HMN Financial, Inc. Announces Fourth Quarter Results, Declares Dividend and Announces...

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

Fourth Quarter Highlights

-- Net income of $2.8 million, up $105,000, or 3.9%, over fourth
quarter of 2006

-- Diluted earnings per share of $0.73, up $0.06, or 9.0%, over
fourth quarter of 2006

-- Other non-interest income up $990,000, or 572.3%, over fourth
quarter of 2006

-- Net interest margin down 89 basis points from fourth quarter
of 2006

-- Provision for loan losses up $137,000, or 10.1%, over fourth
quarter of 2006

Annual Highlights

-- Record net income of $11.3 million, up $2.9 million, or 33.8%,
from 2006

-- Diluted earnings per share of $2.89, up $0.79, or 37.6%, from
2006

-- Other non-interest income up $1.0 million, or 120.4%, over
2006

-- Net interest margin down 46 basis points from 2006

-- Provision for loan losses down $5.0 million, or 56.1%, from
2006
ROCHESTER, Minn.--(Business Wire)--HMN Financial, Inc. (NASDAQ:HMNF):

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EARNINGS SUMMARY Three Months Ended Year Ended
December 31, December 31,
------------------ ------------------
(dollars in thousands, except
per share amounts) 2007 2006 2007 2006
------------------ ------------------
Net income $ 2,775 2,670 $ 11,274 8,428
Diluted earnings per share 0.73 0.67 2.89 2.10
Return on average assets 0.98% 1.11 1.03% 0.86
Return on average equity 11.11% 11.18 11.53% 8.85
Book value per share $ 23.50 21.58 $ 23.50 21.58
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HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $1.1
billion holding company for Home Federal Savings Bank, today reported
net income of $2.8 million for the fourth quarter of 2007, up
$105,000, or 3.9%, from net income of $2.7 million for the fourth
quarter of 2006. Diluted earnings per common share for the fourth
quarter of 2007 were $0.73, up $0.06, or 9.0%, from $0.67 for the
fourth quarter of 2006.

Fourth Quarter Results

Net Interest Income

Net interest income was $9.2 million for the fourth quarter of
2007, a decrease of $596,000, or 6.1%, compared to $9.8 million for
the fourth quarter of 2006. Interest income was $19.3 million for the
fourth quarter of 2007, an increase of $1.9 million, or 11.4%, from
$17.4 million for the same period in 2006. Interest income increased
primarily because average interest earning assets increased $170
million between the periods and because the average yield earned on
investments increased. The increase in average interest earning assets
was the result of a $102 million increase in the average outstanding
loans and a $68 million increase in the average outstanding cash and
investments between the periods. The increase in outstanding loans was
primarily in commercial business and commercial construction loans.
The increase in cash and investments was the result of obtaining
collateralized deposit relationships that required the purchase of
additional investments in order to collateralize the deposits and
maintain adequate liquidity. The average yield on investments
increased 37 basis points between the periods primarily because
maturing investments were reinvested at higher rates. The average
yield earned on interest-earning assets was 7.08% for the fourth
quarter of 2007, a decrease of 46 basis points from the 7.54% average
yield for the fourth quarter of 2006.

Interest expense was $10.1 million for the fourth quarter of 2007,
an increase of $2.6 million, or 34.3%, from $7.5 million for the
fourth quarter of 2006. Interest expense increased primarily because
of an increase in the outstanding commercial money market accounts and
certificates of deposits. Interest expense also increased because of
higher interest rates paid on these deposits. The increased rates were
the result of the 100 basis point increase in federal funds rate that
occurred throughout the first six months of 2006 that was not fully
reflected in deposit rates until the second half of 2006. Increases in
the federal funds rate, which is the rate that banks charge other
banks for short term loans, generally have a lagging effect and
increase the rates banks pay for deposits. The average interest rate
paid on interest-bearing liabilities was 3.96% for the fourth quarter
of 2007, an increase of 48 basis points from the 3.48% average rate
paid in the fourth quarter of 2006. Net interest margin (net interest
income divided by average interest earning assets) for the fourth
quarter of 2007 was 3.39%, a decrease of 89 basis points, compared to
4.28% for the fourth quarter of 2006.

Provision for Loan Losses

The provision for loan losses was $1.5 million for the fourth
quarter of 2007, an increase of $137,000, or 10.1%, from $1.4 million
for the fourth quarter of 2006. The provision for loan losses
increased primarily because of an increase in the allowance required
for risk rated commercial loans in the fourth quarter of 2007 when
compared to the same period in 2006. The increase was primarily due to
decreases in the estimated value of the real estate supporting
residential development loans. Total non-performing assets were $21.9
million at December 31, 2007, an increase of $1.6 million, or 8.2%,
from $20.3 million at September 30, 2007. Non-performing loans
increased $1.9 million to $19.7 million and foreclosed and repossessed
assets decreased $258,000 to $2.2 million primarily due to the sale of
a foreclosed commercial property. The non-performing loan activity for
the quarter included $7.8 million in additional non-performing loans
primarily related to residential development loans, $834,000 in loan
charge offs, $876,000 in loans that were reclassified to performing,
$932,000 in loans that were transferred into real estate owned, and
$3.3 million in principal payments were received.

Non-Interest Income and Expense

Non-interest income was $2.6 million for the fourth quarter of
2007, an increase of $1.1 million, or 77.9%, from $1.5 million for the
fourth quarter of 2006. Fees and service charges increased $53,000
between the periods primarily because of increased retail deposit
account activity and fees. Gain on sales of loans increased $100,000
between the periods due primarily to an increase in the number of
single family loans that were sold. Other non-interest income
increased $990,000 between the periods due primarily to a gain of
$959,000 on the sale of a repossessed commercial property.

Non-interest expense was $5.8 million for the fourth quarter of
2007, an increase of $316,000, or 5.8%, from $5.5 million for the
fourth quarter of 2006. Compensation expense decreased $65,000
primarily due to a decrease in the defined benefit pension costs
between the periods. Occupancy expense increased $43,000 primarily
because of the additional costs associated with the new Eagan branch
that was opened in the third quarter of 2007. Data processing costs
increased $26,000 primarily because of the increased internet and
other banking services provided by a third party processor between the
periods. Mortgage servicing rights amortization decreased $21,000
between the periods because there are fewer mortgage loans being
serviced. Other operating expenses increased $344,000 primarily
because of increased mortgage and commercial loan foreclosure costs in
the fourth quarter of 2007 when compared to the same period in 2006.
Income tax expense decreased $22,000 between the periods.

Return on Assets and Equity

Return on average assets for the fourth quarter of 2007 was 0.98%,
compared to 1.11% for the fourth quarter of 2006. Return on average
equity was 11.11% for the fourth quarter of 2007, compared to 11.18%
for the same period of 2006. Book value per common share at December
31, 2007 was $23.50, compared to $21.58 at December 31, 2006.

Annual Results

Net Income

Net income was $11.3 million for 2007, an increase of $2.9
million, or 33.8%, compared to $8.4 million for 2006. Diluted earnings
per common share for the year ended December 31, 2007 were $2.89, up
$0.79, or 37.6%, from $2.10 for the year ended December 31, 2006. The
increase in net income is due primarily to a $5.0 million decrease in
the loan loss provision between the periods as a result of decreased
commercial loan charge offs. Diluted earnings per share increased
$0.08 as a result of the Company's treasury stock purchases during
2007.

Net Interest Income

Net interest income was $38.7 million for 2007 the same as 2006.
Interest income was $77.5 million for 2007, an increase of $10.0
million, or 14.8%, from $67.5 million for 2006. Interest income
increased because of a $117 million increase in average interest
earning assets and also because the average yields earned on loans and
investments increased between the periods. The increase in average
interest earning assets was the result of a $66 million increase in
the average outstanding loans and a $51 million increase in the
average outstanding cash and investments between the periods. The
increase in outstanding loans was primarily in commercial business and
commercial construction loans. The increase in cash and investments
was the result of obtaining collateralized deposit relationships that
required the purchase of additional investments in order to
collateralize the deposits and maintain adequate liquidity. Yields
increased primarily because of the 100 basis point increase in the
prime interest rate that occurred during the first six months of 2006
that remained in effect until September 2007. Increases in the prime
rate, which is the rate that banks charge their prime business
customers, generally increase the rates on adjustable rate consumer
and commercial loans in the portfolio and on new loans and
investments. The yield earned on interest-earning assets was 7.35% for
2007, an increase of 14 basis points from the 7.21% yield for 2006.

Interest expense was $38.8 million for 2007, an increase of $10.0
million, or 34.6%, from the $28.8 million for 2006. Interest expense
increased primarily because of higher interest rates paid on
commercial money market accounts and certificates of deposits. The
increased rates were the result of the 100 basis point increase in
federal funds rate that occurred throughout the first six months of
2006 that was not fully reflected in deposit rates until the second
half of 2006. Increases in the federal funds rate generally have a
lagging effect and increase the rates banks pay for deposits. The
average interest rate paid on interest-bearing liabilities was 3.92%
for 2007, an increase of 64 basis points from the 3.28% paid for 2006.
Net interest margin for 2007 was 3.67%, a decrease of 46 basis points,
compared to 4.13% for 2006.

Provision for Loan Losses

The provision for loan losses was $3.9 million for 2007, a
decrease of $5.0 million, or 56.1%, from $8.9 million for 2006. The
provision for loan losses decreased primarily because $7.4 million in
related commercial real estate development loans were charged off
during the third quarter of 2006. The decrease in the provision
related to loan charge offs was partially offset by an increase in the
provision for the $77 million increase in the outstanding commercial
loans between the periods. Total non-performing assets were $21.9
million at December 31, 2007, an increase of $11.5 million, or 110.4%,
from $10.4 million at December 31, 2006. Non-performing loans
increased $11.3 million to $19.7 million, foreclosed and repossessed
assets increased $175,000 to $2.2 million, and non-performing other
assets decreased $10,000 to $33,000 between the periods. The increase
in non-performing loans was primarily related to two residential
development loan relationships totaling $8.9 million that became
non-performing due to decreased demand for residential lots. The
non-performing loan activity for the year included $25.0 million in
additional non-performing loans, $1.7 million in loan charge offs,
$2.8 million in loans that were reclassified to performing, $3.5
million in loans that were transferred into real estate owned, and
$5.7 million in principal payments were received on non-performing
loans.

A reconciliation of the allowance for loan losses for 2007 and
2006 are summarized as follows:

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----------------------------------------------------------------------

(in thousands) 2007 2006
----------- -----------
Balance at January 1, $ 9,873 $ 8,778
Provision 3,898 8,878
Charge offs:
Commercial (554) (7,430)
Commercial real estate (245)
Consumer (840) (269)
Single family mortgage (42) (150)
Recoveries 348 66
----------- -----------
Balance at December 31, $ 12,438 $ 9,873
=========== ===========

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Non-Interest Income and Expense

Non-interest income was $7.6 million for 2007, an increase of $1.2
million, or 17.9%, from $6.4 million for 2006. Fees and service
charges increased $28,000 between the periods primarily because of
increased retail deposit account activity and fees. Mortgage servicing
fees decreased $118,000 between the periods due primarily to a
decrease in the single-family mortgage loans being serviced. Security
gains decreased $48,000 due to decreased security sales. Gains on
sales of loans increased $259,000 between the periods primarily
because of the $575,000 increase in the gains recognized on the sale
of government guaranteed commercial loans that was partially offset by
a $316,000 decrease in the gains recognized on the sale of
single-family loans due to decreased loan volumes and profit margins.
Competition in the single- family loan origination market has remained
strong as the overall market has slowed and profit margins were
lowered in order to remain competitive and maintain origination
volume. Other non-interest income increased $1.0 million primarily
because of increased gains on the sale of real estate owned.

Non-interest expense was $23.8 million for 2007, an increase of
$1.2 million, or 5.4%, from $22.6 million for 2006. Compensation and
benefits expense increased $622,000 primarily due to an increase in
annual payroll costs and incentive compensation. Occupancy expense
increased $32,000 primarily because of the additional costs associated
with the new Eagan branch that was opened in the third quarter of
2007. Data processing costs increased $84,000 primarily because of
increased internet and other banking services provided by a third
party processor between the periods. Amortization of mortgage
servicing rights decreased $142,000 due to a decrease in single-family
mortgage loans being serviced when compared to 2006. Other
non-interest expense increased $563,000 primarily because of increased
legal fees and other expenses relating to foreclosed assets. Income
tax expense was $7.3 million in 2007, an increase of $2.1 million, or
39.7%, compared to $5.2 million for 2006. Income tax expense increased
between the periods due to an increase in taxable income and an
effective tax rate that increased from 38.3% for 2006 to 39.3% for
2007. The increase in the effective tax rate was primarily the result
of increased taxable income and changes in state tax allocations.

Return on Assets and Equity

Return on average assets for 2007 was 1.03%, compared to 0.86% for
2006. Return on average equity was 11.53% for 2007, compared to 8.85%
for 2006.

President's Statement

"I am pleased to report record annual earnings despite the
challenging rate and economic environments that existed during the
last half of the year," said HMN President Michael McNeil. "The
decrease in interest rates contributed to the net interest margin
compression that was experienced during the year and the housing
slowdown was a significant factor in the increase in non-performing
loans."

Dividend and Annual Meeting Announcement

HMN Financial, Inc. today announced that it will pay a regular
quarterly dividend of 25 cents per share payable on March 7, 2008 to
stockholders of record on February 15, 2008.

HMN also announced that its annual meeting will be held at the HMN
Financial, Inc. corporate office, located at 1016 Civic Center Drive
NW, Rochester, Minnesota on Tuesday, April 22, 2008, at 10:00 a.m.
local time.

General Information

HMN Financial, Inc. and Home Federal are headquartered in
Rochester, Minnesota. Home Federal operates ten full service offices
in Minnesota located in Albert Lea, Austin, Eagan, LaCrescent,
Rochester, Spring Valley and Winona, Minnesota and two full service
offices in Iowa located in Marshalltown and Toledo, Iowa. Home Federal
also operates loan origination offices located in Sartell and
Rochester, Minnesota. Home Federal Private Banking also operates
branches in Edina and Rochester, Minnesota.

Safe Harbor Statement

This press release may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995.
These statements include, but are not limited to those relating to the
Company's financial expectations for earnings and revenues. A number
of factors could cause actual results to differ materially from the
Company's assumptions and expectations. These include but are not
limited to possible legislative changes and adverse economic, business
and competitive developments such as shrinking interest margins;
reduced collateral values; deposit outflows; reduced demand for
financial services and loan products; changes in accounting policies
and guidelines, or monetary and fiscal policies of the federal
government or tax laws; changes in credit or other risks posed by the
Company's loan and investment portfolios; technological,
computer-related or operational difficulties; adverse changes in
securities markets; results of litigation or other significant
uncertainties. Additional factors that may cause actual results to
differ from the Company's assumptions and expectations include those
set forth in the Company's most recent filings on form 10-K and Form
10-Q with the Securities and Exchange Commission. All forward-looking
statements are qualified by, and should be considered in conjunction
with, such cautionary statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)

----------------------------------------------------------------------
December 31, December 31,
(dollars in thousands, except per share
data) 2007 2006
----------------------------------------------------------------------

Assets
Cash and cash equivalents.................. $ 23,718 43,776
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $18,786 and $6,671)...... 18,468 6,178
Other marketable securities
(amortized cost $165,430 and $119,940).. 167,720 119,962
------------ ------------
186,188 126,140
------------ ------------

Loans held for sale........................ 3,261 1,493
Loans receivable, net...................... 865,088 768,232
Accrued interest receivable................ 6,893 5,061
Real estate, net........................... 2,214 2,072
Federal Home Loan Bank stock, at cost...... 6,198 7,956
Mortgage servicing rights, net............. 1,270 1,958
Premises and equipment, net................ 12,024 11,372
Goodwill................................... 3,801 3,801
Core deposit intangible, net............... 0 106
Prepaid expenses and other assets.......... 1,680 2,943
Deferred tax asset......................... 4,719 2,879
------------ ------------
Total assets............................. $ 1,117,054 977,789
============ ============

Liabilities and Stockholders' Equity
Deposits................................... $ 888,118 725,959
Federal Home Loan Bank advances............ 112,500 150,900
Accrued interest payable................... 9,515 1,176
Customer escrows........................... 866 721
Accrued expenses and other liabilities..... 7,927 5,891
------------ ------------
Total liabilities........................ 1,018,926 884,647
------------ ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: ($.01 par value)
Authorized 500,000 shares; issued and
outstanding shares none................ 0 0
Common stock ($.01 par value):
Authorized 11,000,000; issued shares
9,128,662.............................. 91 91
Additional paid-in capital................. 58,049 57,914
Retained earnings, subject to certain
restrictions.............................. 110,943 103,643
Accumulated other comprehensive income
(loss).................................... 1,167 (284)
Unearned employee stock ownership plan
shares.................................... (3,965) (4,158)
Treasury stock, at cost 4,953,045 and
4,813,232................................. (68,157) (64,064)
------------ ------------
Total stockholders' equity............. 98,128 93,142
------------ ------------
Total liabilities and stockholders' equity. $ 1,117,054 977,789
============ ============
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)

----------------------------------------------------------------------
Three Months Ended Year Ended
December 31, December 31,
(dollars in thousands, except
per share data) 2007 2006 2007 2006
----------------------------------------------------------------------
Interest income:
Loans receivable........... $ 16,483 15,434 66,115 60,181
Securities available for
sale:
Mortgage-backed and
related............... 232 65 727 271
Other marketable....... 2,343 1,471 9,153 5,195
Cash equivalents........... 215 301 1,187 1,555
Other...................... 65 87 341 325
--------- -------- -------- --------
Total interest income.. 19,338 17,358 77,523 67,527
--------- -------- -------- --------

Interest expense:
Deposits................... 8,896 5,848 33,403 22,046
Federal Home Loan Bank
advances.................. 1,193 1,665 5,420 6,795
--------- -------- -------- --------
Total interest expense.. 10,089 7,513 38,823 28,841
--------- -------- -------- --------
Net interest income..... 9,249 9,845 38,700 38,686
Provision for loan losses....... 1,494 1,357 3,898 8,878
--------- -------- -------- --------
Net interest income
after provision for
loan losses............ 7,755 8,488 34,802 29,808
--------- -------- -------- --------

Non-interest income:
Fees and service charges... 833 780 3,139 3,111
Mortgage servicing fees.... 265 276 1,054 1,172
Securities gains, net...... 0 0 0 48
Gain on sales of loans..... 325 225 1,514 1,255
Other...................... 1,163 173 1,887 856
--------- -------- -------- --------
Total non-interest
income................. 2,586 1,454 7,594 6,442
--------- -------- -------- --------

Non-interest expense:
Compensation and benefits.. 2,721 2,786 12,491 11,869
Occupancy.................. 1,144 1,101 4,467 4,435
Advertising................ 118 129 542 475
Data processing............ 326 300 1,267 1,183
Amortization of mortgage
servicing rights, net..... 166 187 706 848
Other...................... 1,295 951 4,349 3,786
--------- -------- -------- --------
Total non-interest
expense................ 5,770 5,454 23,822 22,596
--------- -------- -------- --------
Income before income tax
expense................ 4,571 4,488 18,574 13,654
Income tax expense.............. 1,796 1,818 7,300 5,226
--------- -------- -------- --------
Net income.............. $ 2,775 2,670 11,274 8,428
========= ======== ======== ========
Basic earnings per share........ $ 0.75 0.71 3.02 2.20
========= ======== ======== ========
Diluted earnings per share...... $ 0.73 0.67 2.89 2.10
========= ======== ======== ========
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
---------------------------------------------------------------------
Three Months Ended Year Ended
SELECTED FINANCIAL December 31, December 31,
DATA:
(dollars in
thousands, except
per share data) 2007 2006 2007 2006
---------------------------------------------------------------------

I. OPERATING DATA:
Interest income... $ 19,338 17,358 77,523 67,527
Interest expense.. 10,089 7,513 38,823 28,841
Net interest
income........... 9,249 9,845 38,700 38,686

II. AVERAGE BALANCES:
Assets (1)....... 1,124,661 957,113 1,099,800 981,180
Loans receivable,
net............. 852,035 751,106 827,597 760,991
Mortgage-backed
and related
securities (1).. 200,258 128,885 192,758 131,729
Interest-earning
assets (1)...... 1,082,818 912,927 1,054,193 937,204
Interest-bearing
liabilities..... 1,010,301 855,438 991,389 878,598
Equity (1)....... 99,105 94,758 97,818 95,192

III. PERFORMANCE
RATIOS: (1)
Return on average
assets
(annualized).... 0.98% 1.11% 1.03% 0.86%
Interest rate
spread
information:
Average during
period....... 3.12 4.06 3.44 3.92
End of period. 3.20 3.71 3.20 3.71
Net interest
margin.......... 3.39 4.28 3.67 4.13
Ratio of
operating
expense to
average total
assets
(annualized).... 2.04 2.26 2.17 2.30
Return on average
equity
(annualized).... 11.11 11.18 11.53 8.85
Efficiency....... 48.75 48.27 51.46 50.07
---------------------------
December 31, December 31,
2007 2006
---------------------------
IV. ASSET QUALITY :
Total non-
performing
assets.......... $ 21,935 10,424
Non-performing
assets to total
assets.......... 1.96% 1.07%
Non-performing
loans to total
loans
receivable, net. 2.27% 1.08%
Allowance for
loan losses..... $ 12,438 9,873
Allowance for
loan losses to
total assets.... 1.11% 1.01%
Allowance for
loan losses to
total loans
receivable, net. 1.44 1.29
Allowance for
loan losses to
non-performing
loans........... 63.28 118.84

V. BOOK VALUE PER
SHARE:
Book value per
share........... $ 23.50 21.58
---------------------------

Year Ended Year Ended
Dec 31, 2007 Dec 31, 2006
---------------------------
VI. CAPITAL RATIOS :
Stockholders'
equity to total
assets, at end
of period....... 8.78% 9.53%
Average
stockholders'
equity to
average assets
(1)............. 8.89 9.70
Ratio of average
interest-earning
assets to
average
interest-bearing
liabilities (1). 106.33 106.67
---------------------------
December 31, December 31,
2007 2006
---------------------------
VII. EMPLOYEE DATA:
Number of full
time equivalent
employees....... 203 203
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(1) Average balances were calculated based upon amortized cost
without the market value impact of SFAS 115.

HMN Financial, Inc.
Michael McNeil, President, 507-535-1202

Copyright Business Wire 2008