[graphic of open-winged eagle] HMN FINANCIAL, INC. 101 North Broadway P.O. Box 231 Spring Valley, MN 55975-0231 Phone (507) 346-7345 Fax (507) 346-1111 NEWS RELEASE CONTACT: James B. Gardner, Executive Vice President HMN Financial, Inc. (507) 346-7345 FOR IMMEDIATE RELEASE HMN FINANCIAL, INC. ANNOUNCES FOURTH QUARTER - -------------------------------------------- AND ANNUAL RESULTS - ------------------ EARNINGS SUMMARY Three Months Ended Twelve Months Ended December 31, December 31, --------- -------- ------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Before SAIF assessment: Income $ 1,299,101 1,437,386 $ 5,732,318 5,620,377 Earnings per share and common share equivalents 0.31 0.30 1.29 1.09 Net income 1,299,101 1,437,386 4,274,349 5,620,377 Earnings per share and common share equivalents 0.31 0.30 0.96 1.09 Return on average assets before SAIF assessment 0.93% 1.07% 1.04% 1.07% Return on average assets 0.93% 1.07% 0.78% 1.07% Return on average equity before SAIF assessment 6.06% 6.18% 6.46% 5.86% Return on average equity 6.06% 6.18% 4.82% 5.86% Book value per share<1> $ 18.52 17.29 $ 18.52 17.29 <1> After SAIF assessment SPRING VALLEY, MINNESOTA, January 23, 1997 . . . HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $555 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.3 million for the fourth quarter of 1996, down 7% from $1.4 million for the fourth quarter of 1995. Earnings per share was $0.31 for the fourth quarter of 1996, up 3% from $0.30 per share for the fourth quarter of 1995. Fourth quarter earnings per share increased for 1996 over the same quarter of 1995, even though quarterly income decreased between the periods because HMN continued to repurchase its own common stock during 1996, and thereby reduced the number of its outstanding shares. more . . . Net income for the year ended December 31, 1996 was $4.3 million, down 24% from $5.6 million for the year ended December 31, 1995. Earnings per share was $0.96 for the year ended December 31, 1996, down 12% from $1.09 for the year ended December 31, 1995. In September of 1996 the Federal Deposit Insurance Corporation assessed a one time charge to all members of the Savings Association Insurance Fund (SAIF) in order to recapitalize the SAIF. The Bank s assessment was $2.35 million which reduced after tax earnings by $1.46 million and caused annualized earnings per share to decrease by $0.33 per share. HMN Financial, Inc. s Chairman, Roger P. Weise, stated that earnings per share for the year ended December 31, 1996 without the SAIF assessment would have been $1.29, an increase of $0.20, or 18%, over $1.09 for the year ended December 31, 1995. The increase in earnings per share between the years, excluding the SAIF assessment, is the combined result of the 1996 stock repurchase program and an increase in gain on the sale of securities recognized during 1996. Net interest income was $3.94 million for the fourth quarter of 1996, an increase of $62,000, or 1.6% compared to $3.88 million for the fourth quarter of 1995. Throughout 1996, HMN has been repurchasing its own stock in the open market at an average price that is less than its current book value. The balance sheet impact of the stock repurchase program has been to reduce equity and replace it on the balance sheet with additional advances or deposits. As HMN has increased in total assets, its net interest earning assets actually decreased, however when the impact of changing interest rates on interest- earning assets and interest-bearing liabilities is taken into account, net interest income for the fourth quarter of 1996 increased over the fourth quarter of 1995 by $62,000. Net interest income for the year ended December 31, 1996 was $15.7 million, a decrease of $100,000, or 1%, from $15.8 million for the year ended December 31, 1995. Comparing the year ended December 31, 1996 to the year ended December 31, 1995, the impact of a decrease in net interest-earning assets and changing interest rates caused a net decrease in interest income between the two years. Non-interest income was $324,000 for the fourth quarter of 1996, a decrease of $97,000, or 23%, compared to $421,000 for the fourth quarter of 1995. The decrease was principally due to a $212,000 decrease in securities gains between the two periods and was partially offset by a $23,000 increase in fees and services charges, a $19,000 increase in gain on the sale of loans and a $73,000 increase in other income. Non-interest income was $1.9 million for the year ended December 31, 1996, an increase of $924,000, or 93%, compared to $1.0 million for the year ended December 31, 1995. The increase was principally due to an increase of $614,000 on securities gains, a $35,000 increase in fees and service charges and a $339,000 increase in other income. The increase in income was partially offset by a $63,000 decrease in gain on the sale of loans. Non-interest expense was $2.1 million for the fourth quarter of 1996, an increase of $232,000, or 12%, compared to $1.9 million for the fourth quarter of 1995. The majority of more . . . the increase in non-interest expense between the two quarters was due to a $97,000 increase in compensation and benefits which was the result of adding new employees, normal merit and salary increases; a $90,000 increase in occupancy costs related to depreciation and the addition of a new office in Edina, Minnesota; and a $114,000 increase in other expenses. The increased quarterly expenses were partially offset by a $44,000 decrease in Federal deposit insurance premiums and a decrease of $21,000 in advertising expenses. Non-interest expense was $10.5 million for the year ended December 31, 1996, an increase of $3.0 million, or 41%, compared to $7.5 million for the year ended December 31, 1995. The principal causes for the increase in non-interest expense between the two years was a one time charge of $2.35 million to replenish the SAIF; a $431,000 increase in compensation and benefits which was the result of adding new employees, normal merit and salary increases and the impact of the Recognition and Retention Plan adopted in June of 1995; a $128,000 increase in occupancy related to adding another office and remodeling other offices; and a $137,000 increase in other expenses. During the fourth quarter of 1996, HMN opened a new mortgage banking office located in Edina, Minnesota. This office will purchase loans from third party originators and resell the loans in the secondary market or place the loans in the Bank s mortgage portfolio. HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Spring Valley, MN. The Bank operates seven offices in southern Minnesota. (Three pages of selected consolidated financial information are included with this release.) ***END*** HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) December 31, December 31, 1996 1995 ------------- -------------- ASSETS Cash and cash equivalents $ 10,583,717 4,334,694 Securities available for sale: Mortgage-backed and related securities (amortized cost $134,474,167 and $158,517,548) 133,355,278 158,416,201 Other marketable securities (amortized cost $42,360,499 and $32,247,959) 42,474,810 31,903,566 ----------- ----------- 175,830,088 190,319,767 ----------- ----------- Securities held to maturity: Mortgage-backed and related securities (estimated market value $1,904,993 and $13,931,879) 1,805,744 13,744,063 Other marketable securities (estimated market value $1,000,550 and $3,224,263) 999,812 3,227,729 ----------- ----------- 2,805,556 16,971,792 ----------- ----------- Loans held for sale 739,316 0 Loans receivable, net 349,022,236 314,850,684 Federal Home Loan Bank stock, at cost 5,434,000 3,801,900 Real estate, net 20,610 279,851 Premises and equipment, net 3,581,497 3,645,536 Accrued interest receivable 3,415,152 3,381,507 Prepaid expenses and other assets 3,299,427 362,928 ----------- ----------- Total assets $ 554,731,599 537,948,659 =========== =========== LIABILITIES AND STOCKHOLDERS EQUITY Deposits $ 362,476,944 373,539,468 Federal Home Loan Bank advances 106,078,589 68,876,978 Accrued interest payable 1,542,773 1,562,347 Advance payments by borrowers for taxes and insurance 518,911 550,990 Accrued expenses and other liabilities 2,014,938 1,732,193 ----------- ----------- Total liabilities 472,632,155 446,261,976 ----------- ----------- Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; issued and outstanding none 0 0 Common stock ($.01 par value): authorized 7,000,000 shares; issued 6,085,775 shares 60,858 60,858 Additional paid-in capital 59,428,768 59,285,581 Retained earnings, subject to certain restrictions 54,645,387 50,371,038 Net unrealized loss on securities available for sale (598,045) (265,358) Unearned employee stock ownership plan shares (4,938,520) (5,336,150) Unearned compensation restricted stock awards (793,289) (1,050,305) Treasury stock, at cost 1,651,615 and 783,850 shares (25,705,715) (11,378,981) ----------- ----------- Total stockholders' equity 82,099,444 91,686,683 ----------- ----------- Total liabilities and stockholders' equity $ 554,731,599 537,948,659 =========== =========== HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended Twelve Months Ended December 31, December 31, 1996 1995 1996 1995 ----------------------- ----------------------- Interest Income: Loans receivable $ 6,711,707 6,182,799 25,721,042 23,375,334 Securities available for sale: Mortgage-backed and related 2,296,748 2,549,428 10,027,438 10,294,057 Other marketable 768,923 604,645 2,424,628 2,857,883 Securities held to maturity: Mortgage-backed and related 45,293 248,354 765,120 746,100 Other marketable 14,345 55,443 104,448 389,381 Cash equivalents 178,506 63,624 494,129 412,259 Other 95,067 75,100 327,520 253,170 ---------- ---------- ---------- ---------- Total interest income 10,110,589 9,779,393 39,864,325 38,328,184 ---------- ---------- ---------- ---------- Interest expense: Deposits 4,668,781 4,875,158 18,949,937 18,578,744 Federal Home Loan Bank advances 1,504,838 1,029,305 5,243,853 3,976,353 ---------- ---------- ---------- ---------- Total interest expense 6,173,619 5,904,463 24,193,790 22,555,097 ---------- ---------- ---------- ---------- Net interest income 3,936,970 3,874,930 15,670,535 15,773,087 Provision for loan losses 75,000 75,000 300,000 300,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,861,970 3,799,930 15,370,535 15,473,087 ---------- ---------- ---------- ---------- Non-interest income: Fees and service charges 105,061 82,167 359,249 324,492 Securities gains, net 67,840 279,671 1,029,638 415,955 Gain on sales of loans 22,326 3,027 39,306 102,368 Other 128,628 56,040 494,507 155,434 ---------- ---------- ---------- ---------- Total non-interest income 323,855 420,905 1,922,700 998,249 ---------- ---------- ---------- ---------- Non-interest expense: Compensation and benefits 1,210,524 1,113,918 4,591,367 4,160,248 Occupancy 230,393 140,027 825,609 697,602 Federal deposit insurance premiums 163,214 207,679 799,890 810,432 SAIF assessment 0 0 2,351,563 0 Advertising 78,729 99,820 308,464 312,366 Data processing 120,900 117,200 489,045 476,402 Provision for real estate losses 2,000 9,327 2,000 9,327 Other 341,238 226,726 1,140,948 1,003,682 ---------- ---------- ---------- ---------- Total non-interest expense 2,146,998 1,914,697 10,508,886 7,470,059 ---------- ---------- ---------- ---------- Income before income taxes 2,038,827 2,306,138 6,784,349 9,001,277 Income tax expense 739,726 868,752 2,510,000 3,380,900 ---------- ---------- ---------- ---------- Net income $ 1,299,101 1,437,386 4,274,349 5,620,377 ========== ========== ========== ========== Earnings per common share and common share equivalents $ 0.31 0.30 0.96 1.09 ========== ========== ========== ========== HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) Selected Financial Data: Three Months Ended Twelve Months Ended (dollars in thousands, Dec 31, Dec 31, Dec 31, Dec 31, except per share data) 1996 1995 1996 1995 ------------------- ------------------- I. OPERATING DATA: Interest income $ 10,111 9,779 39,864 38,328 Interest expense 6,174 5,904 24,194 22,555 Net interest income 3,937 3,875 15,670 15,773 II. AVERAGE BALANCES: Assets <1> 557,225 530,705 550,509 525,845 Loans receivable, net 336,349 307,849 324,958 290,243 Mortgage-backed and related securities <1> 140,335 161,292 158,561 162,393 Interest earnings assets <1> 548,057 522,731 541,638 518,165 Interest bearing liabilities 465,612 433,556 455,645 424,886 Equity <1><2> 85,351 92,212 88,736 95,911 III.PERFORMANCE RATIOS: <1> Return on average assets (annualized)<1> 0.93% 1.07% 0.78% 1.07% Interest rate spread information: Average during period<1> 2.06 2.02 2.05 2.09 End of period<1> 2.17 2.10 2.17 2.10 Net interest margin<1> 2.86 2.94 2.89 3.04 Ratio of operating expense to average total assets<1> 1.53 1.43 1.91 1.42 Return on average equity (annualized)<1> 6.06 6.18 4.82 5.86 Dec 31, Dec 31, 1996 1995 --------------------- IV.ASSET QUALITY: Total non-performing assets $ 338 850 Non-performing assets to total assets 0.07% 0.16% Non-performing loans to total loans receivable, net 0.10 0.17 Allowance for loan losses $ 2,341 2,191 Allowance for loan losses to total assets 0.42% 0.41% Allowance for loan losses to total loans receivable, net 0.67 0.71 Allowance for loan losses to non-performing loans 691.84 409.13 V. BOOK VALUE PER SHARE: Book value per share excluding net unrealized loss on securities available for sale $ 18.65 17.34 Book value per share 18.52 17.29 Year Year Ended Ended Dec 31, Dec 31, 1996 1995 ----------------------- VI. CAPITAL RATIOS Stockholders' equity to total assets, at end of period 14.80% 17.04% Average stockholders' equity to average assets <1><2> 16.12 18.24 Ratio of average interest- earning assets to average interest-bearing liabilities<1>118.87 121.95 <FN> <F1>Average balances were calculated based upon amortized cost without the market value impact of SFAS 115. <F2>Average equity and average equity/average asset ratio decreasing due in part by a repurchase of 869,785 shares of common stock during 1996. </FN>