Exhibit 99
HMN Financial, Inc. Announces Third Quarter Results
ROCHESTER, Minn.--(BUSINESS WIRE)--Oct. 19, 2006--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 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
- ----------------------------------------------------------------------
(1) Average balances were calculated based upon amortized cost without the
market value impact of SFAS 115.
CONTACT: HMN Financial, Inc., Rochester
Michael McNeil, President, 507-535-1202