GlobeNewswire Inc | Jul 20, 2020 11:30PM EDT

July 21, 2020

Second Quarter Summary

Net income of $2.7 million, down $0.2 million, compared to $2.9 million in second quarter of 2019 Diluted earnings per share of $0.58, down $0.04, compared to $0.62 in second quarter of 2019 Gain on sales of loans of $2.4 million, up $1.8 million from $0.6 million in second quarter of 2019 Provision for loan losses of $0.3 million, up $1.4 million from ($1.1) million in second quarter of 2019 Net interest margin of 3.57%, down 78 basis points from 4.35% for second quarter of 2019

Year to Date Summary

Net income of $4.1 million, down $0.4 million, compared to $4.5 million in first six months of 2019 Diluted earnings per share of $0.88, down $0.09, compared to $0.97 in first six months of 2019 Gain on sales of loans of $3.5 million, up $2.5 million from $1.0 million in first six months of 2019 Provision for loan losses of $0.8 million, up $1.8 million from ($1.0) million in first six months of 2019 Net interest margin of 3.66%, down 57 basis points from 4.23% for the first six months of 2019

Net Income Summary

Three months Six months ended ended June 30, June 30, (Dollars in thousands, except 2020 2019 2020 2019 per share amounts)Net income $ 2,691 $ 2,862 $ 4,076 $ 4,481 Diluted earnings per share 0.58 0.62 0.88 0.97 Return on average assets 1.29 % 1.60 % 1.01 % 1.25 %(annualized) Return on average equity 11.31 % 13.10 % 8.65 % 10.43 %(annualized)Book value per share $ 20.29 $ 18.33 $ 20.29 $ 18.33

ROCHESTER, Minn., July 20, 2020 (GLOBE NEWSWIRE) -- HMN Financial, Inc. (HMN or the Company) (Nasdaq:HMNF), the $863 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.7 million for the second quarter of 2020, a decrease of $0.2 million, compared to net income of $2.9 million for the second quarter of 2019. Diluted earnings per share for the second quarter of 2020 was $0.58, a decrease of $0.04 from the diluted earnings per share of $0.62 for the second quarter of 2019. The decrease in net income was primarily because of the $1.4 million increase in the provision for loan losses between the periods. The provision for loan losses increased between the periods primarily because of the decrease in the recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. Net interest income also decreased $0.4 million primarily because of a decrease in the yields earned on interest earning assets as a result of the decrease in the average prime rate between the periods. These decreases in net income were partially offset by a $1.6 million increase in other non-interest income due primarily to an increase in the gain on sales of mortgage loans between the periods. The increase in the gain on sales of mortgage loans was due to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods.

Presidents StatementThe COVID-19 pandemic and the related stay-at-home orders continued to have a significant impact on everyone in the second quarter of 2020. The economic effects of the pandemic on our clients combined with the net interest margin compression related to the low interest rate environment continued to be an earnings challenge for our bank and the financial industry as a whole, said Bradley Krehbiel, President and Chief Executive Officer of HMN. Despite these challenges, we are pleased to report the increase in our mortgage loan origination activity and the related gain on sales of loans that we experienced during the second quarter of 2020. We are also encouraged by the positive impact that the Small Business Administrations Paycheck Protection Program (PPP) loan program as well as other economic stimulus actions implemented by the federal government appear to be having on our clients. We are proud to have originated $53.1 million in PPP loans in the second quarter of 2020 and continue to work with our clients to obtain the appropriate amount of loan forgiveness that they are eligible for in consideration for retaining their workforce.

Second Quarter Results

Net Interest IncomeNet interest income was $7.1 million for the second quarter of 2020, a decrease of $0.4 million, or 4.4%, compared to $7.5 million for the second quarter of 2019. Interest income was $7.9 million for the second quarter of 2020, a decrease of $0.4 million, or 5.0%, from $8.3 million for the second quarter of 2019. Interest income decreased despite the $115.7 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets. The average yield earned on interest-earning assets was 3.94% for the second quarter of 2020, a decrease of 89 basis points from 4.83% for the second quarter of 2019. The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $0.7 million for the second quarter of 2020, a decrease of $0.1 million, or 10.1%, compared to $0.8 million for the second quarter of 2019. Interest expense decreased despite the $114.4 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods primarily because of the decrease in the average interest rate paid on deposits. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.40% for the second quarter of 2020, a decrease of 13 basis points from 0.53% for the second quarter of 2019. The decrease in the interest paid on interest-bearing liabilities was primarily because of the decrease in the average federal funds rate between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the second quarter of 2020 was 3.57%, a decrease of 78 basis points, compared to 4.35% for the second quarter of 2019. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

A summary of the Companys net interest margin for the three and six month periods ended June 30, 2020 and 2019 is as follows:

For the three month period ended June 30, 2020 June 30, 2019 (Dollars in Average Interest Yield Average Interest Yieldthousands) Outstanding Earned/ / Outstanding Earned/ / Balance Paid Rate Balance Paid RateInterest-earning assets:Securitiesavailable for $ 96,241 436 1.82 % $ 78,393 348 1.78 %saleLoans held for 8,736 67 3.07 2,482 27 4.36 saleMortgage loans, 129,584 1,306 4.05 113,786 1,247 4.40 netCommercial 455,330 5,293 4.68 407,854 5,677 5.58 loans, netConsumer loans, 64,864 761 4.72 73,777 950 5.16 netOther 49,435 20 0.16 12,161 50 1.62 Totalinterest-earning 804,190 7,883 3.94 688,453 8,299 4.83 assets Interest-bearingliabilities and non-interest bearingdeposits:NOW accounts 112,605 30 0.11 96,579 25 0.10 Savings accounts 88,528 16 0.07 80,013 16 0.08 Money market 204,939 201 0.39 168,605 306 0.73 accountsCertificates 119,722 498 1.67 118,893 475 1.60 Advances and 0 0 0.00 1,152 7 2.54 other borrowingsTotalinterest-bearing 525,794 465,242 liabilitiesNon-interest 209,194 155,921 checkingOthernon-interest 2,142 1,610 bearing depositsTotalinterest-bearingliabilities and 737,130 745 0.40 $ 622,773 829 0.53 non-interest $ bearingdepositsNet interest $ 7,138 $ 7,470 incomeNet interest 3.54 % 4.30 %rate spreadNet interest 3.57 % 4.35 %margin

For the six month period ended June 30, 2020 June 30, 2019 (Dollars in Average Interest Yield Average Interest Yieldthousands) Outstanding Earned/ / Outstanding Earned/ / Balance Paid Rate Balance Paid RateInterest-earning assets:Securitiesavailable for $ 99,755 937 1.89 % $ 78,592 686 1.76 %saleLoans held for 5,745 91 3.18 1,838 39 4.30 saleMortgage loans, 128,409 2,581 4.04 114,814 2,508 4.41 netCommercial 432,556 10,390 4.83 404,399 10,737 5.35 loans, netConsumer loans, 66,641 1,605 4.84 73,178 1,885 5.19 netOther 40,844 123 0.61 18,549 176 1.91 Totalinterest-earning 773,950 15,727 4.09 691,370 16,031 4.68 assets Interest-bearingliabilities and non-interest bearingdeposits:NOW accounts 107,949 61 0.11 97,132 49 0.10 Savings accounts 84,839 32 0.07 79,259 31 0.08 Money market 197,718 494 0.50 175,052 576 0.66 accountsCertificates 121,746 1,050 1.73 116,558 856 1.48 Advances and 0 0 0.00 579 7 2.54 other borrowingsTotalinterest-bearing 512,252 468,580 liabilitiesNon-interest 191,590 156,185 checkingOthernon-interest 2,468 1,835 bearing depositsTotalinterest-bearingliabilities and 1,637 0.47 626,600 1,519 0.49 non-interest $ 706,310 $ bearingdepositsNet interest $ 14,090 $ 14,512 incomeNet interest 3.62 % 4.19 %rate spreadNet interest 3.66 % 4.23 %margin

Provision for Loan LossesThe provision for loan losses was $0.3 million for the second quarter of 2020, an increase of $1.4 million compared to ($1.1) million for the second quarter of 2019. The provision for loan losses increased between the periods primarily because of the decrease in the recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The amount of the increase in the allowance for loan losses related to the economic environment was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic. At June 30, 2020, the Bank had $119.1 million of loans to borrowers who had their loan payments deferred for up to six months. A summary of deferred loans at June 30, 2020 by industry or collateral type is as follows:

Balance (Dollars in thousands) June 30, 2020Commercial loans by industry: Hotels ^(1) $ 54,660 Retail/Office 20,322 Multi-family housing 11,195 Theaters 11,269 Single family housing 4,675 Restaurant/Bar 4,477 Other 9,449 Total commercial loans 116,047 Consumer loans by collateral type: Single family 2,955 Other 77 Total consumer loans 3,032 Total deferred loans $ 119,079

(1) Approximately 39% of the hotel properties are located in Rochester, Minnesota with an additional 31% located in other markets in Minnesota where we operate a full service branch or Loan production office.

The allowance for loan losses is made up of general reserves based on our past loan loss history, specific reserves on impaired loans, and qualitative reserves for other items determined to have a potential impact on future loan losses. The qualitative increase to the allowance for loan losses related to the current economic environment and charge offs were partially offset by improvements in other qualitative reserves and a reduction in the specific reserves required on certain classified loans. The reduction in the specific reserves was primarily related to one classified loan that had its risk rating upgraded which reduced the required reserve by $0.4 million and two other classified loans that paid off during the quarter which reduced the required reserves for these loans by $0.2 million. Total non-performing assets were $3.2 million at June 30, 2020, an increase of $0.6 million, or 21.6%, from $2.6 million at March 31, 2020. Non-performing loans increased $0.6 million and foreclosed and repossessed assets did not change during the second quarter of 2020.

A reconciliation of the Companys allowance for loan losses for the quarters ended June 30, 2020 and 2019 is summarized as follows:

(Dollars in thousands) 2020 2019

$ 8,673 3 Balance at March 31, 9,036Provision 318 (1,059 )Charge offs: Consumer (34 ) (7 )Commercial real estate (730 ) 0 Commercial business 0 (826 )Recoveries 59 1,843 Balance at June 30, $ 8,649 8,624

Allocated to:General allowance $ 8,495 7,856 Specific allowance 154 768 $ 8,649 8,624

The $0.7 million of commercial real estate charge offs during the period relates to a commercial property in the transportation industry whose tenant filed for bankruptcy and the appraised value of the property decreased.

The following table summarizes the amounts and categories of non-performing assets in the Banks portfolio and loan delinquency information as of the end of the three most recently completed quarters.

June March December 30, 31, 31,(Dollars in thousands) 2020 2020 2019 Non?Performing Loans: Single family $ 390 $ 647 $ 617 Commercial real estate 1,579 734 184 Consumer 475 491 659 Commercial business 27 40 621 Total 2,471 1,912 2,081 Foreclosed and Repossessed Assets: Single family 269 269 166 Commercial real estate 414 414 414 Total non?performing assets $ 3,154 $ 2,595 $ 2,661 Total as a percentage of total assets 0.37 % 0.33 % 0.34 %Total non?performing loans $ 2,471 $ 1,912 $ 2,081 Total as a percentage of total loans 0.37 % 0.31 % 0.35 %receivable, netAllowance for loan loss to non-performing 349.92 % 472.54 % 411.45 %loans Delinquency Data: Delinquencies ^(1) 30+ days $ 775 $ 1,464 $ 1,167 90+ days 0 0 0 Delinquencies as a percentage of loan portfolio ^(1) 30+ days 0.11 % 0.23 % 0.19 % 90+ days 0.00 % 0.00 % 0.00 %

(1) Excludes non-accrual loans.

Non-Interest Income and ExpenseNon-interest income was $3.6 million for the second quarter of 2020, an increase of $1.6 million, or 77.8%, from $2.0 million for the second quarter of 2019. Gain on sales of loans increased $1.8 million between the periods primarily because of an increase in single family loan originations and sales. Fees and services charges decreased $0.1 million between the periods due primarily to a decrease in the overdraft fees collected. Other non-interest income decreased slightly due to a decrease in the fees earned on the sale of uninsured investment products between the periods. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others.

Non-interest expense was $6.7 million for the second quarter of 2020, an increase of $0.1 million, or 1.3%, from $6.6 million for the second quarter of 2019. Professional services expense increased $0.1 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim. Compensation and benefits expense increased $0.1 million primarily because of an increase in the accrual for unused employee paid time off. Occupancy and equipment costs increased slightly between the periods due to an increase in depreciation and non-capitalized software costs. Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses. These increases in non-interest expense were partially offset by the $0.1 million decrease in other non-interest expense due to a decrease in advertising expenses between the periods. Income tax expense was $1.1 million for both the second quarter of 2020 and the second quarter of 2019.

Return on Assets and EquityReturn on average assets (annualized) for the second quarter of 2020 was 1.29%, compared to 1.60% for the second quarter of 2019. Return on average equity (annualized) was 11.31% for the second quarter of 2020, compared to 13.10% for the same period in 2019. Book value per common share at June 30, 2020 was $20.29, compared to $18.33 at June 30, 2019.

Six Month Period Results

Net IncomeNet income was $4.1 million for the six month period ended June 30, 2020, a decrease of $0.4 million, or 9.0%, compared to net income of $4.5 million for the six month period ended June 30, 2019. Diluted earnings per share for the six month period ended June 30, 2020 was $0.88, a decrease of $0.09 per share compared to diluted earnings per share of $0.97 for the same period in 2019. The decrease in net income was primarily because of the $1.8 million increase in the provision for loan losses between the periods. The provision for loan losses increased between the periods primarily because of the decrease in recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. Non-interest expenses also increased $0.6 million between the periods primarily because of an increase in expenses for professional services and compensation and benefits. Net income also decreased because of the $0.4 million decrease in net interest income because of a decrease in the yields earned on interest earning assets as a result of the decrease in the average prime rate between the periods. These decreases in net income were partially offset by the $2.4 million increase in other non-interest income due primarily to an increase in the gain on sales of mortgage loans between the periods. The increase in the gain on sales of mortgage loans was due to the increase in mortgage loan refinance activity in the current period as a result of the lower interest rate environment between the periods.

Net Interest IncomeNet interest income was $14.1 million for the first six months of 2020, a decrease of $0.4 million, or 2.9%, compared to $14.5 million for the same period of 2019. Interest income was $15.7 million for the first six months of 2020, a decrease of $0.3 million, or 1.9%, from $16.0 million for the first six months of 2019. Interest income decreased despite the $82.6 million increase in the average interest-earning assets between the periods primarily because of the decrease in the average yield earned on interest-earning assets. The average yield earned on interest-earning assets was 4.09% for the first six months of 2020, a decrease of 59 basis points from 4.68% for the same period of 2019. The decrease in the average yield is primarily related to the decrease in the average prime rate between the periods.

Interest expense was $1.6 million for the first six months of 2020, an increase of $0.1 million, or 7.8%, compared to $1.5 million for the same period of 2019. The average interest rate paid on interest-bearing liabilities and non-interest bearing deposits was 0.47% for the first six months of 2020, a decrease of 2 basis points from 0.49% for the first six months of 2019. The increase in the interest paid on interest-bearing liabilities was primarily because of the $79.7 million increase in the average interest-bearing liabilities and non-interest bearing deposits between the periods. Net interest margin (net interest income divided by average interest-earning assets) for the first six months of 2020 was 3.66%, a decrease of 57 basis points, compared to 4.23% for the first six months of 2019. The decrease in the net interest margin is primarily related to the decrease in the average yield earned on interest-earning assets as a result of the prime rate decreases that occurred between the periods.

Provision for Loan LossesThe provision for loan losses was $0.8 million for the first six months of 2020, an increase of $1.8 million compared to ($1.0) million for the first six months of 2019. The provision for loan losses increased between the periods primarily because of the decrease in recoveries received in the current period when compared to the same period of 2019 and also because of the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. The amount of the increase in our allowance for loan losses related to the economic environment was based, in part, on the amount of loans to borrowers that had their loan payments deferred because they had been negatively impacted by the pandemic. At June 30, 2020, the Bank had $119.1 million of loans with deferred payment agreements for up to six months. The allowance for loan losses is made up of general reserves based on our past loan loss history, specific reserves on impaired loans, and qualitative reserves for other items determined to have a potential impact on future loan losses. The qualitative increase to the allowance for loan losses related to the current economic environment and charge offs were partially offset by improvements in other qualitative reserves and a reduction in the specific reserves required on certain classified loans. The reduction in the specific reserves was primarily related to one classified loan that had its risk rating upgraded which reduced the required reserve by $0.4 million and two other classified loans that paid off during the first six months of 2020 which reduced the required reserve for these loans by $0.2 million. Total non-performing assets were $3.2 million at June 30, 2020, an increase of $0.5 million, or 18.5%, from $2.7 million at December 31, 2019. Non-performing loans increased $0.4 million and foreclosed and repossessed assets increased $0.1 million during the first six months of 2020.

A reconciliation of the Companys allowance for loan losses for the six month periods ended June 30, 2020 and June 30, 2019 is summarized as follows:

(Dollars in thousands) 2020 2019 Balance at January 1, $ 8,564 8,686 Provision 778 (1,032 ) Charge offs: Consumer (45 ) (46 ) Commercial real estate (730 ) 0 Commercial business 0 (869 ) Recoveries 82 1,885 Balance at June 30, $ 8,649 8,624

The $0.7 million of commercial real estate charge offs during the period relates to a commercial property in the transportation industry whose tenant filed for bankruptcy and the appraised value of the property decreased.

Non-Interest Income and ExpenseNon-interest income was $6.1 million for the first six months of 2020, an increase of $2.4 million, or 63.4%, from $3.7 million for the first six months of 2019. Gain on sales of loans increased $2.5 million between the periods primarily because of an increase in single family loan originations and sales. Fees and services charges decreased $0.1 million between the periods due primarily to a decrease in the overdraft fees collected. Other non-interest income decreased slightly due to an increase in the losses realized on equity investments between the periods. Loan servicing fees decreased slightly between the periods due to a decrease in the aggregate balances of commercial loans that were being serviced for others.

Non-interest expense was $13.7 million for the first six months of 2020, an increase of $0.7 million, or 4.9%, from $13.0 million for the first six months of 2019. Professional services expense increased $0.3 million between the periods primarily because of an increase in legal expenses relating to an ongoing bankruptcy litigation claim. Compensation and benefits expense increased $0.2 million primarily because of an increase in the accrual for unused employee paid time off. Occupancy and equipment costs increased $0.1 million between the periods due to an increase in depreciation and non-capitalized software costs. Data processing costs increased slightly between the periods due to an increase in internet and mobile banking expenses. Other non-interest expense increased slightly because of an increase in mortgage servicing expenses due to the increased refinancing activity of serviced loans between the periods. Income tax expense was $1.6 million for the first six months of 2020, a decrease of $0.2 million from $1.8 million the first six months of 2019. The decrease in income tax expense between the periods is primarily the result of a decrease in pre-tax income.

Return on Assets and EquityReturn on average assets (annualized) for the six month period ended June 30, 2020 was 1.01%, compared to 1.25% for the same six month period in 2019. Return on average equity (annualized) was 8.65% for the six month period ended June 30, 2020, compared to 10.43% for the same six month period in 2019.

General InformationHMN Financial, Inc. and the Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates twelve full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson, La Crescent, Owatonna, Rochester (4), Spring Valley and Winona, one full service office in Marshalltown, Iowa, and one full service office in Pewaukee, Wisconsin. The Bank also operates a loan origination office located in Sartell, Minnesota.

Safe Harbor StatementThis 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, continues, seek, may, will, would, could, should, trend, target, and goal or similar statements or variations of such terms and include, but are not limited to, those relating to maintaining credit quality, maintaining net interest margins; the adequacy and amount of available liquidity and capital resources to the Bank; the Companys liquidity and capital requirements; the anticipated impacts of the COVID-19 pandemic and efforts to mitigate the same on the general economy, our clients, and the allowance for loan losses; the anticipated benefits that will be realized by our clients from government assistance programs related to the COVID-19 pandemic; the amount of the Banks non-performing assets and the appropriateness of the allowance therefor; the payment of dividends or repurchases of stock by HMN; 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 of the trust preferred securities held by the Bank; the anticipated results of litigation and our assessment of the impact on our financial statements; the ability of the Bank to pay dividends to HMN; the ability to remain well capitalized; the impact of new accounting pronouncements; and compliance by the Bank with regulatory standards generally (including the Banks status as well-capitalized) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject.

A number of factors, many of which may be amplified by the COVID-19 pandemic and efforts to mitigate the same, could cause actual results to differ materially from the Companys assumptions and expectations. These 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; possible legislative and regulatory changes, including changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as continued shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Companys loan and investment portfolios; changes in costs associated with traditional and alternate funding sources, including changes in collateral advance rates and policies of the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank; technological, computer-related or operational difficulties including those from any third party cyberattack; results of litigation; 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; domestic and international economic developments; the Companys access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Companys assumptions and expectations include those set forth in the Companys most recent filing on Form 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 section of the Companys Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A of its subsequently filed 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.)

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



HMN FINANCIAL, INC. AND SUBSIDIARIESConsolidated Balance Sheets June 30, December 31,(Dollars in thousands) 2020 2019 (unaudited) Assets Cash and cash equivalents $ 65,810 44,399 Securities available for sale: Mortgage-backed and related securities(amortized 50,593 54,851 cost $48,720 and $54,777) Other marketable securities (amortized cost $46,928 47,200 52,741 and $52,751) 97,793 107,592 Loans held for sale 5,167 3,606 Loans receivable, net 668,432 596,392 Accrued interest receivable 3,380 2,251 Mortgage servicing rights, net 2,647 2,172 Premises and equipment, net 10,248 10,515 Goodwill 802 802 Core deposit intangible 107 156 Prepaid expenses and other assets 7,276 8,052 Deferred tax asset, net 1,121 1,702 Total assets $ 862,783 777,639 Liabilities and Stockholders? Equity Deposits $ 752,759 673,870 Accrued interest payable 271 420 Customer escrows 1,821 2,413 Accrued expenses and other liabilities 9,817 8,288 Total liabilities 764,668 684,991 Commitments and contingencies Stockholders? equity: Serial-preferred stock: ($.01 par value) authorized 500,000 shares; issued 0 0 0 Common stock ($.01 par value): Authorized 16,000,000 shares; issued 9,128,662 91 91 Additional paid-in capital 40,312 40,365 Retained earnings, subject to certain restrictions 111,623 107,547 Accumulated other comprehensive income 1,545 46 Unearned employee stock ownership plan shares (1,546 ) (1,643 ) Treasury stock, at cost 4,292,303 and 4,284,840 (53,910 ) (53,758 ) sharesTotal stockholders? equity 98,115 92,648 Total liabilities and stockholders? equity $ 862,783 777,639

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

Three Months Ended Six Months Ended June 30, June 30,(Dollars in thousands, except per 2020 2019 2020 2019 share data)Interest income: Loans receivable $ 7,427 7,901 14,667 15,169 Securities available for sale: Mortgage-backed and related 265 44 554 90 Other marketable 171 304 383 596 Other 20 50 123 176 Total interest income 7,883 8,299 15,727 16,031 Interest expense: Deposits 745 822 1,637 1,512 Federal Home Loan Bank advances 0 7 0 7 and other borrowings Total interest expense 745 829 1,637 1,519 Net interest income 7,138 7,470 14,090 14,512 Provision for loan losses 318 (1,059 ) 778 (1,032 ) Net interest income after 6,820 8,529 13,312 15,544 provision for loan losses Non-interest income: Fees and service charges 669 785 1,383 1,485 Loan servicing fees 297 318 629 633 Gain on sales of loans 2,364 611 3,498 990 Other 264 307 555 604 Total non-interest income 3,594 2,021 6,065 3,712 Non-interest expense: Compensation and benefits 3,799 3,737 7,846 7,647 Occupancy and equipment 1,111 1,081 2,234 2,142 Data processing 321 305 629 606 Professional services 447 381 934 653 Other 975 1,063 2,011 1,966 Total non-interest expense 6,653 6,567 13,654 13,014 Income before income tax 3,761 3,983 5,723 6,242 expenseIncome tax expense 1,070 1,121 1,647 1,761 Net income 2,691 2,862 4,076 4,481 Other comprehensive income, net of 224 442 1,499 926 taxComprehensive income available $ 2,915 3,304 5,575 5,407 to common shareholdersBasic earnings per share $ 0.58 0.62 0.88 0.97 Diluted earnings per share $ 0.58 0.62 0.88 0.97

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

SELECTED FINANCIAL DATA: Three Months Ended Six Months Ended June 30, June 30,(Dollars in thousands, except per 2020 2019 2020 2019 share data)I.OPERATING DATA: Interest income $ 7,883 8,299 15,727 16,031 Interest expense 745 829 1,637 1,519 Net interest income 7,138 7,470 14,090 14,512 II.AVERAGE BALANCES: Assets ^(1) 840,026 717,942 808,795 721,118 Loans receivable, net 649,778 595,417 627,606 592,391 Securities available for sale ^(1) 96,241 78,393 99,755 78,592 Interest-earning assets ^(1) 804,190 688,453 773,950 691,370 Interest-bearing liabilities andnon-interest bearing 737,130 622,773 706,310 626,600 depositsEquity ^(1) 95,728 87,628 94,805 86,631 III. PERFORMANCE RATIOS: ^(1) Return on average assets 1.29 % 1.60 % 1.01 % 1.25 %(annualized)Interest rate spread information: Average during period 3.54 4.30 3.62 4.19 End of period 3.42 4.01 3.42 4.01 Net interest margin 3.57 4.35 3.66 4.23 Ratio of operating expense to averagetotal assets (annualized) 3.19 3.67 3.39 3.64 Return on average equity 11.31 13.10 8.65 10.43 (annualized)Efficiency 61.99 69.19 67.74 71.41 June December June 30, 31, 30, 2020 2019 2019 IV. EMPLOYEE DATA: Number of full time equivalent 174 181 178 employees V.ASSET QUALITY: Total non-performing assets $ 3,154 2,661 3,124 Non-performing assets to total 0.37 % 0.34 % 0.43 % assetsNon-performing loans to total loans 0.37 % 0.35 % 0.45 % receivable, netAllowance for loan losses $ 8,649 8,564 8,624 Allowance for loan losses to total 1.00 % 1.10 % 1.19 % assetsAllowance for loan losses to total 1.29 1.44 1.45 loans receivable, net ^(2)Allowance for loan losses to 349.92 411.45 323.18 non-performing loans VI.BOOK VALUE PER SHARE: Book value per share common share $ 20.29 19.13 18.33 Six Year Six Months Ended Months Ended December Ended June 31, June 30, 2019 30, 2020 2019VII. CAPITAL RATIOS: Stockholders? equity to total 11.37 % 11.91 % 12.29 % assets, at end of periodAverage stockholders? equity to 11.72 12.06 12.01 average assets ^(1)Ratio of average interest-earningassets toaverage interest-bearing liabilities and 109.58 110.18 110.34 non-interest bearing deposits^(1)Home Federal Savings Bank regulatory capital ratios:Common equity tier 1 capital ratio 13.56 13.21 13.56 Tier 1 capital leverage ratio 10.50 10.89 11.79 Tier 1 capital ratio 13.56 13.21 13.56 Risk-based capital 14.81 14.46 14.81

1) Average balances were calculated based upon amortized cost without the market value impact of ASC 320.2) Allowance for loan losses to total loans receivable, net without the $53.1 million of outstanding PPP loans would be 1.41% as of June 30, 2020.