HMNF HMN Financial Inc

HMN Financial, Inc. (NASDAQ:HMNF): First Quarter Highlights Net income of $3.3 million, up $528,000, or 19.3% from first quarter of 2006 Diluted earnings per share of $0.82, up $0.14, or 20.6%, from first quarter of 2006 Net interest income up $395,000, or 4.2%, over first quarter of 2006 Net interest margin down 9 basis points from first quarter of 2006 Gain on sales of loans up $550,000, or 223.6%, over first quarter 2006 EARNINGS SUMMARY Three Months Ended March 31, 2007 � 2006 Net income � $3,268,000� 2,740,000� Diluted earnings per share 0.82� 0.68� Return on average assets 1.28% 1.14% Return on average equity 13.79% 11.82% Book value per share � $22.01� 20.99� HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $1.1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $3.3 million for the first quarter of 2007, up $528,000, or 19.3%, from net income of $2.7 million for the first quarter of 2006. Diluted earnings per common share for the first quarter of 2007 were $0.82, up $0.14, or 20.6%, from $0.68 for the first quarter of 2006. The increase in net income was due primarily to increases in net interest income and the gains recognized on the sale of commercial loans. First Quarter Results Net Interest Income Net interest income was $9.8 million for the first quarter of 2007, an increase of $395,000, or 4.2%, compared to $9.4 million for the first quarter of 2006. Interest income was $18.3 million for the first quarter of 2007, an increase of $2.3 million, or 14.4%, from $16.0 million for the first quarter of 2006. Interest income increased primarily because of an increase in the average interest rate earned on loans and investments. Interest rates increased primarily because of the 50 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 average yield earned on interest-earning assets was 7.49% for the first quarter of 2007, an increase of 51 basis points from the 6.98% average yield for the first quarter of 2006. Interest income also increased because of the $61 million increase in the average interest earning assets between the periods. Interest expense was $8.5 million for the first quarter of 2007, an increase of $1.9 million, or 28.8%, compared to $6.6 million for the first quarter of 2006. Interest expense increased because of the higher interest rates paid on deposits which were caused by the 50 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 3.69% for the first quarter of 2007, an increase of 62 basis points from the 3.07% average interest rate paid in the first quarter of 2006. The average rate on interest bearing liabilities increased more than the average yield on interest bearing assets primarily because most of the deposit growth between the periods was in higher rate money market accounts while the majority of the asset growth was in lower yielding investments. Net interest margin (net interest income divided by average interest earning assets) for the first quarter of 2007 was 4.01%, a decrease of 9 basis points, compared to 4.10% for the first quarter of 2006. Provision for Loan Losses The provision for loan losses was $455,000 for the first quarter of 2007, a decrease of $60,000, compared to $515,000 for the first quarter of 2006. The provision for loan losses decreased primarily because of a decrease in the number of commercial loan risk rating downgrades in the first quarter of 2007 when compared to the same period of 2006. The decrease in the provision due to fewer loan risk ratings downgrades was partially offset by the $33 million in loan growth that was experienced in the first quarter of 2007. Total non-performing assets were $12.7 million at March 31, 2007, an increase of $2.3 million, from $10.4 million at December 31, 2006. Non-performing loans decreased $785,000 and foreclosed and repossessed assets increased $3.1 million during the period. Of the increase in foreclosed and repossessed assets, $1.8 million was the result of purchasing the first mortgage on a previously classified non-performing second mortgage loan in order to improve the Company�s lien position. A reconciliation of the Company�s allowance for loan losses for the quarters ended March 31, 2007 and 2006 is summarized as follows: � � � � � (in thousands) 2007 2006 Balance at January 1, $9,873� $8,778� Provision 455� 515� Charge offs: Commercial loans (42) 0� Consumer loans (580) (91) Recoveries 50� 47� Balance at March 31, $9,756� $9,249� � � � � The increase in consumer loan charge offs is primarily the result of a home equity loan that was charged off in the first quarter of 2007 for which a reserve was established in the fourth quarter of 2006. Non-Interest Income and Expense Non-interest income was $2.1 million for the first quarter of 2007, an increase of $582,000, or 39.2%, from $1.5 million for the first quarter of 2006. Gain on sale of loans increased $550,000 between the periods due to a $612,000 increase in the gain recognized on the sale of government guaranteed commercial loans that was partially offset by a $62,000 decrease in the gain recognized on the sale of single family loans due to a decrease in the volume and profit margins on the loans that were sold. Competition in the single-family loan origination market continues to be very strong and profit margins were lowered in order to remain competitive and maintain origination volumes. Fees and service charges decreased $19,000 between the periods primarily because of decreased late fees. Loan servicing fees decreased $32,000 primarily because of a decrease in the number of single-family loans that are being serviced for others. Other non-interest income increased $83,000 primarily because of increased revenues from the sale of uninsured investment products. Non-interest expense was $6.0 million for the first quarter of 2007, an increase of $10,000, or 0.2%, from $5.9 million for the first quarter of 2006. Compensation expense increased $102,000 primarily because of annual payroll cost increases. Occupancy expense decreased $16,000 due primarily to a decrease in real estate taxes. Advertising expense decreased $25,000 between the periods primarily because of a decrease in the costs associated with promoting the new branch and the introduction of new checking account offerings that occurred in the first quarter of 2006. Mortgage servicing rights amortization decreased $35,000 between the periods because there are fewer mortgage loans being serviced. Income tax expense increased $499,000 between the periods due to an increase in taxable income and an effective tax rate that increased from 38.0% for the first quarter of 2006 to 40.0% for the first quarter of 2007. The increase in the effective tax rate was the result of changes in state tax allocations, a decrease in low income tax credits and an increase in the federal tax rate due to increased income. Return on Assets and Equity Return on average assets for the first quarter of 2007 was 1.28%, compared to 1.14% for the first quarter of 2006. Return on average equity was 13.79% for the first quarter of 2007, compared to 11.82% for the same quarter in 2006. Book value per common share at March 31, 2007 was $22.01, compared to $20.99 at March 31, 2006. President�s Statement "Net interest income continued to increase despite the compression in net interest margin that occurred during the first quarter of 2007,� said HMN President, Michael McNeil. �We are also encouraged with the loan and deposit growth that we experienced during the quarter.� 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 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 � � � � � March 31, December 31, (dollars in thousands) � 2007 � 2006 (unaudited) Assets Cash and cash equivalents $85,633� 43,776� Securities available for sale: Mortgage-backed and related securities (amortized cost $11,445 and $6,671) 11,110� 6,178� Other marketable securities (amortized cost $179,694 and $119,940) 179,931� 119,962� 191,041� 126,140� � Loans held for sale 1,412� 1,493� Loans receivable, net 798,502� 768,232� Accrued interest receivable 6,206� 5,061� Real estate, net 5,127� 2,072� Federal Home Loan Bank stock, at cost 7,511� 7,956� Mortgage servicing rights, net 1,780� 1,958� Premises and equipment, net 11,121� 11,372� Goodwill 3,801� 3,801� Core deposit intangible, net 77� 106� Prepaid expenses and other assets 1,891� 2,943� Deferred tax asset, net 2,941� 2,879� Total assets $1,117,043� 977,789� � � Liabilities and Stockholders� Equity Deposits $871,929� 725,959� Federal Home Loan Bank advances 140,900� 150,900� Accrued interest payable 2,203� 1,176� Customer escrows 1,240� 721� Accrued expenses and other liabilities 5,958� 5,891� Total liabilities 1,022,230� 884,647� Commitments and contingencies Stockholders� equity: Serial preferred stock ($.01 par value): Authorized 500,000 shares; none issued and outstanding 0� 0� Common stock ($.01 par value): Authorized 11,000,000; issued shares 9,128,662 91� 91� Additional paid-in capital 57,537� 57,914� Retained earnings, subject to certain restrictions 105,715� 103,643� Accumulated other comprehensive loss (59) (284) Unearned employee stock ownership plan shares (4,110) (4,158) Treasury stock, at cost 4,821,493 and 4,813,232 shares (64,361) (64,064) Total stockholders� equity 94,813� 93,142� Total liabilities and stockholders� equity $1,117,043� 977,789� � � � � � HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) � � � � � Three Months Ended March 31, (dollars in thousands) � 2007 � 2006 Interest income: Loans receivable $15,745� 14,703� Securities available for sale: Mortgage-backed and related 111� 71� Other marketable 1,896� 890� Cash equivalents 443� 256� Other 84� 63� Total interest income 18,279� 15,983� � Interest expense: Deposits 6,877� 4,868� Federal Home Loan Bank advances 1,618� 1,726� Total interest expense 8,495� 6,594� Net interest income 9,784� 9,389� Provision for loan losses 455� 515� Net interest income after provision for loan losses 9,329� 8,874� � Non-interest income: Fees and service charges 696� 715� Mortgage servicing fees 271� 303� Gain on sales of loans 796� 246� Other 305� 222� Total non-interest income 2,068� 1,486� � Non-interest expense: Compensation and benefits 3,361� 3,259� Occupancy 1,084� 1,100� Advertising 106� 131� Data processing 295� 289� Amortization of mortgage servicing rights, net 182� 217� Other 922� 944� Total non-interest expense 5,950� 5,940� Income before income tax expense 5,447� 4,420� Income tax expense 2,179� 1,680� Net income $3,268� 2,740� Basic earnings per share $0.87� 0.71� Diluted earnings per share $0.82� 0.68� � � � � � � � HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) � � � � � � � SELECTED FINANCIAL DATA: Three Months EndedMarch 31, (dollars in thousands, except per share data) � 2007 � 2006 � � I. ���OPERATING DATA: Interest income � $18,279� 15,983� Interest expense 8,495� 6,594� Net interest income 9,784� 9,389� � II. ��AVERAGE BALANCES: Assets (1) 1,037,984� 973,110� Loans receivable, net 787,937� 778,271� Mortgage-backed and related securities (1) 9,996� 7,360� Interest-earning assets (1) 989,701� 928,945� Interest-bearing liabilities 933,726� 871,172� Equity (1) 96,104� 94,054� � III. PERFORMANCE RATIOS: (1) Return on average assets (annualized) 1.28% 1.14% � Interest rate spread information: Average during period 3.80� 3.91� End of period 3.55� 3.90� Net interest margin 4.01� 4.10� Ratio of operating expense to average total assets (annualized) 2.32� 2.48� Return on average equity (annualized) 13.79� 11.82� Efficiency 50.20� 54.62� � � � � � � March 31, December 31, March 31, � 2007 � 2006 � 2006 IV. ��ASSET QUALITY : Total non-performing assets � $12,708� 10,424� 3,491� Non-performing assets to total assets 1.14% 1.07% � 0.35% Non-performing loans to total loans receivable, net 0.94� 1.08� 0.27� Allowance for loan losses � $9,756� 9,873� 9,249� Allowance for loan losses to total loans receivable, net 1.22% 1.29% � 1.20% Allowance for loan losses to non-performing loans 129.68� 118.84� 454.37� � V. ���BOOK VALUE PER SHARE: Book value per share � $22.01� 21.58� 20.99� � � � � � � � Three Months Ended Mar 31, 2007 � Year Ended Dec 31, 2006 � Three Months Ended Mar 31, 2006 VI. ��CAPITAL RATIOS : � Stockholders� equity to total assets, at end of period 8.49% 9.53% � 9.36% Average stockholders� equity to average assets (1) 9.26� 9.70� 9.67� Ratio of average interest-earning assets to average interest-bearing liabilities (1) � 105.99� � 106.67� � 106.63� March 31, December 31, March 31, � 2007 � 2006 � 2006 VII. �EMPLOYEE DATA: Number of full time equivalent employees 205� 203� 213� � � � � � � � (1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115.