HMNF HMN Financial Inc

HMN Financial, Inc. (NASDAQ:HMNF):

First Quarter Highlights

• Net income of $0.4 million, an improvement of $2.2 million, compared to net loss of $1.8 million in the first quarter of 2010
• Diluted loss per common share of $0.01 compared to diluted loss per common share of $0.61 in the first quarter of 2010
• Provision for loan losses of $1.9 million, down $4.6 million from first quarter of 2010
• Non-performing assets of $70.6 million, down $13.9 million from fourth quarter of 2010
• Net interest margin of 3.62%, up 31 basis points from first quarter of 2010

EARNINGS (LOSS) SUMMARY (unaudited)

Three Months Ended

March 31,

(dollars in thousands, except per share amounts) 2011     2010 Net income (loss) $ 417   (1,847 ) Net loss available to common stockholders (32 ) (2,287 ) Diluted loss per common share (0.01 ) (0.61 ) Return (loss) on average assets 0.19 % (0.73 ) % Return (loss) on average common equity 2.41 % (7.50 ) % Book value per common share $ 10.31 17.10  

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $879 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $0.4 million for the first quarter of 2011, an improvement of $2.2 million compared to a net loss of $1.8 million for the first quarter of 2010. Net loss available to common shareholders was $32,000 for the first quarter of 2011, an improvement of $2.3 million, or 98.6%, from the net loss available to common shareholders of $2.3 million for the first quarter of 2010. Diluted loss per common share for the first quarter of 2011 was $0.01, an improvement of $0.60 from the diluted loss per common share of $0.61 for the first quarter of 2010. The improvement in net income was due primarily to a $4.6 million decrease in the provision for loan losses between the periods that was partially offset by a $1.2 million increase in income taxes and a $0.8 million increase in the losses recognized on the sale of real estate owned between the periods.

President’s Statement"We are pleased to report improved first quarter financial results and a reduction in the non-performing assets in our portfolio” said Home Federal Savings Bank President, Bradley Krehbiel. “We will continue to focus our efforts on reducing non-performing assets, reducing loan concentrations, increasing our core deposit relationships and reducing expenses. We believe that, over time, our focus on these areas will be effective in generating improved financial results. In the meantime, Home Federal Savings Bank continues to have adequate available liquidity and its capital position remains above the levels required for it to be considered a well capitalized financial institution by current regulatory standards.”

First Quarter Results

Net Interest IncomeNet interest income was $7.4 million for the first quarter of 2011, a decrease of $0.6 million, or 6.5%, compared to $8.0 million for the first quarter of 2010. Interest income was $10.7 million for the first quarter of 2011, a decrease of $2.2 million, or 17.0%, from $12.9 million for the first quarter of 2010. Interest income decreased between the periods primarily because of a $143 million decrease in average interest-earning assets between the periods. Average interest earning assets decreased between the periods primarily because of a decrease in the commercial loan portfolio, which occurred because of declining loan demand and the Company’s focus on improving credit quality, reducing loan concentrations, managing interest rate risk and improving capital ratios. The average yield earned on interest-earning assets was 5.21% for the first quarter of 2011, a decrease of 15 basis points from the 5.36% average yield for the first quarter of 2010.

Interest expense was $3.3 million for the first quarter of 2011, a decrease of $1.6 million, or 33.9%, compared to $4.9 million for the first quarter of 2010. Interest expense decreased primarily because of a $124 million decrease in the average interest-bearing liabilities between the periods. The decrease in average interest-bearing liabilities is primarily the result of a decrease in the outstanding borrowings and brokered certificates of deposits between the periods. The decrease in borrowings and brokered deposits between the periods was the result of using the proceeds from loan principal payments to fund maturing borrowings and brokered deposits. Interest expense also decreased because of the lower interest rates paid on money market accounts and certificates of deposits. The decreased rates were the result of the low interest rate environment that continued to exist during the first quarter of 2011. The average interest rate paid on interest-bearing liabilities was 1.66% for the first quarter of 2011, a decrease of 51 basis points from the 2.17% average interest rate paid in the first quarter of 2010. Net interest margin (net interest income divided by average interest earning assets) for the first quarter of 2011 was 3.62%, an increase of 31 basis points, compared to 3.31% for the first quarter of 2010.

Provision for Loan LossesThe provision for loan losses was $1.9 million for the first quarter of 2011, a decrease of $4.6 million, or 70.2%, compared to $6.5 million for the first quarter of 2010. The provision for loan losses decreased in the first quarter of 2011 primarily because there were fewer decreases in the estimated value of the underlying collateral supporting commercial real estate loans that required specific allowances in the current period and there were fewer commercial loan risk rating downgrades when compared to the first quarter of 2010. Total non-performing assets were $70.6 million at March 31, 2011, a decrease of $13.9 million, or 16.5%, from $84.5 million at December 31, 2010. Non-performing loans decreased $19.0 million and foreclosed and repossessed assets increased $5.1 million during the first quarter of 2011. The non-performing loan and foreclosed and repossessed asset activity for the first quarter of 2011 was as follows:

(Dollars in thousands)

            Non-performing loans   Foreclosed and repossessed assets   January 1, 2011 $68,074 January 1, 2011 $16,395 Classified as non-performing 2,445 Transferred from non-performing loans 6,231 Charge offs (10,339 ) Other foreclosures/repossessions 0 Principal payments received (939 ) Real estate sold (1,054 ) Classified as accruing (3,928 ) Net gain on sale of assets 81 Transferred to real estate owned (6,231 ) Write downs (170 ) March 31, 2011 $49,082   March 31, 2011 $21,483                  

Of the $10.3 million in charge offs recorded during the first quarter of 2011, $9.3 million related to the charge offs on four lending relationships where the collateral was moved to real estate owned or repossessed assets during the first quarter of 2011 and the previously established specific reserves were charged off.

A reconciliation of the Company’s allowance for loan losses for the first quarters of 2011 and 2010 is summarized as follows:

          (Dollars in thousands)   2011   2010 Balance at January 1,   $42,828   $23,811 Provision 1,946 6,533 Charge offs: One-to-four family (403 ) (51 ) Consumer (52 ) (306 ) Commercial business (2,308 ) (61 ) Commercial real estate (7,576 ) (660 ) Recoveries 518   18   Balance at March 31, $34,953   $29,284     General allowance $16,105 $12,058 Specific allowance 18,848   17,226   $34,953   $29,284            

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the two most recently completed quarters.

                March 31, December 31, (Dollars in thousands)     2011     2010 Non-Accruing Loans: One-to-four family real estate $ 3,399 $ 4,844 Commercial real estate 21,609 36,737 Consumer 245 224 Commercial business 23,829 26,269 Total 49,082 68,074   Foreclosed and Repossessed Assets: One-to-four family real estate 1,640 972 Consumer 14 14 Commercial real estate 19,829 15,409 Total non-performing assets $ 70,565 $ 84,469 Total as a percentage of total assets 8.03 % 9.59 % Total non-performing loans $ 49,082 $ 68,074 Total as a percentage of total loans receivable, net 7.74 % 10.25 % Allowance for loan loss to non-performing loans 71.21 % 62.91 %   Delinquency Data: Delinquencies (1) 30+ days $ 4,940 $ 4,021 90+ days 178 754 Delinquencies as a percentage of Loan and lease portfolio (1) 30+ days 0.76 % 0.59 % 90+ days 0.03 % 0.11 %              

(1) Excludes non-accrual loans.

The following table summarizes the number of lending relationships and industry of commercial business loans (the largest category of non-performing loans) that were non-performing as of the end of the two most recently completed quarters.

(Dollars in thousands)

Industry Type

 

 

 

#

 

Principal Amountof LoansMarch 31,2011

       

 

 

#

Principal Amountof LoansDecember 31,2010

Construction/development   5   $ 6,205         6 $ 9,148 Finance 1 244 1 248 Retail 3 3,129 1 2,504 Banking 2 8,223 2 8,223 Entertainment 1 309 1 315 Utilities 1 4,598 1 4,614 Restaurant   3     1,121         4   1,217   16   $ 23,829         16 $ 26,269  

The Company had specific reserves established against the above commercial business loans of $9.3 million and $10.7 million, respectively, at March 31, 2011 and December 31, 2010.

The following table summarizes the number and types of commercial real estate loans that were non-performing as of the end of the two most recently completed quarters.

(Dollars in thousands)

Property Type

 

 

 

# of relationships

   

Principal Amountof Loans atMarch 31,2011

 

 

 

# of relationships

   

Principal Amountof Loans atDecember 31,2010

Residential developments   4   $ 10,732   9   $ 23,661 Single family homes 2 296 3 2,673 Alternative fuel plants 1 4,994 1 4,994 Shopping centers/retail 2 1,036 3 1,099 Restaurants/bar 1 614 1 635 Office buildings 2     3,937   1     3,675 12   $ 21,609   18   $ 36,737  

The Company had specific reserves established against the above commercial real estate loans of $6.9 million and $13.3 million, respectively, at March 31, 2011 and December 31, 2010. The decrease in the non-performing commercial real estate loans is due primarily to the $10.3 million in charge offs and $6.2 million in loans that were foreclosed on during the quarter and moved to other real estate owned.

Non-Interest Income and ExpenseNon-interest income was $1.8 million for the first quarter of 2011, an increase of $0.2 million, or 13.5%, from $1.6 million for the first quarter of 2010. Gain on sales of loans increased $181,000 between the periods due to an increase in the gains recognized on the sale of commercial government guaranteed loans that was partially offset by a decrease in the gain recognized on the sale of single family loans due to a decrease in single family loan originations between the periods.

Fees and service charges increased $82,000 between the periods primarily because of an increase in late fees and overdraft charges. Other non-interest income decreased $33,000 between the periods primarily because of decreased rental income on other real estate owned. Loan servicing fees decreased $18,000 between the periods primarily because of a decrease in the number of commercial loans that are being serviced for others.

Non-interest expense was $6.8 million for the first quarter of 2011, an increase of $0.8 million, or 12.9%, from $6.0 million for the first quarter of 2010. The loss on real estate owned increased $808,000 between the periods from a gain in the first quarter of 2010 to a loss in the first quarter of 2011. Compensation expense increased $111,000 primarily because of increased personnel in the commercial loan recovery area. Other non-interest expense increased $83,000 between the periods primarily because of increased legal expenses related to non-performing assets and regulatory compliance. Deposit insurance expense decreased $113,000 primarily because of the decrease in outstanding brokered deposits between the periods. Occupancy expense decreased $91,000 primarily because of a decrease in depreciation expense. Data processing expense decreased $23,000 primarily due to a decrease in debit card expenses as a result of changing vendors in the fourth quarter of 2010.

The effect of income taxes changed $1.2 million between the periods from a benefit of $1.1 million in the first quarter of 2010 to an expense of $76,000 in the first quarter of 2011. The Company has recorded a valuation reserve against the entire deferred tax asset balance at March 31, 2011. Since the valuation reserve is established against the entire deferred tax asset balance, the only amount included as income tax expense for the first quarter of 2011 relates to the taxes on the change in the fair market value of the available for sale investment portfolio.

Net Loss Available to Common ShareholdersThe net loss available to common shareholders was $32,000 for the first quarter of 2011, a decreased loss of $2.3 million from the $2.3 million net loss available to common shareholders in the first quarter of 2010. The net loss available to common shareholders decreased primarily because of the change in the net income/loss between the periods. The Company deferred the February 15, 2011 cash dividend payment on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued to the United States Treasury Department as part of the TARP Capital Purchase Program. The deferred dividend payment will continue to be accrued for payment in the future and will be reported for the deferral period as a preferred dividend requirement that is deducted from income (loss) available to common shareholders for financial statement purposes.

Return on Assets and EquityReturn on average assets for the first quarter of 2011 was 0.19%, compared to (0.73%) for the first quarter of 2010. Return on average equity was 2.41% for the first quarter of 2011, compared to (7.50%) for the first quarter of 2010. Book value per common share at March 31, 2011 was $10.31, compared to $17.10 at March 31, 2010.

General InformationHMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates eleven full service offices in Minnesota located in Albert Lea, Austin, Eagan, Edina, La Crescent, Rochester, Spring Valley and Winona, Minnesota and two full service offices located in Marshalltown and Toledo, Iowa. Home Federal Private Banking operates branches in Rochester, Minnesota. Home Federal Savings Bank also operates a loan origination office in Sartell, Minnesota.

Safe Harbor StatementThis press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding reducing non-performing assets, reducing loan concentrations, increasing core deposit relationships, reducing expenses, and generating improved financial results. These statements are often identified by such forward-looking terminology as “expect,” “intent,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms. 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 the adequacy and marketability of real estate securing loans to borrowers, federal and state regulation and enforcement, including restrictions set forth in the supervisory agreements between each of the Company and Bank and the Office of Thrift Supervision, possible legislative and regulatory 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; international economic developments, 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 filing on Form 10-K 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)     2011   2010 (unaudited) Assets Cash and cash equivalents $ 39,976 20,981 Securities available for sale: Mortgage-backed and related securities (amortized cost $28,284 and $32,036) 29,641 33,506 Other marketable securities (amortized cost $128,652 and $118,631) 128,002   118,058   157,643   151,564     Loans held for sale 1,624 2,728 Loans receivable, net 634,282 664,241 Accrued interest receivable 3,221 3,311 Real estate, net 21,469 16,382 Federal Home Loan Bank stock, at cost 6,410 6,743 Mortgage servicing rights, net 1,575 1,586 Premises and equipment, net 9,123 9,450 Prepaid expenses and other assets 3,433 3,632 Deferred tax asset, net 0   0   Total assets $ 878,756   880,618       Liabilities and Stockholders’ Equity Deposits $ 688,078 683,230 Federal Home Loan Bank advances and Federal Reserve borrowings 115,000 122,500 Accrued interest payable 917 1,092 Customer escrows 1,422 818 Accrued expenses and other liabilities 3,698   3,431   Total liabilities 809,115   811,071   Commitments and contingencies Stockholders’ equity: Serial preferred stock ($.01 par value): Authorized 500,000 shares; issued shares 26,000 24,390 24,264 Common stock ($.01 par value): Authorized 11,000,000; issued shares 9,128,662 91 91 Additional paid-in capital 53,662 56,420 Retained earnings, subject to certain restrictions 55,930 55,838 Accumulated other comprehensive income, net of tax 427 541 Unearned employee stock ownership plan shares (3,336 ) (3,384 ) Treasury stock, at cost 4,740,263 and 4,818,263 shares (61,523 ) (64,223 ) Total stockholders’ equity 69,641   69,547   Total liabilities and stockholders’ equity $ 878,756   880,618                     HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Loss) (unaudited)           Three Months Ended March 31, (Dollars in thousands)  

2011

 

2010

Interest income:   Loans receivable $ 9,903 11,759 Securities available for sale: Mortgage-backed and related 324 535 Other marketable 417 572 Cash equivalents 1 1 Other 69   37   Total interest income 10,714   12,904     Interest expense: Deposits 1,940 3,421 Federal Home Loan Bank advances and Federal Reserve borrowings 1,329   1,522   Total interest expense 3,269   4,943   Net interest income 7,445 7,961 Provision for loan losses 1,946   6,533   Net interest income after provision for loan losses 5,499   1,428     Non-interest income: Fees and service charges 924 842 Loan servicing fees 250 268 Gain on sales of loans 495 314 Other 117   150   Total non-interest income 1,786   1,574     Non-interest expense: Compensation and benefits 3,560 3,449 Loss (gain) on real estate owned 47 (761 ) Occupancy 940 1,031 Deposit insurance 404 517 Data processing 253 276 Other 1,588   1,505   Total non-interest expense 6,792   6,017   Income (loss) before income tax expense (benefit) 493 (3,015 ) Income tax expense (benefit) 76   (1,168 ) Net income (loss) 417 (1,847 ) Preferred stock dividends and discount (449 ) (440 ) Net loss available to common shareholders (32 ) (2,287 ) Basic loss per common share $ (0.01 ) (0.61 ) Diluted loss per common share $ (0.01 ) (0.61 )                  

HMN FINANCIAL, INC. AND SUBSIDIARIES

Selected Consolidated Financial Information

(unaudited)

 

Three Months Ended

   

SELECTED FINANCIAL DATA:

March 31,

(Dollars in thousands, except per share data)

 

2011

   

2010

   

 

   

I.

OPERATING DATA:

  Interest income $ 10,714 12,904 Interest expense 3,269 4,943 Net interest income 7,445 7,961  

II.

AVERAGE BALANCES:

Assets (1) 873,155 1,029,745 Loans receivable, net 650,667 788,981 Securities available for sale (1) 149,928 159,759 Interest-earning assets (1) 833,268 976,402 Interest-bearing liabilities 799,497 923,614 Equity (1) 70,275 99,925  

III.

PERFORMANCE RATIOS: (1)

Return (loss) on average assets (annualized) 0.19 % (0.73 ) % Interest rate spread information: Average during period 3.56 3.19 End of period 3.48 3.20 Net interest margin 3.62 3.31 Ratio of operating expense to average total assets (annualized) 3.15 2.37 Return (loss) on average equity (annualized) 2.41 (7.50 ) Efficiency   73.58     63.11         March 31, December 31, March 31,   2011     2010     2010

IV.

ASSET QUALITY:

Total non-performing assets $ 70,565 84,469 90,726 Non-performing assets to total assets 8.03 % 9.59 % 8.82 % Non-performing loans to total loans receivable, net 7.74 10.25 10.07 Allowance for loan losses $ 34,953 42,828 29,284 Allowance for loan losses to total assets 3.98 % 4.86 % 2.85 % Allowance for loan losses to total loans receivable, net 5.51 6.45 3.78 Allowance for loan losses to non-performing loans 71.21 62.91 37.54  

V.

BOOK VALUE PER COMMON SHARE:

Book value per common share $ 10.31     10.51       17.10  

Three MonthsEndedMar 31, 2011

   

Year EndedDec 31, 2010

   

Three MonthsEndedMar 31, 2010

VI.

CAPITAL RATIOS:

Stockholders’ equity to total assets, at end of period 7.92 % 7.90 % 9.50 % Average stockholders’ equity to average assets (1) 8.05 9.40 9.70 Ratio of average interest-earning assets to average interest-bearing liabilities (1) 104.22 105.67 105.72 Tier 1 or core capital 7.70 7.60 7.88 Risk-based capital   11.47     10.97       11.30 March 31, December 31, March 31,   2011     2010     2010

VII.

EMPLOYEE DATA:

Number of full time equivalent employees 215 212 212                            

(1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115.