Third Quarter Summary
Net income of $2.1 million, down $0.6 million, compared to $2.7 million in third quarter of 2018 Diluted earnings per share of $0.45, down $0.14, compared to $0.59 in third quarter of 2018Net interest income of $7.1 million, down $0.3 million, compared to $7.4 million in third quarter of 2018Net interest margin of 3.97%, down 0.17%, compared to 4.14% in third quarter of 2018Non-performing assets of $2.1 million, or 0.27% of total assets.Year to Date SummaryNet income of $6.6 million, up $0.7 million, compared to $5.9 million in first nine months of 2018Diluted earnings per share of $1.41, up $0.17, compared to $1.24 in first nine months of 2018Net interest income of $21.6 million, up $0.6 million, compared to $21.0 million in first nine months of 2018Net interest margin of 4.14%, up 0.12%, compared to 4.02% in first nine months of 2018Net Income SummaryROCHESTER, Minn., Oct. 17, 2019 (GLOBE NEWSWIRE) — HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $763 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.1 million for the third quarter of 2019, a decrease of $0.6 million, compared to net income of $2.7 million for the third quarter of 2018. Diluted earnings per share for the third quarter of 2019 was $0.45, a decrease of $0.14 per share, compared to diluted earnings per share of $0.59 for the third quarter of 2018. The decrease in net income between the periods was primarily because of a $0.5 million increase in non-interest expenses primarily related to increased compensation and professional services costs, a $0.3 million decrease in net interest income due to an increase in the average rates paid on deposits, and a $0.3 million increase in the loan loss provision. These decreases in net income were partially offset by a $0.4 million increase in the gain on sales of loans between the periods. Income tax expense also decreased $0.1 million as a result of the decreased pre-tax income between the periods.
President’s Statement
“Maintaining net interest margin in the current declining rate environment is becoming a challenge for not only our bank but the financial industry as a whole,” said Bradley Krehbiel, President and Chief Executive Officer of HMN. “Despite the margin challenges, we are pleased to report the increase in our mortgage loan activity and the related gain on sale of loans that we experienced during the third quarter of 2019. We continue to focus our efforts on improving the financial performance of our core banking operations while maintaining the credit quality of our loan portfolio.”Third Quarter Results
Net Interest Income
Net interest income was $7.1 million for the third quarter of 2019, a decrease of $0.3 million, or 3.9%, from $7.4 million for the third quarter of 2018. Interest income was $8.0 million for the third quarter of 2019, the same as for the third quarter of 2018. Interest income remained flat despite the increase in the average federal funds rate between the periods as competitive pricing in our markets did not allow for increased loan rates when the federal funds rate increased in the fourth quarter of 2018. The average yield earned on interest-earning assets was 4.47% for the third quarter of 2019, the same as for the third quarter of 2018.Interest expense was $0.9 million for the third quarter of 2019, an increase of $0.3 million, or 54.3%, from $0.6 million for the third quarter of 2018. The average interest rate paid on interest-bearing liabilities and non-interest-bearing deposits was 0.56% for the third quarter of 2019, an increase of 20 basis points from 0.36% for the third quarter of 2018. The increase in the interest paid on interest-bearing liabilities was primarily because of the increase in the average federal funds rate between the periods which increased the cost of deposits between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the third quarter of 2019 was 3.97%, a decrease of 17 basis points, compared to 4.14% for the third quarter of 2018. The decrease in the net interest margin is primarily related to the increase in interest expense as a result of an increase in the average federal funds rate between the periods while rates on interest earning assets remained flat.A summary of the Company’s net interest margin for the three and nine month periods ended September 30, 2019 and 2018 is as follows:
Provision for Loan Losses
The provision for loan losses was ($0.4) million for the third quarter of 2019, an increase of $0.3 million from the ($0.7) million provision for loan losses for the third quarter of 2018. The credit provision amount for the period was primarily the result of certain adversely classified commercial loans being paid off during the period. These payoffs, combined with the continued improvement in the credit quality of the loan portfolio, resulted in a reduction of the overall allowance for loan losses required between the periods. Total non-performing assets were $2.1 million at September 30, 2019, a decrease of $1.0 million, or 34.1%, from $3.1 million at June 30, 2019. Non-performing loans decreased $1.2 million and foreclosed and repossessed assets increased $0.2 million during the third quarter of 2019. The decrease in the non-performing loans was primarily related to a $1.3 million non-performing loan relationship that was reclassified as an accruing loan during the third quarter of 2019.A reconciliation of the Company’s allowance for loan losses for the quarters ended September 30, 2019 and 2018 is summarized as follows:
The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the two most recently completed quarters and December 31, 2018. (1) Excludes non-accrual loans.Non-Interest Income and Expense
Non-interest income was $2.2 million for the third quarter of 2019, an increase of $0.3 million, or 15.0%, from $1.9 million for the third quarter of 2018. Gain on sales of loans increased $0.4 million between the periods primarily because of an increase in single family loan sales. Fees and service charges decreased $0.1 million due to a decrease in the loan commitment fees earned between the periods. Loan servicing fees decreased slightly between the periods due to a decrease in the commercial loans servicing fees earned.Non-interest expense was $6.7 million for the third quarter of 2019, an increase of $0.5 million, or 8.6%, from $6.2 million for the third quarter of 2018. Compensation and benefits expense increased $0.3 million primarily because of annual salary increases and an increase in the compensation paid as a result of the increased mortgage loan production between the periods. Professional services expense increased $0.1 million due primarily to an increase in legal expenses between the periods. Other non-interest expense increased $0.1 million due primarily to an increase in mortgage loan servicing expenses caused by the increase in serviced loans that were refinanced between the periods. Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and maintenance costs.Income tax expense was $0.9 million for the third quarter of 2019, a decrease of $0.1 million from $1.0 million for the third quarter of 2018. 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 2019 was 1.11%, compared to 1.47% for the third quarter of 2018. Return on average equity (annualized) was 9.10% for the third quarter of 2019, compared to 12.90% for the same period in 2018. Book value per common share at September 30, 2019 was $18.83, compared to $17.35 at September 30, 2018.Nine Month Period Results
Net Income
Net income was $6.6 million for the nine month period ended September 30, 2019, an increase of $0.7 million, or 11.4%, compared to net income of $5.9 million for the nine month period ended September 30, 2018. Diluted earnings per share for the nine month period ended September 30, 2019 was $1.41, an increase of $0.17 per share, compared to diluted earnings per share of $1.24 for the same period in 2018. The increase in net income between the periods was primarily because of a $1.0 million decrease in the provision for loan losses, a $0.6 million increase in net interest income, and a $0.2 million increase in the gain on sales of loans. These increases in net income were partially offset by a $0.4 million increase in compensation expense related to the increased mortgage loan production and annual salary increases, a $0.4 million increase in income tax expense as a result of the increased pre-tax income, and a $0.2 million increase in professional services expenses between the periods.
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