HMN Financial, Inc. Announces Third Quarter Results

Rhea-AI Summary

HMN Financial reported a net income of $1.8 million for Q3 2022, a decline from $3.6 million in Q3 2021. Diluted earnings per share dropped to $0.42 from $0.81 year-over-year. The provision for loan losses increased by $1.5 million to $0.6 million, attributed to loan growth and rising inflation concerns. Net interest income rose 3.1% to $8.3 million, but the net interest margin fell to 3.13% from 3.32%. Year-to-date, net income stood at $5.6 million, down 51.5% from $11.6 million in 2021, primarily due to increased loan loss provisions and lower loan sales.

Positive

• Net interest income increased by 3.1% to $8.3 million in Q3 2022.
• Loan growth positively impacted net interest income.

Negative

• Net income decreased by 50% to $5.6 million year-to-date.
• Diluted earnings per share fell by $1.28 to $1.27 year-to-date.
• Provision for loan losses increased by $3.3 million year-to-date.
• Gain on sales of loans decreased by $2.8 million year-to-date.
• Net interest margin decreased by 25 basis points to 3.06% year-to-date.

Third Quarter Summary

• Net income of $1.8 million, down $1.8 million, compared to $3.6 million in third quarter of 2021
• Diluted earnings per share of $0.42, down $0.39, compared to $0.81 in third quarter of 2021
• Provision for loan losses of $0.6 million, up $1.5 million from ($0.9) million in third quarter of 2021
• Gain on sales of loans of $0.4 million, down $1.1 million from $1.5 million in third quarter of 2021
• Net interest margin of 3.13%, down 19 basis points, compared to 3.32% in third quarter of 2021

Year to Date Summary

• Net income of $5.6 million, down $6.0 million, compared to $11.6 million in first nine months of 2021
• Diluted earnings per share of $1.27, down $1.28, compared to $2.55 in first nine months of 2021
  
• Provision for loan losses of $0.9 million, up $3.3 million from ($2.4) million in first nine months of 2021
  
• Gain on sales of loans of $2.1 million, down $2.8 million from $4.9 million in first nine months of 2021
  
• Net interest margin of 3.06%, down 25 basis points, compared to 3.31% in first nine months of 2021

Net Income Summary

		Three months ended						Nine months ended
		September 30,						September 30,
(Dollars in thousands, except per share amounts)		2022			2021			2022			2021
Net income	$	1,831			3,619		$	5,607			11,565
Diluted earnings per share		0.42			0.81			1.27			2.55
Return on average assets (annualized)		0.67	%		1.45	%		0.71	%		1.60	%
Return on average equity (annualized)		6.30	%		13.18	%		6.59	%		14.57	%
Book value per share	$	20.02			23.93		$	20.02			23.93

ROCHESTER, Minn., Oct. 20, 2022 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $1.0 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.8 million for the third quarter of 2022, a decrease of $1.8 million, compared to net income of $3.6 million for the third quarter of 2021. Diluted earnings per share for the third quarter of 2022 was $0.42, a decrease of $0.39, compared to diluted earnings per share of $0.81 for the third quarter of 2021. The decrease in net income between the periods was primarily because of a $1.5 million increase in the provision for loan losses. The provision for loan losses increased between the periods primarily because of the loan portfolio growth and also because of an increase in qualitative reserves due to the perceived negative impact on borrower finances from rising inflation and interest rates. Net income was also negatively impacted by a $1.1 million decrease in the gain on sales of loans due to a decrease in mortgage loan originations and sales. Income tax expense decreased $0.7 million as a result of the decreased pre-tax income between the periods.

President’s Statement
“We are pleased to report the loan growth that was experienced and the positive impact it had on our net interest income,” said Bradley Krehbiel, President and Chief Executive Officer of HMN. “The increases in the prime interest rate during the first nine months of 2022 also had a positive impact on our net interest income. The combined impact of these items helped offset the reduction in interest income as a result of recording fewer yield enhancements related to the Paycheck Protection Program (PPP) between the periods.”

Third Quarter Results

Net Interest Income
Net interest income was $8.3 million for the third quarter of 2022, an increase of $0.3 million, or 3.1%, from $8.0 million for the third quarter of 2021. Interest income was $8.6 million for the third quarter of 2022, an increase of $0.2 million, or 2.7%, from $8.4 million for the third quarter of 2021. Interest income increased primarily because of the $89.9 million increase in the average interest-earning assets between the periods, which was partially offset by a decrease in the average yield earned on interest-earning assets between the periods. The average yield earned on interest-earning assets was 3.26% for the third quarter of 2022, a decrease of 21 basis points from 3.47% for the third quarter of 2021. The decrease in the average yield is primarily related to the $0.8 million decrease between the periods in the yield enhancements recognized on PPP loans.

Interest expense was $0.3 million for the third quarter of 2022, a decrease of $0.1 million, or 5.6%, from $0.4 million for the third quarter of 2021. Interest expense decreased, despite the $92.1 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods, primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.14% for the third quarter of 2022, a decrease of 2 basis points from 0.16% for the third quarter of 2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the repricing of maturing certificates of deposit in the continued low interest rate environment. Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2022 was 3.13%, a decrease of 19 basis points, compared to 3.32% for the third quarter of 2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets. The decrease in the average yield is primarily related to the $0.8 million decrease between the periods in the yield enhancements recognized on PPP loans.

A summary of the Company’s net interest margin for the three and nine month periods ended September 30, 2022 and 2021 is as follows:

		For the three month period ended
		September 30, 2022							September 30, 2021
(Dollars in thousands)		Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
Interest-earning assets:
Securities available for sale	$	288,747		811		1.11	%	$	215,811		514		0.94	%
Loans held for sale		1,806		26		5.72			5,991		40		2.63
Single family loans, net		187,340		1,646		3.49			164,591		1,442		3.48
Commercial loans, net		465,192		5,270		4.49			420,062		5,840		5.52
Consumer loans, net		43,403		531		4.86			43,955		515		4.65
Other		64,022		347		2.15			110,173		50		0.18
Total interest-earning assets		1,050,510		8,631		3.26			960,583		8,401		3.47
Interest-bearing liabilities:
Checking accounts		159,854		46		0.11			155,373		45		0.11
Savings accounts		126,427		19		0.06			115,526		18		0.06
Money market accounts		294,763		207		0.28			249,335		138		0.22
Certificate accounts		73,355		68		0.37			91,595		159		0.69
Total interest-bearing liabilities		654,399							611,829
Non-interest checking		309,616							259,721
Other non-interest bearing deposits		2,548							2,923
Total interest-bearing liabilities and non-interest bearing deposits	$	966,563		340		0.14		$	874,473		360		0.16
Net interest income			$	8,291						$	8,041
Net interest rate spread						3.12	%						3.31	%
Net interest margin						3.13	%						3.32	%

		For the nine month period ended
		September 30, 2022							September 30, 2021
(Dollars in thousands)		Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid		Yield/ Rate
Interest-earning assets:
Securities available for sale	$	294,394		2,415		1.10	%	$	192,877		1,514		1.05	%
Loans held for sale		2,820		91		4.32			5,303		114		2.88
Single family loans, net		177,842		4,593		3.45			154,992		4,189		3.61
Commercial loans, net		458,017		15,229		4.45			433,514		16,783		5.18
Consumer loans, net		42,010		1,476		4.70			47,779		1,668		4.67
Other		44,950		449		1.34			99,778		116		0.16
Total interest-earning assets		1,020,033		24,253		3.18			934,243		24,384		3.49
Interest-bearing liabilities:
Checking accounts		158,665		126		0.11			156,983		137		0.12
Savings accounts		123,896		54		0.06			111,715		52		0.06
Money market accounts		271,005		497		0.25			238,011		408		0.23
Certificate accounts		78,845		233		0.39			95,537		626		0.88
Advances and other borrowings		656		5		1.04			0		0		0.00
Total interest-bearing liabilities		633,067							602,246
Non-interest checking		303,365							249,215
Other non-interest bearing deposits		2,511							2,632
Total interest-bearing liabilities and non-interest bearing deposits	$	938,943		915		0.13		$	854,093		1,223		0.19
Net interest income			$	23,338						$	23,161
Net interest rate spread						3.05	%						3.30	%
Net interest margin						3.06	%						3.31	%

Provision for Loan Losses
The provision for loan losses was $0.6 million for the third quarter of 2022, an increase of $1.5 million compared to ($0.9) million for the third quarter of 2021. The provision for loan losses increased between the periods primarily because of the loan portfolio growth and also because of an increase in the qualitative reserves due to the perceived negative impact on borrowers from inflation and rising interest rates. The credit provision recorded in 2021 was primarily the result of improvements in the underlying operations supporting many of the loans that were initially negatively impacted by the COVID-19 pandemic in 2020.

The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on the size and risk characteristics of the portfolio and past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter primarily because of the loan portfolio growth and because of an increase in the required qualitative reserves. The qualitative reserves for loan losses related to the disruption in business activity as a result of the COVID-19 pandemic was reduced during the quarter because of a perceived reduction in this risk due to improving conditions. The reduction in pandemic related qualitative reserves was entirely offset by an increase in the qualitative reserves for other economic factors. The other qualitative reserves were increased due to a perceived deterioration of economic conditions during the quarter, including the elevated inflation rate, and enacted and expected increases in the federal funds rate. Total non-performing assets were $1.8 million at September 30, 2022, a decrease of $2.5 million, or 57.8%, from $4.3 million at June 30, 2022. Non-performing loans decreased $2.5 million and foreclosed and repossessed assets did not change during the third quarter of 2022. The decrease in nonperforming loans is primarily related to a $3.3 million decrease in nonperforming commercial real estate loans, primarily because of a $3.1 million loan in the hospitality industry that was reclassified as performing during the quarter. This decrease in non-performing loans was partially offset by increases of $0.2 million and $0.6 million in nonperforming mortgage and commercial loans, respectively.

A reconciliation of the Company’s allowance for loan losses for the quarters ended September 30, 2022 and 2021 is summarized as follows:

(Dollars in thousands)		2022			2021
Balance at June 30	$	9,644			9,915
Provision		579			(886	)
Charge offs:
Commercial real estate		(90	)		0
Consumer		(8	)		0
Recoveries		16			41
Balance at September 30	$	10,141			9,070
Allocated to:
General allowance	$	9,993			8,784
Specific allowance		148			286
	$	10,141			9,070

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, 2021.

		September 30,			June 30,			December 31,
(Dollars in thousands)		2022			2022			2021
Non‑performing loans:
Single family	$	732		$	565		$	340
Commercial real estate		0			3,286			3,757
Consumer		440			436			517
Commercial		639			7			7
Total		1,811			4,294			4,621
Foreclosed and repossessed assets:
Commercial real estate		0			0			290
Total non‑performing assets	$	1,811		$	4,294		$	4,911
Total as a percentage of total assets		0.17	%		0.40	%		0.46	%
Total as a percentage of total loans receivable		0.24	%		0.62	%		0.70	%
Allowance for loan loss to non-performing loans		559.85	%		224.61	%		200.81	%
Delinquency data:
Delinquencies (1)
30+ days	$	1,660		$	2,504		$	1,418
90+ days		0			0			0
Delinquencies as a percentage of loan portfolio (1)
30+ days		0.22	%		0.36	%		0.21	%
90+ days		0.00	%		0.00	%		0.00	%
(1) Excludes non-accrual loans.

Non-Interest Income and Expense
Non-interest income was $2.1 million for the third quarter of 2022, a decrease of $1.0 million, or 32.7%, from $3.1 million for the third quarter of 2021. Gain on sales of loans decreased $1.1 million between the periods primarily because of a decrease in single family loan originations and sales. Other non-interest income increased slightly due primarily to an increase in the fees earned on the sale of uninsured investment products. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others. Fees and service charges increased slightly between the periods due primarily to an increase in overdraft fees.

Non-interest expense was $7.2 million for the third quarter of 2022, an increase of $0.3 million, or 3.9%, from $6.9 million for the third quarter of 2021. Compensation and benefits expense increased $0.4 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the reduced mortgage loan production between the periods. Data processing expenses increased $0.1 million between the periods primarily because of the change to an outsourced data processing relationship at the end of the first quarter of 2022. Other non-interest expense increased slightly between the periods primarily because of an increase in marketing expenses. These increases in non-interest expense were partially offset by a $0.2 million decrease in occupancy and equipment expense due primarily to a decrease in rent expense between the periods as a result of purchasing the combined corporate and branch location in Rochester, Minnesota in the fourth quarter of 2021. Professional services expense decreased $0.1 million between the periods primarily because of a decrease in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022.

Income tax expense was $0.8 million for the third quarter of 2022, a decrease of $0.7 million from $1.5 million for the third quarter of 2021. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

Return on Assets and Equity
Return on average assets (annualized) for the third quarter of 2022 was 0.67%, compared to 1.45% for the third quarter of 2021. Return on average equity (annualized) was 6.30% for the third quarter of 2022, compared to 13.18% for the same period in 2021. Book value per common share at September 30, 2022 was $20.02, compared to $23.93 at September 30, 2021. The reduction in the book value per common share between the periods is primarily related to the increase in the unrealized losses on the available for sale securities portfolio that were recorded in equity as other comprehensive losses.

Nine Month Period Results
Net Income
Net income was $5.6 million for the nine month period ended September 30, 2022, a decrease of $6.0 million, or 51.5%, compared to net income of $11.6 million for the nine month period ended September 30, 2021. Diluted earnings per share for the nine month period ended September 30, 2022 was $1.27, a decrease of $1.28 per share, compared to diluted earnings per share of $2.55 for the same period in 2021. The decrease in net income between the periods was primarily because of a $3.3 million increase in the provision for loan losses. The provision for loan losses increased between the periods primarily because of the loan portfolio growth and also because of an increase in qualitative reserves due to the perceived negative impact on borrower finances from inflation and rising interest rates. Net income was also negatively impacted by a $2.8 million decrease in the gain on sales of loans due to a decrease in mortgage loan originations and sales, a $1.4 million decrease in other non-interest income primarily because of a decrease in the gains that were realized on the sale of real estate owned between the periods, and a $0.9 million increase in compensation and benefits expense primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan originations. These decreases in net income were partially offset by a $2.3 million decrease in income tax expense as a result of the decrease in pre-tax income between the periods.

Net Interest Income
Net interest income was $23.3 million for the first nine months of 2022, an increase of $0.1 million, or 0.8%, from $23.2 million for the same period in 2021. Interest income was $24.3 million for the nine month period ended September 30, 2022, a decrease of $0.1 million, or 0.5%, from $24.4 million for the same nine month period in 2021. Interest income decreased, despite the $85.8 million increase in the average interest-earning assets between the periods, primarily because of a decrease in the average yield earned on interest-earning assets between the periods. The average yield earned on interest-earning assets was 3.18% for the first nine months of 2022, a decrease of 31 basis points from 3.49% for the first nine months of 2021. The decrease in the average yield is primarily related to the $2.0 million decrease between the periods in the yield enhancements recognized on PPP loans.

Interest expense was $0.9 million for the first nine months of 2022, a decrease of $0.3 million, or 25.2%, compared to $1.2 million for the same period of 2021. Interest expense decreased, despite the $84.8 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods, primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.13% for the first nine months of 2022, a decrease of 6 basis points from 0.19% for the first nine months of 2021. The decrease in the interest paid on interest-bearing liabilities was primarily because of the repricing of maturing certificates of deposit in the continued low interest rate environment. Net interest margin (net interest income divided by average interest-earning assets) for the first nine months of 2022 was 3.06%, a decrease of 25 basis points, compared to 3.31% for the first nine months of 2021. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets. The decrease in the average yield is primarily related to the $2.0 million decrease between the periods in the yield enhancements recognized on PPP loans.

Provision for Loan Losses
The provision for loan losses was $0.9 million for the first nine months of 2022, an increase of $3.3 million compared to ($2.4) million for the first nine months of 2021. The provision for loan losses increased between the periods primarily because of the loan portfolio growth and also because of an increase in qualitative reserves due to the perceived negative impact on borrowers from inflation and rising interest rates. The credit provision recorded in the first nine months of 2021 was primarily the result of improvements in the underlying operations supporting many of the loans that were initially negatively impacted by the COVID-19 pandemic in 2020.

The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on the size and risk characteristics of the portfolio and past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter primarily because of the loan portfolio growth and because of an increase in the required qualitative reserves. The qualitative reserves for loan losses related to the disruption in business activity as a result of the COVID-19 pandemic was reduced during the first nine months of 2022 because of a perceived reduction in this risk due to improving conditions. The reduction in pandemic related qualitative reserves was entirely offset by an increase in the qualitative reserves for other economic factors. The other qualitative reserves were increased due to a perceived deterioration of economic conditions during the first nine months of 2022, including the elevated inflation rate, and enacted and expected increases in the federal funds rate. Total non-performing assets were $1.8 million at September 30, 2022, a decrease of $3.1 million, or 63.1%, from $4.9 million at December 31, 2021. Non-performing loans decreased $2.8 million and foreclosed and repossessed assets decreased $0.3 million during the first nine months of 2022. The decrease in nonperforming loans is related to a $3.7 million decrease in non-performing commercial real estate loans, primarily because of a $3.1 million loan in the hospitality industry that was reclassified as performing during the first nine months of 2022. Non-performing consumer loans also decreased $0.1 million during the period. These decreases in non-performing loans were partially offset by increases of $0.4 million and $0.6 million in nonperforming mortgage and commercial loans, respectively.

A reconciliation of the allowance for loan losses for the nine month periods ended September 30, 2022 and 2021 is summarized as follows:

(Dollars in thousands)		2022			2021
Balance at January 1,	$	9,279			10,699
Provision		941			(2,353	)
Charge offs:
Consumer		(24	)		(42	)
Commercial real estate		(90	)		0
Recoveries		35			766
Balance at September 30,	$	10,141			9,070

Non-Interest Income and Expense
Non-interest income was $6.9 million for the first nine months of 2022, a decrease of $4.1 million, or 37.1%, from $11.0 million for the same period of 2021. Gain on sales of loans decreased $2.8 million between the periods primarily because of a decrease in single family loan originations and sales. Other non-interest income decreased $1.4 million due primarily because of a decrease in the gains that were realized on the sale of real estate owned between the periods. Fees and service charges increased $0.1 million between the periods due primarily to an increase in overdraft fees. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others.

Non-interest expense was $21.4 million for the first nine months of 2022, an increase of $1.0 million, or 5.1%, from $20.4 million for the same period of 2021. Compensation and benefits expense increased $0.9 million primarily because of a decrease in the direct loan origination compensation costs that were deferred as a result of the decreased mortgage loan production between the periods. Data processing expenses increased $0.3 million between the periods primarily because of the change to an outsourced data processing relationship at the end of the first quarter of 2022.

Professional services expense increased $0.2 million between the periods primarily because of an increase in legal expenses relating to a bankruptcy litigation claim that was settled during the first quarter of 2022. These increases in non-interest expense were partially offset by a $0.4 million decrease in occupancy and equipment expense due primarily to a decrease in rent expense between the periods as a result of purchasing the combined corporate and branch location in Rochester, Minnesota in the fourth quarter of 2021. Other non-interest expense decreased slightly between the periods primarily because of a decrease in mortgage servicing expense due to the reduction in prepayments on mortgage loan being serviced for others.

Income tax expense was $2.3 million for the first nine months of 2022, a decrease of $2.3 million from $4.6 million for the same period of 2021. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

Return on Assets and Equity
Return on average assets (annualized) for the nine month period ended September 30, 2022 was 0.71%, compared to 1.60% for the same period in 2021. Return on average equity (annualized) was 6.59% for the nine month period ended September 30, 2022, compared to 14.57% for the same period in 2021. Book value per common share at September 30, 2022 was $20.02, compared to $23.93 at September 30, 2021. The reduction in the book value per common share between the periods is primarily related to the increase in the unrealized losses on the available for sale securities portfolio that were recorded in equity as other comprehensive losses.

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, La Crescent, Owatonna, Rochester (4), Spring Valley and Winona, one full service office in Marshalltown, Iowa, and one full service office in Pewaukee, Wisconsin. The Bank also operates two loan origination offices located in Sartell, Minnesota and La Crosse, 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,” “estimate,” “intend,” “look,” “believe,” “anticipate,” “project,” “continue,” “may,” “will,” “would,” “could,” “target,” “goal,” “should,” and “trend,” or similar statements or variations of such terms and include, but are not limited to, those relating to: maintaining credit quality; maintaining net interest margins; the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; enacted and expected changes to the federal funds rate; the anticipated impacts of the COVID-19 pandemic and efforts to mitigate the same on the general economy, the Bank’s clients, and the allowance for loan losses; the amount of the Bank’s non-performing assets in future periods and the appropriateness of the allowances 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 and compositions of non-interest and interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends or repurchases of stock by HMN; 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 to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject.

A number of factors, many of which may be amplified by the deterioration in economic conditions and the COVID-19 pandemic and efforts to mitigate the same, could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the Office of the Comptroller of the Currency and the Federal Reserve Bank of Minneapolis in the event of 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 traditional and alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank and the Federal Reserve Bank; technological, computer-related or operational difficulties including those from any third party cyberattack; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; domestic and international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; the Company’s 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 “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 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 the Company undertakes 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
		September 30,			December 31,
(Dollars in thousands)		2022			2021
		(unaudited)
Assets
Cash and cash equivalents	$	18,645			94,143
Securities available for sale:
Mortgage-backed and related securities (amortized cost $226,499 and $247,275)		195,952			245,397
Other marketable securities (amortized cost $55,697 and $40,691)		53,260			40,368
		249,212			285,765
Loans held for sale		1,934			5,575
Loans receivable, net		740,280			652,502
Accrued interest receivable		2,662			2,132
Mortgage servicing rights, net		3,117			3,280
Premises and equipment, net		16,751			17,373
Goodwill		802			802
Core deposit intangible		0			10
Prepaid expenses and other assets		5,087			5,427
Deferred tax asset, net		9,303			2,529
Total assets	$	1,047,793			1,069,538
Liabilities and Stockholders’ Equity
Deposits	$	947,557			950,666
Accrued interest payable		53			63
Customer escrows		3,332			2,143
Accrued expenses and other liabilities		7,141			6,635
Total liabilities		958,083			959,507
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock ($.01 par value):
authorized 500,000 shares; issued 0		0			0
Common stock ($.01 par value):
authorized 16,000,000 shares; issued 9,128,662		91			91
Additional paid-in capital		40,894			40,740
Retained earnings, subject to certain restrictions		136,230			131,413
Accumulated other comprehensive loss		(25,041	)		(1,583	)
Unearned employee stock ownership plan shares		(1,111	)		(1,256	)
Treasury stock, at cost 4,647,686 and 4,564,087 shares		(61,353	)		(59,374	)
Total stockholders’ equity		89,710			110,031
Total liabilities and stockholders’ equity	$	1,047,793			1,069,538

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income
(unaudited)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(Dollars in thousands, except per share data)		2022			2021			2022			2021
Interest income:
Loans receivable	$	7,473			7,837			21,389			22,754
Securities available for sale:
Mortgage-backed and related		691			457			2,126			1,288
Other marketable		120			57			289			226
Other		347			50			449			116
Total interest income		8,631			8,401			24,253			24,384
Interest expense:
Deposits		340			360			910			1,223
Advances and other borrowings		0			0			5			0
Total interest expense		340			360			915			1,223
Net interest income		8,291			8,041			23,338			23,161
Provision for loan losses		579			(886	)		941			(2,353	)
Net interest income after provision for loan losses		7,712			8,927			22,397			25,514
Non-interest income:
Fees and service charges		821			810			2,397			2,332
Loan servicing fees		406			389			1,188			1,168
Gain on sales of loans		414			1,471			2,096			4,909
Other		413			381			1,264			2,639
Total non-interest income		2,054			3,051			6,945			11,048
Non-interest expense:
Compensation and benefits		4,355			3,948			12,805			11,865
Occupancy and equipment		918			1,090			2,865			3,301
Data processing		513			384			1,443			1,099
Professional services		306			409			1,095			895
Other		1,082			1,075			3,201			3,205
Total non-interest expense		7,174			6,906			21,409			20,365
Income before income tax expense		2,592			5,072			7,933			16,197
Income tax expense		761			1,453			2,326			4,632
Net income		1,831			3,619			5,607			11,565
Other comprehensive loss, net of tax		(7,189	)		(688	)		(23,458	)		(1,508	)
Comprehensive (loss) income available to common stockholders	$	(5,358	)		2,931			(17,851	)		10,057
Basic earnings per share	$	0.42			0.82			1.28			2.57
Diluted earnings per share	$	0.42			0.81			1.27			2.55

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
Selected Financial Data:		Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)		2022		2021		2022			2021
I.   OPERATING DATA:
Interest income	$	8,631		8,401		24,253			24,384
Interest expense		340		360		915			1,223
Net interest income		8,291		8,041		23,338			23,161
II.  AVERAGE BALANCES:
Assets (1)		1,088,301		992,620		1,058,020			967,890
Loans receivable, net		695,935		628,608		677,869			636,285
Securities available for sale (1)		288,747		215,811		294,394			192,877
Interest-earning assets (1)		1,050,510		960,583		1,020,033			934,243
Interest-bearing liabilities and non-interest bearing deposits		966,563		874,473		938,943			854,093
Equity (1)		115,183		108,955		113,783			106,108
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized)		0.67	%	1.45	%	0.71	%		1.60	%
Interest rate spread information:
Average during period		3.12		3.31		3.05			3.30
End of period		3.27		3.12		3.27			3.12
Net interest margin		3.13		3.32		3.06			3.31
Ratio of operating expense to average
total assets (annualized)		2.62		2.76		2.71			2.81
Return on average equity (annualized)		6.30		13.18		6.59			14.57
Efficiency		69.35		62.26		70.70			59.53
		Sep 30, 2022		Dec 31, 2021		Sep 30, 2021
IV. EMPLOYEE DATA:
Number of full time equivalent employees		168		164		168
V.  ASSET QUALITY:
Total non-performing assets	$	1,811		4,911		1,788
Non-performing assets to total assets		0.17	%	0.46	%	0.17	%
Non-performing loans to total loans receivable		0.24		0.70		0.28
Allowance for loan losses	$	10,141		9,279		9,070
Allowance for loan losses to total assets		0.97	%	0.87	%	0.87	%
Allowance for loan losses to total loans receivable		1.35		1.40		1.44
Allowance for loan losses to non-performing loans		559.85		200.81		507.15
VI.  BOOK VALUE PER SHARE:
Book value per share common share	$	20.02		24.11		23.93
		Nine Months Ended Sep 30, 2022		Year Ended Dec 31, 2021		Nine Months Ended Sep 30, 2021
VII. CAPITAL RATIOS:
Stockholders’ equity to total assets, at end of period		8.56	%	10.29	%	10.61	%
Average stockholders’ equity to average assets (1)		10.75		10.92		10.96
Ratio of average interest-earning assets to average interest-bearing liabilities and non-interest bearing deposits(1)		108.64		109.17		109.38
Home Federal Savings Bank regulatory capital ratios:
Common equity tier 1 capital ratio		11.47		13.18		13.85
Tier 1 capital leverage ratio		8.95		9.47		9.64
Tier 1 capital ratio		11.47		13.18		13.85
Risk-based capital		12.66		14.43		15.10

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

CONTACT: 
Bradley Krehbiel
Chief Executive Officer, President
HMN Financial, Inc. (507) 252-7169

FAQ

What were HMNF's earnings results for Q3 2022?

HMN Financial reported a net income of $1.8 million for Q3 2022, down from $3.6 million in Q3 2021.

How did HMNF perform year-to-date in 2022?

Year-to-date, HMN Financial reported a net income of $5.6 million, a 51.5% decrease compared to $11.6 million in the same period of 2021.

What is the current diluted earnings per share for HMNF?

For Q3 2022, diluted earnings per share for HMN Financial were $0.42, down from $0.81 in Q3 2021.

How has HMNF's provision for loan losses changed in 2022?

The provision for loan losses increased to $0.9 million for the nine-month period ending September 30, 2022, up from a negative provision of $2.4 million in the same period of 2021.

What are the key factors affecting HMNF's net interest margin?

HMN Financial's net interest margin decreased to 3.06% for the nine months ending September 30, 2022, primarily due to lower yields on interest-earning assets.