HMN Financial, Inc. Announces Second 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

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HMN Financial, Inc. (NASDAQ:HMNF): Second Quarter Highlights Net income of $2.4 million, down $494,000, or 16.8%, from second quarter 2006 Diluted earnings per share of $0.62, down $0.11, from second quarter of 2006 Average interest earning assets up $94 million over second quarter of 2006 Net interest margin of 3.75%, down 33 basis points from second quarter of 2006 Year to Date Highlights Net income of $5.7 million, up $34,000, or 0.6%, over first six months of 2006 Diluted earnings per share of $1.45, up $0.04, over first six months of 2006 Average interest earning assets up $78 million over first six months of 2006 Net interest margin of 3.88%, down 21 basis points from first six months of 2006 Gain on sales of loans up $436,000, or 79.4%, over first six months of 2006 Earnings Summary Three months ended Six months ended June 30, June 30, (in thousands) 2007 2006 2007 2006 Net income $ 2,450 2,944 $ 5,718 5,684 Diluted earnings per share 0.62 0.73 1.45 1.41 Return on average assets 0.89 % 1.18 % 1.08 % 1.16 % Return on average equity 10.09 % 12.34 % 11.92 % 12.08 % Book value per share $ 22.15 $ 21.38 $ 22.15 $ 21.38 HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $1.1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.4 million for the second quarter of 2007, down $494,000, or 16.8%, from net income of $2.9 million for the second quarter of 2006. Diluted earnings per common share for the second quarter of 2007 were $0.62, down $0.11, or 15.1%, from $0.73 for the second quarter of 2006. Second Quarter Results Net Interest Income Net interest income was $9.9 million for the second quarter of 2007, an increase of $105,000, or 1.1%, compared to $9.8 million for the second quarter of 2006. Interest income was $19.6 million for the second quarter of 2007, an increase of $2.6 million, or 15.4%, from $17.0 million for the same period in 2006. Interest income increased primarily because average interest earning assets increased $94 million between the periods and because the average yield earned on loans and investments increased. The increase in average interest earning assets was the result of a $50 million increase in the average outstanding loans and $44 million increase in the average outstanding cash and investments between the periods. The average yield on investments increased 110 basis points between the periods primarily because maturing investments were reinvested at higher rates. The average yield earned on interest-earning assets was 7.47% for the second quarter of 2007, an increase of 36 basis points from the 7.11% average yield for the second quarter of 2006. Interest expense was $9.8 million for the second quarter of 2007, an increase of $2.5 million, or 34.6%, compared to $7.3 million for the second quarter of 2006. Interest expense increased primarily because of the higher interest rates paid on new commercial money market accounts and retail and brokered certificates of deposits. The increased rates were the result of the 100 basis point increase in the federal funds rate that occurred throughout the first six months of 2006 that was not fully reflected in deposit rates until the second half of 2006. Increases in the federal funds rate, which is the rate that banks charge other banks for short term loans, generally has a lagging effect and increases the rates banks pay for deposits. The average interest rate paid on interest-bearing liabilities was 3.94% for the second quarter of 2007, an increase of 71 basis points from the 3.23% average interest rate paid in the second quarter of 2006. Net interest margin (net interest income divided by average interest earning assets) for the second quarter of 2007 was 3.75%, a decrease of 33 basis points, compared to 4.08% for the second quarter of 2006. Provision for Loan Losses The provision for loan losses was $1.0 million for the second quarter of 2007, an increase of $48,000, or 4.9%, from $1.0 million for the second quarter of 2006. The provision for loan losses increased primarily because of the $40 million in commercial loan growth that was experienced in the second quarter of 2007 compared to the $11 million reduction in the commercial loan portfolio that occurred in the second quarter of 2006. The increase in the provision due to loan growth was partially offset by a reduction in the allowance required for risk rated commercial loans in the second quarter of 2007 compared to the same period of 2006. Total non-performing assets were $16.4 million at June 30, 2007, an increase of $3.7 million, from $12.7 million at March 31, 2007. Non-performing loans increased $4.1 million and foreclosed and repossessed assets decreased $428,000 during the period. The non-performing loan activity for the quarter was as follows: classified $7.6 million in loans as non-accruing, received $983,000 in principal payments on non-accruing loans, reclassified $1.5 million as accruing, transferred $931,000 to real estate owned, and charged off $97,000. The increase in non-accruing loans relates primarily to $6.5 million in related commercial real estate development loans from affiliated borrowers that were downgraded during the period. These loans are for projects within our market area and are secured by land, developed lots and other assets. Non-Interest Income and Expense Non-interest income was $1.3 million for the second quarter of 2007, a decrease of $474,000, or 26.8%, from $1.8 million for the same period in 2006. Other non-interest income decreased $261,000 because of increased losses on the sale of repossessed and foreclosed properties and a decrease in revenues from the sale of uninsured investment products. Gain on sales of loans decreased $114,000 between the periods due primarily to a decrease in the number of single-family mortgage loans sold and a decrease in the profit margins on the loans that were sold. Competition in the single-family loan origination market has remained strong as the overall market has slowed and profit margins have been lowered in order to remain competitive and maintain origination volumes. Security gains decreased $48,000 due to decreased security sales. Non-interest expense was $6.1 million for the second quarter of 2007, an increase of $386,000, or 6.7%, from $5.8 million for the same period of 2006. Other non-interest expense increased $158,000 primarily because of increased expenses related to foreclosed real estate and increased legal fees. Compensation expense increased $144,000 primarily because of annual payroll cost increases. Data processing costs increased $34,000 due to increases in the internet and other banking services provided by the Bank�s third party processor between the periods. Income tax expense decreased $309,000 between the periods due to a decrease in taxable income. Return on Assets and Equity Return on average assets for the second quarter of 2007 was 0.89%, compared to 1.18% for the second quarter of 2006. Return on average equity was 10.09% for the second quarter of 2007, compared to 12.34% for the same period in 2006. Book value per common share at June 30, 2007 was $22.15, compared to $21.38 at June 30, 2006. Six Month Period Results Net Income Net income was $5.7 million for the six month period ended June 30, 2007, an increase of $34,000, or 0.6%, from $5.7 million for the six month period ended June 30, 2006. Diluted earnings per share for the six month period in 2007 were $1.45, up $0.04, or 2.8%, from $1.41 for the same period in 2006. The increase in diluted earnings per share was primarily due to a decrease of 85,415 shares in average net shares outstanding between the periods as a result of the Company�s share repurchase program. Net Interest Income Net interest income was $19.6 million for the first six months of 2007, an increase of $500,000, or 2.6%, from $19.1 million for the same period in 2006. Interest income was $37.9 million for the six month period ended June 30, 2007, an increase of $4.9 million, or 14.9%, from $33.0 million for the same six month period in 2006. Interest income increased because of an increase in the average interest rates earned on loans and investments and also because of the $78 million increase in the average interest earning assets between the periods. Interest rates increased primarily because maturing investments were reinvested at higher rates. Interest on loans increased because of the 100 basis point increase in the prime interest rate that occurred during the first six months of 2006. Increases in the prime rate, which is the rate that banks charge their prime business customers, generally increase 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 7.48% for the first six months of 2007, an increase of 43 basis points from the 7.05% average yield for the first six months of 2006. Interest expense was $18.3 million for the first six months of 2007, an increase of $4.4 million, or 31.9%, compared to $13.9 million for the first six months of 2006. Interest expense increased because of the higher interest rates paid on new commercial money market accounts opened between the periods and the higher rates paid on retail and brokered certificates of deposits. The increased rates were the result of the 100 basis point increase in the federal funds rate during the first six months of 2006 that was not fully reflected in deposit rates until the second half of 2006. The average interest rate paid on interest-bearing liabilities was 3.98% for the first six months of 2007, an increase of 68 basis points from the 3.30% average interest rate paid in the first six months of 2006. Net interest margin (net interest income divided by average interest earning assets) for the first six months of 2007 was 3.88%, a decrease of 21 basis points, compared to 4.09% for the first six months of 2006. Provision for Loan Losses The provision for loan losses was $1.5 million for the first six months of 2007, a decrease of $12,000, or .8%, from the $1.5 million for the same six month period in 2006. The provision for loan losses decreased primarily because of the reduced allowance required for risk rated commercial loans in the first six months of 2007 when compared to the same six month period of 2006. The reduction in the provision related to the reduced risk rating downgrades was partially offset by additions relating to the $73 million increase in the commercial loan portfolio in the first six months of 2007 compared to the $23 million reduction in the portfolio that was experienced in the first six months of 2006. Total non-performing assets were $16.4 million at June 30, 2007, an increase of $6.0 million, from $10.4 million at December 31, 2006. Non-performing loans increased $3.3 million and foreclosed and repossessed assets increased $2.7 million during the period. The non-performing loan activity for the period was as follows: classified $9.2 million in loans as non-accruing, received $1.8 million in principal payments on non-accruing loans, reclassified $1.7 million as accruing, transferred $1.7 million to real estate owned, and charged off $700,000. The increase in non-accruing loans relates primarily to $6.5 million in related commercial real estate development loans from affiliated borrowers that were downgraded during the period. These loans are for projects within our market area and are secured by land, developed lots and other assets. The increase in foreclosed and repossessed assets relates primarily to a $2.9 million single-family home. An agreement has been signed to sell this property and it is anticipated to be sold in the third quarter. A reconciliation of the Company�s allowance for loan losses for the six month period ended June 30, 2007 and June 30, 2006 is summarized as follows: � (in thousands) 2007 2006 Balance at January 1, $9,873 $8,778 Provision 1,483 1,495 Charge offs: Commercial (17) 0 Commercial real estate (70) 0 Consumer loans (632) (109) Recoveries 88 52 Balance at June 30, $10,725 $10,216 Non-Interest Income and Expense Non-interest income was $3.4 million for the first six months of 2007, an increase of $108,000, or 3.3%, from $3.3 million for the same period in 2006. Gain on sales of loans increased $436,000 between the periods primarily due to the $597,000 increase in the gain recognized on the sale of government guaranteed commercial loans that was partially offset by a $161,000 decrease in the gain recognized on the sale of single family loans due to a decrease in the number of loans sold and profit margins realized on the loans that were sold. Competition in the single-family loan origination market has remained strong as the overall market has slowed and profit margins were lowered in order to remain competitive and maintain origination volumes. Other non-interest income decreased $178,000 primarily because of increased losses on the sale of repossessed and foreclosed assets and a decrease in revenues from the sale of uninsured investment products. Security gains decreased $48,000 due to decreased security sales. Fees and service charges decreased $33,000 between the periods primarily because of decreased overdraft fees. Non-interest expense was $12.1 million for the first six months of 2007, an increase of $396,000, or 3.4%, from $11.7 million for the same period of 2006. Compensation expense increased $246,000 primarily because of annual payroll cost increases. Other non-interest expense increased $136,000 primarily because of increased expenses related to foreclosed real estate and increased legal fees. Data processing costs increased $40,000 due to increases in the internet and other banking services provided by the Bank�s third party processor between the periods. Advertising expense increased $63,000 between the periods due to increased promotions and checking and consumer loan advertising. Income tax expense increased $190,000 between the periods due an increase in taxable income and an effective tax rate that increased from 38.2% for the first six months of 2006 to 39.3% for the first six months of 2007. The increase in the effective tax rate was primarily the result of decreased tax exempt income and changes in state tax allocations. Return on Assets and Equity Return on average assets for the six month period ended June 30, 2007 was 1.08%, compared to 1.16% for the same period in 2006. Return on average equity was 11.92% for the six month period ended in 2007, compared to 12.08% for the same period in 2006. President�s Statement �Net interest income continued to improve despite the net interest margin compression experienced in the first six months of 2007. The increase in net interest income was primarily the result of the asset growth that occurred between the periods,� said HMN President, Mike McNeil. �While loan growth has been strong, our loan portfolio has not been immune to the nationwide real estate downturn and our non-performing loans and the costs associated with them have increased as a result. The current loan loss allowance reflects our assessment of the potential losses on these loans based on an evaluation of the available collateral and the borrower�s ability to repay the loan.� General Information HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The Bank operates ten 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 Sartell and Rochester, Minnesota. 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 the Company�s financial expectations for earnings and interest income. 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 � � � � � � � June 30, December 31, (dollars in thousands) � 2007 � 2006 (unaudited) Assets Cash and cash equivalents $ 35,592 43,776 Securities available for sale: Mortgage-backed and related securities (amortized cost $15,357 and $6,671) 14,417 6,178 Other marketable securities (amortized cost $189,911 and $119,940) 189,511 119,962 � 203,928 126,140 � � Loans held for sale 4,454 1,493 Loans receivable, net 843,221 768,232 Accrued interest receivable 7,111 5,061 Real estate, net 4,703 2,072 Federal Home Loan Bank stock, at cost 6,412 7,956 Mortgage servicing rights, net 1,597 1,958 Premises and equipment, net 10,977 11,372 Goodwill 3,801 3,801 Core deposit intangible, net 49 106 Prepaid expenses and other assets 2,148 2,943 Deferred tax asset 3,433 2,879 � Total assets $ 1,127,426 977,789 � � � Liabilities and Stockholders� Equity Deposits $ 925,511 725,959 Federal Home Loan Bank advances 97,500 150,900 Accrued interest payable 4,406 1,176 Customer escrows 814 721 Accrued expenses and other liabilities 4,479 5,891 � Total liabilities 1,032,710 884,647 � Commitments and contingencies 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 91 Additional paid-in capital 57,691 57,914 Retained earnings, subject to certain restrictions 107,225 103,643 Accumulated other comprehensive (loss) (809) (284 ) Unearned employee stock ownership plan shares (4,061) (4,158 ) Treasury stock, at cost 4,852,522 and 4,813,232 shares (65,421) (64,064 ) Total stockholders� equity 94,716 93,142 � Total liabilities and stockholders� equity $ 1,127,426 977,789 � HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) � Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) � � 2007 � 2006 � 2007 � 2006 Interest income: Loans receivable $ 16,629 15,081 32,374 29,784 Securities available for sale: Mortgage-backed and related 171 69 282 140 Other marketable 2,417 1,322 4,313 2,212 Cash equivalents 279 453 722 709 Other 132 85 216 149 Total interest income 19,628 17,011 37,907 32,994 � Interest expense: Deposits 8,346 5,516 15,223 10,384 Federal Home Loan Bank advances 1,427 1,745 3,045 3,471 Total interest expense 9,773 7,261 18,268 13,855 Net interest income 9,855 9,750 19,639 19,139 Provision for loan losses 1,028 980 1,483 1,495 Net interest income after provision for loan losses 8,827 8,770 18,156 17,644 � Non-interest income: Fees and service charges 781 795 1,477 1,510 Mortgage servicing fees 265 302 536 605 Securities gains, net 0 48 0 48 Gains on sales of loans 189 303 985 549 Other 57 318 362 540 Total non-interest income 1,292 1,766 3,360 3,252 � Non-interest expense: Compensation and benefits 3,262 3,118 6,623 6,377 Occupancy 1,112 1,103 2,196 2,203 Advertising 195 107 301 238 Data processing 321 287 616 576 Amortization of mortgage servicing rights, net 189 236 371 453 Other 1,070 912 1,992 1,856 Total non-interest expense 6,149 5,763 12,099 11,703 Income before income tax expense 3,970 4,773 9,417 9,193 Income tax expense 1,520 1,829 3,699 3,509 Net income $ 2,450 2,944 5,718 5,684 Basic earnings per share $ 0.65 0.77 1.52 1.48 Diluted earnings per share $ 0.62 0.73 1.45 1.41 HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) � � � � � � � � SELECTED FINANCIAL DATA: Three Months EndedJune 30, � Six Months EndedJune 30, � (dollars in thousands, except per share data) � � 2007 � 2006 � � 2007 � 2006 � I. OPERATING DATA: Interest income $ 19,628 17,011 37,907 32,994 Interest expense 9,773 7,261 18,268 13,855 Net interest income 9,855 9,750 19,639 19,139 � II. AVERAGE BALANCES: Assets (1) 1,099,991 1,003,183 1,069,159 988,229 Loans receivable, net 818,905 767,774 803,506 772,993 Securities available for sale (1) 202,442 138,823 180,616 126,153 Interest-earning assets (1) 1,053,637 959,477 1,021,846 944,295 Interest-bearing liabilities 994,906 900,825 964,485 886,081 Equity (1) 97,390 95,690 96,751 94,876 � III. PERFORMANCE RATIOS: (1) Return on average assets (annualized) 0.89 % 1.18 % 1.08 % 1.16 % Interest rate spread information: Average during period 3.53 3.88 3.66 3.89 End of period 3.45 3.92 3.45 3.92 Net interest margin 3.75 4.08 3.88 4.09 Ratio of operating expense to average total assets (annualized) 2.24 2.30 2.28 2.39 Return on average equity (annualized) 10.09 12.34 11.92 12.08 Efficiency � 55.17 � � 50.05 � � 52.61 � 52.27 June 30, December 31, June 30, � 2007 � � 2006 � � 2006 � IV. ASSET QUALITY: Total non-performing assets $ 16,365 10,424 13,491 Non-performing assets to total assets 1.45 % 1.07 % 1.34 % Non-performing loans to total loans receivable, net 1.38 % 1.08 % 1.62 % Allowance for loan losses $ 10,725 9,873 10,216 Allowance for loan losses to total assets 0.95 % 1.01 % 1.01 % Allowance for loan losses to total loans receivable, net 1.27 1.29 1.35 Allowance for loan losses to non-performing loans 92.39 118.84 82.93 � V. BOOK VALUE PER SHARE: Book value per share $ 22.15 21.58 21.38 � � � � � � � � � � Six MonthsEndedJune 30, 2007 � � � Year EndedDec 31, 2006 � � � Six MonthsEndedJune 30, 2006 � � VI. CAPITAL RATIOS: Stockholders� equity to total assets, at end of period 8.40 % 9.53 % 9.27 % Average stockholders� equity to average assets (1) 9.05 9.70 9.60 Ratio of average interest-earning assets to average interest-bearing liabilities (1) � 105.95 � � 106.67 � � 106.57 � June 30, December 31, June 30, � 2007 � � 2006 � � 2006 � VII. EMPLOYEE DATA: Number of full time equivalent employees 210 203 212 (1) Average balances were calculated based upon amortized cost without the market value impact of SFAS 115

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HMNF HMN Financial Inc