HMN Financial, Inc. Announces Fourth Quarter Results and Annual Meeting

  HMN Financial, Inc. Announces Fourth Quarter Results and Annual Meeting

Business Wire

ROCHESTER , Minn. -- January 22, 2013

HMN Financial, Inc. (NASDAQ:HMNF):

Fourth Quarter Highlights

  *Net income of $1.5 million compared to net loss of $7.6 million for fourth
    quarter of 2011
  *Diluted earnings per common share of $0.25 compared to diluted loss per
    common share of $2.08 in the fourth quarter of 2011
  *Provision for loan losses of $0, down $7.6 million from fourth quarter of
    2011
  *Losses on real estate owned of $0.3 million, down $2.1 million from fourth
    quarter of 2011
  *Net interest income of $5.5 million, down $1.4 million from fourth quarter
    of 2011
  *Non-performing assets of $40.6 million, down $6.6 million from third
    quarter of 2012

Annual Highlights

  *Net income of $5.3 million compared to net loss of $11.6 million for 2011
  *Diluted earnings per common share of $0.86 compared to diluted loss per
    common share of $3.47 for 2011
  *Provision for loan losses of $2.5 million, down $14.8 million from 2011
  *Losses on real estate owned of $0.2 million, down $2.5 million from 2011
  *Net interest income of $23.7 million, down $4.7 million from 2011
  *Non-performing assets of $40.6 million, down $10.0 million from December
    31, 2011
  *Total assets decreased $137 million in 2012

INCOME (LOSS) SUMMARY    Three Months Ended        Year Ended          
                          December 31,                 December 31,
(dollars in
thousands, except per     2012    2011              2012    2011    
share amounts)
Net income (loss)       $ 1,485   (7,626 )         $ 5,321   (11,555 )
Net income (loss)
available to common       1,016    (8,085 )           3,460    (13,376 )
stockholders
Diluted earnings
(loss) per common         0.25     (2.08  )           0.86     (3.47   )
share
Return (loss) on          0.93    % (3.75  )   %       0.79    % (1.39   )   %
average assets
Return (loss) on          9.77    % (45.87 )   %       8.94    % (16.94  )   %
average common equity
Book value per common   $ 8.02     7.36             $ 8.02     7.36
share
                                                                             

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $653 million
holding company for Home Federal Savings Bank (the Bank), today reported net
income of $1.5 million for the fourth quarter of 2012, an improvement of $9.1
million compared to a net loss of $7.6 million for the fourth quarter of 2011.
Net income available to common shareholders was $1.0 million for the fourth
quarter of 2012, an improvement of $9.1 million from the net loss available to
common shareholders of $8.1 million for the fourth quarter of 2011. Diluted
earnings per common share for the fourth quarter of 2012 was $0.25, an
improvement of $2.33 from the diluted loss per common share of $2.08 for the
fourth quarter of 2011. The improvement in net income in the fourth quarter of
2012 is due primarily to a $7.6 million decrease in the provision for loan
losses, a $0.4 million increase in the gain on sale of loans, and a $2.6
million decrease in noninterest expenses due primarily to the decrease in
expenses and losses recognized on real estate owned between the periods. These
changes to net income were partially offset by a $1.4 million decrease in net
interest income due primarily to a decrease in interest earning assets between
the periods.

President’s Statement
“The reported financial results reflect the increased volume of our mortgage
banking activities and the positive impact that the stabilization of
commercial real estate values has had on our provision for loan losses,” said
Brad Krehbiel, President of HMN. “We are encouraged by the results of our
ongoing efforts to improve credit quality in our commercial loan portfolio as
evidenced by the positive trend of declining non-performing assets. We intend
to continue to focus our efforts on further reducing these non-performing
assets while, at the same time, improving the financial performance of our
core banking operations.”

Fourth Quarter Results

Net Interest Income
Net interest income was $5.5 million for the fourth quarter of 2012, a
decrease of $1.4 million, or 19.7%, compared to $6.9 million for the fourth
quarter of 2011. Interest income was $7.0 million for the fourth quarter of
2012, a decrease of $2.2 million, or 23.6%, from $9.2 million for the same
period in 2011. Interest income decreased between the periods primarily
because of a $163 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 4.62% for the fourth quarter of 2012, a decrease
of 13 basis points from the 4.75% average yield for the fourth quarter of
2011. The decrease in the average yield is due to the continued low interest
rate environment that existed during the fourth quarter of 2012.

Interest expense was $1.5 million for the fourth quarter of 2012, a decrease
of $0.8 million, or 35.1%, compared to $2.3 million for the fourth quarter of
2011. Interest expense decreased primarily because of a $170 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 retail and brokered certificates of
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 retail and brokered certificates of deposits between the
periods was the result of using the proceeds from loan principal payments to
fund the maturing certificates of 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 fourth quarter of
2012. The average interest rate paid on interest-bearing liabilities was 1.06%
for the fourth quarter of 2012, a decrease of 20 basis points from the 1.26%
average interest rate paid in the fourth quarter of 2011. Net interest margin
(net interest income divided by average interest-earning assets) for the
fourth quarter of 2012 was 3.63%, an increase of 8 basis points, compared to
3.55% for the fourth quarter of 2011.

Provision for Loan Losses
The provision for loan losses was $0 for the fourth quarter of 2012, a
decrease of $7.6 million, or 100.0%, from $7.6 million for the fourth quarter
of 2011. The provision decreased in the fourth 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 fourth quarter of 2012 when compared to the
fourth quarter of 2011. The provision also decreased because of the $106
million decrease in the loan portfolio between the periods. Total
non-performing assets were $40.6 million at December 31, 2012, a decrease of
$6.6 million, or 14.0%, from $47.2 million at September 30, 2012.
Non-performing loans decreased $4.6 million and foreclosed and repossessed
assets decreased $2.0 million during the fourth quarter of 2012. The
non-performing loan and foreclosed and repossessed asset activity for the
fourth quarter of 2012 was as follows:

(Dollars in                                                    
thousands)
Non-performing                     Foreclosed and repossessed     
loans                               assets
September 30, 2012    $34,582       September 30, 2012               $12,617
Classified as         1,272         Transferred from                 283
non-performing                      non-performing loans
Charge offs           (681    )     Other                            117
                                    foreclosures/repossessions
Principal payments    (3,694  )     Real estate sold                 (1,680  )
received
Classified as         (1,221  )     Net loss on sale of assets       (672    )
accruing
Transferred to real   (283    )     Write downs                      (70     )
estate owned
December 31, 2012     $29,975      December 31, 2012                $10,595 
                                                                
                                                                     

The decrease in non-performing loans relates primarily to the principal
payments received on non-performing loans during the fourth quarter of 2012.
Of the $3.7 million in principal payments received on non-performing loans in
the fourth quarter of 2012, $1.4 million related to the payoff of two loans in
the utility industry and $0.8 million related to the payoff of a loan secured
by land.

A reconciliation of the allowance for loan losses for the fourth quarters of
2012 and 2011 is summarized as follows:

                                   
(Dollars in thousands)    2012       2011
Balance at September 30,   $20,462     $25,690
Provision                  0           7,609
Charge offs:
Commercial real estate     0           (6,710  )
Commercial business        (468    )   (4,787  )
Consumer                   (150    )   (41     )
One-to-four family         (63     )   (58     )
Recoveries                 1,827      2,185   
Balance at December 31,    21,608     $23,888 
                                       
General allowance          $16,795     $17,254
Specific allowance         4,813      6,634   
                           $21,608    $23,888 
                                         
                                               

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

                                                             
                              December       September       December
                               31,              30,               31,
(Dollars in thousands)       2012         2012          2011
Non-Performing Loans:
One-to-four family real      $ 2,492          $ 2,992           $ 4,435
estate
Commercial real estate         25,543           27,707            22,658
Consumer                       300              317               699
Commercial business            1,640            3,566             6,201
Total                          29,975           34,582            33,993
                                                                             
Foreclosed and Repossessed
Assets:
One-to-four family real        1,595            320               352
estate
Commercial real estate         9,000            12,297            16,264
Total non-performing         $ 40,570         $ 47,199          $ 50,609
assets
Total as a percentage of       6.21       %     7.33        %     6.40       %
total assets
Total non-performing loans   $ 29,975         $ 34,582          $ 33,993
Total as a percentage of
total loans receivable,        6.60       %     7.29        %     6.10       %
net
Allowance for loan losses      72.09      %     59.17       %     70.27      %
to non-performing loans
                                                                             
Delinquency Data:
Delinquencies ^(1)
30+ days                     $ 2,739          $ 5,077           $ 3,226
90+ days                       0                0                 0
Delinquencies as a
percentage of
loan and lease portfolio
^(1)
30+ days                       0.57       %     0.98        %     0.55       %
90+ days                       0.00       %     0.00        %     0.00       %
                                                     
(1) Excludes non-accrual
loans.
                                                                             

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

                                    Principal                   Principal                   Principal
                                      Amount of                     Amount of                     Amount of
                                      Loans at                      Loans at                      Loans at
(Dollars in         # of              December    # of              September   # of              December
thousands)                            31,                           30,                           31,
Property Type       relationships   2012        relationships   2012        relationships   2011
Developments/land   9               $ 24,339      12              $ 26,415      10              $ 17,465
Shopping            2                 386         2                 396         2                 1,315
centers/retail
Restaurants/bar     1                 547         1                 565         1                 616
Office buildings    2                 128         2                 184         1                 2,325
Other buildings     1               143        1               147        3               937
                    15             $ 25,543     18             $ 27,707     17             $ 22,658
                                                                                                  

The decrease in the non-performing commercial real estate loans from September
30, 2012 is due primarily to a $1.1 million development loan that was
reclassified as accruing during the fourth quarter of 2012 and because
additional principal payments were received on various other non-performing
commercial real estate loans during the quarter.

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

(Dollars in thousands)          Principal        Principal        Principal
                                    Amount               Amount               Amount
                                    of Loans             of Loans             of Loans
                                    December             September            December
                                    31,                  30,                  31,
Industry Type              #    2012        #    2012        #    2011
Construction/development     6      $  1,074      6      $  1,650      6      $  2,061
Retail                       2         239        2         247        1         82
Banking                      0         0          0         0          2         1,199
Entertainment                0         0          1         16         1         23
Utilities                    0         0          2         1,379      1         2,792
Restaurant                   1         129        1         135        0         0
Other                        3      198      3      139      1      44
                             12   $  1,640    15   $  3,566    12   $  6,201
                                                                                 

Non-Interest Income and Expense
Non-interest income was $2.4 million for the fourth quarter of 2012, an
increase of $0.4 million, or 20.2%, from $2.0 million for the same period in
2011. Gain on sales of loans increased $0.4 million between the periods
primarily because of an increase in single family loan originations and sales.
Other income increased $26,000 between the periods primarily due to an
increase in rental income on other real estate. Fees and service charges
decreased $0.1 million primarily because of a decrease in overdraft fees
between the periods.

Non-interest expense was $6.3 million for the fourth quarter of 2012, a
decrease of $2.6 million, or 29.2%, from $8.9 million for the same period of
2011. Losses on real estate owned decreased $2.1 million from the fourth
quarter of 2011 primarily because there were fewer losses realized on the sale
of real estate and there were fewer write downs in the value of the real
estate owned in the fourth quarter of 2012 when compared to the same period in
2011. Compensation and benefits expense decreased $0.3 million between the
periods primarily as a result of having fewer employees and also because of a
decrease in pension benefit costs. Occupancy expense decreased $0.1 million
primarily because of a decrease in depreciation and other expenses as a result
of having fewer branch facilities. Deposit insurance expense increased $0.1
million because of an increase in the insurance rates between the periods.
Other non-interest expenses decreased $0.1 million between the periods
primarily because of a decrease in advertising expenses.

Income tax expense was $0.1 million in the fourth quarter of 2012, an increase
of $0.1 million from the fourth quarter of 2011 when no income tax expense was
recorded. 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 December 31, 2012. Since the valuation reserve is
established against the entire deferred tax asset balance, no regular income
tax expense was recorded for the fourth quarter of 2012. The income tax
expense that was recorded in the fourth quarter of 2012 relates to alternative
minimum tax amounts that are due since only a portion of the outstanding net
operating loss carry forwards can be used to offset current income under the
current alternative minimum tax rules.

Net Income (Loss) Available to Common Shareholders
The net income available to common shareholders was $1.0 million for the
fourth quarter of 2012, an improvement of $9.1 million from the $8.1 million
net loss available to common shareholders in the fourth 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 eight 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.

Return (Loss) on Assets and Equity
The return on average assets for the fourth quarter of 2012 was 0.93%,
compared to a 3.75% loss on average assets for the fourth quarter of 2011.
Return on average equity was 9.77% for the fourth quarter of 2012, compared to
a 45.87% loss on average equity for the same period of 2011. Book value per
common share at December 31, 2012 was $8.02, compared to $7.36 at December 31,
2011.

Annual Results

Net Income (Loss)
Net income was $5.3 million for 2012, an improvement of $16.9 million, from
the $11.6 million loss for 2011. Net income available to common shareholders
was $3.5 million for the year ended December 31, 2012, an improvement of $16.9
million, from the net loss available to common shareholders of $13.4 million
for 2011. Diluted earnings per common share for the year ended December 31,
2012 was $0.86, an improvement of $4.33 from the $3.47 diluted loss per common
share for the year ended December 31, 2011. The improvement in net income in
2012 is due primarily to a $14.8 million decrease in the provision for loan
losses between the periods, a $1.9 million increase in the gain on sale of
loans, and a $4.9 million decrease in noninterest expenses due primarily to
the decrease in expenses and losses recognized on real estate owned between
the periods. These improvements to net income were partially offset by a $4.7
million decrease in interest income due primarily to a decrease in interest
earning assets between the periods.

Net Interest Income
Net interest income was $23.7 million for 2012, a decrease of $4.7 million, or
16.6%, from $28.4 million for 2011. Interest income was $30.8 million for
2012, a decrease of $8.7 million, or 22.1%, from $39.5 million for 2011.
Interest income decreased between the periods primarily because of a $146
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 4.78% for the year ended December 31, 2012, a
decrease of 22 basis points from the 5.00% average yield for 2011. The
decrease in the average yield is due to the continued low interest rate
environment that existed during 2012.

Interest expense was $7.1 million for the year ended December 31, 2012, a
decrease of $4.0 million, or 35.9%, from $11.1 million for 2011. Interest
expense decreased primarily because of a $149 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 retail and brokered certificates of 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 retail and brokered certificates of deposits between the periods was the
result of using the proceeds from loan principal payments to fund maturing
certificates of deposits. Interest expense also decreased because of the lower
rates paid on retail money market accounts and certificates of deposit. The
decreased rates were the result of the low interest rate environment that
continued to exist during 2012. The average interest rate paid on
interest-bearing liabilities was 1.17% for the year ended December 31, 2012, a
decrease of 30 basis points from the 1.47% average rate paid for the same
period of 2011. Net interest margin (net interest income divided by average
interest-earning assets) was 3.67% for the year ended December 31, 2012, an
increase of 8 basis points, from the 3.59% margin for 2011.

Provision for Loan Losses
The provision for loan losses was $2.5 million for the year ended December 31,
2012, a decrease of $14.8 million, from $17.3 million for the year ended
December 31, 2011. The provision decreased between the periods 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 2012 when compared to 2011. The provision also
decreased because of the $106 million decrease in the loan portfolio between
the periods. Total non-performing assets were $40.6 million at December 31,
2012, a decrease of $10.0 million, or 19.8%, from $50.6 million at December
31, 2011. Non-performing loans decreased $4.0 million and foreclosed and
repossessed assets decreased $6.0 million during 2012. The non-performing loan
and foreclosed and repossessed asset activity for 2012 was as follows:

(Dollars in                                                    
thousands)
Non-performing                    Foreclosed and repossessed      
loans                              asset activity
December 31, 2011    $33,993       December 31, 2011                 $16,616
Classified as        23,785        Transferred from non-performing   2,242
non-performing                     loans
Charge offs          (9,317  )     Other                             117
                                   foreclosures/repossessions
Principal payments   (13,823 )     Real estate sold                  (7,558  )
received
Classified as        (2,421  )     Net loss on sale of assets        (752    )
accruing
Transferred to       (2,242  )     Write downs                       (70     )
real estate owned
December 31, 2012    $29,975      December 31, 2012                 $10,595 
                                                                
                                                                     

A reconciliation of the allowance for loan losses for 2012 and 2011 is
summarized as follows:

                                  
(in thousands)           2012       2011
Balance at January 1,     $23,888     $42,828
Provision                 2,544       17,278
Charge offs:
Commercial                (2,464  )   (15,512 )
Commercial real estate    (5,719  )   (23,012 )
Consumer                  (1,071  )   (270    )
Single family mortgage    (63     )   (508    )
Recoveries                4,493      3,084   
Balance at December 31,   $21,608    $23,888 
                                      
General allowance         $16,795     $17,255
Specific allowance        4,813      6,633   
                          $21,608    $23,888 
                                        
                                              

Non-Interest Income and Expense
Non-interest income was $9.0 million for the year ended December 31, 2012, an
increase of $2.1 million, or 30.9%, from $6.9 million for the year ended
December 31, 2011. Gains on sales of loans increased $1.9 million, or 115.8%,
between the periods primarily because of an increase in single family loan
originations and sales. 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 $0.4 million primarily because of a
decrease in overdraft charges between the periods.

Non-interest expense was $24.7 million for the year ended December 31, 2012, a
decrease of $4.9 million, or 16.5%, from $29.6 million for the same period in
2011. Losses on real estate owned decreased $2.5 million between the periods
primarily because there were fewer losses realized on the sale of real estate
and there were fewer write downs in the value of the real estate owned in 2012
when compared to 2011. Compensation and benefits expense decreased $1.1
million between the periods primarily as a result of having fewer employees
and also because of a decrease in pension benefit costs. Other non-interest
expenses decreased $1.0 million between the periods primarily because of a
decrease in real estate taxes and legal fees related to other real estate
owned. Occupancy expense decreased $0.4 million primarily because of a
decrease in depreciation and other expenses as a result of having fewer branch
facilities.

Income tax expense was $0.1 million in 2012, an increase of $0.1 million from
2011 when no income tax expense was recorded. 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 December 31, 2012.
Since the valuation reserve is established against the entire deferred tax
asset balance, no regular income tax expense was recorded in 2012. The income
tax expense that was recorded in 2012 relates to alternative minimum tax
amounts that are due since only a portion of the outstanding net operating
loss carry forwards can be used to offset current income under the current
alternative minimum tax rules.

Net Income (Loss) Available to Common Shareholders
Net income available to common shareholders was $3.5 million for the year
ended December 31, 2012, an improvement of $16.9 million, from the net loss
available to common shareholders of $13.4 million for 2011. Net income
available to common shareholders increased primarily because of the change in
net income (loss) between the periods. The Company has deferred the last eight
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.

Return (Loss) on Assets and Equity
The return on average assets was 0.79% for 2012, compared to a 1.39% loss on
average assets for 2011. Return on average common equity was 8.94% for 2012,
compared to a 16.94% loss on average common equity for 2011.

Annual Meeting Announcement
HMN announced that its annual meeting will be held at the Rochester Golf and
Country Club, located at 3100 West Country Club Road, Rochester, Minnesota on
Tuesday, April 23, 2013, at 10:00 a.m. local time.

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, LaCrescent,
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,” “intend,”
“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 filings on Forms 10-K and 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” 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

                                                             
                                                  December 31,  December 31,
(Dollars in thousands)                           2012          2011
                                                   (unaudited)
Assets
Cash and cash equivalents                        $ 83,660         67,840
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $9,825 and $19,586)                10,421         20,645
Other marketable securities
(amortized cost $75,759 and $105,700)              75,470        105,469   
                                                   85,891        126,114   
                                                                  
Loans held for sale                                2,584          3,709
Loans receivable, net                              454,045        555,908
Accrued interest receivable                        2,018          2,449
Real estate, net                                   10,595         16,616
Federal Home Loan Bank stock, at cost              4,063          4,222
Mortgage servicing rights, net                     1,732          1,485
Premises and equipment, net                        7,173          7,967
Prepaid expenses and other assets                  1,566          2,262
Assets held for sale                               0              1,583
Deferred tax asset, net                            0             0         
Total assets                                     $ 653,327       790,155   
                                                                  
                                                                  
Liabilities and Stockholders’ Equity
Deposits                                         $ 514,951        620,128
Deposits held for sale                             0              36,048
Federal Home Loan Bank Advances                    70,000         70,000
Accrued interest payable                           247            780
Customer escrows                                   830            933
Accrued expenses and other liabilities             6,465         5,205     
Total liabilities                                  592,493       733,094   
Commitments and contingencies
Stockholders’ equity:
Serial-preferred stock: ($.01 par value)
Authorized 500,000 shares; issued shares           25,336         24,780
26,000
Common stock ($.01 par value):
Authorized 11,000,000; issued shares 9,128,662     91             91
Additional paid-in capital                         51,795         53,462
Retained earnings, subject to certain              47,004         42,983
restrictions
Accumulated other comprehensive income (loss)      (49       )    471
Unearned employee stock ownership plan shares      (2,997    )    (3,191    )
Treasury stock, at cost 4,705,073 and              (60,346   )    (61,535   )
4,740,711 shares
Total stockholders’ equity                         60,834        57,061    
Total liabilities and stockholders’ equity       $ 653,327       790,155   
                                                                     
                                                                            

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
                                                              
                                                              
                           Three Months Ended          Year Ended
                           December 31,                December 31,
(Dollars in
thousands, except       2012         2011         2012         2011
per share data)
                           (unaudited)  (unaudited)   (unaudited)
Interest income:
Loans receivable       $   6,730         8,605         29,257        36,776
Securities available
for sale:
Mortgage-backed and        114           225           604           1,098
related
Other marketable           136           319           737           1,451
Cash equivalents           30            29            101           36
Other                      28           32           117          180     
Total interest             7,038        9,210        30,816       39,541  
income
                                                                     
Interest expense:
Deposits                   659           1,478         3,741         6,847
Federal Home Loan          854          854          3,398        4,288   
Bank advances
Total interest             1,513        2,332        7,139        11,135  
expense
Net interest income        5,525         6,878         23,677        28,406
Provision for loan         0            7,609        2,544        17,278  
losses
Net interest income
(loss) after               5,525        (731      )   21,133       11,128  
provision for loan
losses
                                                                     
Non-interest income:
Fees and service           841           912           3,325         3,739
charges
Loan servicing fees        251           240           964           987
Gain on sales of           1,105         672           3,574         1,656
loans
Gain on sale of            0             0             552           0
branch office
Other                      177          151          575          487     
Total non-interest         2,374        1,975        8,990        6,869   
income
                                                                     
Non-interest
expense:
Compensation and           2,865         3,205         12,452        13,553
benefits
Losses on real             256           2,380         181           2,681
estate owned
Occupancy                  832           955           3,358         3,741
Deposit insurance          327           254           1,255         1,255
Data processing            326           337           1,332         1,221
Other                      1,676        1,739        6,092        7,101   
Total non-interest         6,282        8,870        24,670       29,552  
expense
Income (loss) before       1,617         (7,626    )   5,453         (11,555 )
income tax expense
Income tax expense         132          0            132          0       
Net income (loss)          1,485         (7,626    )   5,321         (11,555 )
Preferred stock
dividends and              469          459          1,861        1,821   
discount
Net income (loss)
available to common    $   1,016        (8,085    )   3,460        (13,376 )
shareholders
Other comprehensive        (171    )     (264      )   (520     )    (70     )
loss, net of tax
Comprehensive income
(loss) attributable        845          (8,349    )   2,940        (13,446 )
to common
shareholders
Basic earnings
(loss) per common      $   0.26         (2.08     )   0.88         (3.47   )
share
Diluted earnings
(loss) per common      $   0.25         (2.08     )   0.86         (3.47   )
share
                                                               

                                                  

HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
                          Three Months Ended           Year Ended
SELECTED FINANCIAL        December 31,                 December 31,
DATA:
(Dollars in thousand,
except per share        2012         2011        2012      2011
data)
I. OPERATING DATA:                                               
Interest income         $ 7,038          9,210         30,816      39,541
Interest expense          1,513          2,332         7,139       11,135
Net interest income       5,525          6,878         23,677      28,406
                                                                             
II. AVERAGE BALANCES:
Assets ^(1)               633,800        807,341       675,648     832,357
Loans receivable, net     462,803        574,996       503,668     608,826
Mortgage-backed and
related securities        82,057         133,458       87,604      139,473
^(1)
Interest-earning          605,766        768,747       645,122     791,309
assets ^(1)
Interest-bearing          567,018        736,657       610,158     759,172
liabilities
Equity ^(1)               60,457         65,960        59,519      68,201
                                                                             
III. PERFORMANCE
RATIOS: ^(1)
Return (loss) on
average assets            0.93       %   (3.75    )%   0.79    %   (1.39   ) %
(annualized)
Interest rate spread
information:
Average during period     3.56           3.50          3.61        3.53
End of period             3.49           3.34          3.49        3.34
Net interest margin       3.63           3.55          3.67        3.59
Ratio of operating
expense to average
total assets              3.94           4.36          3.65        3.55
(annualized)
Earnings (loss) on
average common equity     9.77           (45.87   )    8.94        (16.94  )

(annualized)
Efficiency               79.53        100.19       75.52       83.78
                          December       December
                          31,            31,
IV. ASSET QUALITY:       2012         2011     
Total non-performing    $ 40,570         50,609
assets
Non-performing assets     6.21       %   6.40     %
to total assets
Non-performing loans
to total loans
receivable, net           6.60       %   6.10     %
Allowance for loan      $ 21,608         23,888
losses
Allowance for loan
losses to total           3.31       %   3.02     %
assets
Allowance for loan
losses to total loans     4.76          4.29

receivable, net
Allowance for loan
losses to                 72.09          70.27
non-performing loans
                                                                             
V. BOOK VALUE PER
COMMON SHARE:
Book value per common    8.02         7.36     
share
                          Year Ended     Year
                                         Ended
VI. CAPITAL RATIOS:      Dec 31,      Dec 31,  
                          2012           2011
Stockholders’ equity
to total assets, at       9.31       %   7.22     %
end of period
Average stockholders’
equity to average         8.81           8.19
assets ^(1)
Ratio of average
interest-earning
assets to
average
interest-bearing          105.73         104.23
liabilities ^(1)
Home Federal Savings
Bank regulatory
capital ratios:
Tier 1 or core            9.68       %   7.14     %
capital^(2)
Risk-based capital       15.52      %  10.86    %
                          December       December
                          31,            31,
                         2012         2011     
VII. EMPLOYEE DATA:
Number of full time     194          205                  
equivalent employees

(1)  Average balances were calculated based upon amortized cost without the
      market value impact of ASC 320.
      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 December 31, 2012.

Contact:

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