HMN Financial is a holding company that own a bank, Home Federal Savings Bank. The Bank’s operations are in the Iowa, Minnesota and Wisconsin areas. The Bank focuses on traditional banking in the various areas for its customers. The stock price is trading at $19.25 and the market capitalization is $193 million.
I have been extremely bullish on banks for a number of months. As it turns out the bullishness is warranted. Many larger banks are seeing their stocks rise. The same reasons will affect the lesser-known stocks simultaneously. HMNF is a great example of that.
A bank earns its money via the differential between the loans it makes, collecting the interest, and the deposit interest it pays. Given that variable, here is HMNF’s loans and deposit numbers, respectively, over the past several years:
2012: $454,045 / $514,951
2013: $384,615 / $553,930
2014: $365,113 / $496,750
2015: $463,185 / $559,387
What you are looking to achieve as a bank is a continual increase in the deposits and loans. They should go hand-in-hand. Over the past several years the deposits have been increasing incrementally. This has been a strong trend. Likewise, the bank has been able to translate that into increased loans, as a bank should focus on. This continual increase is vital to what a bank does; it is a bank’s primary revenue stream.
Also, there is the total interest income and interest expense. What you are looking for in this listing is the largest possible interest income with the lowest interest expense. So, here are the interest incomes and expenses, respectively, as well as in the final column the earnings-per-share to show how these numbers translate:
2012: $30,816 / $7,139 / $0.88
2013: $22,983 / $3,289 / $6.15
2014: $20,613 / $1,211 / $1.40
2015: $21,453 / $1,507 / $0.69
There was a continual decrease in the interest income with a simultaneous decrease in the expenses, naturally. The earnings tell a slightly different story with a choppy return. That is not a bad thing. in fact, what I prefer is far more stable earnings, something this stock has not been able to provide. But, that turns out to be a good thing if you are looking to invest in the company. As it turns out other investors desire the same, easily predictable patterns, which are very difficult to locate in the investing world. But, because the earnings have been a bit choppy, the stock has been trading on the lower end of possibilities. Earnings-per-share is coming in, at the last quarter’s numbers, at $1.25 per share.
The stock is trading just above the 10-times earnings levels that I look for when I am picking a stock. But, 2016 is expected to come in around $1.50 per share. That would mean that the market is moving in advance of the number and is up around the $22.50 level at average ratios. But, the stock market is trading not at the 15-times earnings that are typically average but instead the market is trading above 25-times earnings. That is a massive ratio that is mostly unsustainable. However, with a company such as HMNF you would expect to see potential to be a bit higher.
The economy has a lot of potential with growth. The Federal Reserve is increasing interest rates which directly affects the potential revenue of a bank. As the economy improves continually so will this bank’s prospects going forward. Putting this stock into your portfolio will prove to be a long term smart decision. The stock is underpriced when considering the earnings-per-share. Also, with the potential of the economy and the revenue stream of banks, considering interest rates heading higher, this sector will see large advances with their stock price. You will want to take advantage of that and get into HMNF for a long term position.