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 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 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: (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 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. 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 � � � � � � � � � 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 � � � � � � 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 � � � �
� � � � � � � (1) Average balances were calculated based upon
amortized cost without the market value impact of SFAS 115.
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