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HMN Financial, Inc. Announces Fourth Quarter Results

Net Loss Available to Common ShareholdersThe net loss available to common shareholders was $13.4 million for the year ended December 31, 2011, an improvement of $17.4 million, from the net loss available to common shareholders of $30.8 million for 2010. The net loss available to common shareholders decreased primarily because of the decrease in the net loss between the periods. The Company deferred the February 15, 2011, May 15, 2011, August 15, 2011, and November 15, 2011 cash dividend payments 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 payments have been accrued for payment in the future and are being reported for the deferral period as a preferred dividend requirement that is deducted from the net loss for financial statement purposes to arrive at the net loss available to common shareholders.

Loss on Assets and EquityLoss on average assets was 1.39% for 2011, compared to a 2.98% loss for 2010. Loss on average common equity was 16.94% for 2011, compared to a 31.73% loss for 2010.

General InformationHMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The Bank operates nine full service offices in Minnesota located in Albert Lea, Austin, Eagan, LaCrescent, Rochester (3), Spring Valley and Winona; two full service offices in Iowa located in Marshalltown and Toledo; one loan origination office in Sartell, Minnesota; and two Private Banking offices in Rochester, Minnesota. The Bank has entered into a definitive purchase and assumption agreement with Pinnacle Bank of Marshalltown, Iowa (“Pinnacle”) to sell substantially all of the assets associated with the Toledo, Iowa branch of the Bank (the “Toledo Branch”) and the assumption by Pinnacle of all deposit liabilities of the Toledo Branch. The transaction is subject to regulatory approval and scheduling of the required Toledo Branch data processing conversion. Subject to the foregoing and other customary terms and conditions, the transaction is anticipated to be consummated in the first quarter of 2012.

Safe Harbor StatementThis press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 and include, but are not limited to, those relating to the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements, our expectations for core capital and our strategies and potential strategies for improvement thereof; changes in the size of the Bank’s loan portfolio; the recovery of the valuation allowance on deferred tax assets; the amount and mix of the Bank’s non-performing assets and the appropriateness of the allowance therefor; future losses on non-performing assets; the amount of interest-earning assets; the amount and mix of brokered and other deposits (including the Company’s ability to renew brokered deposits); the availability of alternate funding sources; the payment of dividends; the future outlook for the Company; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer trust preferred securities held by the Bank; expectations relating to the change in Company and Bank primary banking regulators from the Office of Thrift Supervision to the Office of the Comptroller of the Currency (OCC) and Federal Reserve Board (FRB); the Bank’s compliance with regulatory standards generally (including the Bank’s status as “well-capitalized”), and supervisory agreements, individual minimum capital requirements or other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the OCC and the Bank and the Company to any failure to comply with any such regulatory standard, agreement or requirement; the anticipated timing of consummation of the Toledo Branch transaction and the anticipated gain on sale and decrease in assets therefrom. 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 and other collateral securing loans to borrowers, possible legislative and regulatory changes, including changes in the degree and manner of regulatory supervision, the ability of the Company and the Bank to establish and adhere to plans and policies relating to, among other things, capital, business, non-performing assets, loan modifications, documentation of loan loss allowance and concentrations of credit that are satisfactory to the OCC and FRB, as applicable, in accordance with the terms of the Company and Bank supervisory agreements and to otherwise manage the operations of the Company and the Bank to ensure compliance with other requirements set forth in the supervisory agreements; the ability of the Company and the Bank to obtain required consents from the OCC and FRB, as applicable, under the supervisory agreements or other directives; the ability of the Bank to comply with its individual minimum capital requirement and other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard, agreement or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios, changes in costs associated with alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank, technological, computer-related or operational difficulties, results of litigation, and 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; the Company’s access to and adverse changes in securities markets; the market for credit related assets; satisfactory completion of the approval process to be undertaken by Pinnacle in connection with the Toledo Branch sale with the Iowa Division of Banking and the Federal Deposit Insurance Corporation, the timing of Branch data conversion by a third party provider, the failure of either the Bank or Pinnacle to fulfill the terms and conditions of the Toledo Branch sale agreement required to be satisfied prior to closing and changes in assets and liabilities at the Toledo Branch prior to closing; 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. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and Part II, Item 1A of its Quarterly Reports on Forms 10-Q. We undertake no duty to update any of the forward-looking statements after the date of this press release.
Consolidated Balance Sheets
    December 31,       December 31,
(Dollars in thousands)       2011       2010
Cash and cash equivalents $ 67,840 20,981
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $19,586 and $32,036) 20,645 33,506
Other marketable securities
(amortized cost $105,700 and $118,631) 105,469   118,058  
126,114   151,564  
Loans held for sale 3,709 2,728
Loans receivable, net

Accrued interest receivable 2,449 3,311
Real estate, net 16,616 16,382
Federal Home Loan Bank stock, at cost 4,222 6,743
Mortgage servicing rights, net 1,485 1,586
Premises and equipment, net 7,967 9,450
Prepaid expenses and other assets 2,262 3,632
Assets held for sale

Deferred tax asset, net 0   0  
Total assets $ 790,155   880,618  
Liabilities and Stockholders’ Equity
Deposits $ 620,128 683,230
Deposits held for sale 36,048 0
Federal Home Loan Bank Advances 70,000 122,500
Accrued interest payable 780 1,092
Customer escrows 933 818
Accrued expenses and other liabilities 5,205   3,431  
Total liabilities 733,094   811,071  
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock: ($.01 par value)
Authorized 500,000 shares; issued shares 26,000 24,780 24,264
Common stock ($.01 par value):
Authorized 11,000,000; issued shares 9,128,662 91 91
Additional paid-in capital 53,462 56,420
Retained earnings, subject to certain restrictions 42,983 55,838
Accumulated other comprehensive income 471 541
Unearned employee stock ownership plan shares (3,191 ) (3,384 )
Treasury stock, at cost 4,740,711 and 4,818,263 shares (61,535 ) (64,223 )
Total stockholders’ equity 57,061   69,547  
Total liabilities and stockholders’ equity $ 790,155   880,618  
Consolidated Statements of Income

Three Months Ended

Year Ended

December 31,

December 31,

(Dollars in thousands, except per share data)





    (unaudited) (unaudited)    
Interest income:




Loans receivable $ 8,605


36,776 44,248
Securities available for sale:
Mortgage-backed and related 225 369 1,098 1,813
Other marketable 319 387 1,451 2,023
Cash equivalents 29 0 36 4
Other 32   73   180   182  
Total interest income 9,210   10,834   39,541   48,270  
Interest expense:
Deposits 1,478 2,154 6,847 11,281
Federal Home Loan Bank advances 854   1,393   4,288   5,978  
Total interest expense 2,332   3,547   11,135   17,259  
Net interest income 6,878 7,287 28,406 31,011
Provision for loan losses 7,609   10,542   17,278   33,381  
Net interest income (loss) after provision
for loan losses (731 ) (3,255 ) 11,128   (2,370 )
Non-interest income:
Fees and service charges 912 1,007 3,739 3,741
Loan servicing fees 240 261 987 1,067
Gain on sales of loans 672 655 1,656 1,987
Other 151   101   487   476  
Total non-interest income 1,975   2,024   6,869   7,271  
Non-interest expense:
Compensation and benefits 3,205 3,300 13,553 13,516
Losses on real estate owned 2,380 1,509 2,681 1,165
Occupancy 955 961 3,741 4,082
Deposit insurance 254 439 1,255 1,933
Data processing 337 174 1,221 1,040
Other 1,739   1,836   7,101   5,820  
Total non-interest expense 8,870   8,219   29,552   27,556  
Loss before income tax expense (7,626 ) (9,450 ) (11,555 ) (22,655 )
Income tax expense 0   482   0   6,323  
Net loss (7,626 ) (9,932 ) (11,555 ) (28,978 )
Preferred stock dividends and discount 459   449   1,821   1,784  

Net loss available to common shareholders

(8,085 ) (10,381 ) (13,376 ) (30,762 )
Basic loss per common share $ (2.08 ) (2.73 ) (3.47 ) (8.17 )
Diluted loss per common share $ (2.08 ) (2.73 ) (3.47 ) (8.17 )
Selected Consolidated Financial Information


Three Months Ended

Year Ended


December 31,

December 31,

(Dollars in thousand, except per share data)




Interest income $ 9,210 10,834 39,541 48,270
Interest expense 2,332 3,547 11,135 17,259
Net interest income 6,878 7,287 28,406 31,011
Assets (1) 807,341 893,640 832,357 971,094
Loans receivable, net 574,996 685,015 608,826 740,323
Mortgage-backed and related securities (1) 133,458 141,812 139,473 154,691
Interest-earning assets (1) 768,747 852,331 791,309 923,462
Interest-bearing liabilities 736,657 809,499 759,172 873,880
Equity (1) 65,960 79,368 68,201 91,315
Loss on average assets (annualized)



(4.41 ) % (1.39 ) %



Interest rate spread information:
Average during period 3.50 3.30 3.33 3.25
End of period 3.34 3.68 3.34 3.68
Net interest margin 3.55 3.39 3.59 3.36
Ratio of operating expense to average
total assets (annualized) 4.36 3.65 3.55 2.84
Loss on average common equity









Efficiency   100.19         88.26   83.78 71.98
December 31, December 31,
IV. ASSET QUALITY:   2011         2010  
Total non-performing assets $ 50,609 84,469
Non-performing assets to total assets


9.59 %
Non-performing loans to total loans
receivable, net


10.25 %
Allowance for loan losses $ 23,888 42,828

Allowance for loan losses to total assets


4.86 %

Allowance for loan losses to total loans receivable, net



Allowance for loan losses to non-performing loans
70.27 62.91
Book value per common share   7.36         10.51  
Year Ended Year Ended
VI. CAPITAL RATIOS :   Dec 31, 2011       Dec 31, 2010
Stockholders’ equity to total assets, at end of period


7.90 %
Average stockholders’ equity to average assets (1) 8.19 9.40
Ratio of average interest-earning assets to
average interest-bearing liabilities (1) 104.23 105.67
Home Federal Savings Bank
regulatory capital ratios:
Tier 1 or core capital (2)


7.60 %
Risk-based capital  


    10.97   %
December 31, December 31,
  2011         2010  
Number of full time equivalent employees       205         212                    
(1)   Average balances were calculated based upon amortized cost without the market value impact of SFAS 115.
(2)   The OCC has established an individual minimum capital requirement (IMCR) for the Bank. An IMCR requires a bank to establish and maintain levels of capital greater than those generally required for a bank to be classified as “well-capitalized.” Effective December 31, 2011, the Bank was required to establish, and subsequently maintain, core capital at least equal to 8.5% of adjusted total assets, which was in excess of the Bank’s 7.14% core capital to adjusted total assets ratio at December 31, 2011. The failure of the Bank to comply with the terms of the IMCR could subject it to further limits on growth and may cause it to be deemed to be operating in an unsafe and unsound condition, subjecting it to such legal actions or sanctions as the OCC considers appropriate.

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