HMN Financial, Inc. Announces Second Quarter Results

July 20, 2021 7:00 PM EDT

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Second Quarter Highlights

  • Net income of $4.5 million, up $1.8 million, compared to $2.7 million for second quarter of 2020
  • Diluted earnings per share of $1.00, up $0.42, compared to $0.58 for second quarter of 2020
  • Gain on sale of real estate owned of $1.5 million, compared to none for second quarter of 2020
  • Provision for loan losses of ($0.9) million, down $1.2 million from $0.3 million for second quarter of 2020
  • Net interest income of $7.7 million, up $0.6 million from $7.1 million for second quarter of 2020
  • Net interest margin of 3.27%, down 30 basis points from 3.57% for second quarter of 2020

Year to Date Highlights

  • Net income of $7.9 million, up $3.8 million, compared to $4.1 million for first six months of 2020                   
  • Diluted earnings per share of $1.74, up $0.86, compared to $0.88 for first six months of 2020
  • Provision for loan losses of ($1.5) million, down $2.3 million from $0.8 million for first six months of 2020
  • Gain on sale of real estate owned of $1.5 million, compared to none for first six months of 2020
  • Net interest income of $15.1 million, up $1.0 million from $14.1 million for first six months of 2020
  • Net interest margin of 3.31%, down 35 basis points from 3.66% for first six months of 2020

Net Income Summary

  Three months ended  Six months ended 
  June 30,  June 30, 
(Dollars in thousands, except per share amounts) 2021  2020  2021  2020 
Net income$4,528  2,691 $7,946  4,076 
Diluted earnings per share 1.00  0.58  1.74  0.88 
Return on average assets (annualized) 1.86% 1.29% 1.68% 1.01%
Return on average equity (annualized) 17.18% 11.31% 15.31% 8.65%
Book value per share$23.24  20.29 $23.24  20.29 

ROCHESTER, Minn., July 20, 2021 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (Nasdaq: HMNF), the $981 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $4.5 million for the second quarter of 2021, an increase of $1.8 million, compared to net income of $2.7 million for the second quarter of 2020.  Diluted earnings per share for the second quarter of 2021 was $1.00, an increase of $0.42 from the diluted earnings per share of $0.58 for the second quarter of 2020.  The increase in net income between the periods was primarily because of a $1.6 million increase in other non-interest income primarily related to a gain that was realized on the sale of real estate owned, a $1.2 million decrease in the provision for loan losses primarily because of the recovery of a previously charged off commercial real estate loan and the reduction of qualitative reserves related to improvements in the economic environment because of the lessened impact of the COVID-19 pandemic, and a $0.6 million increase in net interest income primarily related to the yield enhancements realized on PPP loans that were repaid during the period. These increases in net income were partially offset by a $0.7 million decrease in the gain on sales of loans due to a decrease in mortgage loan originations, a $0.7 million increase in income tax expense as a result of the increase in pre-tax income between the periods, and a $0.3 million increase in non-interest expenses primarily related to an increase in compensation expense. 

President’s Statement“We are pleased to report the positive quarterly financial results that include a gain from the sale of a long term commercial real estate asset, solid loan sale gains from our mortgage loan origination activity, and a credit loan loss provision which reflects the improving economic landscape,” said Bradley Krehbiel, President and Chief Executive Officer of HMN.  “We are also pleased with the asset growth that we experienced over the past year and the positive impact it had on our net interest income.” 

Second Quarter Results

Net Interest IncomeNet interest income was $7.7 million for the second quarter of 2021, an increase of $0.6 million, or 7.6%, compared to $7.1 million for the second quarter of 2020.  Interest income was $8.1 million for the second quarter of 2021, an increase of $0.2 million, or 2.7%, from $7.9 million for the second quarter of 2020. Interest income increased primarily because of the $0.6 million in yield enhancements recognized on PPP loans that were repaid during the period. Interest income also increased because of the $139.4 million increase in the average interest-earning assets between the periods.  These increases in interest income were partially offset by a decrease in the average yield earned on interest-earning assets which was 3.44% for the second quarter of 2021, a decrease of 50 basis points from 3.94% for the second quarter of 2020.  The decrease in the average yield is primarily related to the decrease in the prime rate that occurred in the first quarter of 2020, which lowered the rate on adjustable rate loans in the portfolio as well as any new or renewing fixed rate loans that were originated since that time.Interest expense was $0.4 million for the second quarter of 2021, a decrease of $0.3 million, or 45.0%, compared to $0.7 million for the second quarter of 2020. Interest expense decreased despite the $127.7 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 0.19% for the second quarter of 2021, a decrease of 21 basis points from 0.40% for the second quarter of 2020. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in deposit rates as a result of the decrease in the federal funds rate in the first quarter of 2020.  Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2021 was 3.27%, a decrease of 30 basis points, compared to 3.57% for the second quarter of 2020.  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 decrease in the prime rate that occurred in the first quarter of 2020.

A summary of the Company’s net interest margin for the three and six month periods ended June 30, 2021 and 2020 is as follows:

  For the three month period ended 
  June 30, 2021  June 30, 2020 
(Dollars in thousands) AverageOutstandingBalance InterestEarned/Paid Yield/Rate  AverageOutstandingBalance InterestEarned/Paid Yield/Rate 
Interest-earning assets:              
Securities available for sale $197,739 502 1.02%$96,241 436 1.82%
Loans held for sale 4,821 38 3.14  8,736 67 3.07 
Single family loans, net 155,205 1,418 3.66  129,584 1,306 4.05 
Commercial loans, net 442,794 5,571 5.05  455,330 5,293 4.68 
Consumer loans, net 47,235 530 4.50  64,864 761 4.72 
Other 95,750 35 0.15  49,435 20 0.16 
Total interest-earning assets 943,544 8,094 3.44  804,190 7,883 3.94 
               
Interest-bearing liabilities:              
Checking accounts 161,288 48 0.12  112,605 30 0.11 
Savings accounts 113,717 18 0.06  88,528 16 0.07 
Money market accounts 240,852 141 0.24  204,939 201 0.39 
Certificate accounts 95,306 203 0.86  119,722 498 1.67 
Total interest-bearing liabilities 611,163      525,794     
Non-interest checking 251,196      209,194     
Other non-interest bearing deposits 2,425      2,142     
Total interest-bearing liabilities and non-interest bearing deposits$864,784 410 0.19 $737,130 745 0.40 
Net interest income  $7,684     $7,138   
Net interest rate spread     3.25%     3.54%
Net interest margin     3.27%     3.57%
               

  For the six month period ended 
  June 30, 2021  June 30, 2020 
(Dollars in thousands) AverageOutstandingBalance InterestEarned/Paid Yield/Rate  AverageOutstandingBalance InterestEarned/Paid Yield/Rate 
Interest-earning assets:              
Securities available for sale $181,220 1,000 1.11%$99,755 937 1.89%
Loans held for sale  4,953 75 3.04  5,745 91 3.18 
Single family loans, net  150,114 2,747 3.69  128,409 2,581 4.04 
Commercial loans, net  440,351 10,943 5.01  432,556 10,390 4.83 
Consumer loans, net 49,722 1,152 4.67  66,641 1,605 4.84 
Other 94,495 66 0.14  40,844 123 0.61 
Total interest-earning assets 920,855 15,983 3.50  773,950 15,727 4.09 
               
Interest-bearing liabilities:              
Checking accounts 157,802 92 0.12  107,949 61 0.11 
Savings accounts 109,778 34 0.06  84,839 32 0.07 
Money market accounts 232,255 270 0.23  197,718 494 0.50 
Certificate accounts 97,541 467 0.97  121,746 1,050 1.73 
Total interest-bearing liabilities 597,376      512,252     
Non-interest checking 243,874      191,590     
Other non-interest bearing deposits 2,485      2,468     
Total interest-bearing liabilities and non-interest bearing deposits$843,735 863 0.21 $706,310 1,637 0.47 
Net interest income  $15,120     $14,090   
Net interest rate spread     3.29%     3.62%
Net interest margin     3.31%     3.66%
               

Provision for Loan LossesThe provision for loan losses was ($0.9) million for the second quarter of 2021, a decrease of $1.2 million compared to $0.3 million for the second quarter of 2020.  The provision for loan losses decreased between the periods primarily because of the increase in the recoveries received in the current period when compared to the same period of 2020 and also because of improvements in the economic environment because of the lessened impact of the COVID-19 pandemic during the current period.  During 2020, the Company increased its allowance for loan losses due to 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 was based, in part, on the amount of loans to borrowers in the hospitality, restaurant and entertainment industries that were negatively impacted by the COVID-19 pandemic.  At June 30, 2021, the Bank had $33.5 million of loans that had been granted loan accommodations in accordance with Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The accommodations granted included $29.2 million of loans that are required to make interest only payments for periods up to December 31, 2021 and $4.3 million of loans that had their loan amortization period increased.  Of these loans, $5.7 million were classified but still accruing at June 30, 2021 and all of these loans were current with their agreed upon payments.  The commercial credit area continues to communicate regularly with the borrowers that have been granted loan accommodations and monitors their activity closely.  This information is used to analyze the performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner.  It is anticipated that most of the remaining borrowers that have been granted accommodations will be in a position to resume making their regular loan payments at the end of the initial accommodation period.  Other borrowers, particularly in the hospitality and restaurant industries, may need additional accommodations when their initial accommodation period ends as their operations may need more time to recover from the impact 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 decreased during the quarter as a result of a decrease in the required qualitative reserves due to an improvement in business activity because of the lessened impact of COVID-19 pandemic resulting from increased vaccination rates and the removal of pandemic-focused restrictions during the period.  Despite the progress made in the vaccination of the general public during the period, it was determined that economic risks related to the pandemic continued to exist and more time was needed to prudently evaluate the impact that these risks would have on our loan portfolio before more qualitative reserves would be released from the allowance for loan losses.  Total non-performing assets were $1.8 million at June 30, 2021, a decrease of $1.4 million, or 45.1%, from $3.2 million at March 31, 2021.  Non-performing loans decreased $0.7 million and foreclosed and repossessed assets decreased $0.7 million during the second quarter of 2021.   A reconciliation of the Company’s allowance for loan losses for the quarters ended June 30, 2021 and 2020 is summarized as follows:

     
(Dollars in thousands)                            2021  2020 
Balance at March 31$10,132       9,036 
Provision (891) 318 
Charge offs:    
Consumer (11) (34)
Commercial real estate 0  (730)
Recoveries 685  59 
Balance at June 30$9,915  8,649 
  Allocated to:    
General allowance$9,652  8,495 
Specific allowance 263  154 
 $9,915  8,649 
     

            The $0.7 million of recoveries relates primarily to a commercial loan in the transportation industry.      

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.                                                                                    

                                                                June 30,  March 31,  December 31, 
(Dollars in thousands)                2021  2021  2020 
Non‑performing loans:         
Single family.$557 $497 $502 
Commercial real estate. 519  1,408  1,484 
Consumer 669  612  689 
Commercial 8  8  9 
Total 1,753  2,525  2,684 
          
Foreclosed and repossessed assets:         
Commercial real estate 0  636  636 
Consumer 0  30  0 
  0  666  636 
Total non‑performing assets$1,753 $3,191 $3,320 
Total as a percentage of total assets 0.18% 0.33% 0.37%
Total as a percentage of total loans receivable, net 0.28% 0.39% 0.42%
Allowance for loan loss to non-performing loans 565.75% 401.37% 398.72%
          
Delinquency data:         
Delinquencies (1)         
30+ days$1,255 $1,147 $995 
90+ days 0  0  0 
Delinquencies as a percentage of loan portfolio (1)         
30+ days 0.19% 0.17% 0.15%
90+ days 0.00% 0.00% 0.00%
          
(1) Excludes non-accrual loans.         

Non-Interest Income and ExpenseNon-interest income was $4.7 million for the second quarter of 2021, an increase of $1.1 million, or 31.9%, from $3.6 million for the second quarter of 2020.  Other non-interest income increased $1.6 million due primarily to a $1.5 million gain that was realized on the sale of real estate owned.   Fees and service charges increased $0.1 million between the periods due primarily to an increase in debit card income.  Loan servicing fees increased $0.1 million 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 non-interest income were partially offset by a $0.7 million decrease in the gain on sales of loans primarily because of a decrease in single family loan originations and sales between the periods.               

Non-interest expense was $7.0 million for the second quarter of 2021, an increase of $0.3 million, or 4.9%, from $6.7 million for the second quarter of 2020.  Compensation and benefits expense increased $0.3 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production between the periods.  Other non-interest expense increased $0.2 million due primarily to a decrease in the direct loan printing and supply costs that were deferred as a result of the decreased mortgage loan production and also because of an increase in charitable contributions between the periods.  Data processing expense increased slightly between the periods due to an increase in debit card processing costs because of increased activity.  These increases in non-interest expense were partially offset by a $0.2 million decrease in professional services expense between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim.  Occupancy and equipment expense decreased slightly due to a decrease in the purchase of non-capitalized equipment between the periods.  

Income tax expense was $1.8 million for the second quarter of 2021, an increase of $0.7 million from $1.1 million for the second quarter of 2020.  The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.  

Paycheck Protection ProgramThe Bank actively participated in helping businesses that were negatively impacted by COVID-19 that applied for forgivable loans under the Paycheck Protection Program (PPP) as part of the CARES Act.  The CARES Act, which was signed into law on March 27, 2020, allocated $349 billion in funding to help small businesses that were negatively impacted by the COVID-19 pandemic.  The Bank had the following activity related to the first round of the PPP program during 2020 and through June 30, 2021:

Dollars in thousands Number of Loans Amount Net Deferred Fees
Originated 413 $53,153 $1,837 
Repaid (130) (19,484) - 
Net deferred fees recognized -   -  (1,097)
Balance, December 31, 2020 283  33,669  740 
Repaid (243) (21,419) - 
Net deferred fees recognized -  -  (597)
Balance, March 31, 2021 40  12,250  143 
Repaid (35) (11,334)  - 
Net deferred fees recognized -    -  (126)
Balance, June 30, 2021 5 $916 $17 
       

The Consolidated Appropriations Act of 2021, which was signed into law on December 27, 2020, allocated $284 billion to the SBA to fund a second round of the PPP and extended the application period for the program to March 31, 2021.  The application period was later extended to May 31, 2021. The Bank actively participated in the second round of the program and began submitting applications for borrowers on January 15, 2021 when the application window opened. The program was adjusted for the second round to allow applications from both first time borrowers and those that obtained loans during the first round of the program.  The revised program, among other things, requires that borrowers demonstrate or certify that they experienced a 25% or greater reduction in gross receipts from a quarter in 2020 compared to the same quarter in 2019 and certify that current economic uncertainty makes the loan request necessary to support their ongoing operations.  The Bank had the following activity related to the second round of the PPP program through June 30, 2021:

Dollars in thousands  Number ofLoans Amount Net Deferred Fees
Originated 416 $26,798 $1,476 
Net deferred fees recognized -                 -  (29)
Balance, March 31, 2021 416  26,798  1,447 
Originated 50  2,167  149 
Repaid (182)             (6,539)               - 
Net deferred fees recognized -                 -  (522)
Balance, June 30, 2021 284 $22,426 $1,074 
       

It is anticipated that the majority of the outstanding loans at June 30, 2021 will be forgiven by the SBA.  The remaining net deferred fees will be recognized into income over the remaining lives of the loans.

Return on Assets and EquityReturn on average assets (annualized) for the second quarter of 2021 was 1.86%, compared to 1.29% for the second quarter of 2020.  Return on average equity (annualized) was 17.18% for the second quarter of 2021, compared to 11.31% for the second quarter of 2020.  Book value per common share at June 30, 2021 was $23.24, compared to $20.29 at June 30, 2020.

Six Month Period Results

Net Income                                                                                                                                            Net income was $7.9 million for the six month period ended June 30, 2021, an increase of $3.8 million, or 94.9%, compared to net income of $4.1 million for the six month period ended June 30, 2020.  Diluted earnings per share for the six month period ended June 30, 2021 was $1.74, an increase of $0.86 per share compared to diluted earnings per share of $0.88 for the same period in 2020.  The increase in net income between the periods was primarily because of a $2.3 million decrease in the provision for loan losses.  The provision for loan losses decreased primarily because of the reduction of required qualitative reserves due to improvements in the economic environment because of the lessened impact of the COVID-19 pandemic and also because of an increase in the recoveries received on previously charged off loans between the periods.  Other non-interest income increased $1.7 million primarily because of the gain that was realized on the sale of real estate owned.  Net interest income increased $1.0 million primarily because of the increase in the yield enhancements that were realized on PPP loans that were repaid during the period.   These increases in net income were partially offset by a $1.6 million increase in income tax expense as a result of the increase in pre-tax income between the periods.

Net Interest IncomeNet interest income was $15.1 million for the first six months of 2021, an increase of $1.0 million, or 7.3%, compared to $14.1 million for the same period of 2020.  Interest income was $16.0 million for the first six months of 2021, an increase of $0.3 million, or 1.6%, from $15.7 million for the first six months of 2020.  Interest income increased primarily because of the $1.2 million in yield enhancements recognized on PPP loans that were repaid during the period. Interest income also increased because of the $146.9 million increase in the average interest-earning assets between the periods.  These increases in interest income were partially offset by a decrease in the average yield earned on interest-earning assets which was 3.50% for the first six months of 2021, a decrease of 59 basis points from 4.09% for the first six months of 2020.  The decrease in the average yield is primarily related to the decrease in the prime rate that occurred in the first quarter of 2020 which lowered the rate on adjustable rate loans in the portfolio as well as any new or renewing fixed rate loans that have been originated since that time.Interest expense was $0.9 million for the first six months of 2021, a decrease of $0.7 million, or 47.3%, compared to $1.6 million for the same period of 2020.  Interest expense decreased despite the $137.4 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 0.21% for the first six months of 2021, a decrease of 26 basis points from 0.47% for the first six months of 2020. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in deposit rates as a result 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 six months of 2021 was 3.31%, a decrease of 35 basis points, compared to 3.66% for the first six months of 2020.  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 decrease in the average prime rate between the periods.  

Provision for Loan LossesThe provision for loan losses was ($1.5) million for the first six months of 2021, a decrease of $2.3 million compared to $0.8 million for the first six months of 2020. The provision for loan losses decreased primarily because of the reduction of qualitative reserves due to improvements in the economic environment because of the lessened impact of the COVID-19 pandemic and also because of an increase in the recoveries received on previously charged off loans between the periods.  During 2020, the Company increased its allowance for loan losses due to 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 was based, in part, on the amount of loans to borrowers in the hospitality, restaurant and entertainment industries that were negatively impacted by the COVID-19 pandemic.  At June 30, 2021, the Bank had $33.5 million of loans that had been granted loan accommodations in accordance with Section 4013 of the CARES Act. The accommodations granted included $29.2 million of loans that are required to make interest only payments for periods up to December 31, 2021 and $4.3 million of loans that had their loan amortization period increased.  Of these loans, $5.7 million were classified but still accruing at June 30, 2021 and all of these loans were current with their agreed upon payments.  The commercial credit area continues to communicate regularly with the borrowers that have been granted loan accommodations and monitors their activity closely.  This information is used to analyze the performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner.  It is anticipated that most of the remaining borrowers that have been granted accommodations will be in a position to resume making their regular loan payments at the end of the initial accommodation period.  Other borrowers, particularly in the hospitality and restaurant industries, may need additional accommodations when their initial accommodation period ends as their operations may need more time to recover from the impact 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 decreased during the period as a result of a decrease in the required qualitative reserves due to an improvement in the business activity because of the lessened impact of the COVID-19 pandemic, resulting from increased vaccination rates and the removal of pandemic-focused restrictions during the period.  Despite the progress made in the vaccination of the general public during the period, it was determined that economic risks related to the pandemic continued to exist and more time was needed to prudently evaluate the impact that these risks would have on our loan portfolio before more qualitative reserves would be released from the allowance for loan losses.  Total non-performing assets were $1.8 million at June 30, 2021, a decrease of $1.5 million, or 47.2%, from $3.3 million at December 31, 2020.  Non-performing loans decreased $0.9 million and foreclosed and repossessed assets decreased $0.6 million during the first six months of 2021.   A reconciliation of the Company’s allowance for loan losses for the six month periods ended June 30, 2021 and 2020 is summarized as follows:

     
(Dollars in thousands) 2021  2020 
Balance at January 1,$10,699  8,564 
Provision (1,467) 778 
Charge offs:    
  Consumer (42) (45)
  Commercial real estate 0  (730)
Recoveries 725  82 
Balance at June 30,$9,915  8,649 
     

The $0.7 million of recoveries relates primarily to a commercial loan in the transportation industry.

Non-Interest Income and ExpenseNon-interest income was $8.0 million for the first six months of 2021, an increase of $1.9 million, or 31.9%, from $6.1 million for the first six months of 2020.  Other non-interest income increased $1.7 million due primarily to a $1.5 million gain that was realized on the sale of commercial real estate owned.  Loan servicing fees increased $0.2 million between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.  Fees and service charges increased $0.1 million between the periods due primarily to an increase in debit card income.  These increases in non-interest income were partially offset by a slight decrease in the gain on sales of loans primarily because of a decrease in single family loan originations and sales between the periods.                    Non-interest expense was $13.5 million for the first six months of 2021, a decrease of $0.2 million, or 1.4%, from $13.7 million for the first six months of 2020.  Professional services expense decreased $0.4 million between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim.  Occupancy and equipment costs decreased slightly between the periods due to a decrease in depreciation and non-capitalized software costs. These decreases were partially offset by a $0.1 million increase in other non-interest expenses due primarily to an increase in FDIC insurance premiums between the periods, a $0.1 million increase in data processing expense between the periods due to an increase in debit card processing costs because of increased activity, and a $0.1 million increase in compensation and benefits expense due to a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production between the periods.            Income tax expense was $3.2 million for the first six months of 2021, an increase of $1.6 million from $1.6 million for the first six months of 2020.  The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.  

Return on Assets and EquityReturn on average assets (annualized) for the six month period ended June 30, 2021 was 1.68%, compared to 1.01% for the same six month period in 2020.  Return on average equity (annualized) was 15.31% for the six month period ended June 30, 2021, compared to 8.65% for the same six month period in 2020.

General InformationHMN 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 “anticipate,” “believe,” “continue,” “could,” “may,” “project,” “will,” and “would,” or similar statements or variations of such terms and include, but are not limited to, those relating to maintaining credit quality, and net interest margins; the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; anticipated impacts of the COVID-19 pandemic and efforts to mitigate the same on the general economy, our clients, deposit balances, and the allowance for loan losses; anticipated benefits that will be realized by our clients from government assistance programs related to the COVID-19 pandemic, including the forgiveness of PPP loans; 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 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 anticipated results of litigation and our assessment of the impact on our financial statements; the ability of the Bank to pay dividends to HMN; 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 Office of the Comptroller of the Currency and the Federal Reserve Bank (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 and the FRB; 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 filings 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, 2020 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.)

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
     
  June 30, December 31,
(Dollars in thousands) 2021  2020 
  (unaudited)   
Assets    
Cash and cash equivalents$100,406  86,269 
Securities available for sale:    
Mortgage-backed and related securities (amortized cost $165,202 and $99,821) 165,886  101,464 
Other marketable securities (amortized cost $45,690 and $46,491) 45,648  46,626 
  211,534  148,090 
     
Loans held for sale 7,380  6,186 
Loans receivable, net 637,219  642,630 
Accrued interest receivable 2,135  3,102 
Mortgage servicing rights, net 3,160  3,043 
Premises and equipment, net 9,871  10,133 
Goodwill 802  802 
Core deposit intangible 23  57 
Prepaid expenses and other assets 6,154  7,241 
Deferred tax asset, net 2,342  2,027 
Total assets$981,026  909,580 
     
     
Liabilities and Stockholders’ Equity    
Deposits$862,282  795,204 
Accrued interest payable 106  140 
Customer escrows 2,382  1,998 
Accrued expenses and other liabilities 8,298  8,986 
Total liabilities 873,068  806,328 
Commitments and contingencies    
Stockholders’ equity:    
Serial-preferred stock: ($.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 40,484  40,480 
Retained earnings, subject to certain restrictions 125,795  117,849 
Accumulated other comprehensive income 462  1,282 
Unearned employee stock ownership plan shares (1,353) (1,450)
Treasury stock, at cost 4,484,087 and 4,359,552 shares (57,521) (55,000)
Total stockholders’ equity 107,958  103,252 
Total liabilities and stockholders’ equity$981,026  909,580 
     

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
 
  Three Months Ended Six Months Ended
  June 30, June 30,
(Dollars in thousands, except per share data) 2021  2020 2021  2020
Interest income:        
Loans receivable$7,557  7,427 14,917  14,667
Securities available for sale:        
Mortgage-backed and related 440  265 831  554
Other marketable 62  171 169  383
Other 35  20 66  123
Total interest income 8,094  7,883 15,983  15,727
         
Interest expense:        
Deposits 410  745 863  1,637
Total interest expense 410  745 863  1,637
Net interest income 7,684  7,138 15,120  14,090
Provision for loan losses (891) 318 (1,467) 778
Net interest income after provision for loan losses 8,575  6,820 16,587  13,312
         
Non-interest income:        
Fees and service charges 783  669 1,522  1,383
Loan servicing fees 384  297 779  629
Gain on sales of loans 1,665  2,364 3,438  3,498
Other 1,910  264 2,258  555
Total non-interest income 4,742  3,594 7,997  6,065
         
Non-interest expense:        
Compensation and benefits 4,096  3,799 7,917  7,846
Occupancy and equipment 1,104  1,111 2,211  2,234
Data processing 368  321 715  629
Professional services 283  447 486  934
Other 1,129  975 2,130  2,011
Total non-interest expense 6,980  6,653 13,459  13,654
Income before income tax expense 6,337  3,761 11,125  5,723
Income tax expense 1,809  1,070 3,179  1,647
Net income 4,528  2,691 7,946  4,076
Other comprehensive income (loss), net of tax 421  224 (820) 1,499
Comprehensive income available to common stockholders$4,949  2,915 7,126  5,575
Basic earnings per share$1.01  0.58 1.76  0.88
Diluted earnings per share$1.00  0.58 1.74  0.88
         

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
 
SELECTED FINANCIAL DATA: Three Months Ended June 30, Six Months Ended June 30, 
(Dollars in thousands, except per share data) 2021 2020 2021 2020 
I. OPERATING DATA:         
Interest income$8,094 7,883 15,983 15,727 
Interest expense 410 745 863 1,637 
Net interest income 7,684 7,138 15,120 14,090 
          
II. AVERAGE BALANCES:         
Assets (1) 977,622 840,026 955,320 808,795 
Loans receivable, net 645,234 649,778 640,187 627,606 
Securities available for sale (1) 197,739 96,241 181,220 99,755 
Interest-earning assets (1) 943,544 804,190 920,855 773,950 
Interest-bearing liabilities and non-interest bearing deposits 864,784 737,130 843,735 706,310 
Equity (1) 105,693 95,728 104,661 94,805 
          
III. PERFORMANCE RATIOS: (1)         
Return on average assets (annualized) 1.86%1.29%1.68%1.01%
Interest rate spread information:         
Average during period 3.25 3.54 3.29 3.62 
End of period 3.56 3.42 3.56 3.42 
Net interest margin 3.27 3.57 3.31 3.66 
Ratio of operating expense to average         
total assets (annualized) 2.86 3.19 2.84 3.39 
Return on average equity (annualized) 17.18 11.31 15.31 8.65 
Efficiency 56.17 61.99 58.22 67.74 
  June 30, December 31, June 30,   
  2021 2020 2020   
IV. EMPLOYEE DATA:         
Number of full time equivalent employees 171 172 174   
          
V. ASSET QUALITY:         
Total non-performing assets$1,753 3,320 3,154   
Non-performing assets to total assets 0.18%0.37%0.37%  
Non-performing loans to total loans receivable, net 0.28%0.42%0.37%  
Allowance for loan losses$9,915 10,699 8,649   
Allowance for loan losses to total assets 1.01%1.18%1.00%  
Allowance for loan losses to total loans receivable, net 1.56 1.66 1.29   
Allowance for loan losses to non-performing loans 565.75 398.72 349.92   
          
VI. BOOK VALUE PER SHARE:         
Book value per share common share$23.24 21.65 20.29   
          
  Six Months EndedJune 30, 2021 Year EndedDecember 31, 2020 Six Months Ended June 30, 2020   
VII. CAPITAL RATIOS:         
Stockholders’ equity to total assets, at end of period 11.00%11.35%11.37%  
Average stockholders’ equity to average assets (1) 10.96 11.43 11.72   
Ratio of average interest-earning assets to average interest-bearing liabilities and non-interest bearing deposits(1) 109.14 109.66 109.58   
Home Federal Savings Bank regulatory capital ratios:         
Common equity tier 1 capital ratio 14.28 13.62 13.56   
Tier 1 capital leverage ratio 10.01 9.85 10.50   
Tier 1 capital ratio 14.28 13.62 13.56   
Risk-based capital 15.53 14.87 14.81   
          
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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Source: HMN Financial, Inc.


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