January 22, 2013 at 23:30 PM EST
HMN Financial, Inc. Announces Fourth Quarter Results and Annual Meeting

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 EndedYear Ended
December 31,December 31,
(dollars in thousands, except per share amounts)2012

2011

2012

2011

Net income (loss)$1,485

(7,626

)

$5,321

(11,555

)

Net income (loss) available to common stockholders

1,016

(8,085

)

3,460

(13,376

)

Diluted earnings (loss) per common share0.25

(2.08

)

0.86

(3.47

)

Return (loss) on average assets0.93%(3.75)%0.79%(1.39)%
Return (loss) on average common equity9.77%(45.87)%8.94%(16.94)%
Book value per common share$8.02

7.36

$8.02

7.36

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 loansForeclosed and repossessed assets
September 30, 2012 $34,582 September 30, 2012 $12,617
Classified as non-performing 1,272 Transferred from non-performing loans 283
Charge offs (681 ) Other foreclosures/repossessions 117
Principal payments received (3,694 ) Real estate sold (1,680 )
Classified as accruing (1,221 ) Net loss on sale of assets (672 )
Transferred to real estate owned (283 ) Write downs (70 )
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 31, September 30, December 31,
(Dollars in thousands) 2012 2012 2011
Non-Performing Loans:
One-to-four family real estate $ 2,492 $ 2,992 $ 4,435
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 estate 1,595 320 352
Commercial real estate 9,000 12,297 16,264
Total non-performing assets $ 40,570 $ 47,199 $ 50,609
Total as a percentage of total assets 6.21 % 7.33 % 6.40 %
Total non-performing loans $ 29,975 $ 34,582 $ 33,993
Total as a percentage of total loans receivable, net 6.60 % 7.29 % 6.10 %
Allowance for loan losses to non-performing loans 72.09 % 59.17 % 70.27 %
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 thousands) # of December 31, # of September 30, # of December 31,

Property Type

relationships 2012 relationships 2012 relationships 2011
Developments/land 9 $ 24,339 12 $ 26,415 10 $ 17,465
Shopping centers/retail 2 386 2 396 2 1,315
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 Amount Principal Amount Principal Amount
of Loans of Loans of Loans
December 31, September 30, December 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 loansForeclosed and repossessed asset activity
December 31, 2011 $33,993 December 31, 2011 $16,616
Classified as non-performing 23,785 Transferred from non-performing loans 2,242
Charge offs (9,317 ) Other foreclosures/repossessions 117
Principal payments received (13,823 ) Real estate sold (7,558 )
Classified as accruing (2,421 ) Net loss on sale of assets (752 )
Transferred to real estate owned (2,242 ) Write downs (70 )
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: ($.01 par value)
Authorized 500,000 shares; issued shares 26,000 25,336 24,780
Common stock ($.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 restrictions 47,004 42,983
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 4,740,711 shares (60,346 ) (61,535 )
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 per share data)

2012

2011

2012

2011

(unaudited) (unaudited) (unaudited)
Interest income:
Loans receivable $ 6,730 8,605 29,257 36,776
Securities available for sale:
Mortgage-backed and related 114 225 604 1,098
Other marketable 136 319 737 1,451
Cash equivalents 30 29 101 36
Other 28 32 117 180
Total interest income 7,038 9,210 30,816 39,541
Interest expense:
Deposits 659 1,478 3,741 6,847
Federal Home Loan Bank advances 854 854 3,398 4,288
Total interest expense 1,513 2,332 7,139 11,135
Net interest income 5,525 6,878 23,677 28,406
Provision for loan losses 0 7,609 2,544 17,278

Net interest income (loss) after provision for loan losses

5,525 (731 ) 21,133 11,128
Non-interest income:
Fees and service charges 841 912 3,325 3,739
Loan servicing fees 251 240 964 987
Gain on sales of loans 1,105 672 3,574 1,656
Gain on sale of branch office 0 0 552 0
Other 177 151 575 487
Total non-interest income 2,374 1,975 8,990 6,869
Non-interest expense:
Compensation and benefits 2,865 3,205 12,452 13,553
Losses on real estate owned 256 2,380 181 2,681
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 expense 6,282 8,870 24,670 29,552
Income (loss) before income tax expense 1,617 (7,626 ) 5,453 (11,555 )
Income tax expense 132 0 132 0
Net income (loss) 1,485 (7,626 ) 5,321 (11,555 )
Preferred stock dividends and discount 469 459 1,861 1,821

Net income (loss) available to common shareholders

$

1,016 (8,085 ) 3,460 (13,376 )
Other comprehensive loss, net of tax (171 ) (264 ) (520 ) (70 )

Comprehensive income (loss) attributable to common shareholders

845 (8,349 ) 2,940 (13,446 )
Basic earnings (loss) per common share $ 0.26 (2.08 ) 0.88 (3.47 )
Diluted earnings (loss) per common share $ 0.25 (2.08 ) 0.86 (3.47 )

HMN FINANCIAL, INC. AND SUBSIDIARIES

Selected Consolidated Financial Information

(unaudited)

Three Months Ended

Year Ended

SELECTED FINANCIAL DATA:

December 31,

December 31,

(Dollars in thousand, except per share data)

2012

2011

2012

2011

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 (1) 82,057 133,458 87,604 139,473
Interest-earning assets (1) 605,766 768,747 645,122 791,309
Interest-bearing liabilities 567,018 736,657 610,158 759,172
Equity (1) 60,457 65,960 59,519 68,201
III. PERFORMANCE RATIOS: (1)
Return (loss) on average assets (annualized) 0.93 % (3.75 )% 0.79 % (1.39 ) %
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 (annualized) 3.94 4.36 3.65 3.55
Earnings (loss) on average common equity

(annualized)

9.77

(45.87

)

8.94

(16.94

)

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

receivable, net

4.76

4.29
Allowance for loan losses to non-performing loans 72.09 70.27
V. BOOK VALUE PER COMMON SHARE:
Book value per common share 8.02 7.36
Year Ended Year Ended

VI. CAPITAL RATIOS:

Dec 31, 2012

Dec 31, 2011
Stockholders’ equity to total assets, at end of period 9.31 % 7.22 %
Average stockholders’ equity to average assets (1) 8.81 8.19
Ratio of average interest-earning assets to
average interest-bearing liabilities (1) 105.73 104.23

Home Federal Savings Bank regulatory capital ratios:

Tier 1 or core capital(2) 9.68 % 7.14 %
Risk-based capital 15.52 % 10.86 %
December 31, December 31,
2012 2011
VII. EMPLOYEE DATA:
Number of full time equivalent employees 194 205
(1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.
(2) 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 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.

Contacts:

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