HMN Financial, Inc. Announces Third Quarter Results

  HMN Financial, Inc. Announces Third Quarter Results

Business Wire

ROCHESTER, Minn. -- October 23, 2012

HMN Financial, Inc. (NASDAQ:HMNF):

Third Quarter Highlights

  *Net income of $0.6 million compared to net loss of $2.1 million in third
    quarter of 2011
  *Diluted earnings per share of $0.04 compared to diluted loss per share of
    $0.65 in third quarter of 2011
  *Provision for loan losses of $1.6 million, down $2.7 million from third
    quarter of 2011
  *Nonperforming assets of $47.2 million, up $3.4 million from second quarter
    of 2012
  *Net interest margin of 3.82%, up 11 basis points from third quarter of
    2011

Year to Date Highlights

  *Net income of $3.8 million compared to net loss of $3.9 million in first
    nine months of 2011
  *Diluted earnings per share of $0.61 compared to diluted loss per share of
    $1.38 in first nine months of 2011
  *Provision for loan losses of $2.5 million, down $7.2 million from first
    nine months of 2011
  *Nonperforming assets of $47.2 million, down $3.4 million from December 31,
    2011
  *Net interest margin of 3.68%, up 8 basis points from first nine months of
    2011
  *Total assets decreased $146 million from December 31, 2011

                                                    
Income (Loss) Summary        Three Months Ended           Nine Months Ended
(unaudited)
                            September 30,               September 30,
(dollars in thousands,
except per share            2012    2011             2012    2011   
amounts)
Net income (loss)        $   637     (2,055 )       $   3,836   (3,929 )
Net income (loss)
available to                 170       (2,511 )           2,444     (5,291 )

common shareholders
Diluted earnings             0.04      (0.65  )           0.61      (1.38  )
(loss) per share
Return (loss) on             0.39      (1.02  ) %         0.74      (0.62  ) %
average assets
Return (loss) on             4.20      (12.10 ) %         8.66      (7.62  ) %
average equity
Book value per common    $   7.83      9.23           $   7.83      9.23
share
                                                                             

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $644 million
holding company for Home Federal Savings Bank (the Bank), today reported net
income of $0.6 million for the third quarter of 2012, an improvement of $2.7
million, or 131.0%, compared to a net loss of $2.1 million for the third
quarter of 2011. Net income available to common shareholders was $0.2 million
for the third quarter of 2012, an improvement of $2.7 million, or 106.8%, from
the net loss available to common shareholders of $2.5 million for the third
quarter of 2011. Diluted earnings per common share for the third quarter of
2012 was $0.04, an increase of $0.69, or 106.2%, from the diluted loss per
common share of $0.65 for the third quarter of 2011. The improvement in net
income for the third quarter of 2012 is due to a $2.7 million decrease in the
provision for loan losses between the periods, a $0.6 million increase in
noninterest income due primarily to an increase in the gain on sales of loans,
and a $0.6 million decrease in noninterest expenses due primarily to the
decrease in expenses related to real estate owned. These changes to net income
were partially offset by a $1.2 million decrease in net interest income due
primarily to a decrease in interest earning assets between the periods.

President’s Statement
“Our core business remains sound and we are encouraged by the increase in our
net interest margin and the declining trend in both our loan loss provision
and other operating expenses,” said Bradley Krehbiel, President of HMN. “The
low rate environment for mortgage loans also continues to have a positive
effect on our single family mortgage loan production and the related gain on
sales of loans. We are pleased that the increase in non-interest income
combined with the decrease in non-interest expense was able to offset the
decline in our net interest income during the quarter as a result of the
decline in our earning assets.”

Third Quarter Results

Net Interest Income
Net interest income was $5.9 million for the third quarter of 2012, a decrease
of $1.2 million, or 16.8%, compared to $7.1 million for the third quarter of
2011. Interest income was $7.6 million for the third quarter of 2012, a
decrease of $2.0 million, or 21.1%, from $9.6 million for the same period in
2011. Interest income decreased between the periods primarily because of a
$145 million decrease in the average interest-earning assets and also because
of a decrease in the 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 because of low loan demand
and the Company’s focus on improving credit quality, managing net interest
margin and improving capital ratios. The average yield earned on
interest-earning assets was 4.89% for the third quarter of 2012, a decrease of
12 basis points from the 5.01% average yield for the third quarter of 2011.
The decrease in the average yield is due to the continued low interest rate
environment that existed during the third quarter of 2012.

Interest expense was $1.7 million for the third quarter of 2012, a decrease of
$0.8 million, or 33.3%, compared to $2.5 million for the third quarter of
2011. Interest expense decreased primarily because of the $150 million
decrease in the average interest-bearing liabilities between the periods. The
decrease in the average interest-bearing liabilities is primarily the result
of a decrease in the average outstanding certificates of deposits and brokered
deposits between the periods and a decrease in other deposits as a result of
the Bank’s Toledo, Iowa branch sale that was completed in the first quarter of
2012. The decrease in certificates of deposits and brokered deposits between
the periods was the result of using the proceeds from loan principal payments
to fund maturing certificates of deposit and brokered 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
third quarter of 2012. The average interest rate paid on interest-bearing
liabilities was 1.14% for the third quarter of 2012, a decrease of 22 basis
points from the 1.36% average interest rate paid in the third quarter of 2011.
Net interest margin (net interest income divided by average interest- earning
assets) for the third quarter of 2012 was 3.82%, an increase of 11 basis
points, compared to 3.71% for the third quarter of 2011.

Provision for Loan Losses
The provision for loan losses was $1.6 million for the third quarter of 2012,
a decrease of $2.7 million, compared to $4.3 million for the third quarter of
2011. The provision decreased in the third quarter of 2012 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 third quarter of 2012 when compared to the third quarter of
2011. The provision also decreased because of the $123 million decrease in the
loan portfolio between the periods. Total non-performing assets were $47.2
million at September 30, 2012, an increase of $3.4 million, or 7.7%, from
$43.8 million at June 30, 2012. Non-performing loans increased $3.5 million
and foreclosed and repossessed assets decreased $0.1 million during the third
quarter of 2012. The non-performing loan and foreclosed and repossessed asset
activity for the quarter was as follows:

                                                               
(Dollars in thousands)                                           
Non-performing loans                      Foreclosed and
                                          repossessed assets
June 30, 2012               $31,091       June 30, 2012                $12,732
Classified as               11,155
non-performing
Charge offs                 (1,866)       Transferred from             1,371
                                          non-performing loans
Principal payments          (3,645)       Real estate sold             (1,644)
received
Classified as accruing      (782)         Net gain on sale of          172
                                          assets
Transferred to real        (1,371)       Write downs                 (14)
estate owned
September 30, 2012         $34,582       September 30, 2012          $12,617
                                                                
                                                                       

The increase in non-performing loans relates primarily to new loans that were
classified as non-performing during the quarter. Of the $11.2 million in loans
classified as non-performing in the third quarter of 2012, $9.5 million
related to three loans on two residential developments because the cash flows
from lot sales were not sufficient to support the required principal payments
on the loans. The largest non-performing loan relationship at September 30,
2012 was for $7.3 million and is secured by a residential development located
in the Bank’s market area.

A reconciliation of the Company’s allowance for loan losses for the quarters
ended September 30, 2012 and 2011 is summarized as follows:

                                    
                                     
(Dollars in thousands)      2012         2011
Balance at June 30,          $20,519       $27,764
Provision                    1,584         4,260
Charge offs:
One-to-four family           0             (32)
Consumer                     (163)         (143)
Commercial business          (168)         (2,167)
Commercial real estate       (1,535)       (4,094)
Recoveries                  225          102
Balance at September 30,    $20,462      $25,690
                                           
General allowance            $15,965       $15,906
Specific allowance          4,497        9,784
                            $20,462      $25,690
                                    
                                           

The following table summarizes the amounts and categories of non-performing
assets in the Bank’s portfolio and loan delinquency information as of the two
most recently completed quarters and December 31, 2011.

                                                              
                              September       June 30,       December 
                               30,                                31,
(Dollars in thousands)       2012          2012         2011      
Non-Performing Loans:
One-to-four family real      $ 2,992           $ 4,409          $ 4,435
estate
Commercial real estate         27,707            22,322           22,658
Consumer                       317               367              699
Commercial business            3,566             3,993            6,201
Total                          34,582            31,091           33,993
                                                                             
Foreclosed and Repossessed
Assets:
One-to-four family real        320               334              352
estate
Commercial real estate         12,297            12,398           16,264
Total non-performing         $ 47,199          $ 43,823         $ 50,609
assets
Total as a percentage of       7.33        %     6.54       %     6.40       %
total assets
Total non-performing loans   $ 34,582          $ 31,091         $ 33,993
Total as a percentage of
total loans receivable,        7.29        %     6.27       %     6.10       %
net
Allowance for loan losses      59.2        %     66.0       %     70.27      %
to non-performing loans
                                                                             
Delinquency Data:
Delinquencies ^(1)
30+ days                     $ 5,077           $ 6,412          $ 3,226
90+ days                       0                 0                0
Delinquencies as a
percentage of
loan and lease portfolio
^(1)
30+ days                       0.98        %     1.24       %     0.54       %
90+ days                       0.00        %     0.00       %     0.00       %
                                                              

(1) Excludes non-accrual loans.

The following table summarizes the number of lending relationships and types
of commercial real estate loans that were non-performing as of the end of the
two most recently completed quarters and December 31, 2011.

                                                                   
                                   Principal                  Principal                  Principal
(Dollars in                        Amount of                  Amount of                  Amount of
thousands)
                                   Loans                      Loans                      Loans
                          #        September         #        June 30,          #        December
                                   30,                                                   31,
Property Type              2012               2012               2011
Developments/land         12       $26,415           13       $20,630           10       $17,465
Shopping                  2        396               2        406               2        1,315
centers/retail
Restaurants/bar           1        565               1        581               1        616
Office buildings          2        184               2        184               1        2,325
Other buildings        1     147           2     521           3     937
                       18    $27,707       20    $22,322       17    $22,658
                                                                                         

The increase in the non-performing commercial real estate loans from June 30,
2012 is due primarily to three loans on two residential developments totaling
$9.5 million that were classified as non-performing during the third quarter
of 2012 because the cash flows from lot sales were not sufficient to support
the required principal payments on the loans.

The following table summarizes the number of lending relationships and
industry of commercial business loans that were non-performing as of the end
of the two most recently completed quarters and December 31, 2011.

                                                                               
                                               Principal                  Principal                  Principal
(Dollars in thousands)                         Amount of                  Amount of                  Amount of
                                               Loans                      Loans                      Loans
                                      #        September         #        June 30,          #        December
                                               30,                                                   31,
Industry Type                          2012               2012               2011
Construction/development/land         6        $1,650            6        $1,796            6        $2,061
Retail                                2        247               2        202               1        82
Banking                               0        0                 0        0                 2        1,199
Entertainment                         1        16                1        20                1        23
Utilities                             2        1,379             2        1,394             1        2,792
Restaurant                            1        135               1        498               0        0
Other                              3     139           2     83            1     44
                                   15    $3,566        14    $3,993        12    $6,201
                                                                                                     

Non-Interest Income and Expense
Non-interest income was $2.1 million for the third quarter of 2012, an
increase of $0.6 million, or 39.3%, from $1.5 million for the same period in
2011. Gains on sales of loans increased $0.8 million primarily because of an
increase in single family loan originations and sales and also because of an
increase in the sale of commercial government guaranteed loans between the
periods. Fees and service charges decreased $0.2 million primarily because of
a decrease in overdraft charges between the periods which was partly due to
the reduction in deposit accounts as a result of the sale of the Toledo, Iowa
branch in the first quarter of 2012.

Non-interest expense was $5.8 million for the third quarter of 2012, a
decrease of $0.6 million, or 9.5%, from $6.4 million for the same period of
2011. Compensation and benefits expense decreased $0.3 million between the
periods primarily because of a decrease in the compensation paid as a result
of having fewer employees. Gain on real estate owned increased $0.3 million
between the periods as there were more gains realized on the sale of real
estate and there were fewer write downs in the value of the real estate owned
in the third quarter of 2012 when compared to the same period in 2011.
Occupancy expense decreased $0.1 million primarily because of a decrease in
depreciation and other expenses as a result of having fewer branch facilities.
Other non-interest expenses decreased $0.1 million primarily because of a
decrease in the costs related to other real estate owned. Deposit insurance
expense increased $0.2 million primarily because of an increase in the
insurance rates between the periods.

No income tax expense was recorded for the third quarter of 2012 or the third
quarter of 2011. 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 September 30, 2012. Since the valuation
reserve is established against the entire deferred tax asset balance, no
income tax expense was recorded for the third quarter of 2012 or 2011.

Net Income (Loss) Available to Common Shareholders
Net income available to common shareholders was $0.2 million for the third
quarter of 2012, an increase of $2.7 million from the $2.5 million net loss
available to common shareholders in the third quarter of 2011. The net income
available to common shareholders increased primarily because of the change in
the net income (loss) between the periods. The Company has deferred the last
seven quarterly dividend payments, beginning with the February 15, 2011
dividend payment, on its Fixed Rate Cumulative Perpetual Preferred Stock,
Series A issued to the United States Treasury Department as part of the TARP
Capital Purchase Program. 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. Under the terms of the certificate of designations for the
preferred stock, dividend payments may be deferred without default, but the
dividend is cumulative and, since the Company failed to pay dividends for six
quarters, the Treasury has the right to appoint two representatives to the
Company’s board of directors, although the Treasury has not yet exercised this
right. Under the terms of the Company’s and Bank’s Supervisory Agreements with
their federal banking regulators, neither the Company nor the Bank may declare
or pay any cash dividends, or purchase or redeem any capital stock, without
prior notice to, and consent of these regulators. The Company does not
anticipate requesting consent from the Federal Reserve Board to make any
payments of dividends on, or purchase of, its common or preferred stock in
2012.

Return (Loss) on Assets and Equity
Return on average assets for the third quarter of 2012 was 0.39%, compared to
a 1.02% loss on average assets for the third quarter of 2011. Return on
average equity was 4.20% for the third quarter of 2012, compared to a 12.10%
loss on average equity for the same period of 2011. Book value per common
share at September 30, 2012 was $7.83, compared to $9.23 at September 30,
2011.

Nine Month Period Results

Net Income (Loss)
Net income was $3.8 million for the nine-month period ended September 30,
2012, an improvement of $7.7 million, from the $3.9 million net loss for the
nine-month period ended September 30, 2011. Net income available to common
shareholders was $2.4 million for the nine-month period ended September 30,
2012, an improvement of $7.7 million, from the net loss available to common
shareholders of $5.3 million for the same period of 2011. Diluted earnings per
common share for the nine-month period in 2012 was $0.61, an improvement of
$1.99, from the diluted loss per common share of $1.38 for the same period in
2011. The improvement in net income for the first nine months of 2012 is due
to a $7.1 million decrease in the provision for loan losses between the
periods, a $0.6 million gain on sale of the Bank’s Toledo, Iowa branch, a $1.5
million increase in the gain on sales of loans, and a $2.3 million decrease in
noninterest expenses due primarily to the decrease in expenses related to real
estate owned. These improvements to net income were partially offset by a $3.4
million decrease in net interest income due primarily to a decrease in
interest earning assets between the periods.

Net Interest Income
Net interest income was $18.2 million for the first nine months of 2012, a
decrease of $3.3 million, or 15.7%, from $21.5 million for the same period in
2011. Interest income was $23.8 million for the nine-month period ended
September 30, 2012, a decrease of $6.5 million, or 21.6%, from $30.3 million
for the same period in 2011. Interest income decreased between the periods
primarily because of a $141 million decrease in the average interest-earning
assets and also because of a decrease in the average yields earned between the
periods. Average interest-earning assets decreased between the periods
primarily because of a decrease in the commercial loan portfolio, which
occurred because of low loan demand and the Company’s focus on improving
credit quality, managing net interest margin and improving capital ratios. The
average yield earned on interest-earning assets was 4.82% for the nine-month
period of 2012, a decrease of 26 basis points from the 5.08% average yield for
the nine-month period of 2011. The decrease in the average yield is due to the
continued low interest rate environment that existed during the first nine
months of 2012.

Interest expense was $5.6 million for the nine-month period ended September
30, 2012, a decrease of $3.2 million, or 36.1%, from $8.8 million for the same
period in 2011. Interest expense decreased primarily because of a $142 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 average outstanding certificates of deposit and brokered
deposits between the periods. The average interest rate paid on
interest-bearing liabilities was 1.20% for the nine-month period of 2012, a
decrease of 34 basis points from the 1.54% average rate paid for the same
nine-month period of 2011. Net interest margin (net interest income divided by
average interest earning assets) was 3.68% for the nine-month period of 2012,
an increase of 8 basis points from the 3.60% margin for the same nine-month
period of 2011.

Provision for Loan Losses
The provision for loan losses was $2.5 million for the first nine months of
2012, a decrease of $7.2 million, from $9.7 million for the same nine-month
period in 2011. The provision decreased in the first nine months of 2012
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 same period of 2011. The provision also decreased because of the $123
million decrease in the loan portfolio between the periods. Total
non-performing assets were $47.2 million at September 30, 2012, a decrease of
$3.4 million, or 6.7%, from $50.6 million at December 31, 2011. Non-performing
loans increased $0.6 million and foreclosed and repossessed assets decreased
$4.0 million during the first nine months of 2012. The non-performing loan and
foreclosed and repossessed asset activity for the first nine months of 2012
was as follows:

                                                             
(Dollars in                                                    
thousands)
                                           Foreclosed and
Non-performing loans                       repossessed asset
                                           activity
December 31, 2011           $33,993        December 31, 2011           $16,616
Classified as               22,514
non-performing
Charge offs                 (8,637)        Transferred from            1,959
                                           non-performing loans
Principal payments          (10,129)       Real estate sold            (5,878)
received
Classified as               (1,200)        Net gain on sale of         521
accruing                                   assets
Transferred to real        (1,959)        Write downs                (601)
estate owned
September 30, 2012         $34,582        September 30, 2012         $12,617
                                                              
                                                                       

A reconciliation of the Company’s allowance for loan losses for the nine-month
periods ended September 30, 2012 and 2011 is summarized as follows:

                                     
                                      
(in thousands)                2012         2011
Balance at January 1,          $23,888       $42,828
Provision                      2,544         9,669
Charge offs:
One-to-four family             0             (450)
Consumer                       (921)         (230)
Commercial business            (1,997)       (10,724)
Commercial real estate         (5,719)       (16,303)
Recoveries                    2,667        900
Balance at September 30,      $20,462      $25,690
                                             
General allowance              $15,965       $15,906
Specific allowance            4,497        9,784
                              $20,462      $25,690
                                     
                                             

Non-Interest Income and Expense
Non-interest income was $6.6 million for the first nine months of 2012, an
increase of $1.7 million, or 35.2%, from $4.9 million for the same period in
2011. Gains on sales of loans increased $1.5 million, or 150.9%, between the
periods as a result of an increase in single family loan originations and
sales due to the low interest rate environment that existed during the first
nine months of 2012. Gain on sale of branch office increased $0.6 million as a
result of the sale of the Toledo, Iowa branch in the first quarter of 2012.
Fees and service charges decreased $0.3 million primarily because of a
decrease in overdraft charges between the periods. Other non-interest income
increased $62,000 due primarily to an increase in the sale of uninsured
investment products and an increase in rental income on other real estate
owned. Mortgage servicing fees decreased $34,000 between the periods primarily
because of a decrease in the number of single family mortgage loans that are
being serviced for others.

Non-interest expense was $18.4 million for the first nine months of 2012, a
decrease of $2.3 million, or 11.1%, from $20.7 million for the same period in
2011. Other non-interest expense decreased $0.9 million because of decreased
real estate taxes and legal fees related to other real estate owned.
Compensation and benefits expense decreased $0.8 million primarily because of
a decrease in the compensation paid as a result of having fewer employees.
Gain on real estate owned improved $0.4 million between the periods as there
were more gains realized on the sale of real estate and there were fewer write
downs in the value of the real estate owned in the first nine months of 2012
when compared to the same period of 2011. Occupancy expense decreased $0.3
million primarily because of a decrease in depreciation and other expenses as
a result of having fewer branch facilities. Deposit insurance expense
decreased $0.1 million primarily because of the decrease in assets between the
periods. Data processing costs increased $0.1 million between the periods
primarily because of an incentive that was received by the Company in the
first quarter of 2011 related to a change in our ATM and debit card vendor.

No income tax expense was recorded for the first nine months of 2012 or the
first nine months of 2011. 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 September 30, 2012. Since the valuation
reserve is established against the entire deferred tax asset balance, no
income tax expense was recorded for the first nine months of 2012 or 2011.

Net Income (Loss) Available to Common Shareholders
Net income available to common shareholders was $2.4 million for the first
nine months of 2012, an increase of $7.7 million from the $5.3 million net
loss available to common shareholders in the same period of 2011. The net
income available to common shareholders increased primarily because of the
change in the net income (loss) between the periods. The Company has deferred
the last seven quarterly dividend payments, beginning with the February 15,
2011 dividend payment, on its Fixed Rate Cumulative Perpetual Preferred Stock,
Series A issued to the United States Treasury Department as part of the TARP
Capital Purchase Program. 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. Under the terms of the certificate of designations for the
preferred stock, dividend payments may be deferred without default, but the
dividend is cumulative and, since the Company failed to pay dividends for six
quarters, the Treasury has the right to appoint two representatives to the
Company’s board of directors, although the Treasury has not yet exercised this
right. Under the terms of the Company’s and Bank’s Supervisory Agreements with
their federal banking regulators, neither the Company nor the Bank may declare
or pay any cash dividends, or purchase or redeem any capital stock, without
prior notice to, and consent of these regulators. The Company does not
anticipate requesting consent from the Federal Reserve Board to make any
payments of dividends on, or purchase of, its common or preferred stock in
2012.

Return (Loss) on Assets and Equity
Return on average assets for the nine-month period ended September 30, 2012
was 0.74%, compared to a loss on average assets of 0.62% for the same period
in 2011. Return on average equity was 8.66% for the nine-month period ended
September 30, 2012, compared to a loss on average equity of 7.62% for the same
period in 2011.

General Information
HMN Financial, Inc. and Home Federal Savings Bank are headquartered in
Rochester, Minnesota. Home Federal Savings Bank operates nine full service
offices in Minnesota located in Albert Lea, Austin, Eagan, La Crescent,
Rochester (3), 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 Statement
This 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,” “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 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
of alternate funding sources; 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,
deposit outflows, changes in credit or other risks posed by the Company’s loan
and investment portfolios, changes in costs associated with alternate funding
sources, including changes in collateral advance rates and policies of the
Federal Home Loan Bank, 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; 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 filing on Form 10-K 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, 2011 and Part II, Item 1A of its Quarterly Reports on
Forms 10-Q. We undertake no duty to update any of the forward-looking
statements after the date of this press release.



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
                                                          
                                            September 30,    December 31,
(dollars in thousands)                     2012             2011
                                              (unaudited)
Assets
Cash and cash equivalents                   $ 76,400              67,840
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $11,629 and $19,586)          12,437              20,645
Other marketable securities
(amortized cost $46,736 and $105,700)         46,406             105,469   
                                              58,843             126,114   
                                                                  
Loans held for sale                           4,654               3,709
Loans receivable, net                         474,346             555,908
Accrued interest receivable                   2,135               2,449
Real estate, net                              12,617              16,616
Federal Home Loan Bank stock, at cost         4,063               4,222
Mortgage servicing rights, net                1,580               1,485
Premises and equipment, net                   7,359               7,967
Prepaid expenses and other assets             1,726               2,262
Assets held for sale                          0                   1,583
Deferred tax asset, net                       0                  0         
Total assets                                $ 643,723            790,155   
                                                                  
                                                                  
Liabilities and Stockholders’ Equity
Deposits                                    $ 505,541             620,128
Deposits held for sale                        0                   36,048
Federal Home Loan Bank advances               70,000              70,000
Accrued interest payable                      237                 780
Customer escrows                              1,422               933
Accrued expenses and other liabilities        6,674              5,205     
Total liabilities                             583,874            733,094   
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock: ($.01 par
value)
authorized 500,000 shares; issued             25,193              24,780
shares 26,000
Common stock ($.01 par value):
authorized 11,000,000; issued shares          91                  91
9,128,662
Additional paid-in capital                    51,990              53,462
Retained earnings, subject to certain         45,844              42,983
restrictions
Accumulated other comprehensive income        122                 471
Unearned employee stock ownership plan        (3,045    )         (3,191    )
shares
Treasury stock, at cost 4,705,073 and         (60,346   )         (61,535   )
4,740,711 shares
Total stockholders’ equity                    59,849             57,061    
Total liabilities and stockholders’         $ 643,723            790,155   
equity
                                                                  



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
                                                      
                        Three Months Ended        Nine Months Ended
                         September 30,                September 30,
(dollars in
thousands, except      2012       2011        2012        2011
per share data)
Interest income:                                               
Loans receivable      $   7,208        8,967          22,527         28,171
Securities
available for sale:
Mortgage-backed and       133           259            490            873
related
Other marketable          160           308            601            1,132
Cash equivalents          25            4              71             7
Other                    25          34           89           148    
Total interest           7,551       9,572        23,778       30,331 
income
                                                                      
Interest expense:
Deposits                  804           1,623          3,082          5,369
Federal Home Loan        855         865          2,544        3,434  
Bank advances
Total interest           1,659       2,488        5,626        8,803  
expense
Net interest income       5,892         7,084          18,152         21,528
Provision for loan       1,584       4,260        2,544        9,669  
losses
Net interest income
after provision
for loan losses          4,308       2,824        15,608       11,859 
                                                                      
Non-interest
income:
Fees and service          821           978            2,484          2,827
charges
Mortgage servicing        245           247            713            747
fees
Gain on sales of          940           188            2,469          984
loans
Gain on sale of           0             0              552            0
branch office
Other                    110         106          398          336    
Total non-interest       2,116       1,519        6,616        4,894  
income
                                                                      
Non-interest
expense:
Compensation and          2,955         3,276          9,587          10,348
benefits
(Gain) loss on real       (172  )       111            (75    )       301
estate owned
Occupancy                 805           930            2,526          2,786
Deposit insurance         353           190            928            1,001
Data processing           333           326            1,006          884
Other                    1,513       1,565        4,416        5,362  
Total non-interest       5,787       6,398        18,388       20,682 
expense
Income (loss)
before income tax         637           (2,055 )       3,836          (3,929 )
expense
Income tax expense       0           0            0            0      
Net income (loss)     $   637           (2,055 )       3,836          (3,929 )
Preferred stock
dividends and            467         456          1,392        1,362  
discount
Net income (loss)
for common               170         (2,511 )      2,444        (5,291 )
shareholders
Other comprehensive
income (loss), net       (77   )      (130   )      (349   )      194    
of tax
Comprehensive
income (loss)
attributable to          93          (2,641 )      2,095        (5,097 )
common

shareholders
Basic earnings
(loss) per common     $  0.04        (0.65  )      0.62         (1.38  )
share
Diluted earnings
(loss) per common     $  0.04        (0.65  )      0.61         (1.38  )
share
                                                         



HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)

                     Three Months Ended               Nine Months Ended
SELECTED               September 30,                      September 30,
FINANCIAL DATA:
(dollars in
thousands,          2012           2011          2012           2011      
except per share
data)
I. OPERATING                                                           
DATA:
Interest income      $ 7,551             9,572            23,778            30,331
Interest expense       1,659             2,488            5,626             8,803
Net interest           5,892             7,084            18,152            21,528
income
                                                                                      
II. AVERAGE
BALANCES:
Assets ^(1)            643,304           802,140          689,698           840,787
Loans                  484,403           597,602          517,389           620,227
receivable, net
Securities
available for          76,631            121,286          89,466            141,500
sale ^(1)
Interest-earning       613,955           758,610          658,337           798,912
assets ^(1)
Interest-bearing       576,919           727,413          624,643           766,759
liabilities
Equity ^(1)            60,384            67,336           59,205            68,956
                                                                                      
III. PERFORMANCE
RATIOS: ^(1)
Return (loss) on
average assets         0.39        %     (1.02)     %     0.74        %     (0.62)    %
(annualized)
Interest rate
spread
information:
Average during         3.75              3.65             3.62              3.54
period
End of period          3.52              3.77             3.52              3.77
Net interest           3.82              3.71             3.68              3.60
margin
Ratio of
operating
expense to
average
total assets           3.58              3.16             3.56              3.29
(annualized)
Return (loss) on
average equity         4.20              (12.10)          8.66              (7.62)
(annualized)
Efficiency            72.26         74.36        74.24           78.28
                       September         December         September
                       30,               31,              30,
                      2012           2011          2011        
IV. ASSET
QUALITY:
Total
non-performing       $ 47,199            50,609           60,002
assets
Non-performing
assets to total        7.33        %     6.40       %     7.33        %
assets
Non-performing
loans to total         7.29              6.10             6.57
loans
receivable, net
Allowance for        $ 20,462            23,888           25,690
loan losses
Allowance for
loan losses to         3.18        %     3.02       %     3.14        %
total assets
Allowance for
loan losses to         4.31              4.29             4.34
total loans
receivable, net
Allowance for
loan losses to         59.17             70.27            66.11
non-performing
loans
                                                                                      
V. BOOK VALUE
PER SHARE:
Book value per       $ 7.83              7.36             9.23
share
                                                                                      
                       Nine                               Nine
                       Months            Year             Months
                       Ended             Ended            Ended
                       Sept 30,          Dec 31,          Sept 30,
                      2012          2011         2011       
VI. CAPITAL
RATIOS:
Stockholders’
equity to total        9.30        %     7.22       %     7.96        %
assets, at end
of period
Average
stockholders’
equity to              8.58              8.19             8.20
average assets
^(1)
Ratio of average
interest-earning
assets to
average
interest-bearing       105.39            104.23           104.19
liabilities ^(1)
Tier I or core         9.55              7.14             7.79
capital ^(2)
Risk-based
capital to            14.61         10.86        11.62      
risk-weighted
assets
                       September         December         September
                       30,               31,              30,
                      2012          2011         2011       
VII. EMPLOYEE
DATA:
Number of full
time equivalent     196           205          206                   
employees

(1)  Average balances were calculated based upon amortized cost without the
      market value impact of ASC 320.
      The 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
(2)   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 September 30, 2012.

Contact:

HMN Financial, Inc.
Bradley Krehbiel, 507-252-7169
President
 
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