[graphic of open-winged eagle] HMN FINANCIAL, INC. 101 NORTH BROADWAY SPRING VALLEY, MINNESOTA 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 Six Months Ended June 30, June 30, ------------------- ------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Net income $ 1,332,220 1,533,084 $ 2,806,700 3,119,775 Primary earnings per common share and common share equivalent 0.34 0.34 0.72 0.67 Return on average assets 0.95% 1.13% 1.02% 1.15% Return on average common equity 6.58% 6.77% 7.00% 6.84% Book value per share $ 19.42 17.73 $ 19.42 17.73 SPRING VALLEY, MINNESOTA, July 18, 1997. . . HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $567 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.3 million for the second quarter of 1997, down 13.1% from $1.5 million for the second quarter of 1996. Primary earnings per share were $0.34 for both the second quarter of 1997 and 1996. Return on average assets was 0.95% and return on average equity was 6.58% for the second quarter of 1997, a decrease of 15.9% and 2.8%, respectively, from the second quarter of 1996. Book value per share was $19.42, up 9.53%, from $17.73 for the second quarter of 1996. Primary earnings per share were $0.72 for the six months ended June 30, 1997, up 7.46% from $0.67 per share for the same period in 1996. Return on average assets was 1.02% for the six months ended June 30, 1997, a decrease of 11.3% from 1.15% for the same period of 1996. Return on average equity was 7.0% for the six months ended June 30, 1997, an increase of 2.3% from the same period of 1996. Net income for the second quarter of 1997 decreased by $201,000, or 13.1% compared to the second quarter of 1996. The decrease in net income was principally due to a decrease of $126,000 of net interest income, a decrease of $79,000 in non-interest income and an increase of $142,000 in non-interest expense. Net income for the six-month period ended June 30, 1997 decreased by $313,000, or 10.0%, compared to the same period of 1996. The decrease was principally due to a decrease of $163,000 in net interest income, a decrease of $82,000 in non-interest income and an increase of $274,000 in non-interest expense. more . . . Net interest income for the second quarter of 1997 was $3.9 million, a decrease of $126,000, or 3.2%, compared to $4.0 million for the same quarter of 1996 because average interest-earning assets increased by $8.8 million, while average interest-bearing liabilities increased by $23.9 million. The additional interest expense caused a decrease in net interest income. HMN's stock repurchase programs conducted during 1996 and 1997 have been funded by increasing interest-bearing liabilities. Net interest income for the six months ended June 30, 1997 was $7.7 million, a decrease of $163,000, or 2.1%, from $7.9 million for the same period of 1996. Average interest-earning assets increased $8.0 million, while average interest-earning liabilities increased $23.1 million which had the net impact of reducing net interest income for the six months ended in 1997 compared to the same period in 1996. Non-interest income for the second quarter of 1997 was $406,000, a decrease of $79,000, or 16.3%, from $485,000 for the same quarter of 1996. The decrease in non-interest income was principally due to a decrease of $155,000 in gain on the sale of securities and was partially offset by increased fee income of $19,000 and an increase in gain on the sale of loans of $62,000. Economic conditions and certain market conditions reduced the ability to sell securities at a gain during the second quarter of 1997 compared to the same period in 1996. Non-interest income for the six months ended June 30, 1997 was $1.1 million, a decrease of $82,000, or 6.9%, from $1.2 million for the same period of 1996. The decrease was principally due to a $384,000 decrease in gain on the sale of securities and was partially offset by a $37,000 increase in fee income, a $210,000 increase in gain on sale of loans, and a $55,000 increase in other income. The increased income recognized on the sale of loans is the direct result of increased mortgage banking activity. The increase in other income for the six months ended June 30, 1997 compared to the same period in 1996 was principally due to an increase in commissions earned by Osterud Insurance Agency, which is a subsidiary of the Bank. Non-interest expense was $2.1 million for the second quarter of 1997, an increase of $143,000, or 7.2%, from $2.0 million for the second quarter of 1996. The majority of the increase in non-interest expense between the two quarters was due to a $260,000, or 23.6%, increase in compensation and benefits and was the result of adding new employees, plus normal merit and salary increases. Besides the increase in compensation, occupancy also increased $37,000 between the two quarters. These increases were partially offset by a $156,000 decrease in federal deposit insurance premiums for the second quarter of 1997 compared to the second quarter of 1996. The decrease in premium expense is the result of the Savings Association Insurance Fund (SAIF) now being fully funded. Non-interest expense for the six months ended June 30, 1997 was $4.2 million, an increase of $274,000, or 6.9%, from $4.0 million for the six months ended June 30, 1996. The principal cause for the increase in non-interest expense between the two periods was due to a $470,000, or 21.3%, increase in compensation and benefits expense and was the result of adding new employees and normal merit and salary increases. Occupancy also increased $81,000 for the six-month period ended June 30, 1997 compared to the same period ended June 30, 1996 partially because of continued remodeling of offices. These increases were partially offset by a $307,000 decrease in federal deposit insurance premiums between the two periods because the SAIF insurance fund is now fully funded. more . . . As previously reported through a press release dated July 1, 1997, HMN Financial, Inc. and Marshalltown Financial Corporation (NASDAQ:MFCX), the thrift holding company for Marshalltown Savings Bank, FSB, have entered into a definitive agreement to merge. Under the agreement, HMN Financial will acquire in a cash transaction valued at $25.9 million, or $17.51 per share, all outstanding shares of Marshalltown Financial's common stock. The agreement is subject to regulatory approvals, as well as approval of Marshalltown Financial's shareholders, a process that is expected to be completed by the end of the year. Marshalltown Savings Bank, FSB is expected to be operated as a division of Home Federal. HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Spring Valley, MN. 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 June 30, December 31, 1997 1996 ------------ ------------ Cash and cash equivalents $ 11,569,823 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $115,681,542 and $134,474,167) 115,016,213 133,355,278 Other marketable securities (amortized cost $73,350,810 and $42,360,499) 73,860,262 42,474,810 ------------ ------------ 188,876,475 175,830,088 ------------ ------------ Securities held to maturity: Mortgage-backed and related securities (fair value $0 and $1,904,993) 0 1,805,744 Other marketable securities (fair value $0 and $1,000,550) 0 999,812 ------------ ------------ 0 2,805,556 ------------ ------------ Loans held for sale 1,205,315 739,316 Loans receivable, net 345,516,286 349,022,236 Federal Home Loan Bank stock, at cost 5,939,500 5,434,000 Real estate, net 89,287 20,610 Premises and equipment, net 4,090,908 3,581,497 Accrued interest receivable 3,762,219 3,415,152 Prepaid expenses and other assets 5,815,165 3,299,427 ------------ ------------ Total assets $566,864,978 554,731,599 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $365,385,386 362,476,944 Federal Home Loan Bank advances 114,364,305 106,078,589 Accrued interest payable 1,207,541 1,542,773 Advance payments by borrowers for taxes and insurance 506,268 518,911 Accrued expenses and other liabilities 2,403,310 2,014,938 Due to brokers 1,200,000 0 ----------- ------------ Total liabilities 485,066,810 472,632,155 ----------- ------------ Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; issued and outstanding none 0 0 Common stock ($.01 par value): authorized 7,000,000 shares; issued 6,085,775 shares 60,858 60,858 Additional paid-in capital 59,620,004 59,428,768 Retained earnings, subject to certain restrictions 57,452,087 54,645,387 Net unrealized loss on securities available for sale (92,998) (598,045) Unearned employee stock ownership plan shares (4,746,400) (4,938,520) Unearned compensation restricted stock awards (716,965) (793,289) Treasury stock, shares at cost 1,873,939 and 1,651,615 shares (29,778,418) (25,705,715) ------------ ------------ Total stockholders' equity 81,798,168 82,099,444 ------------ ------------ Total liabilities and stockholders' equity $ 566,864,978 554,731,599 ============ ============ HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----------------------- ----------------------- Interest Income: Loans receivable $ 6,882,628 6,409,310 13,790,870 12,548,056 Securities available for sale: Mortgage-backed and related 2,176,822 2,527,670 4,366,032 5,301,360 Other marketable 917,067 580,897 1,502,309 985,741 Securities held to maturity: Mortgage-backed and related 0 256,754 33,400 523,777 Other marketable 0 32,405 10,032 75,853 Cash equivalents 87,434 62,086 169,594 165,804 Other 102,011 74,648 196,972 138,630 ---------- ---------- ---------- ---------- Total interest income 10,165,962 9,943,770 20,069,209 19,739,221 ---------- ---------- ---------- ---------- Interest expense: Deposits 4,670,797 4,720,966 9,243,595 9,539,249 Federal Home Loan Bank advances 1,626,510 1,227,662 3,077,910 2,289,523 ---------- ---------- ---------- ---------- Total interest expense 6,297,307 5,948,628 12,321,505 11,828,772 ---------- ---------- ---------- ---------- Net interest income 3,868,655 3,995,142 7,747,704 7,910,449 Provision for loan losses 75,000 75,000 150,000 150,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,793,655 3,920,142 7,597,704 7,760,449 ---------- ---------- ----------- ---------- Non-interest income: Fees and service charges 100,445 81,855 196,857 159,371 Securities gains, net 113,695 268,487 384,612 769,037 Gain on sales of loans 63,614 1,135 217,064 7,084 Other 128,042 133,533 305,557 250,922 ---------- ---------- ---------- ---------- Total non-interest income 405,796 485,010 1,104,090 1,186,414 ---------- ---------- ---------- ---------- Non-interest expense: Compensation and benefits 1,358,859 1,099,123 2,674,846 2,205,118 Occupancy 232,451 195,363 473,598 392,145 Federal deposit insurance premiums 58,924 214,864 117,901 424,656 Advertising 73,658 79,354 151,795 152,039 Data processing 118,803 120,743 243,332 249,196 Provision for real estate losses 1,000 0 3,000 0 Other 283,260 274,789 576,925 543,902 ---------- ---------- ---------- ---------- Total non-interest expense 2,126,955 1,984,236 4,241,397 3,967,056 ---------- ---------- ---------- ---------- Income before income tax expense 2,072,496 2,420,916 4,460,397 4,979,807 Income tax expense 740,276 887,832 1,653,697 1,860,032 ---------- ---------- ---------- ---------- Net income $ 1,332,220 1,533,084 2,806,700 3,119,775 ========== ========== ========== ========== Primary earnings per common share and common share equivalents $ 0.34 0.34 0.72 0.67 ========== ========== ========== ========== Fully diluted earnings per common share and common share equivalents 0.34 0.33 0.71 0.66 ========== ========== ========== ========== HMN FINANCIAL, INC. AND SUBSIDIARIES Selected Consolidated Financial Information (unaudited) Three Months Ended Six Months Ended Selected Financial Data: June 30, June 30, June 30, June 30, (dollars in thousands, 1997 1996 1997 1996 except per share data) ------------------- -------------------- I. OPERATING DATA: Interest income $ 10,166 9,944 20,069 19,739 Interest expense 6,297 5,949 12,321 11,829 Net interest income 3,869 3,995 7,748 7,910 II. AVERAGE BALANCES: Assets <1> 561,583 547,513 555,687 543,787 Loans receivable, net 344,345 320,832 344,633 315,979 Mortgage-backed and related securities <1> 126,450 166,897 129,009 170,292 Interest earnings assets<1> 547,734 538,911 542,859 534,822 Interest bearing liabilities 474,562 450,704 469,204 446,148 Equity <1><2> 81,149 91,082 80,843 91,697 III.PERFORMANCE RATIOS: <1> Return on average assets (annualized) 0.95% 1.13% 1.02% 1.15% Interest rate spread information: Average during period 2.12 2.11 2.16 2.09 End of period 2.21 2.23 2.21 2.23 Net interest margin 2.83 2.98 2.88 2.97 Ratio of operating expense to average total assets (annualized) 1.52 1.46 1.54 1.47 Return on average equity (annualized) 6.58 6.77 7.00 6.84 Efficiency 49.76 44.29 47.92 43.61 June 30, Dec 31, June 30, 1997 1996 1996 --------------------------------- IV.ASSET QUALITY: Total non-performing assets $ 466 361 523 Non-performing assets to total assets 0.08% 0.07% 0.09% Non-performing loans to total loans receivable, net 0.11 0.10 0.11 Allowance for loan losses $ 2,479 2,341 2,339 Allowance for loan losses to total assets 0.44% 0.42% 0.42% Allowance for loan losses to total loans receivable, net 0.72 0.67 0.71 Allowance for loan losses to non-performing loans 663.67 691.84 668.75 V. BOOK VALUE PER SHARE: Book value per share excluding net unrealized loss on securities available for sale $ 19.44 18.65 18.19 Book value per share 19.42 18.52 17.73 Six Six Months Year Months Ended Ended Ended June 30, Dec 31, June 30, 1997 1996 1996 ------------------------------------- VI. CAPITAL RATIOS Stockholders' equity to total assets, at end of period 14.43% 14.80% 15.72% Average stockholders' equity to average assets <1><2> 14.55 16.12 16.86 Ratio of average interest -earning assets to average interest-bearing liabilities<1> 119.88 118.87 119.69 VII. EMPLOYEE DATA: June 30, Dec 31, June 30, 1997 1996 1996 ---------------------------------- Number of employees 116 110 100 <FN> <FN1> Average balances were calculated based upon amortized cost without the market value impact of SFAS 115. <FN2> Average equity and average equity/average asset ratio decreasing due in part by a repurchase of 489,060 shares of common stock in the second half of 1996 and and additional repurchase of 224,334 shares of common stock in the first half of 1997. </FN>