HMN Financial, Inc. Announces Third Quarter Results

Third Quarter Summary

• Net income of $2.1 million, down $0.6 million, compared to $2.7 million in third quarter of 2018 
• Diluted earnings per share of $0.45, down $0.14, compared to $0.59 in third quarter of 2018
• Net interest income of $7.1 million, down $0.3 million, compared to $7.4 million in third quarter of 2018
• Net interest margin of 3.97%, down 0.17%, compared to 4.14% in third quarter of 2018
• Non-performing assets of $2.1 million, or 0.27% of total assets.

Year to Date Summary

• Net income of $6.6 million, up $0.7 million, compared to $5.9 million in first nine months of 2018
• Diluted earnings per share of $1.41, up $0.17, compared to $1.24 in first nine months of 2018
• Net interest income of $21.6 million, up $0.6 million, compared to $21.0 million in first nine months of 2018
• Net interest margin of 4.14%, up 0.12%, compared to 4.02% in first nine months of 2018

Net Income Summary

ROCHESTER, Minn., Oct. 17, 2019 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) HMNF, the $763 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.1 million for the third quarter of 2019, a decrease of $0.6 million, compared to net income of $2.7 million for the third quarter of 2018.  Diluted earnings per share for the third quarter of 2019 was $0.45, a decrease of $0.14 per share, compared to diluted earnings per share of $0.59 for the third quarter of 2018. The decrease in net income between the periods was primarily because of a $0.5 million increase in non-interest expenses primarily related to increased compensation and professional services costs, a $0.3 million decrease in net interest income due to an increase in the average rates paid on deposits, and a $0.3 million increase in the loan loss provision.  These decreases in net income were partially offset by a $0.4 million increase in the gain on sales of loans between the periods.  Income tax expense also decreased $0.1 million as a result of the decreased pre-tax income between the periods.

President's Statement
"Maintaining net interest margin in the current declining rate environment is becoming a challenge for not only our bank but the financial industry as a whole," said Bradley Krehbiel, President and Chief Executive Officer of HMN. "Despite the margin challenges, we are pleased to report the increase in our mortgage loan activity and the related gain on sale of loans that we experienced during the third quarter of 2019.  We continue to focus our efforts on improving the financial performance of our core banking operations while maintaining the credit quality of our loan portfolio."

Third Quarter Results
Net Interest Income
Net interest income was $7.1 million for the third quarter of 2019, a decrease of $0.3 million, or 3.9%, from $7.4 million for the third quarter of 2018.  Interest income was $8.0 million for the third quarter of 2019, the same as for the third quarter of 2018.  Interest income remained flat despite the increase in the average federal funds rate between the periods as competitive pricing in our markets did not allow for increased loan rates when the federal funds rate increased in the fourth quarter of 2018.  The average yield earned on interest-earning assets was 4.47% for the third quarter of 2019, the same as for the third quarter of 2018.

Interest expense was $0.9 million for the third quarter of 2019, an increase of $0.3 million, or 54.3%, from $0.6 million for the third quarter of 2018.  The average interest rate paid on interest-bearing liabilities and non-interest-bearing deposits was 0.56% for the third quarter of 2019, an increase of 20 basis points from 0.36% for the third quarter of 2018. The increase in the interest paid on interest-bearing liabilities was primarily because of the increase in the average federal funds rate between the periods which increased the cost of deposits between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2019 was 3.97%, a decrease of 17 basis points, compared to 4.14% for the third quarter of 2018.  The decrease in the net interest margin is primarily related to the increase in interest expense as a result of an increase in the average federal funds rate between the periods while rates on interest earning assets remained flat.

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

Provision for Loan Losses
The provision for loan losses was ($0.4) million for the third quarter of 2019, an increase of $0.3 million from the ($0.7) million provision for loan losses for the third quarter of 2018. The credit provision amount for the period was primarily the result of certain adversely classified commercial loans being paid off during the period.  These payoffs, 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 $2.1 million at September 30, 2019, a decrease of $1.0 million, or 34.1%, from $3.1 million at June 30, 2019. Non-performing loans decreased $1.2 million and foreclosed and repossessed assets increased $0.2 million during the third quarter of 2019. The decrease in the non-performing loans was primarily related to a $1.3 million non-performing loan relationship that was reclassified as an accruing loan during the third quarter of 2019.

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

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, 2018.

        ⁽¹⁾ Excludes non-accrual loans.

Non-Interest Income and Expense
Non-interest income was $2.2 million for the third quarter of 2019, an increase of $0.3 million, or 15.0%, from $1.9 million for the third quarter of 2018.  Gain on sales of loans increased $0.4 million between the periods primarily because of an increase in single family loan sales.  Fees and service charges decreased $0.1 million due to a decrease in the loan commitment fees earned between the periods.  Loan servicing fees decreased slightly between the periods due to a decrease in the commercial loans servicing fees earned.

Non-interest expense was $6.7 million for the third quarter of 2019, an increase of $0.5 million, or 8.6%, from $6.2 million for the third quarter of 2018.  Compensation and benefits expense increased $0.3 million primarily because of annual salary increases and an increase in the compensation paid as a result of the increased mortgage loan production between the periods.  Professional services expense increased $0.1 million due primarily to an increase in legal expenses between the periods. Other non-interest expense increased $0.1 million due primarily to an increase in mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods.  Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and maintenance costs.

Income tax expense was $0.9 million for the third quarter of 2019, a decrease of $0.1 million from $1.0 million for the third quarter of 2018.  The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

Return on Assets and Equity
Return on average assets (annualized) for the third quarter of 2019 was 1.11%, compared to 1.47% for the third quarter of 2018. Return on average equity (annualized) was 9.10% for the third quarter of 2019, compared to 12.90% for the same period in 2018.  Book value per common share at September 30, 2019 was $18.83, compared to $17.35 at September 30, 2018.

Nine Month Period Results
Net Income
Net income was $6.6 million for the nine month period ended September 30, 2019, an increase of $0.7 million, or 11.4%, compared to net income of $5.9 million for the nine month period ended September 30, 2018.  Diluted earnings per share for the nine month period ended September 30, 2019 was $1.41, an increase of $0.17 per share, compared to diluted earnings per share of $1.24 for the same period in 2018. The increase in net income between the periods was primarily because of a $1.0 million decrease in the provision for loan losses, a $0.6 million increase in net interest income, and a $0.2 million increase in the gain on sales of loans.  These increases in net income were partially offset by a $0.4 million increase in compensation expense related to the increased mortgage loan production and annual salary increases, a $0.4 million increase in income tax expense as a result of the increased pre-tax income, and a $0.2 million increase in professional services expenses between the periods.

Net Interest Income
Net interest income was $21.6 million for the first nine months of 2019, an increase of $0.6 million, or 2.9%, from $21.0 million for the same period in 2018.  Interest income was $24.0 million for the nine month period ended September 30, 2019, an increase of $1.4 million, or 6.4%, from $22.6 million for the same nine month 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 average federal funds rate between the periods.  Interest income also increased $0.3 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 4.60% for the nine month period ended September 30, 2019, an increase of 28 basis points from 4.32% for the same nine month period in 2018.  The average yield earned on the average interest-earning assets increased 5 basis points as a result of the change in yield enhancements recognized between the periods.

Interest expense was $2.4 million for the first nine months of 2019, an increase of $0.8 million, or 53.2%, compared to $1.6 million in the first nine months of 2018.  The average interest rate paid on interest-bearing liabilities and non-interest-bearing deposits was 0.51% for the first nine months of 2019, an increase of 18 basis points from 0.33% for the first nine months of 2018. The increase in the interest paid on non-interest and interest-bearing liabilities was primarily because of the increase in the average 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 nine months of 2019 was 4.14%, an increase of 12 basis points, compared to 4.02% for the first nine 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 average federal funds rate.

Provision for Loan Losses
The provision for loan losses was ($1.5) million for the first nine months of 2019, a decrease of $1.0 million compared to the ($0.5) million provision for loan losses for the first nine months of 2018. The credit provision amount for the period was primarily the result of the increase in net recoveries received during the nine month period ended September 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 $2.1 million at September 30, 2019, a decrease of $1.0 million, or 33.4%, from $3.1 million at December 31, 2018.  Non-performing loans decreased $1.2 million and foreclosed and repossessed assets increased $0.2 million during the first nine months of 2019. The decrease in the non-performing loans was primarily related to a $1.3 million non-performing loan relationship that was reclassified as an accruing loan during the third quarter of 2019. 

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

Non-Interest Income and Expense
Non-interest income was $5.9 million for the first nine months of 2019, an increase of $0.1 million, or 3.0%, from $5.8 million for the same period of 2018. Gain on sales of loans increased $0.2 million between the periods primarily because of an increase in single family loan sales.  Other non-interest income increased $0.1 million due primarily to an increase in the gains recognized on equity securities between the periods.  Fees and service charges decreased $0.1 million due to a decrease in the loan commitment fees earned between the periods.  Loan servicing fees increased slightly due to an increase in single family loan servicing fees earned between the periods.

Non-interest expense was $19.8 million for the first nine months of 2019, an increase of $0.7 million, or 3.6%, from $19.1 million for the same period of 2018.  Compensation and benefits expense increased $0.4 million primarily because of annual salary increases and an increase in the compensation paid as a result of the increased mortgage loan production between the periods.  Professional services expense increased $0.2 million due primarily to an increase in legal expenses between the periods. 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.  Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and maintenance costs.

Income tax expense was $2.7 million for the first nine months of 2019, an increase of $0.4 million from $2.3 million for the first nine 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 nine month period ended September 30, 2019 was 1.20%, compared to 1.09% for the same period in 2018. Return on average equity (annualized) was 9.97% for the nine month period ended September 30, 2019, compared to 9.43% for the same period in 2018.

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," "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, maintaining net interest margins, 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 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); 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; 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 filings 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