HMN Financial, Inc. Announces Second Quarter Results

Second Quarter Summary
  • Net income of $1.0 million, down $0.5 million, compared to $1.5 million in second quarter of 2016
  • Diluted earnings per common share of $0.21, down $0.10, compared to $0.31 in second quarter  of 2016
  • Interest income yield enhancements decreased $0.7 million in second quarter of 2017 compared to second quarter of 2016
  • Total assets increased $44 million in second quarter of 2017

Year to Date Summary
  • Net income of $2.2 million, down $1.1 million, compared to $3.3 million in first six months of 2016
  • Diluted earnings per common share of $0.46, down $0.23, compared to $0.69 in first six months  of 2016
  • Interest income yield enhancements decreased $1.2 million in the first six months of 2017 compared to the first six months of 2016
  • Total assets increased $43 million in first six months of 2017

Net Income Summary
    Three months ended     Six months ended  
    June 30,     June 30,  
(Dollars in thousands, except per share amounts)   2017     2016     2017     2016  
Net income $ 1,024     1,478   $ 2,237     3,252  
Diluted earnings per common share   0.21     0.31     0.46     0.69  
Return on average assets     0.60 %   0.91 %   0.66 %   1.01 %
Return on average equity   5.19 %   8.23 %   5.76 %   9.16 %
Book value per common share $ 17.50   $ 16.34   $ 17.50   $ 16.34  

ROCHESTER, Minn., July 20, 2017 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $725 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.0 million for the second quarter of 2017, a decrease of $0.5 million, compared to net income of $1.5 million for the second quarter of 2016.  Diluted earnings per common share for the second quarter of 2017 was $0.21, a decrease of $0.10 from the diluted earnings per common share of $0.31 for the second quarter of 2016. The decrease in net income in the second quarter of 2017 was primarily due to a $0.7 million decrease in the interest income yield enhancements recognized on loan prepayment penalties, yield adjustments on purchased loans, and interest payments received on non-accruing and previously charged off loans.  Gain on sales of loans decreased $0.2 million between the periods due to a decrease in commercial government guaranteed loan sales. Gains on real estate sales decreased $0.1 million due to fewer real estate sales in the second quarter of 2017 when compared to the same period of 2016. Compensation expense increased $0.2 million between the periods due to normal annual salary increases. Other non-interest expense increased $0.1 million due primarily to an increase in commercial loan expenses. These decreases in net income were partially offset by a $0.5 million increase in interest income because 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, a $0.3 million decrease in income tax expense as a result of the decrease in pre-tax income, and a $0.1 million decrease in the loan loss provision between the periods. 

President's Statement"We are pleased to report the increase in our assets in the second quarter of 2017 and the positive impact that our loan growth has had on our interest income," said Bradley Krehbiel, President and Chief Executive Officer of HMN.  "Our strategy to prudently grow our loan portfolios has resulted in an increase in our outstanding loan portfolios and continues to have a positive impact on the financial performance of our core banking operations."

Second Quarter Results Net Interest IncomeNet interest income was $6.5 million for the second quarter of 2017, a decrease of $0.3 million, or 3.3%, from $6.8 million for the second quarter of 2016. Interest income was $7.0 million for the second quarter of 2017, a decrease of $0.2 million, or 2.23%, from $7.2 million for the second quarter of 2016. Interest income decreased $0.7 million, or 41 basis points, due to a decrease in the amount of yield enhancements recognized from loan prepayment penalties, yield adjustments on purchased loans, and the interest payments received on non-accruing and previously charged off commercial real estate loans between the periods.  It is anticipated that the yield enhancements relating to these items will be lower in subsequent years as the pool of non-accruing and purchased loans continues to decline.   The decrease in interest income as a result of the lower yield enhancements recognized was partially offset by an increase in other interest income between the periods. Interest income increased $0.5 million 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 a 6 basis point increase in the average yields earned between the periods.  While the average interest-earning assets increased $34.0 million between the periods, the average interest-earning assets held in higher yielding loans increased $60.2 million and the amount of average interest-earning assets held in lower yielding cash and investments decreased $26.2 million between the periods. 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.  The average yield earned on interest-earning assets was 4.26% for the second quarter of 2017, a decrease of 35 basis points from 4.61% for the second quarter of 2016.  The decrease in the average yield earned on interest-earning assets is primarily related to the decrease in yield enhancements recognized between the periods.

Interest expense was $0.5 million for the second quarter of 2017, an increase of $0.1 million, or 16.7%, from $0.4 million for the second quarter of 2016. The average interest rate paid on non-interest and interest-bearing liabilities was 0.31% for the second quarter of 2017, an increase of 4 basis points from 0.27% for the second quarter of 2016. The average rate paid increased between the periods due to an increase in the rates paid on certain money market and certificate of deposit accounts that was partially offset by a change in the composition of the average non-interest and interest-bearing liabilities held between the periods.  While the average non-interest and interest-bearing liabilities increased $26.4 million between the periods, the average amount held in lower rate checking and money market accounts increased $23.2 million and the average amount held in higher rate certificates of deposits and other borrowings increased $3.2 million.  Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2017 was 3.98%, a decrease of 38 basis points, compared to 4.36% for the second quarter of 2016.  The decrease in the net interest margin is primarily related to the decrease in yield enhancements recognized between the periods.

A summary of the Company's net interest margin for the three and six month periods ended June 30, 2017 and 2016 is as follows:

    For the three month period ended  
    June 30, 2017     June 30, 2016  
(Dollars in thousands)   AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate     AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate )  
Interest-earning assets:                            
Securities available for sale $ 76,515   288   1.51 % $ 91,364   367   1.62 %
Loans held for sale   2,014   25   5.01     3,073   29   3.80  
Mortgage loans, net   115,173   1,136   3.96     100,349   1,042   4.18  
Commercial loans, net   383,417   4,662   4.88     338,717   4,861   5.77  
Consumer loans, net   73,369   878   4.80     71,590   842   4.73  
Cash equivalents   6,740   5   0.28     18,354   17   0.37  
Federal Home Loan Bank stock   1,043   5   1.75     810   1   0.50  
Total interest-earning assets   658,271   6,999   4.26     624,257   7,159   4.61  
                             
Interest-bearing liabilities and non-interest bearing deposits:                            
NOW accounts   87,219   22   0.10     85,085   14   0.06  
Savings accounts   78,679   16   0.08     73,029   16   0.09  
Money market accounts   168,610   125   0.30     159,708   89   0.22  
Certificates   102,841   166   0.65     102,031   127   0.50  
Advances and other borrowings   12,637   132   4.19     9,989   149   6.00  
Total interest-bearing liabilities   449,986             429,842          
Non-interest checking   152,159             145,599          
Other non-interest bearing deposits   1,199             1,543          
Total interest-bearing liabilities and non-interest bearing deposits $ 603,344   461   0.31   $ 576,984   395   0.27  
Net interest income     $ 6,538           $ 6,764      
Net interest rate spread           3.96 %           4.34 %
Net interest margin           3.98 %           4.36 %
                             

    For the six month period ended  
    June 30, 2017     June 30, 2016  
(Dollars in thousands)   AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate     AverageOutstandingBalance   InterestEarned/Paid   Yield/Rate  
Interest-earning assets:                            
Securities available for sale $ 76,357   563   1.49 % $ 94,363   759   1.62 %
Loans held for sale   1,836   43   4.76     2,588   52   4.04  
Mortgage loans, net   112,632   2,247   4.02     98,438   2,053   4.19  
Commercial loans, net   377,319   9,047   4.84     323,185   9,110   5.67  
Consumer loans, net   72,816   1,724   4.77     68,538   1,653   4.85  
Cash equivalents   11,859   28   0.47     26,622   55   0.42  
Federal Home Loan Bank stock   915   6   1.34     752   2   0.53  
Total interest-earning assets   653,734   13,658   4.21     614,486   13,684   4.48  
                             
Interest-bearing liabilities and non-interest bearing deposits:                            
NOW accounts   89,627   42   0.09     84,153   25   0.06  
Savings accounts   76,986   31   0.08     70,347   31   0.09  
Money market accounts   165,592   231   0.28     159,314   176   0.22  
Certificates   102,398   318   0.63     100,230   240   0.48  
Advances and other borrowings   10,033   247   4.96     9,495   297   6.29  
Total interest-bearing liabilities   444,636             423,539          
Non-interest checking   153,277             144,180          
Other non-interest bearing deposits   1,268             1,340          
Total interest-bearing liabilities and non-interest bearing deposits $ 599,181   869   0.29   $ 569,059   769   0.27  
Net interest income     $ 12,789           $ 12,915      
Net interest rate spread           3.92 %           4.21 %
Net interest margin           3.94 %           4.23 %
                             

Provision for Loan LossesThe provision for loan losses was $0.3 million for the second quarter of 2017, a decrease of $0.1 million from the $0.4 million provision for loan losses for the second quarter of 2016. The provision decreased primarily because of changes in the classification of certain commercial loans and a decrease in the amount reserved on certain single family loans in the portfolio between the periods.  These decreases in the provision were partially offset by a decrease in the recoveries received on previously charged off loans in the second quarter of 2017 when compared to the same period of 2016.  Total non-performing assets were $4.0 million at June 30, 2017, a decrease of $0.1 million, or 1.7%, from $4.1 million at March 31, 2017. Non-performing loans decreased $0.1 million and foreclosed and repossessed assets remained the same during the second quarter of 2017. 

A reconciliation of the Company's allowance for loan losses for the quarters ended June 30, 2017 and 2016 is summarized as follows:
       
(Dollars in thousands)    2017       2016  
Balance at March 31, $ 9,590     $ 9,363  
Provision   269       381  
Charge offs:      
Consumer   (17 )     (8 )
Commercial business   0       (44 )
Recoveries   203       633  
Balance at June 30, $ 10,045     $ 10,325  
Allocated to:      
General allowance $ 9,304     $ 9,375  
Specific allowance   741       950  
  $ 10,045     $ 10,325  
       

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)    2017     2017     2016  
Non-Performing Loans:                  
Single family real estate $ 1,070   $ 1,073   $ 916  
Commercial real estate   1,672     1,615     1,384  
Consumer   465     453     630  
Commercial business   182     293     343  
Total   3,389     3,434     3,273  
                   
Foreclosed and Repossessed Assets:                  
Single family real estate   14     40     0  
Commercial real estate   602     602     611  
Consumer   18     16     16  
Total non-performing assets $ 4,023   $ 4,092   $ 3,900  
Total as a percentage of total assets   0.55 %   0.60 %   0.57 %
Total non-performing loans $ 3,389   $ 3,434   $ 3,273  
Total as a percentage of total loans receivable, net   0.57 %   0.61 %   0.59 %
Allowance for loan loss to non-performing loans   296.45 %   279.29 %   302.56 %
                   
Delinquency Data:                  
Delinquencies (1)                  
30+ days $ 2,512   $ 702   $ 917  
90+ days   0     0     0  
Delinquencies as a percentage of                  
 loan portfolio (1)                  
30+ days   0.42 %   0.12 %   0.16 %
90+ days   0.00 %   0.00 %   0.00 %

(1) Excludes non-accrual loans.

Non-Interest Income and ExpenseNon-interest income was $1.9 million for the second quarter of 2017, a decrease of $0.2 million, or 9.3%, from $2.1 million for the same period of 2016.  Gain on sales of loans decreased $0.2 million between the periods primarily because of a decrease in commercial government guaranteed loan sales.  Loan servicing income increased slightly between the periods primarily because of an increase in commercial loan servicing fees.  Fees and service charges decreased slightly due to a decrease in overdraft fees between the periods.

Non-interest expense was $6.4 million for the second quarter of 2017, an increase of $0.4 million, or 6.7%, from $6.0 million for the same period of 2016.  Compensation expense increased $0.2 million between the periods due to normal annual salary increases.  Gains on real estate sales decreased $0.1 million due to fewer real estate sales in the second quarter of 2017 when compared to the same period of 2016. Other non-interest expense increased $0.1 million due primarily to an increase in commercial loan expenses.

Income tax expense was $0.7 million for the second quarter of 2017, a decrease of $0.3 million from $1.0 million for the second quarter of 2016. The decrease in income tax expense between the periods is primarily related to the decrease in pre-tax income in the second quarter of 2017 when compared to the second quarter of 2016.

Return on Assets and EquityReturn on average assets (annualized) for the second quarter of 2017 was 0.60%, compared to 0.91% for the second quarter of 2016.  Return on average equity (annualized) was 5.19% for the second quarter of 2017, compared to 8.23% for the same period in 2016.  Book value per common share at June 30, 2017 was $17.50, compared to $16.34 at June 30, 2016.

Six Month Period Results

Net IncomeNet income was $2.2 million for the six month period ended June 30, 2017, a decrease of $1.1   million, or 31.2%, compared to net income of $3.3 million for the six month period ended June 30, 2016. Diluted earnings per common share for the six month period ended June 30, 2017 was $0.46, a decrease of $0.23 per share compared to diluted earnings per common share of $0.69 for the same period in 2016. The decrease in net income for the six month period ended June 30, 2017 was due to a number of items including a $0.4 million increase in the provision for loan losses due to a decrease in recoveries received on previously charged off loans in the first six months of 2017 when compared to the same period in 2016.  Net interest income decreased $0.1 million as a result of a decrease in the yield enhancements recognized on loan prepayment penalties, yield adjustments on purchased loans, and interest payments received on non-accruing and previously charged off loans between the periods.  Gain on sales of loans decreased $0.2 million between the periods due to a decrease in commercial government guaranteed loan sales. Gains on real estate sales decreased $0.4 million due to fewer real estate sales in the first six months of 2017 when compared to the same period of 2016. Compensation expense increased $0.4 million between the periods due to normal annual salary increases. Other non-interest expense increased $0.1 million due primarily to an increase in commercial loan expenses.  These decreases in income were partially offset by a $0.6 million decrease in income tax expense as a result of the decrease in pre-tax income between the periods.

Net Interest IncomeNet interest income was $12.8 million for the first six months of 2017, a decrease of $0.1 million, or 1.0%, from $12.9 million for the same period in 2016.  Interest income was $13.7 million for the six month period ended June 30, 2017, the same as it was for the same six month period in 2016. Interest income decreased $1.2 million, or 39 basis points, due to a decrease in the amount of yield enhancements recognized from loan prepayment penalties, yield adjustments on purchased loans, and the interest payments received on non-accruing and previously charged off commercial real estate loans between the periods.  It is anticipated that the yield enhancements relating to these items will be lower in subsequent years as the pool of non-accruing and purchased loans continues to decline.  This decrease in interest income as a result of the lower yield enhancements recognized was partially offset by an increase in other interest income items between the periods. Interest income increased $1.2 million between the periods 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 a 12 basis point increase in the average yields earned between the periods. While the average interest-earning assets increased $39.2 million between the periods, the average interest-earning assets held in higher yielding loans increased $71.8 million and the amount of average interest-earning assets held in lower yielding cash and investments decreased $32.6 million between the periods. 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. The average yield earned on interest-earning assets was 4.21% for the first six months of 2017, a decrease of 27 basis points from 4.48% for the first six months of 2016.  The decrease in the average yield earned on interest-earning assets is primarily related to the decrease in yield enhancements recognized between the periods.

Interest expense was $0.9 million for the first six months of 2017, an increase of $0.1 million, or 13.0%, compared to $0.8 million for the first six months of 2016.  The average rate paid on non-interest and interest-bearing liabilities was 0.29% for the first six months of 2017, an increase of 2 basis points from 0.27% for the first six months of 2016. The average rate paid increased between the periods due to an increase in the rates paid on certain money market and certificate of deposit accounts that was partially offset by a change in the composition of the average non-interest and interest-bearing liabilities held between the periods.  While the average non-interest and interest-bearing liabilities increased $30.1 million between the periods, the average amount held in lower rate checking and money market accounts increased $27.5 million and the average amount held in higher rate certificates of deposits and other borrowings increased $2.6 million between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the first six months of 2017 was 3.94%, a decrease of 29 basis points, compared to 4.23% for the first six months of 2016.  The decrease in the net interest margin is primarily related to the decrease in yield enhancements recognized between the periods.

Provision for Loan LossesThe provision for loan losses was $0.0 million for the first six months of 2017, an increase of $0.4 million from the ($0.4) million provision for loan losses for the same six month period in 2016. The provision for loan losses increased between the periods primarily because there were less recoveries received on previously charged off loans in the first six months of 2017 when compared to the same period of 2016.  Total non-performing assets were $4.0 million at June 30, 2017, an increase of $0.1 million, or 3.1%, from $3.9 million at December 31, 2016.  Non-performing loans increased $0.1 million and foreclosed and repossessed assets remained the same during the first six months of 2017.

A reconciliation of the Company's allowance for loan losses for the six month periods ended June 30, 2017 and June 30, 2016 is summarized as follows:
       
(Dollars in thousands) 2017   2016
Balance at January 1, $ 9,903     $ 9,709  
Provision   (1 )     (351 )
Charge offs:      
Consumer   (218 )     (15 )
Commercial business   0       (44 )
Recoveries   361       1,026  
Balance at June 30, $ 10,045     $ 10,325  
       

Non-Interest Income and ExpenseNon-interest income was $3.8 million for the first six months of 2017, a decrease of $0.1 million, or 1.8%, from $3.9 million for the first six months of 2016.  Gain on sales of loans decreased $0.2 million between the periods primarily because of a decrease in commercial government guaranteed loan sales in the first six months of 2017 when compared to the same period of 2016.   Loan servicing income increased $0.1 million between the periods primarily because of an increase in commercial loan servicing fees.

Non-interest expense was $12.8 million for the first six months of 2017, an increase of $1.1 million, or 9.1%, from $11.7 million for the same period of 2016.  Compensation expense increased $0.4 million between the periods due to normal annual salary increases.  Gains on real estate sales decreased $0.4 million due to a decrease in the number of properties sold in the first six months of 2017 when compared to the same period of 2016.  Other non-interest expense increased $0.1 million due primarily to an increase in commercial loan expenses. Occupancy and equipment expense increased $0.1 million between the periods because of increased non-capitalized software expenses.  Professional services expense increased $0.1 million between the periods due to increased legal costs related to a claim on a commercial loan.

Income tax expense was $1.6 million for the first six months of 2017, a decrease of $0.5 million from $2.1 million for the first six months of 2016. The decrease in income tax expense between the periods is primarily related to the decrease in pre-tax income in the first six months of 2017 when compared to the first six months of 2016.

Return on Assets and EquityReturn on average assets (annualized) for the six month period ended June 30, 2017 was 0.66%, compared to 1.01% for the same period in 2016.  Return on average equity (annualized) was 5.76% for the six month period ended June 30, 2017, compared to 9.16% for the same period in 2016.

General InformationHMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The 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, maintaining 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;  anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and composition of interest-earning assets; the  amount of yield enhancements relating to non-accruing and purchased loans; the amount and composition of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer of the trust preferred securities held by the Bank; the 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, 2016 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)   2017   2016  
    (unaudited)      
Assets          
Cash and cash equivalents $ 31,892     27,561    
Securities available for sale:          
Mortgage-backed and related securities          
(amortized cost $603 and $993)   613     1,005    
Other marketable securities          
(amortized cost $78,807 and $78,846)   78,034     77,472    
    78,647     78,477    
           
Loans held for sale   2,061     2,009    
Loans receivable, net   590,259     551,171    
Accrued interest receivable   2,609     2,626    
Real estate, net   616     611    
Federal Home Loan Bank stock, at cost   817     770    
Mortgage servicing rights, net   1,655     1,604    
Premises and equipment, net   8,213     8,223    
Goodwill   802     802    
Core deposit intangible   404     454    
Prepaid expenses and other assets   1,500     1,768    
Deferred tax asset, net   5,708     5,947    
Total assets $ 725,183     682,023    
           
Liabilities and Stockholders' Equity          
Deposits $ 634,101     592,811    
Other borrowings   7,000     7,000    
Accrued interest payable   214     236    
Customer escrows   1,223     1,011    
Accrued expenses and other liabilities   3,922     5,046    
Total liabilities   646,460     606,104    
Commitments and contingencies          
Stockholders' equity:          
Serial preferred stock ($.01 par value):          
authorized 500,000 shares; issued shares 0   0     0    
Common stock ($.01 par value):          
authorized 16,000,000; issued shares 9,128,662   91     91    
Additional paid-in capital   50,452     50,566    
Retained earnings, subject to certain restrictions   80,123     86,886    
Accumulated other comprehensive loss   (459 )   (820 )  
Unearned employee stock ownership plan shares   (2,127 )   (2,223 )  
Treasury stock, at cost 4,631,124 and 4,639,739 shares   (58,357 )   (58,581 )  
Total stockholders' equity   78,723     75,919    
Total liabilities and stockholders' equity $ 725,183     682,023    
           

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)   2017   2016   2017   2016
Interest income:                
Loans receivable $ 6,701     6,774     13,061     12,868  
Securities available for sale:                
Mortgage-backed and related   5     16     12     36  
Other marketable   283     351     551     723  
Cash equivalents   5     17     28     55  
Other   5     1     6     2  
Total interest income   6,999     7,159     13,658     13,684  
                 
Interest expense:                
Deposits   329     246     622     472  
Federal Home Loan Bank advances and other borrowings   132     149     247     297  
Total interest expense   461     395     869     769  
Net interest income   6,538     6,764     12,789     12,915  
Provision for loan losses   269     381     (1 )   (351 )
Net interest income after provision for loan losses   6,269     6,383     12,790     13,266  
                 
Non-interest income:                
Fees and service charges   845     873     1,669     1,652  
Loan servicing fees   306     271     607     532  
Losses on investments   0     (9 )   0     (9 )
Gain on sales of loans   488     705     1,007     1,192  
Other   267     262     503     490  
Total non-interest income   1,906     2,102     3,786     3,857  
                 
Non-interest expense:                
Compensation and benefits   3,780     3,598     7,724     7,293  
Gains on real estate owned   (1 )   (75 )   (7 )   (424 )
Occupancy and equipment   1,026     1,006     2,065     1,996  
Data processing   260     281     552     554  
Professional services   417     368     676     619  
Other   957     855     1,776     1,686  
Total non-interest expense   6,439     6,033     12,786     11,724  
Income before income tax expense   1,736     2,452     3,790     5,399  
Income tax expense   712     974     1,553     2,147  
Net income   1,024     1,478     2,237     3,252  
Other comprehensive income, net of tax   173     44     361     182  
Comprehensive income attributable to common shareholders $ 1,197     1,522     2,598     3,434  
Basic earnings per share $ 0.24     0.35     0.53     0.78  
Diluted earnings per share $ 0.21     0.31     0.46     0.69  
                 

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)   2017     2016     2017     2016  
I. OPERATING DATA:                        
Interest income $ 6,999     7,159     13,658     13,684  
Interest expense   461     395     869     769  
Net interest income   6,538     6,764     12,789     12,915  
                         
II. AVERAGE BALANCES:                        
Assets (1)   685,287     654,336     680,881     644,712  
Loans receivable, net   571,959     510,656     562,766     490,160  
Securities available for sale (1)   76,515     91,364     76,357     94,363  
Interest-earning assets (1)   658,271     624,257     653,734     614,486  
Interest-bearing and non-interest bearing deposits   and borrowings   603,344     576,984     599,181     569,059  
Equity (1)   79,044     72,263     78,376     71,395  
                         
III. PERFORMANCE RATIOS: (1)                        
Return on average assets (annualized)   0.60 %   0.91 %   0.66 %   1.01 %
Interest rate spread information:                        
Average during period   3.96     4.34     3.92     4.21  
End of period   3.90     4.00     3.90     4.00  
Net interest margin   3.98     4.36     3.94     4.23  
Ratio of operating expense to average                        
total assets (annualized)   3.77     3.71     3.79     3.66  
Return on average equity (annualized)   5.19     8.23     5.76     9.16  
Efficiency   76.27     68.05     77.14     69.90  
    June 30,     December 31,     June 30,        
    2017     2016     2016        
IV. ASSET QUALITY:                        
Total non-performing assets $ 4,023     3,900     4,871        
Non-performing assets to total assets   0.55 %   0.57 %   0.75 %      
Non-performing loans to total loans receivable, net   0.57 %   0.59 %   0.65 %      
Allowance for loan losses $ 10,045     9,903     10,325        
Allowance for loan losses to total assets   1.39 %   1.45 %   1.58 %      
Allowance for loan losses to total loans                        
receivable, net   1.70     1.80     1.95        
Allowance for loan losses to non-performing loans   296.45     302.56     299.29        
                         
V. BOOK VALUE PER SHARE:                        
Book value per share common share $ 17.50     16.91     16.34        
    Six Months EndedJune 30, 2017     Year EndedDecember 31, 2016     Six Months Ended June 30, 2016        
VI.  CAPITAL RATIOS:                        
Stockholders' equity to total assets, at end of period   10.86 %   11.13 %   11.22 %      
Average stockholders' equity to average assets (1)   11.51     11.07     11.07        
Ratio of average interest-earning assets to                        
average interest-bearing liabilities (1)   109.10     108.36     107.98        
Home Federal Savings Bank regulatory capital ratios:                        
Common equity tier 1 capital ratio   12.99     13.42     13.04        
Tier 1 capital leverage ratio   11.77     11.55     11.44        
Tier 1 capital ratio   12.99     13.42     13.04        
Risk-based capital   14.25     14.68     14.30        
    June 30,     December 31,     June 30,        
    2017     2016     2016        
VII. EMPLOYEE DATA:                        
Number of full time equivalent employees   196     200     199        

(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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