HMN Financial, Inc. Announces Fourth Quarter Results

Fourth Quarter Highlights

• Net income of $1.7 million, up $0.6 million from $1.1 million for fourth quarter of 2015
• Diluted earnings per share of $0.35, up $0.12 from $0.23 for fourth quarter of 2015
• Net interest income of $6.3 million, up $0.6 million from $5.7 million for fourth quarter of 2015
• Non-performing assets of $3.9 million, down $1.9 million, or 32.9%, from September 30, 2016

Annual Highlights

• Net income of $6.4 million, up $3.4 million from $3.0 million for 2015
• Diluted earnings per share of $1.34, up $0.73 from $0.61 for 2015
• Net interest income of $25.8 million, up $5.9 million from $19.9 million for 2015
• Non-performing assets of $3.9 million, down $2.3 million from December 31, 2015
• Total assets of $682 million, up $39 million from December 31, 2015

ROCHESTER, Minn., Jan. 25, 2017 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $682 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.7 million for the fourth quarter of 2016, an increase of $0.6 million compared to net income of $1.1 million for the fourth quarter of 2015.  Diluted earnings per share for the fourth quarter of 2016 was $0.35, an increase of $0.12 from the diluted earnings per share of $0.23 for the fourth quarter of 2015.  The increase in net income for the fourth quarter of 2016 is due primarily to a $0.6 million increase in interest income as a result of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held between the periods.  The provision for loan losses decreased $0.5 million between the periods due to improvements in the credit quality of the commercial loan portfolio.  These increases in income were partially offset by a $0.5 million increase in income tax expense due to the increase in pre-tax income in the fourth quarter of 2016 when compared to the same period of 2015.

President’s Statement

“We are pleased to report the continued improvement in both the credit quality of our loan portfolio and net income in the fourth quarter of 2016 when compared to the same period of 2015,” said Bradley Krehbiel, President and Chief Executive Officer of HMN.  “The increase in net income between the periods is the result of increasing interest income and managing expenses in order to improve our financial results.  We will continue to focus our efforts on prudently growing our core deposit and loan balances in order to further enhance the financial performance of our core banking operations.” 

Fourth Quarter Results

Net Interest Income

Net interest income was $6.3 million for the fourth quarter of 2016, an increase of $0.6 million, or 10.1%, from $5.7 million for the fourth quarter of 2015.  Interest income was $6.7 million for the fourth quarter of 2016, an increase of $0.6 million, or 9.9%, from $6.1 million for the same period in 2015.  Interest income increased between the periods primarily because of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held, which resulted in an increase in the average yields earned between the periods.  While the average interest-earning assets increased $47.5 million between the periods, the average interest-earning assets held in higher yielding loans increased $91.7 million and the amount of average interest-earning assets held in lower yielding cash and investments decreased $44.2 million between the periods.  The yield on average interest-earning assets was also enhanced $0.2 million, or 6 basis points, due to loan prepayment penalties, yield adjustments recognized on purchased loans, and interest payments received on non-accruing and previously charged off loans in the fourth quarter of 2016.  The increase in the average outstanding loans between the periods was primarily the result of an increase in the commercial loan portfolio, which occurred because of an increase in loan originations and a reduction in loan payoffs between the periods.  Average outstanding loans also increased $6.1 million between the periods as a result of an acquisition that occurred in the second quarter of 2016.  The average yield earned on interest-earning assets was 4.15% for the fourth quarter of 2016, an increase of 9 basis points from 4.06% for the fourth quarter of 2015.

Interest expense was $0.4 million for the fourth quarter of 2016, the same as the fourth quarter of 2015.  The average rate paid on interest-bearing liabilities also remained the same between the periods.  While the average interest-bearing liabilities increased $35.7 million between the periods, the average amount held in lower rate checking and money market accounts increased $35.3 million and the average amount held in higher rate certificates of deposits and other borrowings increased $0.4 million between the periods. The increase in the average outstanding deposits between the periods was primarily the result of organic deposit growth. The average outstanding deposits also increased $15.2 million as a result of an acquisition that occurred in the second quarter of 2016.  The average interest rate paid on interest-bearing liabilities was 0.28% for both the fourth quarter of 2016 and the fourth quarter of 2015.  Net interest margin (net interest income divided by average interest-earning assets) for the fourth quarter of 2016 was 3.89%, an increase of 9 basis points, compared to 3.80% for the fourth quarter of 2015. 

A summary of the Company’s net interest margin for the three month periods ended December 31, 2016 and 2015 is as follows:

Provision for Loan Losses

The provision for loan losses was ($0.4) million for the fourth quarter of 2016, a decrease of $0.5 million, compared to $0.1 million for the fourth quarter of 2015.  The provision for loan losses decreased between the periods primarily because of the decrease in reserves required on certain commercial loans due to credit quality improvements in the fourth quarter of 2016 when compared to the same period of 2015.  Total non-performing assets were $3.9 million at December 31, 2016, a decrease of $1.9 million, or 32.9%, from $5.8 million at September 30, 2016.  Non-performing loans decreased $1.7 million and foreclosed and repossessed assets decreased $0.2 million during the fourth quarter of 2016.

A reconciliation of the allowance for loan losses for the fourth quarters of 2016 and 2015 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, 2015.

⁽¹⁾ Excludes non-accrual loans.

Non-Interest Income and Expense

Non-interest income was $2.2 million for the fourth quarter of 2016, an increase of $0.2 million, or 12.0%, from $2.0 million for the same period of 2015.  The increase in non-interest income is primarily related to the $0.2 million increase in the gain on sales of loans due primarily to an increase in single family loan originations and sales between the periods. Fees and service charges increased slightly between the periods due to an increase in debit card income.  Loan servicing fees increased slightly due to an increase in the loans serviced for others between the periods.  These increases were partially offset by a $0.1 million decrease in other non-interest income because of a decrease in the sales of uninsured investment products between the periods.

Non-interest expense was $6.2 million for the fourth quarter of 2016, an increase of $0.2 million, or 3.5%, from $6.0 million for the same period of 2015.  Compensation expense increased $0.3 million between the periods due to annual increases in compensation and an increase in the number of employees between the periods related to the increased loan production.  Occupancy and equipment expense increased $0.1 million because of increased software and building expenses.  Data processing expense increased slightly between the periods due to increased mobile and on-line banking costs.  Professional services expense increased $0.1 million between the periods primarily because of increased legal fees.  These increases in non-interest expenses were partially offset by a $0.3 million increase in the gains on real estate owned because there were more sales and fewer valuation write downs in the fourth quarter of 2016 when compared to the same period of 2015.

Income tax expense was $1.0 million for the fourth quarter of 2016, an increase of $0.5 million from $0.5 million for the fourth quarter of 2015. The increase in income tax expense between the periods is primarily related to the increase in pre-tax income in the fourth quarter of 2016 when compared to the fourth quarter of 2015.

Return on Assets and Equity

Return on average assets (annualized) for the fourth quarter of 2016 was 0.99%, compared to 0.69% for the fourth quarter of 2015.  Return on average equity (annualized) was 8.93% for the fourth quarter of 2016, compared to 6.19% for the same period of 2015.  Book value per share at December 31, 2016 was $16.91, compared to $15.54 at December 31, 2015.

Annual Results

Net Income

Net income was $6.4 million for 2016, an increase of $3.4 million, or 114.8%, compared to net income of $3.0 million for 2015.  Net income available to common shareholders was $6.4 million for 2016, an increase of $3.6 million, or 123.0%, compared to net income available to common shareholders of $2.8 million for 2015.  Diluted earnings per share for the year ended December 31, 2016 was $1.34, an increase of $0.73 per share compared to diluted earnings per share of $0.61 for the year ended December 31, 2015.  The increase in net income for 2016 is due primarily to a $5.9 million increase in interest income as a result of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held between the periods. Gain on sales of loans increased $0.7 million due primarily to an increase in single family mortgage loan production and sales between the periods.  The provision for loan losses decreased $0.5 million between the periods due to improvements in the credit quality of the commercial loan portfolio.  These increases in income were partially offset by a $1.0 million increase in compensation expense due to annual increases in compensation and an increase in the number of employees related to the increased loan production.  Income tax expense increased $2.5 million because of the increase in pre-tax income between the periods. 

Net Interest Income

Net interest income was $25.8 million for 2016, an increase of $5.9 million, or 29.1%, from $19.9 million for 2015.  Interest income was $27.3 million for 2016, an increase of $5.8 million, or 27.5%, from $21.5 million for 2015.  Interest income increased between the periods primarily because of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held, which resulted in an increase in the average yields earned between the periods.  While the average interest-earning assets increased $67.3 million between the periods, the average interest-earning assets held in higher yielding loans increased $120.4 million and the amount of average interest-earning assets held in lower yielding cash and investments decreased $53.1 million between the periods.  The yield on average interest-earning assets was also enhanced $2.2 million, or 30 basis points, due to loan prepayment penalties, yield adjustments recognized on purchased loans, and interest payments received on non-accruing and previously charged off loans during 2016.  The increase in the average outstanding loans between the periods was primarily the result of an increase in the commercial loan portfolio, which occurred because of an increase in loan originations and a reduction in loan payoffs between the periods.  Average outstanding loans also increased $18.6 million between the periods as a result of the acquisitions that occurred in the third quarter of 2015 and the second quarter of 2016.  The average yield earned on interest-earning assets was 4.36% for 2016, an increase of 53 basis points from 3.83% for 2015.

Interest expense was $1.6 million for 2016, an increase of $0.1 million, or 5.7%, compared to $1.5 million for 2015.  Interest expense increased because of an increase in the average outstanding interest-bearing liabilities.  The average rate paid on interest-bearing liabilities decreased 1 basis point between the periods primarily because of the change in the composition of the average interest-bearing liabilities.  While the average interest-bearing liabilities increased $62.9 million between the periods, the average amount held in lower rate checking and money market accounts increased $58.0 million and the average amount held in higher rate certificates of deposits and other borrowings increased $4.9 million between the periods. The increase in the average outstanding deposits between the periods was primarily the result of the $42.9 million increase in the average outstanding deposits as a result of acquisitions that occurred in the third quarter of 2015 and the second quarter of 2016.  The average interest rate paid on interest-bearing liabilities was 0.28% for 2016 compared to 0.29% for 2015.   Net interest margin (net interest income divided by average interest-earning assets) for 2016 was 4.11%, an increase of 55 basis points compared to 3.56% for 2015.

A summary of the Company’s net interest margin for 2016 and 2015 is as follows:

Provision for Loan Losses

The provision for loan losses was ($0.6) million for the year ended December 31, 2016, a decrease of $0.4 million, from ($0.2) million for the year ended December 31, 2015. The provision for loan losses decreased between the periods primarily because of the decrease in the reserve percentages applied to certain risk rated loan categories as a result of an internal analysis performed.  Total non-performing assets were $3.9 million at December 31, 2016, a decrease of $2.3 million, or 37.4%, from $6.2 million at December 31, 2015.  Non-performing loans decreased $0.9 million and foreclosed and repossessed assets decreased $1.4 million during 2016. 
    
A reconciliation of the allowance for loan losses for 2016 and 2015 is summarized as follows:

Non-Interest Income and Expense

Non-interest income was $8.2 million for the year ended December 31, 2016, an increase of $0.5 million, or 7.2%, from $7.7 million for the year ended December 31, 2015.  The increase in non-interest income is primarily related to the $0.7 million increase in the gain on sales of loans due primarily to an increase in single family loan originations and sales between the periods.  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 due to an increase in the loans serviced for others between the periods.  These increases were partially offset by a $0.3 million decrease in other non-interest income because of a decrease in the gains realized on acquisitions between the periods.

Non-interest expense was $24.1 million for the year ended December 31, 2016, an increase of $0.9 million, or 4.0%, from $23.2 million for the year ended December 31, 2015.  Compensation expense increased $1.0 million between the periods due to annual increases in compensation and an increase in the number of employees between the periods related to the increased loan production.  Occupancy and equipment expense increased $0.3 million because of increased software and equipment expenses.  Other non-interest expense increased $0.1 million due primarily to an increase in loan related expenses as a result of the increase in loans originated between the periods.  Data processing expense increased $0.1 million between the periods due to increased mobile and on-line banking costs.  Other professional expenses increased $0.1 million primarily due to expenses related to the acquisition that occurred in the second quarter of 2016. These increases in non-interest expenses were partially offset by a $0.8 million increase in the gains on real estate owned between the periods primarily because of the gains that were recognized on the sale of two commercial properties during 2016.

Income tax expense was $4.1 million for the year ended December 31, 2016, an increase of $2.5 million, from $1.6 million for the year ended December 31, 2015.  The increase in income tax expense between the periods is primarily related to the increase in pre-tax income in 2016 when compared to 2015.

Net Income Available to Common Shareholders

Net income available to common shareholders was $6.4 million for 2016, an increase of $3.6 million from the $2.8 million net income available to common shareholders for 2015.  Net income available to common shareholders increased primarily because of the increase in net income and a reduction in the dividends required to be paid on the outstanding Fixed Rate Cumulative Perpetual Preferred Stock Series A (the “Preferred Stock”) between the periods.  On February 17, 2015 the Company redeemed the final 10,000 shares of its outstanding Preferred Stock and, as a result, no dividends are required to be paid on the Preferred Stock after that date. 

Return on Assets and Equity

Return on average assets (annualized) for 2016 was 0.96%, compared to 0.50% for 2015.  Return on average equity (annualized) was 8.71% for 2016, compared to 4.27% for 2015.  Book value per share at December 31, 2016 was $16.91, compared to $15.54 at December 31, 2015.

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 (2), LaCrescent, Rochester (4), Spring Valley and Winona and one full service office in Marshalltown, Iowa.  The Bank also operates three loan origination offices in Minnesota located in Sartell, Owatonna, and Mankato and one loan origination office in Delafield, Wisconsin.

Safe Harbor Statement

This press release may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to growing our core deposit relationships and loan balances, enhancing the financial performance of our core banking operations, improving credit quality, reducing non-performing assets, and generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for maintenance thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; our ability to integrate acquired operations; 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 and composition of 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 trust preferred securities held by the Bank; the ability of the Bank to pay dividends to HMN; the ability of HMN to pay the principal and interest payments on its third party note payable; the ability to remain well capitalized; 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 additional changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with alternate funding sources, including changes in collateral advance rates and policies of the FHLB; technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; acquisition integration costs; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the Company’s most recent filing on Forms 10-K and 10-Q with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 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.