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
                 
Net Income Summary     Three Months Ended       Year Ended  
      December 31,       December 31,  
(Dollars in thousands, except per share amounts)     2016       2015       2016     2015  
Net income   $ 1,684       1,090     $ 6,350       2,956  
Net income available to common stockholders     1,684       1,090       6,350       2,848  
Diluted earnings per share     0.35       0.23       1.34       0.61  
Return on average assets (annualized)     0.99 %     0.69 %     0.96 %     0.50 %
Return on average equity (annualized)     8.93 %     6.19 %     8.71 %     4.27 %
Book value per share   $ 16.91       15.54     $ 16.91       15.54  
                                 

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:
    For the three-month period ended  
    December 31, 2016     December 31, 2015  
(Dollars in thousands)   AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate     AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate  
Interest-earning assets:                            
  Securities available for sale $ 76,912   281   1.45 % $ 116,953   455   1.54 %
  Loans held for sale   2,783   27   3.86     2,574   27   4.14  
  Mortgage loans, net   108,133   1,072   3.94     91,170   955   4.16  
  Commercial loans, net   360,355   4,406   4.86     296,854   3,789   5.06  
  Consumer loans, net   73,969   900   4.84     62,933   866   5.46  
  Cash equivalents   20,908   23   0.44     25,115   16   0.25  
  Federal Home Loan Bank stock   806   2   0.86     734   1   0.56  
Total interest-earning assets $ 643,866   6,711   4.15   $ 596,333   6,109   4.06  
                             
Interest-bearing liabilities:                            
  NOW accounts $ 89,864   14   0.06   $ 79,096   6   0.03  
  Savings accounts   72,896   15   0.08     65,859   15   0.09  
  Money market accounts   170,475   99   0.23     161,923   86   0.21  
  Certificates   101,889   147   0.57     100,512   122   0.48  
  Advances and other borrowings   9,511   145   6.05     10,888   164   5.98  
Total interest-bearing liabilities $ 444,635           $ 418,278          
  Non-interest checking   144,626             135,666          
  Other non-interest bearing deposits   1,206             808          
Total interest-bearing liabilities and non-interest   bearing deposits $ 590,467   420   0.28   $ 554,752   393   0.28  
Net interest income       6,291             5,716      
Net interest rate spread           3.87 %           3.78 %
Net interest margin           3.89 %           3.80 %
                             

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:

       
(Dollars in thousands)    2016       2015  
Balance at September 30, $ 10,306     $   8,786  
Provision   (374 )     75  
Charge offs:      
  Commercial business    (80 )     (62 )
  Consumer   (79 )     (40 )
Recoveries   130       950  
Balance at December 31, $   9,903     $   9,709  
       
Allocated to:      
General allowance $   8,915     $   8,700  
Specific allowance   988       1,009  
  $   9,903     $   9,709  
       

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.
    December 31,     September 30,     December 31,  
(Dollars in thousands)    2016     2016     2015  
Non-Performing Loans:                  
  One-to-four family real estate $ 916   $ 923   $ 1,655  
  Commercial real estate   1,384     2,847     1,694  
  Consumer   630     815     786  
  Commercial business   343     412     46  
  Total   3,273     4,997     4,181  
                   
Foreclosed and Repossessed Assets:                  
  One-to-four family real estate   0     0     48  
  Commercial real estate   611     815     1,997  
  Consumer   16     0     0  
Total non-performing assets $ 3,900   $ 5,812   $ 6,226  
Total as a percentage of total assets   0.57 %   0.85 %   0.97 %
Total non-performing loans $ 3,273   $ 4,997   $ 4,181  
Total as a percentage of total loans receivable, net   0.59 %   0.92 %   0.90 %
Allowance for loan losses to non-performing loans   302.56 %   206.24 %   232.22 %
                   
Delinquency Data:                  
Delinquencies (1)                  
  30+ days $ 917   $ 1,506   $ 993  
  90+ days   0     0     0  
Delinquencies as a percentage of                  
 loan and lease portfolio (1)                  
  30+ days   0.16 %   0.27 %   0.21 %
  90+ days   0.00 %   0.00 %   0.00 %
                   

(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:

    For the twelve-month period ended  
    December 31, 2016     December 31, 2015  
(Dollars in thousands)   AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate     AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate  
Interest-earning assets:                            
Securities available for sale $ 86,159   1,347   1.56 % $ 134,080   1,997   1.49 %
  Loans held for sale   3,046   126   4.14     2,507   87   3.47  
  Mortgage loans, net   103,040   4,272   4.15     77,626   3,248   4.18  
  Commercial loans, net   339,521   18,036   5.31     260,005   13,135   5.05  
  Consumer loans, net   71,413   3,466   4.85     56,455   2,919   5.17  
  Cash equivalents   23,337   96   0.41     28,544   63   0.22  
  Federal Home Loan Bank stock   770   6   0.78     734   4   0.54  
Total interest-earning assets $ 627,286   27,349   4.36   $ 559,951   21,453   3.83  
                             
Interest-bearing liabilities:                            
  NOW accounts $ 85,440   50   0.06   $ 76,136   17   0.02  
  Savings accounts   71,728   62   0.09     55,273   42   0.08  
  Money market accounts   164,522   366   0.22     153,441   347   0.23  
  Certificates   100,942   524   0.52     96,600   528   0.55  
  Advances and other borrowings   9,374   591   6.30     9,225   573   6.21  
Total interest-bearing liabilities $ 432,006           $ 390,675          
   Non-interest checking   145,450             124,342          
  Other non-interest bearing deposits   1,434             985          
Total interest-bearing liabilities and non-interest   bearing deposits $ 578,890   1,593   0.28   $ 516,002   1,507   0.29  
Net interest income       25,756             19,946      
Net interest rate spread           4.08 %           3.54 %
Net interest margin           4.11 %           3.56 %
                             

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:
       
(in thousands)    2016       2015  
Balance beginning of period $   9,709     $  8,332  
Provision   (645 )     (164 )
Charge offs:      
  Commercial   (180 )     (69 )
  Commercial real estate   (67 )     0  
  Consumer   (108 )     (105 )
  Single family mortgage    (66 )     (19 )
Recoveries   1,260       1,734  
Balance at December 31, $   9,903     $   9,709  
       

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.)
 
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
             
      December 31,   December 31,  
(Dollars in thousands)     2016     2015    
      (unaudited)      
Assets            
Cash and cash equivalents   $ 27,561     39,782    
Securities available for sale:            
 Mortgage-backed and related securities            
  (amortized cost $993 and $2,237)     1,005     2,283    
 Other marketable securities            
  (amortized cost $78,846 and $110,092)     77,472     109,691    
      78,477     111,974    
             
Loans held for sale     2,009     3,779    
Loans receivable, net     551,171     463,185    
Accrued interest receivable     2,626     2,254    
Real estate, net     611     2,045    
Federal Home Loan Bank stock, at cost     770     691    
Mortgage servicing rights, net     1,604     1,499    
Premises and equipment, net     8,223     7,469    
Goodwill     802     0    
Core deposit intangible     454     393    
Prepaid expenses and other assets     1,768     1,417    
Deferred tax asset, net     5,947     8,673    
 Total assets   $ 682,023     643,161    
             
             
Liabilities and Stockholders' Equity            
Deposits   $ 592,811     559,387    
Other borrowings     7,000     9,000    
Accrued interest payable     236     242    
Customer escrows     1,011     830    
Accrued expenses and other liabilities     5,046     4,057    
 Total liabilities     606,104     573,516    
Commitments and contingencies            
Stockholders' equity:            
 Serial-preferred stock: ($.01 par value)            
 authorized 500,000 shares; issued shares 0 and 10,000     0     0    
 Common stock ($.01 par value):            
 authorized 16,000,000; issued shares 9,128,662     91     91    
Additional paid-in capital.     50,566     50,388    
Retained earnings, subject to certain restrictions     86,886     80,536    
Accumulated other comprehensive loss     (820 )   (214 )  
Unearned employee stock ownership plan shares     (2,223 )   (2,417 )  
Treasury stock, at cost 4,639,739 and 4,645,769 shares     (58,581 )   (58,739 )  
 Total stockholders' equity     75,919     69,645    
Total liabilities and stockholders' equity   $ 682,023     643,161    
             

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
 
    Three Months EndedDecember 31,   Year Ended  December 31, 
  (Dollars in thousands, except per share data)    2016    2015    2016   2015 
      (unaudited)   (unaudited)     (unaudited)    
Interest income:                    
 Loans receivable   $ 6,405     5,638       25,900     19,389  
 Securities available for sale:                    
  Mortgage-backed and related     10     29       58     116  
  Other marketable     271     426       1,289     1,881  
 Cash equivalents     23     15       96     63  
 Other     2     1       6     4  
  Total interest income     6,711     6,109       27,349     21,453  
                     
Interest expense:                    
 Deposits.     275     229       1,002     934  
 Advances and other borrowings     145     164       591     573  
  Total interest expense     420     393       1,593     1,507  
  Net interest income     6,291     5,716       25,756     19,946  
Provision for loan losses     (374 )   75       (645 )   (164 )
  Net interest income after provision for loan losses     6,665     5,641       26,401     20,110  
                     
Non-interest income:                    
 Fees and service charges     874     827       3,427     3,316  
 Loan servicing fees     296     268       1,108     1,046  
 Gain on sales of loans     770     536       2,618     1,964  
 Other     257     330       1,048     1,327  
  Total non-interest income     2,197     1,961       8,201     7,653  
                     
Non-interest expense:                    
 Compensation and benefits     3,748     3,448       14,764     13,733  
 (Gains) losses on real estate owned     (161 )   97       (596 )   218  
 Occupancy and equipment     1,047     981       4,041     3,722  
 Data processing     308     267       1,161     1,020  
 Professional services     386     325       1,257     1,108  
 Other     877     878       3,503     3,395  
  Total non-interest expense     6,205     5,996       24,130     23,196  
  Income before income tax expense     2,657     1,606       10,472     4,567  
Income tax expense     973     516       4,122     1,611  
  Net income     1,684     1,090       6,350     2,956  
Preferred stock dividends     0     0       0     (108 )
  Net income available to common shareholders     1,684     1,090       6,350     2,848  
Other comprehensive income (loss), net of tax     (737 )   (277 )     (606 )   204  
Comprehensive income available to common shareholders   $ 947     813       5,744     3,052  
Basic earnings per share   $ 0.40     0.26       1.52     0.69  
Diluted earnings per share   $ 0.35     0.23       1.34     0.61  
                     

 
HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
  (unaudited)  
Selected Financial Data: Three Months Ended  December 31, Year Ended  December 31, 
(Dollars in thousands, except per share data)  2016   2015   2016   2015 
I. OPERATING DATA:                    
  Interest income $ 6,711     6,109     27,349   21,453  
  Interest expense   420     393     1,593   1,507  
  Net interest income   6,291     5,716     25,756   19,946  
                         
II. AVERAGE BALANCES:                      
  Assets (1)   674,792     628,914     658,407   592,204  
  Loans receivable, net   542,457     450,957     513,974   394,086  
  Mortgage-backed and related securities (1)   76,912     116,953     86,159   134,080  
  Interest-earning assets (1)   643,866     596,333     627,286   559,951  
  Interest-bearing liabilities   590,467     554,752     578,890   516,002  
  Equity (1)   75,016     69,902     72,869   69,259  
                         
III. PERFORMANCE RATIOS: (1)                      
  Return on average assets (annualized)    0.99 %   0.69 %   0.96 % 0.50 %
  Interest rate spread information:                      
    Average during period   3.87     3.78     4.08   3.54  
    End of period   3.87     3.79     3.87   3.79  
  Net interest margin   3.89     3.80     4.11   3.56  
  Ratio of operating expense to average                      
    total assets (annualized)    3.66     3.78     3.66   3.92  
  Return on average common equity (annualized)   8.93     6.19     8.71   4.27  
 Efficiency   73.10     78.10     71.06   84.05  
    December 31,   December 31,        
IV. ASSET QUALITY:  2016   2015        
  Total non-performing assets $ 3,900     6,226            
  Non-performing assets to total assets   0.57 %   0.97          
  Non-performing loans to total loans                      
    receivable, net   0.59 %   0.90          
  Allowance for loan losses $ 9,903     9,709            
  Allowance for loan losses to total assets   1.45 %   1.51          
  Allowance for loan losses to total loans   receivable, net   1.80     2.10            
  Allowance for loan losses to non-performing loans   302.56     232.22            
                         
V. BOOK VALUE PER COMMON SHARE:                      
  Book value per common share $ 16.91     15.54            
     Year Ended   Year Ended        
VI. CAPITAL RATIOS:  Dec 31, 2016   Dec 31, 2015        
  Stockholders' equity to total assets, at end of period   11.13 %   10.83 %          
  Average stockholders' equity to average assets (1)    11.07     11.70            
  Ratio of average interest-earning assets to                      
    average interest-bearing liabilities (1)   108.36     108.52            
  Home Federal Savings Bank regulatory capital ratios:                      
    Common equity tier 1 capital ratio   13.42     14.08            
    Tier 1 capital leverage ratio   11.55     11.46            
    Tier 1 capital ratio   13.42     14.08            
    Risk-based capital   14.68     15.35            
     December 31,   December 31,        
     2016   2015        
VII. EMPLOYEE DATA:                      
  Number of full time equivalent employees   200     185            

(1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.

CONTACT: Bradley KrehbielChief Executive Officer, PresidentHMN Financial, Inc. (507) 252-7169

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