HMN Financial, Inc. (HMN) (NASDAQ:HMNF): -0- *T 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 *T 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. -0- *T
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 *T
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