HMN Financial (NASDAQ:HMNF)
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HMN Financial, Inc. (NASDAQ:HMNF):
Third Quarter Highlights
Net interest income up $757,000, or 8.5%, over third quarter of 2005
Net interest margin of 4.06%, up 27 basis points over third quarter
of 2005
Provision for loan losses up $5.1 million, or 533.0%, over third
quarter of 2005
Net income of $74,000, down $2.2 million, or 96.8%, from third
quarter of 2005
Diluted earnings per share of $0.02, down $0.55, or 96.5%, from
third quarter of 2005
Year to Date Highlights
Net interest income up $2.4 million, or 9.4%, over first nine
months of 2005
Net interest margin of 4.08%, up 32 basis points over first nine
months of 2005
Provision for loan losses up $5.0 million, or 201.4%, over first
nine months of 2005
Net income of $5.8 million, down $1.8 million, or 24.2%, from first
nine months of 2005
Diluted earnings per share of $1.43, down $0.46, or 24.3%, from
first nine months of 2005
EARNINGS SUMMARY
Three Months Ended
Nine Months Ended
September 30,
September 30,
2006
2005
2006
2005
Net income
$73,512
2,276,401
$5,757,288
7,590,918
Diluted earnings per share
0.02
0.57
1.43
1.89
Return on average assets
0.03
0.92%
0.78
1.03%
Return on average equity
0.30
10.02%
8.07
11.51%
Book value per share
$21.21
19.97
$21.21
19.97
HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $991 million holding
company for Home Federal Savings Bank (the Bank), today reported net
income of $74,000 for the third quarter of 2006, down $2.2 million, or
96.8%, from net income of $2.3 million for the third quarter of 2005.
Diluted earnings per common share for the third quarter of 2006 were
$0.02, down $0.55, or 96.5%, from $0.57 for the third quarter of 2005.
The decrease in net income is due to a $5.1 million increase in the loan
loss provision between the periods as a result of increased commercial
loan charge offs.
Third Quarter Results
Net Interest Income
Net interest income was $9.7 million for the third quarter of 2006, an
increase of $757,000, or 8.5%, compared to $8.9 million for the third
quarter of 2005. Interest income was $17.2 million for the third quarter
of 2006, an increase of $2.0 million, or 12.7%, from $15.2 million for
the same period in 2005. Interest income increased because of an
increase in the average interest rates earned on loans and investments.
Interest rates increased primarily because of the 150 basis point
increase in the prime interest rate between the periods. Increases in
the prime rate, which is the rate that banks charge their prime business
customers, generally increase the rates on adjustable rate consumer and
commercial loans in the portfolio and new loans originated. The increase
in interest income due to increased rates was partially offset by a $59
million decrease in the average outstanding loan portfolio balance
between the periods due to an increase in commercial loan prepayments
and a decrease in loan originations. The average yield earned on
interest-earning assets was 7.19% for the third quarter of 2006, an
increase of 74 basis points from the 6.45% yield for the third quarter
of 2005.
Interest expense was $7.5 million for the third quarter of 2006, an
increase of $1.2 million, or 18.8%, compared to $6.3 million for the
third quarter of 2005. Interest expense increased primarily because of
higher interest rates paid on deposits which were caused by the 150
basis point increase in the federal funds rate between the periods.
Increases in the federal funds rate, which is the rate that banks charge
other banks for short term loans, generally increase the rates banks pay
for deposits. The increase in deposit rates was partially offset by a
change in the mix of funding sources between the periods. The average
outstanding balances of brokered deposits and Federal Home Loan Bank
advances of $86 million were replaced with other less expensive
deposits. The average interest rate paid on interest-bearing liabilities
was 3.34% for the third quarter of 2006, an increase of 52 basis points
from the 2.82% paid for the third quarter of 2005. Net interest margin
(net interest income divided by average interest earning assets) for the
third quarter of 2006 was 4.06%, an increase of 27 basis points,
compared to 3.79% for the third quarter of 2005.
Provision for Loan Losses
The provision for loan losses was $6.0 million for the third quarter of
2006, an increase of $5.1 million, or 533.0%, from $952,000 for the
third quarter of 2005. The provision for loan losses increased primarily
because $7.4 million in related commercial real estate development loans
were charged off during the quarter. Most of the charged off loans had
been downgraded to substandard and classified as non-accruing in the
second quarter of 2006 due to nonperformance. During the third quarter,
it was determined that the properties securing the loans, primarily
developed and undeveloped single family home lots and a golf course,
would be sold at auction in order to liquidate the assets and repay the
loans. The properties were sold late in the third quarter at amounts
substantially less than the recorded amounts due to an unanticipated
decrease in the values of the properties. The loans were personally
guaranteed and the Company is continuing to pursue repayment from the
guarantors. The amounts charged off represent an estimate of the loss
incurred after considering the auction proceeds and reviewing each
guarantor’s financial position and assessing
their ability to repay their personal obligations. Of the $14.4 million
principal balance of these loans at June 30, 2006, $4.2 million is
recorded as non-accruing at September 30, 2006. The Company does not
anticipate making any material future cash expenditures in connection
with these loans except for those relating to possible collection costs
associated with enforcement of the personal guarantees. The increase in
the provision related to loan charge offs was partially offset by a $22
million decrease in outstanding commercial loans during the third
quarter of 2006. Total non-performing assets were $10.3 million at
September 30, 2006, a decrease of $3.2 million, or 23.7%, from $13.5
million at June 30, 2006. Non-performing loans decreased $3.1 million
and foreclosed, repossessed, and other assets decreased $96,000. The
decrease in non-performing loans during the quarter relates primarily to
the charge off of $6.9 million in commercial real estate development
loans described above that were previously classified as non-performing.
The decrease related to the charge offs was partially offset by an
increase in other non-performing commercial real estate loans of $1.3
million, a $524,000 increase in non-performing commercial business
loans, an $895,000 increase in non-performing single family loans, and a
$1.1 million increase in non-performing consumer loans.
Non-Interest Income and Expense
Non-interest income was $1.7 million for the third quarter of 2006, an
increase of $14,000, or 0.8%, from $1.7 million for the same period in
2005. Fees and service charges increased $114,000 between the periods
primarily because of increased retail deposit account activity and fees.
Gains on sales of loans decreased $144,000 due to a decrease in the
single-family mortgage loans that were sold and a decrease in the profit
margins realized on the loans that were sold. Competition in the
single-family loan origination market remained strong and profit margins
were decreased in order to remain competitive. Other non-interest income
increased $59,000 primarily because of a decrease in the losses on the
sale of repossessed assets in the third quarter of 2006 when compared to
the same period in 2005.
Non-interest expense was $5.4 million for the third quarter of 2006, a
decrease of $110,000, or 2.0%, from $5.5 million for the same period of
2005. Compensation expense decreased $75,000 between the periods due to
a decrease in incentive compensation that was partially offset by
increased pension costs. Occupancy expense increased $88,000 primarily
because of the additional costs associated with the new branch and loan
origination offices opened in Rochester in the first quarter of 2006.
Data processing costs increased $28,000 primarily because of an increase
in internet and other banking services provided by a third party
processor between the periods. Other operating expenses decreased
$97,000 primarily because of decreased mortgage loan and commercial
foreclosure costs in the third quarter of 2006 when compared to the same
period in 2005. Because of the pre-tax loss for the quarter, an income
tax benefit of $102,000 was recorded for the third quarter of 2006, a
decrease of $2.0 million, or 105.4%, compared to $1.9 million in expense
for the same period of 2005.
Return on Assets and Equity
Return on average assets for the third quarter of 2006 was 0.03%,
compared to 0.92% for the third quarter of 2005. Return on average
equity was 0.30% for the third quarter of 2006, compared to 10.02% for
the same period of 2005. Book value per common share at September 30,
2006 was $21.21, compared to $19.97 at September 30, 2005.
Nine Month Period Results
Net Income
Net income was $5.8 million for the nine-month period ended September
30, 2006, a decrease of $1.8 million, or 24.2%, compared to $7.6 million
for the nine-month period ended September 30, 2005. Diluted earnings per
common share for the nine-month period in 2006 were $1.43, down $0.46,
or 24.3%, from $1.89 for the same period in 2005.
Net Interest Income
Net interest income was $28.8 million for the first nine months of 2006,
an increase of $2.4 million, or 9.4%, from $26.4 million for the same
period in 2005. Interest income was $50.2 million for the nine-month
period ended September 30, 2006, an increase of $6.0 million, or 13.5%,
from $44.2 million for the same period in 2005. Interest income
increased primarily because of an increase in the average interest rates
earned on loans and investments. Interest rates increased primarily
because of the 150 basis point increase in the prime interest rate
between the periods. The increase in interest income due to increased
rates was partially offset by a $40 million decrease in the average
outstanding loan portfolio balance between the periods due to an
increase in commercial loan prepayments and a decrease in loan
originations. The yield earned on interest-earning assets was 7.10% for
the first nine months of 2006, an increase of 80 basis points from the
6.30% yield for the same period in 2005.
Interest expense was $21.3 million for the nine-month period ended
September 30, 2006, an increase of $3.5 million, or 19.5%, from $17.8
million for the same period in 2005. Interest expense increased
primarily because of higher interest rates paid on deposits which were
caused by the 150 basis point increase in the federal funds rate between
the periods. The increase in deposit rates was partially offset by a
change in the mix of funding sources between the periods. The average
outstanding balances of brokered deposits and Federal Home Loan Bank
advances of $45 million were replaced with other less expensive
deposits. The average interest rate paid on interest-bearing liabilities
was 3.22% for the first nine-months of 2006, an increase of 53 basis
points from the 2.69% paid for the same period of 2005. Net interest
margin (net interest income divided by average interest earning assets)
for the first nine months of 2006 was 4.08%, an increase of 32 basis
points, compared to 3.76% for the same period of 2005.
Provision for Loan Losses
The provision for loan losses was $7.5 million for the first nine-months
of 2006, an increase of $5.0 million, or 201.4%, from $2.5 million for
the same nine-month period in 2005. The provision for loan losses
increased primarily because $7.4 million in related commercial real
estate development loans were charged off during the third quarter as
more fully described above in the third quarter “Provision
for Loan Losses” discussion. The increase in
the provision related to loan charge offs was partially offset by the
$45 million decrease in outstanding commercial loans during the first
nine months of 2006. Total non-performing assets were $10.3 million at
September 30, 2006, an increase of $6.4 million, or 165.1%, from $3.9
million at December 31, 2005. Non-performing loans increased $6.9
million and foreclosed, repossessed and other nonperforming assets
decreased $477,000 during the first nine months of 2006. The increase in
non-performing loans during the nine month period relates primarily to a
$4.3 million increase in non-performing commercial real estate loans, a
$573,000 increase in non-performing commercial business loans, a
$583,000 increase in non-performing single-family mortgage loans, and a
$879,000 increase in non-performing consumer loans.
A reconciliation of the Company’s allowance
for loan losses for the nine-month periods ended September 30, 2006 and
2005 is summarized as follows:
(in thousands)
2006
2005
Balance at January 1,
$8,777,655
$8,995,892
Provision
7,521,000
2,495,000
Charge offs:
Commercial loans
(7,373,569)
(2,614,530)
Consumer loans
(234,323)
(195,020)
Single family mortgage loans
0
(230,934)
Recoveries
55,172
182,921
Balance at September 30,
$8,745,935
$8,633,329
Non-Interest Income and Expense
Non-interest income was $5.0 million for the first nine months of 2006,
an increase of $265,000, or 5.6%, from $4.7 million for the same period
in 2005. Fees and service charges increased $336,000 between the periods
primarily because of increased retail deposit account activity and fees.
Security gains increased $48,000 due to increased security sales. Gains
on sales of loans decreased $212,000 between the periods due to a
decrease in the number of single-family mortgage loans sold and a
decrease in the profit margins realized on the loans that were sold.
Competition in the single-family loan origination market remained strong
and profit margins were lowered in order to remain competitive. Other
non-interest income increased $100,000 primarily because of a decrease
in the losses recognized on repossessed assets in the first nine months
of 2006 when compared to the same period of 2005.
Non-interest expense was $17.1 million for the first nine months of
2006, an increase of $781,000, or 4.8%, from $16.4 million for the same
period in 2005. Compensation expense increased $743,000 primarily
because of increases in payroll due to annual pay increases and pension
costs. Occupancy expense increased $255,000 primarily because of the
additional costs associated with new branch and loan origination offices
opened in Rochester in the first quarter of 2006. Data processing costs
increased $121,000 primarily because of an increase in internet and
other banking services provided by a third party processor between the
periods. Other non-interest expense decreased $269,000 primarily because
of a decrease in mortgage loan expenses and professional fees. Income
tax expense was $3.4 million for the first nine months of 2006, a
decrease of $1.2 million, or 26.5%, compared to $4.6 million for the
same period of 2005. Income tax expense decreased primarily because of a
decrease in taxable income.
Return on Assets and Equity
Return on average assets for the nine-month period ended September 30,
2006 was 0.78%, compared to 1.03% for the same period in 2005. Return on
average equity was 8.07% for the nine-month period ended September 30,
2006, compared to 11.51% for the same period in 2005.
President’s
Statement
“The financial results for the third quarter
were negatively impacted by the commercial loan charge offs that were
recognized,” said HMN President Michael
McNeil. “While we strive to maintain the
highest credit quality in our loan portfolio, unintended results can
occur due to changing credit and market conditions. The charged off
loans related to one real estate development and we believe are not
indicative of the overall commercial loan portfolio. We remain confident
in our business strategy and look forward to improved financial results.”
General Information
HMN Financial, Inc. and Home Federal Savings Bank are headquartered in
Rochester, Minnesota. The Bank operates ten full service offices in
southern Minnesota located in Albert Lea, Austin, LaCrescent, Rochester,
Spring Valley and Winona and two full service offices in Iowa located in
Marshalltown and Toledo. Home Federal Savings Bank also operates loan
origination offices located in Sartell and Rochester, Minnesota. Eagle
Crest Capital Bank, a division of Home Federal Savings Bank, operates
branches in Edina and Rochester, Minnesota.
Safe Harbor Statement
This press release may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements include, but are not limited to those relating to the Company’s
financial expectations for earnings and revenues. A number of factors
could cause actual results to differ materially from the Company’s
assumptions and expectations. These factors include possible legislative
changes and adverse economic, business and competitive developments such
as shrinking interest margins; reduced collateral values; deposit
outflows; reduced demand for financial services and loan products;
changes in accounting policies and guidelines, changes in monetary and
fiscal policies of the federal government or changes in tax laws.
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 filings on form 10-K and Form 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.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
December 31,
2006
2005
(unaudited)
Assets
Cash and cash equivalents
$71,239,159
47,268,795
Securities available for sale:
Mortgage-backed and related securities (amortized cost $6,806,874
and $7,428,504)
6,220,609
6,879,756
Other marketable securities (amortized cost $139,850,065 and
$113,749,841)
139,787,337
112,778,813
146,007,946
119,658,569
Loans held for sale
4,216,500
1,435,141
Loans receivable, net
729,381,119
785,678,461
Accrued interest receivable
4,659,303
4,460,014
Real estate, net
1,033,111
1,214,621
Federal Home Loan Bank stock, at cost
7,955,700
8,364,600
Mortgage servicing rights, net
2,139,158
2,653,635
Premises and equipment, net
11,674,555
11,941,863
Investment in limited partnerships
118,989
141,048
Goodwill
3,800,938
3,800,938
Core deposit intangible
134,367
219,760
Prepaid expenses and other assets
6,697,618
1,854,948
Deferred tax asset
2,199,400
2,544,400
Total assets
$991,257,863
991,236,793
Liabilities and Stockholders’ Equity
Deposits
$741,617,758
731,536,560
Federal Home Loan Bank advances
150,900,000
160,900,000
Accrued interest payable
1,434,822
2,085,573
Customer escrows
1,090,363
1,038,575
Accrued expenses and other liabilities
4,150,742
4,947,816
Total liabilities
899,193,685
900,508,524
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock: ($.01 par value) authorized 500,000
shares; issued and outstanding none
0
0
Common stock ($.01 par value): authorized 11,000,000; issued
shares 9,128,662
91,287
91,287
Additional paid-in capital
57,786,780
58,011,099
Retained earnings, subject to certain restrictions
101,911,810
98,951,777
Accumulated other comprehensive loss
(391,792)
(917,577)
Unearned employee stock ownership plan shares
(4,205,988)
(4,350,999)
Unearned compensation restricted stock awards
0
(182,521)
Treasury stock, at cost 4,785,198 and 4,721,402 shares
(63,127,919)
(60,874,797)
Total stockholders’ equity
92,064,178
90,728,269
Total liabilities and stockholders’ equity
$991,257,863
991,236,793
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2006
2005
2006
2005
Interest income:
Loans receivable
$14,962,250
14,385,320
44,746,541
41,487,679
Securities available for sale:
Mortgage-backed and related
66,408
78,645
205,839
252,701
Other marketable
1,511,616
645,871
3,723,794
1,941,809
Cash equivalents
545,550
114,872
1,254,410
342,812
Other
89,337
13,525
238,142
182,285
Total interest income
17,175,161
15,238,233
50,168,726
44,207,286
Interest expense:
Deposits
5,813,416
4,456,305
16,197,525
12,358,727
Federal Home Loan Bank advances
1,659,472
1,836,269
5,130,207
5,485,461
Total interest expense
7,472,888
6,292,574
21,327,732
17,844,188
Net interest income
9,702,273
8,945,659
28,840,994
26,363,098
Provision for loan losses
6,026,000
952,000
7,521,000
2,495,000
Net interest income after provision for loan losses
3,676,273
7,993,659
21,319,994
23,868,098
Non-interest income:
Fees and service charges
820,075
706,337
2,330,661
1,994,291
Mortgage servicing fees
291,157
305,417
896,091
901,760
Securities gains, net
0
0
48,122
0
Gain on sales of loans
481,209
624,947
1,029,794
1,242,436
Losses in limited partnerships
(6,500)
(6,500)
(22,059)
(20,710)
Other
149,479
90,957
705,106
604,711
Total non-interest income
1,735,420
1,721,158
4,987,715
4,722,488
Non-interest expense:
Compensation and benefits
2,706,431
2,781,366
9,083,004
8,340,048
Occupancy
1,130,755
1,042,417
3,334,439
3,079,131
Deposit insurance premiums
23,348
34,679
79,337
97,204
Advertising
108,013
101,775
346,172
291,448
Data processing
306,542
278,880
882,300
761,719
Amortization of mortgage servicing rights, net
208,202
256,763
661,293
766,885
Other
956,490
1,053,536
2,756,276
3,025,033
Total non-interest expense
5,439,781
5,549,416
17,142,821
16,361,468
Income (loss) before income tax expense
(28,088)
4,165,401
9,164,888
12,229,118
Income tax (benefit) expense
(101,600)
1,889,000
3,407,600
4,638,200
Net income
$73,512
2,276,401
5,757,288
7,590,918
Basic earnings per share
$0.02
0.59
1.50
1.98
Diluted earnings per share
$0.02
0.57
1.43
1.89
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)
2006
2005
2006
2005
I. OPERATING DATA:
Interest income
$17,175
15,238
50,169
44,207
Interest expense
7,473
6,292
21,328
17,844
Net interest income
9,702
8,946
28,841
26,363
II. AVERAGE BALANCES:
Assets (1)
991,379
983,244
989,291
981,123
Loans receivable, net
747,261
807,046
764,322
804,585
Mortgage-backed and related securities (1)
6,916
8,266
7,144
8,790
Interest-earning assets (1)
947,529
937,400
945,385
937,715
Interest-bearing liabilities
887,037
884,155
886,403
885,675
Equity (1)
96,248
90,129
95,339
88,205
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized)
0.03%
0.92%
0.78%
1.03%
Interest rate spread information:
Average during period
3.85
3.63
3.88
3.61
End of period
3.97
3.51
3.97
3.51
Net interest margin
4.06
3.79
4.08
3.76
Ratio of operating expense to average total assets (annualized)
2.18
2.24
2.32
2.23
Return on average equity (annualized)
0.30
10.02
8.07
11.51
Efficiency
47.56
52.03
50.68
52.63
Sept. 30,
Dec. 31,
Sept. 30,
2006
2005
2005
IV. ASSET QUALITY:
Total non-performing assets
$10,294
3,883
4,651
Non-performing assets to total assets
1.04%
0.39%
0.47%
Non-performing loans to total loans receivable, net
1.26%
0.30%
0.37%
Allowance for loan losses
$8,746
8,778
8,633
Allowance for loan losses to total loans receivable, net
1.20%
1.11%
1.06%
Allowance for loan losses to non-performing loans
94.89
376.88
289.51
V. BOOK VALUE PER SHARE:
Book value per share
$21.21
20.59
19.97
Nine Months
Year
Nine Months
Ended
Ended
Ended
Sept 30, 2006
Dec 31, 2005
Sept 30, 2005
VI. CAPITAL RATIOS:
Stockholders’ equity to total assets, at
end of period
9.29%
9.15%
8.96%
Average stockholders’ equity to average
assets (1)
9.64
9.05
8.99
Ratio of average interest-earning assets to average
interest-bearing liabilities (1)
106.65
105.96
105.88
Sept. 30,
Dec. 31,
Sept. 30,
2006
2005
2005
VII. EMPLOYEE DATA:
Number of full time equivalent employees
207
208
206
(1) Average balances were calculated based upon amortized cost without
the market value impact of SFAS 115.
HMN Financial, Inc. (NASDAQ:HMNF):
Third Quarter Highlights
-- Net interest income up $757,000, or 8.5%, over third quarter
of 2005
-- Net interest margin of 4.06%, up 27 basis points over third
quarter of 2005
-- Provision for loan losses up $5.1 million, or 533.0%, over
third quarter of 2005
-- Net income of $74,000, down $2.2 million, or 96.8%, from third
quarter of 2005
-- Diluted earnings per share of $0.02, down $0.55, or 96.5%,
from third quarter of 2005
Year to Date Highlights
-- Net interest income up $2.4 million, or 9.4%, over first nine
months of 2005
-- Net interest margin of 4.08%, up 32 basis points over first
nine months of 2005
-- Provision for loan losses up $5.0 million, or 201.4%, over
first nine months of 2005
-- Net income of $5.8 million, down $1.8 million, or 24.2%, from
first nine months of 2005
-- Diluted earnings per share of $1.43, down $0.46, or 24.3%,
from first nine months of 2005
-0-
*T
EARNINGS SUMMARY Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
--------------------- ---------------------
Net income $73,512 2,276,401 $5,757,288 7,590,918
Diluted earnings per share 0.02 0.57 1.43 1.89
Return on average assets 0.03 0.92% 0.78 1.03%
Return on average equity 0.30 10.02% 8.07 11.51%
Book value per share $21.21 19.97 $21.21 19.97
*T
HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $991 million holding
company for Home Federal Savings Bank (the Bank), today reported net
income of $74,000 for the third quarter of 2006, down $2.2 million, or
96.8%, from net income of $2.3 million for the third quarter of 2005.
Diluted earnings per common share for the third quarter of 2006 were
$0.02, down $0.55, or 96.5%, from $0.57 for the third quarter of 2005.
The decrease in net income is due to a $5.1 million increase in the
loan loss provision between the periods as a result of increased
commercial loan charge offs.
Third Quarter Results
Net Interest Income
Net interest income was $9.7 million for the third quarter of
2006, an increase of $757,000, or 8.5%, compared to $8.9 million for
the third quarter of 2005. Interest income was $17.2 million for the
third quarter of 2006, an increase of $2.0 million, or 12.7%, from
$15.2 million for the same period in 2005. Interest income increased
because of an increase in the average interest rates earned on loans
and investments. Interest rates increased primarily because of the 150
basis point increase in the prime interest rate between the periods.
Increases in the prime rate, which is the rate that banks charge their
prime business customers, generally increase the rates on adjustable
rate consumer and commercial loans in the portfolio and new loans
originated. The increase in interest income due to increased rates was
partially offset by a $59 million decrease in the average outstanding
loan portfolio balance between the periods due to an increase in
commercial loan prepayments and a decrease in loan originations. The
average yield earned on interest-earning assets was 7.19% for the
third quarter of 2006, an increase of 74 basis points from the 6.45%
yield for the third quarter of 2005.
Interest expense was $7.5 million for the third quarter of 2006,
an increase of $1.2 million, or 18.8%, compared to $6.3 million for
the third quarter of 2005. Interest expense increased primarily
because of higher interest rates paid on deposits which were caused by
the 150 basis point increase in the federal funds rate between the
periods. Increases in the federal funds rate, which is the rate that
banks charge other banks for short term loans, generally increase the
rates banks pay for deposits. The increase in deposit rates was
partially offset by a change in the mix of funding sources between the
periods. The average outstanding balances of brokered deposits and
Federal Home Loan Bank advances of $86 million were replaced with
other less expensive deposits. The average interest rate paid on
interest-bearing liabilities was 3.34% for the third quarter of 2006,
an increase of 52 basis points from the 2.82% paid for the third
quarter of 2005. Net interest margin (net interest income divided by
average interest earning assets) for the third quarter of 2006 was
4.06%, an increase of 27 basis points, compared to 3.79% for the third
quarter of 2005.
Provision for Loan Losses
The provision for loan losses was $6.0 million for the third
quarter of 2006, an increase of $5.1 million, or 533.0%, from $952,000
for the third quarter of 2005. The provision for loan losses increased
primarily because $7.4 million in related commercial real estate
development loans were charged off during the quarter. Most of the
charged off loans had been downgraded to substandard and classified as
non-accruing in the second quarter of 2006 due to nonperformance.
During the third quarter, it was determined that the properties
securing the loans, primarily developed and undeveloped single family
home lots and a golf course, would be sold at auction in order to
liquidate the assets and repay the loans. The properties were sold
late in the third quarter at amounts substantially less than the
recorded amounts due to an unanticipated decrease in the values of the
properties. The loans were personally guaranteed and the Company is
continuing to pursue repayment from the guarantors. The amounts
charged off represent an estimate of the loss incurred after
considering the auction proceeds and reviewing each guarantor's
financial position and assessing their ability to repay their personal
obligations. Of the $14.4 million principal balance of these loans at
June 30, 2006, $4.2 million is recorded as non-accruing at September
30, 2006. The Company does not anticipate making any material future
cash expenditures in connection with these loans except for those
relating to possible collection costs associated with enforcement of
the personal guarantees. The increase in the provision related to loan
charge offs was partially offset by a $22 million decrease in
outstanding commercial loans during the third quarter of 2006. Total
non-performing assets were $10.3 million at September 30, 2006, a
decrease of $3.2 million, or 23.7%, from $13.5 million at June 30,
2006. Non-performing loans decreased $3.1 million and foreclosed,
repossessed, and other assets decreased $96,000. The decrease in
non-performing loans during the quarter relates primarily to the
charge off of $6.9 million in commercial real estate development loans
described above that were previously classified as non-performing. The
decrease related to the charge offs was partially offset by an
increase in other non-performing commercial real estate loans of $1.3
million, a $524,000 increase in non-performing commercial business
loans, an $895,000 increase in non-performing single family loans, and
a $1.1 million increase in non-performing consumer loans.
Non-Interest Income and Expense
Non-interest income was $1.7 million for the third quarter of
2006, an increase of $14,000, or 0.8%, from $1.7 million for the same
period in 2005. Fees and service charges increased $114,000 between
the periods primarily because of increased retail deposit account
activity and fees. Gains on sales of loans decreased $144,000 due to a
decrease in the single-family mortgage loans that were sold and a
decrease in the profit margins realized on the loans that were sold.
Competition in the single-family loan origination market remained
strong and profit margins were decreased in order to remain
competitive. Other non-interest income increased $59,000 primarily
because of a decrease in the losses on the sale of repossessed assets
in the third quarter of 2006 when compared to the same period in 2005.
Non-interest expense was $5.4 million for the third quarter of
2006, a decrease of $110,000, or 2.0%, from $5.5 million for the same
period of 2005. Compensation expense decreased $75,000 between the
periods due to a decrease in incentive compensation that was partially
offset by increased pension costs. Occupancy expense increased $88,000
primarily because of the additional costs associated with the new
branch and loan origination offices opened in Rochester in the first
quarter of 2006. Data processing costs increased $28,000 primarily
because of an increase in internet and other banking services provided
by a third party processor between the periods. Other operating
expenses decreased $97,000 primarily because of decreased mortgage
loan and commercial foreclosure costs in the third quarter of 2006
when compared to the same period in 2005. Because of the pre-tax loss
for the quarter, an income tax benefit of $102,000 was recorded for
the third quarter of 2006, a decrease of $2.0 million, or 105.4%,
compared to $1.9 million in expense for the same period of 2005.
Return on Assets and Equity
Return on average assets for the third quarter of 2006 was 0.03%,
compared to 0.92% for the third quarter of 2005. Return on average
equity was 0.30% for the third quarter of 2006, compared to 10.02% for
the same period of 2005. Book value per common share at September 30,
2006 was $21.21, compared to $19.97 at September 30, 2005.
Nine Month Period Results
Net Income
Net income was $5.8 million for the nine-month period ended
September 30, 2006, a decrease of $1.8 million, or 24.2%, compared to
$7.6 million for the nine-month period ended September 30, 2005.
Diluted earnings per common share for the nine-month period in 2006
were $1.43, down $0.46, or 24.3%, from $1.89 for the same period in
2005.
Net Interest Income
Net interest income was $28.8 million for the first nine months of
2006, an increase of $2.4 million, or 9.4%, from $26.4 million for the
same period in 2005. Interest income was $50.2 million for the
nine-month period ended September 30, 2006, an increase of $6.0
million, or 13.5%, from $44.2 million for the same period in 2005.
Interest income increased primarily because of an increase in the
average interest rates earned on loans and investments. Interest rates
increased primarily because of the 150 basis point increase in the
prime interest rate between the periods. The increase in interest
income due to increased rates was partially offset by a $40 million
decrease in the average outstanding loan portfolio balance between the
periods due to an increase in commercial loan prepayments and a
decrease in loan originations. The yield earned on interest-earning
assets was 7.10% for the first nine months of 2006, an increase of 80
basis points from the 6.30% yield for the same period in 2005.
Interest expense was $21.3 million for the nine-month period ended
September 30, 2006, an increase of $3.5 million, or 19.5%, from $17.8
million for the same period in 2005. Interest expense increased
primarily because of higher interest rates paid on deposits which were
caused by the 150 basis point increase in the federal funds rate
between the periods. The increase in deposit rates was partially
offset by a change in the mix of funding sources between the periods.
The average outstanding balances of brokered deposits and Federal Home
Loan Bank advances of $45 million were replaced with other less
expensive deposits. The average interest rate paid on interest-bearing
liabilities was 3.22% for the first nine-months of 2006, an increase
of 53 basis points from the 2.69% paid for the same period of 2005.
Net interest margin (net interest income divided by average interest
earning assets) for the first nine months of 2006 was 4.08%, an
increase of 32 basis points, compared to 3.76% for the same period of
2005.
Provision for Loan Losses
The provision for loan losses was $7.5 million for the first
nine-months of 2006, an increase of $5.0 million, or 201.4%, from $2.5
million for the same nine-month period in 2005. The provision for loan
losses increased primarily because $7.4 million in related commercial
real estate development loans were charged off during the third
quarter as more fully described above in the third quarter "Provision
for Loan Losses" discussion. The increase in the provision related to
loan charge offs was partially offset by the $45 million decrease in
outstanding commercial loans during the first nine months of 2006.
Total non-performing assets were $10.3 million at September 30, 2006,
an increase of $6.4 million, or 165.1%, from $3.9 million at December
31, 2005. Non-performing loans increased $6.9 million and foreclosed,
repossessed and other nonperforming assets decreased $477,000 during
the first nine months of 2006. The increase in non-performing loans
during the nine month period relates primarily to a $4.3 million
increase in non-performing commercial real estate loans, a $573,000
increase in non-performing commercial business loans, a $583,000
increase in non-performing single-family mortgage loans, and a
$879,000 increase in non-performing consumer loans.
A reconciliation of the Company's allowance for loan losses for
the nine-month periods ended September 30, 2006 and 2005 is summarized
as follows:
-0-
*T
(in thousands) 2006 2005
----------- -----------
Balance at January 1, $8,777,655 $8,995,892
Provision 7,521,000 2,495,000
Charge offs:
Commercial loans (7,373,569) (2,614,530)
Consumer loans (234,323) (195,020)
Single family mortgage loans 0 (230,934)
Recoveries 55,172 182,921
----------- -----------
Balance at September 30, $8,745,935 $8,633,329
=========== ===========
*T
Non-Interest Income and Expense
Non-interest income was $5.0 million for the first nine months of
2006, an increase of $265,000, or 5.6%, from $4.7 million for the same
period in 2005. Fees and service charges increased $336,000 between
the periods primarily because of increased retail deposit account
activity and fees. Security gains increased $48,000 due to increased
security sales. Gains on sales of loans decreased $212,000 between the
periods due to a decrease in the number of single-family mortgage
loans sold and a decrease in the profit margins realized on the loans
that were sold. Competition in the single-family loan origination
market remained strong and profit margins were lowered in order to
remain competitive. Other non-interest income increased $100,000
primarily because of a decrease in the losses recognized on
repossessed assets in the first nine months of 2006 when compared to
the same period of 2005.
Non-interest expense was $17.1 million for the first nine months
of 2006, an increase of $781,000, or 4.8%, from $16.4 million for the
same period in 2005. Compensation expense increased $743,000 primarily
because of increases in payroll due to annual pay increases and
pension costs. Occupancy expense increased $255,000 primarily because
of the additional costs associated with new branch and loan
origination offices opened in Rochester in the first quarter of 2006.
Data processing costs increased $121,000 primarily because of an
increase in internet and other banking services provided by a third
party processor between the periods. Other non-interest expense
decreased $269,000 primarily because of a decrease in mortgage loan
expenses and professional fees. Income tax expense was $3.4 million
for the first nine months of 2006, a decrease of $1.2 million, or
26.5%, compared to $4.6 million for the same period of 2005. Income
tax expense decreased primarily because of a decrease in taxable
income.
Return on Assets and Equity
Return on average assets for the nine-month period ended September
30, 2006 was 0.78%, compared to 1.03% for the same period in 2005.
Return on average equity was 8.07% for the nine-month period ended
September 30, 2006, compared to 11.51% for the same period in 2005.
President's Statement
"The financial results for the third quarter were negatively
impacted by the commercial loan charge offs that were recognized,"
said HMN President Michael McNeil. "While we strive to maintain the
highest credit quality in our loan portfolio, unintended results can
occur due to changing credit and market conditions. The charged off
loans related to one real estate development and we believe are not
indicative of the overall commercial loan portfolio. We remain
confident in our business strategy and look forward to improved
financial results."
General Information
HMN Financial, Inc. and Home Federal Savings Bank are
headquartered in Rochester, Minnesota. The Bank operates ten full
service offices in southern Minnesota located in Albert Lea, Austin,
LaCrescent, Rochester, Spring Valley and Winona and two full service
offices in Iowa located in Marshalltown and Toledo. Home Federal
Savings Bank also operates loan origination offices located in Sartell
and Rochester, Minnesota. Eagle Crest Capital Bank, a division of Home
Federal Savings Bank, operates branches in Edina and Rochester,
Minnesota.
Safe Harbor Statement
This press release may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
These statements include, but are not limited to those relating to the
Company's financial expectations for earnings and revenues. A number
of factors could cause actual results to differ materially from the
Company's assumptions and expectations. These factors include possible
legislative changes and adverse economic, business and competitive
developments such as shrinking interest margins; reduced collateral
values; deposit outflows; reduced demand for financial services and
loan products; changes in accounting policies and guidelines, changes
in monetary and fiscal policies of the federal government or changes
in tax laws. 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 filings on form 10-K and Form
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.
-0-
*T
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
----------------------------------------------------------------------
September 30, December 31,
2006 2005
(unaudited)
----------------------------------------------------------------------
Assets
Cash and cash equivalents................... $71,239,159 47,268,795
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $6,806,874 and
$7,428,504)............................. 6,220,609 6,879,756
Other marketable securities (amortized
cost $139,850,065 and $113,749,841)..... 139,787,337 112,778,813
------------- ------------
146,007,946 119,658,569
------------- ------------
Loans held for sale......................... 4,216,500 1,435,141
Loans receivable, net....................... 729,381,119 785,678,461
Accrued interest receivable................. 4,659,303 4,460,014
Real estate, net............................ 1,033,111 1,214,621
Federal Home Loan Bank stock, at cost....... 7,955,700 8,364,600
Mortgage servicing rights, net.............. 2,139,158 2,653,635
Premises and equipment, net................. 11,674,555 11,941,863
Investment in limited partnerships.......... 118,989 141,048
Goodwill.................................... 3,800,938 3,800,938
Core deposit intangible..................... 134,367 219,760
Prepaid expenses and other assets........... 6,697,618 1,854,948
Deferred tax asset.......................... 2,199,400 2,544,400
------------- ------------
Total assets..............................$991,257,863 991,236,793
============= ============
Liabilities and Stockholders' Equity
Deposits....................................$741,617,758 731,536,560
Federal Home Loan Bank advances............. 150,900,000 160,900,000
Accrued interest payable.................... 1,434,822 2,085,573
Customer escrows............................ 1,090,363 1,038,575
Accrued expenses and other liabilities...... 4,150,742 4,947,816
------------- ------------
Total liabilities......................... 899,193,685 900,508,524
------------- ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: ($.01 par value)
authorized 500,000 shares; issued and
outstanding none......................... 0 0
Common stock ($.01 par value): authorized
11,000,000; issued shares 9,128,662...... 91,287 91,287
Additional paid-in capital.................. 57,786,780 58,011,099
Retained earnings, subject to certain
restrictions............................... 101,911,810 98,951,777
Accumulated other comprehensive loss........ (391,792) (917,577)
Unearned employee stock ownership plan
shares..................................... (4,205,988) (4,350,999)
Unearned compensation restricted stock
awards..................................... 0 (182,521)
Treasury stock, at cost 4,785,198 and
4,721,402 shares........................... (63,127,919) (60,874,797)
------------- ------------
Total stockholders' equity................ 92,064,178 90,728,269
------------- ------------
Total liabilities and stockholders' equity..$991,257,863 991,236,793
============= ============
*T
-0-
*T
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
----------------------------------------------------------------------
Interest income:
Loans receivable....$14,962,250 14,385,320 44,746,541 41,487,679
Securities available
for sale:
Mortgage-backed
and related..... 66,408 78,645 205,839 252,701
Other marketable. 1,511,616 645,871 3,723,794 1,941,809
Cash equivalents.... 545,550 114,872 1,254,410 342,812
Other............... 89,337 13,525 238,142 182,285
------------ ----------- ----------- -----------
Total interest
income.......... 17,175,161 15,238,233 50,168,726 44,207,286
------------ ----------- ----------- -----------
Interest expense:
Deposits............ 5,813,416 4,456,305 16,197,525 12,358,727
Federal Home Loan
Bank advances...... 1,659,472 1,836,269 5,130,207 5,485,461
------------ ----------- ----------- -----------
Total interest
expense.......... 7,472,888 6,292,574 21,327,732 17,844,188
------------ ----------- ----------- -----------
Net interest
income........... 9,702,273 8,945,659 28,840,994 26,363,098
Provision for loan
losses............... 6,026,000 952,000 7,521,000 2,495,000
------------ ----------- ----------- -----------
Net interest
income after
provision for
loan losses...... 3,676,273 7,993,659 21,319,994 23,868,098
------------ ----------- ----------- -----------
Non-interest income:
Fees and service
charges............ 820,075 706,337 2,330,661 1,994,291
Mortgage servicing
fees............... 291,157 305,417 896,091 901,760
Securities gains,
net................ 0 0 48,122 0
Gain on sales of
loans.............. 481,209 624,947 1,029,794 1,242,436
Losses in limited
partnerships....... (6,500) (6,500) (22,059) (20,710)
Other............... 149,479 90,957 705,106 604,711
------------ ----------- ----------- -----------
Total non-interest
income........... 1,735,420 1,721,158 4,987,715 4,722,488
------------ ----------- ----------- -----------
Non-interest expense:
Compensation and
benefits........... 2,706,431 2,781,366 9,083,004 8,340,048
Occupancy........... 1,130,755 1,042,417 3,334,439 3,079,131
Deposit insurance
premiums........... 23,348 34,679 79,337 97,204
Advertising......... 108,013 101,775 346,172 291,448
Data processing..... 306,542 278,880 882,300 761,719
Amortization of
mortgage servicing
rights, net........ 208,202 256,763 661,293 766,885
Other............... 956,490 1,053,536 2,756,276 3,025,033
------------ ----------- ----------- -----------
Total non-interest
expense.......... 5,439,781 5,549,416 17,142,821 16,361,468
------------ ----------- ----------- -----------
Income (loss)
before income tax
expense.......... (28,088) 4,165,401 9,164,888 12,229,118
Income tax (benefit)
expense.............. (101,600) 1,889,000 3,407,600 4,638,200
------------ ----------- ----------- -----------
Net income........ $73,512 2,276,401 5,757,288 7,590,918
============ =========== =========== ===========
Basic earnings per
share................ $0.02 0.59 1.50 1.98
============ =========== =========== ===========
Diluted earnings per
share................ $0.02 0.57 1.43 1.89
============ =========== =========== ===========
*T
-0-
*T
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) 2006 2005 2006 2005
----------------------------------------------------------------------
I. OPERATING DATA:
Interest income............. $17,175 15,238 50,169 44,207
Interest expense............ 7,473 6,292 21,328 17,844
Net interest income......... 9,702 8,946 28,841 26,363
II. AVERAGE BALANCES:
Assets (1).................. 991,379 983,244 989,291 981,123
Loans receivable, net....... 747,261 807,046 764,322 804,585
Mortgage-backed and related
securities (1)............. 6,916 8,266 7,144 8,790
Interest-earning assets (1). 947,529 937,400 945,385 937,715
Interest-bearing liabilities 887,037 884,155 886,403 885,675
Equity (1).................. 96,248 90,129 95,339 88,205
III. PERFORMANCE RATIOS: (1)
Return on average assets
(annualized)............... 0.03% 0.92% 0.78% 1.03%
Interest rate spread
information:
Average during period.... 3.85 3.63 3.88 3.61
End of period............ 3.97 3.51 3.97 3.51
Net interest margin......... 4.06 3.79 4.08 3.76
Ratio of operating expense
to average total assets
(annualized)............... 2.18 2.24 2.32 2.23
Return on average equity
(annualized)............... 0.30 10.02 8.07 11.51
Efficiency.................. 47.56 52.03 50.68 52.63
----------------------------
Sept. 30, Dec. 31, Sept. 30,
2006 2005 2005
----------------------------
IV. ASSET QUALITY:
Total non-performing assets. $10,294 3,883 4,651
Non-performing assets to
total assets............... 1.04% 0.39% 0.47%
Non-performing loans to
total loans receivable, net 1.26% 0.30% 0.37%
Allowance for loan losses... $8,746 8,778 8,633
Allowance for loan losses to
total loans receivable, net 1.20% 1.11% 1.06%
Allowance for loan losses to
non-performing loans....... 94.89 376.88 289.51
V. BOOK VALUE PER SHARE:
Book value per share........ $21.21 20.59 19.97
----------------------------
Nine Nine
Months Year Months
Ended Ended Ended
Sept 30, Dec 31, Sept 30,
2006 2005 2005
----------------------------
VI. CAPITAL RATIOS:
Stockholders' equity to
total assets, at end of
period..................... 9.29% 9.15% 8.96%
Average stockholders' equity
to average assets (1)...... 9.64 9.05 8.99
Ratio of average interest-
earning assets to average
interest-bearing
liabilities (1)............ 106.65 105.96 105.88
----------------------------
Sept. 30, Dec. 31, Sept. 30,
2006 2005 2005
----------------------------
VII. EMPLOYEE DATA:
Number of full time
equivalent employees....... 207 208 206
----------------------------------------------------------------------
*T
(1) Average balances were calculated based upon amortized cost
without the market value impact of SFAS 115.