EX-99 3 a4749772ex99.txt HMN FINANCIAL, INC. EXHIBIT 99 Exhibit 99 HMN Financial, Inc. Announces Third Quarter Earnings ROCHESTER, Minn.--(BUSINESS WIRE)--Oct. 21, 2004--HMN Financial, Inc. (HMN) (Nasdaq:HMNF): Third Quarter Highlights -- Net income of $2.6 million, down $490,000, or 16.1%, from third quarter of 2003 -- Diluted earnings per share of $ 0.64, down $ 0.12, or 15.8%, from third quarter of 2003 -- Net interest income up $1.3 million, or 20.6%, over third quarter of 2003 -- Loan sale gains down $1.3 million, or 78.2%, from third quarter of 2003 -- Mortgage servicing rights amortization up $433,000, or 224.1%, over third quarter of 2003 Year to Date Highlights -- Net income of $7.2 million, up $708,000, or 11.0%, over first nine months of 2003 -- Diluted earnings per share of $1.77, up $0.14, or 8.59%, over first nine months of 2003 -- Net interest income up $4.5 million, or 25.1%, over first nine months of 2003 -- Loan sale gains down $3.3 million, or 72.4%, from first nine months of 2003 -- Security gains down $1.2 million, or 99.7%, from first nine months of 2003 EARNINGS SUMMARY Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2004 2003 2004 2003 ---------------------- ---------------------- Net income $2,550,201 3,040,281 $7,167,821 6,460,049 Diluted earnings per share 0.64 0.76 1.77 1.63 Return on average assets 1.09 1.53% 1.06 1.13% Return on average equity 12.02 15.12% 11.44 10.99% Book value per share $18.66 17.73 $18.66 17.73 HMN Financial, Inc. (HMN) (Nasdaq:HMNF), the $955 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.6 million for the third quarter of 2004, down $490,000, or 16.1%, from net income of $3.0 million for the third quarter of 2003. Diluted earnings per common share for the third quarter of 2004 were $0.64, down $0.12, from $0.76 for the third quarter of 2003. Third Quarter Results Net Interest Income Net interest income was $7.8 million for the third quarter of 2004, an increase of $1.3 million, or 20.6%, compared to $6.4 million for the third quarter of 2003. Interest income was $13.1 million for the third quarter of 2004, an increase of $1.6 million, or 14.3%, from $11.5 million for the same period in 2003. Interest income increased primarily because of an increase in interest-earning assets and because of a change in the mix of assets between the periods. The increase in interest-earning assets was caused primarily by the $131 million increase in commercial and consumer loans between the periods. The increase in interest income on commercial and consumer loans was partially offset by lower income in the single-family loan portfolio due to a decrease in the outstanding balance and lower interest rates of this portfolio in the third quarter of 2004 when compared to the same period in 2003. The yield earned on interest-earning assets was 5.87% for the third quarter of 2004, a decrease of 23 basis points from the 6.10% yield for the third quarter of 2003. Interest expense was $5.4 million for the third quarter of 2004, an increase of $321,000, or 6.3%, compared to $5.1 million for the third quarter of 2003. Interest expense increased primarily because of the $177 million in deposit growth that was experienced between the periods. The increase in interest expense caused by the increased deposits was partially offset by a decrease in the average interest rate paid on deposits. The decrease in the average rate was primarily the result of the $96 million in growth that was experienced in checking and money market accounts, which generally have lower interest rates than other deposit accounts. The average interest rate paid on interest-bearing liabilities was 2.53% for the third quarter of 2004, a decrease of 34 basis points from the 2.87% paid for the third quarter of 2003. Net interest margin (net interest income divided by average interest earning assets) for the third quarter of 2004 was 3.47%, an increase of 6 basis points, compared to 3.41% for the third quarter of 2003. Provision for Loan Losses The provision for loan losses was $775,000 for the third quarter of 2004, an increase of $230,000, or 42.2%, from $545,000 for the third quarter of 2003. The provision for loan losses increased primarily because of the $10.5 million of additional commercial and consumer loan growth that was experienced in the third quarter of 2004 when compared to the third quarter of 2003. Total non-performing assets were $3.7 million at September 30, 2004, an increase of $248,000, or 7.1%, from $3.5 million at June 30, 2004. The increase in non-performing assets relates primarily to increases in foreclosed and repossessed assets and non-accruing consumer loans. Non-Interest Income and Expense Non-interest income was $1.6 million for the third quarter of 2004, a decrease of $1.5 million, or 48.7%, from $3.1 million for the same period in 2003. Gains on sales of loans decreased by $1.3 million due to the significant decrease in mortgage loan activity in the third quarter of 2004 when compared to the same period in 2003. Non-interest income also decreased by $415,000 due to the lower gains recognized on the sale of securities during the third quarter of 2004 when compared to the same quarter in 2003. These decreases in non-interest income were partially offset by an increase of $116,000 in fees and service charges between the periods due to an increase in the number of deposit accounts and the fees charged. Mortgage servicing fees increased by $31,000 between the periods because of the increased size of the mortgage loan servicing portfolio and other non-interest income increased by $31,000 primarily because of increased revenues from the sale of uninsured investment products. Non-interest expense was $4.9 million for the third quarter of 2004, an increase of $550,000, or 12.7%, from $4.3 million for the third quarter of 2003. Amortization of mortgage servicing rights increased by $433,000, or 224.1%, due primarily to the recapture of an $810,000 impairment reserve in the third quarter of 2003 as a result of a slow down in mortgage loan prepayment speeds. In comparison, no impairment reserves were established or recaptured in the third quarter of 2004. Data processing costs decreased by $77,000 primarily because of the renegotiation of a third party service contract in the fourth quarter of 2003. Compensation expense increased by $345,000, or 16.5%, primarily due to an increase in the number of employees and because of annual increases in payroll and employee benefit costs. Other operating expenses decreased by $288,000 primarily due the reduction in costs associated with the decreased mortgage loan production in the current quarter when compared to the same period in 2003. Income tax expense was $1.2 million for the third quarter of 2004, a decrease of $469,000, compared to $1.6 million for the same period of 2003. The decrease in income tax expense is due to the decrease in taxable income and a decrease in the effective tax rate. Return on Assets and Equity Return on average assets for the third quarter of 2004 was 1.09%, compared to 1.53% for the third quarter of 2003. Return on average equity was 12.02% for the third quarter of 2004, compared to 15.12% for the same quarter of 2003. Book value per common share at September 30, 2004 was $18.66, compared to $17.73 at September 30, 2003. Nine Month Period Results Net Income Net income was $7.2 million for the nine-month period ended September 30, 2004, an increase of $708,000, or 11.0%, compared to $6.5 million for the nine-month period ended September 30, 2003. Diluted earnings per common share for the nine-month period in 2004 were $1.77, up $0.14, or 8.6%, from $1.63 for the same nine-month period in 2003. Net Interest Income Net interest income was $22.4 million for the first nine months of 2004, an increase of $4.5 million, or 25.1%, from $17.9 million for the same period in 2003. Interest income was $37.9 million for the nine-month period of 2004, an increase of $4.9 million, or 14.9%, from $33.0 million for the same nine-month period in 2003. Interest income increased primarily because of an increase in interest-earning assets and because of a change in the mix of assets between the periods. The increase in interest-earning assets was caused primarily by the $131 million increase in commercial and consumer loans between the periods. The increase in interest income on commercial and consumer loans was partially offset by lower income on the single-family loan portfolio in the first nine months of 2004 when compared to the same period in 2003. The yield earned on interest-earning assets was 5.87% for the first nine months of 2004, a decrease of 19 basis points from the 6.06% yield for the first nine months of 2003. Interest expense was $15.6 million for the nine-month period of 2004, an increase of $442,000, or 2.9%, from the $15.1 million for the same period in 2003. Interest expense on deposits and Federal Home Loan Bank advances decreased by $2.9 million due to a decline in the interest rates paid and increased by $3.3 million due to the $138 million increase in the average outstanding balance of deposits and advances between the periods. The average interest rate paid on interest-bearing liabilities was 2.54% for the first nine months of 2004, a decrease of 44 basis points from the 2.98% paid for the same period in 2003. Net interest margin (net interest income divided by average interest earning assets) for the first nine-months of 2004 was 3.46%, a 17 basis point increase, compared to 3.29% for the same period of 2003. Provision for Loan Losses The provision for loan losses was $2.0 million for the nine-month period of 2004, an increase of $141,000, or 7.4%, from $1.9 million for the same nine-month period in 2003. The provision for loan losses increased primarily because of the slightly higher growth experienced in the commercial and consumer loan portfolios in the first nine-months of 2004 compared to the same period of 2003. Total non-performing assets were $3.7 million at September 30, 2004, a decrease of $1.3 million, or 26.1%, from $5.0 million at December 31, 2003. The decrease in non-performing assets relates primarily to a $1.0 million decrease in non-accruing commercial real estate loans, $626,000 decrease in non-accruing consumer loans, and a $472,000 increase in foreclosed and repossessed assets. Non-Interest Income and Expense Non-interest income was $4.8 million for the first nine months of 2004, a decrease of $3.6 million, or 42.5%, from $8.4 million for the same period in 2003. Gains on sales of loans decreased by $3.3 million due to the significant decrease in mortgage loan activity in the first nine months of 2004 when compared to the same period of 2003. Non-interest income also decreased by $1.2 million because of lower gains on security sales. Fees and service charges increased by $402,000 between the periods due primarily to an overdraft protection program that was implemented during the second quarter of 2003 and because of increases in the number of deposit accounts and the fees charged. Mortgage servicing fees increased by $153,000 due to the increased size of the mortgage loan servicing portfolio between the periods. Other non-interest income increased by $153,000 primarily because of increased revenues from the sale of uninsured investment products. Non-interest expense was $14.8 million for the first nine months of 2004, an increase of $79,000, or 0.5%, from $14.7 million for the same period in 2003. Amortization expense on mortgage servicing rights decreased by $910,000 between the periods because of a decrease in the prepayments on the mortgage loans being serviced. Data processing costs decreased by $219,000 primarily because of the renegotiation of a third party service contract in the fourth quarter of 2003. Compensation expense increased by $1.1 million because of an increase in the number of employees and because of annual payroll and benefit cost increases. Occupancy expense increased by $271,000 primarily because of increases in real estate taxes on existing facilities and increased expenses relating to additional corporate facilities that were put in place in the first quarter of 2004. Income tax expense was unchanged at $3.2 million for both nine-month periods despite the increase in taxable income in 2004 primarily because of a decrease in the effective tax rate in 2004 compared to 2003. The decrease in the effective tax rate was caused in part by an increase in tax-exempt income and a change in the apportionment of state taxes. Return on Assets and Equity Return on average assets for the nine-month period ended September 30, 2004 was 1.06%, compared to 1.13% for the same period in 2003. Return on average equity was 11.44% for the nine-month period ended September 30, 2004, compared to 10.99% for the same period in 2003. President's Statement "HMN's core earnings continue to improve," said HMN President Michael McNeil. "I am pleased that our growth, along with the change in the mix of our assets and liabilities, has allowed us to achieve record nine-month earnings of $7.2 million in 2004 despite the $4.5 million decline in the gains recognized on the sale of securities and mortgage loans." General Information HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The Bank operates eight 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 St. Cloud, Minnesota and in West Des Moines, Iowa. 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 HMN's financial expectations for earnings and revenues. A number of factors could cause actual results to differ materially from HMN's assumptions and expectations. These factors include possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; 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 HMN's assumptions and expectations include those set forth in HMN's most recent filings 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, 2004 2003 (unaudited) ---------------------------------------------------------------------- Assets Cash and cash equivalents.................. $43,102,740 30,496,823 Securities available for sale: Mortgage-backed and related securities (amortized cost $10,073,233 and $13,707,005)........................... 9,392,905 13,048,718 Other marketable securities (amortized cost $95,737,058 and $91,035,285).......................... 95,404,115 91,615,047 ------------- ------------ 104,797,020 104,663,765 ------------- ------------ Loans held for sale........................ 3,652,495 6,542,824 Loans receivable, net...................... 766,062,706 688,951,199 Accrued interest receivable................ 3,927,166 3,462,221 Real estate, net........................... 424,142 73,271 Federal Home Loan Bank stock, at cost...... 9,938,300 10,004,400 Mortgage servicing rights, net............. 3,286,026 3,447,843 Premises and equipment, net................ 12,542,097 12,110,151 Investment in limited partnerships......... 174,758 617,042 Goodwill................................... 3,800,938 3,800,938 Core deposit intangible.................... 362,081 447,474 Prepaid expenses and other assets.......... 2,807,443 2,108,575 Deferred tax asset, net.................... 457,200 0 ------------- ------------ Total assets........................... $955,335,112 866,726,446 ============= ============ Liabilities and Stockholders' Equity Deposits................................... $666,752,426 551,687,995 Federal Home Loan Bank advances............ 198,900,000 203,900,000 Accrued interest payable................... 1,264,402 766,837 Customer Escrows........................... 1,343,056 22,457,671 Accrued expenses and other liabilities..... 4,282,512 6,952,600 Deferred tax liabilities, net.............. 0 26,300 ------------- ------------ Total liabilities...................... 872,542,396 785,791,403 ------------- ------------ Commitments and contingencies Minority interest.......................... 1,614 3,986 Stockholders' equity: Serial preferred stock: ($.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................. 57,746,116 57,863,726 Retained earnings, subject to certain restrictions.............................. 90,127,064 85,364,657 Accumulated other comprehensive loss....... (655,671) (50,725) Unearned employee stock ownership plan shares.................................... (4,592,716) (4,738,084) Treasury stock, at cost 4,691,798 and 4,616,010 shares.......................... (59,924,978) (57,599,804) ------------- ------------ Total stockholders' equity............. 82,791,102 80,931,057 ------------- ------------ Total liabilities and stockholders' equity. $955,335,112 866,726,446 ============= ============ ---------------------------------------------------------------------- HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) ---------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ---------------------------------------------------------------------- Interest income: Loans receivable... $12,242,408 10,744,663 35,220,089 30,628,304 Securities available for sale: Mortgage-backed and related..... 81,341 72,646 292,633 175,405 Other marketable. 730,727 591,292 2,180,525 1,843,359 Cash equivalents... 40,410 12,762 160,750 98,659 Other.............. 61,196 86,196 139,016 268,880 ------------ ----------- ----------- ----------- Total interest income.......... 13,156,082 11,507,559 37,939,013 33,014,607 ------------ ----------- ----------- ----------- Interest expense: Deposits........... 3,190,799 2,474,680 9,015,152 7,438,497 Federal Home Loan Bank advances..... 2,195,801 2,590,574 6,550,436 7,684,876 ------------ ----------- ----------- ----------- Total interest expense......... 5,386,600 5,065,254 15,565,588 15,123,373 ------------ ----------- ----------- ----------- Net interest income.......... 7,769,482 6,442,305 22,373,425 17,891,234 Provision for loan losses.............. 775,000 545,000 2,041,000 1,900,000 ------------ ----------- ----------- ----------- Net interest income after provision for loan losses..... 6,994,482 5,897,305 20,332,425 15,991,234 ------------ ----------- ----------- ----------- Non-interest income: Fees and service charges........... 741,704 625,419 2,014,905 1,612,595 Mortgage servicing fees.............. 291,709 261,198 869,789 716,503 Securities gains, net............... 2,451 417,443 3,812 1,233,229 Gain on sales of loans............. 349,214 1,601,047 1,268,445 4,592,837 Earnings (losses) in limited partnerships...... (6,500) 10,153 (19,617) (313,161) Other.............. 210,155 179,112 667,952 514,906 ------------ ----------- ----------- ----------- Total non- interest income. 1,588,733 3,094,372 4,805,286 8,356,909 ------------ ----------- ----------- ----------- Non-interest expense: Compensation and benefits.......... 2,430,026 2,085,383 7,540,268 6,392,457 Occupancy.......... 914,382 805,890 2,670,154 2,399,207 Deposit insurance premiums.......... 23,600 18,047 70,099 54,838 Advertising........ 116,195 92,161 291,591 278,013 Data processing.... 233,254 310,614 652,540 871,660 Amortization of mortgage servicing rights, net of valuation adjustments and servicing costs... 239,806 (193,287) 795,439 1,705,344 Other.............. 923,135 1,211,288 2,783,471 3,022,975 ------------ ----------- ----------- ----------- Total non- interest expense 4,880,398 4,330,096 14,803,562 14,724,494 ------------ ----------- ----------- ----------- Income before income tax expense......... 3,702,817 4,661,581 10,334,149 9,623,649 Income tax expense... 1,152,700 1,621,300 3,168,700 3,163,600 ------------ ----------- ----------- ----------- Income before minority interest........ 2,550,117 3,040,281 7,165,449 6,460,049 Minority interest.... (84) 0 (2,372) 0 ------------ ----------- ----------- ----------- Net income....... $2,550,201 3,040,281 7,167,821 6,460,049 ============ =========== =========== =========== Basic earnings per share............... $0.66 0.79 1.85 1.71 ============ =========== =========== =========== Diluted earnings per share............... $0.64 0.76 1.77 1.63 ============ =========== =========== =========== ---------------------------------------------------------------------- HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) ---------------------------------------------------------------------- SELECTED FINANCIAL DATA: Three Months Ended Nine Months Ended (Dollars in thousands, except per September 30, September 30, share data) 2004 2003 2004 2003 ---------------------------------------------------------------------- I. OPERATING DATA: Interest income............. $13,156 11,507 37,939 33,014 Interest expense............ 5,387 5,065 15,566 15,123 Net interest income......... 7,769 6,442 22,373 17,891 II. AVERAGE BALANCES: Assets (1).................. 934,248 787,565 906,937 765,645 Loans receivable, net....... 752,281 619,188 720,835 582,286 Mortgage-backed and related securities (1)............. 10,287 19,210 11,644 24,057 Interest-earning assets (1). 891,608 748,961 863,534 727,965 Interest-bearing liabilities 846,297 700,566 819,168 679,186 Equity (1).................. 84,391 79,764 83,726 78,621 III. PERFORMANCE RATIOS: (1) Return on average assets (annualized)............... 1.09% 1.53% 1.06% 1.13% Interest rate spread information: Average during period..... 3.34 3.23 3.33 3.09 End of period............. 3.33 3.25 3.33 3.25 Net interest margin......... 3.47 3.41 3.46 3.29 Ratio of operating expense to average total assets (annualized)............... 2.08 2.18 2.18 2.57 Return on average equity (annualized)............... 12.02 15.12 11.44 10.99 Efficiency.................. 52.15 45.40 54.47 56.10 --------------------------- Sept 30, Dec 31, Sept 30, 2004 2003 2003 --------------------------- IV. ASSET QUALITY: Total non-performing assets. $3,719 5,035 6,021 Non-performing assets to total assets............... 0.39% 0.58% 0.75% Non-performing loans to total loans receivable, net 0.38 0.68% 0.85% Allowance for loan losses... $8,471 6,940 6,592 Allowance for loan losses to total assets............... 0.89% 0.80% 0.82% Allowance for loan losses to total loans receivable, net 1.11 1.01 1.02 Allowance for loan losses to non-performing loans....... 291.04 147.99 119.64 V. BOOK VALUE PER SHARE: Book value per share........ $18.66 17.93 17.73 --------------------------- Nine Nine Months Year Months Ended Ended Ended Sept 30, Dec 31, Sept 30, 2004 2003 2003 --------------------------- VI. CAPITAL RATIOS: Stockholders' equity to total assets, at end of period..................... 8.67% 9.34% 9.85% Average stockholders' equity to average assets (1)...... 9.23 10.15 10.27 Ratio of average interest- earning assets to average interest-bearing liabilities (1)............ 105.42 106.65 107.18 --------------------------- Sept 30, Dec 31, Sept 30, 2004 2003 2003 --------------------------- VII. EMPLOYEE DATA: Number of full time equivalent employees....... 199 203 185 ---------------------------------------------------------------------- (1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115. CONTACT: HMN Financial, Inc., Rochester Michael McNeil, 507-535-1202