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, --------------------- --------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net income $ 1,248,054 1,299,101 $ 5,578,866 4,274,349 Basic earnings per share 0.34 0.32 1.51 0.99 Diluted earnings per share 0.31 0.31 1.41 0.96 Return on average assets before SAIF assessment 0.98% 1.04% Return on average assets 0.84% 0.93% 0.98% 0.78% Return on average equity before SAIF assessment 6.84% 6.46% Return on average equity 6.09% 6.06% 6.84% 4.82% Book value per share $ 20.38 18.52<F1>$ 20.38 18.52<F1> [FN] <FN1> After SAIF assessment </FN> SPRING VALLEY, MINNESOTA, February 4, 1998 . . . HMN Financial, Inc.(HMN) (NASDAQ:HMNF), the $691 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.25 million for the fourth quarter of 1997, down $51,000, or 3.9% from $1.3 million for the fourth quarter of 1996. Basic earnings per share was $0.34 for the fourth quarter of 1997 compared to $0.32 basic earnings per share for the fourth quarter of 1996. Diluted earnings per share was $0.31 for the fourth quarter of both 1997 and 1996. Return on average assets for the fourth quarter of 1997 was 0.84% compared to 0.93% for the fourth quarter of 1996. Return on average equity for the fourth quarter of 1997 was 6.09% compared to 6.06% for the fourth quarter of 1996. Book value per share was $20.38 at December 31, 1997, an increase of $1.86, or 10%, from $18.52 at December 31, 1996. more... Net income for the year ended December 31, 1997 was $5.6 million, an increase of $1.3 million, or 31%, from $4.3 million for the year ended December 31, 1996. Basic earnings per share was $1.51 for the year ended December 31, 1997, an increase of $0.52 per share, or 53%, from $0.99 basic earnings per share for December 31, 1996. Diluted earnings per share was $1.41 for the year ended December 31, 1997, an increase of $0.45 per share, or 47%, from $0.96 basic earnings per share for year ended in 1996. In September of 1996, Congress enacted the Savings Association Insurance Fund (SAIF) legislation which assessed a one time charge of $2.35 million to the Bank in order to recapitalize the SAIF. The total SAIF assessment of $2.35 million was charged directly to earnings and reduced after tax earnings by $1.46 million. The assessment reduced basic earnings per share and diluted earnings per share for the year ended 1996 by $0.34 and $0.33, respectively. Return on average assets for the year ended 1997 was 0.98% compared to 0.78% for the year ended 1996. Return on average equity for the year ended 1997 was 6.84% compared to 4.82% for the year ended 1996. If the impact of the SAIF assessment is removed from the 1996 calculations return on average assets would have been 1.04% and return on average equity would have been 6.46%. Book value per share was $20.38 at December 31, 1997, an increase of $1.86, or 10%, from $18.52 at December 31, 1996. On December 5, 1997 HMN completed its acquisition of Marshalltown Financial Corporation (MFC), the thrift holding company for Marshalltown Savings Bank, FSB (Marshalltown Bank). In connection with the acquisition, Marshalltown Bank was merged into Home Federal Savings Bank and is being operated as a branch of the Bank. The aggregate merger consideration was $24.8 million, consisting of $23.7 million for the 1.35 million outstanding MFC shares, or $17.51 per MFC share, and $1.1 million for the outstanding MFC options. HMN owned 60,000 shares of MFC, which were cancelled under the merger agreement. The purchase method was used to account for the merger. On December 5, 1997 as a result of the merger, the Bank's securities portfolio increased by $47.2 million, loans receivable, net increased by $69.8 million, a core deposit intangible was recognized for $1.57 million, goodwill was recognized for $4.5 million and deposits increased by $103.1 million. The consolidated statement of income for HMN as of December 31, 1997 includes the operations of the acquired MFC from December 6, 1997 through December 31, 1997. Net interest income for the fourth quarter of 1997 was $3.85 million, a decrease of $88,000, or 2.2%, compared to $3.94 million for the fourth quarter of 1996. Interest income for the fourth quarter of 1997 was $10.7 million, an increase of $596,000 from $10.1 million for the same quarter of 1996. Interest income increased by $739,000 primarily due to an increase in net loans receivable and was partially offset by a $143,000 decrease of interest income due to a general decline in interest rates during 1997. Interest expense for the fourth quarter of 1997 was $6.9 million, an increase of $684,000, or 11.1%, compared to $6.2 million for the same quarter of 1996. Interest expense increased by $650,000 due to an increase in the deposit base and advances from the Federal Home Loan Bank of Des Moines (FHLB). Interest expense also increased by $34,000 primarily due to an increase in more... the interest rates paid on FHLB advances. Net interest income for the year ended December 31, 1997 was $15.4 million, a decrease of $223,000, or 1.4%,from $15.7 million for the same year ended in 1996. Interest income for the year ended December 31, 1997 was $41.1 million, an increase of $1.2 million, or 3.1%, compared to $39.9 million for the year ended in 1996. The increased interest income was primarily due to an increase in net loans receivable. Interest expense for the year ended December 31, 1997 was $25.6 million an increase of $1.4 million, or 6.0% from $24.2 million for the year ended December 31, 1996. The increase in interest income was totally offset by an increase in interest expense of $223,000, primarily due to additional borrowing from the FHLB. Net interest margin for the quarter ended December 31, 1997 was 2.60%, a decline of 26 basis points from 2.86% for the quarter ended December 31, 1996. Net interest margin for the year ended December 31, 1997 was 2.77%, a decline of 12 basis points from 2.89% for the year ended December 31, 1996. During 1997 HMN increased its investment in non-interest bearing assets such as mortgage servicing assets, partnerships which invest in mortgage servicing assets and partnerships which invest in the common stock of other financial institutions. HMN is in the process of building a new retail banking facility in Spring Valley. HMN also repurchased its own common stock in the open market during 1997. The impact of the above mentioned investing activities and the purchase of MFC caused net interest earning assets to decline. The decline in net interest earning assets when coupled with general fluctuations in interest rates caused HMN's net interest margin to decline. Non-interest income for the fourth quarter of 1997 was $740,000, an increase of $416,000, or 128%, from $324,000 for the same quarter in 1996. The increase in quarterly income was primarily due to a $310,000 increase in gains recognized on the sale of securities and a $113,000 increase in gain on the sale of loans. Interest rates, in general, decreased during the fourth quarter of 1997, creating a favorable environment for HMN to sell securities and loans. During 1997, HMN increased its mortgage banking activities and is selling more loans in the secondary market than it did in 1996. Non-interest income for the year ended December 31, 1997 was $2.7 million, an increase of $800,000, or 42%, from $1.9 million for the same year ended in 1996. The increase in non-interest income was primarily due to a $430,000 gain on the sale of loans, a $220,000 increase in gains recognized on the sale of securities and a $128,000 increase in fee income. The increase in gain on sale of loans was due to HMN's increased mortgage banking activities and a general decrease in interest rates which allowed both loans and securities to be sold at a profit. Non-interest expense for the fourth quarter of 1997 was $2.6 million, an increase of $405,000, or 18.9%, from $2.1 million for the same quarter of 1996. Compensation and benefits expense increased by $273,000 due to new employees added in either mortgage banking activities or by the purchase of MFC and normal merit and salary increases for existing HMN employees. Non- interest expense for the year ended December 31, 1997 was $9.0 million, a decrease of $1.5 million, or 14.1%, from $10.5 million for the year ended in 1996. The majority of the $1.5 million decrease in non-interest expense was due to the one time SAIF assessment of $2.35 million not repeating itself in 1997. As a result of the SAIF more... assessment the FDIC insurance premium expense decreased by $561,000. The decrease in non-interest expense was partially offset by a $999,000 increase in compensation and benefits, an increase in occupancy of $158,000 and an increase in other expense of $227,000. Compensation and benefits expense increased as a result of adding new employees in mortgage banking activities, the purchase of MFC and normal merit and salary increases to existing employees. Occupancy increased for the year ended December 31, 1997 compared to 1996 because of the purchase of MFC and the continued remodeling and updating of offices for new technological advances. HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Spring Valley, MN. The Bank operates seven offices in southern Minnesota and three in Iowa. HMN Mortgage Services, Inc., a subsidiary of HMN Financial, Inc. operates mortgage banking facilities in Eden Prairie and Brooklyn Park, MN. (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, ASSETS 1997 1996 ------------ ------------ Cash and cash equivalents $ 9,364,635 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $135,598,404 and $134,474,167) 135,935,482 133,355,278 Other marketable securities (amortized cost $68,356,926 and $42,360,499) 69,923,477 42,474,810 ------------ ------------ 205,858,959 175,830,088 ------------ ------------ 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 2,287,265 739,316 Loans receivable, net 442,068,600 349,022,236 Federal Home Loan Bank stock, at cost 7,432,200 5,434,000 Real estate, net 133,939 20,610 Premises and equipment, net 5,880,710 3,581,497 Accrued interest receivable 4,038,131 3,415,152 Investment in limited partnerships 5,989,399 2,887,525 Goodwill 4,500,873 0 Core deposit intangible 1,546,273 0 Investment in mortgage servicing rights 781,005 4,681 Prepaid expenses and other assets 1,349,521 407,221 ------------ ------------ Total assets $691,231,510 554,731,599 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $467,347,688 362,476,944 Federal Home Loan Bank advances 127,650,021 106,078,589 Accrued interest payable 1,365,064 1,542,773 Advance payments by borrowers for taxes and insurance 786,619 518,911 Accrued expenses and other liabilities 6,056,356 2,014,938 Due to stockholders of Marshalltown Financial Corporation 3,555,352 0 ------------ ------------ Total liabilities 606,761,100 472,632,155 ------------ ------------ Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares;issued and outstanding none 0 0 Common stock ($.01 par value): authorized 7,000,000;issued shares 6,085,775 60,858 60,858 Additional paid-in capital 59,729,090 59,428,768 Retained earnings, subject to certain restrictions 60,224,253 54,645,387 Net unrealized gain/(loss) on securities available for sale 1,129,818 (598,045) Unearned employee stock ownership plan shares (4,554,280) (4,938,520) Unearned compensation restricted stock awards (600,668) (793,289) Treasury stock, at cost 1,941,407 and 1,651,615 shares (31,518,661) (25,705,715) ------------ ------------ Total stockholders' equity 84,470,410 82,099,444 ------------ ------------ Total liabilities and stockholders' equity $691,231,510 554,731,599 ============ ============ HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended Twelve MonthsEnded December 31, December31, 1997 1996 1997 1996 ---------------------- ---------------------- Interest Income: Loans receivable $7,598,770 6,711,707 28,328,864 25,721,042 Securities available for sale: Mortgage-backed and related 1,796,406 2,296,748 8,255,402 10,027,438 Other marketable 1,077,616 768,923 3,699,378 2,424,628 Securities held to maturity: Mortgage-backed and related 0 45,293 33,400 765,120 Other marketable 0 14,345 10,032 104,448 Cash equivalents 117,196 178,506 342,433 494,129 Other 116,563 95,067 420,722 327,520 ----------- ----------- ----------- ----------- Total interest income 10,706,551 10,110,589 41,090,231 39,864,325 ----------- ----------- ----------- ----------- Interest expense: Deposits 5,062,832 4,668,781 19,056,164 18,949,937 Federal Home Loan Bank advances 1,794,303 1,504,838 6,586,855 5,243,853 ----------- ----------- ----------- ----------- Total interest expense 6,857,135 6,173,619 25,643,019 24,193,790 ----------- ----------- ----------- ----------- Net interest income 3,849,416 3,936,970 15,447,212 15,670,535 Provision for loan losses 75,000 75,000 300,000 300,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 3,774,416 3,861,970 15,147,212 15,370,535 ----------- ----------- ----------- ----------- Non-interest income: Fees and service charges 168,739 105,061 487,085 359,249 Securities gains, net 377,410 67,840 1,249,569 1,029,638 Gain on sales of loans 135,094 22,326 469,461 39,306 Other 58,458 128,628 516,244 494,507 ----------- ---------- ----------- ----------- Total non-interest income 739,701 323,855 2,722,359 1,922,700 ----------- ---------- ----------- ----------- Non-interest expense: Compensation and benefits 1,483,598 1,210,524 5,590,297 4,591,367 Occupancy 264,437 230,393 983,238 825,609 Federal deposit insurance premiums 63,275 163,214 238,654 799,890 SAIF assessment 0 0 0 2,351,563 Advertising 101,214 78,729 315,771 308,464 Data processing 136,498 120,900 508,930 489,045 Provision for real estate losses 15,000 2,000 18,000 2,000 Other 488,441 341,238 1,367,815 1,140,948 ----------- ---------- ----------- ----------- Total non-interest expense 2,552,463 2,146,998 9,022,705 10,508,886 ----------- ---------- ----------- ----------- Income before income taxes 1,961,654 2,038,827 8,846,866 6,784,349 Income tax expense 713,600 739,726 3,268,000 2,510,000 ----------- ---------- ----------- ----------- Net income $1,248,054 1,299,101 5,578,866 4,274,349 =========== ========== =========== =========== Basic earnings per share $ 0.34 0.32 1.51 0.99 =========== ========== =========== =========== Diluted earnings per share $ 0.31 0.31 1.41 0.96 =========== ========== =========== =========== 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) 1997 1996 1997 1996 -------------------- --------------------- I. OPERATING DATA: Interest income $ 10,706 10,111 41,090 39,864 Interest expense 6,857 6,174 25,643 24,194 Net interest income 3,849 3,937 15,447 15,670 II. AVERAGE BALANCES: Assets <F1> 607,023 557,225 572,103 550,509 Loans receivable, net 388,333 336,349 355,657 324,958 Mortgage-backed and related securities <F1> 109,702 140,335 121,804 158,561 Interest earnings assets <F1> 586,836 548,057 556,831 541,638 Interest bearing liabilities 512,950 465,612 483,130 455,645 Equity <F1><F2> 83,938 85,351 82,144 88,736 III.PERFORMANCE RATIOS: <F1> Return on average assets (annualized) 0.84% 0.93% 0.98% 0.78% Interest rate spread information: Average during period 1.93 2.06 2.07 2.05 End of period 1.60 2.17 1.60 2.17 Net interest margin 2.60 2.86 2.77 2.89 Ratio of operating expense to average total assets (annualized) 1.63 1.53 1.56 1.91 Return on average equity (annualized) 6.09 6.06 6.84 4.82 Efficiency 55.62 50.39 49.66 59.73 IV. ASSET QUALITY: Dec 31, Dec 31, 1997 1996 -------------------- Total non-performing assets $ 807 361 Non-performing assets to total assets 0.12% 0.07% Non-performing loans to total loans receivable, net 0.15 0.10 Allowance for loan losses $2,748 2,341 Allowance for loan losses to total assets 0.40% 0.42% Allowance for loan losses to total loans receivable, net 0.62 0.67 Allowance for loan losses to non-performing loans 413.17 691.84 V. BOOK VALUE PER SHARE: Book value per share excluding net unrealized loss on securities available for sale $ 20.11 18.65 Book value per share 20.38 18.52 Tangible book value 18.92 18.52 Year Year Ended Ended Dec 31, Dec 31, 1997 1996 --------------------- VI. CAPITAL RATIOS Stockholders' equity to total assets, at end of period 12.22% 14.80% Average stockholders' equity to average assets <F1><F2> 14.36 16.12 Ratio of average interest -earning assets to average interest-bearing liabilities<F1> 115.25 118.87 Dec 31, Dec 31, V. EMPLOYEE DATA: 1997 1996 ---------------------- Number of employees 150 110 [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 to a repurchase of 243,088 shares of common stock in the fourth quarter of 1996 and an additional repurchase of 224,334 shares of common stock in 1997. </FN>