Add
HMNF to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HMNF > SEC Filings for HMNF > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
Quarterly Report
Forward-looking Information
This quarterly report and other reports filed by the Company with the Securities
and Exchange Commission 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 of available liquidity to the Bank, the future outlook
for the Company and the Company's compliance with regulatory standards. 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, 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; the
Company's participation in the U.S. Treasury Department's Capital Purchase
Program; the Company's use of the proceeds from the sale of securities to the
U.S. Treasury Department 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 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"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 2008 and Part II, Item 1A of this quarterly report on Form 10-Q.
General
The earnings of the Company are primarily dependent on the Bank's net interest
income, which is the difference between interest earned on loans and
investments, and the interest paid on interest-bearing liabilities such as
deposits, Federal Home Loan Bank (FHLB) advances, and Federal Reserve
borrowings. The difference between the average rate of interest earned on assets
and the average rate paid on liabilities is the "interest rate spread". Net
interest income is produced when interest-earning assets equal or exceed
interest-bearing liabilities and there is a positive interest rate spread. Net
interest income and net interest rate spread are affected by changes in interest
rates, the volume and mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. The Company's net income is
also affected by the generation of non-interest income, which consists primarily
of gains or losses from the sale of securities, gains from the sale of loans,
fees for servicing mortgage loans, and the generation of fees and service
charges on deposit accounts. The Bank incurs expenses in addition to interest
expense in the form of salaries and benefits, occupancy expenses, provisions for
loan losses and amortization of mortgage servicing assets. Over the past several
years, the Company has increased the emphasis on commercial and commercial real
estate loans, which has increased the credit risk inherent in the loan
portfolio. While HMN did not originate or hold subprime mortgages in its loan
portfolio, purchase investments backed by subprime mortgages, or incur any write
downs directly related to subprime mortgages, subprime credit issues indirectly
impacted the Company by making it more difficult for some borrowers with
marginal credit to qualify for a mortgage because most of the non-traditional
mortgage products were eliminated by the banks and mortgage companies that were
previously offering them. This decrease in available credit reduced the demand
for single family homes as there were fewer qualified buyers in the marketplace.
The decrease in demand for housing and building lots affected our level of
charge offs and the risk ratings on some of our residential development loans.
Consequently, the provision for loan losses has increased due to commercial real
estate loan charge offs and risk rating downgrades due primarily to decreased
demand for housing and building and a general decline in the economic conditions
in our markets.
The earnings of financial institutions, such as the Bank, are significantly
affected by prevailing economic and competitive conditions, particularly changes
in interest rates, government monetary and fiscal policies, and regulations of
various regulatory authorities. Lending activities are influenced by the demand
for and supply of business credit, single family and commercial properties,
competition among lenders, the level of interest rates and the availability of
funds. Deposit flows and costs of deposits are influenced by prevailing market
rates of interest on competing investments, account maturities and the levels of
personal income and savings. The interest rates charged by the FHLB and Federal
Reserve Bank (FRB) on advances to the Bank also have a significant impact on the
Bank's overall cost of funds.
Critical Accounting Policies
Critical accounting policies are those policies that the Company's management
believes are the most important to understanding the Company's financial
condition and operating results. The Company has identified the following
policies as being critical because they require difficult, subjective, and/or
complex judgments that are inherently uncertain. Therefore, actual financial
results could differ significantly depending upon the estimates used.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis of the loan
portfolio. In this analysis, management considers factors including, but not
limited to, specific occurrences of loan impairment, changes in the size of the
portfolios, national and regional economic conditions such as unemployment data,
loan portfolio composition, loan delinquencies, local construction permits,
development plans, local economic growth rates, value of underlying collateral,
historical experience and observations made by the Company's ongoing internal
audit and regulatory exam processes. Loans are charged off to the extent they
are deemed to be uncollectible. The Company has established separate components
of its overall methodology to determine the adequacy of the loan loss allowance
for its homogeneous single-family and consumer loan portfolios and its
non-homogeneous loan portfolios. The determination of the allowance for the
non-homogeneous commercial, commercial real estate, and multi-family loan
portfolios involves assigning standardized risk ratings and loss factors that
are periodically reviewed. The loss factors are estimated using a combination of
the Company's own loss experience and external industry data and are generally
assigned to all loans that are on performing status. The Company also performs
an individual analysis of impairment on each non-performing loan that is based
on the expected cash flows or the value of the assets collateralizing the loans.
The determination of the allowance on the homogeneous single-family and consumer
loan portfolios is calculated on a pooled basis with individual determination of
the allowance of all non-performing loans.
The adequacy of the allowance for loan losses is dependent upon management's
estimates of variables affecting valuation, appraisals of collateral,
evaluations of performance and status of the loans, and the amounts and timing
of future cash flows expected to be received on impaired loans. Such estimates,
appraisals, evaluations and cash flows may be subject to frequent adjustments
due to changing economic prospects of borrowers or properties. The estimates are
reviewed periodically and adjustments, if any, are recorded in the provision for
loan losses in the periods in which the adjustments become known. The allowance
is allocated to individual loan categories based upon the relative risk
characteristics of the loan portfolios and the actual loss experience. The
Company increases its allowance for loan losses by charging the provision for
loan losses against income. The methodology for establishing the allowance for
loan losses takes into consideration probable losses that have been identified
in connection with specific loans as well as probable losses in the loan
portfolio for which specific reserves are not required. Although management
believes that based on current conditions the allowance for loan losses is
maintained at an adequate amount to provide for probable loan losses inherent in
the portfolio as of the balance sheet dates, future conditions may differ
substantially from those anticipated in determining the allowance for loan
losses and adjustments may be required in the future.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the
enactment date. These calculations are based on many complex factors including
estimates of the timing of reversals of temporary differences, the
interpretation of federal and state income tax laws, and a determination of the
differences between the tax and the financial reporting basis of assets and
liabilities. Actual results could differ significantly from the estimates and
interpretations used in determining the current and deferred income tax
liabilities.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48) on
January 1, 2007. FIN 48 requires the use of estimates and management's best
judgment to determine the amounts and probabilities of all of the possible
outcomes that could be realized upon the ultimate settlement of a tax position
using the facts, circumstances, and information available. The application of
FIN 48 requires significant judgment in arriving at the amount of tax benefits
to be recognized in the financial statements for a given tax position. It is
possible that the tax benefits realized upon the ultimate resolution of a tax
position may result in tax benefits that are significantly different from those
estimated.
Net Income (Loss)
The net loss for the first quarter of 2009 was $2.6 million, down $4.1 million,
or 276.2%, from net income of $1.5 million for the first quarter of 2008. Net
loss available to common shareholders was $3.1 million for the first quarter of
2009, down $4.6 million, or 305.0%, from net income available to common
shareholders of $1.5 million for the first quarter of 2008. Net loss available
to common shareholders was reduced by $429,000 of preferred stock dividends and
discounts in the first quarter of 2009, with no comparable amount in the first
quarter of 2008. Diluted loss per common share for the first quarter of 2009 was
$0.83, down $1.22 from diluted earnings per common share of $0.39 for the first
quarter of 2008. The decrease in net income was due primarily to a $5.0 million
increase in the loan loss provision between the periods as a result of the
increased charge offs on non-performing loans.
Net Interest Income
Net interest income was $8.8 million for the first quarter of 2009, an increase
of $0.1 million, or 1.1%, compared to $8.7 million for the first quarter of
2008. Interest income was $15.4 million for the first quarter of 2009, a
decrease of $2.4 million, or 13.7%, from $17.8 million for the first quarter of
2008. Interest income decreased primarily because of a decrease in the average
interest rate earned on loans and investments. Interest rates decreased
primarily because of the 200 basis point decrease in the prime interest rate
between the periods. Decreases in the prime rate, which is the rate that banks
charge their prime business customers, generally decrease the rates on
adjustable rate consumer and commercial loans in the portfolio and on new loans
originated. The decrease in interest income due to decreased interest rates was
partially offset by the $16.0 million increase in the average interest earning
assets between the periods. Interest income was also adversely affected by the
increase in non-performing assets between the periods. The average yield earned
on interest-earning assets was 5.76% for the first quarter of 2009, a decrease
of 96 basis points from the 6.72% average yield for the first quarter of 2008.
Interest expense was $6.6 million for the first quarter of 2009, a decrease of
$2.5 million, or 27.8%, compared to $9.1 million for the first quarter of 2008.
Interest expense decreased primarily because of the lower interest rates paid on
money market accounts and certificates of deposits. The decreased rates were the
result of the 200 basis point decrease in the federal funds rate that occurred
between the periods as well as the 200 basis point decrease that occurred in the
first quarter of 2008. Decreases in the federal funds rate, which is the rate
that banks charge other banks for short term loans, generally have a lagging
effect and decrease the rates banks pay for deposits. The lagging effect of
deposit rate changes is primarily due to the Bank's deposits that are in the
form of certificates of deposits which do not re-price immediately when the
federal funds rate changes. The average interest rate paid on interest-bearing
liabilities was 2.63% for the first quarter of 2009, a decrease of 107 basis
points from the 3.70% average interest rate paid in the first quarter of 2008.
Net interest margin (net interest income divided by average interest earning
assets) for the first quarter of 2009 was 3.30%, an increase of 2 basis points,
compared to 3.28% for the first quarter of 2008.
A summary of the Company' net interest margin for the three month period ended
March 31, 2009 and March 31,
2008 is as follows:
For the three month period ended
March 31, 2009 March 31, 2008
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(Dollars in thousands) Balance Paid Rate Balance Paid Rate
Interest-earning
assets:
Securities available
for sale $ 165,387 1,748 4.29 % $ 169,570 2,134 5.06 %
Loans held for sale 3,305 41 5.03 2,197 32 5.86
Mortgage loans, net 160,762 2,358 5.95 157,778 2,442 6.22
Commercial loans, net 648,210 9,958 6.23 630,868 11,490 7.33
Consumer loans, net 85,407 1,271 6.04 83,641 1,556 7.48
Cash equivalents 10,468 1 0.04 14,175 57 1.62
Federal Home Loan Bank
stock 7,286 (23 ) (1.28 ) 6,587 80 4.88
Total interest-earning
assets 1,080,825 15,354 5.76 1,064,816 17,791 6.72
Interest-bearing
liabilities and
noninterest bearing
deposits:
NOW accounts 112,143 40 0.14 121,675 607 2.01
Savings accounts 29,236 9 0.12 40,716 134 1.32
Money market accounts 95,983 356 1.50 160,489 1,120 2.81
Certificates 260,170 2,101 3.28 246,943 2,734 4.45
Brokered deposits 255,210 2,469 3.92 262,193 3,276 5.03
Federal Home Loan Bank
advances 192,967 1,596 3.35 105,330 1,237 4.72
Total interest-bearing
liabilities 945,709 937,346
Noninterest checking 65,537 52,633
Other noninterest
bearing escrow deposits 1,306 1,272
Total interest-bearing
liabilities and
noninterest bearing
deposits $ 1,012,552 6,571 2.63 $ 991,251 9,108 3.70
Net interest income $ 8,783 $ 8,683
Net interest rate
spread 3.13 % 3.02 %
Net interest margin 3.30 % 3.28 %
|
Provision for Loan Losses
The provision for loan losses was $6.6 million for the first quarter of 2009, an
increase of $5.0 million, or 321.1%, compared to $1.6 million for the first
quarter of 2008. The provision for loan losses increased primarily because of an
increase in the charge offs of commercial real estate loans in the first quarter
of 2009 when compared to the same period of 2008. The increase was due primarily
to decreases in the estimated value of the real estate supporting classified
commercial real estate loans.
A rollforward of the Company's allowance for loan losses for the quarters ended
March 31, 2009 and 2008 is summarized as follows:
(Dollars in thousands) 2009 2008
Balance at January 1, $ 21,257 $ 12,438
Provision 6,569 1,560
Charge offs:
One-to-four family 0 (60 )
Consumer (694 ) (22 )
Commercial business (184 ) (24 )
Commercial real estate (9,461 ) 0
Recoveries 7 21
Balance at March 31, $ 17,494 $ 13,913
|
Non-Interest Income
Non-interest income was $0.6 million for the first quarter of 2009, a decrease
of $0.9 million, or 57.6%, from $1.5 million for the first quarter of 2008.
Other non-interest income decreased $1.3 million primarily because of a
$1.1 million increase in the valuation reserves required on other real estate
owned due to decreases in the estimated value of the real estate. Gain on sales
of loans increased $267,000 between the periods due to an increase in the gains
recognized on the sale of single family loans because of increased loan
originations. Fees and service charges increased $148,000 between the periods
primarily because of increased retail deposit account activity and fees. Loan
servicing fees increased $10,000 primarily because of an increase in the number
of commercial loans that are being serviced for others.
Non-Interest Expense
Non-interest expense was $7.2 million for the first quarter of 2009, an increase
of $1.0 million, or 15.8%, from $6.2 million for the first quarter of 2008.
Other non-interest expense increased $681,000 primarily because of a $366,000
increase in legal and other fees related to foreclosed assets and an ongoing
state tax assessment challenge and because of a $222,000 increase in FDIC
insurance expense. Compensation expense increased $489,000 primarily because of
the accrual of contractual costs related to the departure of a former executive
officer. Data processing costs decreased $149,000 primarily because of reduced
fees paid to third party vendors as a result of the core system conversion that
occurred in the fourth quarter of 2008. Occupancy expense decreased $40,000 due
primarily to decreased depreciation expense on furniture and equipment.
Income Tax Expense
Income tax expense decreased $2.7 million between the periods due to a decrease
in taxable income and an effective tax rate that increased from 37.7% for the
first quarter of 2008 to 40.2% for the first quarter of 2009. The increase in
the effective tax rate was primarily due to the impact of tax exempt income.
Non-Performing Assets
The following table summarizes the amounts and categories of non-performing
assets in the Bank's portfolio and loan delinquency information as March 31,
2009 and December 31, 2008.
March 31, December 31,
(Dollars in thousands) 2009 2008
Non-Accruing Loans:
One-to-four family real estate $ 3,812 $ 7,251
Commercial real estate 29,829 46,953
Consumer 5,052 5,298
Commercial business 11,410 4,671
Total 50,103 64,173
Other assets 25 25
Foreclosed and Repossessed Assets:
One-to-four family real estate 344 258
Commercial real estate 19,409 10,300
Total non-performing assets $ 69,881 $ 74,756
Total as a percentage of total assets 6.28 % 6.53 %
Total non-performing loans $ 50,103 $ 64,173
Total as a percentage of total loans receivable, net 5.71 % 7.12 %
Allowance for loan loss to non-performing loans 34.92 % 33.12 %
Delinquency Data:
Delinquencies (1)
30+ days $ 7,893 $ 11,488
90+ days 515 0
Delinquencies as a percentage of loan and lease portfolio (1)
30+ days 0.89 % 1.26 %
90+ days 0.06 % 0.00 %
|
(1) Excludes non-accrual loans.
Total non-performing assets were $69.9 million at March 31, 2009, a decrease of
$4.9 million, from $74.8 million at December 31, 2008. Non-performing loans
decreased $14.1 million and foreclosed and repossessed assets increased
$9.2 million during the first quarter of 2009. The non-performing loan activity
for the quarter included $8.1 million in additional non-performing loans
primarily related to five loans secured by leased equipment and two secured
commercial lines of credit, $10.3 million in loan charge offs, $562,000 in loans
that were reclassified as performing, $10.4 million in loans that were
transferred into real estate owned and $933,000 in principal payments that were
received. The foreclosed and repossessed asset activity for the quarter included
$10.4 million in additional foreclosed real estate primarily related to a
residential development and a multi-family housing project, $1.1 million in
additional losses due to a decrease in the estimated value of the underlying
real estate and $132,000 of real estate that was sold.
The decrease in the non-performing loans relates primarily to charge offs and
transfers to real estate owned as we work through the asset recovery process.
The following table summarizes the number and types of commercial real estate
loans that were non-performing (the largest category of non-performing loans) at
March 31, 2009 and December 31, 2008.
Principal Amount Principal Amount
of Loan at of Loan at
(Dollars in thousands) March 31, December 31,
Property Type # of relationships 2009 # of relationships 2008
Residential developments 5 $ 9,180 6 $ 17,680
Single family homes 3 944 4 898
Condominiums 0 0 1 5,440
Hotel 1 4,999 1 4,999
Alternative fuel plants 2 12,528 2 12,493
Shopping centers 2 1,205 2 1,237
Elderly care facilities 1 40 3 4,037
Commercial buildings 1 158 1 169
Restaurant/bar 1 775 0 0
16 $ 29,829 20 $ 46,953
|
In addition to the non-performing assets in the prior table of all non-performing assets, as of March 31, 2009, the Bank held five loans for which the interest rates were modified in troubled debt restructurings in 2008. The . . .
|
|