HMN Financial, Inc. Announces Second Quarter Results

Second Quarter Summary
• Net income of $2.9 million, up $1.2 million, compared to $1.7 million in second quarter of 2018
• Diluted earnings per share of $0.62, up $0.26, compared to $0.36 in second quarter of 2018
• Net interest income of $7.5 million, up $0.6 million, compared to $6.9 million in second quarter of 2018
• Non-performing assets of $3.1 million, or 0.43% of total assets

Year to Date Summary
• Net income of $4.5 million, up $1.3 million, compared to $3.2 million in first six months of 2018
• Diluted earnings per share of $0.97, up $0.31, compared to $0.66 in first six months of 2018
• Net interest income of $14.5 million, up $0.9 million, compared to $13.6 million in first six months of 2018

Net Income Summary

ROCHESTER, Minn., July 18, 2019 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) HMNF, the $723 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.9 million for the second quarter of 2019, an increase of $1.2 million, compared to net income of $1.7 million for the second quarter of 2018.  Diluted earnings per share for the second quarter of 2019 was $0.62, an increase of $0.26 from the diluted earnings per share of $0.36 for the second quarter of 2018.  The increase in net income between the periods was primarily because of the $1.4 million decrease in the provision for loan losses and a $0.5 million increase in net interest income.  These increases were partially offset by an increase in other non-interest expenses of $0.3 million and a $0.5 million increase in income tax expense as a result of the increased pre-tax income between the periods.   

President's Statement
"We are pleased with our improving net interest margin and the related increase in net interest income," said Bradley Krehbiel, President and Chief Executive Officer of HMN.  "The increases in our net interest income combined with the net recoveries received on previously charged off loans had a positive impact on our net income for the quarter.  We will continue to focus our efforts on improving the Bank's core operating results by managing our net interest margin while prudently growing the asset size of the Bank." 

Second Quarter Results

Net Interest Income
Net interest income was $7.5 million for the second quarter of 2019, an increase of $0.6 million, or 7.8%, from $6.9 million for the second quarter of 2018.  Interest income increased primarily because of the higher interest amounts earned on interest-earning assets as a result of the increase in the federal funds rate between the periods.  Interest income also increased $0.4 million between the periods because of an increase in the amount of yield enhancements recognized on non-accruing loans that were paid off.  The average yield earned on interest-earning assets was 4.83% for the second quarter of 2019, an increase of 56 basis points from 4.27% for the second quarter of 2018.  The average yield earned on average interest-earning assets increased 30 basis points as a result of the change in yield enhancements recognized between the periods.   

Interest expense was $0.8 million for the second quarter of 2019, an increase of $0.3 million, or 57.4%, from $0.5 million for the second quarter of 2018.  The average interest rate paid on non-interest and interest-bearing liabilities was 0.53% for the second quarter of 2019, an increase of 20 basis points from 0.33% for the second quarter of 2018.  The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of the increase in the federal funds rate between the periods which increased the cost of deposits.  Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2019 was 4.35%, an increase of 38 basis points, compared to 3.97% for the second quarter of 2018.  The increase in the net interest margin is primarily related to the increase in interest income between the periods as a result of the change in the yield enhancements recognized and an increase in the federal funds rate.  

A summary of the Company's net interest margin for the three and six month periods ended June 30, 2019 and 2018 is as follows:

Provision for Loan Losses
The provision for loan losses was ($1.1 million) for the second quarter of 2019, a decrease of $1.4 million compared to $0.3 million for the second quarter of 2018.  The credit provision amount for the period was primarily the result of the increase in the net recoveries received on previously charged off commercial loans during the second quarter of 2019 compared to the same period of 2018.  The net recoveries combined with the continued improvement in the credit quality of the loan portfolio resulted in a reduction of the overall allowance for loan losses required between the periods.  Total non-performing assets were $3.1 million at June 30, 2019, an increase of $0.1 million, or 5.3%, from $3.0 million at March 31, 2019.  Non-performing loans increased $0.1 million and foreclosed and repossessed assets remained the same during the second quarter of 2019. 

A reconciliation of the Company's allowance for loan losses for the quarters ended June 30, 2019 and 2018 is summarized as follows:

The decrease in the allowance for loan losses reflects the improvement in the credit quality of the loan portfolio between the periods.  The $0.8 million of commercial business loan charge offs relates primarily to two commercial business loans that were charged off due to the bankruptcy filing of the borrowers.  The $1.8 million in recoveries relates primarily to the repayment of a commercial real estate loan of which $1.7 million had previously been charged off.   

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 three most recently completed quarters.
                                                                                   

                ⁽¹⁾ Excludes non-accrual loans.

Non-Interest Income and Expense
Non-interest income was $2.0 million for the second quarter of 2019, a decrease of $0.1 million, or 1.6%, from $2.1 million for the same period of 2018.  Gain on sales of loans decreased $0.1 million between the periods primarily because of a decrease in commercial government guaranteed loan sales.  Loan servicing income increased slightly due to an increase in the single family loan servicing fees earned.  Other non-interest income increased slightly due to an increase in the fees earned on the sales of uninsured investment products between the periods. 

Non-interest expense was $6.6 million for the second quarter of 2019, an increase of $0.3 million, or 4.0%, from $6.3 million for the second quarter of 2018.  Other non-interest expense increased $0.1 million due primarily to an increase in loan related expenses.  Professional services expense increased $0.1 million due primarily to an increase in legal expenses between the periods.  Compensation and benefits expense increased $0.1 million primarily because of an increase in pension costs between the periods.  Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and maintenance costs.  These increases in non-interest expense were partially offset by a slight decrease in data processing expense primarily because of a decrease in phone and internet costs between the periods due to a change in vendors. 

Income tax expense was $1.1 million for the second quarter of 2019, an increase of $0.5 million from $0.6 million for the second quarter of 2018.  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 second quarter of 2019 was 1.60%, compared to 0.95% for the second quarter of 2018.  Return on average equity (annualized) was 13.10% for the second quarter of 2019, compared to 8.25% for the same period in 2018.  Book value per common share at June 30, 2019 was $18.33, compared to $17.75 at June 30, 2018.

Six Month Period Results

Net Income                                                                                                                                           
Net income was $4.5 million for the six month period ended June 30, 2019, an increase of $1.3 million, or 41.3%, compared to net income of $3.2 million for the six month period ended June 30, 2018.  Diluted earnings per share for the six month period ended June 30, 2019 was $0.97, an increase of $0.31 per share compared to diluted earnings per share of $0.66 for the same period in 2018.  The increase in net income between the periods was primarily because of the $1.2 million decrease in the provision for loan losses and a $0.9 million increase in net interest income.  These increases were partially offset by a $0.5 million increase in income tax expense as a result of the increased pre-tax income between the periods.   

Net Interest Income
Net interest income was $14.5 million for the first six months of 2019, an increase of $0.9 million, or 6.6%, from $13.6 million for the same period in 2018.  Interest income increased primarily because of the higher interest amounts earned on interest-earning assets as a result of the increase in the federal funds rate between the periods.  Interest income also increased $0.5 million because of an increase in the amount of yield enhancements recognized between the periods on non-accruing loans that were paid off.  The average yield earned on interest-earning assets was 4.68% for the six month period ended June 30, 2019, an increase of 43 basis points from 4.25% for the same six month period in 2018.  The average yield earned on the average interest-earning assets increased 19 basis points as a result of the change in yield enhancements recognized between the periods.    

Interest expense was $1.5 million for the first six months of 2019, an increase of $0.5 million, or 52.5%, compared to $1.0 million for the first six months of 2018.  The average interest rate paid on non-interest and interest-bearing liabilities was 0.49% for the first six months of 2019, an increase of 17 basis points from 0.32% for the first six months of 2018. The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of the increase in the federal funds rate between the periods which increased the cost of deposits.  Net interest margin (net interest income divided by average interest-earning assets) for the first six months of 2019 was 4.23%, an increase of 27 basis points, compared to 3.96% for the first six months of 2018.  The increase in the net interest margin is primarily related to the increase in interest income between the periods as a result of the increase in the federal funds rate and the change in the yield enhancements recognized.   

Provision for Loan Losses
The provision for loan losses was ($1.0 million) for the first six months of 2019, a decrease of $1.2 million compared to $0.2 million the first six months of 2018. The credit provision amount for the period was primarily the result of the increase in net recoveries received during the six month period ended June 30, 2019 when compared to the same period of 2018.  The net recoveries combined with the continued improvement in the credit quality of the loan portfolio resulted in a reduction of the overall allowance for loan losses required between the periods.  Total non-performing assets were $3.1 million at June 30, 2019, the same as they were at December 31, 2018.   

A reconciliation of the Company's allowance for loan losses for the six month periods ended June 30, 2019 and June 30, 2018 is summarized as follows:

The decrease in the allowance for loan losses reflects the improvement in the credit quality of the loan portfolio between the periods.  The $0.9 million of commercial business loan charge offs relates primarily to two commercial business loans that were charged off due to the bankruptcy filing of the borrowers.  The $1.9 million in recoveries relates primarily to the repayment of a commercial real estate loan of which $1.7 million had previously been charged off.  

Non-Interest Income and Expense
Non-interest income was $3.7 million for the first six months of 2019, a decrease of $0.1 million, or 3.1%, from $3.8 million for the same six month period of 2018.  Gain on sales of loans decreased $0.1 million between the periods primarily because of a decrease in commercial government guaranteed loan sales. Fees and service charges decreased $0.1 million between the periods due primarily to a decrease in overdraft fees.  These decreases in non-interest income were partially offset by a slight increase in other non-interest income due to an increase in the sale of uninsured investment products and a slight increase in loan servicing income earned on single family loans between the periods.

Non-interest expense was $13.0 million for the first six months of 2019, an increase of $0.1 million, or 1.1%, from $12.9 million for the same six month period of 2018.  Compensation and benefits expense increased $0.1 million primarily because of an increase in pension costs between the periods.  Professional services expense increased $0.1 million due primarily to an increase in legal expenses between the periods. These increases in non-interest expense were partially offset by a $0.1 million decrease in other non-interest expense between the periods due primarily to decreases in the losses incurred on deposit accounts.   Occupancy and equipment costs decreased slightly between the periods due to a decrease in non-capitalized equipment and software costs. Data processing costs decreased slightly because of a decrease in phone and internet costs between the periods due to a change in vendors. 

Income tax expense was $1.8 million for the first six months of 2019, an increase of $0.6 million from $1.2 million for the first six months of 2018.  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 six month period ended June 30, 2019 was 1.25%, compared to 0.89% for the same six month period in 2018.  Return on average equity (annualized) was 10.43% for the six month period ended June 30, 2019, compared to 7.66% for the same six month period in 2018.

General Information
HMN Financial, Inc. and the Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates thirteen full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson (2), La Crescent, Owatonna, Rochester (4), Spring Valley and Winona and one full service office in Marshalltown, Iowa.  The Bank also operates two loan origination offices located in Sartell, Minnesota and Pewaukee, Wisconsin.

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," "estimate," "project," "seek," "may," "will," "would," "could," "should," "trend," "target," and "goal" or similar statements or variations of such terms and include, but are not limited to, those relating to growing our core deposit relationships and loan balances, enhancing the financial performance of our core banking operations, maintaining credit quality, reducing non-performing assets, and generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company's liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for maintenance thereof; improvements in loan production; changes in the size of the Bank's loan portfolio; the amount of the Bank's non-performing assets and the appropriateness of the allowance 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 of yield enhancements relating to non-accruing and purchased loans; the amount and composition of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; 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, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.

A number of factors 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 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); technological, computer-related or operational difficulties; 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; 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 Forms 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" sections of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 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.)

1. Average balances were calculated based upon amortized cost without the market value impact of ASC 320.

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