HMN Financial Participates in U.S. Treasurys Capital Purchase Program

ROCHESTER, Minn.--(BUSINESS WIRE)--HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF - News), the holding company for Home Federal Savings Bank (the Bank), announced today it has successfully completed the sale of $26.0 million in preferred stock and related warrant to the United States Treasury Department. This transaction is part of Treasury’s capital purchase program under the Emergency Economic Stabilization Act of 2008. Under the terms of the transaction, the Company issued 26,000 shares of cumulative perpetual preferred stock and a warrant to purchase 833,333 shares of HMN common stock at an exercise price of $4.68 per share.

The preferred shares are entitled to a 5% annual cumulative dividend for each of the first five years of the investment, increasing to 9% thereafter, unless HMN redeems the shares. The preferred stock can’t be redeemed for a period of three years from the date of the Treasury investment, except with the proceeds of certain qualifying offerings of Tier 1 capital. After three years, the preferred stock may be redeemed in whole or in part, at par plus accrued and unpaid dividends. The preferred stock is non-voting, other than certain class voting rights. The warrant may be exercised at any time over its ten-year term. Treasury has agreed not to vote any shares of common stock acquired upon exercise of the warrant. Without the consent of Treasury, for three years following issuance of the preferred stock, HMN cannot (i) increase the rate at which it pays dividends on its common stock in excess of the rate at which it last declared a quarterly common stock dividend, or $0.25 per share, or (ii) subject to certain exceptions, repurchase any shares of HMN common stock outstanding.

Both the preferred securities and the warrant will be accounted for as Tier 1 capital. The Bank’s risk-based capital ratio (the ratio of risk-based capital to risk-weighted assets) was 10.54% at September 30, 2008, which is above the regulatory capital requirements of 10.0% for a “well capitalized” bank. If this additional capital had been included in the Bank’s capital calculation at September 30, 2008, the Bank’s risk based capital ratio would have increased to 13.5% as risk-based capital would have increased by $26.0 million from $91.5 million to $117.5 million and risk-weighted assets would have remained at $867.8 million.

“This investment will further enhance our already well-capitalized position,” said Michael McNeil, President and CEO. “Our ability to meet the needs of our customers and the communities we serve will be further strengthened by these funds. Additional capital should also benefit shareholders by providing funding that should enable us to expand our market share and build shareholder value.”
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