HMN Financial, Inc. Announces Third Quarter Results

Third Quarter Summary
Net income of $3.1 million, up $1.0 million, compared to $2.1 million in third quarter of 2019 Diluted earnings per share of $0.67, up $0.22, compared to $0.45 in third quarter of 2019Gain on sales of loans of $3.0 million, up $2.2 million from $0.8 million in third quarter of 2019Provision for loan losses of $0.8 million, up $1.2 million from ($0.4) million in third quarter of 2019Net interest margin of 3.40%, down 57 basis points, compared to 3.97% in third quarter of 2019Year to Date SummaryNet income of $7.2 million, up $0.6 million, compared to $6.6 million in first nine months of 2019Diluted earnings per share of $1.54, up $0.13, compared to $1.41 in first nine months of 2019Gain on sales of loans of $6.5 million, up $4.7 million from $1.8 million in first nine months of 2019Provision for loan losses of $1.5 million, up $3.0 million from ($1.5) million in first nine months of 2019Net interest margin of 3.57%, down 57 basis points, compared to 4.14% in first nine months of 2019Net Income SummaryROCHESTER, Minn., Oct. 19, 2020 (GLOBE NEWSWIRE) — HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $898 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $3.1 million for the third quarter of 2020, an increase of $1.0 million, compared to net income of $2.1 million for the third quarter of 2019.  Diluted earnings per share for the third quarter of 2020 was $0.67, an increase of $0.22 per share, compared to diluted earnings per share of $0.45 for the third quarter of 2019.  The increase in net income was primarily because of a $2.2 million increase in the gain on sales of mortgage loans between the periods.  The increase in the gain on sales of mortgage loans was due primarily to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods.  Net interest income increased $0.2 million primarily because of a decrease in interest expense between the periods.  These increases in net income were partially offset by a $1.2 million increase in the provision for loan losses between the periods.  The provision for loan losses increased primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic.  Income tax expense also increased $0.3 million as a result of the increased pre-tax income between the periods.President’s Statement“The COVID-19 pandemic and the related social distancing mandates continued to have a significant impact on the Company in the third quarter of 2020,” said Bradley Krehbiel, President and Chief Executive Officer of HMN.  “The economic effects of the pandemic resulted in the recording of additional provisions for loan losses in the third quarter as we continue to analyze the impact of the pandemic on our borrowers.  The increased provision for loan losses combined with the net interest margin compression we are experiencing, as a result of the historic low interest rate environment, continue to have a negative impact on the Company’s earnings.  Despite these challenges, we are pleased to report the increases in net income for both the quarter and the first nine months of 2020, due in large part to the increased mortgage loan origination activity and the related gain on sales of loans.” 
                                                           
Third Quarter ResultsNet Interest IncomeNet interest income was $7.3 million for the third quarter of 2020, an increase of $0.2 million, or 2.8%, from $7.1 million for the third quarter of 2019.  Interest income was $7.9 million for the third quarter of 2020, a decrease of $0.1 million, or 0.6%, from $8.0 million for the third quarter of 2019. Interest income decreased despite the $143.4 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets.  The average yield earned on interest-earning assets was 3.71% for the third quarter of 2020, a decrease of 76 basis points from 4.47% for the third quarter of 2019.  The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.
Interest expense was $0.7 million for the third quarter of 2020, a decrease of $0.2 million, or 27.6%, from $0.9 million for the third quarter of 2019.  Interest expense decreased despite the $133.7 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.34% for the third quarter of 2020, a decrease of 22 basis points from 0.56% for the third quarter of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2020 was 3.40%, a decrease of 57 basis points, compared to 3.97% for the third quarter of 2019.  The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.A summary of the Company’s net interest margin for the three and nine month periods ended September 30, 2020 and 2019 is as follows:
Provision for Loan Losses
The provision for loan losses was $0.8 million for the third quarter of 2020, an increase of $1.2 million from the ($0.4) million provision for loan losses for the third quarter of 2019.  The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The amount of the increase in the allowance for loan losses related to the economic environment is based, in part, on the amount of loans to borrowers that continued to have their loan payments deferred because of the impact of the pandemic.  At September 30, 2020 the Bank had $82.0 million of loans to borrowers who had their loan payments deferred for up to six months compared to $119.1 million of loans to borrowers who had their payments deferred at June 30, 2020.A summary of deferred loans at September 30, 2020 and June 30, 2020 by industry or collateral type is as follows:(1) Approximately $38.5 million of the hotel properties are located in Minnesota with approximately $21.3 million located in Rochester, Minnesota, $13.8 million in the Minneapolis/St. Paul, Minnesota metro area, and $3.4 million in St. Cloud, Minnesota.All of the borrowers whose loan deferral period ended during the third quarter of 2020 had resumed making their normal payments and none of the loans removed from the deferral list were classified as non-performing as of September 30, 2020.  The initial deferral period for all remaining deferred loans at September 30, 2020 is scheduled to end in the fourth quarter of 2020.  The commercial credit area continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely.  This information is used to analyze the performance of these credits and to help anticipate any potential issues that these credits may have when their initial deferral period ends.  It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries, may need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans.  The general reserve amount includes quantitative reserves based on our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter as a result of an increase in the qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and an increase in the reserves related to an analysis of the Bank’s charged off loan history.  Total non-performing assets were $3.0 million at September 30, 2020, a decrease of $0.2 million, or 6.3%, from $3.2 million at June 30, 2020.  Non-performing loans increased $0.1 million and foreclosed and repossessed assets decreased $0.3 million during the third quarter of 2020.  A reconciliation of the Company’s allowance for loan losses for the quarters ended September 30, 2020 and 2019 is summarized as follows:The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, 2019.⁽¹⁾ Excludes non-accrual loans.Non-Interest Income and ExpenseNon-interest income was $4.4 million for the third quarter of 2020, an increase of $2.2 million, or 97.4%, from $2.2 million for the third quarter of 2019.  Gain on sales of loans increased $2.2 million between the periods primarily because of an increase in single family loan originations and sales.  Other non-interest income increased $0.1 million due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.  These increases in the non-interest income were partially offset by a decrease of $0.1 million in fees and service charges earned between the periods due primarily to a decrease in the overdraft fees collected.       
Non-interest expense was $6.6 million for the third quarter of 2020, a decrease of $0.1 million, or 2.2%, from $6.7 million for the third quarter of 2019.  Professional services expense decreased $0.2 million between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim.  Occupancy and equipment expense decreased slightly between the periods due to a decrease in depreciation and non-capitalized equipment costs. Other non-interest expense decreased slightly due primarily to an increase in the gains recognized on the sale of other real estate owned between the periods.  These decreases in non-interest expense were partially offset by a $0.1 million increase in compensation and benefits expense related to the increased mortgage loan production between the periods.  Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses.   
Income tax expense was $1.2 million for the third quarter of 2020, an increase of $0.3 million from $0.9 million for the third quarter of 2019.  The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.   Return on Assets and EquityReturn on average assets (annualized) for the third quarter of 2020 was 1.39%, compared to 1.11% for the third quarter of 2019.  Return on average equity (annualized) was 12.50% for the third quarter of 2020, compared to 9.10% for the same period in 2019.  Book value per common share at September 30, 2020 was $20.91, compared to $18.83 at September 30, 2019.Nine Month Period Results