HMN FINANCIAL INC - Quarter Report: 2022 March (Form 10-Q)

hmnf20220331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2022

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _________ to _________

Commission File Number 0-24100

HMN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒
Smaller reporting company ☒	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

Class		Outstanding at April 29, 2022
Common stock, $0.01 par value		4,540,976

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HMN FINANCIAL, INC.

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

Item 1:	Financial Statements	3

	Consolidated Balance Sheets at March 31, 2022 and December 31, 2021	3

	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2022 and 2021	4

	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2022 and 2021	5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	6

	Notes to Consolidated Financial Statements	7

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4:	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	32

Item 1A:	Risk Factors	32

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3:	Defaults Upon Senior Securities	32

Item 4:	Mine Safety Disclosures	32

Item 5:	Other Information	32

Item 6:	Exhibits	33

Signatures		34

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PART I – FINANCIAL INFORMATION

Item 1 : Financial Statements

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

	March 31,			December 31,
(Dollars in thousands, except par value)	2022			2021
	(unaudited)
Assets
Cash and cash equivalents	$	29,176			94,143
Securities available for sale:
Mortgage-backed and related securities (amortized cost $249,903 and $247,275)		235,349			245,397
Other marketable securities (amortized cost $50,693 and $40,691)		49,299			40,368
Total securities available for sale		284,648			285,765

Loans held for sale		1,882			5,575
Loans receivable, net		679,124			652,502
Accrued interest receivable		2,269			2,132
Mortgage servicing rights, net		3,270			3,280
Premises and equipment, net		17,225			17,373
Goodwill		802			802
Core deposit intangible		4			10
Prepaid expenses and other assets		4,741			5,427
Deferred tax asset, net		6,257			2,529
Total assets	$	1,029,398			1,069,538

Liabilities and Stockholders’ Equity
Deposits	$	920,398			950,666
Accrued interest payable		58			63
Customer escrows		2,954			2,143
Accrued expenses and other liabilities		5,365			6,635
Total liabilities		928,775			959,507
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		91			91
Additional paid-in capital		40,695			40,740
Retained earnings, subject to certain restrictions		132,634			131,413
Accumulated other comprehensive loss		(11,601	)		(1,583	)
Unearned employee stock ownership plan shares		(1,208	)		(1,256	)
Treasury stock, at cost 4,588,712 and 4,564,087 shares		(59,988	)		(59,374	)
Total stockholders’ equity		100,623			110,031
Total liabilities and stockholders’ equity	$	1,029,398			1,069,538

See accompanying notes to consolidated financial statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2022			2021
Interest income:
Loans receivable	$	6,751			7,360
Securities available for sale:
Mortgage-backed and related		727			391
Other marketable		61			107
Other		26			31
Total interest income		7,565			7,889

Interest expense:
Deposits		283			453
Total interest expense		283			453
Net interest income		7,282			7,436
Provision for loan losses		296			(576	)
Net interest income after provision for loan losses		6,986			8,012

Non-interest income:
Fees and service charges		766			739
Loan servicing fees		386			395
Gain on sales of loans		868			1,773
Other		355			348
Total non-interest income		2,375			3,255

Non-interest expense:
Compensation and benefits		4,288			3,821
Occupancy and equipment		1,050			1,107
Data processing		354			347
Professional services		529			203
Other		1,031			1,001
Total non-interest expense		7,252			6,479
Income before income tax expense		2,109			4,788
Income tax expense		622			1,370
Net income		1,487			3,418
Other comprehensive loss, net of tax		(10,018	)		(1,241	)
Comprehensive (loss) income available to common shareholders	$	(8,531	)		2,177
Basic earnings per share	$	0.34			0.75
Diluted earnings per share	$	0.34			0.74

See accompanying notes to consolidated financial statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

(unaudited)

												Unearned
												Employee
									Accumulated			Stock						Total
			Additional						Other			Ownership						Stock-
	Common		Paid-In			Retained			Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings			Loss			Shares			Stock			Equity
Balance, December 31, 2021	$	91		40,740			131,413			(1,583	)		(1,256	)		(59,374	)		110,031
Net income							1,487												1,487
Other comprehensive loss										(10,018	)								(10,018	)
Dividends paid to stockholders							(266	)											(266	)
Stock repurchases																(743	)		(743	)
Restricted stock awards				(182	)											182			0
Stock awards withheld for tax withholding																(53	)		(53	)
Amortization of restricted stock awards				62															62
Earned employee stock ownership plan shares				75									48						123
Balance, March 31, 2022	$	91		40,695			132,634			(11,601	)		(1,208	)		(59,988	)		100,623

											Unearned
											Employee
								Accumulated			Stock						Total
			Additional					Other			Ownership						Stock-
	Common		Paid-In			Retained		Comprehensive			Plan			Treasury			Holders’
(Dollars in thousands)	Stock		Capital			Earnings		Income			Shares			Stock			Equity
Balance, December 31, 2020	$	91		40,480			117,849		1,282			(1,450	)		(55,000	)		103,252
Net income							3,418											3,418
Other comprehensive loss									(1,241	)								(1,241	)
Stock repurchases															(523	)		(523	)
Restricted stock awards				(184	)										184			0
Amortization of restricted stock awards				60														60
Earned employee stock ownership plan shares				49								49						98
Balance, March 31, 2021	$	91		40,405			121,267		41			(1,401	)		(55,339	)		105,064

See accompanying notes to consolidated financial statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	1,487			3,418
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		296			(576	)
Depreciation		315			254
Amortization of premiums, net		282			181
Amortization of deferred loan fees		(82	)		(625	)
Amortization of core deposit intangible		6			25
Amortization of purchased loan fair value adjustments		(11	)		(5	)
Amortization of mortgage servicing rights		225			297
Capitalized mortgage servicing rights		(215	)		(368	)
Losses (gains) recognized on equity securities		31			(53	)
Gain on sales of loans		(868	)		(1,773	)
Proceeds from sale of loans held for sale		33,877			50,040
Disbursements on loans held for sale		(23,739	)		(46,156	)
Amortization of restricted stock awards		62			60
Amortization of unearned Employee Stock Ownership Plan shares		48			49
Earned Employee Stock Ownership Plan shares priced above original cost		75			49
(Increase) decrease in accrued interest receivable		(137	)		728
(Decrease) increase in accrued interest payable		(5	)		5
Decrease (increase) in other assets		720			(1,586	)
Decrease in other liabilities		(1,270	)		(1,295	)
Other, net		1			2
Net cash provided by operating activities		11,098			2,671
Cash flows from investing activities:
Principal collected on securities available for sale		12,132			7,498
Proceeds collected on maturities of securities available for sale		0			25,682
Purchases of securities available for sale		(25,043	)		(66,268	)
Purchase of Federal Home Loan Bank stock		(191	)		(159	)
Net increase in loans receivable		(32,276	)		(960	)
Proceeds from sale of premises		4			0
Purchases of premises and equipment		(172	)		(66	)
Net cash used by investing activities		(45,546	)		(34,273	)
Cash flows from financing activities:
(Decrease) increase in deposits		(30,268	)		60,274
Purchase of treasury stock		(743	)		(523	)
Stock awards withheld for tax withholding		(53	)		0
Dividends to stockholders		(266	)		0
Increase in customer escrows		811			973
Net cash (used) provided by financing activities		(30,519	)		60,724
(Decrease) increase in cash and cash equivalents		(64,967	)		29,122
Cash and cash equivalents, beginning of period		94,143			86,269
Cash and cash equivalents, end of period	$	29,176			115,391
Supplemental cash flow disclosures:
Cash paid for interest	$	288			448
Cash paid for income taxes		0			1,921
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale		5,451			3,008

See accompanying notes to consolidated financial statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

(1) HMN Financial, Inc.

HMN Financial, Inc. (HMN or the Company) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank). The Bank has a community banking philosophy and operates retail banking and loan production facilities in Minnesota, Iowa and Wisconsin. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA), which does business as Home Federal Investment Services and offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which is currently inactive, but has acted in the past as an intermediary for the Bank in holding and operating certain foreclosed properties.

The consolidated financial statements included herein are for HMN, the Bank, OIA and HPH. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2) Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of comprehensive (loss) income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with U.S. Generally Accepted Accounting Principles (GAAP). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three month period ended March 31, 2022 are not necessarily indicative of the results which may be expected for the entire year.

(3) New Accounting Standards

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the guidance for troubled debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancing and restructures by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, such as HMN, the amendments in this ASU require that an entity disclose current period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The amendments in the ASU will be effective for entities, such as HMN, that have not yet adopted the amendments in ASU 2016-13 when ASU 2016-13 is adopted. The amendments in this ASU should be applied prospectively, except as provided in the next sentence. For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Management is in the process of evaluating the impact of this ASU on the Company’s financial statement amounts and disclosures when it is adopted in the first quarter of 2023.

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. The amendments in this ASU, for public business entities that are filers with the Securities and Exchange Commission (SEC), were originally effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. On November 26, 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses which delayed the implementation date of ASU 2016-13 for SEC smaller reporting companies, such as HMN, from the first quarter of 2020 to the first quarter of 2023. All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company has not early adopted this ASU. Management has accumulated the charge off information necessary to calculate the appropriate life of loan loss percentages for the various loan categories, has identified several key metrics to help identify and project anticipated changes in the credit quality of the Bank’s loan portfolio upon enactment, has identified some qualitative reserve metrics and amounts, and has prepared preliminary calculations using the new methodology as outlined in the ASU. Based on the preliminary calculations it is not anticipated that the adoption of this ASU will have a material impact on the Company’s consolidated financial statements when it is adopted in the first quarter of 2023.

On February 6, 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)-Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). The amendments in this ASU related to Leases (Topic 842) did not have any impact on the Company. The amendments in this ASU related to Topic 326 adds additional guidance related to the SEC’s expectations for the documentation of the measurement, review process, and the systematic methodology used by entities to determine the current credit losses under FASB ASC Topic 326. It is anticipated that this additional guidance will require periodic third party reviews of the Company’s calculation of the allowance for credit losses in subsequent periods after ASC Topic 326 is adopted in the first quarter of 2023.

(4) Fair Value Measurements

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

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

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

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

The following table summarizes the assets and liabilities of the Company for which fair values are determined on a recurring basis as of March 31, 2022 and December 31, 2021.

	Carrying Value at March 31, 2022
(Dollars in thousands)	Total			Level 1		Level 2			Level 3
Securities available for sale	$	284,648			0		284,648			0
Equity securities		217			0		217			0
Mortgage loan commitments		(131	)		0		(131	)		0
Total	$	284,734			0		284,734			0

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	Carrying Value at December 31, 2021
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Securities available for sale	$	285,765		0		285,765		0
Equity securities		248		0		248		0
Mortgage loan commitments		26		0		26		0
Total	$	286,039		0		286,039		0

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of the lower-of-cost-or-market accounting or write-downs of individual assets. The following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at March 31, 2022 and December 31, 2021.

	Carrying Value at March 31, 2022
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Three Months Ended March 31, 2022 Total Losses
Loans held for sale	$	1,882		0		1,882		0		(31	)
Mortgage servicing rights		3,270		0		3,270		0		0
Impaired loans		4,117		0		4,117		0		(42	)
Real estate, net		290		0		290		0		0
Total	$	9,559		0		9,559		0		(73	)

	Carrying Value at December 31, 2021
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Year Ended December 31, 2021 Total Losses
Loans held for sale	$	5,575		0		5,575		0		(56	)
Mortgage servicing rights		3,280		0		3,280		0		0
Impaired loans		4,244		0		4,244		0		(218	)
Real estate, net		290		0		290		0		0
Total	$	13,389		0		13,389		0		(274	)

(5) Fair Value of Financial Instruments

ASC 825, Disclosures about Fair Values of Financial Instruments requires interim reporting period disclosure of the estimated fair values of the Company’s financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value estimates are made as of March 31, 2022 and December 31, 2021 based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.

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The estimated fair value of the Company’s financial instruments as of March 31, 2022 and December 31, 2021 are shown below. Following the table, there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments.


	March 31, 2022													December 31, 2021
							Fair Value Hierarchy											Fair Value Hierarchy
(Dollars in thousands)	Carrying Amount			Estimated Fair Value			Level 1		Level 2		Level 3	Contract Amount		Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3	Contract Amount
Financial assets:
Cash and cash equivalents	$	29,176			29,176			29,176							94,143		94,143		94,143
Securities available for sale		284,648			284,648					284,648					285,765		285,765				285,765
Equity securities		217			217					217					248		248				248
Loans held for sale		1,882			1,882					1,882					5,575		5,575				5,575
Loans receivable, net		679,124			672,369					672,369					652,502		661,298				661,298
Federal Home Loan Bank stock		1,283			1,283					1,283					1,092		1,092				1,092
Accrued interest receivable		2,269			2,269					2,269					2,132		2,132				2,132

Financial liabilities:
Deposits		920,398			919,450					919,450					950,666		950,558				950,558
Accrued interest payable		58			58					58					63		63				63
Off-balance sheet financial instruments:
Commitments to extend credit		(131	)		(131	)							195,861		26		26							195,141
Commitments to sell loans		43			43								13,345		12		12							12,340

Cash and Cash Equivalents

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

Securities Available for Sale

The fair values of securities were based upon quoted market prices for similar securities.

Equity Securities

The fair values of equity securities were based upon quoted market prices for similar securities.

Loans Held for Sale

The fair values of loans held for sale were based upon quoted market prices for loans with similar interest rates and terms to maturity.

Loans Receivable

The fair value of the loan portfolio, with the exception of the adjustable rate portfolio, was calculated by discounting the scheduled cash flows through the estimated maturity using anticipated prepayment speeds and using discount rates that reflect the credit and interest rate risk inherent in each loan portfolio. The fair value of the adjustable loan portfolio was estimated by grouping the loans with similar characteristics and comparing the characteristics of each group to the prices quoted for similar types of loans in the secondary market. The fair value disclosures for both the fixed and adjustable rate portfolios were adjusted to reflect the exit price amount anticipated to be received from the sale of the portfolio in an open market transaction.

Federal Home Loan Bank (FHLB) Stock

The carrying amount of FHLB stock approximates its fair value.

Accrued Interest Receivable

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

Deposits

The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value disclosures for all of the deposits were adjusted to reflect the exit price amount anticipated to be received from the sale of the deposits in an open market transaction.

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Accrued Interest Payable

The carrying amount of accrued interest payable approximates its fair value since it is short-term in nature.

Commitments to Extend Credit

The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties.

Commitments to Sell Loans

The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.

(6) Other Comprehensive (Loss) Income

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

	For the period ended March 31,
(Dollars in thousands)	2022									2021
	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Securities available for sale:
Gross unrealized losses arising during the period	$	(13,746	)		(3,728	)		(10,018	)		(1,721	)		(480	)		(1,241	)
Other comprehensive loss	$	(13,746	)		(3,728	)		(10,018	)		(1,721	)		(480	)		(1,241	)

(7) Securities Available For Sale

The following table shows the gross unrealized losses and fair values for the securities available for sale portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021.

	Less Than Twelve Months							Twelve Months or More							Total
(Dollars in thousands)	# of Investments		Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2022
Mortgage backed securities:
Federal National Mortgage Association (FNMA)		24	$	94,362		(5,167	)		10	$	34,367		(2,504	)	$	128,729		(7,671	)
Federal Home Loan Mortgage Corporation (FHLMC)		15		77,184		(4,769	)		8		27,878		(2,114	)		105,062		(6,883	)
Other marketable securities:
U.S. Government agency obligations		6		29,129		(869	)		2		9,594		(404	)		38,723		(1,273	)
Corporate preferred stock		0		0		0			1		560		(140	)		560		(140	)
Total temporarily impaired securities		45	$	200,675		(10,805	)		21	$	72,399		(5,162	)	$	273,074		(15,967	)

	Less Than Twelve Months							Twelve Months or More							Total
(Dollars in thousands)	# of Investments		Fair Value		Unrealized Losses			# of Investments		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2021
Mortgage backed securities:
FNMA		19	$	98,423		(1,234	)		2	$	6,810		(133	)	$	105,233		(1,367	)
FHLMC		17		85,624		(1,038	)		2		7,664		(151	)		93,288		(1,189	)
Other marketable securities:
U.S. Government agency obligations		7		34,659		(337	)		0		0		0			34,659		(337	)
Corporate preferred stock		0		0		0			1		658		(42	)		658		(42	)
Total temporarily impaired securities		43	$	218,706		(2,609	)		5	$	15,132		(326	)	$	233,838		(2,935	)

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The Company reviews its investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the market liquidity for the investment, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. The unrealized losses on impaired securities other than the corporate preferred stock are the result of changes in interest rates. The unrealized losses reported for the corporate preferred stock at March 31, 2022 relates to a single trust preferred security that was issued by the holding company of a small community bank. As of March 31, 2022 all payments were current on the trust preferred security and the issuer’s subsidiary bank was considered to be well-capitalized based on its most recent regulatory filing. Based on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at March 31, 2022 as the Company does not intend to sell the security and has the intent and ability to hold it for a period of time sufficient to recover the temporary loss. Management believes that the Company will receive all principal and interest payments contractually due on the security and that the decrease in the market value is primarily due to a lack of liquidity in the market for trust preferred securities. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.

A summary of securities available for sale at March 31, 2022 and December 31, 2021 is as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
March 31, 2022
Mortgage-backed securities:
FNMA	$	136,400		0		(7,671	)		128,729
FHLMC		113,459		0		(6,883	)		106,576
Collateralized mortgage obligations:
FNMA		44		0		0			44
		249,903		0		(14,554	)		235,349
Other marketable securities:
U.S. Government agency obligations		49,993		19		(1,273	)		48,739
Corporate preferred stock		700		0		(140	)		560
		50,693		19		(1,413	)		49,299
	$	300,596		19		(15,967	)		284,648

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2021
Mortgage-backed securities:
FNMA	$	138,628		550		(1,367	)		137,811
FHLMC		108,599		126		(1,189	)		107,536
Collateralized mortgage obligations:
FNMA		48		2		0			50
		247,275		678		(2,556	)		245,397
Other marketable securities:
U.S. Government agency obligations		39,991		56		(337	)		39,710
Corporate preferred stock		700		0		(42	)		658
		40,691		56		(379	)		40,368
	$	287,966		734		(2,935	)		285,765

The following table indicates amortized cost and estimated fair value of securities available for sale at March 31, 2022 based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates.

(Dollars in thousands)	Amortized Cost		Fair Value
Due less than one year	$	65,173		61,542
Due after one year through five years		184,049		174,822
Due after five years through fifteen years		51,371		48,281
Due after fifteen years		3		3
Total	$	300,596		284,648

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The allocation of mortgage-backed securities in the table above is based upon the anticipated future cash flow of the securities using estimated mortgage prepayment speeds. The allocation of other marketable securities that have call features is based on the anticipated cash flows to the expected call date if it is anticipated that the security will be called, or to the maturity date if it is not anticipated to be called.

(8) Loans Receivable, Net

A summary of loans receivable at March 31, 2022 and December 31, 2021 is as follows:

(Dollars in thousands)	March 31, 2022		December 31, 2021
Single family	$	168,481		163,322
Commercial real estate:
Real estate rental and leasing		213,559		209,666
Other		193,895		187,202
		407,454		396,868
Consumer		41,031		41,645
Commercial business		71,960		60,165
Total loans		688,926		662,000
Less:
Unamortized discounts		12		10
Net deferred loan fees		206		209
Allowance for loan losses		9,584		9,279
Total loans receivable, net	$	679,124		652,502

(9) Allowance for Loan Losses and Credit Quality Information

The allowance for loan losses is summarized as follows:

(Dollars in thousands)	Single Family			Commercial Real Estate			Consumer			Commercial Business		Total
Balance, December 31, 2021	$	974			6,388			981			936		9,279
Provision for losses		28			107			10			151		296
Charge-offs		0			0			(1	)		0		(1	)
Recoveries		0			0			1			9		10
Balance, March 31, 2022	$	1,002			6,495			991			1,096		9,584

Balance, December 31, 2020	$	1,030			7,295			1,389			985		10,699
Provision for losses		(191	)		(222	)		(171	)		8		(576	)
Charge-offs		0			0			(31	)		0		(31	)
Recoveries		0			0			2			38		40
Balance, March 31, 2021	$	839			7,073			1,189			1,031		10,132

Allocated to:
Specific reserves	$	36			280			83			7		406
General reserves		938			6,108			898			929		8,873
Balance, December 31, 2021	$	974			6,388			981			936		9,279

Allocated to:
Specific reserves	$	34			280			121			7		442
General reserves		968			6,215			870			1,089		9,142
Balance, March 31, 2022	$	1,002			6,495			991			1,096		9,584

Loans receivable at December 31, 2021:
Individually reviewed for impairment	$	340			3,757			546			7		4,650
Collectively reviewed for impairment		162,982			393,111			41,099			60,158		657,350
Ending balance	$	163,322			396,868			41,645			60,165		662,000

Loans receivable at March 31, 2022:
Individually reviewed for impairment	$	478			3,551			523			7		4,559
Collectively reviewed for impairment		168,003			403,903			40,508			71,953		684,367
Ending balance	$	168,481			407,454			41,031			71,960		688,926

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The following table summarizes the amount of classified and unclassified loans at March 31, 2022 and December 31, 2021:

	March 31, 2022
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	134		935		54		0		1,123		167,358		168,481
Commercial real estate:
Real estate rental and leasing		15,470		4,731		0		0		20,201		193,358		213,559
Other		6,296		9,318		0		0		15,614		178,281		193,895
Consumer		0		413		20		90		523		40,508		41,031
Commercial business		1,893		1,739		0		0		3,632		68,328		71,960
	$	23,793		17,136		74		90		41,093		647,833		688,926

	December 31, 2021
	Classified										Unclassified
(Dollars in thousands)	Special Mention		Substandard		Doubtful		Loss		Total		Total		Total Loans
Single family	$	410		791		56		0		1,257		162,065		163,322
Commercial real estate:
Real estate rental and leasing		16,012		4,753		0		0		20,765		188,901		209,666
Other		6,824		9,571		0		0		16,395		170,807		187,202
Consumer		0		475		21		50		546		41,099		41,645
Commercial business		1,933		1,813		0		0		3,746		56,419		60,165
	$	25,179		17,403		77		50		42,709		619,291		662,000

Classified loans represent special mention, substandard (performing and non-performing), and non-performing loans categorized as doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is essentially uncollateralized and/or considered uncollectible and of such little value that continuance as an asset on the balance sheet may not be warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.

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The aging of past due loans at March 31, 2022 and December 31, 2021 is summarized as follows:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due and Still Accruing
March 31, 2022
Single family	$	679		0		265		944		167,537		168,481		0
Commercial real estate:
Real estate rental and leasing		0		0		0		0		213,559		213,559		0
Other		0		0		0		0		193,895		193,895		0
Consumer		393		34		122		549		40,482		41,031		0
Commercial business		0		0		0		0		71,960		71,960		0
	$	1,072		34		387		1,493		687,433		688,926		0
December 31, 2021
Single family	$	864		65		153		1,082		162,240		163,322		0
Commercial real estate:
Real estate rental and leasing		198		0		0		198		209,468		209,666		0
Other		226		3,402		0		3,628		183,574		187,202		0
Consumer		174		89		122		385		41,260		41,645		0
Commercial business		0		0		0		0		60,165		60,165		0
	$	1,462		3,556		275		5,293		656,707		662,000		0

Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a troubled debt restructuring (TDR). The following table summarizes impaired loans and related allowances as of March 31, 2022 and December 31, 2021:

	March 31, 2022						December 31, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans with no related allowance recorded:
Single family	$	394		413		0		253		272		0
Commercial real estate:
Other		185		185		0		189		189		0
Consumer		359		359		0		419		419		0

Loans with an allowance recorded:
Single family		84		84		34		87		87		36
Commercial real estate:
Other		3,366		3,366		280		3,568		3,568		280
Consumer		164		164		121		127		127		83
Commercial business		7		7		7		7		7		7

Total:
Single family		478		497		34		340		359		36
Commercial real estate:
Other		3,551		3,551		280		3,757		3,757		280
Consumer		523		523		121		546		546		83
Commercial business		7		7		7		7		7		7
	$	4,559		4,578		442		4,650		4,669		406

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The following table summarizes the average recorded investment and interest income recognized on impaired loans during the three months ended March 31, 2022 and 2021:

	March 31, 2022				March 31, 2021
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Loans with no related allowance recorded:
Single family	$	324		2		739		6
Commercial real estate:
Real estate rental and leasing		0		0		1,002		0
Other		187		0		205		0
Consumer		389		2		543		1

Loans with an allowance recorded:
Single family		86		0		116		0
Commercial real estate:
Real estate rental and leasing		0		0		83		0
Other		3,467		0		157		0
Consumer		146		1		162		0
Commercial business		7		0		36		0

Total:
Single family		410		2		855		6
Commercial real estate:
Real estate rental and leasing		0		0		1,085		0
Other		3,654		0		362		0
Consumer		535		3		705		1
Commercial business		7		0		36		0
	$	4,606		5		3,043		7

At March 31, 2022 and December 31, 2021, non-accruing loans totaled $4.5 million and $4.6 million, respectively, for which the related allowance for loan losses was $0.4 million for both periods. All of the interest income recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accruing loans for which no specific allowance has been recorded because management determined that the value of the collateral was sufficient to repay the loan totaled $0.9 million at both March 31, 2022 and December 31, 2021. Non-accrual loans also include certain loans that have had terms modified in a TDR.

The non-accrual loans at March 31, 2022 and December 31, 2021 are summarized as follows:

(Dollars in thousands)	March 31, 2022		December 31, 2021

Single family	$	478	$	340
Commercial real estate:
Other		3,551		3,757
Consumer		500		517
Commercial business		7		7
	$	4,536	$	4,621

At March 31, 2022 and December 31, 2021, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $1.0 million and $1.1 million, respectively. Of the loans that were restructured in the first quarter of 2022, none were classified but performing, and $0.2 were non-performing at March 31, 2022.

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The following table summarizes TDRs at March 31, 2022 and December 31, 2021:

	March 31, 2022						December, 31, 2021
(Dollars in thousands)	Accruing		Non-Accrual		Total		Accruing		Non-Accrual		Total
Single family	$	0		250		250		0		254		254
Commercial real estate		0		349		349		0		355		355
Consumer		23		375		398		29		413		442
	$	23		974		997		29		1,022		1,051

TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after twelve months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for the entire twelve month period. All loans classified as TDRs are considered to be impaired.

When a loan is modified in a TDR, there may be a direct, material impact on the loans within the consolidated balance sheets, as principal balances may be partially forgiven. The financial effects of TDRs are presented in the following table and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the three months ended March 31, 2022 and March 31, 2021.

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial real estate:
Other		1	$	165		165		1	$	139		139
Commercial business		0		0		0		1		14		14
Total		1	$	165		165		2	$	153		153

There were no loans that were restructured within the twelve months preceding March 31, 2022 and March 31, 2021 that subsequently defaulted during the three months ended March 31, 2022 and March 31, 2021.

The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement. Loans that were non-accrual prior to modification remain on non-accrual status for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accrual status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.

TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral-dependent, the value of the collateral is reviewed and additional reserves may be added as needed. Loans that are not collateral-dependent may have additional reserves established if deemed necessary. The reserves for TDRs were $0.2 million, or 2.4%, of the total $9.6 million in loan loss reserves at March 31, 2022 and $0.2 million, or 2.6%, of the total $9.3 million in loan loss reserves at December 31, 2021.

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. Section 4013 of the CARES Act temporarily allowed the Bank to grant modifications of loans to borrowers that were impacted by the pandemic without classifying the modifications as TDRs if the accommodation was granted before December 31, 2021. In accordance with the regulatory guidance, the Bank granted accommodations on certain loans to borrowers who were negatively impacted by the COVID-19 pandemic. At March 31, 2022 and March 31, 2021, the Bank had $0 and $34.5 million, respectively, of outstanding loans that were granted loan accommodations in accordance with Section 4013 of the CARES Act.

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(10) Intangible Assets

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

(Dollars in thousands)	Three Months Ended March 31, 2022			Twelve Months Ended December 31, 2021			Three Months Ended March 31, 2021
Balance, beginning of period	$	3,280			3,043			3,043
Originations		215			1,405			368
Amortization		(225	)		(1,168	)		(297	)
Balance, end of period	$	3,270			3,280			3,114
Fair value of mortgage servicing rights	$	5,469			4,813			4,073

All of the loans sold where the Company continues to service the loans are serviced for FNMA under the individual loan sale program. The following is a summary of the risk characteristics of the loans being serviced for FNMA at March 31, 2022:

Weighted

Loan

Average

Principal

Interest

Remaining

Number

(Dollars in thousands)

Balance

Rate

Term (months)

of Loans

Original term 15 year fixed rate

117,268

2.85

141

1,066

Original term 30 year fixed rate

428,532

3.43

312

2,671

Amortization expense for intangible assets was $0.2 million and $0.3 million for the three month periods ended March 31, 2022 and March 31, 2021, respectively. The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2022 and December 31, 2021 is presented in the following table.

	March 31, 2022
	Gross					Unamortized
	Carrying		Accumulated			Intangible
(Dollars in thousands)	Amount		Amortization			Assets
Mortgage servicing rights	$	5,931		(2,661	)		3,270
Core deposit intangible		154		(150	)		4
Goodwill		802		0			802
Total	$	6,887		(2,811	)		4,076

	December 31, 2021
	Gross					Unamortized
	Carrying		Accumulated			Intangible
(Dollars in thousands)	Amount		Amortization			Assets
Mortgage servicing rights	$	5,854		(2,574	)		3,280
Core deposit intangible		574		(564	)		10
Goodwill		802		0			802
Total	$	7,230		(3,138	)		4,092

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The following table indicates the estimated future amortization expense for intangible assets:

(Dollars in thousands)	Mortgage Servicing Rights		Core Deposit Intangible		Total Intangible Assets
Year ending December 31,
2022	$	535		4		539
2023		672		0		672
2024		637		0		637
2025		569		0		569
2026		469		0		469
Thereafter		388		0		388
Total	$	3,270		4		3,274

No amortization expense relating to goodwill is recorded as GAAP does not allow goodwill to be amortized but requires that it be tested for impairment at least annually, or sooner, if there are indications that impairment may exist.

Projections of amortization are based on existing asset balances and the existing interest rate environment as of March 31, 2022. The Company’s actual experience may be significantly different depending upon changes in mortgage interest rates and other market conditions.

(11) Leases

The Company accounts for its leases in accordance with ASU 2016-02, Leases (Topic 842) and as of March 31, 2022 a $0.3 million right-of-use asset and an offsetting lease payment obligation liability were recorded on the consolidated balance sheet in other assets and other liabilities, respectively.

Operating lease right-of-use assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Right-of-use assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. Because the Company only has operating leases and the right-of-use asset is offset by a lease payment obligation liability, the lease payments are the only amount that is recorded in occupancy expense in the consolidated statements of comprehensive (loss) income.

The Company’s leases relate to office space and bank branches with remaining lease terms between five and thirty-seven months. Certain leases contain extension options which typically range from three to ten years. Because these extension options are not considered reasonably certain of exercise, they are not included in the lease term.

The table below summarizes the Company’s net lease cost for the three months ended March 31, 2022 and 2021.

(Dollars in thousands)	Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
Operating lease cost	$	57		225

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

(Dollars in thousands)	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	57			225
Weighted-average remaining lease term – operating leases, in years		2.2			3.5
Weighted-average discount rate – operating leases		1.83	%		2.19	%

The decrease in the net lease cost and operating cash flows between the periods is related to the purchase of the combined corporate office and branch facility in Rochester, Minnesota during the fourth quarter of 2021. This facility had previously been leased by the Company.

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The table below summarizes the maturity of remaining lease liabilities at March 31, 2022:

(Dollars in thousands)	March 31, 2022
2022	$	155
2023		92
2024		77
2025		15
2026 and thereafter		0
Total lease payments		339
Less: Interest		(7	)
Present value of lease liabilities	$	332

(12) Earnings per Common Share

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

	Three Months Ended
(Dollars in thousands, except per share data)	March 31, 2022		March 31, 2021
Weighted average number of common shares outstanding used in basic earnings per common share calculation		4,391,325		4,560,743
Net dilutive effect of:
Restricted stock awards and options		33,878		28,681
Weighted average number of shares outstanding adjusted for effect of dilutive securities		4,425,203		4,589,424
Income available to common stockholders	$	1,487		3,418
Basic earnings per common share	$	0.34		0.75
Diluted earnings per common share	$	0.34		0.74

(13) Regulatory Capital and Oversight

The Bank is subject to the Basel III regulatory capital requirements. The Basel III requirements, among other things, (i) apply a set of capital requirements to the Bank, including requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum Tier 1 capital requirement, and (iii) set forth rules for calculating risk-weighted assets for purposes of such requirements. The rules also made corresponding revisions to the prompt corrective action framework and include capital ratios and buffer requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The FRB amended its Small Bank Holding Company Policy Statement (Policy Statement), to exempt small bank holding companies with assets less than $3 billion from the above capital requirements. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company currently meets the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table and defined in the regulation) of common equity Tier 1 capital to risk-weighted assets, Tier 1 capital to adjusted total assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted assets.

The Bank’s average total assets for the first quarter of 2022 were $1.0 billion, its adjusted total assets were $1.0 billion, and its risk-weighted assets were $778.7 million. The following table presents the Bank’s capital amounts and ratios at March 31, 2022 for actual capital, required capital and excess capital, including ratios in order to qualify as being well capitalized under the prompt corrective actions regulations.

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	Actual					Required to be Adequately Capitalized					Excess Capital					To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Percent of Assets⁽¹⁾			Amount		Percent of Assets⁽¹⁾			Amount		Percent of Assets⁽¹⁾			Amount		Percent of Assets⁽¹⁾
March 31, 2022
Common equity Tier 1 capital	$	99,354		12.76	%	$	35,040		4.50	%	$	64,314		8.26	%	$	50,614		6.50	%
Tier 1 leverage		99,354		9.55			41,633		4.00			57,721		5.55			52,042		5.00
Tier 1 risk-based capital		99,354		12.76			46,720		6.00			52,634		6.76			62,294		8.00
Total risk-based capital		108,938		13.99			62,294		8.00			46,644		5.99			77,867		10.00

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

The Bank must maintain a capital conservation buffer of 2.50% composed of common equity Tier 1 capital above its minimum risk-based capital requirements in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Management believes that, as of March 31, 2022, 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 OCC has extensive discretion in its supervisory and enforcement activities and can adjust the requirement to be well-capitalized in the future.

(14) Stockholders’ Equity

The Company repurchased 30,000 shares of its common stock in the open market for a gross purchase price of $0.7 million under its share repurchase program during the first quarter of 2022. At March 31, 2022, the Company was authorized to repurchase up to $3.4 million more of its common stock under the existing share repurchase program. The Company also declared a quarterly dividend of 6 cents per share that was paid to stockholders as of the record date on March 9, 2022.

(15) Commitments and Contingencies

The Bank issues standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit issued and available at March 31, 2022 were approximately $10.5 million, expire over the next twenty-three months, and are collateralized primarily with commercial real estate mortgages. Since the conditions under which the Bank is required to fund the standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments.

From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. The Company is, and expects to become, engaged in foreclosure proceedings, collection actions, and other litigation as part of its normal banking activities. The Company examines each legal matter, and, in those situations where it determines that a particular legal matter presents loss contingencies that are both probable and reasonably estimable, establishes an appropriate accrual. In many situations, the Company is not able to estimate reasonably possible losses due to the preliminary nature of the legal matter, as well as a variety of other factors and uncertainties. Based on the Company’s current understanding of all of the outstanding legal matters, management does not believe that judgments or settlements arising from any pending or threatened litigation, individually or in the aggregate, would have a material adverse effect on the consolidated financial condition or results of operations.

(16) Business Segments

The Bank has been identified as a reportable operating segment in accordance with the provisions of ASC 280. HMN, the holding company, did not meet the quantitative thresholds for a reportable segment and therefore is included in the “Other” category.

The Company evaluates performance and allocates resources based on the segment’s net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of directors.

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The following table sets forth certain information about the reconciliations of reported profit and assets for each of the Company’s reportable segments.

(Dollars in thousands)	Home Federal Savings Bank			Other			Eliminations			Consolidated Total
At or for the quarter ended March 31, 2022:
Interest income - external customers	$	7,565			0			0			7,565
Non-interest income - external customers		2,375			0			0			2,375
Intersegment interest income		0			9			(9	)		0
Intersegment non-interest income		59			1,638			(1,697	)		0
Interest expense		292			0			(9	)		283
Provision for loan losses		296			0			0			296
Non-interest expense		7,106			205			(59	)		7,252
Income tax expense (benefit)		667			(45	)		0			622
Net income		1,638			1,487			(1,638	)		1,487
Total assets		1,028,627			100,755			(99,984	)		1,029,398
At or for the quarter ended March 31, 2021:
Interest income - external customers	$	7,889			0			0			7,889
Non-interest income - external customers		3,254			1			0			3,255
Intersegment interest income		0			8			(8	)		0
Intersegment non-interest income		58			3,594			(3,652	)		0
Interest expense		461			0			(8	)		453
Provision for loan losses		(576	)		0			0			(576	)
Non-interest expense		6,309			228			(58	)		6,479
Income tax expense (benefit)		1,413			(43	)		0			1,370
Net income		3,594			3,418			(3,594	)		3,418
Total assets		970,641			105,195			(104,531	)		971,305

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Item 2:

HMN FINANCIAL, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Information

Safe Harbor Statement

This quarterly report on Form 10-Q and other reports filed by the Company with the SEC may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “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 maintaining credit quality; maintaining net interest margins; 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 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 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, 2021and Part II, Item 1A of its subsequently filed quarterly reports on Form 10-Q. All statements in this quarterly report on Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no duty to update any of the forward-looking statements after the date of this quarterly report on Form 10-Q.

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General

HMN is the stock savings bank holding company for the Bank, which operates community banking and loan production offices in Minnesota, Iowa and Wisconsin. The earnings of the Company are primarily dependent on the Bank's net interest income, which is the difference between interest earned on loans and investments, and the interest paid on interest-bearing liabilities such as deposits and other borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the interest rate spread. Net interest income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and composition of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net earnings are also affected by the generation of non-interest income, which consists primarily of gains from the sale of loans, fees for servicing loans, commissions on the sale of uninsured investment products, and service charges on deposit accounts. The Bank incurs expenses in addition to interest expense in the form of compensation and benefits, occupancy and equipment expenses, provisions for 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

While our significant accounting policies are described in the notes to our consolidated financial statements, we believe the following discussion addresses our most critical accounting estimates, which are those estimates made in accordance with U.S. generally accepted accounting principles (GAAP) that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. The Company has identified the following critical accounting estimates that management believes involve the most difficult, subjective, and/or complex judgments that are inherently uncertain. Therefore, actual financial results could differ significantly depending upon the estimates, assumptions and other factors used.

Allowance for 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, regional and local economic conditions such as unemployment data, loan delinquencies, 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 a decrease in the allowance and a credit 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. In addition, the Company will be required to adopt Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments in the first quarter of 2023. See “Note 1 - New Accounting Pronouncements” in the Notes to Consolidated Financial Statements for further information on the potential impact of adopting ASU 2016-13.

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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 relate to unrealized losses on the investment portfolio and 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 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.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2022 COMPARED TO THE QUARTER ENDED MARCH 31, 2021

Net Income

Net income was $1.5 million for the first quarter of 2022, a decrease of $1.9 million compared to net income of $3.4 million for the first quarter of 2021. Diluted earnings per share for the first quarter of 2022 was $0.34, a decrease of $0.40 from diluted earnings per share of $0.74 for the first quarter of 2021. The decrease in net income between the periods was primarily because of a $0.9 million increase in the provision for loan losses due to an increase in the balance of the loan portfolio, a $0.9 million decrease in the gain on sales of loans due to a decrease in mortgage loan originations and sales and a $0.5 million increase in compensation and benefits expense primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production. These decreases in net income were partially offset by a $0.8 million decrease in income tax expense as a result of the decrease in pre-tax income between the periods.

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Net Interest Income

Net interest income was $7.3 million for the first quarter of 2022, a decrease of $0.1 million, or 2.1%, compared to $7.4 million for the first quarter of 2021. Interest income was $7.6 million for the first quarter of 2022, a decrease of $0.3 million, or 4.1%, from $7.9 million for the first quarter of 2021. Interest income decreased despite the $105.1 million increase in the average interest-earning assets between the periods primarily because of a decrease in the average yield earned on interest-earning assets between the periods. The average yield earned on interest-earning assets was 3.06% for the first quarter of 2022, a decrease of 50 basis points from 3.56% for the first quarter of 2021. The decrease in the average yield is primarily related to the $0.6 million decrease in the yield enhancements recognized on Paycheck Protection Program (PPP) loans that were repaid between the periods and a decrease in the yields earned on loans and investments due to the continued low interest rate environment. This trend is expected to continue throughout 2022 as all of the PPP loans have been repaid as of March 31, 2022.

Interest expense was $0.3 million for the first quarter of 2022, a decrease of $0.2 million, or 37.5%, compared to $0.5 million for the first quarter of 2021. Interest expense decreased despite the $100.3 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 0.13% for the first quarter of 2022, a decrease of 9 basis points from 0.22% for the first quarter of 2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the repricing of maturing certificates of deposit in the continued low interest rate environment.

Net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2022 was 2.94%, a decrease of 42 basis points, compared to 3.36% for the first quarter of 2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets. The decrease in the average yield is primarily related to the $0.6 million decrease in the yield enhancements recognized on PPP loans that were repaid between the periods and a decrease in the yields earned on loans and investments due to the continued low interest rate environment.

A summary of the Company’s net interest margin for the three-month periods ended March 31, 2022 and 2021 is as follows:

	For the Three-Month Period Ended
	March 31, 2022							March 31, 2021
(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	$	295,370		788		1.08	%	$	164,518		498		1.23	%
Loans held for sale		3,967		34		3.52			5,087		37		2.95
Single family loans, net		170,047		1,437		3.43			144,965		1,329		3.72
Commercial loans, net		449,279		4,809		4.34			437,881		5,372		4.98
Consumer loans, net		40,727		471		4.69			52,238		622		4.83
Other		43,593		26		0.24			93,225		31		0.13
Total interest-earning assets		1,002,983		7,565		3.06			897,914		7,889		3.56

Interest-bearing liabilities:
Checking accounts		160,315		41		0.10			154,277		44		0.12
Savings accounts		121,033		18		0.06			105,795		16		0.06
Money market accounts		250,745		132		0.21			223,563		129		0.23
Certificate accounts		84,343		92		0.44			99,801		264		1.07
Total interest-bearing liabilities		616,436							583,436
Non-interest checking		303,697							236,471
Other non-interest bearing liabilities		2,636							2,544
Total interest-bearing liabilities and non-interest bearing deposits	$	922,769		283		0.13		$	822,451		453		0.22
Net interest income			$	7,282						$	7,436
Net interest rate spread						2.93	%						3.34	%
Net interest margin						2.94	%						3.36	%

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Provision for Loan Losses

The provision for loan losses was $0.3 million for the first quarter of 2022, an increase of $0.9 million compared to ($0.6) million for the first quarter of 2021. The provision for loan losses increased between the periods primarily because of the growth in the loan portfolio during the first quarter of 2022. The credit provision recorded in 2021 was primarily the result of improvements in the underlying operations supporting many of the loans that were initially negatively impacted by the COVID-19 pandemic in 2020.

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 the size of the portfolio and our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter as a result of an increase in the required quantitative reserves due to an increase in the loan portfolio. The qualitative allowance for loan losses related to the disruption in business activity as a result of the COVID-19 pandemic was reduced during the quarter because of a perceived reduction in this risk due to improving conditions. The reduction in pandemic related qualitative reserves was partially offset by an increase in the qualitative reserves for other economic factors. The other qualitative reserves were increased due to a perceived deterioration of economic condition during the quarter, including an increase in the rate of inflation, and enacted and expected increases in the federal funds rate.

A reconciliation of the Company’s allowance for loan losses for the first quarters of 2022 and 2021 is summarized as follows:

(Dollars in thousands)	2022			2021
Balance at January 1,	$	9,279			10,699
Provision		296			(576	)
Charge offs:
Consumer		(1	)		(31	)
Recoveries		10			40
Balance at March 31,	$	9,584			10,132

Allocated to:
General allowance	$	9,142			9,927
Specific allowance		442			205
	$	9,584			10,132

Non-Interest Income

Non-interest income was $2.4 million for the first quarter of 2022, a decrease of $0.9 million, or 27.0%, from $3.3 million for the first quarter of 2021. Gain on sales of loans decreased $0.9 million between the periods primarily because of a decrease in single family loan originations and sales. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of Small Business Administration loans that were being serviced for others. These decreases were partially offset by a slight increase in fees and service charges between the periods due primarily to an increase in retail overdraft fees. Other non-interest income increased slightly due primarily to an increase in the sale of uninsured investment products between the periods.

Non-Interest Expense

Non-interest expense was $7.3 million for the first quarter of 2022, an increase of $0.8 million, or 11.9%, from $6.5 million for the first quarter of 2021. Compensation and benefits expense increased $0.5 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production between the periods. Professional services expense increased $0.3 million between the periods primarily because of an increase in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022. Other non-interest expense increased slightly between the periods due primarily to a decrease in the printing and supply costs that were deferred as a result of the decreased mortgage loan production and an increase in deposit insurance costs due to asset growth. Data processing expenses increased slightly between the periods due to an increase in debit card and mobile banking costs. These increases in non-interest expense were partially offset by a $0.1 million decrease in occupancy and equipment expense due primarily to a decrease in rent expense between the periods as a result of purchasing the combined corporate and branch location in Rochester, Minnesota in the fourth quarter of 2021.

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Income Taxes

Income tax expense was $0.6 million for the first quarter of 2022, a decrease of $0.8 million from $1.4 million for the first quarter of 2021. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

FINANCIAL CONDITION

Non-Performing Assets

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

	March 31,			December 31,
(Dollars in thousands)	2022			2021
Non‑performing loans:
Single family	$	478		$	340
Commercial real estate		3,551			3,757
Consumer		500			517
Commercial business		7			7
Total		4,536			4,621

Foreclosed and repossessed assets:
Commercial real estate		290			290
Total non‑performing assets	$	4,826		$	4,911
Total as a percentage of total assets		0.47	%		0.46	%
Total as a percentage of total loans receivable		0.66	%		0.70	%
Allowance for loan losses to non-performing loans		211.31	%		200.81	%

Delinquency data:
Delinquencies ⁽¹⁾
30+ days	$	913		$	1,418
90+ days		0			0
Delinquencies as a percentage of loan portfolio ⁽¹⁾
30+ days		0.13	%		0.21	%
90+ days		0.00	%		0.00	%

⁽¹⁾	Excludes non-accrual loans.

Total non-performing assets were $4.8 million at March 31, 2022, a decrease of $0.1 million, or 1.8%, from $4.9 million at December 31, 2021. Non-performing loans decreased $0.1 million and foreclosed and repossessed assets remained the same during the first quarter of 2022.

Dividends

The Company declared a quarterly dividend of 6 cents per share of common stock that was paid on March 9, 2022. The declaration and amount of any future cash dividends remains subject to the sole discretion of the Board of Directors and will depend upon many factors, including the Company’s results of operations, financial condition, capital requirements, regulatory and contractual restrictions, business strategy and other factors deemed relevant by the Board of Directors.

LIQUIDITY AND CAPITAL RESOURCES

For the quarter ended March 31, 2022, the net cash provided by operating activities was $11.1 million. The Company collected $12.1 million in principal repayments and maturities on securities and purchased securities and FHLB stock for $25.2 million. The Company had a net decrease in deposit balances of $30.3 million and an increase of customer escrows of $0.8 million during the quarter. It also purchased $0.7 million of treasury stock, obtained $0.1 million in treasury stock for the taxes payable on stock awards, paid dividends to stockholders of $0.3 million, and purchased $0.2 million of premises and equipment. Loans receivable also increased $32.3 million during the quarter.

The Company has certificates of deposit with outstanding balances of $54.8 million that come due over the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that cash outflows from deposits that do not renew will be replaced with a combination of other customers’ deposits or FHLB advances. FRB borrowings could also be used to fund unanticipated outflows of certificates of deposit.

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The Company had eleven deposit customers each with aggregate deposits greater than $5.0 million as of March 31, 2022. The $101.2 million in funds held by these customers may be withdrawn at any time, but management anticipates that the majority of these deposits will not be withdrawn from the Bank over the next twelve months. If these deposits were withdrawn, it is anticipated that they would be replaced with deposits from other customers or FHLB advances. FRB borrowings could also be used to replace unanticipated outflows of large checking and money market deposits.

The Company had the ability to borrow $182.6 million from the FHLB at March 31, 2022 based on the collateral value of the loans pledged. The credit policy of the FHLB relating to the collateral value of the loans collateralizing the available line of credit with the FHLB may change such that the current collateral pledged to secure future advances is no longer acceptable or the formulas for determining the excess pledged collateral may change. The FHLB could also reduce the amount of funds it will lend to the Bank. It is not anticipated that the Bank will need to find alternative funding sources in the next twelve months to replace the available borrowings from the FHLB. However, if needed, the Bank could borrow an additional $72.7 million from the FRB at March 31, 2022 based on the collateral value of the loans pledged.

The Company’s primary source of cash is dividends from the Bank. At March 31, 2022, the Company had $11.4 million in cash. The primary use of cash by the Company is the payment of operating expenses, the repurchase of Company stock, and the payment of dividends to stockholders.

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, including Company level expenses, 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 also 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 were to raise capital through the issuance of additional shares of common stock or other equity securities, it would dilute the ownership interests of existing stockholders 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 its control. Accordingly, the Company may not be able to raise additional capital, if deemed prudent, on favorable economic terms or other terms acceptable to it.

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.

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The following table discloses the projected changes in the market value of the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis-point changes in interest rates from interest rates in effect on March 31, 2022.

(Dollars in thousands)	Market Value
Basis point change in interest rates	-100			0			+100			+200
Total market-risk sensitive assets	$	1,026,342			1,001,596			979,280			956,377
Total market-risk sensitive liabilities		884,967			832,107			789,265			752,326
Off-balance sheet financial instruments		112			0			265			496
Net market risk	$	141,263			169,489			189,750			203,555
Percentage change from current market value		(16.65	)%		0.00	%		11.95	%		20.10	%

The preceding table was prepared utilizing a model using the following assumptions (the Model Assumptions) regarding prepayment and decay ratios that were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 2% to 44%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 6% and 44%, depending on the note rate and the period to maturity. Mortgage-backed securities were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook accounts and money market accounts were assumed to decay at an annual rate of 7% and 17%, respectively. Retail checking accounts, commercial checking accounts and commercial money market accounts were assumed to decay at annual rates of 6%, 22% and 13%, respectively. Callable investments were projected to be called at the first call date where the projected interest rate on similar remaining term instruments was less than the interest rate on the callable investment.

Certain shortcomings are inherent in the method of analysis presented in the above table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the Interest Spread) will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets that are approaching their lifetime interest rate caps could be different from the values disclosed in the table. Certain liabilities, such as certificates of deposit, have fixed rates that restrict interest rate changes until maturity. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may also decrease in the event of a substantial sustained increase in interest rates.

Asset/Liability Management

The Company’s management reviews the impact that changing interest rates will have on the Company’s net interest income projected for the next twelve months to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income during the twelve month period ended March 31, 2023 of immediate interest rate changes called rate shocks:

(Dollars in thousands)
Rate Shock in Basis Points	Projected Change in Net Interest Income			Percentage Change
+200	$	1,785			6.11	%
+100		860			2.94
0		0			0.00
-100		(1,321	)		(4.52	)

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

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

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.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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

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HMN FINANCIAL, INC.

PART II - OTHER INFORMATION

ITEM 1.

Legal Proceedings.

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

ITEM 1A.

Risk Factors.

The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC, under “Part 1, Item 1A. Risk Factors” could affect the Company’s financial performance and could cause its actual results for future periods to differ materially from its anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information with respect to purchases made by the Company of its own stock during the first quarter of 2022:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs (a)
January 1, 2022 to January 31, 2022		0	$	N/A		0	$	4,147,650
February 1, 2022 to February 28, 2022		0		N/A		0	$	4,147,650
March 1, 2022 to March 31, 2022		30,000		24.78		743,400	$	3,404,250
Total		30,000	$	24.78		743,400	$	3,404,250

(a) On July 27, 2021 the Company’s Board of Directors increased the amount of shares authorized to be repurchased to $6.0 million. Subsequent to that authorization, $2.6 million of shares have been repurchased under the program. Share repurchases may be executed through various means, including through open market transactions, privately negotiated transactions or otherwise. The repurchase program does not obligate the Company to purchase any shares and has no set expiration date.

ITEM 3.

Defaults Upon Senior Securities.

None.

ITEM 4.

Mine Safety Disclosures.

Not applicable.

ITEM 5.

Other Information.

None.

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ITEM 6.

Exhibits.

INDEX TO EXHIBITS

Exhibit		Filing Status
Number	Exhibit

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

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

32	Section 1350 Certifications of CEO and CFO	Filed Electronically

101	Financial statements from the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2022, filed with the Securities and Exchange Commission on May 4, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL); (i) the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021, (ii) the Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021, (iii) the Consolidated Statements of Stockholders’ Equity for the Three Month Periods Ended March 31, 2022 and 2021, (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021, and (v) Notes to Consolidated Financial Statements.	Filed Electronically

104	Cover Page Interactive Data File from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 (formatted as Inline XBRL and contained in Exhibit 101).	Filed Electronically

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SIGNATURES

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

		HMN FINANCIAL, INC.

		Registrant


Date:	May 4, 2022	/s/ Bradley Krehbiel
		Bradley Krehbiel, President and Chief Executive Officer
		(Duly Authorized Officer)

Date:	May 4, 2022	/s/ Jon Eberle
		Jon Eberle, Senior Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)