Third Quarter Summary

  • Net income of $3.1 million, up $1.0 million, compared to $2.1 million in third quarter of 2019 
  • Diluted earnings per share of $0.67, up $0.22, compared to $0.45 in third quarter of 2019
  • Gain on sales of loans of $3.0 million, up $2.2 million from $0.8 million in third quarter of 2019
  • Provision for loan losses of $0.8 million, up $1.2 million from ($0.4) million in third quarter of 2019
  • Net interest margin of 3.40%, down 57 basis points, compared to 3.97% in third quarter of 2019

Year to Date Summary

  • Net income of $7.2 million, up $0.6 million, compared to $6.6 million in first nine months of 2019
  • Diluted earnings per share of $1.54, up $0.13, compared to $1.41 in first nine months of 2019
  • Gain on sales of loans of $6.5 million, up $4.7 million from $1.8 million in first nine months of 2019
  • Provision for loan losses of $1.5 million, up $3.0 million from ($1.5) million in first nine months of 2019
  • Net interest margin of 3.57%, down 57 basis points, compared to 4.14% in first nine months of 2019

Net Income Summary

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in thousands, except per share amounts) 2020 2019  2020 2019 
Net income$3,101 2,076 $7,177 6,557 
Diluted earnings per share 0.67 0.45  1.54 1.41 
Return on average assets (annualized) 1.39%1.11% 1.15%1.20%
Return on average equity (annualized) 12.50%9.10% 9.98%9.97%
Book value per share$20.91 18.83 $20.91 18.83 

ROCHESTER, Minn., Oct. 19, 2020 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $898 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $3.1 million for the third quarter of 2020, an increase of $1.0 million, compared to net income of $2.1 million for the third quarter of 2019.  Diluted earnings per share for the third quarter of 2020 was $0.67, an increase of $0.22 per share, compared to diluted earnings per share of $0.45 for the third quarter of 2019.  The increase in net income was primarily because of a $2.2 million increase in the gain on sales of mortgage loans between the periods.  The increase in the gain on sales of mortgage loans was due primarily to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods.  Net interest income increased $0.2 million primarily because of a decrease in interest expense between the periods.  These increases in net income were partially offset by a $1.2 million increase in the provision for loan losses between the periods.  The provision for loan losses increased primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic.  Income tax expense also increased $0.3 million as a result of the increased pre-tax income between the periods.

President’s Statement

“The COVID-19 pandemic and the related social distancing mandates continued to have a significant impact on the Company in the third quarter of 2020,” said Bradley Krehbiel, President and Chief Executive Officer of HMN.  “The economic effects of the pandemic resulted in the recording of additional provisions for loan losses in the third quarter as we continue to analyze the impact of the pandemic on our borrowers.  The increased provision for loan losses combined with the net interest margin compression we are experiencing, as a result of the historic low interest rate environment, continue to have a negative impact on the Company’s earnings.  Despite these challenges, we are pleased to report the increases in net income for both the quarter and the first nine months of 2020, due in large part to the increased mortgage loan origination activity and the related gain on sales of loans.” 
                                                           
Third Quarter Results

Net Interest Income

Net interest income was $7.3 million for the third quarter of 2020, an increase of $0.2 million, or 2.8%, from $7.1 million for the third quarter of 2019.  Interest income was $7.9 million for the third quarter of 2020, a decrease of $0.1 million, or 0.6%, from $8.0 million for the third quarter of 2019. Interest income decreased despite the $143.4 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets.  The average yield earned on interest-earning assets was 3.71% for the third quarter of 2020, a decrease of 76 basis points from 4.47% for the third quarter of 2019.  The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $0.7 million for the third quarter of 2020, a decrease of $0.2 million, or 27.6%, from $0.9 million for the third quarter of 2019.  Interest expense decreased despite the $133.7 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 0.34% for the third quarter of 2020, a decrease of 22 basis points from 0.56% for the third quarter of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2020 was 3.40%, a decrease of 57 basis points, compared to 3.97% for the third quarter of 2019.  The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

A summary of the Company’s net interest margin for the three and nine month periods ended September 30, 2020 and 2019 is as follows:

  For the three month period ended 
  September 30, 2020  September 30, 2019 
(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$103,132 434 1.67%$80,286 365 1.80%
Loans held for sale 9,309 65 2.76  3,557 43 4.72 
Single family loans, net 134,460 1,325 3.92  115,844 1,236 4.23 
Commercial loans, net 474,325 5,390 4.52  398,674 5,229 5.20 
Consumer loans, net 60,473 709 4.66  73,788 920 4.95 
Other 71,180 26 0.15  37,355 205 2.18 
Total interest-earning assets 852,879 7,949 3.71  709,504 7,998 4.47 
               
Interest-bearing liabilities and non-interest-bearing deposits:              
Checking accounts 129,276 41 0.13  93,024 23 0.10 
Savings accounts 93,022 17 0.07  80,269 16 0.08 
Money market accounts 221,991 190 0.34  173,606 303 0.69 
Certificates 111,847 408 1.45  127,888 564 1.75 
Total interest-bearing liabilities 556,136      474,787     
Non-interest checking 219,512      166,972     
Other non-interest bearing deposits 2,218      2,415     
Total interest-bearing liabilities and non-interest-
   bearing deposits

$
777,866 656 0.34 
$
644,174 906 0.56 
Net interest income  $7,293     $7,092   
Net interest rate spread     3.37%     3.91%
Net interest margin     3.40%     3.97%
               


  For the nine month period ended 
  September 30, 2020  September 30, 2019 
(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$100,889 1,371 1.81%$79,163 1,051 1.77%
Loans held for sale 6,942 156 2.99  2,417 82 4.51 
Mortgage loans, net 130,441 3,907 4.00  115,162 3,744 4.35 
Commercial loans, net 446,580 15,781 4.72  402,469 15,966 5.30 
Consumer loans, net 64,570 2,312 4.78  73,384 2,805 5.11 
Other 51,030 149 0.39  24,886 381 2.05 
Total interest-earning assets 800,452 23,676 3.95  697,481 24,029 4.60 
               
Interest-bearing liabilities and non-interest-bearing deposits:              
Checking accounts 115,110 102 0.12  95,748 73 0.10 
Savings accounts 87,587 48 0.07  79,599 47 0.08 
Money market accounts 205,868 684 0.44  174,565 878 0.67 
Certificates 118,422 1,459 1.65  120,376 1,420 1.58 
Advances and other borrowings 0 0 0.00  384 7 2.54 
Total interest-bearing liabilities 526,987      470,672     
Non-interest checking 200,965      159,820     
Other non-interest bearing deposits 2,384      2,030     
Total interest-bearing liabilities and non-interest-
   bearing deposits

$
730,336 2,293 0.42 
$
632,522 2,425 0.51 
Net interest income  $21,383     $21,604   
Net interest rate spread     3.53%     4.09%
Net interest margin     3.57%     4.14%
               

Provision for Loan Losses

The provision for loan losses was $0.8 million for the third quarter of 2020, an increase of $1.2 million from the ($0.4) million provision for loan losses for the third quarter of 2019.  The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The amount of the increase in the allowance for loan losses related to the economic environment is based, in part, on the amount of loans to borrowers that continued to have their loan payments deferred because of the impact of the pandemic.  At September 30, 2020 the Bank had $82.0 million of loans to borrowers who had their loan payments deferred for up to six months compared to $119.1 million of loans to borrowers who had their payments deferred at June 30, 2020.

A summary of deferred loans at September 30, 2020 and June 30, 2020 by industry or collateral type is as follows:


(Dollars in thousands)
 Balance
September 30, 2020
 Balance
June 30, 2020
Commercial real estate loans by industry:    
Hotels (1)$54,660 54,660
Retail/Office 7,127 20,322
Theaters 11,269 11,269
Multi-family 0 11,195
Single family 0 4,675
Restaurant/Bar 2,876 4,477
Other 5,747 9,449
Total commercial loans 81,679 116,047
     
Consumer loans by collateral type:    
Single family 366 2,955
Other 0 77
Total consumer loans 366 3,032
Total deferred loans$82,045 119,079
     

(1) Approximately $38.5 million of the hotel properties are located in Minnesota with approximately $21.3 million located in Rochester, Minnesota, $13.8 million in the Minneapolis/St. Paul, Minnesota metro area, and $3.4 million in St. Cloud, Minnesota.

All of the borrowers whose loan deferral period ended during the third quarter of 2020 had resumed making their normal payments and none of the loans removed from the deferral list were classified as non-performing as of September 30, 2020.  The initial deferral period for all remaining deferred loans at September 30, 2020 is scheduled to end in the fourth quarter of 2020.  The commercial credit area continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely.  This information is used to analyze the performance of these credits and to help anticipate any potential issues that these credits may have when their initial deferral period ends.  It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries, may need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.

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 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 qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and an increase in the reserves related to an analysis of the Bank’s charged off loan history.  Total non-performing assets were $3.0 million at September 30, 2020, a decrease of $0.2 million, or 6.3%, from $3.2 million at June 30, 2020.  Non-performing loans increased $0.1 million and foreclosed and repossessed assets decreased $0.3 million during the third quarter of 2020.  

A reconciliation of the Company’s allowance for loan losses for the quarters ended September 30, 2020 and 2019 is summarized as follows:

   
(Dollars in thousands)                      2020  2019 
Balance at June 30,$8,649  8,624 
Provision 770  (420)
Charge offs:    
Single family 0  (2)
Consumer (29) (46)
Commercial business (8) 0 
Recoveries 150  39 
Balance at September 30,$9,532  8,195 
     
Allocated to:    
General allowance$9,416  7,528 
Specific allowance 116  667 
 $9,532  8,195 
     

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 and December 31, 2019.

                                                                   September 30,  June 30,  December 31, 
(Dollars in thousands)                2020  2020  2019 
Non‑Performing Loans:         
Single family$352 $390 $617 
Commercial real estate 1,537  1,579  184 
Consumer 641  475  659 
Commercial business 11  27  621 
Total 2,541  2,471  2,081 
          
Foreclosed and Repossessed Assets:         
Single family 0  269  166 
Commercial real estate 414  414  414 
Total non‑performing assets$2,955 $3,154 $2,661 
Total as a percentage of total assets 0.33% 0.37% 0.34%
Total non‑performing loans$2,541 $2,471 $2,081 
Total as a percentage of total loans receivable, net 0.38% 0.37% 0.35%
Allowance for loan losses to non-performing loans 375.19% 349.92% 411.45%
          
Delinquency Data:         
Delinquencies (1)         
30+ days$995 $775 $1,167 
90+ days 0  0  0 
Delinquencies as a percentage of loan portfolio (1)         
30+ days 0.14% 0.11% 0.19%
90+ days 0.00% 0.00% 0.00%
          

(1) Excludes non-accrual loans.

Non-Interest Income and Expense

Non-interest income was $4.4 million for the third quarter of 2020, an increase of $2.2 million, or 97.4%, from $2.2 million for the third quarter of 2019.  Gain on sales of loans increased $2.2 million between the periods primarily because of an increase in single family loan originations and sales.  Other non-interest income increased $0.1 million due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.  These increases in the non-interest income were partially offset by a decrease of $0.1 million in fees and service charges earned between the periods due primarily to a decrease in the overdraft fees collected.       

Non-interest expense was $6.6 million for the third quarter of 2020, a decrease of $0.1 million, or 2.2%, from $6.7 million for the third quarter of 2019.  Professional services expense decreased $0.2 million between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim.  Occupancy and equipment expense decreased slightly between the periods due to a decrease in depreciation and non-capitalized equipment costs. Other non-interest expense decreased slightly due primarily to an increase in the gains recognized on the sale of other real estate owned between the periods.  These decreases in non-interest expense were partially offset by a $0.1 million increase in compensation and benefits expense related to the increased mortgage loan production between the periods.  Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses.   

Income tax expense was $1.2 million for the third quarter of 2020, an increase of $0.3 million from $0.9 million for the third quarter of 2019.  The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.   

Return on Assets and Equity

Return on average assets (annualized) for the third quarter of 2020 was 1.39%, compared to 1.11% for the third quarter of 2019.  Return on average equity (annualized) was 12.50% for the third quarter of 2020, compared to 9.10% for the same period in 2019.  Book value per common share at September 30, 2020 was $20.91, compared to $18.83 at September 30, 2019.

Nine Month Period Results

Net Income

Net income was $7.2 million for the nine month period ended September 30, 2020, an increase of $0.6 million, or 9.5%, compared to net income of $6.6 million for the nine month period ended September 30, 2019.  Diluted earnings per share for the nine month period ended September 30, 2020 was $1.54, an increase of $0.13 per share, compared to diluted earnings per share of $1.41 for the same period in 2019.  The increase in net income was primarily because of a $4.7 million increase in the gain on sales of mortgage loans between the periods.  The increase in the gain on sales of mortgage loans was due primarily to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods. This increase in net income was partially offset by a $3.0 million increase in the provision for loan losses between the periods.  The provision for loan losses increased primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and also because of the decrease in the net recoveries received in the current period when compared to the same period of 2019.  Non-interest expenses increased $0.5 million due primarily to an increase in compensation expense between the periods.  Net interest income decreased $0.2 million primarily because of a decrease in the yield earned on interest earning assets due to the decrease in the average prime rate between the periods.  Income tax expense also increased $0.2 million as a result of the increased pre-tax income between the periods.

Net Interest Income

Net interest income was $21.4 million for the first nine months of 2020, a decrease of $0.2 million, or 1.0%, from $21.6 million for the same period in 2019.  Interest income was $23.7 million for the nine month period ended September 30, 2020, a decrease of $0.3 million, or 1.5%, from $24.0 million for the same nine month period in 2019.  Interest income decreased despite the $103.0 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets.  The average yield earned on interest-earning assets was 3.95% for the first nine months of 2020, a decrease of 65 basis points from 4.60% for the first nine months of 2019.  The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $2.3 million for the first nine months of 2020, a decrease of $0.1 million, or 5.4%, compared to $2.4 million in the first nine months of 2019. Interest expense decreased despite the $97.8 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 0.42% for the first nine months of 2020, a decrease of 9 basis points from 0.51% for the first nine months of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the first nine months of 2020 was 3.57%, a decrease of 57 basis points, compared to 4.14% for the first nine months of 2019.  The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

Provision for Loan Losses

The provision for loan losses was $1.5 million for the first nine months of 2020, an increase of $3.0 million compared to the ($1.5) million provision for loan losses for the first nine months of 2019.  The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and also because of the decrease in the net recoveries received in the current period when compared to the same period of 2019.  The amount of the increase in the allowance for loan losses related to the economic environment was based, in part, on the amount of loans to borrowers that continued to have their loan payments deferred because of the impact of the pandemic.  At September 30, 2020 the Bank had $82.0 million of loans to borrowers who had their loan payments deferred for up to six months compared to $119.1 million at June 30, 2020.  

All of the borrowers whose loan deferral period ended during the third quarter of 2020 had resumed making their normal payments and none of the loans removed from the deferral list were classified as non-performing as of September 30, 2020.  The initial deferral period for all remaining deferred loans at September 30, 2020 is scheduled to end in the fourth quarter of 2020.  The commercial credit area continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely.  This information is used to analyze the performance of these credits and to help anticipate any potential issues that these credits may have when their initial deferral period ends.  It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries, may need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.

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 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 period as a result of an increase in our qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the Covid-19 pandemic and an increase in our reserves related to an analysis of the Bank’s charged off loan history.  Total non-performing assets were $3.0 million at September 30, 2020, an increase of $0.3 million, or 11.0%, from $2.7 million at December 31, 2019.  Non-performing loans increased $0.5 million and foreclosed and repossessed assets decreased $0.2 million during the first nine months of 2020.

A reconciliation of the allowance for loan losses for the nine month periods ended September 30, 2020 and 2019 is summarized as follows:

   
(Dollars in thousands)                        2020  2019 
Balance at January 1,$8,564  8,686 
Provision 1,548  (1,452)
Charge offs:    
Single family 0  (2)
Consumer (74) (92)
Commercial real estate (730) 0 
Commercial business (8) (869)
Recoveries 232  1,924 
Balance at September 30,$9,532  8,195 
     

Non-Interest Income and Expense

Non-interest income was $10.5 million for the first nine months of 2020, an increase of $4.6 million, or 76.1%, from $5.9 million for the same period of 2019.  Gain on sales of loans increased $4.7 million between the periods primarily because of an increase in single family loan originations and sales.  Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.  Other non-interest income increased slightly due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. These increases in the non-interest income were partially offset by a decrease of $0.2 million in the fees and services charges earned between the periods due primarily to a decrease in the overdraft fees collected. 

Non-interest expense was $20.3 million for the first nine months of 2020, an increase of $0.5 million, or 2.5%, from $19.8 million for the same period of 2019.  Compensation and benefits expense increased $0.3 million primarily related to the increased mortgage loan production between the periods.  Professional services expense increased $0.1 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim.   Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and non-capitalized equipment costs. Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses. Other non-interest expense increased slightly due to an increase in mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods.

Income tax expense was $2.9 million for the first nine months of 2020, an increase of $0.2 million from $2.7 million for the first nine months of 2019.  The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income. 

Return on Assets and Equity

Return on average assets (annualized) for the nine month period ended September 30, 2020 was 1.15%, compared to 1.20% for the same period in 2019.  Return on average equity (annualized) was 9.98% for the nine month period ended September 30, 2020, compared to 9.97% for the same period in 2019.

General Information

HMN Financial, Inc. and the Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates twelve full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson, La Crescent, Owatonna, Rochester (4), Spring Valley and Winona, one full service office in Marshalltown, Iowa, and one full service office in Pewaukee, Wisconsin. The Bank also operates a loan origination office located in Sartell, Minnesota.

Safe Harbor Statement

This press release may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “project,” “continue,” “may,” “will,” “would,” “could,” “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 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 anticipated benefits that will be realized by our clients from government assistance programs related to the COVID-19 pandemic; the amount of the Bank’s non-performing assets in future periods and the appropriateness of the allowances therefor; 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 OCC and FRB 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 Company’s most recent filing on Form 10-K  and 10-Q with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of its subsequently filed quarterly reports on Form 10-Q.

All statements in this press release, including forward-looking statements, speak only as of the date they are made, and we undertake no duty to update any of the forward-looking statements after the date of this press release.

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

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


  HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
      
  September 30, December 31, 
(Dollars in thousands) 2020 2019 
  (unaudited)   
Assets     
Cash and cash equivalents$76,027  44,399  
Securities available for sale:     
Mortgage-backed and related securities (amortized cost $69,826 and $54,777) 71,458  54,851  
Other marketable securities (amortized cost $46,874 and $52,751) 47,106  52,741  
  118,564  107,592  
      
Loans held for sale. 7,225  3,606  
Loans receivable, net 670,297  596,392  
Accrued interest receivable 4,236  2,251  
Mortgage servicing rights, net 2,880  2,172  
Premises and equipment, net 10,342  10,515  
Goodwill 802  802  
Core deposit intangible 82  156  
Prepaid expenses and other assets 6,798  8,052  
Deferred tax asset, net 1,199  1,702  
Total assets.$898,452  777,639  
      
Liabilities and Stockholders’ Equity     
Deposits$787,023  673,870  
Accrued interest payable 225  420  
Customer escrows 1,857  2,413  
Accrued expenses and other liabilities 8,204  8,288  
Total liabilities 797,309  684,991  
Commitments and contingencies     
Stockholders’ equity:     
Serial preferred stock ($.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 40,393  40,365  
Retained earnings, subject to certain restrictions 114,724  107,547  
Accumulated other comprehensive income 1,343  46  
Unearned employee stock ownership plan shares (1,498) (1,643) 
Treasury stock, at cost 4,292,303 and 4,284,840 shares (53,910) (53,758) 
Total stockholders’ equity 101,143  92,648  
Total liabilities and stockholders’ equity$898,452  777,639  
      


HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
    
  Three Months Ended
September 30,
 Nine Months Ended
September 30,
(Dollars in thousands, except per share data)  2020  2019    2020 2019 
Interest income:          
Loans receivable$7,489  7,428  22,156 22,597 
Securities available for sale:        
Mortgage-backed and related 271  56  825 146 
Other marketable 163  309  546 905 
Other 26  205  149 381 
Total interest income 7,949  7,998  23,676 24,029 
         
Interest expense:        
Deposits 656  906  2,293 2,418 
Federal Home Loan Bank advances and other borrowings 0  0  0 7 
Total interest expense 656  906  2,293 2,425 
Net interest income 7,293  7,092  21,383 21,604 
Provision for loan losses             770  (420)        1,548 (1,452)
Net interest income after provision for loan losses 6,523  7,512  19,835 23,056 
         
Non-interest income:        
Fees and service charges 753  820  2,136 2,305 
Loan servicing fees 347  324  976 957 
Gain on sales of loans 3,005  845  6,503 1,835 
Other 291  238  846 842 
Total non-interest income 4,396  2,227  10,461 5,939 
         
Non-interest expense:        
Compensation and benefits 3,916  3,849  11,762 11,496 
Occupancy and equipment 1,101  1,142  3,335 3,284 
Data processing 334  319  963 925 
Professional services 241  428  1,175 1,081 
Other 1,004  1,009  3,015 2,975 
Total non-interest expense 6,596  6,747  20,250 19,761 
Income before income tax expense 4,323  2,992  10,046 9,234 
Income tax expense 1,222  916  2,869 2,677 
Net income 3,101  2,076  7,177 6,557 
Other comprehensive income (loss), net of tax           (202)           149  1,297         1,075 
Comprehensive income available to common shareholders$2,899  2,225  8,474 7,632 
Basic earnings per share$0.67  0.45  1.55 1.42 
Diluted earnings per share$0.67  0.45  1.54 1.41 
            
         

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)

   Three Months Ended  Nine Months Ended 
SELECTED FINANCIAL DATA: September 30,  September 30, 
(Dollars in thousands, except per share data) 2020  2019  2020  2019 
I.OPERATING DATA:            
 Interest income$7,949  7,998  23,676  24,029 
 Interest expense 656  906  2,293  2,425 
 Net interest income 7,293  7,092  21,383  21,604 
              
II.AVERAGE BALANCES:            
 Assets (1) 888,000  743,954  835,389  728,814 
 Loans receivable, net 669,258  588,306  641,591  591,015 
 Securities available for sale (1) 103,132  80,286  100,889  79,163 
 Interest-earning assets (1) 852,879  709,504  800,452  697,481 
 Interest-bearing liabilities and non-interest-bearing    
 deposits
 777,866  644,174  730,336  632,522 
 Equity (1) 98,663  90,512  96,100  87,939 
              
III.PERFORMANCE RATIOS: (1)            
 Return on average assets (annualized) 1.39% 1.11% 1.15% 1.20%
 Interest rate spread information:            
 Average during period 3.37  3.91  3.53  4.09 
 End of period 3.35  3.88  3.35  3.88 
 Net interest margin 3.40  3.97  3.57  4.14 
 Ratio of operating expense to average            
 total assets (annualized) 2.95  3.60  3.24  3.63 
 Return on average equity (annualized) 12.50  9.10  9.98  9.97 
 Efficiency  56.43  72.41  63.59  71.75 
              
   September 30, December 31, September 30,   
   2020 2019 2019   
IV.EMPLOYEE DATA:            
 Number of full time equivalent employees 171  181  179    
              
V.ASSET QUALITY:            
 Total non-performing assets$2,955  2,661  2,059    
 Non-performing assets to total assets 0.33% 0.34% 0.27%   
 Non-performing loans to total loans receivable, net 0.38  0.35  0.25    
 Allowance for loan losses$9,532  8,564  8,195    
 Allowance for loan losses to total assets 1.06% 1.10% 1.07%   
 Allowance for loan losses to total loans receivable,
 net (2)
 1.42  1.44  1.41    
 Allowance for loan losses to non-performing loans 375.19  411.45  554.16    
                  
VI.BOOK VALUE PER SHARE:            
  Book value per common share$20.91  19.13  18.83    
              
   Nine Months
Ended
September 30,
2020
 Year
Ended
December 31,
2019
 Nine Months
Ended
September 30,
2019
   
VII.CAPITAL RATIOS:            
 Stockholders’ equity to total assets, at end of period. 11.26% 11.91% 11.95%   
 Average stockholders’ equity to average assets (1) 11.50  12.06  12.07    
 Ratio of average interest-earning assets to            
 average interest-bearing liabilities (1) 109.60  110.18  110.27    
 Home Federal Savings Bank regulatory capital
 ratios:
            
 Common equity tier 1 capital ratio 13.16  13.21  13.31    
 Tier 1 capital leverage ratio 9.73  10.89  11.00    
 Tier 1 capital ratio 13.16  13.21  13.31    
 Risk-based capital 14.41  14.46  14.56    
              


 (1)Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
 (2)Allowance for loan losses to total loans receivable, net without the $53.1 million of outstanding PPP loans would be 1.54% as of September 30, 2020.