director Michael A. Bue Retired President and Chief Executive Officer Marquette Bank Rochester   Bradley C. Krehbiel President and Chief Executive Officer HMN and Home Federal Savings Bank   Bernard R. Nigon Retired Audit Partner with RSM US LLP (formerly McGladrey & Pullen, LLP)   Dr. Hugh C. Smith Retired Professor of Medicine, Mayo Clinic College of Medicine and Consultant in Cardiovascular Division, Mayo Clinic Mark E. Utz Attorney at law, Wendland Utz, Ltd.   Hans K. Zietlow Former Director of Real Estate for Kwik Trip, Inc.     Executive Officers Who Are Not Directors Jon J. Eberle Senior Vice President, Chief Financial Officer and Treasurer of HMN and Executive Vice President, Chief Financial Officer and Treasurer of Home Federal Savings Bank   Lawrence D. McGraw Executive Vice President and Chief Operating Officer Home Federal Savings Bank		Eagan 2805 Dodd Road, Suite 160 Eagan, MN 55121 (651) 405-2000   Kasson 502 South Mantorville Avenue Kasson, MN 55944 (507) 634-7022   La Crescent 208 South Walnut La Crescent, MN 55947 (507) 895-9200   Marshalltown 303 West Main Street Marshalltown, IA 50158 (641) 754-6198   Owatonna 1015 West Frontage Road, Suite 100 Owatonna, MN 55060 (507) 413-6420   Pewaukee 1870 Meadow Lane Pewaukee, WI 53072 (262) 337-9511   Rochester 1201 South Broadway Rochester, MN 55904 (507) 536-2416   1016 Civic Center Drive NW Rochester, MN 55901 (507) 535-1309   100 1st Avenue Bldg., Suite 200 Rochester, MN 55902 (507) 280-7250   2048 Superior Drive NW, Suite 400 Rochester, MN 55901 (507) 226-0800   Spring Valley 715 North Broadway Spring Valley, MN 55975 (507) 346-9709
		Branch Offices of the Bank Albert Lea 143 West Clark Street Albert Lea, MN 56007 (507) 379-2551		Winona 175 Center Street Winona, MN 55987 (507) 453-6460
		Austin 201 Oakland Avenue West Austin, MN 55912 (507) 434-2500		Loan Production Offices Sartell 50 14th Ave E, Suite 100 Sartell, MN 56377 (320) 654-4020