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

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 ShareholdersNet 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 EquityThe 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 AnnouncementHMN 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 InformationHMN 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 StatementThis 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.
Consolidated Balance Sheets
  December 31,   December 31,
(Dollars in thousands)     2012   2011
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  


Consolidated Statements of Comprehensive Income (Loss)





Three Months Ended

Year Ended

December 31,

December 31,

(Dollars in thousands, except per share data)




(unaudited)   (unaudited) (unaudited)
Interest income:
Loans receivable $ 6,730 8,605 29,257 36,776
Securities available for sale:
Mortgage-backed and 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 )






Selected Consolidated Financial Information


Three Months Ended

Year Ended


December 31,

December 31,

(Dollars in thousand, except per share 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
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
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





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

Allowance for loan losses to non-performing loans 72.09 70.27
Book value per common share   8.02     7.36  
Year Ended Year Ended


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  
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.

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