HMNF News HMN Financial, Inc. Announces Third Quarter Results
ROCHESTER, Minn.--(BUSINESS WIRE)--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
