• HMN Financial, Inc. Announces Second Quarter Results

    ソース: Nasdaq GlobeNewswire / 22 7 2024 18:00:49   America/Chicago

    Second Quarter Summary

    • Net income of $1.0 million, down $0.4 million, from $1.4 million for second quarter of 2023
    • Diluted earnings per share of $0.22, down $0.10, from $0.32 for second quarter of 2023
    • Net interest income of $7.5 million, down $0.2 million, from $7.7 million for second quarter of 2023
    • Gain on sales of loans of $0.6 million, up $0.3 million, from $0.3 million for second quarter of 2023
    • Net interest margin of 2.70%, down 20 basis points, from 2.90% for second quarter of 2023
    • Goodwill impairment of $0.8 million was recorded in the second quarter of 2024
    • As previously announced, on May 14, 2024, we entered into a definitive Agreement and Plan of Merger to which Alerus Financial Corporation (Nasdaq:ALRS) will acquire HMN Financial, Inc. in an all-stock merger. The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions, including receipt of required regulatory and stockholder approvals.
    • Merger related expenses of $0.5 million were recorded in the second quarter of 2024

    Year to Date Summary

    • Net income of $2.3 million, down $0.8 million, from $3.1 million for first six months of 2023
    • Diluted earnings per share of $0.52, down $0.18, from $0.70 for first six months of 2023
    • Net interest income of $14.7 million, down $1.1 million from $15.8 million for first six months of 2023
    • Gain on sales of loans of $0.9 million, up $0.3 million, from $0.6 million for first six months of 2023
    • Net interest margin of 2.67%, down 33 basis points, from 3.00% for first six months of 2023
    Net Income Summary Three months ended  Six months ended 
      June 30,  June 30, 
    (Dollars in thousands, except per share amounts) 2024  2023  2024  2023 
    Net income$970  1,421 $2,288  3,055 
    Diluted earnings per share 0.22  0.32  0.52  0.70 
    Return on average assets (annualized) 0.34% 0.52% 0.40% 0.56%
    Return on average equity (annualized) 3.18% 4.81% 3.77% 5.22%
    Book value per share$24.71  22.76 $24.71  22.76 


    Amounts Excluding Merger Related Expenses (1)    
      Three months ended  Six months ended 
      June 30,  June 30, 
    (Dollars in thousands, except per share amounts) 2024  2024 
    Adjusted net income$1,334 $2,652 
    Adjusted diluted earnings per share 0.30  0.61 
    Adjusted return on average assets (annualized) 0.47% 0.46%
    Adjusted return on average equity (annualized) 4.37% 4.37%
    Adjusted book value per share$24.79 $24.79 

    (1) Amounts excluding merger related expenses for net income, diluted earnings per share, return on average assets, return on average equity, and book value per share are non-GAAP financial measures. Please see Item VIII. in the Selected Consolidated Information for disclosure and reconciliation of non-GAAP financial measures.

    ROCHESTER, Minn., July 22, 2024 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $1.1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.0 million for the second quarter of 2024, a decrease of $0.4 million compared to net income of $1.4 million for the second quarter of 2023. Diluted earnings per share for the second quarter of 2024 was $0.22, a decrease of $0.10 from diluted earnings per share of $0.32 for the second quarter of 2023. The decrease in net income between the periods was primarily because of a $0.8 million increase in other expenses due to a goodwill impairment that was recorded, a $0.5 million increase in professionals services due to merger related expenses, and a $0.2 million decrease in net interest income because of a decline in the net interest margin as a result of funding costs increasing faster than the yields on interest earning assets. These decreases in net income were partially offset by a $0.6 million decrease in the provision for credit losses due primarily to perceived improvements in the forecasted economic environment, a $0.3 million increase in the gain on sales of loans due to an increase in the amount of originated loans that were sold, and a $0.2 million reduction in income tax expense between the periods as a result of the reduced pretax income.

    President’s Statement
    “Maintaining our net interest margin continues to be a challenge in the current interest rate environment as our funding costs continue to increase at a faster rate than the yields earned on our earning assets,” said Bradley Krehbiel, President and Chief Executive Officer of HMN. “We are, however, encouraged by the increase in our net interest margin from the prior quarter and will continue to focus our effort on increasing our net interest margin further by expanding our core customer deposit relationships.”

    Second Quarter Results
    Net Interest Income
    Net interest income was $7.5 million for the second quarter of 2024, a decrease of $0.2 million, or 3.1%, compared to $7.7 million for the second quarter of 2023. Interest income was $12.6 million for the second quarter of 2024, an increase of $2.1 million, or 19.8%, from $10.5 million for the second quarter of 2023. Interest income increased primarily because of the increase in the average yield earned on interest-earning assets between the periods and also because of the $47.3 million increase in the average interest-earning assets. The average yield earned on interest-earning assets was 4.54% for the second quarter of 2024, an increase of 60 basis points from 3.94% for the second quarter of 2023. The increase in the average yield is primarily related to the increase in market interest rates as a result of the 3.75% increase in the prime interest rate over the past two years.

    Interest expense was $5.1 million for the second quarter of 2024, an increase of $2.3 million, or 83.7%, compared to $2.8 million for the second quarter of 2023. Interest expense increased primarily because of the increase in the average interest rate paid on interest-bearing liabilities between the periods. Interest expense also increased because of the $40.8 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 2.01% for the second quarter of 2024, an increase of 88 basis points from 1.13% for the second quarter of 2023. The increase in the average rate paid is primarily related to the change in the types of funding sources as more brokered deposits and certificates of deposits were used as funding sources in the second quarter of 2024 than were used in the second quarter of 2023. These funding sources generally have higher interest rates than traditional checking and money market accounts. The increase in market interest rates as a result of the 3.75% increase in the federal funds rate over the past two years also contributed to the higher funding costs in the second quarter of 2024 when compared to the same period in 2023. Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2024 was 2.70%, a decrease of 20 basis points, compared to 2.90% for the second quarter of 2023. The decrease in the net interest margin is primarily because the increase in the average rate paid on interest-bearing liabilities and non-interest bearing deposits exceeded the increase in the average yield earned on interest-earning assets between the periods.

    A summary of the Company’s net interest margin for the three- and six-month periods ended June 30, 2024 and 2023 is as follows:

      For the three-month period ended 
      June 30, 2024  June 30, 2023 
    (Dollars in thousands) Average
    Outstanding
    Balance    		 Interest
    Earned/
    Paid    		 Yield/
    Rate    		  Average
    Outstanding
    Balance    		 Interest
    Earned/
    Paid    		 Yield/
    Rate    		 
    Interest-earning assets:              
    Securities available for sale$221,664 1,031 1.87%$259,187 800 1.24%
    Loans held for sale 2,944 50 6.87  1,872 29 6.24 
    Single family loans, net 265,291 2,958 4.48  225,065 2,195 3.91 
    Commercial loans, net 551,691 7,379 5.38  527,900 6,663 5.06 
    Consumer loans, net 41,246 717 6.99  47,518 732 6.18 
    Other 32,668 445 5.47  6,661 78 4.70 
    Total interest-earning assets 1,115,504 12,580 4.54  1,068,203 10,497 3.94 
                   
    Interest-bearing liabilities:              
    Checking accounts 143,572 300 0.84  169,870 253 0.60 
    Savings accounts 104,100 28 0.11  115,658 28 0.10 
    Money market accounts 279,382 1,707 2.46  267,075 1,049 1.58 
    Retail certificate accounts 153,871 1,626 4.25  89,436 474 2.13 
    Wholesale certificate accounts 111,061 1,409 5.10  62,978 745 4.74 
    Customer escrows 0 0 0.00  4,737 23 2.00 
    Advances and other borrowings 1,266 18 5.63  14,419 197 5.48 
    Total interest-bearing liabilities 793,252      724,173     
    Non-interest checking 224,385      252,008     
    Other non-interest bearing liabilities 2,397      3,043     
    Total interest-bearing liabilities and non-interest bearing deposits$1,020,034 5,088 2.01 $979,224 2,769 1.13 
    Net interest income  $7,492     $7,728   
    Net interest rate spread     2.53%     2.81%
    Net interest margin     2.70%     2.90%
                   
      For the six-month period ended 
      June 30, 2024  June 30, 2023 
    (Dollars in thousands) Average
    Outstanding
    Balance    		 Interest
    Earned/
    Paid    		 Yield/
    Rate    		  Average
    Outstanding
    Balance    		 Interest
    Earned/
    Paid    		 Yield/
    Rate    		 
    Interest-earning assets:              
    Securities available for sale$225,783 1,954 1.74%$263,909 1,595 1.22%
    Loans held for sale 2,398 79 6.62  1,546 47 6.16 
    Single family loans, net 265,041 5,835 4.43  216,643 4,146 3.86 
    Commercial loans, net 546,419 14,450 5.32  525,425 13,036 5.00 
    Consumer loans, net 41,374 1,426 6.93  46,655 1,393 6.02 
    Other 30,673 835 5.47  8,726 193 4.46 
    Total interest-earning assets 1,111,688 24,579 4.45  1,062,904 20,410 3.87 
                   
    Interest-bearing liabilities:              
    Checking accounts 144,210 606 0.84  165,811 441 0.54 
    Savings accounts 105,206 56 0.11  118,185 54 0.09 
    Money market accounts 275,698 3,288 2.40  262,944 1,704 1.31 
    Retail certificate accounts 144,032 2,975 4.15  82,725 697 1.70 
    Wholesale certificate accounts 113,742 2,885 5.10  62,018 1,456 4.73 
    Customer escrows 0 0 0.00  5,560 55 2.00 
    Advances and other borrowings 748 21 5.64  7,856 212 5.44 
    Total interest-bearing liabilities 783,636      705,099     
    Non-interest checking 231,357      266,989     
    Other non-interest bearing liabilities 2,648      2,735     
    Total interest-bearing liabilities and non-interest bearing deposits$1,017,641 9,831 1.94 $974,823 4,619 0.96 
    Net interest income  $14,748     $15,791   
    Net interest rate spread     2.51%     2.91%
    Net interest margin     2.67%     3.00%
                   


    Provision for Credit Losses
    The provision for credit losses was ($0.3) million for the second quarter of 2024, a decrease of $0.6 million compared to $0.3 million for the second quarter of 2023. The provision for credit losses decreased as a result of the reduction in the required qualitative reserves due primarily to perceived improvements in the forecasted economic conditions. These reductions were partially offset by an increase in the provision as a result of an increase in the allowance for credit losses attributable to loan growth.

    The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluations. The collective reserve amount is assessed based on the size and risk characteristics of the various portfolio segments, past loss history, and other adjustments determined to have a potential impact on future credit losses.

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

      Three months ended June 30
    (Dollars in thousands)  2024  2023 
    Balance at March 31,$11,586  11,342 
    Provision (307) 200 
    Charge offs:    
    Consumer (8) (27)
    Commercial business (9) 0 
    Recoveries 30  2 
    Balance at June 30,$11,292  11,517 
         
    Allocated to:    
    Collective allowance$10,884  11,345 
    Individual allowance 408  172 
     $11,292  11,517 
         


    The following table presents the components of the provision for credit losses for the second quarter of 2024 and 2023.

      Three months ended June 30,
    (Dollars in thousands) 2024  2023


    Provision for credit losses on:    		    
    Loans$(307) 200
    Unfunded commitments 1  56
    Total$(306) 256
         


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

      June 30,  March 31, 
    (Dollars in thousands)  2024  2024 
    Non-performing loans:      
    Single family$590 $742 
    Commercial real estate 1,025  462 
    Consumer 320  334 
    Commercial business 1,255  1,262 
    Total non-performing assets$3,190 $2,800 
    Total as a percentage of total assets 0.29% 0.24%
    Total as a percentage of total loans receivable 0.36% 0.32%
    Allowance for credit losses to non-performing loans 353.92% 413.78%
           
    Delinquency data:      
    Delinquencies (1)      
    30+ days$3,198 $1,632 
    90+ days 0  0 
    Delinquencies as a percentage of loan portfolio (1)      
    30+ days 0.36% 0.19%
    90+ days 0.00% 0.00%
    (1) Excludes non-accrual loans.      


    Non-Interest Income and Expense
    Non-interest income was $2.2 million for the second quarter of 2024, an increase of $0.2 million, or 12.0%, from $2.0 million for the second quarter of 2023. Gain on sales of loans increased $0.3 million between the periods because of an increase in single family loan sales due primarily to an increase in the amount of originated mortgage loans that were sold. Other non-interest income increased slightly due primarily to an increase in the revenue earned on the sales of uninsured investment products between the periods. Fees and service charges decreased $0.1 million between the periods due primarily to a decrease in overdraft fees collected as a result of changes to the Company’s overdraft policy that were implemented in the first quarter of 2024. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others as more serviced loans were paid off than were added to the servicing portfolio during the period.

    Non-interest expense was $8.7 million for the second quarter of 2024, an increase of $1.2 million, or 16.2%, from $7.5 million for the second quarter of 2023. Other non-interest expense increased $0.8 million primarily because there was an impairment of goodwill that was recorded during the quarter. Professional services increased $0.5 million between the periods primarily because of an increase in legal, accounting, and other professional services expenses related to the pending merger. The Company expects to incur additional merger related costs through the closing of the pending merger with Alerus. Data processing expense increased slightly due to an increase in debit card processing expenses between the periods. These increases were partially offset by a slight decrease in compensation and benefits expense primarily because of a decrease in the number of employees between the periods. Occupancy and equipment expense decreased slightly between the periods due primarily to a decrease in building expenses.

    Income tax expense was $0.4 million for the second quarter of 2024, a decrease of $0.2 million from $0.6 million for the second quarter of 2023. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

    Return on Assets and Equity
    Return on average assets (annualized) for the second quarter of 2024 was 0.34%, compared to 0.52% for the second quarter of 2023. Return on average equity (annualized) was 3.18% for the second quarter of 2024, compared to 4.81% for the same period in 2023. Book value per common share at June 30, 2024 was $24.71, compared to $22.76 at June 30, 2023.

    Six-Month Period Results

    Net Income
    Net income was $2.3 million for the six-month period ended June 30, 2024, a decrease of $0.8 million, or 25.1%, compared to net income of $3.1 million for the six-month period ended June 30, 2023. Diluted earnings per share for the six-month period ended June 30, 2024 was $0.52, a decrease of $0.18 per share compared to diluted earnings per share of $0.70 for the same period in 2023. The decrease in net income between the periods was primarily because of a $0.8 million increase in other expenses due to an impairment of goodwill that was recorded, a $0.5 million increase in professional services due to merger related expenses, and a $1.1 million decrease in net interest income because of a decline in the net interest margin as a result of funding costs increasing faster than the yields on interest earning assets. These decreases in net income were partially offset by a $0.7 million decrease in the provision for credit losses due primarily to perceived improvements in the forecasted economic environment, a $0.3 million increase in the gain on sales of loans due to an increase in the amount of loans that were sold, and a $0.3 million reduction in income tax expense between the periods as a result of the reduced pretax income.

    Net Interest Income
    Net interest income was $14.7 million for the first six months of 2024, a decrease of $1.1 million, or 6.6%, compared to $15.8 million for the same period of 2023. Interest income was $24.6 million for the first six months of 2024, an increase of $4.2 million, or 20.4%, from $20.4 million for the first six months of 2023. Interest income increased primarily because of the increase in the average yield earned on interest-earning assets between the periods and also because of the $48.8 million increase in the average interest-earning assets. The average yield earned on interest-earning assets was 4.45% for the first six months of 2024, an increase of 58 basis points from 3.87% for the same period of 2023. The increase in the average yield is primarily related to the increase in market interest rates as a result of the 3.75% increase in the prime interest rate over the past two years.

    Interest expense was $9.8 million for the first six months of 2024, an increase of $5.2 million, or 112.8%, compared to $4.6 million for the same period of 2023. Interest expense increased primarily because of the increase in the average interest rate paid on interest-bearing liabilities between the periods. Interest expense also increased because of the $42.8 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 1.94% for the first six months of 2024, an increase of 98 basis points from 0.96% for the first six months of 2023. The increase in the average rate paid is primarily related to the change in the types of funding sources as more brokered deposits and certificates of deposits were used as funding sources in the first six months of 2024 than were used in the same period of 2023. These funding sources generally have higher interest rates than traditional checking and money market accounts. The increase in market interest rates as a result of the 3.75% increase in the federal funds rate over the past two years also contributed to the higher funding costs in the first six months of 2024 when compared to the same period in 2023. Net interest margin (net interest income divided by average interest-earning assets) for the first six months of 2024 was 2.67%, a decrease of 33 basis points, compared to 3.00% for the first six months of 2023. The decrease in the net interest margin is primarily because the increase in the average rate paid on interest-bearing liabilities and non-interest bearing deposits exceeded the increase in the average yield earned on interest-earning assets between the periods.

    Provision for Credit Losses
    The provision for credit losses was ($0.5) million in the first six months of 2024, a decrease of $0.7 million compared to $0.2 million for the first six months of 2023. The provision for credit losses decreased as a result of the reduction in the required qualitative reserves due primarily to perceived improvements in the forecasted economic conditions. These reductions were partially offset by an increase in the provision as a result of an increase in the allowance for credit losses attributable to loan growth.

    The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluations. The collective reserve amount is assessed based on the size and risk characteristics of the various portfolio segments, past loss history, and other adjustments determined to have a potential impact on future credit losses.

    A reconciliation of the Company’s allowance for credit losses for the six-month periods ending June 30, 2024 and 2023 is summarized as follows:

      Six months ended June 30,
    (Dollars in thousands)  2024  2023 
    Balance at January 1,$11,824  10,277 
    Adoption of Accounting Standard Update (ASU) 2016-13 0  1,070 
    Provision (515) 168 
    Charge offs:    
    Single family (30) 0 
    Consumer (8) (27)
    Commercial business (9) 0 
    Recoveries 30  29 
    Balance at June 30,$11,292  11,517 
         


    On January 1, 2023, the Company adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The transition to this ASU resulted in a cumulative-effect adjustment to the allowance for credit losses of $1.1 million, an increase in deferred tax assets of $0.3 million, and a decrease to retained earnings of $0.8 million as of the adoption date. In addition, a liability of $0.1 million was established for projected future losses on unfunded commitments on outstanding lines of credit upon adoption. The projected liability for unfunded commitments did not change during the first six months of 2024 and increased $80,000 in the first six months of 2023. The respective provisions for credit losses reflects these changes.

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

      Six months ended June 30,
    (Dollars in thousands) 2024  2023
    Provision for credit losses on:    
    Loans$(515) 168
    Unfunded commitments 0  80
    Total$(515) 248
         


    The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the most recently completed quarter and December 31, 2023.

      June 30,  December 31, 
    (Dollars in thousands)  2024  2023 
    Non-performing loans:      
    Single family$590 $762 
    Commercial real estate 1,025  493 
    Consumer 320  376 
    Commercial business 1,255  2,187 
    Total non-performing assets$3,190 $3,818 
    Total as a percentage of total assets 0.29% 0.34%
    Total as a percentage of total loans receivable 0.36% 0.44%
    Allowance for credit losses to non-performing loans 353.92% 309.69%
           
    Delinquency data:      
    Delinquencies (1)      
    30+ days$3,198 $715 
    90+ days 0  0 
    Delinquencies as a percentage of loan portfolio (1)      
    30+ days 0.36% 0.08%
    90+ days 0.00% 0.00%
    (1) Excludes non-accrual loans.      


    Non-Interest Income and Expense
    Non-interest income was $4.1 million for the first six months of 2024, an increase of $0.2 million, or 5.5%, from $3.9 million for the first six months of 2023. Gain on sales of loans increased $0.3 million between the periods because of an increase in single family loan sales due primarily to an increase in the amount of originated mortgage loans that were sold. Other non-interest income increased $0.1 million due primarily to an increase in the revenue earned on the sales of uninsured investment products between the periods. These increases in net income were partially offset by a $0.1 million decrease in fees and service charges between the periods due primarily to a decrease in overdraft fees collected as a result of changes to the Company’s overdraft policy that were implemented in the first quarter of 2024. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others as more serviced loans were paid off than were added to the servicing portfolio during the period.

    Non-interest expense was $16.2 million for the first six months of 2024, an increase of $1.0 million, or 7.0%, from $15.2 million for the first six months of 2023. Other non-interest expense increased $0.7 million primarily because a goodwill impairment was recorded in the second quarter. Professional services increased $0.5 million between the periods primarily because of an increase in legal, accounting, and other professional services expenses related to the pending merger. The Company expects to incur additional merger related costs through the closing of the pending merger with Alerus. Data processing expense increased $0.1 million due to an increase in debit card processing expenses between the periods. These increases were partially offset by a $0.1 million decrease in compensation and benefits expense primarily because of decrease in the number of employees between the periods. Occupancy and equipment expense decreased $0.1 million between the periods due primarily to a decrease in building expenses.

    Income tax expense was $0.9 million for the first six months of 2024, a decrease of $0.3 million from $1.2 million for the first six months of 2023. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

    Return on Assets and Equity
    Return on average assets (annualized) for the first six months of 2024 was 0.40%, compared to 0.56% for the first six months of 2023. Return on average equity (annualized) was 3.77% for the first six months of 2024, compared to 5.22% for the same period in 2023. Book value per common share at June 30, 2024 was $24.71, compared to $22.76 at June 30, 2023.

    General Information
    HMN Financial, Inc. and the 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 located in La Crosse, Wisconsin.

    Safe Harbor Statement
    This press release may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “anticipate,” “continue,” “could,” “expect,” “future,” “may,” “optimistic”, “project” and “will,” or similar statements or variations of such terms and include, but are not limited to, those relating to: the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period; the risk that integration of HMN’s operations with those of Alerus will be materially delayed or will be more costly or difficult than expected; the parties’ inability to meet expectations regarding the timing of the proposed merger; changes to tax legislation and their potential effects on the accounting for the proposed merger; the inability to complete the proposed merger due to the failure of HMN’s or Alerus’ stockholders to adopt the merger agreement, or the failure of Alerus’ stockholders to approve the issuance of Alerus common stock in connection with the merger; the failure to satisfy other conditions to completion of the proposed merger, including receipt of required regulatory and other approvals; the failure of the proposed merger to close for any other reason; diversion of management’s attention from ongoing business operations and opportunities due to the proposed merger; the challenges of integrating and retaining key employees; the effect of the announcement of the proposed merger on HMN’s, Alerus’ or the combined company’s respective customer and employee relationships and operating results; the possibility that the proposed merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; the amount HMN’s stockholders’ equity as of the closing date of the proposed merger and any potential downward adjustment in the exchange ratio; the dilution caused by Alerus’ issuance of additional shares of Alerus common stock in connection with the proposed merger; enacted and expected changes to the federal funds rate and the resulting impacts on consumer deposits, loan originations, net interest margin, net interest income and related aspects of the Home Federal Savings Bank’s (the Bank) business; the anticipated impacts of inflation and rising interest rates on the general economy, the Bank’s clients, and the allowance for credit losses; anticipated future levels of the provision for credit losses; anticipated level of future asset growth; anticipated ability to maintain and grow core deposit relationships; anticipated call dates of callable investments owned; anticipated impact of tax law changes on future taxable state income; anticipated level of future core deposit growth; and the payment of dividends by HMN.

    A number of factors, many of which may be amplified by deterioration in economic conditions, could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Bank of Minneapolis in the event of non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with traditional and alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank; technological, computer-related or operational difficulties including those from any third party cyberattack; reduced demand for financial services and loan products; adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; domestic and international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; the Company’s ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the “Risk Factors” section of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. All statements in this press release, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no duty to update any of the forward-looking statements after the date of this press release.

    Additional Information and Where to Find It

    Alerus filed a registration statement on Form S-4 with the SEC on July 15, 2024 in connection with the proposed transaction. The registration statement includes a joint proxy statement of Alerus and HMN that also constitutes a prospectus of Alerus, which will be sent to the stockholders of Alerus and HMN after the SEC declares the registration statement effective. Before making any voting decision, the stockholders of Alerus and HMN are advised to read the joint proxy statement/prospectus when it becomes available because it will contain important information about Alerus, HMN and the proposed transaction. When filed, this document and other documents relating to the Merger filed by Alerus or HMN can be obtained free of charge from the SEC’s website at www.sec.gov. These documents also can be obtained free of charge by accessing Alerus’ website at www.alerus.com under the link “Investors Relations” and then under “SEC Filings” and HMN’s website at www.justcallhome.com/HMNFinancial under “SEC Filings.” Alternatively, these documents can be obtained free of charge from Alerus upon written request to Alerus Financial Corporation, Corporate Secretary, 401 Demers Avenue, Grand Forks, North Dakota 58201 or by calling (701) 795-3200, or from HMN upon written request to HMN Financial, Inc., Corporate Secretary, 1016 Civic Center Drive NW, Rochester, Minnesota 55901 or by calling (507) 535-1200. The contents of the websites referenced above are not deemed to be incorporated by reference into this press release, the registration statement or the joint proxy statement/prospectus.

    Participants in the Solicitation

    This press release does not constitute a solicitation of proxy, an offer to purchase or a solicitation of an offer to sell any securities. Alerus, HMN, and certain of their directors, executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies from the stockholders of Alerus and HMN in connection with the proposed merger under SEC rules. Information about the directors and executive officers of Alerus and HMN will be included in the joint proxy statement/prospectus for the proposed transaction filed with the SEC. These documents (when available) may be obtained free of charge in the manner described above under “Additional Information and Where to Find It.”

    Security holders may obtain information regarding the names, affiliations and interests of Alerus’ directors and executive officers in the definitive proxy statement of Alerus relating to its 2024 Annual Meeting of Stockholders filed with the SEC on March 25, 2024 and on Alerus’ Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 8, 2024. Security holders may also obtain information regarding the names, affiliations and interests of HMN’s directors and executive officers in the definitive proxy statement of HMN relating to its 2024 Annual Meeting of Stockholders filed with the SEC on March 21, 2024 and HMN’s Annual Report on Form 10-K/A for the year ended December 31, 2023 filed with the SEC on March 19, 2024. To the extent the holdings of Alerus’ securities by Alerus’ directors and executive officers or the holdings of HMN securities by HMN’s directors and executive officers have changed since the amounts set forth in Alerus’ or HMN’s respective proxy statement for its 2024 Annual Meeting of Stockholders, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. These documents can be obtained free of charge in the manner described above under “Additional Information and Where to Find It.”

    Non-GAAP Financial Measures

    In this press release, to supplement our consolidated financial statements, the Company presents adjusted total noninterest expense, adjusted total income tax expense, adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average stockholders’ equity and adjusted book value per share to reflect the impact of expenses incurred in connection with the aforementioned Plan of Merger. These measures are not in accordance with accounting principles generally accepted in the United States of America (GAAP) and accordingly reconciliations of these items to these items determined in accordance with GAAP are included in the “Reconciliation of Non-GAAP Results” table at the end of this press release.

    (Three pages of selected consolidated financial information are included with this release.)

     
    HMN FINANCIAL, INC. AND SUBSIDIARIES
    Consolidated Balance Sheets
         
      June 30, December 31,
    (Dollars in thousands) 2024  2023 
      (unaudited)  
    Assets    
    Cash and cash equivalents$13,663  11,151 
    Securities available for sale:    
    Mortgage-backed and related securities (amortized cost $161,951 and $179,366) 144,991  161,414 
    Other marketable securities (amortized cost $54,330 and $54,112) 54,031  53,680 
    Total securities available for sale 199,022  215,094 
         
    Loans held for sale 2,861  1,006 
    Loans receivable, net 864,698  845,692 
    Accrued interest receivable 3,982  3,553 
    Mortgage servicing rights, net 2,643  2,709 
    Premises and equipment, net 15,623  15,995 
    Goodwill 0  802 
    Prepaid expenses and other assets 3,967  3,962 
    Deferred tax asset, net 7,088  7,171 
    Total assets$1,113,547  1,107,135 
         
    Liabilities and Stockholders’ Equity    
    Deposits$983,244  976,793 
    Federal Home Loan Bank advances and Federal Reserve borrowings 10,800  13,200 
    Accrued interest payable 3,903  2,399 
    Customer escrows 1,993  2,246 
    Accrued expenses and other liabilities 3,264  4,790 
    Total liabilities 1,003,204  999,428 
    Commitments and contingencies    
    Stockholders’ equity:    
    Serial-preferred stock ($.01 par value): authorized 500,000 shares; issued 0 0  0 
    Common stock ($.01 par value): authorized 16,000,000 shares; issued 9,128,662 outstanding 4,464,952 and 4,457,905 91  91 
    Additional paid-in capital 41,280  41,235 
    Retained earnings, subject to certain restrictions 143,782  142,278 
    Accumulated other comprehensive loss (12,367) (13,191)
    Unearned employee stock ownership plan shares (772) (870)
    Treasury stock, at cost 4,663,710 and 4,670,757 shares (61,671) (61,836)
    Total stockholders’ equity 110,343  107,707 
    Total liabilities and stockholders’ equity$1,113,547  1,107,135 
         


    HMN FINANCIAL, INC. AND SUBSIDIARIES
    Consolidated Statements of Comprehensive Income
    (unaudited)

      Three Months Ended Six Months Ended
      June 30, June 30,
    (Dollars in thousands, except per share data) 2024  2023 2024  2023
    Interest income:        
    Loans receivable$11,104  9,619 21,790  18,622
    Securities available for sale:        
    Mortgage-backed and related 473  600 987  1,252
    Other marketable 558  200 967  343
    Other 445  78 835  193
    Total interest income 12,580  10,497 24,579  20,410
             
    Interest expense:        
    Deposits 5,070  2,549 9,810  4,352
    Customer escrows 0  23 0  55
    Advances and other borrowings 18  197 21  212
    Total interest expense 5,088  2,769 9,831  4,619
             
    Net interest income 7,492  7,728 14,748  15,791
             
    Provision for credit losses (306) 256 (515) 248
    Net interest income after provision for credit losses 7,798  7,472 15,263  15,543
             
    Non-interest income:        
    Fees and service charges 764  831 1,496  1,638
    Loan servicing fees 386  391 774  791
    Gain on sales of loans 633  334 927  629
    Other 427  418 920  844
    Total non-interest income 2,210  1,974 4,117  3,902
             
    Non-interest expense:        
    Compensation and benefits 4,420  4,459 9,117  9,264
    Occupancy and equipment 880  914 1,732  1,864
    Data processing 579  545 1,114  1,050
    Professional services 750  292 1,071  529
    Other 2,036  1,247 3,182  2,443
    Total non-interest expense 8,665  7,457 16,216  15,150
    Income before income tax expense 1,343  1,989 3,164  4,295
    Income tax expense 373  568 876  1,240
    Net income 970  1,421 2,288  3,055
    Other comprehensive income, net of tax 832  705 824  2,951
    Comprehensive income available to common stockholders$1,802  2,126 3,112  6,006
    Basic earnings per share$0.22  0.33 0.53  0.70
    Diluted earnings per share$0.22  0.32 0.52  0.70
             



    HMN FINANCIAL, INC. AND SUBSIDIARIES    		 
    Selected Consolidated Financial Information 
    (unaudited) 
    SELECTED FINANCIAL DATA: Three Months Ended
    June 30,
    		 Six Months Ended
    June 30,
    		 
    (Dollars in thousands, except per share data)   
    I. OPERATING DATA: 2024 2023 2024 2023 
    Interest income$12,580 10,497 24,579 20,410 
    Interest expense 5,088 2,769 9,831 4,619 
    Net interest income 7,492 7,728 14,748 15,791 
              
    II. AVERAGE BALANCES:         
    Assets (1) 1,151,730 1,105,130 1,147,967 1,099,675 
    Loans receivable, net 858,228 800,483 852,834 788,723 
    Securities available for sale (1) 221,664 259,187 225,783 263,909 
    Interest-earning assets (1) 1,115,504 1,068,203 1,111,688 1,062,904 
    Interest-bearing liabilities and non-interest bearing deposits 1,020,034 979,224 1,017,641 974,823 
    Equity (1) 122,786 118,568 122,139 118,021 
              
    III. PERFORMANCE RATIOS: (1)         
    Return on average assets (annualized) 0.34%0.52%0.40%0.56%
    Interest rate spread information:         
    Average during period 2.53 2.81 2.51 2.91 
    End of period 2.60 2.78 2.60 2.78 
    Net interest margin 2.70 2.90 2.67 3.00 
    Ratio of operating expense to average total assets (annualized) 3.03 2.71 2.84 2.78 
    Return on average common equity (annualized) 3.18 4.81 3.77 5.22 
    Efficiency 89.31 76.86 85.96 76.93 
              
      June 30, December 31, June 30,   
      2024 2023 2023   
    IV. EMPLOYEE DATA:         
    Number of full time equivalent employees 153 162 167   
              
    V. ASSET QUALITY:         
    Total non-performing assets$3,190 3,818 1,751   
    Non-performing assets to total assets 0.29%0.34%0.16%  
    Non-performing loans to total loans receivable 0.36 0.44 0.18   
    Allowance for credit losses$11,292 11,824 11,517   
    Allowance for credit losses to total assets 1.01%1.07%1.04%  
    Allowance for credit losses to total loans receivable 1.29 1.38 1.37   
    Allowance for credit losses to non-performing loans 353.92 309.69 752.44   
              
    VI. BOOK VALUE PER COMMON SHARE:         
    Book value per common share$24.71 24.16 22.76   
              
      Six Months Ended
    June 30,
    2024    		 Year Ended
    December 31,
    2023    		 Six Months Ended
    June 30,
    2023    		   
    VII. CAPITAL RATIOS:         
    Stockholders’ equity to total assets, at end of period 9.91%9.73%9.21%  
    Average stockholders’ equity to average assets (1) 10.64 10.65 10.73   
    Ratio of average interest-earning assets to average interest-bearing liabilities and non-interest bearing deposits (1) 109.24 109.00 109.04   
    Home Federal Savings Bank regulatory capital ratios:         
    Common equity tier 1 capital ratio 11.94 11.54 11.36   
    Tier 1 capital leverage ratio 9.28 9.08 9.25   
    Tier 1 capital ratio 11.94 11.54 11.36   
    Risk-based capital 13.19 12.80 12.61   
              
    (1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
              

    This press release contains certain financial information determined by methods other than in accordance with GAAP. This non-GAAP disclosure has limitation as an analytical tool and should not be considered in isolation or as a substitute for the analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Our management uses this non-GAAP measure in its analysis of our performance because it believes this measure is material and will be used as a measure of our performance by investors.

    VIII. RECONCILIATION OF NON-GAAP MEASURESThree Months Ended June 30, 2024 Six Months Ended June 30, 2024
    Total noninterest expense (GAAP)$8,665   $16,216 
    Less: merger-related expenses (500)   (500)
    Adjusted total noninterest expense$8,165   $15,716 
           
    Income tax expense (GAAP)$373   $876 
    Plus: merger-related expenses 136    136 
    Adjusted total income tax expense$509   $1,012 
           
    Net income (GAAP)$970   $2,288 
    Plus: merger-related expenses 500    500 
    Less: related tax effect (136)   (136)
    Adjusted net income$1,334   $2,652 
           
    Weighted average number of shares outstanding 4,378,816    4,374,430 
    adjusted for effect of dilutive securities      
           
    Diluted earnings per shares (GAAP)$0.22   $0.52 
    Plus: effect of merger-related expenses 0.08    0.09 
    Adjusted diluted earnings per share$0.30   $0.61 
           
    Return on average assets 0.34%   0.40%
    Less: merger-related expenses 0.13    0.06 
    Adjusted return on average assets 0.47%   0.46%
           
    Return on average equity (GAAP) 3.18%   3.77%
    Plus: effect of merger-related expenses 1.19    0.60 
    Adjusted return on average shareholders’ equity 4.37%   4.37%
           
    Net outstanding common shares 4,464,952    4,464,952 
           
    Book value per share$24.71   $24.71 
    Plus: effect of merger-related expenses 0.08    0.08 
    Adjusted book value per share$24.79   $24.79 
           
           


    CONTACT:
    Bradley Krehbiel,
    Chief Executive Officer, President
    HMN Financial, Inc. (507) 252-7169


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