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.
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