HMN Financial, Inc. (HMN and, together with its subsidiaries, the Company)
is a stock savings bank holding company that owns 100 percent of Home Federal
Savings Bank (the Bank). The Bank has a community banking philosophy and operates
retail banking and loan production facilities in Minnesota, Iowa, and Wisconsin.
The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA),
which offers financial planning products and services, and HFSB Property Holdings,
LLC (HPH), which was inactive in 2015, but has acted as an intermediary for
the Bank in holding and operating certain foreclosed properties. HMN was incorporated
in Delaware in 1994.
As a community-oriented financial institution, the Company seeks to serve the
financial needs of communities in its market area. The Company’s business
involves attracting deposits from the general public and businesses and using
such deposits to originate or purchase one-to-four family residential, commercial
real estate, and multi-family mortgage loans as well as consumer, construction,
and commercial business loans. The Company also invests in mortgage-backed and
related securities, U.S. government agency obligations and other permissible
investments. The executive offices of the Company are located at 1016 Civic
Center Drive Northwest, Rochester, Minnesota 55901. Its telephone number at
that address is (507) 535-1200.
Historically, the Company has originated 15 and 30 year fixed rate mortgage
loans secured by one-to-four family residences for its loan portfolio. Over
the past 15 years, the Company has focused on managing interest rate risk and
increasing interest income by increasing its investment in shorter term and
generally higher yielding commercial real estate, commercial business and construction
loans, while reducing its investment in longer term one-to-four family real
estate loans. The Company continues to originate 15 and 30 year fixed rate mortgage
loans and some shorter term fixed rate loans. The shorter term fixed rate loans
and adjustable rate loans are generally placed into portfolio, while the majority
of the 15 and 30 year fixed rate mortgage loans are sold in the secondary mortgage
market. Mortgage interest rates continued to be at relatively low levels in
2015 and very few 15 and 30 year loans were placed into portfolio as most were
sold into the secondary market in order to manage the Company’s interest
rate risk position.
The aggregate amount of loans and extensions of credit that the Bank is permitted
to make to any one borrower is generally limited to 15% of unimpaired capital
and surplus. In addition to the 15% limit, the Bank is permitted to lend an
additional amount equal to 10% of unimpaired capital and surplus if the additional
amount is fully secured by “readily marketable collateral” having
a current market value of at least 100% of the loan or extension of credit.
Similarly, the Bank is permitted to lend additional amounts equal to the lesser
of 30% of unimpaired capital and surplus, or $30 million, for certain residential
development loans. Applicable law establishes a number of rules for combining
loans to separate borrowers. Loans or extensions of credit to one person may
be attributed to other persons if: (i) the proceeds of a loan or extension of
credit are used for the direct benefit of the other person; or (ii) a common
enterprise is deemed to exist between persons.
All of the Banks lending is subject to its written underwriting standards
and to loan origination procedures. Decisions on loan applications are made
on the basis of detailed applications and property valuations determined by
an independent appraiser. The loan applications are designed primarily to determine
the borrowers ability to repay. The more significant items on the application
are verified through the use of credit reports, financial statements, tax returns,
or confirmations.
The Company utilizes the available for sale securities portfolio in virtually
all aspects of asset/liability management. In making investment decisions, the
Investment-Asset/Liability Committee considers, among other things, the yield
and interest rate objectives, the credit risk position, and the Banks liquidity
and projected cash flow requirements.
Securities. Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of insured
banks and savings institutions, certain bankers acceptances, repurchase agreements
and federal funds. Subject to various restrictions, the holding company of a
federally chartered savings institution may also invest its assets in commercial
paper, investment grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly.
The investment strategy of the Company has been directed toward a mix of high-quality
assets (primarily government agency obligations) with short and intermediate
terms to maturity.
The Banks other available sources of funds include advances from the FHLB
and borrowings from the Federal Reserve Bank of Minneapolis. As a member of
the FHLB of Des Moines, the Bank is required to own capital stock in the FHLB
and is authorized to apply for advances. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The
FHLB may prescribe the acceptable uses for these advances, as well as limitations
on the size of the advances and repayment provisions. Consistent with its asset/liability
management strategy, the Bank has utilized FHLB advances from time to time to
fund loan demand and extend the term to maturity of its liabilities. The Bank
may also use short-term FHLB and Federal Reserve Bank borrowings to offset short
term cash needs due to deposit outflows or loan fundings
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