Commercial loans boost earnings at Minnesota bank

Commercial loan volume picked up very nicely year-over-year for HMN Financial Inc. Better yet, the yield on that portfolio jumped to 5.77 percent from 5.14 percent as the Rochester, Minn.-based operator of Home Federal Savings Bank sharpened its focus on higher yielding loan products..The results are quickly reflected in the company's earnings report. For the first six months of 2016, HMN earned $6.8 million, a 46 percent climb over year-earlier results. The powerhouse behind this was a loan portfolio that not only expanded by double digits but saw its net interest margin close out the business period at 4.34 percent. That compares to 3.56 percent in the 2015 period..Shareholders have taken heed of this, as well. So far this year, HMN shares are up 20 percent. S&P Capital IQ rates the stock a buy..Part of the higher results are due to the third-quarter 2015 purchase of Kasson State Bank, and the second-quarter 2016 acquisition of a bank branch in Albert Lea. But the lion's share has been due to commercial loans. In the business period that ended June 30 they comprised 54 percent of HMN's portfolio, and 67 percent of interest earned. A year earlier they accounted for 46 percent of the bank's portfolio and 61.6 percent of interest earned..Brad Krehbiel, president/CEO of HMN, said extra staff was brought on board to ramp up lending efforts. "Just as importantly," he added, "we also invested in training our market presidents to provide business loans and treasury management products so that nearly all of our branches are now managed by staff who understand and can satisfy the needs of businesses in their communities.".The second biggest interest earner for HMN was home mortgages, where the average outstanding balance grew 41.8 percent year over year. Here again, HMN enjoyed a relatively high yield of 4.18 percent at a time when home loans nationwide are advertised in the low 3 percent range..Krehbiel said the increase was due in part to the acquisition of the Kasson State Bank. But during the year HMN formed a team of lenders and underwriters to review home loan applications from credit-worthy clients whose needs are not best met by secondary market products.."We portfolio these loans and benefit from the improved interest income," he said..The mortgage loans in question are made only to applicants who have strong, clean credit histories. However, Krehbiel said their request might carry a loan to value or debt to income ratio that might be a bit higher than what a conforming secondary market loan would require. The underwriting team structures the loan to insure that any exception to standard terms and conditions is mitigated by other strengths in the credit.."The result," Krehbiel said, "is a loan that fits the unique needs of our client and one that carries competitive and prudent terms and conditions for our bank.".The company has funded these loans in part by putting to work money that had been tied up in securities available for sale. That balance fell by $50 million over the year. The yield on those securities averaged 1.62 percent at mid year, so it made sense to shift funds to higher-yield products such as the commercial loans..Home Federal conducts its banking from 12 full service branches in Minnesota and one in Iowa. The Minnesota operations are focused on the southeastern portion of the state, with Rochester being the largest city served. There is one branch, Eagan, which is located in the metro area of Minneapolis-St. Paul..In a market like the Twin Cities, "there is no way a small institution like HMN can compete with the promotional budgets of the big banks in that market," Krehbiel said. So HMN strives to hire the best employees in the market. It also works its network – existing clients, and strategic partners such as attorneys, accounts and realtors – to generate word of mouth referrals..HMN also has three loan production offices: two in Minnesota and one in suburban Milwaukee. Krehbiel said the loan production offices enable the bank to enter a market without a considerable capital investment. They focus primarily on meeting the needs of area businesses. They might not offer HMN's entire suite of banking products on site, but he said that a centralized support staff will regularly meet with clients at their place of business. ."We find that most business owners are too busy to come to the bank and prefer to conduct their daily banking online, so long as they know a human being can be reached should the need arise."