HMN Financial : Announces Fourth Quarter Results, January 25, 2017

1016 Civic Center Drive NW  Rochester, MN 55901  Phone [phone]  Fax [phone]

NEWS RELEASE CONTACT: Bradley Krehbiel Chief Executive Officer, President HMN Financial, Inc. [phone] FOR IMMEDIATE RELEASE HMN FINANCIAL, INC. ANNOUNCES FOURTH QUARTER RESULTS

Fourth Quarter Highlights

• Net income of $1.7 million, up $0.6 million from $1.1 million for fourth quarter of 2015
• Diluted earnings per share of $0.35, up $0.12 from $0.23 for fourth quarter of 2015
• Net interest income of $6.3 million, up $0.6 million from $5.7 million for fourth quarter of 2015
• Non-performing assets of $3.9 million, down $1.9 million, or 32.9%, from September 30, 2016

  Annual Highlights

• Net income of $6.4 million, up $3.4 million from $3.0 million for 2015
• Diluted earnings per share of $1.34, up $0.73 from $0.61 for 2015
• Net interest income of $25.8 million, up $5.9 million from $19.9 million for 2015
• Non-performing assets of $3.9 million, down $2.3 million from December 31, 2015
• Total assets of $682 million, up $39 million from December 31, 2015

Net Income Summary Three Months Ended Year Ended

December 31, December 31, (Dollars in thousands, except per share amounts) 2016 2015 2016 2015 Net income $ 1,684 1,090 $ 6,350 2,956

Net income available to common stockholders 1,684 1,090 6,350 2,848

Diluted earnings per share 0.35 0.23 1.34 0.61

Return on average assets (annualized) 0.99 % 0.69 % 0.96 % 0.50 %

Return on average equity (annualized) 8.93 % 6.19 % 8.71 % 4.27 %

Book value per share $ 16.91 15.54 $ 16.91 15.54

ROCHESTER, MINNESOTA, January 25, 2017 - HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $682 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $1.7 million for the fourth quarter of 2016, an increase of $0.6 million compared to net income of $1.1 million for the fourth quarter of 2015. Diluted earnings per share for the fourth quarter of 2016 was $0.35, an increase of $0.12 from the diluted earnings per share of $0.23 for the fourth quarter of 2015. The increase in net income for the fourth quarter of 2016 is due primarily to a $0.6 million increase in interest income as a result of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held between the periods. The provision for loan losses decreased $0.5 million between the periods due to improvements in the credit quality of the commercial loan portfolio. These increases in income were partially offset by a $0.5 million increase in income tax expense due to the increase in pre-tax income in the fourth quarter of 2016 when compared to the same period of 2015.

President's Statement

"We are pleased to report the continued improvement in both the credit quality of our loan portfolio and net income in the fourth quarter of 2016 when compared to the same period of 2015," said Bradley Krehbiel, President and Chief Executive Officer of HMN. "The increase in net income between the periods is the result of increasing interest income and managing expenses in order to improve our financial results. We will continue to focus our efforts on prudently growing our core deposit and loan balances in order to further enhance the financial performance of our core banking operations."

Fourth Quarter Results

Net Interest Income

Net interest income was $6.3 million for the fourth quarter of 2016, an increase of $0.6 million, or 10.1%, from $5.7 million for the fourth quarter of 2015. Interest income was $6.7 million for the fourth quarter of 2016, an increase of $0.6 million, or 9.9%, from $6.1 million for the same period in 2015. Interest income increased between the periods primarily because of an increase in the average interest-earning assets and a change in the composition of the average interest-earning assets held, which resulted in an increase in the average yields earned between the periods. While the average interest-earning assets increased $47.5 million between the periods, the average interest-earning assets held in higher yielding loans increased

$91.7 million and the amount of average interest-earning assets held in lower yielding cash and investments decreased $44.2 million between the periods. The yield on average interest-earning assets was also enhanced $0.2 million, or 6 basis points, due to loan prepayment penalties, yield adjustments recognized on purchased loans, and interest payments received on non-accruing and previously charged off loans in the fourth quarter of 2016. The increase in the average outstanding loans between the periods was primarily the result of an increase in the commercial loan portfolio, which occurred because of an increase in loan originations and a reduction in loan payoffs between the periods. Average outstanding loans also increased

$6.1 million between the periods as a result of an acquisition that occurred in the second quarter of 2016. The average yield earned on interest-earning assets was 4.15% for the fourth quarter of 2016, an increase of 9 basis points from 4.06% for the fourth quarter of 2015.

Interest expense was $0.4 million for the fourth quarter of 2016, the same as the fourth quarter of 2015. The average rate paid on interest-bearing liabilities also remained the same between the periods. While the average interest-bearing liabilities increased $35.7 million between the periods, the average amount held in lower rate checking and money market accounts increased $35.3 million and the average amount held in higher rate certificates of deposits and other borrowings increased $0.4 million between the periods. The increase in the average outstanding deposits between the periods was primarily the result of organic deposit growth. The average outstanding deposits also increased $15.2 million as a result of an acquisition that occurred in the second quarter of 2016. The average interest rate paid on interest-bearing liabilities was 0.28% for both the fourth quarter of 2016 and the fourth quarter of 2015. Net interest margin (net interest income divided by average interest-earning assets) for the fourth quarter of 2016 was 3.89%, an increase of 9 basis points, compared to 3.80% for the fourth quarter of 2015.

A summary of the Company's net interest margin for the three month periods ended December 31, 2016 and 2015 is as follows:

For the three-month period ended

December 31, 2016 December 31, 2015

(Dollars in thousands)

Interest-earning assets:

Average Outstanding Balance

Interest Earned/ Paid

Yield/ Rate

Average Outstanding Balance

Interest Earned/ Paid

Yield/ Rate

Securities available for sale .............................	$ 76,912	281	1.45 %	$ 116,953	455	1.54 %
Loans held for sale……………………………	2,783	27	3.86	2,574	27	4.14
Mortgage loans, net..........................................	108,133	1,072	3.94	91,170	955	4.16
Commercial loans, net .....................................	360,355	4,406	4.86	296,854	3,789	5.06
Consumer loans, net.........................................	73,969	900	4.84	62,933	866	5.46
Cash equivalents ..............................................	20,908	23	0.44	25,115	16	0.25
Federal Home Loan Bank stock ......................	806	2	0.86	734	1	0.56
Total interest-earning assets .....................................	$ 643,866	6,711	4.15	$ 596,333	6,109	4.06

Interest-bearing liabilities:

NOW accounts ................................................. $ 89,864 14 0.06 $ 79,096 6 0.03

Savings accounts.............................................. 72,896 15 0.08 65,859 15 0.09

Money market accounts................................... 170,475 99 0.23 161,923 86 0.21

Certificates ....................................................... 101,889 147 0.57 100,512 122 0.48

Advances and other borrowings ...................... 9,511 145 6.05 10,888 164 5.98

Total interest-bearing liabilities................................ $ 444,635 $ 418,278

Non-interest checking ...................................... 144,626 135,666

Other non-interest bearing deposits................. 1,206 808

Total interest-bearing liabilities and non-interest

bearing deposits .....................................................	$ 590,467	420	0.28	$ 554,752	393	0.28
Net interest income ...................................................	6,291	5,716
Net interest rate spread .............................................	3.87 %	3.78 %
Net interest margin....................................................	3.89 %	3.80 %

Provision for Loan Losses

The provision for loan losses was ($0.4) million for the fourth quarter of 2016, a decrease of $0.5 million, compared to $0.1 million for the fourth quarter of 2015. The provision for loan losses decreased between the periods primarily because of the decrease in reserves required on certain commercial loans due to credit quality improvements in the fourth quarter of 2016 when compared to the same period of 2015. Total non-performing assets were $3.9 million at December 31, 2016, a decrease of $1.9 million, or 32.9%, from $5.8 million at September 30, 2016. Non-performing loans decreased $1.7 million and foreclosed and repossessed assets decreased $0.2 million during the fourth quarter of 2016.

A reconciliation of the allowance for loan losses for the fourth quarters of 2016 and 2015 is summarized as follows:

(Dollars in thousands)	2016	2015
Balance at September 30,	$ 10,306	$ 8,786
Provision Charge offs: Commercial business	(374) (80)	75 (62)
Consumer	(79)	(40)
Recoveries	130	950
Balance at December 31,	$ 9,903	$ 9,709
Allocated to: General allowance	$ 8,915	$ 8,700
Specific allowance	988	1,009
$ 9,903	$ 9,709

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, 2015.

(Dollars in thousands)	December 31, 2016	September 30, 2016	December 31, 2015
Non-Performing Loans:
One-to-four family real estate	$ 916	$ 923	$ 1,655
Commercial real estate	1,384	2,847	1,694
Consumer	630	815	786
Commercial business	343	412	46
Total	3,273	4,997	4,181
Foreclosed and Repossessed Assets:
One-to-four family real estate	0	0	48
Commercial real estate	611	815	1,997
Consumer	16	0	0
Total non-performing assets	$ 3,900	$ 5,812	$ 6,226
Total as a percentage of total assets	0.57	%	0.85	%	0.97	%
Total non-performing loans	$ 3,273	$ 4,997	$ 4,181
Total as a percentage of total loans receivable, net	0.59	%	0.92	%	0.90	%
Allowance for loan losses to non-performing loans	302.56	%	206.24	%	232.22	%
Delinquency Data:
Delinquencies (1)
30+ days	$ 917	$ 1,506	$ 993
90+ days	0	0	0
Delinquencies as a percentage of loan and lease portfolio (1)
30+ days	0.16	%	0.27	%	0.21	%
90+ days	0.00	%	0.00	%	0.00	%

(1) Excludes non-accrual loans.

Non-Interest Income and Expense

Non-interest income was $2.2 million for the fourth quarter of 2016, an increase of $0.2 million, or 12.0%, from $2.0 million for the same period of 2015. The increase in non-interest income is primarily related to the $0.2 million increase in the gain on sales of loans due primarily to an increase in single family loan originations and sales between the periods. Fees and service charges increased slightly between the periods due to an increase in debit card income. Loan servicing fees increased slightly due to an increase in the loans serviced for others between the periods. These increases were partially offset by a $0.1 million decrease in other non-interest income because of a decrease in the sales of uninsured investment products between the periods.

Non-interest expense was $6.2 million for the fourth quarter of 2016, an increase of $0.2 million, or 3.5%, from $6.0 million for the same period of 2015. Compensation expense increased $0.3 million between the periods due to annual increases in compensation and an increase in the number of employees between the periods related to the increased loan production. Occupancy and equipment expense increased

$0.1 million because of increased software and building expenses. Data processing expense increased slightly between the periods due to increased mobile and on-line banking costs. Professional services expense increased $0.1 million between the periods primarily because of increased legal fees. These increases in non-interest expenses were partially offset by a $0.3 million increase in the gains on real estate owned because there were more sales and fewer valuation write downs in the fourth quarter of 2016 when compared to the same period of 2015.

Income tax expense was $1.0 million for the fourth quarter of 2016, an increase of $0.5 million from $0.5 million for the fourth quarter of 2015. The increase in income tax expense between the periods is primarily related to the increase in pre-tax income in the fourth quarter of 2016 when compared to the fourth quarter of 2015.