HMN Financial, Inc. Announces Second Quarter Results

HMN Financial, Inc. (NASDAQ:HMNF):
         
Three months ended Six months ended  

Net Income Summary (unaudited)
June 30, June 30,
   
(Dollars in thousands, except per share amounts) 2013 2012 2013 2012
Net income $ 1,799 395 $ 2,540 3,199

Net income (loss) available to common stockholders
1,252 (69 ) 1,517 2,274
Diluted earnings (loss) per common share 0.30 (0.02 ) 0.36 0.57
Return on average assets 1.21 % 0.23 % 0.84 % 0.90 %
Return on average equity 11.78 % 2.66 % 8.36 % 10.98 %
Book value per common share $ 8.09 $ 7.79 $ 8.09 $ 7.79
 

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $561 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.8 million for the second quarter of 2013, an improvement of $1.4 million, compared to net income of $0.4 million for the second quarter of 2012. The net income available to common shareholders was $1.3 million for the second quarter of 2013, an improvement of $1.4 million from the net loss available to common shareholders of $0.1 million for the second quarter of 2012. Diluted earnings per common share for the second quarter of 2013 were $0.30, an improvement of $0.32 from the diluted loss per common share of $0.02 for the second quarter of 2012. The improvement in net income in the second quarter of 2013 was primarily due to a $1.6 million decrease in the provision for loan losses and a $1.1 million decrease in non-interest expense between the periods. These positive changes to net income were partially offset by a $1.3 million decrease in net interest income due primarily to the decrease in interest earning assets between the periods.

President’s Statement“We are pleased to report the continued improvement in our net operating results and the decrease in our non-performing assets in the second quarter of 2013,” said Bradley Krehbiel, President and Chief Executive Officer of HMN. “We continue to focus our efforts on improving credit quality and reducing non-performing assets in the most cost effective manner while at the same time reducing expenses to reflect the decreased size of our balance sheet. We believe that, over time, our focus on these areas will be effective in generating improved financial results.”

Second Quarter Results Net Interest IncomeNet interest income was $4.7 million for the second quarter of 2013, a decrease of $1.3 million, or 22.7%, compared to $6.0 million for the second quarter of 2012. Interest income was $5.8 million for the second quarter of 2013, a decrease of $2.2 million, or 27.2%, from $8.0 million for the same period in 2012. Interest income decreased between the periods primarily because of an $82 million decrease in the average interest-earning assets and also because of a decrease in average yields between the periods. Average interest-earning assets decreased between the periods primarily because of a decrease in the commercial loan portfolio, which occurred primarily because of loan prepayments or non-renewals as a result of the Company’s focus on improving credit quality, decreasing loan concentrations, managing net interest margin and improving capital ratios. The average yield earned on interest-earning assets was 4.07% for the second quarter of 2013, a decrease of 83 basis points from the 4.90% average yield for the second quarter of 2012. The decrease in average yield is due to the continued low short-term interest rate environment that existed during the second quarter of 2013. The increase in domestic long-term mortgage rates during the second quarter of 2013 did not materially impact the average yield earned on interest-earning assets during the second quarter of 2013 since most of the mortgage loans originated by the Bank are sold into the secondary market and not placed in the loan portfolio.

Interest expense was $1.1 million for the second quarter of 2013, a decrease of $0.8 million, or 41.5%, compared to $1.9 million for the second quarter of 2012. Interest expense decreased primarily because of the $90 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 certificates of deposits between the periods was the result of using the proceeds from loan principal payments to fund maturing borrowings and brokered certificates of 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 second quarter of 2013. The average interest rate paid on interest-bearing liabilities was 0.85% for the second quarter of 2013, a decrease of 39 basis points from the 1.24% average interest rate paid in the second quarter of 2012. The average interest rate paid on interest-bearing liabilities is anticipated to continue to decrease in the third quarter of 2013 as a result of paying off all outstanding Federal Home Loan Bank advances in the second quarter of 2013. Net interest margin (net interest income divided by average interest earning assets) for the second quarter of 2013 was 3.28%, a decrease of 44 basis points, compared to 3.72% for the second quarter of 2012.

Provision for Loan LossesThe provision for loan losses was ($0.5) million for the second quarter of 2013, a decrease of $1.6 million, or 147.8%, from $1.1 million for the second quarter of 2012. The provision for loan losses decreased in the second quarter of 2013 primarily because there were fewer decreases in the estimated value of the underlying collateral supporting commercial real estate loans that required additional allowances or charge offs in the current period when compared to the second quarter of 2012. The provision also decreased because of a decrease in the outstanding loan portfolio balances, an improvement in the classifications of certain risk rated loans, and the recoveries received during the quarter on previously charged off loans. Total non-performing assets were $35.3 million at June 30, 2013, a decrease of $3.4 million, or 8.8%, from $38.7 million at March 31, 2013. Non-performing loans decreased $2.9 million and foreclosed and repossessed assets decreased $0.5 million during the second quarter of 2013. The non-performing loan and foreclosed and repossessed asset activity for the second quarter of 2013 was as follows:

(Dollars in thousands)
               
Non-performing loans   Foreclosed and repossessed assets  
March 31, 2013 $28,762 March 31, 2013 $9,918
Classified as non-performing 2,619 Transferred from non-performing loans 236
Charge offs (1,377 ) Other foreclosures/repossessions 687
Principal payments received (3,634 ) Real estate sold (1,651 )
Classified as accruing (293 ) Net gain on sale of assets 566
Transferred to real estate owned (236 ) Write downs (333 )
June 30, 2013 $25,841   June 30, 2013 $9,423  
           
 

The decrease in non-performing loans during the second quarter of 2013 relates primarily to principal payments received and charge offs during the period. Of the $3.6 million in principal payments received, $1.4 million related to the payoff of non-performing single family construction loans as a result of the houses being sold and $1.3 million related to additional principal payments received from various developers as a result of land or lot sales. Of the $1.4 million in loans that were charged off, $0.8 million related to a real estate development loan as a result of a decrease in the estimated value of the underlying collateral and $0.6 million related to various commercial business loans. These decreases in non-performing loans were partially offset by loans that were newly classified as non-performing during the period. Of the $2.6 million in loans newly classified as non-performing, $1.2 million relates to home equity loans and $0.9 million relates to single family construction loans.

A reconciliation of the Company’s allowance for loan losses for the quarters ended June 30, 2013 and 2012 is summarized as follows:

         
   
(Dollars in thousands)   2013   2012
Balance at March 31, $21,941 $21,424
Provision (520 ) 1,088
Charge offs:
One-to-four family (13 ) 0
Consumer (55 ) (493 )
Commercial business (556 ) (1,820 )
Commercial real estate (759 ) (1,554 )
Recoveries 321   1,874  
Balance at June 30, $20,359   $20,519  

Allocated to:
General allowance $12,260 $14,507
Specific allowance 8,099   6,012  
$20,359   $20,519  
         
 

The following table summarizes the amounts and categories of non-performing assets in the Bank’s portfolio and loan delinquency information as of the end of the three most recently completed quarters.
                             
  June 30,     March 31,     December 31,
(Dollars in thousands)     2013         2013         2012
Non-Performing Loans:
One-to-four family real estate $ 2,091 $ 2,127 $ 2,492
Commercial real estate 21,533 24,590 25,543
Consumer 1,462 334 300
Commercial business 755 1,711 1,640
Total 25,841 28,762 29,975
 
Foreclosed and Repossessed Assets:
One-to-four family real estate 707 1,114 1,595
Commercial real estate 8,716 8,804 9,000
Total non-performing assets $ 35,264 $ 38,680 $ 40,570
Total as a percentage of total assets 6.29 % 6.17 % 6.21 %
Total non-performing loans $ 25,841 $ 28,762 $ 29,975
Total as a percentage of total loans receivable, net 6.22 % 6.62 % 6.60 %
Allowance for loan loss to non-performing loans 78.79 % 76.29 % 72.09 %
 
Delinquency Data:
Delinquencies (1)
30+ days $ 5,820 $ 3,613 $ 2,739
90+ days (2) 0 4 7,423
Delinquencies as a percentage of
Loan and lease portfolio (1)
30+ days 1.22 % 0.76 % 0.57 %
90+ days 0.00 % 0.00 % 1.55 %
                           
 

(1) Excludes non-accrual loans. (2) Loans delinquent for 90 days and over are generally non-accruing and are included in the Company’s non-performing asset total unless they are well secured and in the process of collection.

The increase in delinquent loans in the second quarter of 2013 relates to a multi-family loan for $1.2 million and a $2.0 million commercial business loan that, because of unanticipated delays in the loan renewal process, were more than 30 days delinquent at June 30, 2013.

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

    Principal     Principal     Principal
Amount of Amount of Amount of
(Dollars in thousands) Loans at Loans at Loans at
# of June 30, # of March 31, # of December 31,
Property Type   relationships   2013   relationships   2013   relationships   2012
Developments/land 9 $20,956 10 $23,854 9 $24,339
Shopping centers/retail 1 66 1 69 2 386
Restaurants/bar 1 511 1 526 1 547
Office buildings 0 0 0 0 2 128
Other buildings 0   0   1   141   1   143
11   $21,533   13   $24,590   15   $25,543
 

The decrease in the non-performing commercial real estate loans from March 31, 2013 is due primarily to principal payments received on construction and development loans during the quarter as a result of various types of real estate sales including building lots, land and single family houses.

Non-Interest Income and ExpenseNon-interest income was $2.0 million for the second quarter of 2013, an increase of $0.2 million, or 10.8%, from $1.8 million for the same period in 2012. Gains on sales of loans increased $0.1 million between the periods primarily because of an increase in single family loan originations due to the low interest rate environment that continued to exist in the second quarter of 2013. Fees and service charges increased $0.1 million primarily because of an increase in overdraft charges and debit card fees between the periods.

Non-interest expense was $5.3 million for the second quarter of 2013, a decrease of $1.1 million, or 16.2%, from $6.4 million for the same period of 2012. The gains on real estate owned increased $0.5 million primarily because of an increase in the gains recognized on the properties sold. Compensation expense decreased $0.2 million primarily because of a decrease in employees between the periods due to certain branch closures and our continued focus on reducing expenses. Other non-interest expense decreased $0.2 million primarily because of a decrease in real estate taxes and other expenses related to other real estate owned. Deposit insurance costs decreased $0.1 million primarily because of a decrease in assets between the periods.

Income tax expense was $55,000 for the second quarter of 2013, an increase of $55,000 from the second quarter of 2012 when no income tax expense was recorded. In the second quarter of 2010, the Company recorded a deferred tax asset valuation reserve against its entire deferred tax asset balance and the Company continued to maintain a valuation reserve against the entire deferred tax asset balance at June 30, 2013. Since the valuation reserve is established against the entire deferred tax asset balance, no regular income tax expense was recorded for the second quarter of 2013. The income tax expense that was recorded in the second quarter of 2013 relates to alternative minimum tax amounts that are due since only a portion of the outstanding net operating loss carry forwards can be used to offset current income under the current alternative minimum tax rules.

Net Income (Loss) Available to Common ShareholdersThe net income available to common shareholders was $1.3 million for the second quarter of 2013, an improvement of $1.4 million from the $0.1 net loss available to common shareholders in the second quarter of 2012. The net income available to common shareholders increased primarily because of the change in the net income between the periods. The Company has deferred the last ten quarterly dividend payments, beginning with the February 15, 2011 dividend payment, on its Fixed Rate, Series A, Cumulative Perpetual Preferred Stock that was originally issued to the United States Treasury Department as part of the TARP Capital Purchase Program (the “Preferred Stock”). 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 income for financial statement purposes to arrive at the net income (loss) available to common shareholders.

Return on Assets and EquityReturn on average assets for the second quarter of 2013 was 1.21%, compared to a 0.23% return on average assets for the second quarter of 2012. Return on average equity was 11.78% for the second quarter of 2013, compared to 2.66% for the same period in 2012. Book value per common share at June 30, 2013 was $8.09, compared to $7.79 at June 30, 2012.

Six Month Period Results

Net IncomeNet income was $2.5 million for the six month period ended June 30, 2013, a decrease of $0.7 million, or 20.6%, compared to the net income of $3.2 million for the six month period ended June 30, 2012. The net income available to common shareholders was $1.5 million for the six month period ended June 30, 2013, a decrease of $0.8 million, or 33.3%, compared to the net income available to common shareholders of $2.3 million for the same period of 2012. Diluted earnings per common share for the six month period ended June 30, 2013 was $0.36, a decrease of $0.21 per share compared to the diluted earnings per common share of $0.57 for the same period in 2012. The decrease in net income for the six month period ended June 30, 2013 was primarily due to a $2.7 million decrease in net interest income due primarily to the decrease in interest earning assets between the periods and a $0.6 million decrease in the gain related to the sale of the Bank’s Toledo, Iowa branch in the first quarter of 2012. These changes to net income were partially offset by a $1.5 million decrease in the provision for loan losses and a $1.2 million decrease in non-interest expenses.

Net Interest IncomeNet interest income was $9.6 million for the first six months of 2013, a decrease of $2.7 million, or 21.7%, from $12.3 million for the same period in 2012. Interest income was $12.1 million for the six month period ended June 30, 2013, a decrease of $4.1 million, or 25.4%, from $16.2 million for the same six month period in 2012. Interest income decreased between the periods primarily because of a $96 million decrease in the average interest-earning assets and also because of a decrease in average yields between the periods. Average interest-earning assets decreased between the periods primarily because of a decrease in the commercial loan portfolio, which occurred primarily because of loan prepayments or non-renewals as a result of the Company’s focus on improving credit quality, decreasing loan concentrations, managing net interest margin and improving capital ratios. The average yield earned on interest-earning assets was 4.18% for the first six months of 2013, a decrease of 61 basis points from the 4.79% average yield for the first six months of 2012. The decrease in average yield is due to the continued low short-term interest rate environment that existed during the first six months of 2013. The increase in domestic long-term mortgage rates during the second quarter of 2013 did not materially impact the average yield earned on interest-earning assets during the first six months of 2013 since most of the mortgage loans originated by the Bank are sold into the secondary market and not placed in the loan portfolio.

Interest expense was $2.5 million for the first six months of 2013, a decrease of $1.5 million, or 36.8%, compared to $4.0 million for the first six months of 2012. Interest expense decreased primarily because of the $107 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 and a decrease in other deposits as a result of the branch sale that occurred in the first quarter of 2012. The decrease in borrowings and brokered certificates of deposits between the periods was the result of using the proceeds from loan principal payments to fund maturing borrowings and brokered certificates of 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 six months of 2013. The average interest rate paid on interest-bearing liabilities was 0.93% for the first six months of 2013, a decrease of 30 basis points from the 1.23% average interest rate paid in the first six months of 2012. The average interest rate paid on interest-bearing liabilities is anticipated to continue to decrease in the third quarter of 2013 as a result of paying off all outstanding Federal Home Loan Bank advances in the second quarter of 2013. Net interest margin (net interest income divided by average interest earning assets) for the first six months of 2013 was 3.31%, a decrease of 31 basis points, compared to 3.62% for the first six months of 2012.

Provision for Loan LossesThe provision for loan losses was ($0.5) million for the first six months of 2013, a decrease of $1.5 million, or 154.2%, from $1.0 million for the same six month period in 2012. The provision for loan losses decreased in the first six months of 2013 primarily because there were fewer decreases in the estimated value of the underlying collateral supporting commercial real estate loans that required additional allowances or charge offs in the current period when compared to the first six months of 2012. The provision also decreased because of a decrease in the outstanding loan portfolio balances, an improvement in the classifications of certain risk rated loans, and the recoveries received during the first six months of 2013 on previously charged off loans. Total non-performing assets were $35.3 million at June 30, 2013, a decrease of $5.3 million, or 13.1%, from $40.6 million at December 31, 2012. Non-performing loans decreased $4.1 million and foreclosed and repossessed assets decreased $1.2 million during the first six months of 2013. The non-performing loan and foreclosed and repossessed asset activity for the first six months of 2013 was as follows:

(Dollars in thousands)
             
Non-performing loans   Foreclosed and repossessed asset activity  
January 1, 2013 $29,975 January 1, 2013 $10,595
Classified as non-performing 3,480 Transferred from non-performing loans 236
Charge offs (1,723 ) Other foreclosures/repossessions 619
Principal payments received (4,989 ) Real estate sold (2,279 )
Classified as accruing (666 ) Net gain on sale of assets 702
Transferred to real estate owned (236 ) Write downs (450 )
June 30, 2013 $25,841   June 30, 2013 $9,423  
               
 

The decrease in non-performing loans during the first six months of 2013 relates primarily to principal payments received and charge offs during the period. Of the $5.0 million in principal payments received during the period, $1.7 million related to the payoff of non-performing single family construction loans as a result of the houses being sold and $1.6 million related to additional principal payments received from various developers as a result of land or lot sales. Of the $1.7 million in loans that were charged off, $0.9 million related to two real estate development loans as a result of a decrease in the estimated value of the underlying collateral and $0.6 million related to various commercial business loans. These decreases in non-performing loans were partially offset by loans that were newly classified as non-performing during the period. Of the $3.5 million in loans newly classified as non-performing, $1.2 million relates to home equity loans and $1.1 million relates to single family construction loans.

A reconciliation of the Company’s allowance for loan losses for the six month periods ended June 30, 2013 and June 30, 2012 is summarized as follows:

         
   
(Dollars in thousands)   2013   2012
Balance at January 1, $21,608 $23,888
Provision (520 ) 960
Charge offs:
One-to-four family (200 ) 0
Consumer (101 ) (757 )
Commercial business (557 ) (1,829 )
Commercial real estate (909 ) (4,184 )
Recoveries 1,038   2,441  
Balance at June 30, $20,359   $20,519  
         
 

Non-Interest Income and ExpenseNon-interest income was $3.9 million for the first six months of 2013, a decrease of $0.6 million, or 14.2%, from $4.5 million for the first six months of 2012. Gain on sale of branch office decreased $0.6 million as a result of the sale of the Toledo, Iowa branch in the first quarter of 2012. Gains on sales of loans decreased $0.1 million between the periods primarily because of a decrease in the sales of commercial government guaranteed loans during the first six months of 2013 when compared to the same period in 2012.

Non-interest expense was $11.4 million for the first six months of 2013, a decrease of $1.2 million, or 9.8%, from $12.6 million for the same period of 2012. Compensation and benefits decreased $0.5 million primarily because of a decrease in employees between the periods due to certain branch closures and our continued focus on reducing expenses. The gains on real estate owned increased $0.4 million primarily because of an increase in the gains recognized on the properties sold. Other non-interest expense decreased $0.2 million primarily because of decreased real estate taxes and other expenses related to other real estate owned. Deposit insurance costs decreased $0.1 million primarily because of a decrease in assets between the periods.

Income tax expense was $80,000 for the first six months of 2013, an increase of $80,000 from the same period of 2012 when no income tax expense was recorded. In the second quarter of 2010, the Company recorded a deferred tax asset valuation reserve against its entire deferred tax asset balance and the Company continued to maintain a valuation reserve against the entire deferred tax asset balance at June 30, 2013. Since the valuation reserve is established against the entire deferred tax asset balance, no regular income tax expense was recorded in the first six months of 2013. The income tax expense that was recorded in the first six months of 2013 relates to alternative minimum tax amounts that are due since only a portion of the outstanding net operating loss carry forwards can be used to offset current income under the current alternative minimum tax rules.

Net Income Available to Common ShareholdersThe net income available to common shareholders was $1.5 million for the first six months of 2013, a decrease of $0.8 million from the $2.3 million net income available to common shareholders in the first six months of 2012. The net income available to common shareholders decreased primarily because of the change in the net income between the periods. As discussed previously in this earnings release, the Company has deferred the last ten quarterly dividend payments, beginning with the February 15, 2011 dividend payment, on its Preferred Stock. 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 income for financial statement purposes to arrive at the net income available to common shareholders.

Return on Assets and EquityReturn on average assets for the six month period ended June 30, 2013 was 0.84%, compared to a 0.90% return on average assets for the same period in 2012. Return on average equity was 8.36% for the six month period ended June 30, 2013, compared to 10.98% for the same period in 2012.

General InformationHMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates eight full service offices in Minnesota located in Albert Lea, Austin, Eagan, La Crescent, Rochester (2), Spring Valley and Winona; one full service office in Iowa located in Marshalltown; one loan origination office in Sartell, Minnesota; and two Private Banking offices in Rochester, Minnesota.

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,” “intend,” “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 increasing our core deposit relationships, reducing non-performing assets, reducing expense and generating improved financial results; 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 and use of alternate funding sources, including Federal Home Loan Bank advances; 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; and 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 FRB and the Bank and the Company to any failure to comply with any such regulatory standard, agreement or requirement. 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; federal and state regulation and enforcement, including restrictions set forth in the supervisory agreements between each of the Company and Bank and the OCC and FRB; 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, cash inflows and deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios, relative costs associated with alternate funding sources, 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 and the investment expectations of holders of our capital stock; the market for credit related assets; 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 Forms 10-K and 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, 2012 and Part II, Item 1A of its Quarterly Reports on Form 10-Q. We undertake no duty to update any of the forward-looking statements after the date of this press release.

(Three pages of selected consolidated financial information are included with this release.)
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
           
  June 30,   December 31,
(Dollars in thousands)     2013   2012
(unaudited)
Assets
Cash and cash equivalents $ 29,933 83,660
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $6,694 and $9,825) 7,042 10,421
Other marketable securities

(amortized cost $84,811 and $75,759)
83,251   75,470  
90,293   85,891  
 
Loans held for sale 3,212 2,584
Loans receivable, net 415,534 454,045
Accrued interest receivable 2,004 2,018
Real estate, net 9,423 10,595
Federal Home Loan Bank stock, at cost 784 4,063
Mortgage servicing rights, net 1,795 1,732
Premises and equipment, net 6,883 7,173
Prepaid expenses and other assets 1,113   1,566  
Total assets $ 560,974   653,327  
 
 
Liabilities and Stockholders’ Equity
Deposits $ 491,753 514,951
Federal Home Loan Bank advances 0 70,000
Accrued interest payable 178 247
Customer escrows 808 830
Accrued expenses and other liabilities 7,073   6,465  
Total liabilities 499,812   592,493  
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock ($.01 par value):
authorized 500,000 shares; issued shares 26,000 25,629 25,336
Common stock ($.01 par value):
authorized 16,000,000; issued shares 9,128,662 91 91
Additional paid-in capital 51,760 51,795
Retained earnings, subject to certain restrictions 48,822 47,004
Accumulated other comprehensive loss (1,567 ) (49 )
Unearned employee stock ownership plan shares (2,900 ) (2,997 )
Treasury stock, at cost 4,735,589 and 4,705,073 shares (60,673 ) (60,346 )
Total stockholders’ equity 61,162   60,834  
Total liabilities and stockholders’ equity $ 560,974   653,327  
           
 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(unaudited)
           
  Three Months Ended   Six Months Ended
June 30, June 30,
(Dollars in thousands, except per share data)     2013   2012   2013   2012
Interest income:    
Loans receivable $ 5,503 7,523 11,531 15,319
Securities available for sale:
Mortgage-backed and related 82 164 176 357
Other marketable 148 192 287 441
Cash equivalents 35 19 68 46
Other 19   54   48   64  
Total interest income 5,787   7,952   12,110   16,227  
 
Interest expense:
Deposits 465 1,061 1,022 2,278
Federal Home Loan Bank advances 650   844   1,485   1,689  
Total interest expense 1,115   1,905   2,507   3,967  
Net interest income 4,672 6,047 9,603 12,260
Provision for loan losses (520 ) 1,088   (520 ) 960  
Net interest income after provision for loan losses 5,192   4,959   10,123   11,300  
 
Non-interest income:
Fees and service charges 883 834 1,672 1,663
Mortgage servicing fees 257 236 505 468
Gain on sales of loans 702 620 1,380 1,529
Gain on sale of branch office 0 0 0 552
Other 145   104   304   288  
Total non-interest income 1,987   1,794   3,861   4,500  
 
Non-interest expense:
Compensation and benefits 2,980 3,219 6,179 6,632
(Gain) loss on real estate owned (306 ) 174 (325 ) 97
Occupancy 826 839 1,676 1,721
Deposit insurance 190 305 508 575
Data processing 325 336 655 673
Other 1,310   1,485   2,671   2,903  
Total non-interest expense 5,325   6,358   11,364   12,601  
Income before income tax expense 1,854 395 2,620 3,199
Income tax expense 55   0   80   0  
Net income 1,799 395 2,540 3,199
Preferred stock dividends and discount (547 ) (464 ) (1,023 ) (925 )
Net income (loss) available to common shareholders $ 1,252   (69 ) 1,517   2,274  
Other comprehensive loss, net of tax $ (1,227 ) (93 ) (1,373 ) (273 )

Comprehensive income (loss) attributable to common shareholders

$
25   (162 )

144
  2,001  
Basic earnings (loss) per common share $ 0.32   (0.02 ) 0.38   0.58  
Diluted earnings (loss) per common share $ 0.30   (0.02 ) 0.36   0.57  
 

HMN FINANCIAL, INC. AND SUBSIDIARIES

Selected Consolidated Financial Information

(unaudited)
 

 
 

 

 
     

 

 
   
   

 
                               

SELECTED FINANCIAL DATA:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands, except per share data)
   

2013
     

2012
     

2013
     

2012
   

I.

OPERATING DATA:
Interest income

$

5,787
7,952 12,110 16,227
Interest expense 1,115 1,905 2,507 3,967
Net interest income 4,672 6,047 9,603 12,260
 

II.

AVERAGE BALANCES:
Assets (1) 595,747 684,046 610,220 713,151
Loans receivable, net 412,445 522,015 427,002 534,064
Securities available for sale (1) 93,877 86,651 92,378 95,954
Interest-earning assets (1) 570,914 653,268 584,836 680,772
Interest-bearing liabilities 526,831 617,098 541,435 648,766
Equity (1) 61,273 59,629 61,318 58,608
 

III.

PERFORMANCE RATIOS: (1)
Return on average assets (annualized) 1.21

%

0.23
% 0.84

 

%
0.90 %
Interest rate spread information:
Average during period 3.22 3.65 3.24 3.56
End of period 4.15 3.52 4.15 3.71
Net interest margin 3.28 3.72 3.31 3.62

Ratio of operating expense to average total assets (annualized)
3.59 3.74 3.76 3.55
Return on average equity (annualized) 11.78 2.66 8.36 10.98
Efficiency 79.96 81.09 84.40 75.19
                   
June 30, December 31, June 30,
2013     2012     2012

IV.

ASSET QUALITY:
Total non-performing assets 35,264 40,570 43,823
Non-performing assets to total assets 6.29 % 6.21 %

6.54

%

 
Non-performing loans to total loans receivable, net 6.22 % 6.60 %

6.27

%

 
Allowance for loan losses 20,359 21,608 20,519
Allowance for loan losses to total assets 3.63 % 3.31 %

3.06

%

 

Allowance for loan losses to total loans receivable, net
4.90 4.76 4.14
Allowance for loan losses to non-performing loans 78.79 72.09 66.00
 

V.

BOOK VALUE PER SHARE:
Book value per share 8.09 8.02 7.79
                   
Six Months Year Ended Six Months
Ended Dec 31, Ended
June 30, 2013     2012     June 30, 2012

VI.

CAPITAL RATIOS:

Stockholders’ equity to total assets, at end of period

10.90

%

9.31
%

8.88

%

Average stockholders’ equity to average assets (1)

10.05

8.81
8.22

Ratio of average interest-earning assets to average interest-bearing liabilities (1)

108.02

105.73
104.93
Tier 1 or core capital (2)

11.78

9.68
9.04
Risk-based capital

17.31

15.52
13.73
                   

June 30,

December 31,
June 30,

2013
   

2012
    2012

VII.

EMPLOYEE DATA:
    Number of full time equivalent employees    

190
     

194
      200            
    (1)   Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
(2) 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. The Bank’s core capital ratio was in excess of this requirement at June 30, 2013.

Copyright Business Wire 2010

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