HMN Financial, Inc. Announces Third Quarter Results

HMN Financial, Inc. Announces Third Quarter Results

Third Quarter Highlights

  *Net income of $6.0 million compared to net income of $0.6 million in third
    quarter of 2012
  *Diluted earnings per share of $1.27 compared to diluted earnings per share
    of $0.04 in third quarter of 2012
  *Provision for loan losses of ($4.3) million, down $5.9 million from third
    quarter of 2012
  *Net interest income of $5.3 million, down $0.6 million from third quarter
    of 2012
  *Non-performing assets of $31.3 million, down $4.0 million from second
    quarter of 2013

Year to Date Highlights

  *Net income of $8.6 million compared to net income of $3.8 million in first
    nine months of 2012
  *Diluted earnings per share of $1.65 compared to diluted earnings per share
    of $0.61 in first nine months of 2012
  *Provision for loan losses of ($4.9) million, down $7.4 million from first
    nine months of 2012
  *Net interest income of $14.9 million, down $3.2 million from first nine
    months of 2012
  *Non-performing assets of $31.3 million, down $9.3 million from December
    31, 2012
  *Total assets decreased $91 million from December 31, 2012

                                         Three Months Ended Nine Months Ended
Income Summary(unaudited)               September 30,      September 30,
(Dollars in thousands, except per share   2013       2012    2013      2012
amounts)
Net income                                $ 6,034    637     $ 8,574   3,836
Net income available to common            5,511     170    7,028    2,444
shareholders
Diluted earnings per share                1.27       0.04    1.65      0.61
Return on average assets                  4.44       0.39%   1.96      0.74%
Return on average equity                  38.17      4.20%   18.55     8.66%
Book value per common share               $ 9.47     7.83    $ 9.47    7.83
                                                                   

ROCHESTER, Minn., Oct. 18, 2013 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN
or the Company) (Nasdaq:HMNF), the $563 million holding company for Home
Federal Savings Bank (the Bank), today reported net income of $6.0 million for
the third quarter of 2013, an improvement of $5.4 million compared to net
income of $0.6 million for the third quarter of 2012. Net income available to
common shareholders was $5.5 million for the third quarter of 2013, an
improvement of $5.3 million from the net income available to common
shareholders of $0.2 million for the third quarter of 2012. Diluted earnings
per common share for the third quarter of 2013 was $1.27, an increase of $1.23
from the diluted earnings per common share of $0.04 for the third quarter of
2012. The improvement in net income for the third quarter of 2013 is due to a
$5.9 million decrease in the provision for loan losses between the periods
primarily because of improving values of the underlying collateral supporting
commercial real estate loans and a $0.5 million decrease in non-interest
expense. The decrease in non-interest expense is primarily due to decreased
legal expenses relating to real estate owned and loan collection efforts and
mortgage servicing rights amortization expense. These improvements to net
income were partially offset by a $0.3 million decrease in non-interest income
due primarily to a decrease in the gain on sales of loans and a $0.6 million
decrease in net interest income due primarily to a decrease in interest
earning assets between the periods.

President's Statement

"We are pleased to report the continued improvement in our net operating
results and the decrease in our non-performing assets in the third quarter of
2013," said Bradley Krehbiel, President of HMN."Our core business remains
profitable and we are encouraged by the declining trend in both our loan loss
provision and other operating expenses.We continue to focus our efforts on
improving credit quality and reducing non-performing assets in the most cost
effective manner while at the same time reducing expenses to reflect the
decreased size of our balance sheet. We believe that, over time, our focus on
these areas will be effective in generating improved financial results."

Third Quarter Results

Net Interest Income

Net interest income was $5.3 million for the third quarter of 2013, a decrease
of $0.6 million, or 9.6%, compared to $5.9 million for the third quarter of
2012. Interest income was $5.7 million for the third quarter of 2013, a
decrease of $1.9 million, or 24.1%, from $7.6 million for the same period in
2012.Interest income decreased between the periods primarily because of a $99
million decrease in the average interest-earning assets and also because of a
decrease in the average yields on interest-earning assets between the periods.
Average interest-earning assets decreased between the periods primarily
because of a decrease in the commercial loan portfolio, which occurred because
of loan prepayments or non-renewals as a result of the Company's focus on
improving credit quality, decreasing loan concentrations, managing net
interest margin and improving capital ratios. The average yield earned on
interest-earning assets was 4.41% for the third quarter of 2013, a decrease of
48 basis points from the 4.89% average yield for the third quarter of
2012.The decrease in average yield is due to the continued low short-term
interest rate environment that existed during the third quarter of 2013. The
increase in domestic long-term mortgage rates that began during the second
quarter of 2013 did not materially impact the average yield earned on
interest-earning assets during the third quarter of 2013 since most of the
mortgage loans originated by the Bank are sold into the secondary market and
not placed in the loan portfolio.

Interest expense was $0.4 million for the third quarter of 2013, a decrease of
$1.3 million, or 75.6%, compared to $1.7 million for the third quarter of
2012.Interest expense decreased primarily because of the $108 million
decrease in the average interest-bearing liabilities between the periods,
largely as the result of a decrease in the outstanding borrowings and brokered
certificates of deposit between the periods. The decrease in borrowings and
brokered certificates of deposit between the periods was the result of using
the proceeds from loan principal payments to fund maturing borrowings and
brokered certificates of deposit.Interest expense also decreased because of
the lower interest rates paid on money market accounts and certificates of
deposit due to the low short-term interest rate environment that continued to
exist during the third quarter of 2013. The average interest rate paid on
interest-bearing liabilities was 0.34% for the third quarter of 2013, a
decrease of 80 basis points from the 1.14% average interest rate paid in the
third quarter of 2012.

Provision for Loan Losses

The provision for loan losses was ($4.3) million for the third quarter of
2013, a decrease of $5.9 million, compared to $1.6 million for the third
quarter of 2012.The provision for loan losses decreased in the third quarter
primarily because of improving values of the underlying collateral supporting
commercial real estate loans in the third quarter of 2013 when compared to the
third quarter of 2012. The provision also decreased because of a decrease in
the outstanding loan portfolio balances, a decrease in the reserve percentages
on certain risk classifications as a result of an internal analysis of the
loan portfolio, an improvement in the classifications of certain risk rated
loans, and the recoveries received during the quarter on previously charged
off loans. Total non-performing assets were $31.3 million at September 30,
2013, a decrease of $4.0 million, or 11.4%, from $35.3 million at June 30,
2013.Non-performing loans decreased $3.5 million and foreclosed and
repossessed assets decreased $0.5 million during the third quarter of 2013.
The non-performing loan and foreclosed and repossessed asset activity for the
quarter was as follows:

(Dollars in thousands)               
Non-performing loans                 Foreclosed and repossessed       
                                      assets
June 30, 2013                $ 25,841 June 30, 2013                    $ 9,423
Classified as non-performing 1,312                                    
Charge offs                  (426)    Transferred from non-performing  639
                                      loans
Principal payments received  (2,814)  Real estate sold                 (1,350)
Classified as accruing       (917)    Net gain on sale of assets       297
Transferred to real estate   (639)    Write downs and payments         (110)
owned
September 30, 2013           $ 22,357 September 30, 2013               $ 8,899

The decrease in non-performing loans during the third quarter of 2013 relates
primarily to principal payments received and loans being classified as
accruing during the period. Of the $2.8 million in principal payments
received, $1.2 million related to the payoff of a non-performing multi family
construction loan that was refinanced with another financial institution and
$1.6 million related to additional principal payments received on various
construction and development loans as a result of various types of real estate
sales including building lots, land, and single family homes. Of the $0.9
million in loans that were classified as accruing, $0.7 million related to
various commercial real estate loans and $0.2 million related to a single
family loan. These decreases in non-performing loans were partially offset by
loans that were newly classified as non-performing during the period. Of the
$1.3 million in loans newly classified as non-performing, $1.1 million related
to commercial real estate loans, $0.1 million related to commercial business
loans, and $0.1 million related toconsumer loans.

A reconciliation of the Company's allowance for loan losses for the quarters
ended September 30, 2013 and 2012 is summarized as follows:



(Dollars in thousands)  2013     2012
Balance at June 30,      $ 20,359 $ 20,519
Provision                (4,330)  1,584
Charge offs:                     
One-to-four family       0        0
Consumer                 (374)    (163)
Commercial business      (2)      (168)
Commercial real estate  (50)     (1,535)
Recoveries               902      225
Balance at September 30, $ 16,505 $ 20,462
                                
General allowance        $ 9,953  $ 15,965
Specific allowance       6,552    4,497
                        $ 16,505 $ 20,462


The following table summarizes the amounts and categories of non-performing
assets in the Bank's portfolio and loan delinquency information as of the two
most recently completed quarters and December 31, 2012.

                                                       
                             September 30,    June 30,   December 31,
(Dollars in thousands)       2013             2013       2012
Non‑Performing Loans:                                   
One‑to‑four family real       $ 1,626          $ 2,091    $ 2,492
estate
Commercial real estate        19,578           21,533     25,543
Consumer                      442              1,462      300
Commercial business           711              755        1,640
Total                         22,357           25,841     29,975
                                                       
Foreclosed and Repossessed                              
Assets:
One‑to‑four family real       1,082            707        1,595
estate
Commercial real estate        7,817            8,716      9,000
Total non‑performing assets   $ 31,256         $ 35,264   $ 40,570
Total as a percentage of      5.56%            6.29%      6.21%
total assets
Total non‑performing loans    $ 22,357         $ 25,841   $ 29,975
Total as a percentage of      5.68%            6.22%      6.60%
total loans receivable, net
Allowance for loan losses to  73.83%           78.79%     72.09%
non-performing loans
                                                       
Delinquency Data:                                       
Delinquencies ^(1)                                      
30+ days                      $ 2,516          $ 5,820    $ 2,739
90+ days^(2)                  0                0          7,423
Delinquencies as a percentage
of Loan and lease portfolio                             
^(1)
30+ days                      0.53%            1.22%      0.57%
90+ days                      0.00%            0.00%      1.55%
                                                                          
^(1) Excludes non-accrual loans.
^(2) Loans delinquent for 90 days and over are generally non-accruing
and are included in the Company's non-performing asset totalunless they
are well secured and in the process of collection.


The following table summarizes the number of lending relationships and types
of commercial real estate loans that were non-performing as of the end of the
two most recently completed quarters and December 31, 2012.

                               Principal              Principal              Principal
                              Amount                 Amount                 Amount
(Dollars in                    of Loans               of Loans               of Loans
thousands)                     at                      at                      at
                 # of          September # of          June 30,  # of          December
Property Type     relationships 30,       relationships 2013      relationships 31,
                                2013                                            2012
Developments/land 8             $ 19,413  9             $ 20,956 9             $ 24,339
Retail            2             165       1             66        2             386
Restaurants/bar   0             0         1             511       1             547
Other buildings   0             0         0             0         3             271
                 10            $ 19,578  11            $ 21,533 15            $ 25,543

The decrease in the non-performing commercial real estate loans from June 30,
2013 is due primarily to principal payments received on construction and
development loans during the quarter as a result of various types of real
estate sales including building lots, land, and single family houses.

Non-Interest Income and Expense

Non-interest income was $1.8 million for the third quarter of 2013, a decrease
of $0.3 million, or 13.8%, from $2.1 million for the same period of 2012. Gain
on sales of loans decreased $0.5 million primarily because of a decrease in
single family loan originations due to the higher long-term mortgage interest
rate environment that existed in the third quarter of 2013. Fees and service
charges increased $0.1 million primarily because of an increase in overdraft
charges and debit card fees between the periods. Other non-interest income
increased $0.1 million primarily because of an increase in the sales of
uninsured investment products.

Non-interest expense was $5.3 million for the third quarter of 2013, a
decrease of $0.5 million, or 8.7%, from $5.8 million for the same period of
2012. Other non-interest expenses decreased $0.3 million primarily because of
decreased legal expenses relating to real estate owned and loan collection
efforts and mortgage servicing rights amortization expense. The decrease in
mortgage servicing rights amortization expense is the result of fewer
refinanced mortgage loans in the quarter due to the increase in long-term
mortgage rates that were experienced during the quarter. Deposit insurance
costs decreased $0.2 million primarily because of a decrease in assets between
the periods. The gain on real estate owned increased $0.1 million primarily
because of an increase in the gains recognized on the properties
sold.Occupancy expense increased $0.1 million as a result of increased repair
and maintenance expenses incurred during the quarter when compared to the same
period in 2012.

Income tax expense was $0.2 million for the third quarter of 2013, an increase
of $0.2 million from the third quarter of 2012 when no income tax expense was
recorded. The income tax expense that was recorded in the third quarter of
2013 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.

No regular income tax expense was recorded for the third quarter of 2013
because the Company continued to maintain a valuation reserve against the
entire deferred tax asset balance at September 30, 2013. The Company
originally recorded a deferred tax asset valuation reserve against its entire
deferred tax asset balance in the second quarter of 2010.

Net Income Available to Common Shareholders

Net income available to common shareholders was $5.5 million for the third
quarter of 2013, an increase of $5.3 million from the $0.2 million net income
available to common shareholders in the third quarter of 2012. The net income
available to common shareholders increased between the periods primarily
because of the increase in net income between the periods.The Company has
deferred the last eleven quarterly dividend payments, beginning with the
February 15, 2011 dividend payment, on its Fixed Rate, Series A, Cumulative
Perpetual Preferred Stock, that was originally issued to the United States
Treasury Department as part of the TARP Capital Purchase Program (the
"Preferred Stock"). The Preferred Stock is currently held by unaffiliated
third party investors.Under the terms of the certificate of designations for
the Preferred Stock, dividend payments may be deferred but the dividend is
cumulative and compounds quarterly while unpaid. 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 net income for financial statement purposes to arrive at the net income
available to common shareholders. The current stated dividend rate on the
Preferred Stock of 5% per annum will increase to 9% per annum on February 15,
2014.

Basic earnings per common share was $1.38 and $0.04 for the third quarter of
2013 and 2012, respectively, and diluted earnings per common share was $1.27
and $0.04 for the same periods, respectively. The increased spread between
basic and diluted earnings per common share for the third quarter of 2013 as
compared to the same period of 2012 is primarily due to increased net income
and an increase in the price of our common stock, which resulted in a larger
number of stock options and warrants having a lower exercise price than the
market price of our common stock.

Return on Assets and Equity

Return on average assets (annualized) for the third quarter of 2013 was 4.44%,
compared to 0.39% for the third quarter of 2012. Return on average equity
(annualized) was 38.17% for the third quarter of 2013, compared to 4.20% for
the same period of 2012. Book value per common share at September 30, 2013 was
$9.47, compared to $7.83 at September 30, 2012.

Nine Month Period Results

Net Income

Net income was $8.6 million for the nine-month period ended September 30,
2013, an increase of $4.8 million, or 123.5%, compared to the net income of
$3.8 million for the nine-month period ended September 30, 2012. The net
income available to common shareholders was $7.0 million for the nine-month
period ended September 30, 2013, an increase of $4.6 million, or 187.6%,
compared to the net income available to common shareholders of $2.4 million
for the same period of 2012. Diluted earnings per common share for the first
nine months of 2013 was $1.65, an increase of $1.04 per share compared to the
diluted earnings per common share of $0.61 for the same period in 2012. The
improvement in net income for the first nine months of 2013 is due primarily
to a $7.4 million decrease in the provision for loan losses between the
periods primarily because of improving values of the underlying collateral
supporting commercial real estate loans and a $1.7 million decrease in
non-interest expenses due primarily to an increase in the gains recognized on
the sale of real estate owned and a decrease in expenses related to other real
estate owned. These improvements to net income were partially offset by a $3.2
million decrease in net interest income due primarily to a decrease in
interest earning assets between the periods, a $0.9 million decrease in
non-interest income due primarily to a decrease in the gain on sales of loans
and a decrease in the gain related to the sale of the Bank's Toledo, Iowa
branch in the first quarter of 2012, and a $0.2 million increase in income tax
expense between the periods.

Net Interest Income

Net interest income was $14.9 million for the first nine months of 2013, a
decrease of $3.3 million, or 17.8%, from $18.2 million for the same period in
2012. Interest income was $17.8 million for the nine-month period ended
September 30, 2013, a decrease of $6.0 million, or 25.0%, from $23.8 million
for the same period in 2012. Interest income decreased between the periods
primarily because of a $97 million decrease in the average interest-earning
assets and also because of a decrease in the average yields earned on average
interest-earning assets between the periods. Average interest-earning assets
decreased between the periods primarily because of a decrease in the
commercial loan portfolio, which occurred because of loan prepayments or
non-renewals as a result of the Company's focus on improving credit quality,
decreasing loan concentrations, managing net interest margin and improving
capital ratios. The average yield earned on interest-earning assets was 4.25%
for the first nine months of 2013, a decrease of 57 basis points from the
4.82% average yield for the same period of 2012. The decrease in the average
yield is due to the continued low short-term interest rate environment that
existed during the first nine months of 2013. The increase in domestic
long-term mortgage rates that began during the second quarter of 2013 did not
materially impact the average yield earned on interest-earning assets during
the first nine months of 2013 since most of the mortgage loans originated by
the Bank are sold into the secondary market and not placed in the loan
portfolio.

Interest expense was $2.9 million for the nine-month period ended September
30, 2013, a decrease of $2.7 million, or 48.3%, from $5.6 million for the same
period in 2012. Interest expense decreased primarily because of a $108 million
decrease in the average interest-bearing liabilities between the periods,
largely due to a decrease in the outstanding borrowings and brokered
certificates of deposit. The decrease in borrowings and brokered certificates
of deposit between the periods was the result of using the proceeds from loan
principal payments to fund maturing borrowings and brokered certificates of
deposit. Interest expense also decreased because of the lower interest rates
paid on money market accounts and certificates of deposit due to the low
short-term interest rate environment that continued to exist during the first
nine months of 2013. The average interest rate paid on interest-bearing
liabilities was 0.75% for the first nine months of 2013, a decrease of 45
basis points from the 1.20% average interest rate paid in the first nine
months of 2012.

Provision for Loan Losses

The provision for loan losses was ($4.9) million for the first nine months of
2013, a decrease of $7.4 million, from $2.5 million for the same nine-month
period in 2012. The provision for loan losses decreased in the first nine
months of 2013 primarily because of improving values of the underlying
collateral supporting commercial real estate loans in the first nine months of
2013 when compared to the same period of 2012. The provision also decreased
because of a decrease in the outstanding loan portfolio balances, a decrease
in the reserve percentages on certain risk classifications as a result of an
internal analysis of the loan portfolio, an improvement in the classifications
of certain risk rated loans, and the recoveries received during the first nine
months of 2013 on previously charged off loans.Total non-performing assets
were $31.3 million at September 30, 2013, a decrease of $9.3 million, or
23.0%, from $40.6 million at December 31, 2012.Non-performing loans decreased
$7.6 million and foreclosed and repossessed assets decreased $1.7 million
during the first nine months of 2013. The non-performing loan and foreclosed
and repossessed asset activity for the first nine months of 2013 was as
follows:

(Dollars in thousands)          
Non-performing loans           Foreclosed and repossessed assets   
December 31, 2012      $ 29,975 December 31, 2012                   $ 10,595 
Classified as          4,792    Transferred from non-performing     876      
non-performing                  loans
Charge offs            (2,149)  Other foreclosures/repossessions    687      
Principal payments     (7,802)  Real estate sold                    (3,629)  
received
Classified as accruing (1,583)  Net gain on sale of assets          998      
Transferred to real    (876)    Write downs and payments            (628)    
estate owned
September 30, 2013     $ 22,357 September 30, 2013                  $ 8,899  
                               

A reconciliation of the Company's allowance for loan losses for the nine-month
periods ended September 30, 2013 and 2012 is summarized as follows:



(Dollars in thousands)  2013     2012
Balance at January 1,    $ 21,608 $ 23,888
Provision                (4,850)  2,544
Charge offs:                     
One-to-four family       (200)    0
Consumer                 (475)    (921)
Commercial business      (606)    (1,997)
Commercial real estate  (911)    (5,719)
Total charge offs        (2,192)  (8,637)
Recoveries               1,939    2,667
Balance at September 30, $ 16,505 $ 20,462



Non-Interest Income and Expense

Non-interest income was $5.7 million for the first nine months of 2013, a
decrease of $0.9 million, or 14.1%, from $6.6 million for the same period in
2012. Gain on sale of branch office was $0 for the first nine months of 2013,
compared to the $0.6 million recorded in the same period of 2012 as a result
of the sale of the Toledo, Iowa branch in the first quarter of 2012. Gain on
sales of loans decreased $0.7 million between the periods primarily because of
a decrease in the sales of commercial government guaranteed loans during the
first nine months of 2013 when compared to the same period in 2012. These
decreases in non-interest income were partially offset by an increase of $0.1
million in fees and service charges due to increased overdraft charges, $0.1
million increase in mortgage servicing income as a result of servicing more
loans, and $0.1 million increase in other income as a result of an increase in
the sales of uninsured investment products.

Non-interest expense was $16.7 million for the first nine months of 2013, a
decrease of $1.7 million, or 9.5%, from $18.4 million for the same period in
2012. The gain on real estate owned increased $0.5 million primarily because
of an increase in the gains recognized on the properties sold. Compensation
and benefits expense decreased $0.4 million primarily because of a decrease in
employees between the periods due to certain branch closures and our continued
focus on reducing expenses. Other non-interest expense decreased $0.5 million
because of decreased real estate taxes and other expenses related to other
real estate owned. Deposit insurance costs decreased $0.2 million primarily
because of a decrease in assets between the periods.

Income tax expense was $0.2 million for the first nine months of 2013, an
increase of $0.2 million from the same period of 2012 when no income tax
expense was recorded. The income tax expense that was recorded in the first
nine months of 2013 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.

No regular income tax expense was recorded for the first nine months of 2013
because the Company continued to maintain a valuation reserve against the
entire deferred tax asset balance at September 30, 2013. The Company
originally recorded a deferred tax asset valuation reserve against its entire
deferred tax asset balance in the second quarter of 2010.

Net Income Available to Common Shareholders

The net income available to common shareholders was $7.0 million for the first
nine months of 2013, an increase of $4.6 million from the $2.4 million net
income available to common shareholders in the same period of 2012.The net
income available to common shareholders increased between the periods
primarily because of the increase in net income between the periods. As
discussed previously in this earnings release, the Company has deferred the
last eleven quarterly dividend payments, beginning with the February 15, 2011
dividend payment, on its Preferred Stock. 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 net income
for financial statement purposes to arrive at the net income available to
common shareholders.

Basic earnings per common share was $1.76 and $0.62 for the first nine months
of 2013 and 2012, respectively, and diluted earnings per common share was
$1.65 and $0.61 for the same periods, respectively. The increased spread
between basic and diluted earnings per common share for the nine months ended
September 30, 2013 as compared to the same period of 2012 is primarily due to
increased net income and an increase in the price of our common stock, which
resulted in a larger number of stock options and warrants having a lower
exercise price than the market price of our common stock.

Return on Assets and Equity

Return on average assets (annualized) for the nine-month period ended
September 30, 2013 was 1.96%, compared to 0.74% for the same period in 2012.
Return on average equity (annualized) was 18.55% for the nine-month period
ended September 30, 2013, compared to 8.66% for the same period in 2012.

General Information

HMN Financial, Inc. and Home Federal Savings Bank are headquartered in
Rochester, Minnesota. Home Federal Savings Bank operates eight full service
offices in Minnesota located in Albert Lea, Austin, Eagan, La Crescent,
Rochester (2), Spring Valley and Winona; one full service office in
Marshalltown, Iowa; one loan origination office in Sartell, Minnesota; and two
Private Banking offices in Rochester, Minnesota.

Safe Harbor Statement

This press release may contain forward-looking statements within the meaning
of the safe harbor provisions 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.Examples of forward-looking statements include, but are not limited to,
statements 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
and use of alternate funding sources, including Federal Home Loan Bank
advances; 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"),
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.Important factors that could cause our
actual results and financial condition to differ materially from those
indicated in the forward-looking statements 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 FRB and OCC, respectively; 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 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, cash inflows and deposit outflows, changes
in credit or other risks posed by the Company's loan and investment
portfolios, relative costs associated with alternate funding sources,
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 and the
investment expectations of holders of our capital stock; 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, 2012 and Part II, Item 1A of its Quarterly Reports on Form 10-Q.

All statements in this press release, including forward-looking statements,
speak only as of the date they are made, and we undertake no duty to update
any of the forward-looking statements after the date of this press
release.

(Three pages of selected
consolidated financial information are included with this release.)



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

                                                   September 30, December 31,
(Dollars in thousands)                              2013          2012
                                                   (unaudited)   
Assets                                                           
Cash and cash equivalents                           $ 57,652      83,660
Securities available for sale:                                   
Mortgage-backed and related securities                          
(amortized cost $5,625 and $9,825)                 5,973         10,421
Other marketable securities                                     
(amortized cost $84,800 and $75,759)               83,714        75,470
                                                   89,687        85,891
                                                                
Loans held for sale                                 1,180         2,584
Loans receivable, net                               393,322       454,045
Accrued interest receivable                         1,817         2,018
Real estate, net                                    8,899         10,595
Federal Home Loan Bank stock, at cost               784           4,063
Mortgage servicing rights, net                      1,769         1,732
Premises and equipment, net                         6,726         7,173
Prepaid expenses and other assets                   729           1,566
Total assets                                       $ 562,565     653,327
                                                                
                                                                
Liabilities and Stockholders' Equity                             
Deposits                                            $ 485,921     514,951
Federal Home Loan Bank advances                     0             70,000
Accrued interest payable                            127           247
Customer escrows                                    1,328         830
Accrued expenses and other liabilities              7,813         6,465
Total liabilities                                  495,189       592,493
Commitments and contingencies                                    
Stockholders' equity:                                            
Serial preferred stock: ($.01 par value)                        
authorized 500,000 shares; issued shares 26,000    25,778        25,336
Common stock ($.01 par value):                                  
authorized 16,000,000; issued shares 9,128,662     91            91
Additional paid-in capital                          51,638        51,795
Retained earnings, subject to certain restrictions  54,488        47,004
Accumulated other comprehensive loss                (1,094)       (49)
Unearned employee stock ownership plan shares       (2,852)       (2,997)
Treasury stock, at cost 4,735,589 and 4,705,073     (60,673)      (60,346)
shares
Total stockholders' equity                         67,376        60,834
Total liabilities and stockholders' equity          $ 562,565     653,327




HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)

                                        Three Months Ended Nine Months Ended
                                        September 30,      September 30,
(Dollars in thousands, except per share  2013       2012   2013      2012
data)
Interest income:                                                   
Loans receivable                        $ 5,492    7,208   17,023    22,527
Securities available for sale:                                     
Mortgage-backed and related             66         133     242       490
Other marketable                        156        160     443       601
Cash equivalents                        12         25      80        71
Other                                   3          25      51        89
Total interest income                   5,729      7,551   17,839    23,778
                                                                  
Interest expense:                                                  
Deposits                                404        804     1,426     3,082
Federal Home Loan Bank advances         0          855     1,485     2,544
Total interest expense                  404        1,659   2,911     5,626
Net interest income                    5,325      5,892   14,928    18,152
Provision for loan losses               (4,330)    1,584   (4,850)   2,544
Net interest income after provision for  9,655      4,308   19,778    15,608
loan losses
                                                                  
Non-interest income:                                               
Fees and service charges                929        821     2,601     2,484
Mortgage servicing fees                 267        245     772       713
Gain on sales of loans                  433        940     1,813     2,469
Gain on sale of branch office           0          0       0         552
Other                                   194        110     498       398
Total non-interest income               1,823      2,116   5,684     6,616
                                                                  
Non-interest expense:                                              
Compensation and benefits               3,009      2,955   9,188     9,587
(Gain) loss on real estate owned        (282)      (172)   (607)     (75)
Occupancy                               867        805     2,543     2,526
Deposit insurance                       172        353     680       928
Data processing                         313        333     968       1,006
Other                                   1,207      1,513   3,878     4,416
Total non-interest expense              5,286      5,787   16,650    18,388
Income before income tax expense        6,192      637     8,812     3,836
Income tax expense                      158        0       238       0
Net income                              $ 6,034    637     8,574     3,836
Preferred stock dividends and discount  (523)      (467)   (1,546)   (1,392)
Net income for common shareholders      5,511      170     7,028     2,444
Other comprehensive income (loss), net   473        (77)    (1,045)   (349)
of tax
Comprehensive income attributable to     5,984     93     5,983    2,095
common shareholders
Basic earnings per common share         $ 1.38     0.04    1.76      0.62
Diluted earnings per common share       $ 1.27     0.04    1.65      0.61




HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)

                           Three Months Ended           Nine Months Ended
SELECTED FINANCIAL DATA:    September 30,                September 30,
(dollars in thousands,      2013            2012         2013          2012
except per share data)
I.OPERATING DATA:                                                  
Interest income            $ 5,729         7,551        17,839        23,778
Interest expense           404             1,659        2,911         5,626
Net interest income        5,325           5,892        14,928        18,152
                                                                   
II.AVERAGE BALANCES:                                               
Assets ^(1)                 539,046         643,304      586,235       689,698
Loans receivable, net      399,591         484,403      417,765       517,389
Securities available for    90,499          76,631       91,744        89,466
sale ^(1)
Interest-earning assets     515,153         613,955      561,353       658,337
^(1)
Interest-bearing            468,432         576,919      516,833       624,643
liabilities
Equity ^(1)                 62,719          60,384       61,790        59,205
                                                                   
III. PERFORMANCE RATIOS:                                            
^(1)
Return on average assets    4.44%           0.39%        1.96%         0.74%
(annualized)
Interest rate spread                                                
information:
Average during period      4.07            3.75         3.50          3.62
End of period              3.80            3.52         3.80          3.52
Net interest margin        4.10            3.82         3.56          3.68
Ratio of operating expense
to average total assets     3.89            3.58         3.80          3.56
(annualized)
Return on average equity    38.17           4.20         18.55         8.66
(annualized)
Efficiency                 73.95           72.26        80.78         74.24
                                                                   
                           September 30,   December 31, September 30, 
                           2013            2012         2012          
IV.ASSET QUALITY:                                                  
Total non-performing        $ 31,256        40,570       47,199        
assets
Non-performing assets to    5.56%           6.21%        7.33%         
total assets
Non-performing loans to     5.68            6.60         7.29          
total loans receivable, net
Allowance for loan losses  $ 16,505        21,608       20,462        
Allowance for loan losses   2.93%           3.31%        3.18%         
to total assets
Allowance for loan losses
to total loans receivable,  4.20            4.76         4.31          
net
Allowance for loan losses   73.83           72.09        59.17         
to non-performing loans
                                                                   
V.BOOK VALUE PER COMMON                                            
SHARE:
Book value per common       $ 9.47          8.02         7.83          
share
                                                                   
                           Nine Months     Year         Nine Months   
                           Ended           Ended        Ended         
                           Sept 30, 2013   Dec 31, 2012 Sept 30, 2012 
VI. CAPITAL RATIOS:                                                
Stockholders' equity to
total assets, at end of     11.98%          9.31%        9.30%         
period
Average stockholders'
equity to average assets    10.54           8.81         8.58          
^(1)
Ratio of average
interest-earning assets to  108.61          105.73       105.39        
average interest-bearing
liabilities ^(1)
Tier I or core capital ^(2) 12.71           9.68         9.55          
Risk-based capital to       19.38           15.52        14.61        
risk-weighted assets
                                                                   
                           September 30,   December 31, September 30, 
                           2013            2012         2012          
VII. EMPLOYEE DATA:                                                 
Number of full time         188             194          196           
equivalent employees
                                                                   
(1)Average balances were calculated based upon amortized cost without the
market value impact of ASC 320.

(2)The 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 December31, 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 September 30, 2013.

CONTACT: Bradley Krehbiel
         Chief Executive Officer, President
         HMN Financial, Inc. (507) 252-7169