HMNF HMN Financial Inc

HMN Financial, Inc. (NASDAQ:HMNF): EARNINGS SUMMARY � Three Months Ended � Year Ended December 31, December 31, (dollars in thousands, except per share amounts) 2007 � � 2006 2007 � � 2006 Net income $ 2,775 � 2,670 $ 11,274 � 8,428 Diluted earnings per share 0.73 0.67 2.89 2.10 Return on average assets 0.98 % 1.11 1.03 % 0.86 Return on average equity 11.11 % 11.18 11.53 % 8.85 Book value per share $ 23.50 21.58 $ 23.50 21.58 HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $1.1 billion holding company for Home Federal Savings Bank, today reported net income of $2.8 million for the fourth quarter of 2007, up $105,000, or 3.9%, from net income of $2.7 million for the fourth quarter of 2006. Diluted earnings per common share for the fourth quarter of 2007 were $0.73, up $0.06, or 9.0%, from $0.67 for the fourth quarter of 2006. Fourth Quarter Results Net Interest Income Net interest income was $9.2 million for the fourth quarter of 2007, a decrease of $596,000, or 6.1%, compared to $9.8 million for the fourth quarter of 2006. Interest income was $19.3 million for the fourth quarter of 2007, an increase of $1.9 million, or 11.4%, from $17.4 million for the same period in 2006. Interest income increased primarily because average interest earning assets increased $170 million between the periods and because the average yield earned on investments increased. The increase in average interest earning assets was the result of a $102 million increase in the average outstanding loans and a $68 million increase in the average outstanding cash and investments between the periods. The increase in outstanding loans was primarily in commercial business and commercial construction loans. The increase in cash and investments was the result of obtaining collateralized deposit relationships that required the purchase of additional investments in order to collateralize the deposits and maintain adequate liquidity. The average yield on investments increased 37 basis points between the periods primarily because maturing investments were reinvested at higher rates. The average yield earned on interest-earning assets was 7.08% for the fourth quarter of 2007, a decrease of 46 basis points from the 7.54% average yield for the fourth quarter of 2006. Interest expense was $10.1 million for the fourth quarter of 2007, an increase of $2.6 million, or 34.3%, from $7.5 million for the fourth quarter of 2006. Interest expense increased primarily because of an increase in the outstanding commercial money market accounts and certificates of deposits. Interest expense also increased because of higher interest rates paid on these deposits. The increased rates were the result of the 100 basis point increase in federal funds rate that occurred throughout the first six months of 2006 that was not fully reflected in deposit rates until the second half of 2006. Increases in the federal funds rate, which is the rate that banks charge other banks for short term loans, generally have a lagging effect and increase the rates banks pay for deposits. The average interest rate paid on interest-bearing liabilities was 3.96% for the fourth quarter of 2007, an increase of 48 basis points from the 3.48% average rate paid in the fourth quarter of 2006. Net interest margin (net interest income divided by average interest earning assets) for the fourth quarter of 2007 was 3.39%, a decrease of 89 basis points, compared to 4.28% for the fourth quarter of 2006. Provision for Loan Losses The provision for loan losses was $1.5 million for the fourth quarter of 2007, an increase of $137,000, or 10.1%, from $1.4 million for the fourth quarter of 2006. The provision for loan losses increased primarily because of an increase in the allowance required for risk rated commercial loans in the fourth quarter of 2007 when compared to the same period in 2006. The increase was primarily due to decreases in the estimated value of the real estate supporting residential development loans. Total non-performing assets were $21.9 million at December 31, 2007, an increase of $1.6 million, or 8.2%, from $20.3 million at September 30, 2007. Non-performing loans increased $1.9 million to $19.7 million and foreclosed and repossessed assets decreased $258,000 to $2.2 million primarily due to the sale of a foreclosed commercial property. The non-performing loan activity for the quarter included $7.8 million in additional non-performing loans primarily related to residential development loans, $834,000 in loan charge offs, $876,000 in loans that were reclassified to performing, $932,000 in loans that were transferred into real estate owned, and $3.3 million in principal payments were received. Non-Interest Income and Expense Non-interest income was $2.6 million for the fourth quarter of 2007, an increase of $1.1 million, or 77.9%, from $1.5 million for the fourth quarter of 2006. Fees and service charges increased $53,000 between the periods primarily because of increased retail deposit account activity and fees. Gain on sales of loans increased $100,000 between the periods due primarily to an increase in the number of single family loans that were sold. Other non-interest income increased $990,000 between the periods due primarily to a gain of $959,000 on the sale of a repossessed commercial property. Non-interest expense was $5.8 million for the fourth quarter of 2007, an increase of $316,000, or 5.8%, from $5.5 million for the fourth quarter of 2006. Compensation expense decreased $65,000 primarily due to a decrease in the defined benefit pension costs between the periods. Occupancy expense increased $43,000 primarily because of the additional costs associated with the new Eagan branch that was opened in the third quarter of 2007. Data processing costs increased $26,000 primarily because of the increased internet and other banking services provided by a third party processor between the periods. Mortgage servicing rights amortization decreased $21,000 between the periods because there are fewer mortgage loans being serviced. Other operating expenses increased $344,000 primarily because of increased mortgage and commercial loan foreclosure costs in the fourth quarter of 2007 when compared to the same period in 2006. Income tax expense decreased $22,000 between the periods. Return on Assets and Equity Return on average assets for the fourth quarter of 2007 was 0.98%, compared to 1.11% for the fourth quarter of 2006. Return on average equity was 11.11% for the fourth quarter of 2007, compared to 11.18% for the same period of 2006. Book value per common share at December 31, 2007 was $23.50, compared to $21.58 at December 31, 2006. Annual Results Net Income Net income was $11.3 million for 2007, an increase of $2.9 million, or 33.8%, compared to $8.4 million for 2006. Diluted earnings per common share for the year ended December 31, 2007 were $2.89, up $0.79, or 37.6%, from $2.10 for the year ended December 31, 2006. The increase in net income is due primarily to a $5.0 million decrease in the loan loss provision between the periods as a result of decreased commercial loan charge offs. Diluted earnings per share increased $0.08 as a result of the Company�s treasury stock purchases during 2007. Net Interest Income Net interest income was $38.7 million for 2007 the same as 2006. Interest income was $77.5 million for 2007, an increase of $10.0 million, or 14.8%, from $67.5 million for 2006. Interest income increased because of a $117 million increase in average interest earning assets and also because the average yields earned on loans and investments increased between the periods. The increase in average interest earning assets was the result of a $66 million increase in the average outstanding loans and a $51 million increase in the average outstanding cash and investments between the periods. The increase in outstanding loans was primarily in commercial business and commercial construction loans. The increase in cash and investments was the result of obtaining collateralized deposit relationships that required the purchase of additional investments in order to collateralize the deposits and maintain adequate liquidity. Yields increased primarily because of the 100 basis point increase in the prime interest rate that occurred during the first six months of 2006 that remained in effect until September 2007. 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 and investments. The yield earned on interest-earning assets was 7.35% for 2007, an increase of 14 basis points from the 7.21% yield for 2006. Interest expense was $38.8 million for 2007, an increase of $10.0 million, or 34.6%, from the $28.8 million for 2006. Interest expense increased primarily because of higher interest rates paid on commercial money market accounts and certificates of deposits. The increased rates were the result of the 100 basis point increase in federal funds rate that occurred throughout the first six months of 2006 that was not fully reflected in deposit rates until the second half of 2006. Increases in the federal funds rate generally have a lagging effect and increase the rates banks pay for deposits. The average interest rate paid on interest-bearing liabilities was 3.92% for 2007, an increase of 64 basis points from the 3.28% paid for 2006. Net interest margin for 2007 was 3.67%, a decrease of 46 basis points, compared to 4.13% for 2006. Provision for Loan Losses The provision for loan losses was $3.9 million for 2007, a decrease of $5.0 million, or 56.1%, from $8.9 million for 2006. The provision for loan losses decreased primarily because $7.4 million in related commercial real estate development loans were charged off during the third quarter of 2006. The decrease in the provision related to loan charge offs was partially offset by an increase in the provision for the $77 million increase in the outstanding commercial loans between the periods. Total non-performing assets were $21.9 million at December 31, 2007, an increase of $11.5 million, or 110.4%, from $10.4 million at December 31, 2006. Non-performing loans increased $11.3 million to $19.7 million, foreclosed and repossessed assets increased $175,000 to $2.2 million, and non-performing other assets decreased $10,000 to $33,000 between the periods. The increase in non-performing loans was primarily related to two residential development loan relationships totaling $8.9 million that became non-performing due to decreased demand for residential lots. The non-performing loan activity for the year included $25.0 million in additional non-performing loans, $1.7 million in loan charge offs, $2.8 million in loans that were reclassified to performing, $3.5 million in loans that were transferred into real estate owned, and $5.7 million in principal payments were received on non-performing loans. A reconciliation of the allowance for loan losses for 2007 and 2006 are summarized as follows: � � � � � � � (in thousands) 2007 2006 Balance at January 1, $ 9,873 $ 8,778 Provision 3,898 8,878 Charge offs: Commercial (554 ) (7,430 ) Commercial real estate (245 ) Consumer (840 ) (269 ) Single family mortgage (42 ) (150 ) Recoveries � 348 � � 66 � Balance at December 31, $ 12,438 � $ 9,873 � � � � � � Non-Interest Income and Expense Non-interest income was $7.6 million for 2007, an increase of $1.2 million, or 17.9%, from $6.4 million for 2006. Fees and service charges increased $28,000 between the periods primarily because of increased retail deposit account activity and fees. Mortgage servicing fees decreased $118,000 between the periods due primarily to a decrease in the single-family mortgage loans being serviced. Security gains decreased $48,000 due to decreased security sales. Gains on sales of loans increased $259,000 between the periods primarily because of the $575,000 increase in the gains recognized on the sale of government guaranteed commercial loans that was partially offset by a $316,000 decrease in the gains recognized on the sale of single-family loans due to decreased loan volumes and profit margins. Competition in the single- family loan origination market has remained strong as the overall market has slowed and profit margins were lowered in order to remain competitive and maintain origination volume. Other non-interest income increased $1.0 million primarily because of increased gains on the sale of real estate owned. Non-interest expense was $23.8 million for 2007, an increase of $1.2 million, or 5.4%, from $22.6 million for 2006. Compensation and benefits expense increased $622,000 primarily due to an increase in annual payroll costs and incentive compensation. Occupancy expense increased $32,000 primarily because of the additional costs associated with the new Eagan branch that was opened in the third quarter of 2007. Data processing costs increased $84,000 primarily because of increased internet and other banking services provided by a third party processor between the periods. Amortization of mortgage servicing rights decreased $142,000 due to a decrease in single-family mortgage loans being serviced when compared to 2006. Other non-interest expense increased $563,000 primarily because of increased legal fees and other expenses relating to foreclosed assets. Income tax expense was $7.3 million in 2007, an increase of $2.1 million, or 39.7%, compared to $5.2 million for 2006. Income tax expense increased between the periods due to an increase in taxable income and an effective tax rate that increased from 38.3% for 2006 to 39.3% for 2007. The increase in the effective tax rate was primarily the result of increased taxable income and changes in state tax allocations. Return on Assets and Equity Return on average assets for 2007 was 1.03%, compared to 0.86% for 2006. Return on average equity was 11.53% for 2007, compared to 8.85% for 2006. President's Statement �I am pleased to report record annual earnings despite the challenging rate and economic environments that existed during the last half of the year,� said HMN President Michael McNeil. �The decrease in interest rates contributed to the net interest margin compression that was experienced during the year and the housing slowdown was a significant factor in the increase in non-performing loans.� Dividend and Annual Meeting Announcement HMN Financial, Inc. today announced that it will pay a regular quarterly dividend of 25 cents per share payable on March 7, 2008 to stockholders of record on February 15, 2008. HMN also announced that its annual meeting will be held at the HMN Financial, Inc. corporate office, located at 1016 Civic Center Drive NW, Rochester, Minnesota on Tuesday, April 22, 2008, at 10:00 a.m. local time. General Information HMN Financial, Inc. and Home Federal are headquartered in Rochester, Minnesota. Home Federal operates ten full service offices in Minnesota located in Albert Lea, Austin, Eagan, LaCrescent, Rochester, Spring Valley and Winona, Minnesota and two full service offices in Iowa located in Marshalltown and Toledo, Iowa. Home Federal also operates loan origination offices located in Sartell and Rochester, Minnesota. Home Federal Private Banking also 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 include but are not limited to 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, or monetary and fiscal policies of the federal government or tax laws; changes in credit or other risks posed by the Company�s loan and investment portfolios; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation or other significant uncertainties. 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 (unaudited) � � � � � � � December 31, � December 31, (dollars in thousands, except per share data) � � 2007 � 2006 � Assets Cash and cash equivalents $ 23,718 43,776 Securities available for sale: Mortgage-backed and related securities (amortized cost $18,786 and $6,671) 18,468 6,178 Other marketable securities (amortized cost $165,430 and $119,940) 167,720 � 119,962 � 186,188 � 126,140 � � Loans held for sale 3,261 1,493 Loans receivable, net 865,088 768,232 Accrued interest receivable 6,893 5,061 Real estate, net 2,214 2,072 Federal Home Loan Bank stock, at cost 6,198 7,956 Mortgage servicing rights, net 1,270 1,958 Premises and equipment, net 12,024 11,372 Goodwill 3,801 3,801 Core deposit intangible, net 0 106 Prepaid expenses and other assets 1,680 2,943 Deferred tax asset 4,719 � 2,879 � Total assets $ 1,117,054 � 977,789 � � � Liabilities and Stockholders� Equity Deposits $ 888,118 725,959 Federal Home Loan Bank advances 112,500 150,900 Accrued interest payable 9,515 1,176 Customer escrows 866 721 Accrued expenses and other liabilities 7,927 � 5,891 � Total liabilities 1,018,926 � 884,647 � Commitments and contingencies Stockholders� equity: Serial preferred stock: ($.01 par value) Authorized 500,000 shares; issued and outstanding shares none 0 0 Common stock ($.01 par value): Authorized 11,000,000; issued shares 9,128,662 91 91 Additional paid-in capital 58,049 57,914 Retained earnings, subject to certain restrictions 110,943 103,643 Accumulated other comprehensive income (loss) 1,167 (284 ) Unearned employee stock ownership plan shares (3,965 ) (4,158 ) Treasury stock, at cost 4,953,045 and 4,813,232 (68,157 ) (64,064 ) Total stockholders� equity 98,128 � 93,142 � Total liabilities and stockholders� equity $ 1,117,054 � 977,789 � HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) � � � � � � � � � � � Three Months Ended � Year Ended December 31, December 31, (dollars in thousands, except per share data) � � 2007 � 2006 � 2007 � 2006 Interest income: � � Loans receivable $ 16,483 � 15,434 66,115 60,181 Securities available for sale: Mortgage-backed and related 232 65 727 271 Other marketable 2,343 1,471 9,153 5,195 Cash equivalents 215 301 1,187 1,555 Other 65 87 341 325 Total interest income 19,338 17,358 77,523 67,527 � Interest expense: Deposits 8,896 5,848 33,403 22,046 Federal Home Loan Bank advances 1,193 1,665 5,420 6,795 Total interest expense 10,089 7,513 38,823 28,841 Net interest income 9,249 9,845 38,700 38,686 Provision for loan losses 1,494 1,357 3,898 8,878 Net interest income after provision for loan losses 7,755 8,488 34,802 29,808 � Non-interest income: Fees and service charges 833 780 3,139 3,111 Mortgage servicing fees 265 276 1,054 1,172 Securities gains, net 0 0 0 48 Gain on sales of loans 325 225 1,514 1,255 Other 1,163 173 1,887 856 Total non-interest income 2,586 1,454 7,594 6,442 � Non-interest expense: Compensation and benefits 2,721 2,786 12,491 11,869 Occupancy 1,144 1,101 4,467 4,435 Advertising 118 129 542 475 Data processing 326 300 1,267 1,183 Amortization of mortgage servicing rights, net 166 187 706 848 Other 1,295 951 4,349 3,786 Total non-interest expense 5,770 5,454 23,822 22,596 Income before income tax expense 4,571 4,488 18,574 13,654 Income tax expense 1,796 1,818 7,300 5,226 Net income $ 2,775 2,670 11,274 8,428 Basic earnings per share $ 0.75 0.71 3.02 2.20 Diluted earnings per share $ 0.73 0.67 2.89 2.10 HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) � Three Months Ended � Year Ended SELECTED FINANCIAL DATA: December 31, December 31, (dollars in thousands, except per share data) � � 2007 � � 2006 � 2007 � � 2006 � � I. OPERATING DATA: Interest income $ 19,338 17,358 77,523 67,527 Interest expense 10,089 7,513 38,823 28,841 Net interest income 9,249 9,845 38,700 38,686 � II. AVERAGE BALANCES: Assets (1) 1,124,661 957,113 1,099,800 981,180 Loans receivable, net 852,035 751,106 827,597 760,991 Mortgage-backed and related securities (1) 200,258 128,885 192,758 131,729 Interest-earning assets (1) 1,082,818 912,927 1,054,193 937,204 Interest-bearing liabilities 1,010,301 855,438 991,389 878,598 Equity (1) 99,105 94,758 97,818 95,192 III. PERFORMANCE RATIOS: (1) Return on average assets (annualized) 0.98 % 1.11 % 1.03 % 0.86 % Interest rate spread information: Average during period 3.12 4.06 3.44 3.92 End of period 3.20 3.71 3.20 3.71 Net interest margin 3.39 4.28 3.67 4.13 Ratio of operating expense to average total assets (annualized) 2.04 2.26 2.17 2.30 Return on average equity (annualized) 11.11 11.18 11.53 8.85 Efficiency � 48.75 � � 48.27 � 51.46 50.07 December 31, December 31, � 2007 � 2006 IV. ASSET QUALITY : Total non-performing assets $ 21,935 10,424 Non-performing assets to total assets 1.96 % 1.07 % � Non-performing loans to total loans receivable, net 2.27 % 1.08 % � Allowance for loan losses $ 12,438 9,873 Allowance for loan losses to total assets 1.11 % 1.01 % � Allowance for loan losses to total loans receivable, net 1.44 � 1.29 Allowance for loan losses to non-performing loans 63.28 118.84 V. BOOK VALUE PER SHARE: Book value per share $ 23.50 � � 21.58 � � Year Ended Year Ended � Dec 31, 2007 � Dec 31, 2006 VI. CAPITAL RATIOS : Stockholders� equity to total assets, at end of period 8.78 % 9.53 % � Average stockholders� equity to average assets (1) 8.89 9.70 Ratio of average interest-earning assets to average interest-bearing liabilities (1) � 106.33 � � 106.67 � December 31, December 31, � 2007 � 2006 VII. EMPLOYEE DATA: Number of full time equivalent employees � � 203 � � 203 � � � � � � (1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115.