HMN Financial Inc
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Financials : Thrifts & Mortgage Finance | Small Cap Value
Company profile

HMN Financial, Inc. (HMN) is a stock savings bank holding company that owns Home Federal Savings Bank (the Bank). The Bank operates retail banking and loan production facilities in Minnesota, Iowa and Wisconsin. The Bank has two subsidiaries, Osterud Insurance Agency, Inc., which offers financial planning products and services, and HFSB Property Holdings, LLC, which acts as an intermediary for the Bank in holding and operating certain foreclosed properties. HMN's business involves attracting deposits from the general public and businesses and using such deposits to originate or purchase one- to four-family residential, commercial real estate and multi-family mortgage loans, among others. HMN invests in mortgage-backed and related securities, the United States government agency obligations and other permissible investments. HMN serves the southern Minnesota counties of Dodge, Fillmore, Freeborn, Houston, Mower, Olmsted and Winona, and portions of Steele, Goodhue and Wabasha.

Closing Price
$16.50
Day's Change
0.00 (0.00%)
Bid
--
Ask
--
B/A Size
--
Day's High
16.72
Day's Low
16.08
Volume
(Above Average)
Volume:
5,013

10-day average volume:
5,478
5,013

HMN Financial, Inc. Announces Third Quarter Results

7:00 pm ET October 19, 2020 (Globe Newswire) Print

Third Quarter Summary

-- Net income of $3.1 million, up $1.0 million, compared to $2.1 million in third quarter of 2019

-- Diluted earnings per share of $0.67, up $0.22, compared to $0.45 in third quarter of 2019

-- Gain on sales of loans of $3.0 million, up $2.2 million from $0.8 million in third quarter of 2019

-- Provision for loan losses of $0.8 million, up $1.2 million from ($0.4) million in third quarter of 2019

-- Net interest margin of 3.40%, down 57 basis points, compared to 3.97% in third quarter of 2019

Year to Date Summary

-- Net income of $7.2 million, up $0.6 million, compared to $6.6 million in first nine months of 2019

-- Diluted earnings per share of $1.54, up $0.13, compared to $1.41 in first nine months of 2019

-- Gain on sales of loans of $6.5 million, up $4.7 million from $1.8 million in first nine months of 2019

-- Provision for loan losses of $1.5 million, up $3.0 million from ($1.5) million in first nine months of 2019

-- Net interest margin of 3.57%, down 57 basis points, compared to 4.14% in first nine months of 2019

Net Income Summary

                                                   Three Months Ended     Nine Months Ended
                                                   September 30,          September 30,
(Dollars in thousands, except per share amounts)   2020     2019          2020    2019
Net income                                       $ 3,101    2,076       $ 7,177   6,557
Diluted earnings per share                         0.67     0.45          1.54    1.41
Return on average assets (annualized)              1.39   % 1.11      %   1.15  % 1.20      %
Return on average equity (annualized)              12.50  % 9.10      %   9.98  % 9.97      %
Book value per share                             $ 20.91    18.83       $ 20.91   18.83

HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $898 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $3.1 million for the third quarter of 2020, an increase of $1.0 million, compared to net income of $2.1 million for the third quarter of 2019. Diluted earnings per share for the third quarter of 2020 was $0.67, an increase of $0.22 per share, compared to diluted earnings per share of $0.45 for the third quarter of 2019. The increase in net income was primarily because of a $2.2 million increase in the gain on sales of mortgage loans between the periods. The increase in the gain on sales of mortgage loans was due primarily to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods. Net interest income increased $0.2 million primarily because of a decrease in interest expense between the periods. These increases in net income were partially offset by a $1.2 million increase in the provision for loan losses between the periods. The provision for loan losses increased primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. Income tax expense also increased $0.3 million as a result of the increased pre-tax income between the periods.

President's Statement

"The COVID-19 pandemic and the related social distancing mandates continued to have a significant impact on the Company in the third quarter of 2020," said Bradley Krehbiel, President and Chief Executive Officer of HMN. "The economic effects of the pandemic resulted in the recording of additional provisions for loan losses in the third quarter as we continue to analyze the impact of the pandemic on our borrowers. The increased provision for loan losses combined with the net interest margin compression we are experiencing, as a result of the historic low interest rate environment, continue to have a negative impact on the Company's earnings. Despite these challenges, we are pleased to report the increases in net income for both the quarter and the first nine months of 2020, due in large part to the increased mortgage loan origination activity and the related gain on sales of loans."

Third Quarter Results

Net Interest Income

Net interest income was $7.3 million for the third quarter of 2020, an increase of $0.2 million, or 2.8%, from $7.1 million for the third quarter of 2019. Interest income was $7.9 million for the third quarter of 2020, a decrease of $0.1 million, or 0.6%, from $8.0 million for the third quarter of 2019. Interest income decreased despite the $143.4 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets. The average yield earned on interest-earning assets was 3.71% for the third quarter of 2020, a decrease of 76 basis points from 4.47% for the third quarter of 2019. The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $0.7 million for the third quarter of 2020, a decrease of $0.2 million, or 27.6%, from $0.9 million for the third quarter of 2019. Interest expense decreased despite the $133.7 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.34% for the third quarter of 2020, a decrease of 22 basis points from 0.56% for the third quarter of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2020 was 3.40%, a decrease of 57 basis points, compared to 3.97% for the third quarter of 2019. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

A summary of the Company's net interest margin for the three and nine month periods ended September 30, 2020 and 2019 is as follows:

                                                                  For the three month period ended
                                                                  September 30, 2020                     September 30, 2019
(Dollars in thousands)                                            Average         Interest  Yield/       Average         Interest  Yield/
                                                                  Outstanding     Earned/   Rate         Outstanding     Earned/   Rate
                                                                  Balance         Paid                   Balance         Paid
Interest-earning assets:
Securities available for sale                                   $ 103,132         434       1.67   %  $  80,286          365       1.80   %
Loans held for sale                                               9,309           65        2.76         3,557           43        4.72
Single family loans, net                                          134,460         1,325     3.92         115,844         1,236     4.23
Commercial loans, net                                             474,325         5,390     4.52         398,674         5,229     5.20
Consumer loans, net                                               60,473          709       4.66         73,788          920       4.95
Other                                                             71,180          26        0.15         37,355          205       2.18
Total interest-earning assets                                     852,879         7,949     3.71         709,504         7,998     4.47
Interest-bearing liabilities and non-interest-bearing deposits:
Checking accounts                                                 129,276         41        0.13         93,024          23        0.10
Savings accounts                                                  93,022          17        0.07         80,269          16        0.08
Money market accounts                                             221,991         190       0.34         173,606         303       0.69
Certificates                                                      111,847         408       1.45         127,888         564       1.75
Total interest-bearing liabilities                                556,136                                474,787
Non-interest checking                                             219,512                                166,972
Other non-interest bearing deposits                               2,218                                  2,415
Total interest-bearing liabilities and non-interest-            $ 777,866         656       0.34      $  644,174         906       0.56
bearing deposits
Net interest income                                                           $   7,293                              $   7,092
Net interest rate spread                                                                    3.37   %                               3.91   %
Net interest margin                                                                         3.40   %                               3.97   %
                                                                  For the nine month period ended
                                                                  September 30, 2020                     September 30, 2019
(Dollars in thousands)                                            Average         Interest  Yield/       Average         Interest  Yield/
                                                                  Outstanding     Earned/   Rate         Outstanding     Earned/   Rate
                                                                  Balance         Paid                   Balance         Paid
Interest-earning assets:
Securities available for sale                                   $ 100,889         1,371     1.81   %  $  79,163          1,051     1.77   %
Loans held for sale                                               6,942           156       2.99         2,417           82        4.51
Mortgage loans, net                                               130,441         3,907     4.00         115,162         3,744     4.35
Commercial loans, net                                             446,580         15,781    4.72         402,469         15,966    5.30
Consumer loans, net                                               64,570          2,312     4.78         73,384          2,805     5.11
Other                                                             51,030          149       0.39         24,886          381       2.05
Total interest-earning assets                                     800,452         23,676    3.95         697,481         24,029    4.60
Interest-bearing liabilities and non-interest-bearing deposits:
Checking accounts                                                 115,110         102       0.12         95,748          73        0.10
Savings accounts                                                  87,587          48        0.07         79,599          47        0.08
Money market accounts                                             205,868         684       0.44         174,565         878       0.67
Certificates                                                      118,422         1,459     1.65         120,376         1,420     1.58
Advances and other borrowings                                     0               0         0.00         384             7         2.54
Total interest-bearing liabilities                                526,987                                470,672
Non-interest checking                                             200,965                                159,820
Other non-interest bearing deposits                               2,384                                  2,030
Total interest-bearing liabilities and non-interest-            $ 730,336         2,293     0.42      $  632,522         2,425     0.51
bearing deposits
Net interest income                                                           $   21,383                             $   21,604
Net interest rate spread                                                                    3.53   %                               4.09   %
Net interest margin                                                                         3.57   %                               4.14   %

Provision for Loan Losses

The provision for loan losses was $0.8 million for the third quarter of 2020, an increase of $1.2 million from the ($0.4) million provision for loan losses for the third quarter of 2019. The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The amount of the increase in the allowance for loan losses related to the economic environment is based, in part, on the amount of loans to borrowers that continued to have their loan payments deferred because of the impact of the pandemic. At September 30, 2020 the Bank had $82.0 million of loans to borrowers who had their loan payments deferred for up to six months compared to $119.1 million of loans to borrowers who had their payments deferred at June 30, 2020.

A summary of deferred loans at September 30, 2020 and June 30, 2020 by industry or collateral type is as follows:

(Dollars in thousands)                      Balance             Balance
                                            September 30, 2020  June 30, 2020
Commercial real estate loans by industry:
Hotels                                    $ 54,660              54,660
Retail/Office                               7,127               20,322
Theaters                                    11,269              11,269
Multi-family                                0                   11,195
Single family                               0                   4,675
Restaurant/Bar                              2,876               4,477
Other                                       5,747               9,449
Total commercial loans                      81,679              116,047
Consumer loans by collateral type:
Single family                               366                 2,955
Other                                       0                   77
Total consumer loans                        366                 3,032
Total deferred loans                      $ 82,045              119,079

(1) Approximately $38.5 million of the hotel properties are located in Minnesota with approximately $21.3 million located in Rochester, Minnesota, $13.8 million in the Minneapolis/St. Paul, Minnesota metro area, and $3.4 million in St. Cloud, Minnesota.

All of the borrowers whose loan deferral period ended during the third quarter of 2020 had resumed making their normal payments and none of the loans removed from the deferral list were classified as non-performing as of September 30, 2020. The initial deferral period for all remaining deferred loans at September 30, 2020 is scheduled to end in the fourth quarter of 2020. The commercial credit area continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely. This information is used to analyze the performance of these credits and to help anticipate any potential issues that these credits may have when their initial deferral period ends. It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries, may need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.

The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the quarter as a result of an increase in the qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and an increase in the reserves related to an analysis of the Bank's charged off loan history. Total non-performing assets were $3.0 million at September 30, 2020, a decrease of $0.2 million, or 6.3%, from $3.2 million at June 30, 2020. Non-performing loans increased $0.1 million and foreclosed and repossessed assets decreased $0.3 million during the third quarter of 2020.

A reconciliation of the Company's allowance for loan losses for the quarters ended September 30, 2020 and 2019 is summarized as follows:

(Dollars in thousands)     2020      2019
Balance at June 30,      $ 8,649     8,624
Provision                  770       (420  )
Charge offs:
Single family              0         (2    )
Consumer                   (29   )   (46   )
Commercial business        (8    )   0
Recoveries                 150       39
Balance at September 30, $ 9,532     8,195
Allocated to:
General allowance        $ 9,416     7,528
Specific allowance         116       667
                         $ 9,532     8,195

The following table summarizes the amounts and categories of non-performing assets in the Bank's portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, 2019.

                                                       September 30,     June 30,     December 31,
(Dollars in thousands)                                 2020              2020         2019
Nonâ?'Performing Loans:
Single family                                        $ 352             $ 390        $ 617
Commercial real estate                                 1,537             1,579        184
Consumer                                               641               475          659
Commercial business                                    11                27           621
Total                                                  2,541             2,471        2,081
Foreclosed and Repossessed Assets:
Single family                                          0                 269          166
Commercial real estate                                 414               414          414
Total nonâ?'performing assets                        $ 2,955           $ 3,154      $ 2,661
Total as a percentage of total assets                  0.33          %   0.37     %   0.34         %
Total nonâ?'performing loans                         $ 2,541           $ 2,471      $ 2,081
Total as a percentage of total loans receivable, net   0.38          %   0.37     %   0.35         %
Allowance for loan losses to non-performing loans      375.19        %   349.92   %   411.45       %
Delinquency Data:
Delinquencies
30+ days                                             $ 995             $ 775        $ 1,167
90+ days                                               0                 0            0
Delinquencies as a percentage of loan portfolio
30+ days                                               0.14          %   0.11     %   0.19         %
90+ days                                               0.00          %   0.00     %   0.00         %

Excludes non-accrual loans.

Non-Interest Income and Expense

Non-interest income was $4.4 million for the third quarter of 2020, an increase of $2.2 million, or 97.4%, from $2.2 million for the third quarter of 2019. Gain on sales of loans increased $2.2 million between the periods primarily because of an increase in single family loan originations and sales. Other non-interest income increased $0.1 million due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. Loan servicing fees increased slightly between the periods due to an increase in the aggregate balances of single family mortgage loans that were being serviced for others. These increases in the non-interest income were partially offset by a decrease of $0.1 million in fees and service charges earned between the periods due primarily to a decrease in the overdraft fees collected.

Non-interest expense was $6.6 million for the third quarter of 2020, a decrease of $0.1 million, or 2.2%, from $6.7 million for the third quarter of 2019. Professional services expense decreased $0.2 million between the periods primarily because of a decrease in legal expenses relating to an ongoing bankruptcy litigation claim. Occupancy and equipment expense decreased slightly between the periods due to a decrease in depreciation and non-capitalized equipment costs. Other non-interest expense decreased slightly due primarily to an increase in the gains recognized on the sale of other real estate owned between the periods. These decreases in non-interest expense were partially offset by a $0.1 million increase in compensation and benefits expense related to the increased mortgage loan production between the periods. Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses.

Income tax expense was $1.2 million for the third quarter of 2020, an increase of $0.3 million from $0.9 million for the third quarter of 2019. The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.

Return on Assets and Equity

Return on average assets (annualized) for the third quarter of 2020 was 1.39%, compared to 1.11% for the third quarter of 2019. Return on average equity (annualized) was 12.50% for the third quarter of 2020, compared to 9.10% for the same period in 2019. Book value per common share at September 30, 2020 was $20.91, compared to $18.83 at September 30, 2019.

Nine Month Period Results

Net Income

Net income was $7.2 million for the nine month period ended September 30, 2020, an increase of $0.6 million, or 9.5%, compared to net income of $6.6 million for the nine month period ended September 30, 2019. Diluted earnings per share for the nine month period ended September 30, 2020 was $1.54, an increase of $0.13 per share, compared to diluted earnings per share of $1.41 for the same period in 2019. The increase in net income was primarily because of a $4.7 million increase in the gain on sales of mortgage loans between the periods. The increase in the gain on sales of mortgage loans was due primarily to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods. This increase in net income was partially offset by a $3.0 million increase in the provision for loan losses between the periods. The provision for loan losses increased primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and also because of the decrease in the net recoveries received in the current period when compared to the same period of 2019. Non-interest expenses increased $0.5 million due primarily to an increase in compensation expense between the periods. Net interest income decreased $0.2 million primarily because of a decrease in the yield earned on interest earning assets due to the decrease in the average prime rate between the periods. Income tax expense also increased $0.2 million as a result of the increased pre-tax income between the periods.

Net Interest Income

Net interest income was $21.4 million for the first nine months of 2020, a decrease of $0.2 million, or 1.0%, from $21.6 million for the same period in 2019. Interest income was $23.7 million for the nine month period ended September 30, 2020, a decrease of $0.3 million, or 1.5%, from $24.0 million for the same nine month period in 2019. Interest income decreased despite the $103.0 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets. The average yield earned on interest-earning assets was 3.95% for the first nine months of 2020, a decrease of 65 basis points from 4.60% for the first nine months of 2019. The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $2.3 million for the first nine months of 2020, a decrease of $0.1 million, or 5.4%, compared to $2.4 million in the first nine months of 2019. Interest expense decreased despite the $97.8 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 0.42% for the first nine months of 2020, a decrease of 9 basis points from 0.51% for the first nine months of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the first nine months of 2020 was 3.57%, a decrease of 57 basis points, compared to 4.14% for the first nine months of 2019. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

Provision for Loan Losses

The provision for loan losses was $1.5 million for the first nine months of 2020, an increase of $3.0 million compared to the ($1.5) million provision for loan losses for the first nine months of 2019. The provision for loan losses increased between the periods primarily because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic and also because of the decrease in the net recoveries received in the current period when compared to the same period of 2019. The amount of the increase in the allowance for loan losses related to the economic environment was based, in part, on the amount of loans to borrowers that continued to have their loan payments deferred because of the impact of the pandemic. At September 30, 2020 the Bank had $82.0 million of loans to borrowers who had their loan payments deferred for up to six months compared to $119.1 million at June 30, 2020.

All of the borrowers whose loan deferral period ended during the third quarter of 2020 had resumed making their normal payments and none of the loans removed from the deferral list were classified as non-performing as of September 30, 2020. The initial deferral period for all remaining deferred loans at September 30, 2020 is scheduled to end in the fourth quarter of 2020. The commercial credit area continues to communicate regularly with the borrowers that have had their loan payments deferred and monitors their activity closely. This information is used to analyze the performance of these credits and to help anticipate any potential issues that these credits may have when their initial deferral period ends. It is anticipated that some of the remaining borrowers with deferred loan payments will be in a position to resume making their regular loan payments, while other borrowers, particularly in the hospitality and restaurant industries, may need to have their loan terms modified for a period of time until their operations recover more fully from the impacts of the pandemic.

The allowance for loan losses is made up of general reserves on the entire loan portfolio and specific reserves on impaired loans. The general reserve amount includes quantitative reserves based on our past loan loss history and qualitative reserves for other items determined to have a potential impact on future loan losses. The general reserves increased during the period as a result of an increase in our qualitative allowance for loan losses because of the current economic environment related to the disruption in business activity as a result of the Covid-19 pandemic and an increase in our reserves related to an analysis of the Bank's charged off loan history. Total non-performing assets were $3.0 million at September 30, 2020, an increase of $0.3 million, or 11.0%, from $2.7 million at December 31, 2019. Non-performing loans increased $0.5 million and foreclosed and repossessed assets decreased $0.2 million during the first nine months of 2020.

A reconciliation of the allowance for loan losses for the nine month periods ended September 30, 2020 and 2019 is summarized as follows:

(Dollars in thousands)     2020      2019
Balance at January 1,    $ 8,564     8,686
Provision                  1,548     (1,452 )
Charge offs:
Single family              0         (2     )
Consumer                   (74   )   (92    )
Commercial real estate     (730  )   0
Commercial business        (8    )   (869   )
Recoveries                 232       1,924
Balance at September 30, $ 9,532     8,195

Non-Interest Income and Expense

Non-interest income was $10.5 million for the first nine months of 2020, an increase of $4.6 million, or 76.1%, from $5.9 million for the same period of 2019. Gain on sales of loans increased $4.7 million between the periods primarily because of an increase in single family loan originations and sales. 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. Other non-interest income increased slightly due primarily to an increase in the fees earned on the sale of uninsured investment products between the periods. These increases in the non-interest income were partially offset by a decrease of $0.2 million in the fees and services charges earned between the periods due primarily to a decrease in the overdraft fees collected.

Non-interest expense was $20.3 million for the first nine months of 2020, an increase of $0.5 million, or 2.5%, from $19.8 million for the same period of 2019. Compensation and benefits expense increased $0.3 million primarily related to the increased mortgage loan production between the periods. Professional services expense increased $0.1 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim. Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and non-capitalized equipment costs. Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses. Other non-interest expense increased slightly due to an increase in mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods.

Income tax expense was $2.9 million for the first nine months of 2020, an increase of $0.2 million from $2.7 million for the first nine months of 2019. The increase in income tax expense between the periods is primarily the result of an increase in pre-tax income.

Return on Assets and Equity

Return on average assets (annualized) for the nine month period ended September 30, 2020 was 1.15%, compared to 1.20% for the same period in 2019. Return on average equity (annualized) was 9.98% for the nine month period ended September 30, 2020, compared to 9.97% for the same period in 2019.

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 a loan origination office located in Sartell, Minnesota.

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," "project," "continue," "may," "will," "would," "could," "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; the anticipated impacts of the COVID-19 pandemic and efforts to mitigate the same on the general economy, our clients, and the allowance for loan losses; the anticipated benefits that will be realized by our clients from government assistance programs related to the COVID-19 pandemic; the amount of the Bank's non-performing assets in future periods and the appropriateness of the allowances therefor; 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 anticipated results of litigation and our assessment of the impact on our financial statements; 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 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 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 continued 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 (FHLB) 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; 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 Form 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" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 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.)

CONTACT: Bradley Krehbiel

Chief Executive Officer, President

HMN Financial, Inc. (507) 252-7169

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
                                                                                 September 30,  December 31,
(Dollars in thousands)                                                           2020           2019
                                                                                 (unaudited)
Assets
Cash and cash equivalents                                                   $    76,027         44,399
Securities available for sale:
Mortgage-backed and related securities (amortized cost $69,826 and $54,777)      71,458         54,851
Other marketable securities (amortized cost $46,874 and $52,751)                 47,106         52,741
                                                                                 118,564        107,592
Loans held for sale.                                                             7,225          3,606
Loans receivable, net                                                            670,297        596,392
Accrued interest receivable                                                      4,236          2,251
Mortgage servicing rights, net                                                   2,880          2,172
Premises and equipment, net                                                      10,342         10,515
Goodwill                                                                         802            802
Core deposit intangible                                                          82             156
Prepaid expenses and other assets                                                6,798          8,052
Deferred tax asset, net                                                          1,199          1,702
Total assets.                                                               $    898,452        777,639
Liabilities and Stockholders' Equity
Deposits                                                                    $    787,023        673,870
Accrued interest payable                                                         225            420
Customer escrows                                                                 1,857          2,413
Accrued expenses and other liabilities                                           8,204          8,288
Total liabilities                                                                797,309        684,991
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                                                       40,393         40,365
Retained earnings, subject to certain restrictions                               114,724        107,547
Accumulated other comprehensive income                                           1,343          46
Unearned employee stock ownership plan shares                                    (1,498  )      (1,643  )
Treasury stock, at cost 4,292,303 and 4,284,840 shares                           (53,910 )      (53,758 )
Total stockholders' equity                                                       101,143        92,648
Total liabilities and stockholders' equity                                  $    898,452        777,639
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
                                                          Three Months Ended   Nine Months Ended
                                                          September 30,        September 30,
(Dollars in thousands, except per share data)             2020       2019      2020    2019
Interest income:
Loans receivable                                       $  7,489      7,428     22,156  22,597
Securities available for sale:
Mortgage-backed and related                               271        56        825     146
Other marketable                                          163        309       546     905
Other                                                     26         205       149     381
Total interest income                                     7,949      7,998     23,676  24,029
Interest expense:
Deposits                                                  656        906       2,293   2,418
Federal Home Loan Bank advances and other borrowings      0          0         0       7
Total interest expense                                    656        906       2,293   2,425
Net interest income                                       7,293      7,092     21,383  21,604
Provision for loan losses                                 770        (420 )    1,548   (1,452 )
Net interest income after provision for loan losses       6,523      7,512     19,835  23,056
Non-interest income:
Fees and service charges                                  753        820       2,136   2,305
Loan servicing fees                                       347        324       976     957
Gain on sales of loans                                    3,005      845       6,503   1,835
Other                                                     291        238       846     842
Total non-interest income                                 4,396      2,227     10,461  5,939
Non-interest expense:
Compensation and benefits                                 3,916      3,849     11,762  11,496
Occupancy and equipment                                   1,101      1,142     3,335   3,284
Data processing                                           334        319       963     925
Professional services                                     241        428       1,175   1,081
Other                                                     1,004      1,009     3,015   2,975
Total non-interest expense                                6,596      6,747     20,250  19,761
Income before income tax expense                          4,323      2,992     10,046  9,234
Income tax expense                                        1,222      916       2,869   2,677
Net income                                                3,101      2,076     7,177   6,557
Other comprehensive income (loss), net of tax             (202  )    149       1,297   1,075
Comprehensive income available to common shareholders$    2,899      2,225     8,474   7,632
Basic earnings per share                             $    0.67       0.45      1.55    1.42
Diluted earnings per share                           $    0.67       0.45      1.54    1.41

HMN FINANCIAL, INC. AND SUBSIDIARIES

Selected Consolidated Financial Information

(unaudited)

                                                                                 Three Months Ended           Nine Months Ended
SELECTED FINANCIAL DATA:                                                         September 30,                September 30,
(Dollars in thousands, except per share data)                                    2020           2019          2020           2019
I.                     OPERATING DATA:
                       Interest income                                         $ 7,949          7,998         23,676         24,029
                       Interest expense                                          656            906           2,293          2,425
                       Net interest income                                       7,293          7,092         21,383         21,604
II.                    AVERAGE BALANCES:
                       Assets                                                    888,000        743,954       835,389        728,814
                       Loans receivable, net                                     669,258        588,306       641,591        591,015
                       Securities available for sale                             103,132        80,286        100,889        79,163
                       Interest-earning assets                                   852,879        709,504       800,452        697,481
                       Interest-bearing liabilities and non-interest-bearing     777,866        644,174       730,336        632,522
                       deposits
                       Equity                                                    98,663         90,512        96,100         87,939
III.                   PERFORMANCE RATIOS:
                       Return on average assets (annualized)                     1.39    %      1.11    %     1.15    %      1.20    %
                       Interest rate spread information:
                       Average during period                                     3.37           3.91          3.53           4.09
                       End of period                                             3.35           3.88          3.35           3.88
                       Net interest margin                                       3.40           3.97          3.57           4.14
                       Ratio of operating expense to average
                       total assets (annualized)                                 2.95           3.60          3.24           3.63
                       Return on average equity (annualized)                     12.50          9.10          9.98           9.97
                       Efficiency                                                56.43          72.41         63.59          71.75
                                                                                 September 30,  December 31,  September 30,
                                                                                 2020           2019          2019
IV.                    EMPLOYEE DATA:
                       Number of full time equivalent employees                  171            181           179
V.                     ASSET QUALITY:
                       Total non-performing assets                             $ 2,955          2,661         2,059
                       Non-performing assets to total assets                     0.33    %      0.34    %     0.27    %
                       Non-performing loans to total loans receivable, net       0.38           0.35          0.25
                       Allowance for loan losses                               $ 9,532          8,564         8,195
                       Allowance for loan losses to total assets                 1.06    %      1.10    %     1.07    %
                       Allowance for loan losses to total loans receivable,      1.42           1.44          1.41
                       net
                       Allowance for loan losses to non-performing loans         375.19         411.45        554.16
VI.                    BOOK VALUE PER SHARE:
                       Book value per common share                             $ 20.91          19.13         18.83
                                                                                 Nine Months    Year          Nine Months
                                                                                 Ended          Ended         Ended
                                                                                 September 30,  December 31,  September 30,
                                                                                 2020           2019          2019
VII.                   CAPITAL RATIOS:
                       Stockholders' equity to total assets, at end of period.   11.26   %      11.91   %     11.95   %
                       Average stockholders' equity to average assets            11.50          12.06         12.07
                       Ratio of average interest-earning assets to
                       average interest-bearing liabilities                      109.60         110.18        110.27
                       Home Federal Savings Bank regulatory capital
                       ratios:
                       Common equity tier 1 capital ratio                        13.16          13.21         13.31
                       Tier 1 capital leverage ratio                             9.73           10.89         11.00
                       Tier 1 capital ratio                                      13.16          13.21         13.31
                       Risk-based capital                                        14.41          14.46         14.56
 (1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
 (2) Allowance for loan losses to total loans receivable, net without the $53.1 million of outstanding PPP loans would be 1.54% as of September 30, 2020.

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