Market Overview

HMN Financial, Inc. Announces First Quarter Results

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First Quarter Highlights

  • Net income of $1.4 million, down $0.2 million, from net income of $1.6 million for first quarter of 2019
  • Diluted earnings per share of $0.30, down $0.05, from $0.35 for first quarter of 2019
  • Gain on sales of loans of $1.1 million, up $0.7 million, from $0.4 million for first quarter of 2019
  • Net interest margin of 3.76%, down 35 basis points, from 4.11% for first quarter of 2019
  • Provision for loan losses of $0.5 million, up $0.5 million, from first quarter of 2019
Net Income Summary   Three Months Ended  
March 31,
 
     
(Dollars in thousands, except per share amounts)   2020   2019  
Net income $ 1,385   1,620  
Diluted earnings per share   0.30   0.35  
Return on average assets (annualized)   0.72 % 0.91 %
Return on average equity (annualized)   5.93 % 7.67 %
Book value per share $ 19.68   17.63  

ROCHESTER, Minn., April 20, 2020 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $784 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.4 million for the first quarter of 2020, a decrease of $0.2 million compared to net income of $1.6 million for the first quarter of 2019.  Diluted earnings per share for the first quarter of 2020 was $0.30, a decrease of $0.05 from diluted earnings per share of $0.35 for the first quarter of 2019.  The decrease in net income between the periods was due to a $0.6 million increase in non-interest expenses that was primarily the result of a $0.2 million increase in legal expenses related to a bankruptcy litigation claim and a $0.1 million increase in compensation expense due to normal salary increases and the opening of a new branch location in 2019.  Net income also decreased because of the $0.5 million increase in the provision for loan losses between the periods due primarily to changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic.  These decreases in net income were partially offset by a $0.7 million increase in the gain on sales of loans between the periods.  The increase in the gain on sales of loans was due to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods. 

President's Statement
"The COVID-19 pandemic and the related stay-at-home orders have impacted everyone in the first quarter of 2020.  The economic effects of the pandemic on our clients combined with the net interest margin compression related to the low interest rate environment continues to be an earnings challenge for our bank and the financial industry as a whole," said Bradley Krehbiel, President and Chief Executive Officer of HMN.  "Despite these challenges, we are pleased to report the increase in our mortgage loan origination activity and the related gain on sales of loans that we experienced during the first quarter of 2020.  We are also encouraged by the potential positive impact that the Small Business Administration loan programs, as well as other economic stimulus actions implemented by the Federal Government, will have on our clients.  We continue to assist our clients in navigating the various stimulus programs so that they can maximize the benefits of these programs." 

First Quarter Results
Net Interest Income
Net interest income was $6.9 million for the first quarter of 2020, a decrease of $0.1 million, or 1.3%, compared to $7.0 million for the first quarter of 2019.  Interest income was $7.8 million for the first quarter of 2020, an increase of $0.1 million, or 1.4%, from $7.7 million for the first quarter of 2019.  Interest income increased primarily because of the $49.4 million increase in the average interest-earning assets between the periods.  The average yield earned on interest-earning assets was 4.24% for the first quarter of 2020, a decrease of 28 basis points from 4.52% for the first 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 $0.9 million for the first quarter of 2020, an increase of $0.2 million, or 29.3%, compared to $0.7 million for the first quarter of 2019. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.53% for the first quarter of 2020, an increase of 8 basis points from 0.45% for the first quarter of 2019. The increase in the interest paid on interest-bearing liabilities was primarily because of the lag in the market's response in lowering deposit pricing when the federal funds rate decreased in the second half of 2019 and the first quarter of 2020.  Net interest margin (net interest income divided by average interest-earning assets) for the first quarter of 2020 was 3.76%, a decrease of 35 basis points, compared to 4.11% for the first quarter of 2019.  The decrease in the net interest margin is primarily related to the increase in interest expense as a result of the lag in the markets response in lowering deposit pricing when the federal funds rate decreased in the second half of 2019 and the first quarter of 2020 coupled with a decrease in the average yield earned on interest-earning assets between the periods.  

A summary of the Company's net interest margin for the three-month periods ended March 31, 2020 and 2019 is as follows:

    For the three-month period ended  
    March 31, 2020     March 31, 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 $ 103,269   501   1.95 % $ 78,794   338   1.74 %
  Loans held for sale   2,754   24   3.52     1,187   12   4.17  
  Mortgage loans, net   127,235   1,276   4.03     115,854   1,261   4.41  
  Commercial loans, net   409,781   5,097   5.00     400,905   5,060   5.12  
  Consumer loans, net   68,418   843   4.96     72,572   935   5.22  
  Other   32,254   103   1.28     25,008   126   2.04  
Total interest-earning assets   743,711   7,844   4.24     694,320   7,732   4.52  
                             
Interest-bearing liabilities:                            
  Checking accounts   103,294   30   0.12     97,692   24   0.10  
  Savings accounts   81,150   16   0.08     78,496   15   0.08  
  Money market accounts   190,497   293   0.62     181,570   270   0.60  
  Certificates   123,770   553   1.80     114,196   381   1.35  
Total interest-bearing liabilities   498,711             471,954          
  Non-interest checking   173,986             156,454          
  Other non-interest bearing liabilities   2,793             2,062          
Total interest-bearing liabilities and non-interest bearing deposits  $ 675,490   892   0.53    $ 630,470   690   0.45  
Net interest income     $ 6,952           $ 7,042      
Net interest rate spread           3.71 %           4.07 %
Net interest margin           3.76 %           4.11 %
                             

Provision for Loan Losses
The provision for loan losses was $0.5 million for the first quarter of 2020, an increase of $0.5 million compared to $27,000 for the first 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 our loan loss allowance related to the economic environment was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic.  At March 31, 2020, the Bank had $78.6 million of loans with deferred payment agreements with $48.4 million of these loans related to the hotel industry and $9.6 million related to the theater industry. The qualitative increase to our loan loss allowance related to the current economic environment along with the increase to the allowance related to loan growth were partially offset by improvements in other qualitative reserves and a reduction in the specific reserves required on loans that were paid off during the quarter.  Total non-performing assets were $2.6 million at March 31, 2020, a decrease of $0.1 million, or 2.5%, from $2.7 million at December 31, 2019.  Non-performing loans decreased $0.2 million and foreclosed and repossessed assets increased $0.1 million during the first quarter of 2020.   
           
A reconciliation of the Company's allowance for loan losses for the first quarters of 2020 and 2019 is as follows:

         
(Dollars in thousands)    2020     2019  
 

Balance at January 1,
$ 8,564     8,686  
Provision   460     27  
Charge offs:        
  Consumer   (12 )   (39 )
  Commercial business   0     (43 )
Recoveries   24     42  
Balance at March 31, $ 9,036     8,673  
 

Allocated to:
       
General allowance $ 8,389     7,854  
Specific allowance   647     819  
  $ 9,036     8,673  
         

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.

    March 31,     December 31,  
(Dollars in thousands)    2020     2019  
Non‑performing loans:            
  Single family $ 647   $ 617  
  Commercial real estate   734     184  
  Consumer   491     659  
  Commercial   40     621  
  Total   1,912     2,081  
             
Foreclosed and repossessed assets:            
  Single family $ 269     166  
  Commercial real estate   414     414  
Total non‑performing assets $ 2,595   $ 2,661  
Total as a percentage of total assets   0.33 %   0.34 %
Total non‑performing loans $ 1,912   $ 2,081  
Total as a percentage of total loans receivable, net   0.31 %   0.35 %
Allowance for loan losses to non-performing loans   472.54 %   411.45 %
             
Delinquency data:            
Delinquencies (1)            
  30+ days $ 1,464   $ 1,167  
  90+ days   0     0  
Delinquencies as a percentage of loan portfolio (1)            
  30+ days   0.23 %   0.19 %
  90+ days   0.00 %   0.00 %
             
(1) Excludes non-accrual loans.             

Non-Interest Income and Expense
Non-interest income was $2.5 million for the first quarter of 2020, an increase of $0.8 million, or 46.1%, from $1.7 million for the first quarter of 2019.  Gain on sales of loans increased $0.7 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 single family loans being serviced.  Fees and services charges increased slightly due primarily to an increase in debit card income. These increases were partially offset by a slight decrease in other non-interest income due to an increase in the losses realized on equity investments between the periods. 

Non-interest expense was $7.0 million for the first quarter of 2020, an increase of $0.6 million, or 8.6%, from $6.4 million for the first quarter of 2019.  Professional services expense increased $0.2 million between the periods primarily because of an increase in legal expenses relating to a bankruptcy litigation claim.  Compensation and benefits expense increased $0.1 million primarily because of annual salary increases and the opening of a new branch location in 2019.  Other non-interest expense increased $0.1 million because of an increase in mortgage servicing expenses due to the increase in serviced loans being refinanced between the periods.  Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and non-capitalized software costs.  Data processing costs increased slightly between the periods due to an increase in mobile banking expenses.  Income tax expense was $0.6 million for both the first quarter of 2020 and the first quarter of 2019. 

Return on Assets and Equity
Return on average assets (annualized) for the first quarter of 2020 was 0.72%, compared to 0.91% for the first quarter of 2019.  Return on average equity (annualized) was 5.93% for the first quarter of 2020, compared to 7.67% for the first quarter of 2019.  Book value per common share at March 31, 2020 was $19.68, compared to $17.63 at March 31, 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," "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; 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 anticipated impact of the COVID-19 pandemic 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 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, many of which may be amplified by the COVID-19 pandemic, 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  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.

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.)

 

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
           
    March 31,   December 31,  
(Dollars in thousands)   2020     2019    
    (unaudited)      
Assets          
Cash and cash equivalents $ 35,744     44,399    
Securities available for sale:          
 Mortgage-backed and related securities (amortized cost $52,160 and $54,777)   53,687     54,851    
 Other marketable securities (amortized cost $46,945 and $52,751)   47,252     52,741    
    100,939     107,592    
           
Equity securities   110     167    
Loans held for sale   4,884     3,606    
Loans receivable, net   617,645     596,392    
Accrued interest receivable   2,236     2,251    
Real estate, net   683     580    
Federal Home Loan Bank stock, at cost   932     854    
Mortgage servicing rights, net   2,206     2,172    
Premises and equipment, net   10,426     10,515    
Goodwill   802     802    
Core deposit intangible   131     156    
Prepaid expenses and other assets   6,254     6,451    
Deferred tax asset, net   1,208     1,702    
 Total assets $ 784,200     777,639    
           
Liabilities and Stockholders' Equity          
Deposits $ 677,519     673,870    
Accrued interest payable   344     420    
Customer escrows   3,120     2,413    
Accrued expenses and other liabilities   8,182     8,288    
 Total liabilities   689,165     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   40,347     40,365    
Retained earnings, subject to certain restrictions   108,932     107,547    
Accumulated other comprehensive income   1,321     46    
Unearned employee stock ownership plan shares   (1,595 )   (1,643 )  
Treasury stock, at cost 4,300,689 and 4,284,840 shares   (54,061 )   (53,758 )  
 Total stockholders' equity   95,035     92,648    
Total liabilities and stockholders' equity $ 784,200     777,639    
           


HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
         
    Three Months Ended
March 31,
(Dollars in thousands, except per share data)       2020   2019
Interest income:        
 Loans receivable $ 7,240   7,268
 Securities available for sale:        
      Mortgage-backed and related   289   46
      Other marketable   212   292
 Other   103   126
      Total interest income   7,844   7,732
         
Interest expense:        
  Deposits   892   690
      Total interest expense   892   690
         Net interest income   6,952   7,042
Provision for loan losses   460   27
         Net interest income after provision for loan losses   6,492   7,015
         
Non-interest income:        
 Fees and service charges   714   700
 Loan servicing fees   332   315
 Gain on sales of loans   1,134   379
 Other   291   297
      Total non-interest income   2,471   1,691
         
Non-interest expense:        
 Compensation and benefits   4,047   3,910
 Occupancy and equipment   1,123   1,060
 Data processing   308   301
 Professional services   487   272
 Other   1,036   903
      Total non-interest expense   7,001   6,446
       Income before income tax expense   1,962   2,260
Income tax expense   577   640
      Net income   1,385   1,620
Other comprehensive income, net of tax   1,275   484
Comprehensive income available to common shareholders $ 2,660   2,104
Basic earnings per share $ 0.30   0.35
Diluted earnings per share $ 0.30   0.35
         


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

SELECTED FINANCIAL DATA:
  Three Months Ended
March 31,
   
(Dollars in thousands, except per share data)   2020     2019  
I. OPERATING DATA:                
   Interest income $ 7,844   7,732        
   Interest expense   892   690        
   Net interest income   6,952   7,042        
                 
II. AVERAGE BALANCES:                
    Assets (1)   777,564   724,330        
    Loans receivable, net   605,434   589,331        
    Securities available for sale (1)   103,269   78,794        
    Interest-earning assets (1)   743,711   694,320        
    Interest-bearing liabilities and non-interest bearing deposits   675,490   630,470        
    Equity (1)   93,881   85,623        
                 
III. PERFORMANCE RATIOS: (1)                
     Return on average assets (annualized)   0.72 % 0.91 %      
     Interest rate spread information:                
          Average during period   3.71   4.07        
          End of period   3.65   4.15        
     Net interest margin   3.76   4.11        
     Ratio of operating expense to average total assets (annualized)   3.62   3.61        
     Return on average common equity (annualized)   5.93   7.67        
     Efficiency   74.29   73.81        
    March 31,   December 31,   March 31,    
    2020   2019   2019    
IV. EMPLOYEE DATA:                
     Number of full time equivalent employees   180   181   176    
                 
 V. ASSET QUALITY:                
    Total non-performing assets $ 2,595   2,661   2,965    
    Non-performing assets to total assets   0.33 % 0.34 % 0.41 %  
    Non-performing loans to total loans receivable, net   0.31   0.35   0.42    
    Allowance for loan losses $ 9,036   8,564   8,673    
    Allowance for loan losses to total assets   1.15 % 1.10 % 1.20 %  
    Allowance for loan losses to total loans receivable, net   1.46   1.44   1.45    
    Allowance for loan losses to non-performing loans   472.54   411.45   343.90    
                 
VI. BOOK VALUE PER COMMON SHARE:                
     Book value per common share $ 19.68   19.13   17.63    
  Three Months
Ended
Mar 31, 2020

 Year Ended
Dec 31, 2019
Three Months
Ended
Mar 31, 2019
   
VII.  CAPITAL RATIOS:                
      Stockholders' equity to total assets, at end of period   12.12 % 11.91 % 11.81 %  
      Average stockholders' equity to average assets (1)   12.07   12.06   11.82    
      Ratio of average interest-earning assets to                
      average interest-bearing liabilities (1)   110.10   110.18   110.13    
      Home Federal Savings Bank regulatory capital ratios:                
        Common equity tier 1 capital ratio   13.22   13.21   13.06    
        Tier 1 capital leverage ratio   10.97   10.89   11.27    
        Tier 1 capital ratio   13.22   13.21   13.06    
        Risk-based capital   14.47   14.46   14.31    
                 
                 

(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
   

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