HMN Financial, Inc. Announces First Quarter Results

Share Name	Share Symbol	Market	Type
HMN Financial Inc	NASDAQ:HMNF	NASDAQ	Common Stock

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-0.05	-0.19%	26.40	10.57	42.25	26.60	26.01	26.48	1,158	23:41:14

HMN Financial (NASDAQ:HMNF)
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First Quarter Highlights Net income of $1.5 million, down $1.8 million, or 54.5% from first quarter of 2007 Diluted earnings per share of $0.39, down $0.43, or 52.4%, from first quarter of 2007 Net interest income down $1.1 million, or 11.2%, from first quarter of 2007 Net interest margin down 73 basis points from first quarter of 2007 Gain on sales of loans down $640,000, or 80.4%, from first quarter 2007 Provision for loan losses up $1.1 million, or 242.9%, over first quarter of 2007 EARNINGS SUMMARY � Three Months Ended March 31, � (dollars in thousands, except per share amounts) 2008 � � 2007 Net income $ 1,488 � 3,268 Diluted earnings per share 0.39 0.82 Return on average assets 0.54 % 1.28 % Return on average equity 6.06 % 13.79 % Book value per share $ 23.85 22.01 HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $1.1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.5 million for the first quarter of 2008, down $1.8 million, or 54.5%, from net income of $3.3 million for the first quarter of 2007. Diluted earnings per common share for the first quarter of 2008 were $0.39, down $0.43, or 52.4%, from $0.82 for the first quarter of 2007. The decrease in net income was due primarily to decreases in net interest income and gain on sales of loans and an increase in the provision for loan losses. First Quarter Results Net Interest Income Net interest income was $8.7 million for the first quarter of 2008, a decrease of $1.1 million, or 11.2%, compared to $9.8 million for the first quarter of 2007. Interest income was $17.8 million for the first quarter of 2008, a decrease of $488,000, or 2.7%, from $18.3 million for the first quarter of 2007. 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 300 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 average yield earned on interest-earning assets was 6.72% for the first quarter of 2008, a decrease of 77 basis points from the 7.49% average yield for the first quarter of 2007. The decrease in interest income due to decreased interest rates was partially offset by the $75 million increase in the average interest earning assets between the periods. Interest expense was $9.1 million for the first quarter of 2008, an increase of $612,000, or 7.2%, compared to $8.5 million for the first quarter of 2007. Interest expense increased primarily because of the $102 million increase in the average outstanding deposits between the periods. The increase was primarily in brokered deposits that were obtained to replace the scheduled outflow of escrowed money market deposits and advance maturities and to fund loan growth. The rates on these deposits are typically higher than money market deposit rates, are fixed for a period of time and have not fully reflected the decreases in the federal funds rate that occurred in the last half of 2007 and the first three months 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 average interest rate paid on interest-bearing liabilities was 3.70% for the first quarter of 2008, an increase of 1 basis point from the 3.69% average interest rate paid in the first quarter of 2007. Net interest margin (net interest income divided by average interest earning assets) for the first quarter of 2008 was 3.28%, a decrease of 73 basis points, compared to 4.01% for the first quarter of 2007. Provision for Loan Losses The provision for loan losses was $1.6 million for the first quarter of 2008, an increase of $1.1 million, or 242.9%, compared to $455,000 for the first quarter of 2007. The provision for loan losses increased primarily because of an increase in the allowance required for risk rated commercial real estate loans in the first quarter of 2008 when compared to the same period of 2007. The increase was due primarily to decreases in the estimated value of the real estate supporting classified residential development loans. Total non-performing assets were $28.2 million at March 31, 2008, an increase of $6.3 million, from $21.9 million at December 31, 2007. Non-performing loans increased $4.3 million and foreclosed and repossessed assets increased $2.0 million during the period. The non-performing loan activity for the quarter included $7.0 million in additional non-performing loans primarily related to one construction loan on a commercial facility, $105,000 in loan charge offs, $418,000 in loans that were reclassified as performing, $928,000 in loans that were transferred into real estate owned, and $1.2 million in principal payments that were received. A rollforward of the Company�s allowance for loan losses for the quarters ended March 31, 2008 and 2007 is summarized as follows: (in thousands) � 2008 � 2007 Balance at January 1, $ 12,438 $ 9,873 Provision 1,560 455 Charge offs: One-to-four family (60 ) 0 Consumer (22 ) (580 ) Commercial (24 ) (42 ) Recoveries � 21 � � 50 � Balance at March 31, $ 13,913 $ 9,756 Non-Interest Income and Expense Non-interest income was $1.5 million for the first quarter of 2008, a decrease of $550,000, or 26.6%, from $2.1 million for the first quarter of 2007. Gain on sale of loans decreased $640,000 between the periods due to a $739,000 decrease in the gain recognized on the sale of government guaranteed commercial loans that was partially offset by a $99,000 increase in the gain recognized on the sale of single family loans due to increased loan originations. Fees and service charges increased $97,000 between the periods primarily because of increased retail deposit account activity and fees. Loan servicing fees decreased $29,000 primarily because of a decrease in the number of single-family loans that are being serviced for others. Other non-interest income increased $22,000 primarily because of an increase in the gains realized on the sale of other real estate owned. Non-interest expense was $6.3 million for the first quarter of 2008, an increase of $302,000, or 5.1%, from $6.0 million for the first quarter of 2007. Other non-interest expense increased $212,000 primarily because of legal fees related to foreclosed assets and an ongoing state tax assessment challenge. Occupancy expense increased $48,000 due primarily to increased real estate taxes and costs associated with the Eagan branch that was opened in the third quarter of 2007. Advertising expense increased $18,000 between the periods primarily because of additional costs associated with the rebranding of our private banking services. Mortgage servicing rights amortization decreased $22,000 between the periods because there were fewer mortgage loans being serviced. Income tax expense decreased $1.3 million between the periods due to a decrease in taxable income and an effective tax rate that decreased from 40.0% for the first quarter of 2007 to 37.7% for the first quarter of 2008. The decrease in the effective tax rate was primarily the result of a decrease in the federal tax rate due to decreased income and a higher percentage of tax exempt income. Return on Assets and Equity Return on average assets for the first quarter of 2008 was 0.54%, compared to 1.28% for the first quarter of 2007. Return on average equity was 6.06% for the first quarter of 2008, compared to 13.79% for the same quarter in 2007. Book value per common share at March 31, 2008 was $23.85, compared to $22.01 at March 31, 2007. President�s Statement "Our financial results in the first quarter reflect the challenging rate and economic environments that continue to exist� said HMN President, Michael McNeil. �The recent decreases in the prime interest rate were the primary reason for the margin compression that we experienced and the increase in the loan loss provisions is a result of the continued weakness in the housing market.� General Information HMN Financial, Inc. and Home Federal are headquartered in Rochester, Minnesota. Home Federal operates ten full service offices in Minnesota located in Albert Lea, Austin, Eagan, LaCrescent, Rochester, Spring Valley and Winona, Minnesota and two full service offices located in Marshalltown and Toledo, Iowa. Home Federal also operates loan origination offices in Sartell and Rochester, Minnesota. Home Federal Private Banking also 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 the Company�s financial expectations for earnings and revenues. 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 possible legislative 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; changes in credit or other risks posed by the Company�s loan and investment portfolios; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation or other significant uncertainties. Additional factors that may cause actual results to differ from the Company�s assumptions and expectations include those set forth in the Company�s most recent 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. HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets � � � � � � � � March 31, � December 31, (dollars in thousands) � � 2008 � 2007 (unaudited) Assets Cash and cash equivalents $ 27,536 23,718 Securities available for sale: Mortgage-backed and related securities (amortized cost $17,943 and $18,786) 17,716 18,468 Other marketable securities (amortized cost $135,451 and $165,430) 139,679 � 167,720 � 157,395 � 186,188 � � Loans held for sale 3,090 3,261 Loans receivable, net 877,756 865,088 Accrued interest receivable 6,426 6,893 Real estate, net 4,184 2,214 Federal Home Loan Bank stock, at cost 5,580 6,198 Mortgage servicing rights, net 1,110 1,270 Premises and equipment, net 12,401 12,024 Goodwill 3,801 3,801 Prepaid expenses and other assets 1,600 1,680 Deferred tax asset, net 3,890 � 4,719 � Total assets $ 1,104,769 � 1,117,054 � � � Liabilities and Stockholders� Equity Deposits $ 892,977 888,118 Federal Home Loan Bank advances 97,500 112,500 Accrued interest payable 9,092 9,515 Customer escrows 1,565 866 Accrued expenses and other liabilities 4,247 � 7,927 � Total liabilities 1,005,381 � 1,018,926 � Commitments and contingencies Stockholders� equity: Serial preferred stock ($.01 par value): Authorized 500,000 shares; none issued and outstanding 0 0 Common stock ($.01 par value): Authorized 11,000,000; issued shares 9,128,662 91 91 Additional paid-in capital 57,662 58,049 Retained earnings, subject to certain restrictions 111,514 110,943 Accumulated other comprehensive income 2,367 1,167 Unearned employee stock ownership plan shares (3,916 ) (3,965 ) Treasury stock, at cost 4,960,863 and 4,953,045 shares (68,330 ) (68,157 ) Total stockholders� equity 99,388 � 98,128 � Total liabilities and stockholders� equity $ 1,104,769 � 1,117,054 � � � � � � � � � HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) � � Three Months Ended March 31, (dollars in thousands) � � 2008 � 2007 Interest income: � Loans receivable $ 15,520 15,745 Securities available for sale: Mortgage-backed and related 224 111 Other marketable 1,910 1,896 Cash equivalents 57 443 Other 80 84 Total interest income 17,791 18,279 � Interest expense: Deposits 7,870 6,877 Federal Home Loan Bank advances 1,237 1,618 Total interest expense 9,107 8,495 Net interest income 8,684 9,784 Provision for loan losses 1,560 455 Net interest income after provision for loan losses 7,124 9,329 � Non-interest income: Fees and service charges 793 696 Loan servicing fees 242 271 Gain on sales of loans 156 796 Other 327 305 Total non-interest income 1,518 2,068 � Non-interest expense: Compensation and benefits 3,360 3,361 Occupancy 1,132 1,084 Advertising 124 106 Data processing 342 295 Amortization of mortgage servicing rights, net 160 182 Other 1,134 922 Total non-interest expense 6,252 5,950 Income before income tax expense 2,390 5,447 Income tax expense 902 2,179 Net income $ 1,488 3,268 Basic earnings per share $ 0.41 0.87 Diluted earnings per share $ 0.39 0.82 � � � � � � HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) � SELECTED FINANCIAL DATA: � Three Months Ended March 31, � (dollars in thousands, except per share data) � � 2008 � 2007 � � � I. OPERATING DATA: � Interest income $ 17,791 18,279 Interest expense 9,107 8,495 Net interest income 8,684 9,784 � II. AVERAGE BALANCES: Assets (1) 1,106,527 1,037,984 Loans receivable, net 872,287 787,937 Mortgage-backed and related securities (1) 18,416 9,996 Interest-earning assets (1) 1,064,816 989,701 Interest-bearing liabilities 991,251 933,726 Equity (1) 98,816 96,104 � III. PERFORMANCE RATIOS:(1) Return on average assets (annualized) 0.54 % 1.28 % Interest rate spread information: Average during period 3.02 3.80 End of period 2.99 3.55 Net interest margin 3.28 4.01 Ratio of operating expense to average total assets (annualized) 2.27 2.32 Return on average equity (annualized) 6.06 13.79 Efficiency 61.28 50.20 � � � � � � � � March 31, December 31, � March 31, � 2008 � 2007 � 2007 IV. ASSET QUALITY : Total non-performing assets $ 28,232 21,935 12,708 Non-performing assets to total assets 2.56 % 1.96 % 1.14 % Non-performing loans to total loans receivable, net 2.73 2.27 0.94 Allowance for loan losses $ 13,913 12,438 9,756 Allowance for loan losses to total assets 1.26 % 1.11 % 0.87 % Allowance for loan losses to total loans receivable, net 1.59 1.44 1.22 Allowance for loan losses to non-performing loans 57.98 63.28 129.68 � V. BOOK VALUE PER SHARE: Book value per share $ 23.85 23.50 22.01 � � � � � � � � Three Months Three Months Ended Year Ended Ended � Mar 31, 2008 � Dec 31, 2007 � Mar 31, 2007 VI. CAPITAL RATIOS : Stockholders� equity to total assets, at end of period 9.00 % 8.78 % 8.49 % Average stockholders� equity to average assets(1) 8.93 8.89 9.26 Ratio of average interest-earning assets to average interest-bearing liabilities (1) � 107.42 � � 106.33 � � 105.99 � March 31, December 31, March 31, � 2008 � 2007 � 2007 VII. EMPLOYEE DATA: Number of full time equivalent employees 207 203 205 � � � � � � � � � � � (1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115.

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