HMN Financial, Inc. Announces Fourth Quarter Results and Annual Meeting

HMN Financial, Inc. Announces Fourth Quarter Results and Annual Meeting

Fourth Quarter Highlights

  *Net income of $18.1 million compared to net income of $1.5 million for
    fourth quarter of 2012
  *Diluted earnings per common share of $3.93 compared to diluted earnings
    per common share of $0.25 in the fourth quarter of 2012
  *Deferred tax valuation reserve eliminated, resulting in $14.7 million
    decrease in income tax expense from the fourth quarter of 2012
  *Provision for loan losses of ($3.0 million), down $3.0 million from fourth
    quarter of 2012
  *Net interest income of $4.8 million, down $0.8 million from fourth quarter
    of 2012
  *Non-performing assets of $24.4 million, down $6.9 million from September
    30, 2013

Annual Highlights

  *Net income of $26.7 million compared to net income of $5.3 million for
    2012
  *Diluted earnings per common share of $5.71 compared to diluted earnings
    per common share of $0.86 for 2012
  *Deferred tax valuation reserve eliminated, resulting in $14.5 million
    decrease in income tax expense from 2012
  *Provision for loan losses of ($7.9 million), down $10.4 million from 2012
  *Gains on real estate owned of $0.8 million, up $1.0 million from 2012
  *Net interest income of $19.7 million, down $4.0 million from 2012
  *Non-performing assets of $24.4 million, down $16.2 million from December
    31, 2012

INCOME SUMMARY                               Three Months Ended Year Ended
                                            December 31,       December 31,
(dollars in thousands, except per share      2013       2012    2013    2012
amounts)
Net income                                   $18,096    1,485   $26,670 5,321
Net income available to common stockholders  17,574     1,016   24,602  3,460
Diluted earnings per common share            3.93       0.25    5.71    0.86
Return on average assets                     12.23%     0.93%   4.55%   0.79%
Return on average common equity              106.72%    9.77%   42.22%  8.94%
Book value per common share                  $13.49     8.02    $13.49  8.02

ROCHESTER, Minn., Jan. 28, 2014 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN
or the Company) (Nasdaq:HMNF), the $649 million holding company for Home
Federal Savings Bank (the Bank), today reported net income of $18.1 million
for the fourth quarter of 2013, an improvement of $16.6 million compared to
net income of $1.5 million for the fourth quarter of 2012.Net income
available to common shareholders was $17.6 million for the fourth quarter of
2013, an improvement of $16.6 million from the net income available to common
shareholders of $1.0 million for the fourth quarter of 2012.Diluted earnings
per common share for the fourth quarter of 2013 was $3.93, an improvement of
$3.68 from the diluted earnings per common share of $0.25 for the fourth
quarter of 2012.The improvement in net income in the fourth quarter of 2013
is due primarily to a $14.7 million decrease in income tax expense as a result
of eliminating the valuation reserve against the Company's deferred tax asset,
a $3.0 million decrease in the provision for loan losses, and a $0.5 million
increase on the gains recognized on the sale of real estate owned.These
improvements to net income were partially offset by a $0.8 million decrease in
net interest income due primarily to a decrease in interest earning assets
between the periods and a $0.8 million decrease in the gain on sale of loans
due to a decrease in mortgage loan originations and sales.
President's Statement
"The elimination of the deferred tax asset valuation reserve in the fourth
quarter is a direct result of our improved financial results," said Brad
Krehbiel, President of HMN. "We are also encouraged by the results of our
ongoing efforts to improve the credit quality in our commercial loan portfolio
as evidenced by the continued positive trend of declining non-performing
assets and the reduction in the required provision for loan losses. We intend
to continue to focus our efforts on further reducing these non-performing
assets while, at the same time, improving the financial performance of our
core banking operations."

Fourth Quarter Results

Net Interest Income

Net interest income was $4.8 million for the fourth quarter of 2013, a
decrease of $0.7 million, or 13.7%, compared to $5.5 million for the fourth
quarter of 2012.Interest income was $5.1 million for the fourth quarter of
2013, a decrease of $1.9 million, or 26.9%, from $7.0 million for the same
period in 2012.Interest income decreased between the periods primarily
because of a $44 million decrease in the average interest-earning assets and
also because of a decrease in the average yields between the periods.Average
interest-earning assets decreased between the periods primarily because of a
$61 million decrease in the commercial loan portfolio, which occurred because
loan payoffs exceeded production primarily as a result of the Company's focus
on improving credit quality, managing net interest margin and improving
capital ratios.The average yield earned on interest-earning assets was 3.64%
for the fourth quarter of 2013, a decrease of 98 basis points from the 4.62%
average yield for the fourth quarter of 2012.The decrease in the average
yield is due to the continued low interest rate environment that existed
during the fourth quarter of 2013 and also because of the $44 million increase
in the average assets that were held in lower earning cash and investments in
the fourth quarter of 2013 when compared to the same period of 2012.

Interest expense was $0.4 million for the fourth quarter of 2013, a decrease
of $1.1 million, or 75.0%, compared to $1.5 million for the fourth quarter of
2012.Interest expense decreased primarily because of a $60 million decrease
in the average interest-bearing liabilities between the periods.The decrease
in the average interest-bearing liabilities is primarily the result of a
decrease in the average outstanding retail and brokered certificates of
deposits and Federal Home Loan Bank advances between the periods.The decrease
in average balances of certificates of deposits and advances between the
periods was the result of using the proceeds from loan principal payments to
fund the maturing certificates of deposits and advances.The $133 million
decrease in average balances of certificates of deposits and advances was
partially offset by the $74 million increase in the average balance of retail
and commercial checking and money market accounts between the
periods.Interest expense also decreased because of the lower interest rates
paid on deposits as a result of the low interest rate environment that
continued to exist during the fourth quarter of 2013.The average interest
rate paid on interest-bearing liabilities was 0.30% for the fourth quarter of
2013, a decrease of 76 basis points from the 1.06% average interest rate paid
in the fourth quarter of 2012.Net interest margin (net interest income
divided by average interest-earning assets) for the fourth quarter of 2013 was
3.37%, a decrease of 26 basis points, compared to 3.63% for the fourth quarter
of 2012.

Provision for Loan Losses

The provision for loan losses was ($3.0 million) for the fourth quarter of
2013, a decrease of $3.0 million, from $0 for the fourth quarter of 2012.The
provision decreased in the fourth quarter of 2013 primarily because of
improving values of the underlying collateral supporting commercial real
estate loans in the fourth quarter of 2013 when compared to the fourth quarter
of 2012.The provision also decreased because of the $80 million decrease in
the loan portfolio between the periods.Total non-performing assets were $24.4
million at December 31, 2013, a decrease of $6.9 million, or 22.0%, from $31.3
million at September 30, 2013.Non-performing loans decreased $4.9 million and
foreclosed and repossessed assets decreased $2.0 million during the fourth
quarter of 2013.The non-performing loan and foreclosed and repossessed asset
activity for the fourth quarter of 2013 was as follows:

(Dollars in thousands)                                                    
Non-performing loans                Foreclosed and repossessed    
                                     assets
September 30, 2013           $22,357 September 30, 2013            $8,899
Classified as non-performing 1,503   Transferred from              0
                                     non-performing loans
Charge offs                  (2,854) Real estate sold              (2,198)
Principal payments received  (3,240) Net gain on sale of assets    589
Classified as accruing       (270)   Write downs and payments      (392)
Transferred to real estate   0       December 31, 2013             $6,898
owned
December 31, 2013            $17,496                              
                                                                          

The decrease in non-performing loans relates primarily to charge offs and
principal payments received on non-performing loans during the fourth quarter
of 2013.Of the $2.9 million in charge offs, $2.8 million relates to the
charge off of previously established reserves on a single family development
loan. Of the $3.2 million in principal payments received on non-performing
loans in the fourth quarter of 2013, $2.7 million related to payments received
from the proceeds from the sale of the property securing the non-performing
loans and $0.5 million was the result of a loan being refinanced with another
lender.

A reconciliation of the allowance for loan losses for the fourth quarters of
2013 and 2012 is summarized as follows:

                                          
(Dollars in thousands)  2013     2012
Balance at September 30, $16,505  $20,462
Provision                (3,031) 0
Charge offs:                     
Commercial real estate   (2,800)  0
Commercial business     (45)     (468)
Consumer                 (9)      (150)
One-to-four family       0        (63)
Recoveries               781      1,827
Balance at December 31,  $11,401  $21,608
                                
General allowance        $7,623   $16,795
Specific allowance       3,778    4,813
                        $11,401  $21,608
                                          

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


                               December 31,   September 30,   December 31,
(Dollars in thousands)          2013           2013            2012
Non‑Performing Loans:                                         
One‑to‑four family real estate   $1,602         $1,626          $2,492
Commercial real estate           14,549         19,578          25,543
Consumer                         737            442             300
Commercial business              608            711             1,640
Total                            17,496         22,357          29,975
                                                             
Foreclosed and Repossessed                                    
Assets:
One‑to‑four family real estate   0              1,082           1,595
Commercial real estate           6,898          7,817           9,000
Total non‑performing assets      $24,394        $31,256         $40,570
Total as a percentage of total   3.76%          5.56%           6.21%
assets
Total non‑performing loans       $17,496        $22,357         $29,975
Total as a percentage of total   4.55%          5.68%           6.60%
loans receivable, net
Allowance for loan losses to     65.17%         73.83%          72.09%
non-performing loans
                                                             
Delinquency Data:                                             
Delinquencies ^(1)                                            
30+ days                         $6,370         $2,516          $2,739
90+ days ^(2)                    0              0               0
Delinquencies as a percentage of                              
loan and lease portfolio ^(1)
30+ days                         1.33%          0.53%           0.57%
90+ days                         0.00%          0.00%           0.00%

^(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 total
unless they are well secured and in the process of collection.

The following table summarizes the number 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
(Dollars in                    Amount of              Amount of              Amount of
thousands)                     Loans at                Loans at                Loans at
Property Type     # of          December  # of          September # of          December
                  relationships 31,       relationships 30,       relationships 31,
                                2013                    2013                    2012
Developments/land 9             $14,549   8             $19,413   9             $24,339
Retail            0             0         2             165       2             386
Other buildings   0             0         0             0         4             818
                 9             $14,549   10            $19,578   15            $25,543

The $5.0 million decrease in the non-performing commercial real estate loans
from September 30, 2013 is due primarily to a $2.8 million charge off on loans
secured by a single family development and additional principal payments
received on various other non-performing commercial real estate loans during
the quarter.

Non-Interest Income and Expense

Non-interest income was $1.6 million for the fourth quarter of 2013, a
decrease of $0.8 million, or 31.4%, from $2.4 million for the same period in
2012.Gain on sales of loans decreased $0.8 million between the periods
primarily because of a decrease in single family loan originations and
sales.Fees and service charges increased $0.1 million primarily because of an
increase in overdraft fees between the periods. 

Non-interest expense was $6.0 million for the fourth quarter of 2013, a
decrease of $0.3 million, or 4.9%, from $6.3 million for the same period of
2012.Gains on real estate owned increased $0.5 million from the fourth
quarter of 2012 primarily because there were more gains realized on the sale
of real estate and fewer write downs in the value of the real estate owned in
the fourth quarter of 2013 when compared to the same period in 2012.Deposit
insurance expense decreased $0.1 million because of a decrease in assets and
insurance rates between the periods. Data processing expense decreased $0.1
million due to a decrease in hardware and software depreciation expense.Other
non-interest expenses decreased $0.2 million between the periods primarily
because of a decrease in legal and other professional services. These
decreases in noninterest expense were partially offset by a $0.6 million
increase in compensation expense between the periods primarily because of an
increase in employee incentives and pension benefit costs.

Income tax benefit was $14.6 million in the fourth quarter of 2013, an
increase of $14.7 million from $0.1 million in income tax expense for the same
period in 2012.In the second quarter of 2010, the Company recorded a deferred
tax asset valuation reserve against its entire deferred tax asset balance and
the Company continued to maintain a valuation reserve against the entire
deferred tax asset balance at December 31, 2012.Since the valuation reserve
was established against the entire deferred tax asset balance, no regular
income tax expense was recorded for the fourth quarter of 2012. The income tax
expense that was recorded in the fourth quarter of 2012 relates to alternative
minimum tax amounts that were 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.In the fourth quarter of 2013, the
valuation reserve against the deferred tax asset was eliminated which resulted
in a $14.6 million income tax benefit. 

Net Income Available to Common Shareholders

The net income available to common shareholders was $17.6 million for the
fourth quarter of 2013, an improvement of $16.6 million from the $1.0 million
net income available to common shareholders in the fourth quarter of 2012.The
net income available to common shareholders increased primarily because of the
increase in the net income between the periods for the reasons described
above.Beginning with the February 15, 2011 dividend payment, the Company has
deferred the last twelve quarterly dividend payments on its Fixed Rate, Series
A, Cumulative Perpetual Preferred Stock, which 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.

Return on Assets and Equity

The return on average assets for the fourth quarter of 2013 was 12.23%,
compared to a 0.93% return on average assets for the fourth quarter of
2012.Return on average equity was 106.72% for the fourth quarter of 2013,
compared to a 9.77% return on average equity for the same period of 2012.Book
value per common share at December 31, 2013 was $13.49, compared to $8.02 at
December 31, 2012.

Annual Results

Net Income

Net income was $26.7 million for 2013, an improvement of $21.4 million, from
$5.3 million for 2012.Net income available to common shareholders was $24.6
million for the year ended December 31, 2013, an improvement of $21.1 million,
from net income available to common shareholders of $3.5 million for
2012.Diluted earnings per common share for the year ended December 31, 2013
was $5.71, an improvement of $4.85 from $0.86 diluted earnings per common
share for the year ended December 31, 2012.The improvement in net income in
2013 is due primarily to a $14.5 million decrease in income tax expense as a
result of eliminating the valuation reserve against the Company's deferred tax
asset, a $10.4 million decrease in the provision for loan losses, a $1.0
million increase on the gains recognized on the sale of real estate owned, and
a $0.7 million decrease in other non-interest expenses primarily related to
legal and professional services.These improvements to net income were
partially offset by a $4.0 million decrease in net interest income due
primarily to a decrease in interest earning assets between the periods and a
$1.5 million decrease in the gain on sale of loans due to a decrease in
mortgage loan originations and sales.
Net Interest Income

Net interest income was $19.7 million for 2013, a decrease of $4.0 million, or
16.8%, from $23.7 million for 2012.Interest income was $23.0 million for
2013, a decrease of $7.8 million, or 25.4%, from $30.8 million for 2012.
Interest income decreased between the periods primarily because of an $84
million decrease in the average interest-earning assets and also because of a
decrease in the average yields between the periods.Average interest-earning
assets decreased between the periods primarily because of a $69 million
decrease in the commercial loan portfolio, which occurred because loan payoffs
exceeded production primarily as a result of the Company's focus on improving
credit quality, managing net interest margin and improving capital ratios.The
average yield earned on interest-earning assets was 4.09% for the year ended
December 31, 2013, a decrease of 69 basis points from the 4.78% average yield
for 2012.The decrease in the average yield is due to the continued low
interest rate environment that existed during 2013 and also because of the $15
million increase in the average assets that were held in lower earning cash
and investments in 2013 when compared to the same period of 2012.

Interest expense was $3.3 million for the year ended December 31, 2013, a
decrease of $3.8 million, or 53.9%, from $7.1 million for 2012.Interest
expense decreased primarily because of a $96 million decrease in the average
interest-bearing liabilities between the periods.The decrease in the average
interest-bearing liabilities is primarily the result of a decrease in the
average outstanding retail and brokered certificates of deposits and Federal
Home Loan Bank advances between the periods.The decrease in certificates of
deposits and advances between the periods was the result of using the proceeds
from loan principal payments to fund the maturing certificates of deposits and
advances.The $126 million decrease in average balances of certificates of
deposits and advances was partially offset by the $30 million increase in the
average balance of retail and commercial checking and money market accounts
between the periods.Interest expense also decreased because of the lower
interest rates paid on deposits as a result of the low interest rate
environment that continued to exist during 2013.The average interest rate
paid on interest-bearing liabilities was 0.64% for the year ended December 31,
2013, a decrease of 53 basis points from the 1.17% average interest rate paid
for 2012.Net interest margin (net interest income divided by average
interest-earning assets) for the year ended December 31, 2013 was 3.51%, a
decrease of 16 basis points, compared to 3.67% for 2012.

Provision for Loan Losses

The provision for loan losses was ($7.9 million) for the year ended December
31, 2013, a decrease of $10.4 million, from $2.5 million for the year ended
December 31, 2012.The provision decreased between the periods primarily
because of improving values of the underlying collateral supporting commercial
real estate loans in 2013 when compared to 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 2013 on
previously charged off loans.Total non-performing assets were $24.4 million
at December 31, 2013, a decrease of $16.2 million, or 39.9%, from $40.6
million at December 31, 2012.Non-performing loans decreased $12.5 million and
foreclosed and repossessed assets decreased $3.7 million during 2013.The
non-performing loan and foreclosed and repossessed asset activity for 2013 was
as follows:

(Dollars in thousands)          
Non-performing loans           Foreclosed and repossessed asset       
                                activity
December 31, 2012      $29,975  December 31, 2012                      $10,595
Classified as          6,295    Transferred from non-performing loans  876
non-performing
Charge offs            (5,002)  Other foreclosures/repossessions       687
Principal payments     (11,043) Real estate sold                       (5,827)
received
Classified as accruing (1,853)  Net gain on sale of assets             1,587
Transferred to real    (876)    Write downs                            (1,020)
estate owned
December 31, 2013      $17,496  December 31, 2013                      $6,898
                               

A reconciliation of the allowance for loan losses for 2013 and 2012 is
summarized as follows:


(in thousands)         2013    2012
Balance at January 1,   $21,608 $23,888
Provision               (7,881) 2,544
Charge offs:                   
Commercial              (651)   (2,464)
Commercial real estate  (3,711) (5,719)
Consumer                (484)   (1,071)
Single family mortgage (200)   (63)
Recoveries              2,720   4,493
Balance at December 31, $11,401 $21,608
                              
General allowance       $7,623  $16,795
Specific allowance      3,778   4,813
                       $11,401 $21,608


Non-Interest Income and Expense

Non-interest income was $7.3 million for the year ended December 31, 2013, a
decrease of $1.7 million, or 18.7%, from $9.0 million for the year ended
December 31, 2012.Gains on sales of loans decreased $1.5 million, or 41.2%,
between the periods primarily because of a decrease in single family loan
originations and sales.Gain on sale of branch office was $0 for 2013,
compared to $0.6 million in 2012 as a result of the sale of the Toledo, Iowa
branch in the first quarter of 2012.Fees and service charges increased $0.2
million primarily because of an increase in overdraft charges between the
periods.Other non-interest income increased $0.1 million due to an increase
in the sale of non-insured investment products.Mortgage servicing fees
increased $0.1 million as a result of servicing more single family loans. 

Non-interest expense was $22.6 million for the year ended December 31, 2013, a
decrease of $2.1 million, or 8.3%, from $24.7 million for the same period in
2012.Gains on real estate owned increased $1.0 million between the periods
primarily because there were more gains realized on the sale of real estate
and fewer write downs in the value of the real estate owned in 2013 when
compared to 2012.Deposit insurance expense decreased $0.4 million because of
a decrease in assets and insurance rates between the periods.Data processing
expense decreased $0.2 million due to a decrease in hardware and software
depreciation expense.Other non-interest expenses decreased $0.7 million
between the periods primarily because of a decrease in legal and other
professional services.These decreases in noninterest expense were partially
offset by a $0.2 million increase in compensation expense between the periods
primarily because of an increase in employee incentives and pension benefit
costs.

Income tax benefit was $14.4 million in 2013, an increase of $14.5 million
from $0.1 million in income tax expense for 2012.In the second quarter of
2010, the Company recorded a deferred tax asset valuation reserve against its
entire deferred tax asset balance and the Company continued to maintain a
valuation reserve against the entire deferred tax asset balance at December
31, 2012.Since the valuation reserve was established against the entire
deferred tax asset balance, no regular income tax expense was recorded for
2012. The income tax expense that was recorded in 2012 relates to alternative
minimum tax amounts that were 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.In the fourth quarter of 2013, the
valuation reserve against the deferred tax asset was eliminated which resulted
in a $14.4 million income tax benefit for the year ended December 31, 2013.


Net Income Available to Common Shareholders

Net income available to common shareholders was $24.6 million for the year
ended December 31, 2013, an improvement of $21.1 million, from the net income
available to common shareholders of $3.5 million for 2012.Net income
available to common shareholders increased primarily because of the increase
in net income between the periods for the reasons described above.Beginning
with the February 15, 2011 dividend payment, the Company has deferred the last
twelve quarterly dividend payments, on its Preferred Stock, which was
originally issued to the United States Treasury Department as part of the TARP
Capital Purchase Program.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.

Return on Assets and Equity

The return on average assets was 4.55% for 2013, compared to a 0.79% return on
average assets for 2012.Return on average common equity was 42.22% for 2013,
compared to a 8.94% return on average common equity for 2012.

Annual Meeting Announcement

HMN announced that its annual meeting will be held at the Rochester Golf and
Country Club, located at 3100 West Country Club Road, Rochester, Minnesota on
Tuesday, April 22, 2014, at 10:00 a.m. local time. The Company's common
stockholders at the close of business on February 26, 2014, the record date,
will be entitled to vote at the annual meeting.

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
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
Office of the Comptroller of the Currency ("the OCC") and the Federal Reserve
Board ("the 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

                                                    December 31, December 31,
(Dollars in thousands)                               2013         2012
                                                    (unaudited)  
Assets                                                           
Cash and cash equivalents                            $120,686     83,660
Securities available for sale:                                   
Mortgage-backed and related securities                           
(amortized cost $4,899 and $9,825)                   5,213        10,421
Other marketable securities                                      
(amortized cost $103,788 and $75,759)                102,743      75,470
                                                    107,956      85,891
                                                                
Loans held for sale                                  1,502        2,584
Loans receivable, net                                384,615      454,045
Accrued interest receivable                          1,953        2,018
Real estate, net                                     6,898        10,595
Federal Home Loan Bank stock, at cost                784          4,063
Mortgage servicing rights, net                       1,708        1,732
Premises and equipment, net                          6,711        7,173
Prepaid expenses and other assets                    698          1,566
Deferred tax asset, net                              15,111       0
Total assets                                         $648,622     653,327
                                                                
                                                                
Liabilities and Stockholders' Equity                             
Deposits                                             $553,930     514,951
Federal Home Loan Bank advances                      0            70,000
Accrued interest payable                             146          247
Customer escrows                                     614          830
Accrued expenses and other liabilities               8,257        6,465
Total liabilities                                    562,947      592,493
Commitments and contingencies                                    
Stockholders' equity:                                            
Serial-preferred stock: ($.01 par value)                         
Authorized 500,000 shares; issued shares 26,000      26,000       25,336
Common stock ($.01 par value):                                   
Authorized 16,000,000; issued shares 9,128,662       91           91
Additional paid-in capital                           51,175       51,795
Retained earnings, subject to certain restrictions   72,211       47,004
Accumulated other comprehensive loss                 (674)        (49)
Unearned employee stock ownership plan shares        (2,804)      (2,997)
Treasury stock, at cost 4,704,313 and 4,705,073      (60,324)     (60,346)
shares
Total stockholders' equity                           85,675       60,834
Total liabilities and stockholders' equity           $648,622     653,327



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

                                 Three Months Ended       Year Ended
                                 December 31,             December 31,
(Dollars in thousands, except per 2013         2012        2013        2012
share data)
                                 (unaudited) (unaudited) (unaudited) 
Interest income:                                                    
Loans receivable                  $4,864       6,730       21,887      29,257
Securities available for sale:                                      
Mortgage-backed and related       58           114         300         604
Other marketable                  171          136         614         737
Cash equivalents                  49           30          129         101
Other                             2            28          53          117
Total interest income             5,144        7,038       22,983      30,816
                                                                   
Interest expense:                                                   
Deposits                          378          659         1,804       3,741
Federal Home Loan Bank advances   0            854         1,485       3,398
Total interest expense            378          1,513       3,289       7,139
Net interest income               4,766        5,525       19,694      23,677
Provision for loan losses         (3,031)      0           (7,881)     2,544
Net interest income after         7,797        5,525       27,575      21,133
provision for loan losses
                                                                   
Non-interest income:                                                
Fees and service charges          912          841         3,513       3,325
Mortgage servicing fees           257          251         1,029       964
Gain on sales of loans            289          1,105       2,102       3,574
Gain on sale of branch office     0            0           0           552
Other                             170          177         668         575
Total non-interest income         1,628        2,374       7,312       8,990
                                                                   
Non-interest expense:                                               
Compensation and benefits         3,492        2,865       12,680      12,452
(Gains) losses on real estate     (223)        256         (830)       181
owned
Occupancy                         795          832         3,338       3,358
Deposit insurance                 188          327         868         1,255
Data processing                   209          326         1,177       1,332
Other                             1,512        1,676       5,390       6,092
Total non-interest expense        5,973        6,282       22,623      24,670
Income before income tax expense  3,452        1,617       12,264      5,453
Income tax (benefit) expense      (14,644)     132         (14,406)    132
Net income                        18,096       1,485       26,670      5,321
Preferred stock dividends and     (522)        (469)       (2,068)     (1,861)
discount
Net income available to           $17,574      1,016       24,602      3,460
commonshareholders
Other comprehensive income        420          (171)       (625)       (520)
(loss), net of tax
Comprehensive income attributable $17,994      845         23,977      2,940
to common shareholders
Basic earnings per common share   $4.37        0.26        6.15        0.88
Diluted earnings per common share $3.93        0.25        5.71        0.86


                                                                  
HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
                            Three Months Ended             Year Ended
SELECTED FINANCIAL DATA:     December 31,                   December 31,
(Dollars in thousands,       2013            2012           2013      2012
except per share data)
I.OPERATING DATA:                                                 
Interest income              $5,144          7,038          22,983    30,816
Interest expense             378             1,513          3,289     7,139
Net interest income          4,766           5,525          19,694    23,677
                                                                  
II.AVERAGE BALANCES:                                              
Assets ^(1)                  586,875         633,800        586,396   675,648
Loans receivable, net        380,546         462,803        408,384   503,668
Mortgage-backed and related  96,389          82,057         92,915    87,604
securities ^(1)
Interest-earning assets ^(1) 561,391         605,766        561,363   645,122
Interest-bearing liabilities 507,474         567,018        514,474   610,158
Equity ^(1)                  67,270          60,457         63,171    59,519
                                                                  
III. PERFORMANCE RATIOS:                                           
^(1)
Return on average assets     12.23%          0.93%          4.55%     0.79%
(annualized)
Interest rate spread                                               
information:
Average during period        3.34            3.56           3.45      3.61
End of period                3.16            3.49           3.16      3.49
Net interest margin          3.37            3.63           3.51      3.67
Ratio of operating expense
to average total assets      4.04            3.94           3.86      3.65
(annualized)
Return on average common     106.72          9.77           42.22     8.94
equity (annualized)
Efficiency                   93.42           79.53          83.77     75.52
                            December 31,    December 31,        
IV.ASSET QUALITY:           2013            2012                
Total non-performing assets  $24,394         40,570              
Non-performing assets to     3.76%           6.21%               
total assets
Non-performing loans to      4.55%           6.60%               
total loans receivable, net
Allowance for loan losses    $11,401         21,608              
Allowance for loan losses to 1.76%           3.31%               
total assets
Allowance for loan losses to 2.96            4.76                
total loans receivable, net
Allowance for loan losses to 65.17           72.09               
non-performing loans
                                                              
V.BOOK VALUE PER COMMON                                       
SHARE:
Book value per common share  $13.49          8.02                
                            Year Ended      Year Ended          
VI. CAPITAL RATIOS:         Dec 31, 2013    Dec 31, 2012        
Stockholders' equity to
total assets, at end of      13.21%          9.31%               
period
Average stockholders' equity 10.77           8.81                
to average assets ^(1)
Ratio of average
interest-earning assets to   109.11          105.73              
average interest-bearing
liabilities ^(1)
Home Federal Savings Bank                                      
regulatory capital ratios:
Tier 1 or core capital^(2)   12.22%          9.68%               
Risk-based capital           20.78%          15.52%              
                            December 31,    December 31,        
                            2013            2012                
VII. EMPLOYEE DATA:                                            
Number of full time          185             194                 
equivalent employees

(1)Average balances were calculated based upon amortized cost without the
market value impact of ASC 320.
(2)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 December 31, 2013.

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