HMN FINANCIAL, INC. 101 North Broadway Spring Valley, Minnesota 55975 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 QUARTERLY RESULTS - ----------------------------------------------- EARNINGS SUMMARY Three Months Ended March 31, --------------------------- 1997 1996 ----------- ----------- Net income $1,474,480 1,586,691 Earnings per common share and common share equivalent 0.38 0.33 Return on average assets 1.09% 1.18% Return on average common equity 7.43% 6.91% Book value per share $18.71 17.54 SPRING VALLEY, MINNESOTA, April 17, 1997 . . . HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $553 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.5 million for the first quarter of 1997, down 7.1%, from $1.6 million for the first quarter of 1996. Earnings per common share were $0.38 for the first quarter of 1997, up 15.2% from $0.33 for the first quarter of 1996. Return on average assets was 1.09%, down from 1.18% in the first quarter of 1996. Return on average equity was 7.43% for the first quarter of 1997 compared to 6.91% for the same quarter in 1996. Book value per share was $18.71 at March 31, 1997, an increase of $1.17, or 6.7%, from March 31, 1996. The 15.2% increase in earnings per share for the first quarter of 1997 was primarily due to HMN's repurchase of its common stock during 1996 and 1997. Net income for the first quarter of 1997 decreased by $112,000 compared to the first quarter of 1996 due primarily to a $132,000 increase in non-interest expense. The increase in non-interest expense was principally due to an increase in HMNs work force related to opening a mortgage banking office in Eden Prairie, Minnesota, annual compensation ... more increases in the Bank, increased occupancy costs related to the mortgage banking office and increased depreciation due to retail bank office remodeling. Net interest income was $3.9 million for both the first quarter of 1997 and the first quarter of 1996. Net interest income for the two periods remained similar despite an increase of $7.2 million in interest earning assets due to a decrease in the net interest margin. Net average interest-earning assets for the first quarter of 1997 were $74.1 million, a decrease of $15.0 million, or 16.8%, from $89.1 million for the same quarter in 1996. Throughout 1996 and into 1997, HMN has been repurchasing its own common 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 with additional interest-bearing liabilities. During the same period, HMN also started to invest in non-interest earning assets such as mortgage servicing rights. As a result of these actions, even as HMN increased in total assets, its net interest-earning assets actually decreased, which in turn caused net interest margin to decline from the first quarter of 1996 to the first quarter of 1997. Non-interest income was $698,000 for the first quarter of 1997 a slight decrease from $701,000 of non-interest income for the first quarter of 1996. Due to changes in market conditions securities gains, net decreased by $230,000 and were partially offset by increased fee income of $19,000, increased gains recognized on the sale of loans of $148,000, and a $60,000 increase in income generated from a mortgage servicing partnership. As of March 31, 1997 HMN transferred $1.3 million of securities classified as held to maturity to available for sale because it no longer has the intent to hold the securities to maturity. After the transfer all of HMN's securities were classified as available for sale. As previously announced, HMN completed its stock program in January 1997 with the purchase of 224,334 shares of common stock from the open market. HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Spring Valley, Minnesota. The Bank operates seven offices in southern Minnesota and a mortgage banking office in Eden Prairie, Minnesota. (Three pages of selected consolidated financial information are included with this release.) ***END*** HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) ASSETS March 31, December 31, 1997 1996 ----------- ------------ Cash and cash equivalents $ 12,754,058 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $126,570,616 and $134,474,167) 123,924,773 133,355,278 Other marketable securities (amortized cost $56,174,663 and $42,360,499) 56,223,639 42,474,810 ----------- ----------- 180,148,412 175,830,088 ----------- ----------- Securities held to maturity: Mortgage-backed and related securities (estimated market value $0 and $1,904,993) 0 1,805,744 Other marketable securities (estimated market value $0 and $1,000,550) 0 999,812 ----------- ----------- 0 2,805,556 ----------- ----------- Loans held for sale 1,060,571 739,316 Loans receivable, net 341,104,076 349,022,236 Federal Home Loan Bank stock, at cost 5,627,100 5,434,000 Real estate, net 105,578 20,610 Premises and equipment, net 3,961,454 3,581,497 Accrued interest receivable 2,917,906 3,415,152 Deferred income taxes 46,038 0 Prepaid expenses and other assets 5,295,539 3,299,427 ----------- ----------- Total assets $ 553,020,732 554,731,599 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 364,122,660 362,476,944 Federal Home Loan Bank advances 105,721,447 106,078,589 Accrued interest payable 1,476,598 1,542,773 Advance payments by borrowers for taxes and insurance 799,372 518,911 Accrued expenses and other liabilities 2,129,007 2,014,938 ----------- ----------- Total liabilities 474,249,084 472,632,155 ----------- ----------- 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 59,491,535 59,428,768 Retained earnings, subject to certain restrictions 56,119,867 54,645,387 Net unrealized loss on securities available for sale (1,506,685) (598,045) Unearned employee stock ownership plan shares (4,842,460) (4,938,520) Unearned compensation restricted stock awards (736,115) (793,289) Treasury stock, at cost 1,875,949 and 1,651,615 shares (29,815,352) (25,705,715) ----------- ----------- Total stockholders' equity 78,771,648 82,099,444 ----------- ----------- Total liabilities and stockholders' equity $ 553,020,732 554,731,599 =========== =========== HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended March 31, 1997 1996 --------------------------- Interest Income: Loans receivable $ 6,908,242 6,138,747 Securities available for sale: Mortgage-backed and related securities 2,189,210 2,773,690 Other marketable securities 585,242 404,845 Securities held to maturity: Mortgage-backed and related securities 33,400 267,023 Other marketable securities 10,032 43,448 Cash equivalents 82,160 103,718 Other 94,961 63,981 ---------- ---------- Total interest income 9,903,247 9,795,452 ---------- ---------- Interest expense: Deposits 4,572,798 4,818,284 Federal Home Loan Bank advances 1,451,400 1,061,861 ---------- ---------- Total interest expense 6,024,198 5,880,145 ---------- ---------- Net interest income 3,879,049 3,915,307 Provision for loan losses 75,000 75,000 ---------- ---------- Net interest income after provision for loan losses 3,804,049 3,840,307 ---------- ---------- Non-interest income: Fees and service charges 96,412 77,516 Securities gains (losses), net 270,917 500,550 Gain on sales of loans 153,450 5,949 Other 177,515 117,389 ---------- ---------- Total non-interest income 698,294 701,404 ---------- ---------- Non-interest expense: Compensation and benefits 1,315,987 1,105,995 Occupancy 241,147 196,782 Federal deposit insurance premiums 58,977 209,792 Advertising 78,137 72,685 Data processing 124,529 128,453 Provision for real estate losses 2,000 0 Other 293,665 269,113 ---------- ---------- Total non-interest expense 2,114,442 1,982,820 ---------- ---------- Income before income tax expense 2,387,901 2,558,891 Income tax expense 913,421 972,200 ---------- ---------- Net income $ 1,474,480 1,586,691 ========== ========== Earnings per common share and common share equivalents $ 0.38 0.33 ========== ========== HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) Three Months Ended Selected Financial Data: March 31, March 31, (dollars in thousands, 1997 1996 except per share date) ----------------------- I. OPERATING DATA: Interest income $ 9,903 9,795 Interest expense 6,024 5,880 Net interest income 3,879 3,915 II. AVERAGE BALANCES: Assets <F1> 549,725 540,061 Loans receivable, net 344,925 311,126 Mortgage-backed and related securities <F1> 173,239 173,687 Interest earnings assets <F1> 537,929 530,733 Interest bearing liabilities 463,787 441,592 Equity <F1><F2> 80,534 92,312 III.PERFORMANCE RATIOS: <F1> Return on average assets (annualized)<F1> 1.09% 1.18% Interest rate spread information: Average during period<F1> 2.20 2.08 End of period<F1> 2.25 1.96 Net interest margin<F1> 2.92 2.97 Ratio of operating expense to average total assets<F1> 1.56 1.48 Return on average equity (annualized)<F1> 7.43 6.91 March 31, Dec 31, March 31, 1997 1996 1996 ---------------------------------- IV.ASSET QUALITY: Total non-performing assets $ 436 361 740 Non-performing assets to total assets 0.08% 0.07% 0.14% Non-performing loans to total loans receivable, net 0.10 0.10 0.15 Allowance for loan losses $2,423 2,341 2,264 Allowance for loan losses to total assets 0.44% 0.42% 0.42% Allowance for loan losses to total loans receivable, net 0.71 0.67 0.74 Allowance for loan losses to non-performing loans 742.11 691.84 486.31 V. BOOK VALUE PER SHARE: Book value per share excluding net unrealized loss on securities available for sale $19.07 18.65 17.73 Book value per share 18.71 18.52 17.54 Three Three Months Year Months Ended Ended Ended March 31, Dec 31, March 31, 1997 1996 1996 ------------------------------------- VI. CAPITAL RATIOS Stockholders' equity to total assets, at end of period 14.24% 14.80% 16.77% Average stockholders' equity to average assets <F1><F2> 14.65 16.12 17.09 Ratio of average interest- earning assets to average interest-bearing liabilities<F1> 115.99 118.87 120.19 <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 and 224,334 shares repurchased during the first quarter of 1997. </FN>