HMN Financial, Inc. Announces First Quarter Results

ROCHESTER, Minn.--(Business Wire)--
First Quarter Highlights

-- Net income of $1.5 million, down $1.8 million, or 54.5% from
first quarter of 2007

-- Diluted earnings per share of $0.39, down $0.43, or 52.4%,
from first quarter of 2007

-- Net interest income down $1.1 million, or 11.2%, from first
quarter of 2007

-- Net interest margin down 73 basis points from first quarter of
2007

-- Gain on sales of loans down $640,000, or 80.4%, from first
quarter 2007

-- Provision for loan losses up $1.1 million, or 242.9%, over
first quarter of 2007

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EARNINGS SUMMARY
------------------------------------------------- Three Months Ended
March 31,
------------------
(dollars in thousands, except per share amounts) 2008 2007
------------------
Net income $ 1,488 3,268
Diluted earnings per share 0.39 0.82
Return on average assets 0.54% 1.28%
Return on average equity 6.06% 13.79%
Book value per share $ 23.85 22.01
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HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $1.1 billion holding
company for Home Federal Savings Bank (the Bank), today reported net
income of $1.5 million for the first quarter of 2008, down $1.8
million, or 54.5%, from net income of $3.3 million for the first
quarter of 2007. Diluted earnings per common share for the first
quarter of 2008 were $0.39, down $0.43, or 52.4%, from $0.82 for the
first quarter of 2007. The decrease in net income was due primarily to
decreases in net interest income and gain on sales of loans and an
increase in the provision for loan losses.

First Quarter Results

Net Interest Income

Net interest income was $8.7 million for the first quarter of
2008, a decrease of $1.1 million, or 11.2%, compared to $9.8 million
for the first quarter of 2007. Interest income was $17.8 million for
the first quarter of 2008, a decrease of $488,000, or 2.7%, from $18.3
million for the first quarter of 2007. Interest income decreased
primarily because of a decrease in the average interest rate earned on
loans and investments. Interest rates decreased primarily because of
the 300 basis point decrease in the prime interest rate between the
periods. Decreases in the prime rate, which is the rate that banks
charge their prime business customers, generally decrease the rates on
adjustable rate consumer and commercial loans in the portfolio and on
new loans originated. The average yield earned on interest-earning
assets was 6.72% for the first quarter of 2008, a decrease of 77 basis
points from the 7.49% average yield for the first quarter of 2007. The
decrease in interest income due to decreased interest rates was
partially offset by the $75 million increase in the average interest
earning assets between the periods.

Interest expense was $9.1 million for the first quarter of 2008,
an increase of $612,000, or 7.2%, compared to $8.5 million for the
first quarter of 2007. Interest expense increased primarily because of
the $102 million increase in the average outstanding deposits between
the periods. The increase was primarily in brokered deposits that were
obtained to replace the scheduled outflow of escrowed money market
deposits and advance maturities and to fund loan growth. The rates on
these deposits are typically higher than money market deposit rates,
are fixed for a period of time and have not fully reflected the
decreases in the federal funds rate that occurred in the last half of
2007 and the first three months of 2008. Decreases in the federal
funds rate, which is the rate that banks charge other banks for short
term loans, generally have a lagging effect and decrease the rates
banks pay for deposits. The average interest rate paid on
interest-bearing liabilities was 3.70% for the first quarter of 2008,
an increase of 1 basis point from the 3.69% average interest rate paid
in the first quarter of 2007. Net interest margin (net interest income
divided by average interest earning assets) for the first quarter of
2008 was 3.28%, a decrease of 73 basis points, compared to 4.01% for
the first quarter of 2007.

Provision for Loan Losses

The provision for loan losses was $1.6 million for the first
quarter of 2008, an increase of $1.1 million, or 242.9%, compared to
$455,000 for the first quarter of 2007. The provision for loan losses
increased primarily because of an increase in the allowance required
for risk rated commercial real estate loans in the first quarter of
2008 when compared to the same period of 2007. The increase was due
primarily to decreases in the estimated value of the real estate
supporting classified residential development loans. Total
non-performing assets were $28.2 million at March 31, 2008, an
increase of $6.3 million, from $21.9 million at December 31, 2007.
Non-performing loans increased $4.3 million and foreclosed and
repossessed assets increased $2.0 million during the period. The
non-performing loan activity for the quarter included $7.0 million in
additional non-performing loans primarily related to one construction
loan on a commercial facility, $105,000 in loan charge offs, $418,000
in loans that were reclassified as performing, $928,000 in loans that
were transferred into real estate owned, and $1.2 million in principal
payments that were received.

A rollforward of the Company's allowance for loan losses for the
quarters ended March 31, 2008 and 2007 is summarized as follows:

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(in thousands) 2008 2007
-------- -------
Balance at January 1, $12,438 $9,873
Provision 1,560 455
Charge offs:
One-to-four family (60) 0
Consumer (22) (580)
Commercial (24) (42)
Recoveries 21 50
-------- -------
Balance at March 31, $13,913 $9,756
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Non-Interest Income and Expense

Non-interest income was $1.5 million for the first quarter of
2008, a decrease of $550,000, or 26.6%, from $2.1 million for the
first quarter of 2007. Gain on sale of loans decreased $640,000
between the periods due to a $739,000 decrease in the gain recognized
on the sale of government guaranteed commercial loans that was
partially offset by a $99,000 increase in the gain recognized on the
sale of single family loans due to increased loan originations. Fees
and service charges increased $97,000 between the periods primarily
because of increased retail deposit account activity and fees. Loan
servicing fees decreased $29,000 primarily because of a decrease in
the number of single-family loans that are being serviced for others.
Other non-interest income increased $22,000 primarily because of an
increase in the gains realized on the sale of other real estate owned.

Non-interest expense was $6.3 million for the first quarter of
2008, an increase of $302,000, or 5.1%, from $6.0 million for the
first quarter of 2007. Other non-interest expense increased $212,000
primarily because of legal fees related to foreclosed assets and an
ongoing state tax assessment challenge. Occupancy expense increased
$48,000 due primarily to increased real estate taxes and costs
associated with the Eagan branch that was opened in the third quarter
of 2007. Advertising expense increased $18,000 between the periods
primarily because of additional costs associated with the rebranding
of our private banking services. Mortgage servicing rights
amortization decreased $22,000 between the periods because there were
fewer mortgage loans being serviced.

Income tax expense decreased $1.3 million between the periods due
to a decrease in taxable income and an effective tax rate that
decreased from 40.0% for the first quarter of 2007 to 37.7% for the
first quarter of 2008. The decrease in the effective tax rate was
primarily the result of a decrease in the federal tax rate due to
decreased income and a higher percentage of tax exempt income.

Return on Assets and Equity

Return on average assets for the first quarter of 2008 was 0.54%,
compared to 1.28% for the first quarter of 2007. Return on average
equity was 6.06% for the first quarter of 2008, compared to 13.79% for
the same quarter in 2007. Book value per common share at March 31,
2008 was $23.85, compared to $22.01 at March 31, 2007.

President's Statement

"Our financial results in the first quarter reflect the
challenging rate and economic environments that continue to exist"
said HMN President, Michael McNeil. "The recent decreases in the prime
interest rate were the primary reason for the margin compression that
we experienced and the increase in the loan loss provisions is a
result of the continued weakness in the housing market."

General Information

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

Safe Harbor Statement

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

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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

----------------------------------------------------------------------
March 31, December 31,
(dollars in thousands) 2008 2007
----------------------------------------------------------------------
(unaudited)
Assets
Cash and cash equivalents................... $ 27,536 23,718
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $17,943 and $18,786)...... 17,716 18,468
Other marketable securities
(amortized cost $135,451 and $165,430).... 139,679 167,720
----------- ------------
157,395 186,188
----------- ------------

Loans held for sale......................... 3,090 3,261
Loans receivable, net....................... 877,756 865,088
Accrued interest receivable................. 6,426 6,893
Real estate, net............................ 4,184 2,214
Federal Home Loan Bank stock, at cost....... 5,580 6,198
Mortgage servicing rights, net.............. 1,110 1,270
Premises and equipment, net................. 12,401 12,024
Goodwill.................................... 3,801 3,801
Prepaid expenses and other assets........... 1,600 1,680
Deferred tax asset, net..................... 3,890 4,719
----------- ------------
Total assets.............................. $ 1,104,769 1,117,054
=========== ============

Liabilities and Stockholders' Equity
Deposits.................................... $ 892,977 888,118
Federal Home Loan Bank advances............. 97,500 112,500
Accrued interest payable.................... 9,092 9,515
Customer escrows............................ 1,565 866
Accrued expenses and other liabilities...... 4,247 7,927
----------- ------------
Total liabilities......................... 1,005,381 1,018,926
----------- ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock ($.01 par value):
Authorized 500,000 shares; none issued
and outstanding........................ 0 0
Common stock ($.01 par value):
Authorized 11,000,000; issued shares
9,128,662.............................. 91 91
Additional paid-in capital.................. 57,662 58,049
Retained earnings, subject to certain
restrictions............................... 111,514 110,943
Accumulated other comprehensive income...... 2,367 1,167
Unearned employee stock ownership plan
shares..................................... (3,916) (3,965)
Treasury stock, at cost 4,960,863 and
4,953,045 shares........................... (68,330) (68,157)
----------- ------------
Total stockholders' equity................ 99,388 98,128
----------- ------------
Total liabilities and stockholders' equity.. $ 1,104,769 1,117,054
=========== ============

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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)

----------------------------------------------------------------------
Three Months Ended
March 31,
(dollars in thousands) 2008 2007
----------------------------------------------------------------------
Interest income:
Loans receivable................................ $ 15,520 15,745
Securities available for sale:
Mortgage-backed and related................... 224 111
Other marketable.............................. 1,910 1,896
Cash equivalents................................ 57 443
Other........................................... 80 84
--------- --------
Total interest income......................... 17,791 18,279
--------- --------

Interest expense:
Deposits........................................ 7,870 6,877
Federal Home Loan Bank advances................. 1,237 1,618
--------- --------
Total interest expense........................ 9,107 8,495
--------- --------
Net interest income........................... 8,684 9,784
Provision for loan losses......................... 1,560 455
--------- --------
Net interest income after provision for loan
losses....................................... 7,124 9,329
--------- --------

Non-interest income:
Fees and service charges........................ 793 696
Loan servicing fees............................. 242 271
Gain on sales of loans.......................... 156 796
Other........................................... 327 305
--------- --------
Total non-interest income..................... 1,518 2,068
--------- --------

Non-interest expense:
Compensation and benefits....................... 3,360 3,361
Occupancy....................................... 1,132 1,084
Advertising..................................... 124 106
Data processing................................. 342 295
Amortization of mortgage servicing rights, net.. 160 182
Other........................................... 1,134 922
--------- --------
Total non-interest expense.................... 6,252 5,950
--------- --------
Income before income tax expense.............. 2,390 5,447
Income tax expense................................ 902 2,179
--------- --------
Net income.................................... $ 1,488 3,268
========= ========
Basic earnings per share.......................... $ 0.41 0.87
========= ========
Diluted earnings per share........................ $ 0.39 0.82
========= ========

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

----------------------------------------------------------------------
SELECTED FINANCIAL DATA: Three Months Ended
March 31,
(dollars in thousands,
except per share data) 2008 2007
----------------------------------------------------------------------
I. OPERATING DATA:
Interest income.......... $ 17,791 18,279
Interest expense......... 9,107 8,495
Net interest income...... 8,684 9,784

II. AVERAGE BALANCES:
Assets (1)............... 1,106,527 1,037,984
Loans receivable, net.... 872,287 787,937
Mortgage-backed and
related securities (1).. 18,416 9,996
Interest-earning assets
(1)..................... 1,064,816 989,701
Interest-bearing
liabilities............. 991,251 933,726
Equity (1)............... 98,816 96,104

III. PERFORMANCE RATIOS:(1)
Return on average assets
(annualized)............ 0.54% 1.28%
Interest rate spread
information:
Average during period.. 3.02 3.80
End of period.......... 2.99 3.55
Net interest margin...... 3.28 4.01
Ratio of operating
expense to average total
assets (annualized)..... 2.27 2.32
Return on average equity
(annualized)............ 6.06 13.79
Efficiency............... 61.28 50.20

-----------------------------------------
March 31, December 31, March 31,
2008 2007 2007
-----------------------------------------
IV. ASSET QUALITY :
Total non-performing
assets.................. $ 28,232 21,935 12,708
Non-performing assets to
total assets............ 2.56% 1.96% 1.14%
Non-performing loans to
total loans receivable,
net..................... 2.73 2.27 0.94
Allowance for loan losses $ 13,913 12,438 9,756
Allowance for loan losses
to total assets......... 1.26% 1.11% 0.87%
Allowance for loan losses
to total loans
receivable, net......... 1.59 1.44 1.22
Allowance for loan losses
to non-performing loans. 57.98 63.28 129.68

V. BOOK VALUE PER SHARE:
Book value per share..... $ 23.85 23.50 22.01

-----------------------------------------
Three Months Three Months
Ended Year Ended Ended
Mar 31, 2008 Dec 31, 2007 Mar 31, 2007
-----------------------------------------
VI. CAPITAL RATIOS :
Stockholders' equity to
total assets, at end of
period.................. 9.00% 8.78% 8.49%
Average stockholders'
equity to average
assets(1)............... 8.93 8.89 9.26
Ratio of average
interest-earning assets
to average interest-
bearing liabilities (1). 107.42 106.33 105.99
-----------------------------------------
March 31, December 31, March 31,

2008 2007 2007
-----------------------------------------
VII. EMPLOYEE DATA:
Number of full time
equivalent employees.... 207 203 205

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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, 507-535-1202
President

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