HMNF HMN Financial Inc

HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $863 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.7 million for the second quarter of 2020, a decrease of $0.2 million, compared to net income of $2.9 million for the second quarter of 2019.  Diluted earnings per share for the second quarter of 2020 was $0.58, a decrease of $0.04 from the diluted earnings per share of $0.62 for the second quarter of 2019.  The decrease in net income was primarily because of the $1.4 million increase in the provision for loan losses between the periods.  The provision for loan losses increased between the periods primarily because of the decrease in the recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic.  Net interest income also decreased $0.4 million primarily because of a decrease in the yields earned on interest earning assets as a result of the decrease in the average prime rate between the periods.  These decreases in net income were partially offset by a $1.6 million increase in other non-interest income due primarily to an increase in the gain on sales of mortgage loans between the periods.  The increase in the gain on sales of mortgage loans was due to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods.    

President’s Statement“The COVID-19 pandemic and the related stay-at-home orders continued to have a significant impact on everyone in the second quarter of 2020.  The economic effects of the pandemic on our clients combined with the net interest margin compression related to the low interest rate environment continued to be an earnings challenge for our bank and the financial industry as a whole,” said Bradley Krehbiel, President and Chief Executive Officer of HMN.  “Despite these challenges, we are pleased to report the increase in our mortgage loan origination activity and the related gain on sales of loans that we experienced during the second quarter of 2020.  We are also encouraged by the positive impact that the Small Business Administration’s Paycheck Protection Program (PPP) loan program as well as other economic stimulus actions implemented by the federal government appear to be having on our clients.  We are proud to have originated $53.1 million in PPP loans in the second quarter of 2020 and continue to work with our clients to obtain the appropriate amount of loan forgiveness that they are eligible for in consideration for retaining their workforce.” 

Second Quarter Results

Net Interest IncomeNet interest income was $7.1 million for the second quarter of 2020, a decrease of $0.4 million, or 4.4%, compared to $7.5 million for the second quarter of 2019.  Interest income was $7.9 million for the second quarter of 2020, a decrease of $0.4 million, or 5.0%, from $8.3 million for the second quarter of 2019.  Interest income decreased despite the $115.7 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 3.94% for the second quarter of 2020, a decrease of 89 basis points from 4.83% for the second 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 second quarter of 2020, a decrease of $0.1 million, or 10.1%, compared to $0.8 million for the second quarter of 2019. Interest expense decreased despite the $114.4 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 0.40% for the second quarter of 2020, a decrease of 13 basis points from 0.53% for the second 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 second quarter of 2020 was 3.57%, a decrease of 78 basis points, compared to 4.35% for the second 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 six month periods ended June 30, 2020 and 2019 is as follows:

		For the three month period ended
		June 30, 2020							June 30, 2019
(Dollars in thousands)		AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate			AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate
Interest-earning assets:
Securities available for sale	$	96,241		436		1.82	%	$	78,393		348		1.78	%
Loans held for sale		8,736		67		3.07			2,482		27		4.36
Mortgage loans, net		129,584		1,306		4.05			113,786		1,247		4.40
Commercial loans, net		455,330		5,293		4.68			407,854		5,677		5.58
Consumer loans, net		64,864		761		4.72			73,777		950		5.16
Other		49,435		20		0.16			12,161		50		1.62
Total interest-earning assets		804,190		7,883		3.94			688,453		8,299		4.83
Interest-bearing liabilities and   non-interest bearing deposits:
NOW accounts		112,605		30		0.11			96,579		25		0.10
Savings accounts		88,528		16		0.07			80,013		16		0.08
Money market accounts		204,939		201		0.39			168,605		306		0.73
Certificates		119,722		498		1.67			118,893		475		1.60
Advances and other borrowings		0		0		0.00			1,152		7		2.54
Total interest-bearing liabilities		525,794							465,242
Non-interest checking		209,194							155,921
Other non-interest bearing deposits		2,142							1,610
Total interest-bearing liabilities and non-interest   bearing deposits	$	737,130		745		0.40		$	622,773		829		0.53
Net interest income			$	7,138						$	7,470
Net interest rate spread						3.54	%						4.30	%
Net interest margin						3.57	%						4.35	%

		For the six month period ended
		June 30, 2020							June 30, 2019
(Dollars in thousands)		AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate			AverageOutstandingBalance		InterestEarned/Paid		Yield/Rate
Interest-earning assets:
Securities available for sale	$	99,755		937		1.89	%	$	78,592		686		1.76	%
Loans held for sale		5,745		91		3.18			1,838		39		4.30
Mortgage loans, net		128,409		2,581		4.04			114,814		2,508		4.41
Commercial loans, net		432,556		10,390		4.83			404,399		10,737		5.35
Consumer loans, net		66,641		1,605		4.84			73,178		1,885		5.19
Other		40,844		123		0.61			18,549		176		1.91
Total interest-earning assets		773,950		15,727		4.09			691,370		16,031		4.68
Interest-bearing liabilities and   non-interest bearing deposits:
NOW accounts		107,949		61		0.11			97,132		49		0.10
Savings accounts		84,839		32		0.07			79,259		31		0.08
Money market accounts		197,718		494		0.50			175,052		576		0.66
Certificates		121,746		1,050		1.73			116,558		856		1.48
Advances and other borrowings		0		0		0.00			579		7		2.54
Total interest-bearing liabilities		512,252							468,580
Non-interest checking		191,590							156,185
Other non-interest bearing deposits		2,468							1,835
Total interest-bearing liabilities and non-interest   bearing deposits	$	706,310		1,637		0.47		$	626,600		1,519		0.49
Net interest income			$	14,090						$	14,512
Net interest rate spread						3.62	%						4.19	%
Net interest margin						3.66	%						4.23	%

Provision for Loan LossesThe provision for loan losses was $0.3 million for the second quarter of 2020, an increase of $1.4 million compared to ($1.1) million for the second quarter of 2019.  The provision for loan losses increased between the periods primarily because of the decrease in the recoveries received in the current period when compared to the same period of 2019 and also 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 was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic.  At June 30, 2020, the Bank had $119.1 million of loans to borrowers who had their loan payments deferred for up to six months.   A summary of deferred loans at June 30, 2020 by industry or collateral type is as follows:

(Dollars in thousands)		Balance June 30, 2020
Commercial loans by industry:
Hotels (1)	$	54,660
Retail/Office		20,322
Multi-family housing		11,195
Theaters		11,269
Single family housing		4,675
Restaurant/Bar		4,477
Other		9,449
Total commercial loans		116,047
Consumer loans by collateral type:
Single family		2,955
Other		77
Total consumer loans		3,032
Total deferred loans	$	119,079

(1) Approximately 39% of the hotel properties are located in Rochester, Minnesota with an additional 31% located in other markets in Minnesota where we operate a full service branch or Loan production office.

The allowance for loan losses is made up of general reserves based on our past loan loss history, specific reserves on impaired loans, and qualitative reserves for other items determined to have a potential impact on future loan losses. The qualitative increase to the allowance for loan losses related to the current economic environment and charge offs were partially offset by improvements in other qualitative reserves and a reduction in the specific reserves required on certain classified loans.  The reduction in the specific reserves was primarily related to one classified loan that had its risk rating upgraded which reduced the required reserve by $0.4 million and two other classified loans that paid off during the quarter which reduced the required reserves for these loans by $0.2 million.  Total non-performing assets were $3.2 million at June 30, 2020, an increase of $0.6 million, or 21.6%, from $2.6 million at March 31, 2020.  Non-performing loans increased $0.6 million and foreclosed and repossessed assets did not change during the second quarter of 2020.  

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

(Dollars in thousands)		2020				2019
Balance at March 31,	$	9,036				8,673 3
Provision		318				(1,059	)
Charge offs:
Consumer		(34	)			(7	)
Commercial real estate		(730	)			0
Commercial business		0				(826	)
Recoveries		59				1,843
Balance at June 30,	$	8,649				8,624
Allocated to:
General allowance	$	8,495				7,856
Specific allowance		154				768
	$	8,649				8,624

The $0.7 million of commercial real estate charge offs during the period relates to a commercial property in the transportation industry whose tenant filed for bankruptcy and the appraised value of the property decreased.

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the three most recently completed quarters. 

		June 30,			March 31,			December 31,
(Dollars in thousands)		2020			2020			2019
Non‑Performing Loans:
Single family	$	390		$	647		$	617
Commercial real estate		1,579			734			184
Consumer		475			491			659
Commercial business		27			40			621
Total		2,471			1,912			2,081
Foreclosed and Repossessed Assets:
Single family		269			269			166
Commercial real estate		414			414			414
Total non‑performing assets	$	3,154		$	2,595		$	2,661
Total as a percentage of total assets		0.37	%		0.33	%		0.34	%
Total non‑performing loans	$	2,471		$	1,912		$	2,081
Total as a percentage of total loans receivable, net		0.37	%		0.31	%		0.35	%
Allowance for loan loss to non-performing loans		349.92	%		472.54	%		411.45	%
Delinquency Data:
Delinquencies (1)
30+ days	$	775		$	1,464		$	1,167
90+ days		0			0			0
Delinquencies as a percentage of loan portfolio (1)
30+ days		0.11	%		0.23	%		0.19	%
90+ days		0.00	%		0.00	%		0.00	%

(1) Excludes non-accrual loans.

Non-Interest Income and ExpenseNon-interest income was $3.6 million for the second quarter of 2020, an increase of $1.6 million, or 77.8%, from $2.0 million for the second quarter of 2019.  Gain on sales of loans increased $1.8 million between the periods primarily because of an increase in single family loan originations and sales.  Fees and services charges decreased $0.1 million between the periods due primarily to a decrease in the overdraft fees collected.  Other non-interest income decreased slightly due to a decrease in the fees earned on the sale of uninsured investment products between the periods.  Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others.

Non-interest expense was $6.7 million for the second quarter of 2020, an increase of $0.1 million, or 1.3%, from $6.6 million for the second quarter of 2019.  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.  Compensation and benefits expense increased $0.1 million primarily because of an increase in the accrual for unused employee paid time off.  Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and non-capitalized software costs.  Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses. These increases in non-interest expense were partially offset by the $0.1 million decrease in other non-interest expense due to a decrease in advertising expenses between the periods.  Income tax expense was $1.1 million for both the second quarter of 2020 and the second quarter of 2019. 

Return on Assets and EquityReturn on average assets (annualized) for the second quarter of 2020 was 1.29%, compared to 1.60% for the second quarter of 2019.  Return on average equity (annualized) was 11.31% for the second quarter of 2020, compared to 13.10% for the same period in 2019.  Book value per common share at June 30, 2020 was $20.29, compared to $18.33 at June 30, 2019.

Six Month Period Results

Net IncomeNet income was $4.1 million for the six month period ended June 30, 2020, a decrease of $0.4 million, or 9.0%, compared to net income of $4.5 million for the six month period ended June 30, 2019.  Diluted earnings per share for the six month period ended June 30, 2020 was $0.88, a decrease of $0.09 per share compared to diluted earnings per share of $0.97 for the same period in 2019.  The decrease in net income was primarily because of the $1.8 million increase in the provision for loan losses between the periods.  The provision for loan losses increased between the periods primarily because of the decrease in recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. Non-interest expenses also increased $0.6 million between the periods primarily because of an increase in expenses for professional services and compensation and benefits.  Net income also decreased because of the $0.4 million decrease in net interest income because of a decrease in the yields earned on interest earning assets as a result of the decrease in the average prime rate between the periods.  These decreases in net income were partially offset by the $2.4 million increase in other non-interest income due primarily to an increase in the gain on sales of mortgage loans between the periods.  The increase in the gain on sales of mortgage loans was due 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 IncomeNet interest income was $14.1 million for the first six months of 2020, a decrease of $0.4 million, or 2.9%, compared to $14.5 million for the same period of 2019.  Interest income was $15.7 million for the first six months of 2020, a decrease of $0.3 million, or 1.9%, from $16.0 million for the first six months of 2019.  Interest income decreased despite the $82.6 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 4.09% for the first six months of 2020, a decrease of 59 basis points from 4.68% for the same period 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 $1.6 million for the first six months of 2020, an increase of $0.1 million, or 7.8%, compared to $1.5 million for the same period of 2019. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.47% for the first six months of 2020, a decrease of 2 basis points from 0.49% for the first six months of 2019. The increase in the interest paid on interest-bearing liabilities was primarily because of the $79.7 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods.  Net interest margin (net interest income divided by average interest-earning assets) for the first six months of 2020 was 3.66%, a decrease of 57 basis points, compared to 4.23% for the first six 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 LossesThe provision for loan losses was $0.8 million for the first six months of 2020, an increase of $1.8 million compared to ($1.0) million for the first six months of 2019.  The provision for loan losses increased between the periods primarily because of the decrease in recoveries received in the current period when compared to the same period of 2019 and also 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 our allowance for loan losses related to the economic environment was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic.  At June 30, 2020, the Bank had $119.1 million of loans with deferred payment agreements for up to six months. The allowance for loan losses is made up of general reserves based on our past loan loss history, specific reserves on impaired loans, and qualitative reserves for other items determined to have a potential impact on future loan losses. The qualitative increase to the allowance for loan losses related to the current economic environment and charge offs were partially offset by improvements in other qualitative reserves and a reduction in the specific reserves required on certain classified loans.  The reduction in the specific reserves was primarily related to one classified loan that had its risk rating upgraded which reduced the required reserve by $0.4 million and two other classified loans that paid off during the first six months of 2020 which reduced the required reserve for these loans by $0.2 million.  Total non-performing assets were $3.2 million at June 30, 2020, an increase of $0.5 million, or 18.5%, from $2.7 million at December 31, 2019.  Non-performing loans increased $0.4 million and foreclosed and repossessed assets increased $0.1 million during the first six months of 2020.

A reconciliation of the Company’s allowance for loan losses for the six month periods ended June 30, 2020 and June 30, 2019 is summarized as follows:

(Dollars in thousands)		2020				2019
Balance at January 1,	$	8,564				8,686
Provision		778				(1,032	)
Charge offs:
Consumer		(45	)			(46	)
Commercial real estate		(730	)			0
Commercial business		0				(869	)
Recoveries		82				1,885
Balance at June 30,	$	8,649				8,624

The $0.7 million of commercial real estate charge offs during the period relates to a commercial property in the transportation industry whose tenant filed for bankruptcy and the appraised value of the property decreased.

Non-Interest Income and ExpenseNon-interest income was $6.1 million for the first six months of 2020, an increase of $2.4 million, or 63.4%, from $3.7 million for the first six months of 2019.  Gain on sales of loans increased $2.5 million between the periods primarily because of an increase in single family loan originations and sales.  Fees and services charges decreased $0.1 million between the periods due primarily to a decrease in the overdraft fees collected.  Other non-interest income decreased slightly due to an increase in the losses realized on equity investments between the periods.  Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others.

Non-interest expense was $13.7 million for the first six months of 2020, an increase of $0.7 million, or 4.9%, from $13.0 million for the first six months of 2019.  Professional services expense increased $0.3 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim.  Compensation and benefits expense increased $0.2 million primarily because of an increase in the accrual for unused employee paid time off.  Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and non-capitalized software 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 because of an increase in mortgage servicing expenses due to the increased refinancing activity of serviced loans between the periods.   Income tax expense was $1.6 million for the first six months of 2020, a decrease of $0.2 million from $1.8 million the first six months of 2019.  The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.   

Return on Assets and EquityReturn on average assets (annualized) for the six month period ended June 30, 2020 was 1.01%, compared to 1.25% for the same six month period in 2019.  Return on average equity (annualized) was 8.65% for the six month period ended June 30, 2020, compared to 10.43% for the same six month period in 2019.

General InformationHMN 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,” “estimate,” “project,” “continues,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to 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 and the appropriateness of the allowance 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
		June 30,			December 31,
(Dollars in thousands)		2020			2019
		(unaudited)
Assets
Cash and cash equivalents	$	65,810			44,399
Securities available for sale:
Mortgage-backed and related securities (amortized cost $48,720 and $54,777)		50,593			54,851
Other marketable securities (amortized cost $46,928 and $52,751)		47,200			52,741
		97,793			107,592
Loans held for sale		5,167			3,606
Loans receivable, net		668,432			596,392
Accrued interest receivable		3,380			2,251
Mortgage servicing rights, net		2,647			2,172
Premises and equipment, net		10,248			10,515
Goodwill		802			802
Core deposit intangible		107			156
Prepaid expenses and other assets		7,276			8,052
Deferred tax asset, net		1,121			1,702
Total assets	$	862,783			777,639
Liabilities and Stockholders’ Equity
Deposits	$	752,759			673,870
Accrued interest payable		271			420
Customer escrows		1,821			2,413
Accrued expenses and other liabilities		9,817			8,288
Total liabilities		764,668			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		40,312			40,365
Retained earnings, subject to certain restrictions		111,623			107,547
Accumulated other comprehensive income		1,545			46
Unearned employee stock ownership plan shares		(1,546	)		(1,643	)
Treasury stock, at cost 4,292,303 and 4,284,840 shares		(53,910	)		(53,758	)
Total stockholders’ equity		98,115			92,648
Total liabilities and stockholders’ equity	$	862,783			777,639

HMN FINANCIAL, INC. AND SUBSIDIARIESConsolidated Statements of Comprehensive Income(unaudited)

		Three Months Ended					Six Months Ended
		June 30,					June 30,
(Dollars in thousands, except per share data)		2020		2019			2020		2019
Interest income:
Loans receivable	$	7,427		7,901			14,667		15,169
Securities available for sale:
Mortgage-backed and related		265		44			554		90
Other marketable		171		304			383		596
Other		20		50			123		176
Total interest income		7,883		8,299			15,727		16,031
Interest expense:
Deposits		745		822			1,637		1,512
Federal Home Loan Bank advances and other borrowings		0		7			0		7
Total interest expense		745		829			1,637		1,519
Net interest income		7,138		7,470			14,090		14,512
Provision for loan losses		318		(1,059	)		778		(1,032	)
Net interest income after provision for loan losses		6,820		8,529			13,312		15,544
Non-interest income:
Fees and service charges		669		785			1,383		1,485
Loan servicing fees		297		318			629		633
Gain on sales of loans		2,364		611			3,498		990
Other		264		307			555		604
Total non-interest income		3,594		2,021			6,065		3,712
Non-interest expense:
Compensation and benefits		3,799		3,737			7,846		7,647
Occupancy and equipment		1,111		1,081			2,234		2,142
Data processing		321		305			629		606
Professional services		447		381			934		653
Other		975		1,063			2,011		1,966
Total non-interest expense		6,653		6,567			13,654		13,014
Income before income tax expense		3,761		3,983			5,723		6,242
Income tax expense		1,070		1,121			1,647		1,761
Net income		2,691		2,862			4,076		4,481
Other comprehensive income, net of tax		224		442			1,499		926
Comprehensive income available  to common shareholders	$	2,915		3,304			5,575		5,407
Basic earnings per share	$	0.58		0.62			0.88		0.97
Diluted earnings per share	$	0.58		0.62			0.88		0.97

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
SELECTED FINANCIAL DATA:		Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)		2020		2019		2020		2019
I. OPERATING DATA:
Interest income	$	7,883		8,299		15,727		16,031
Interest expense		745		829		1,637		1,519
Net interest income		7,138		7,470		14,090		14,512
II. AVERAGE BALANCES:
Assets (1)		840,026		717,942		808,795		721,118
Loans receivable, net		649,778		595,417		627,606		592,391
Securities available for sale (1)		96,241		78,393		99,755		78,592
Interest-earning assets (1)		804,190		688,453		773,950		691,370
Interest-bearing liabilities and non-interest bearing    deposits		737,130		622,773		706,310		626,600
Equity (1)		95,728		87,628		94,805		86,631
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized)		1.29	%	1.60	%	1.01	%	1.25	%
Interest rate spread information:
Average during period		3.54		4.30		3.62		4.19
End of period		3.42		4.01		3.42		4.01
Net interest margin		3.57		4.35		3.66		4.23
Ratio of operating expense to average
total assets (annualized)		3.19		3.67		3.39		3.64
Return on average equity (annualized)		11.31		13.10		8.65		10.43
Efficiency		61.99		69.19		67.74		71.41
		June 30,		December 31,		June 30,
		2020		2019		2019
IV. EMPLOYEE DATA:
Number of full time equivalent employees		174		181		178
V. ASSET QUALITY:
Total non-performing assets	$	3,154		2,661		3,124
Non-performing assets to total assets		0.37	%	0.34	%	0.43	%
Non-performing loans to total loans receivable, net		0.37	%	0.35	%	0.45	%
Allowance for loan losses	$	8,649		8,564		8,624
Allowance for loan losses to total assets		1.00	%	1.10	%	1.19	%
Allowance for loan losses to total loans receivable, net (2)		1.29		1.44		1.45
Allowance for loan losses to non-performing loans		349.92		411.45		323.18
VI. BOOK VALUE PER SHARE:
Book value per share common share	$	20.29		19.13		18.33
		Six Months EndedJune 30, 2020		Year EndedDecember 31,2019		Six Months Ended June 30, 2019
VII. CAPITAL RATIOS:
Stockholders’ equity to total assets, at end of period		11.37	%	11.91	%	12.29	%
Average stockholders’ equity to average assets (1)		11.72		12.06		12.01
Ratio of average interest-earning assets to average   interest-bearing liabilities and non-interest bearing   deposits(1)		109.58		110.18		110.34
Home Federal Savings Bank regulatory capital ratios:
Common equity tier 1 capital ratio		13.56		13.21		13.56
Tier 1 capital leverage ratio		10.50		10.89		11.79
Tier 1 capital ratio		13.56		13.21		13.56
Risk-based capital		14.81		14.46		14.81

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 1.41% as of June 30, 2020.