HMNF News HMN Financial, Inc. Announces Second Quarter Results
ROCHESTER, Minn.--(BUSINESS WIRE)--July 20, 2006--HMN Financial, Inc. (HMN) (NASDAQ:HMNF):
Second Quarter Highlights
-- Net income of $2.9 million, up $444,000, or 17.8%, over
second quarter 2005
-- Diluted earnings per share of $0.73, up $0.11, over second
quarter of 2005
-- Net interest income up $1.0 million, or 11.5%, over second
quarter of 2005
-- Net interest margin of 4.08%, up 38 basis points over
second quarter of 2005
-- Income tax expense up $436,000, or 31.3%, over second
quarter of 2005
Year to Date Highlights
-- Net income of $5.7 million, up $369,000, or 6.9%, over
first six months of 2005
-- Diluted earnings per share of $1.41, up $0.08, over first
six months of 2005
-- Net interest income up $1.7 million, or 9.9%, over first
six months of 2005
-- Net interest margin of 4.09%, up 34 basis points over
first six months of 2005
-- Income tax expense up $760,000, or 27.6%, over first six
months of 2005
Earnings Summary
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net income $2,943,370 2,499,453 $5,683,776 5,314,517
Diluted earnings
per share 0.73 0.62 1.41 1.33
Return on average
assets 1.18% 1.01% 1.16% 1.09%
Return on average
equity 12.34% 11.38% 12.08% 12.29%
Book value per
share $21.38 $19.64 $21.38 $19.64
HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.9 million for the second quarter of 2006, up $444,000, or 17.8%, over net income of $2.5 million for the second quarter of 2005. Diluted earnings per common share for the second quarter of 2006 were $0.73, up $0.11, or 17.7%, from $0.62 for the second quarter of 2005.
Second Quarter Results
Net Interest Income
Net interest income was $9.7 million for the second quarter of 2006, an increase of $1.0 million, or 11.5%, compared to $8.7 million for the second quarter of 2005. Interest income was $17.0 million for the second quarter of 2006, an increase of $2.2 million, or 15.2%, from $14.8 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 200 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 on new loans originated. The increase in interest income due to increased rates was partially offset by a $37 million decrease in the average outstanding loan portfolio balances between the periods. The average yield earned on interest-earning assets was 7.11% for the second quarter of 2006, an increase of 86 basis points from the 6.25% average yield for the second quarter of 2005.
Interest expense was $7.3 million for the second quarter of 2006, an increase of $1.3 million, or 20.5%, compared to $6.0 million for the second quarter of 2005. Interest expense increased because of the higher interest rates paid on deposits which were caused by the 200 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 average interest rate paid on interest-bearing liabilities was 3.23% for the second quarter of 2006, an increase of 53 basis points from the 2.70% average interest rate paid in the second quarter of 2005. Net interest margin (net interest income divided by average interest earning assets) for the second quarter of 2006 was 4.08%, an increase of 38 basis points, compared to 3.70% for the second quarter of 2005.
Provision for Loan Losses
The provision for loan losses was $980,000 for the second quarter of 2006, an increase of $73,000, or 8.0%, from $907,000 for the second quarter of 2005. The provision for loan losses increased primarily because $10.0 million of related commercial real estate loans were downgraded and classified as non-accruing during the quarter. These loans are collateralized by real estate and are guaranteed by the borrowers. The increase in the provision related to the commercial loan risk rating downgrades was partially offset by a decrease in the provision related to the $11 million reduction in the commercial loan portfolio in the second quarter of 2006 compared to the $12 million in growth that was experienced in the second quarter of 2005. The reduction in loan growth was the result of management's decision not to pursue long-term, low fixed-rate commercial loans in an environment of rising short-term interest rates. Total non-performing assets were $13.5 million at June 30, 2006, an increase of $9.6 million from $3.9 million at December 31, 2005. Non-performing loans increased $10.0 million, foreclosed and repossessed assets decreased $275,000 and other non performing assets decreased $106,000 during the period.
Non-Interest Income and Expense
Non-interest income was $1.8 million for the second quarter of 2006, an increase of $191,000, or 12.2%, from $1.6 million for the same period in 2005. Fees and service charges increased $110,000 between the periods primarily because of increased retail deposit account activity and fees. Security gains increased $48,000 due to increased security sales. Gain on sale of loans decreased $22,000 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 has increased as the overall market has slowed and profit margins have been lowered in order to remain competitive and maintain origination volumes. Other non-interest income increased $59,000 primarily because of increased revenues from the sale of uninsured investment products.
Non-interest expense was $5.8 million for the second quarter of 2006, an increase of $242,000, or 4.4%, from $5.6 million for the same period of 2005. Compensation expense increased $333,000 primarily because of annual payroll increases and increased pension costs. Occupancy expense increased $62,000 due primarily to additional costs associated with new branch and loan origination offices opened in Rochester in the first quarter of 2006. Data processing costs increased $42,000 due to increases in the internet and other banking services provided by the Bank's third party processor between the periods. Other non-interest expense decreased $152,000 primarily because of decreased mortgage loan expenses and professional fees incurred during the second quarter of 2006. Income tax expense increased $436,000 between the periods due to an increase in taxable income and an effective tax rate that increased from 35.8% for the second quarter of 2005 to 38.3% for the second quarter of 2006. The increase in the effective tax rate was primarily the result of state tax law changes that were enacted in the third quarter of 2005.
Return on Assets and Equity
Return on average assets for the second quarter of 2006 was 1.18%, compared to 1.01% for the second quarter of 2005. Return on average equity was 12.34% for the second quarter of 2006, compared to 11.38% for the same quarter in 2005. Book value per common share at June 30, 2006 was $21.38, compared to $19.64 at June 30, 2005.
Six Month Period Results
Net Income
Net income was $5.7 million for the six month period ended June 30, 2006, an increase of $369,000, or 6.9%, compared to $5.3 million for the six month period ended June 30, 2005. Diluted earnings per share for the six month period in 2006 were $1.41, up $0.08, or 6.0%, from $1.33 for the same period in 2005.
Net Interest Income
Net interest income was $19.1 million for the first six months of 2006, an increase of $1.7 million, or 9.9%, from $17.4 million for the same period in 2005. Interest income was $33.0 million for the six month period ended June 30, 2006, an increase of $4.0 million, or 13.9%, from $29.0 million for the same six month 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 200 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 $30 million decrease in the average outstanding loan portfolio balance between the periods. The average yield earned on interest-earning assets was 7.05% for the first six months of 2006, an increase of 82 basis points from the 6.23% average yield for the first six months of 2005.
Interest expense was $13.9 million for the first six months of 2006, an increase of $2.3 million, or 19.9%, compared to $11.6 million for the first six months of 2005. Interest expense increased because of the higher interest rates paid on deposits which were caused by the 200 basis point increase in the federal funds rate between the periods. The average interest rate paid on interest-bearing liabilities was 3.15% for the first six months of 2006, an increase of 52 basis points from the 2.63% average interest rate paid in the first six months of 2005. Net interest margin (net interest income divided by average interest earning assets) for the first six months of 2006 was 4.09%, an increase of 34 basis points, compared to 3.75% for the first six months of 2005.
Provision for Loan Losses
The provision for loan losses was $1.5 million for the first six months of 2006, a decrease of $48,000, from $1.5 million for the same six month period in 2005. The provision for loan losses decreased primarily because of the $23 million reduction in the commercial loan portfolio in the first six months of 2006 compared to the $52 million in growth that was experienced in the first six months of 2005. The reduction in loan growth was the result of management's decision not to pursue long-term, low fixed-rate commercial loans in an environment of rising short-term interest rates. The decrease in the provision related to the reduced loan growth was partially offset by an increase in the provision due to increased commercial loan risk rating downgrades in the first six months of 2006 when compared to the same period of 2005. Total non-performing assets were $13.5 million at June 30, 2006, an increase of $9.6 million from $3.9 million at December 31, 2005. Non-performing loans increased $10.0 million, foreclosed and repossessed assets decreased $275,000 and other non performing assets decreased $106,000 during the period.
Non-Interest Income and Expense
Non-interest income was $3.3 million for the first six months of 2006, an increase of $251,000, or 8.4%, from $3.0 million for the same period in 2005. Fees and service charges increased $223,000 between the periods primarily because of increased retail deposit account activity and fees. Security gains increased $48,000 due to increased security sales. Gain on sale of loans decreased $69,000 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 has increased as the overall market has slowed and profit margins have been lowered in order to remain competitive and maintain origination volumes. Other non-interest income increased $42,000 primarily because of increased revenues from the sale of uninsured investment products.
Non-interest expense was $11.7 million for the first six months of 2006, an increase of $891,000, or 8.2%, from $10.8 million for the same period of 2005. Compensation expense increased $818,000 primarily because of annual payroll increases and increased pension costs. Occupancy expense increased $167,000 due primarily to additional costs associated with new branch and loan origination offices opened in Rochester in the first quarter of 2006. Data processing costs increased $93,000 due to increases in the internet and other banking services provided by the Bank's third party processor between the periods. Other non-interest expense decreased $172,000 primarily because of a decrease in mortgage loan expenses and professional fees. Income tax expense increased $760,000 between the periods due to an increase in taxable income and an effective tax rate that increased from 34.1% for the first six months of 2005 to 38.2% for the first six months of 2006. The increase in the effective tax rate was primarily the result of state tax law changes that were enacted in the third quarter of 2005.
Return on Assets and Equity
Return on average assets for the six month period ended June 30, 2006 was 1.16%, compared to 1.09% for the same period in 2005. Return on average equity was 12.08% for the six month period ended in 2006, compared to 12.29% for the same period in 2005.
President's Statement
"Net earnings continued to improve despite the challenging interest rate environment," said HMN President, Mike McNeil. "The increase in net income was primarily the result of an improved net interest margin that reflected an improved deposit mix. We believe that actively managing our net interest margin will continue to have a positive effect on earnings."
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 and the management of net interest margin. 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; 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 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
----------------------------------------------------------------------
June 30, December 31,
2006 2005
----------------------------------------------------------------------
(unaudited)
Assets
Cash and cash equivalents................ $62,608,169 47,268,795
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $7,055,100 and
$7,428,504)......................... 6,267,160 6,879,756
Other marketable securities
(amortized cost $139,615,255 and
$113,749,841)...................... 138,953,180 112,778,813
--------------- ------------
145,220,340 119,658,569
--------------- ------------
Loans held for sale...................... 7,128,570 1,435,141
Loans receivable, net.................... 757,621,273 785,678,461
Accrued interest receivable.............. 4,396,521 4,460,014
Real estate, net......................... 1,101,060 1,214,621
Federal Home Loan Bank stock, at cost.... 8,400,700 8,364,600
Mortgage servicing rights, net........... 2,296,433 2,653,635
Premises and equipment, net.............. 12,025,027 11,941,863
Investment in limited partnerships....... 125,489 141,048
Goodwill................................. 3,800,938 3,800,938
Core deposit intangible, net............. 162,831 219,760
Prepaid expenses and other assets........ 2,530,750 1,854,948
Deferred tax asset....................... 2,516,800 2,544,400
--------------- ------------
Total assets......................... $1,009,934,901 991,236,793
=============== ============
Liabilities and Stockholders' Equity
Deposits................................. $748,355,396 731,536,560
Federal Home Loan Bank advances.......... 160,900,000 160,900,000
Accrued interest payable................. 1,568,173 2,085,573
Advance payments by borrowers for taxes
and insurance........................... 779,722 1,038,575
Accrued expenses and other liabilities... 4,707,906 4,947,816
--------------- ------------
Total liabilities.................... 916,311,197 900,508,524
--------------- ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock ($.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............... 57,689,740 58,011,099
Retained earnings, subject to certain
restrictions............................ 102,784,471 98,951,777
Accumulated other comprehensive (loss)... (875,415) (917,577)
Unearned employee stock ownership plan
shares.................................. (4,254,285) (4,350,999)
Unearned compensation restricted stock
awards.................................. 0 (182,521)
Treasury stock, at cost 4,748,698 and
4,721,402 shares........................ (61,812,094) (60,874,797)
--------------- ------------
Total stockholders' equity........... 93,623,704 90,728,269
--------------- ------------
Total liabilities and stockholders'
equity.................................. $1,009,934,901 991,236,793
=============== ============
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2006 2005 2006 2005
------------ ----------- ----------- -----------
Interest income:
Loans receivable.. $15,081,511 13,769,340 29,784,291 27,102,359
Securities
available for
sale:
Mortgage-backed
and related... 68,869 84,288 139,431 174,056
Other
marketable.... 1,322,547 654,182 2,212,178 1,295,938
Cash equivalents.. 452,434 175,671 708,860 227,940
Other............. 85,984 89,232 148,805 168,760
------------ ----------- ----------- -----------
Total interest
income........ 17,011,345 14,772,713 32,993,565 28,969,053
------------ ----------- ----------- -----------
Interest expense:
Deposits.......... 5,516,428 4,199,791 10,384,109 7,902,422
Federal Home Loan
Bank advances.... 1,744,879 1,826,501 3,470,735 3,649,192
------------ ----------- ----------- -----------
Total interest
expense....... 7,261,307 6,026,292 13,854,844 11,551,614
------------ ----------- ----------- -----------
Net interest
income........ 9,750,038 8,746,421 19,138,721 17,417,439
Provision for loan
losses.............. 980,000 907,000 1,495,000 1,543,000
------------ ----------- ----------- -----------
Net interest
income after
provision for
loan losses... 8,770,038 7,839,421 17,643,721 15,874,439
------------ ----------- ----------- -----------
Non-interest income:
Fees and service
charges.......... 795,808 685,357 1,510,586 1,287,954
Mortgage servicing
fees............. 301,259 303,363 604,934 596,343
Securities gains,
net.............. 48,122 0 48,122 0
Gains on sales of
loans............ 302,608 324,173 548,585 617,489
Losses in limited
partnerships (9,059) (6,500) (15,559) (14,210)
Other............. 327,223 268,206 555,627 513,754
------------ ----------- ----------- -----------
Total non-
interest
income........ 1,765,961 1,574,599 3,252,295 3,001,330
------------ ----------- ----------- -----------
Non-interest expense:
Compensation and
benefits......... 3,117,702 2,784,578 6,376,573 5,558,682
Occupancy......... 1,103,392 1,041,460 2,203,684 2,036,714
Deposit insurance
premiums......... 24,792 34,619 55,989 62,525
Advertising....... 107,501 105,765 238,159 189,673
Data processing 287,043 245,351 575,758 482,839
Amortization of
mortgage
servicing rights,
net.......... 236,551 271,089 453,091 510,122
Other............. 886,648 1,038,805 1,799,786 1,971,497
------------ ----------- ----------- -----------
Total non-
interest
expense....... 5,763,629 5,521,667 11,703,040 10,812,052
------------ ----------- ----------- -----------
Income before
income tax
expense....... 4,772,370 3,892,353 9,192,976 8,063,717
Income tax expense... 1,829,000 1,392,900 3,509,200 2,749,200
------------ ----------- ----------- -----------
Net income..... $2,943,370 2,499,453 5,683,776 5,314,517
============ =========== =========== ===========
Basic earnings per
share............... $0.77 0.65 1.48 1.39
============ =========== =========== ===========
Diluted earnings per
share............... $0.73 0.62 1.41 1.33
============ =========== =========== ===========
HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
----------------------------------------------------------------------
SELECTED FINANCIAL DATA: Three Months Ended
June 30,
(dollars in thousands, except per share data) 2006 2005
----------------------------------------------------------------------
I. OPERATING DATA:
Interest income........................... $17,011 14,773
Interest expense.......................... 7,261 6,027
Net interest income....................... 9,750 8,746
II. AVERAGE BALANCES:
Assets (1)............................... 1,003,183 991,455
Loans receivable, net.................... 767,774 806,267
Mortgage-backed and related securities
(1)..................................... 7,162 8,823
Interest-earning assets (1).............. 959,477 948,304
Interest-bearing liabilities............. 900,825 896,210
Equity (1)............................... 95,690 88,100
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized).... 1.18% 1.01%
Interest rate spread information:
Average during period................. 3.88 3.55
End of period......................... 3.92 3.65
Net interest margin...................... 4.08 3.70
Ratio of operating expense to average....
total assets (annualized).............. 2.30 2.23
Return on average equity (annualized).... 12.34 11.38
Efficiency............................... 50.05 53.50
----------------------------------------------------------------------
SELECTED FINANCIAL DATA: Six Months Ended
June 30,
(dollars in thousands, except per share data) 2006 2005
----------------------------------------------------------------------
I. OPERATING DATA:
Interest income........................... 32,994 28,969
Interest expense.......................... 13,855 11,552
Net interest income....................... 19,139 17,417
II. AVERAGE BALANCES:
Assets (1)............................... 988,229 980,045
Loans receivable, net 772,993 803,334
Mortgage-backed and related securities
(1)..................................... 7,261 9,056
Interest-earning assets (1).............. 944,295 937,875
Interest-bearing liabilities............. 886,081 886,447
Equity (1)............................... 94,876 87,227
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized).... 1.16% 1.09 %
Interest rate spread information:
Average during period................. 3.89 3.60
End of period......................... 3.92 3.65
Net interest margin...................... 4.09 3.75
Ratio of operating expense to average....
total assets (annualized).............. 2.39 2.22
Return on average equity (annualized).... 12.08 12.29
Efficiency............................... 52.27 52.95
-----------------------------------------
June 30, December 31, June 30,
2006 2005 2005
-----------------------------------------
IV. ASSET QUALITY:
Total non-performing
assets.............. $13,491 3,883 12,475
Non-performing assets
to total assets..... 1.34% 0.39% 1.27%
Non-performing loans
to total loans
receivable, net.... 1.62% 0.30% 1.38%
Allowance for loan
losses..... $10,216 8,778 10,223
Allowance for loan
losses to total loans
receivable, net...... 1.35% 1.11% 1.25%
Allowance for loan
losses to
non-performing
loans............. 82.93 376.88 90.26
V. BOOK VALUE PER SHARE:
Book value per share. $21.38 20.59 19.64
-----------------------------------------
Six Months Year Ended Six Months
Ended Dec 31, 2005 Ended
June 30, 2006 June 30, 2005
-----------------------------------------
VI. CAPITAL RATIOS:
Stockholders' equity
to total assets, at
end of period....... 9.27% 9.15% 8.78%
Average stockholders'
equity to average
assets (1).......... 9.60 9.05 8.90
Ratio of average
interest-earning
assets to...........
average interest-
bearing
liabilities (1)... 106.57 105.96 105.80
-----------------------------------------
June 30, December 31, June 30,
2006 2005 2005
-----------------------------------------
VII. EMPLOYEE DATA:
Number of full time
equivalent employees 212 208 209
(1) Average balances were calculated based upon amortized cost without
the market value impact of SFAS 115
