SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (d) FOR THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-24100
HMN FINANCIAL, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 41-1777397
------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Broadway, Spring Valley, Minnesota 55975-0231
- -------------------------------------------- ----------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
(507) 346-7345
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's common
stock as of the latest practicable date.
Class Outstanding at August 5, 1997
- ----------------------------- -----------------------------
Common stock, $0.01 par value 4,211,836
This Form 10-Q consists of 55 pages.
The exhibit index is on page 22.
1
<PAGE>
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements (unaudited) ----
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three Months Ended and Six Months Ended
June 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
for the Six Month Period Ended June 30, 1997 5
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of
Security Holders 19
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K and Form 11-K 20
Signatures 21
2
<PAGE>
PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 11,569,823 10,583,717
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $115,681,542
and $134,474,167) 115,016,213 133,355,278
Other marketable securities
(amortized cost $73,350,810
and $42,360,499) 73,860,262 42,474,810
----------- -----------
188,876,475 175,830,088
----------- -----------
Securities held to maturity:
Mortgage-backed and related securities
(fair value $0 and $1,904,993) 0 1,805,744
Other marketable securities
(fair value $0 and $1,000,550) 0 999,812
----------- -----------
0 2,805,556
----------- -----------
Loans held for sale 1,205,315 739,316
Loans receivable, net 345,516,286 349,022,236
Federal Home Loan Bank stock, at cost 5,939,500 5,434,000
Real estate, net 89,287 20,610
Premises and equipment, net 4,090,908 3,581,497
Accrued interest receivable 3,762,219 3,415,152
Prepaid expenses and other assets 5,815,165 3,299,427
----------- -----------
Total assets $ 566,864,978 554,731,599
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 365,385,386 362,476,944
Federal Home Loan Bank advances 114,364,305 106,078,589
Accrued interest payable 1,207,541 1,542,773
Advance payments by borrowers for
taxes and insurance 506,268 518,911
Accrued expenses and other liabilities 2,403,310 2,014,938
Due to brokers 1,200,000 0
----------- -----------
Total liabilities 485,066,810 472,632,155
----------- -----------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: authorized
500,000 shares; issued and
outstanding none 0 0
Common stock ($.01 par value):
authorized 7,000,000 shares;
issued 6,085,775 shares 60,858 60,858
Additional paid-in capital 59,620,004 59,428,768
Retained earnings, subject to
certain restrictions 57,452,087 54,645,387
Net unrealized loss on securities
available for sale (92,998) (598,045)
Unearned employee stock ownership
plan shares (4,746,400) (4,938,520)
Unearned compensation restricted
stock awards (716,965) (793,289)
Treasury stock, shares at cost
1,873,939 and 1,651,615 shares (29,778,418) (25,705,715)
----------- -----------
Total stockholders' equity 81,798,168 82,099,444
----------- -----------
Total liabilities and stockholders'
equity $ 566,864,978 554,731,599
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------------------- ----------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 6,882,628 6,409,310 13,790,870 12,548,056
Securities available
for sale:
Mortgage-backed
and related 2,176,822 2,527,670 4,366,032 5,301,360
Other marketable 917,067 580,897 1,502,309 985,741
Securities held to maturity:
Mortgage-backed and related 0 256,754 33,400 523,777
Other marketable 0 32,405 10,032 75,853
Cash equivalents 87,434 62,086 169,594 165,804
Other 102,011 74,648 196,972 138,630
---------- ---------- ---------- ----------
Total interest income 10,165,962 9,943,770 20,069,209 19,739,221
---------- ---------- ---------- ----------
Interest expense:
Deposits 4,670,797 4,720,966 9,243,595 9,539,249
Federal Home Loan Bank
advances 1,626,510 1,227,662 3,077,910 2,289,523
---------- --------- ---------- ----------
Total interest expense 6,297,307 5,948,628 12,321,505 11,828,772
---------- --------- ---------- ----------
Net interest income 3,868,655 3,995,142 7,747,704 7,910,449
Provision for loan losses 75,000 75,000 150,000 150,000
---------- --------- ---------- ----------
Net interest income
after provision
for loan losses 3,793,655 3,920,142 7,597,704 7,760,449
---------- --------- ---------- ----------
Non-interest income:
Fees and service charges 100,445 81,855 196,857 159,371
Securities gains, net 113,695 268,487 384,612 769,037
Gain on sales of loans 63,614 1,135 217,064 7,084
Other 128,042 133,533 305,557 250,922
---------- --------- ---------- ----------
Total non-interest income 405,796 485,010 1,104,090 1,186,414
---------- --------- ---------- ----------
Non-interest expense:
Compensation and benefits 1,358,859 1,099,123 2,674,846 2,205,118
Occupancy 232,451 195,363 473,598 392,145
Federal deposit insurance
premiums 58,924 214,864 117,901 424,656
Advertising 73,658 79,354 151,795 152,039
Data processing 118,803 120,743 243,332 249,196
Provision for real
estate losses 1,000 0 3,000 0
Other 283,260 274,789 576,925 543,902
---------- --------- ---------- ----------
Total non-interest
expense 2,126,955 1,984,236 4,241,397 3,967,056
---------- --------- ---------- ----------
Income before income tax
expense 2,072,496 2,420,916 4,460,397 4,979,807
Income tax expense 740,276 887,832 1,653,697 1,860,032
---------- --------- ---------- ----------
Net income $ 1,332,220 1,533,084 2,806,700 3,119,775
========== ========= ========== ==========
Primary earnings per
common share and common
share equivalents $ 0.34 0.34 0.72 0.67
========== ========= ========== ==========
Fully diluted earnings
per common share and
common share equivalents $ 0.34 0.33 0.71 0.66
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Month Period Ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Net
unrealized
Additional (loss) on
Common Paid-in Retained securities
Stock Capital Earnings available for sale
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045)
Net income 2,806,700
Change in fair value
on securities available
for sale 505,047
Treasury stock
purchases
Amortization of
restricted stock awards
Retirement and retention
awards granted 2,250
Employee stock option
exercised (46)
Restricted stock awards tax
benefit 61,092
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 124,410
------- ---------- ---------- ----------
Balance,
June 30, 1997 $ 60,858 59,620,004 57,452,087 (92,998)
======= ========== ========== ==========
Unearned
shares
Employee Unearned
Stock Compensation Total
Ownership Restricted Treasury Stockholders'
Plan Stock Awards Stock Equity
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1996 $ (4,938,520) (793,289) (25,705,715) 82,099,444
Net income 2,806,700
Change in fair value on
securities available
for sale 505,047
Treasury stock
purchases (4,109,637) (4,109,637)
Amortization of
restricted stock awards 115,324 115,324
Retirement and retention
awards granted (39,000) 36,750 0
Employee stock option
exercised 184 138
Restricted stock awards tax
benefit 61,092
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 192,120 316,530
---------- --------- ---------- ----------
Balance,
June 30, 1997 $ (4,746,400) (716,965) (29,778,418) 81,798,168
========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,806,700 3,119,775
Adjustments to reconcile net income
to cash provided by operating activities:
Provision for loan losses 150,000 150,000
Provision for real estate losses 3,000 0
Depreciation 207,634 181,971
Amortization of (discounts) premiums, net (107,808) (16,163)
Amortization of deferred loan fees (183,614) (229,289)
Provision for deferred income taxes 258,698 147,562
Securities gains, net (384,612) (774,273)
Gain on sales of real estate (3,743) (39,100)
Gain on sales of loans (217,064) (7,084)
Proceeds from sale of loans originated
for sale 2,739,372 362,070
Amortization of restricted stock awards 115,324 116,700
Amortization of unearned ESOP shares 192,120 198,840
Earned employee stock ownership shares
priced above original cost 124,410 62,424
Increase in accrued interest receivable (347,067) (43,835)
(Decrease) increase in accrued
interest payable (335,232) 154,983
Equity earnings of limited partnership (112,487) 0
Increase in other assets (94,493) (124,031)
(Decrease) increase in other liabilities (149,358) 55,481
Other, net 20,768 (26,994)
---------- ----------
Net cash provided by operating
activities 4,682,548 3,289,037
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 33,311,951 49,480,583
Principal collected on securities
available for sale 6,657,798 6,740,657
Proceeds collected on maturity of
securities available for sale 15,868,412 5,500,000
Purchases of securities available for sale (60,433,633) (53,439,412)
Proceeds from sales of securities held to
maturity 348,871 0
Principal collected on securities held
to maturity 240,441 863,649
Proceeds collected on maturity of
securities held to maturity 1,000,000 2,000,000
Purchases of securities held to maturity 0 (709,765)
Proceeds from sales of loans receivable 25,341,959 154,612
Purchase interest in mortgage servicing
rights (370,008) 0
Purchase interest in limited partnership (1,938,750) 0
Purchase of Federal Home Loan Bank stock (505,500) (1,356,000)
Net increase in loans receivable (29,608,581) (27,035,570)
Proceeds from sale of real estate 35,627 361,010
Purchases of premises and equipment (717,045) (83,559)
---------- ----------
Net cash used by investing activities (10,768,458) (17,523,795)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits 2,908,442 (10,344,717)
Purchase of treasury stock (4,109,637) (5,955,302)
Stock options exercised 138 0
Proceeds from Federal Home Loan Bank
advances 74,800,000 45,700,000
Repayment of Federal Home Loan Bank advances(66,514,284) (13,523,925)
Decrease in advance payments by borrowers
for taxes and insurance (12,643) (33,488)
---------- ----------
Net cash provided by financing activities 7,072,016 15,842,568
---------- ----------
Increase in cash and cash equivalents 986,106 1,607,810
Cash and cash equivalents, beginning of period 10,583,717 4,334,694
---------- ----------
Cash and cash equivalents, end of period $ 11,569,823 5,942,504
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 12,656,737 11,673,789
Cash paid for income taxes 1,445,500 1,780,833
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale $ 4,781,034 9,694,418
Securities held to maturity transferred
to securities available for sale 1,295,147 0
Loans transferred to loans held for sale 25,277,122 0
Transfer of loans to real estate 188,776 168,187
Transfer of real estate to loans 84,772 0
Securities purchased with liability due
to broker 1,200,000 0
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1997 and 1996
(1) HMN FINANCIAL, INC.
The consolidated financial statements included herein are for HMN Financial
Inc. (HMN), Security Finance Corporation (SFC), HMN Mortgage Services, Inc.,
Home Federal Savings Bank (the Bank) and the Bank's wholly owned subsidiary,
Osterud Insurance Agency, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and therefore, do not include all
disclosures necessary for a complete presentation of the consolidated balance
sheets, consolidated statements of income, consolidated statements of
stockholders' equity and consolidated statements of cash flows in conformity
with generally accepted accounting principles. However, all adjustments
consisting of only normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. The statements of income for the three month
period and six month period ended June 30, 1997 are not necessarily
indicative of the results which may be expected for the entire year.
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform with the current period presentation.
(3) NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. The Statement simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, EARNINGS PER SHARE, and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The
Statement is effective for financial statements issued for periods ending
after December 15, 1997. Management is currently studying the impact of
adopting SFAS No. 128.
In July 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
which establishes standards of disclosure and financial statement display for
reporting total comprehensive income and the individual
7
<PAGE>
components thereof. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. As used in SFAS No. 130, the term
comprehensive income thus encompasses net income. The term OTHER
COMPREHENSIVE INCOME refers to components of comprehensive income that are
excluded from net income under generally accepted accounting principles.
Comprehensive income may be presented in any of the following financial
statements: in a separate statement of comprehensive income; in a statement
of changes in equity; or below the total of net income or loss in the income
statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. Comparative
statements for previous years must be reclassified, although reclassification
adjustments are not required to be shown for such earlier periods.
Management is currently studying the impact of adopting SFAS No. 130.
In July 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which establishes new standards for
determining a reportable segment and for disclosing information regarding
each such segment. The amount of each segment item reported should be the
measure reported to the chief operating decision maker for purposes of making
decisions about allocating resources to the segment and assessing its
performance. Adjustments and eliminations made in preparing an enterprise's
general-purpose financial statements and allocations of revenues, expenses ,
and gains or losses should be included in determining reported segment profit
or loss only if they are included in the measure of the segments's profit or
loss that is used by the chief operating decision maker. Similarly, only
those assets that are included in the measure of the segment's assets that is
used by the chief operating decision maker should be reported for that
segment. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997, with earlier application encouraged. Management is currently
studying the impact of adopting SFAS No. 131.
(4) SECURITIES HELD TO MATURITY
During the first quarter of 1997, HMN determined that it no longer had the
intent to hold its securities classified as held to maturity to the actual
maturity date of the securities. Therefore it sold one security and on March
31, 1997 it transferred all the remaining securities in the held to maturity
portfolio to the available for sale portfolio. The following information
summarizes the sale and transfer of the securities held to maturity during
1997.
<TABLE>
<CAPTION>
Unrealized
Holding
Unrealized Gain,
Amortized Fair Realized Holding Net of Tax,
Cost Value Gain Gain in Equity
--------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Security sold $ 344,139 348,871 4,732
Securities transferred
to available for sale $1,223,753 1,295,147 71,394 42,641
</TABLE>
(5) EARNINGS PER SHARE
Primary earnings per common share and common share equivalents for the three
month periods ended June 30, 1997 and 1996 were computed by dividing net
income for each period ($1,332,220 and $1,533,084, respectively) by the
weighted average common shares and common share equivalents outstanding
(3,915,302 and 4,580,792, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the three months
ended June 30, 1997 and 1996 were computed by dividing net income for the
period ($1,332,220 and $1,533,084, respectively) by the weighted average
common shares and fully diluted common share equivalents outstanding
(3,943,053 and 4,600,976, respectively) during each period.
Primary earnings per common share and common share equivalents for the six
month periods ended June 30, 1997 and 1996 were computed by dividing net
income for each period ($2,806,700 and $3,119,775, respectively) by the
weighted average common shares and common share equivalents outstanding
(3,921,455 and 4,673,506, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the six months
ended June 30, 1997 and 1996 were computed by dividing net income for the
period ($2,806,700 and $3,119,775,
8
<PAGE>
respectively) by the weighted average common shares and fully diluted common
share equivalents outstanding (3,956,422 and 4,697,742, respectively) during
each period.
(6) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on HMN's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table on the following page) of Tangible, Core, and Risk-based capital (as
defined in the regulations) to total assets (as defined). At June 30, 1997
Management is of the opinion that the Bank meets all capital adequacy
requirements to which it is subject.
Management believes that based upon the Bank's capital calculations at June
30, 1997 and other conditions consistent with the Prompt Corrective Actions
Provisions of the OTS regulations, the Bank would be categorized as well
capitalized.
At June 30, 1997 the Bank's capital amounts and ratios are presented for
actual capital, required capital, and excess capital including amounts and
ratios in order to qualify as being well capitalized under the Prompt
Corrective Actions regulations:
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Actual Required
------------------- -------------------
Percent of Percent of
(in thousands) Amount Assets<F1> Amount Assets<F1>
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Bank stockholder's equity $ 60,965
Less:
Net unrealized gain on
certain securities
available for sale 977
Excess mortgage servicing
rights 533
-------
Tangible capital 59,455 10.95% $ 8,146 1.50%
-------
Tangible capital to
adjusted total assets 10.95%
Core capital (Tier I) 59,455 10.95% 16,291 3.00%
Tier I capital to risk-
weighted assets 24.44%
Plus:
Allowable allowance for
loan losses 2,479
Risk-based capital $ 61,934 25.46% $ 19,463 8.00%
<FN>
<1> Based upon the Bank's adjusted total assets for the purpose of the
tangible and core capital ratios and risk-weighted assets for the purpose of
the risk-based capital ratio.
</FN>
- -----------------------------------------------------------------------------
To Be Well Capitalized
Under Prompt
Corrective Actions
Excess Capital Provisions
------------------- --------------------
Percent of Percent of
(in thousands) Amount Assets<F1> Amount Assets<F1>
-------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Bank stockholder's equity
Less:
Net unrealized gain on
certain securities
available for sale
Excess mortgage servicing
rights
Tangible capital $ 51,309 9.45%
Tangible capital to
adjusted total assets $ 27,152 5.00%
Core capital (Tier I) 43,164 7.95%
Tier I capital to risk-
weighted assets 14,598 6.00%
Plus:
Allowable allowance for
loan losses
Risk-based capital $ 42,471 17.46% $ 24,329 10.00%
<FN>
<1> Based upon the Bank's adjusted total assets for the purpose of the
tangible and core capital ratios and risk-weighted assets for the purpose of
the risk-based capital ratio.
</FN>
- -----------------------------------------------------------------------------
</TABLE>
9
<PAGE>
(7) STOCKHOLDERS' EQUITY
During January of 1997, with Board authorization and approval from the Office
of Thrift Supervision (OTS), HMN purchased a total of 224,334 shares of its
own common stock from the open market for $4.1 million. All shares were
placed in treasury stock.
On June 30, 1997, HMN announced its intention to purchase up to 300,000
shares of its own common stock in the open market over the next twelve month
period.
(8) PENDING ACQUISITION
On July 1, 1997, HMN Financial, Inc. and Marshalltown Financial Corporation
(MFC), the thrift holding company for Marshalltown Savings Bank, FSB, entered
into a definitive agreement to merge. Under the agreement, HMN will acquire
in a cash transaction valued at $25.9 million, or $17.51 per share, all
outstanding shares of MFC's common stock. The agreement is subject to
regulatory approvals, as well as approval of MFC's shareholders, a process
that is expected to be completed by the end of the year. At June 30, 1997,
MFC's consolidated balance sheet had total assets of $127.5 million of which
$63.4 million were in loans receivable, net and $56.1 million were investment
securities or mortgage-backed securities. MFC's deposits totaled $106.4
million and stockholders' equity totaled $20.1 million.
10
<PAGE>
HMN FINANCIAL, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
HMN's net income is dependent primarily on its net interest income, which is
the difference between interest earned on its loans and investments and the
interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between the yield earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread)
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. HMN's interest rate spread is affected by regulatory, economic
and competitive factors that influence interest rates, loan demand and
deposit flows. Net interest margin is calculated by dividing net interest
income by the average interest-earning assets and is normally expressed as a
percentage. Net interest income and net interest margin are affected by
changes in interest rates, the volume and the mix of interest-earning assets
and interest-bearing liabilities, and the level of non-performing assets.
HMN's net income is also affected by the generation of non-interest income,
which primarily consists of gains from the sale of securities, gains from
sale of loans, service charges, fees and other income. In addition, net
income is affected by the level of operating expenses and establishment of a
provision for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities
are influenced by the demand for and supply of housing, competition among
lenders, the level of interest rates and the availability of funds. Deposit
flows and costs of funds are influenced by prevailing market rates of
interest primarily on competing investments, account maturities and the
levels of personal income and savings in the market area of the Bank.
NET INCOME
HMN's net income for the second quarter of 1997 was $1.3 million, or $0.34
primary earnings per share, a decrease of $201,000, or 13.1% compared to net
income of $1.5 million, or $0.34 primary earnings per share for the second
quarter of 1996. The decrease in net income was principally due to a
decrease of $126,000 in net interest income, a decrease of $79,000 in non-
interest income and an increase of $143,000 in non-interest expense. Primary
earnings per share for the second quarter of 1997 remained the same as the
second quarter of 1996 despite a decrease in net income because HMN purchased
972,404 shares of its own common stock in the open market from April 1, 1996
through January 31, 1997.
Net income for the six-month period ended June 30, 1997 was $2.8 million, or
$0.72 primary earnings per share, a decrease of $313,000, or 10.0%, compared
to $3.1 million, or $0.67 primary earnings per share, for the same six month
period of 1996. The decrease in net income was principally due to a decrease
of $163,000 in net interest income, a decrease of $82,000 in non-interest
income and an increase of $274,000 in non-interest expense. Primary earnings
per share for the six month period ended June 30, 1997 increased by $0.05
compared to the same period in 1996 despite a decrease in net income between
the periods because HMN purchased 1,094,119 shares of its own common stock in
the open market from January 1, 1996 through January 31, 1997.
NET INTEREST INCOME
Net interest income for the second quarter of 1997 was $3.9 million, a
decrease of $126,000, or 3.2%, compared to $4.0 million for the same quarter
of 1996. Interest income for the second quarter of 1997 was $10.2 million,
an increase of $222,000, or 2.2%, compared to $9.9 million for the same
quarter of 1996. The increase in interest income was primarily due to the
purchase of loans that were partially funded by the sale of lower yielding
investment securities. Average interest-earning assets were $547.7 million
for the
11
<PAGE>
second quarter of 1997, an increase of $8.8 million compared to average
interest-earning assets of $538.9 million for the same quarter of 1996.
Interest expense for the second quarter of 1997 was $6.3 million an increase
of $349,000, or 5.9%, compared to $5.9 million for the same quarter of 1996.
The increase in interest expense was caused primarily by an increase in
average interest-bearing liabilities. Average interest-bearing liabilities
for the second quarter of 1997 were $474.6 million, an increase of $23.9
million, or 5.3%, compared to $450.7 million for the second quarter of 1996.
The majority of the funds received from the increase in interest-bearing
liabilities were used to purchase the net increase in average interest-
bearing assets, facilitate the HMN stock repurchases, and purchase loan
servicing assets.
Net interest income for the six months ended June 30, 1997 was $7.7 million,
a decrease of $163,000, or 2.1%, from $7.9 million for the same period of
1996. Interest income for the six month period ended June 30, 1997 was
$20.1 million, an increase of $330,000, or 1.7%, compared to $19.7 million
for the same period of 1996. The increase in interest income was primarily
due to the purchase of loans that were partially funded by the sale of lower
yielding investment securities. Average interest-earning assets were $542.9
million for the six months ended June 30, 1997, an increase of $8.1 million
compared to average interest-earning assets of $534.8 million for the same
period of 1996. Interest expense for the six month period ended June 30,
1997 was $12.3 million, an increase of $493,000, or 4.2%, compared to $11.8
million for the same period of 1996. The increase in interest expense was
caused primarily by an increase in average interest-bearing liabilities.
Average interest-bearing liabilities for the six month period ended June 30,
1997 were $469.2 million, an increase of $23.1 million, or 5.2%, compared to
$446.1 million for the same period of 1996. The majority of the funds
received from the increase in interest-bearing liabilities were used to
purchase the net increase in average interest-bearing assets, facilitate the
HMN stock repurchases, and purchase loan servicing assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the second quarters ended June 30, 1997 and
1996 were both $75,000. The provision for loan losses for the six months
ended June 30, 1997 and 1996 were both $150,000. The provision is the result
of management's evaluation of the loan portfolio, a historically low level of
non-performing loans, minimal loan charge-off experience, and its assessment
of the general economic conditions in the geographic area where properties
securing the loan portfolio are located. Management's evaluation did not
reveal conditions that would cause it to increase the provision for loan
losses during 1997 compared to 1996. Future economic conditions and other
unknown factors will impact the need for future provisions for loan losses.
As a result, no assurances can be given that increases in the allowance for
loan losses will not be required during future periods.
A reconciliation of HMN's allowance for loan losses is summarized as follows:
1997 1996
--------- ---------
Balance at January 1, $ 2,340,585 2,190,664
Provision 150,000 150,000
Charge-offs (19,009) (1,216)
Recoveries 7,250 23
--------- ---------
Balance at June 30, $ 2,478,826 2,339,471
========= =========
NON-INTEREST INCOME
Non-interest income for the second quarter of 1997 was $406,000, a decrease
of $79,000, or 16.3%, from $485,000 for the same quarter of 1996. The
decrease in non-interest income was principally due to a decrease of $155,000
in gain on the sale of securities and was partially offset by increased fee
income of $19,000 and an increase in gain on the sale of loans of $62,000.
Economic conditions and certain market conditions reduced the ability to sell
securities at a gain during the second quarter of 1997 compared to the same
period in 1996.
12
<PAGE>
Non-interest income for the six months ended June 30, 1997 was $1.1 million,
a decrease of $82,000, or 6.9%, from $1.2 million for the same period of
1996. The decrease was principally due to a $384,000 decrease in gain on the
sale of securities and was partially offset by a $37,000 increase in fee
income, a $210,000 increase in gain on sale of loans, and a $55,000 increase
in other income. The increased income recognized on the sale of loans is the
direct result of increased mortgage banking activity. The increase in other
income for the six months ended June 30, 1997 compared to the same period in
1996 was principally due to an increase in commissions earned by Osterud
Insurance Agency, which is a subsidiary of the Bank.
NON-INTEREST EXPENSE
Non-interest expense was $2.1 million for the second quarter of 1997, an
increase of $143,000, or 7.2%, from $2.0 million for the second quarter of
1996. The majority of the increase in non-interest expense between the two
quarters was due to a $260,000, or 23.6%, increase in compensation and
benefits and was the result of adding new employees, plus normal merit and
salary increases. Besides the increase in compensation, occupancy also
increased $37,000 between the two quarters. These increases were partially
offset by a $156,000 decrease in federal deposit insurance premiums for the
second quarter of 1997 compared to the second quarter of 1996. The decrease
in premium expense is the result of the Savings Association Insurance Fund
(SAIF) now being fully funded.
Non-interest expense for the six months ended June 30, 1997 was $4.2 million,
an increase of $274,000, or 6.9%, from $4.0 million for the six months ended
June 30, 1996. The principal cause for the increase in non-interest expense
between the two periods was due to a $470,000, or 21.3%, increase in
compensation and benefits expense and was the result of adding new employees
and normal merit and salary increases. Occupancy also increased $81,000 for
the six-month period ended June 30, 1997 compared to the same period ended
June 30, 1996 partially because of continued remodeling of offices. These
increases were partially offset by a $307,000 decrease in federal deposit
insurance premiums between the two periods because the SAIF insurance fund is
now fully funded.
INCOME TAX EXPENSE
Income tax expense was $740,000 for the second quarter of 1997, a decrease of
$148,000, or 16.6%, from $888,000 for the second quarter of 1996. The
decrease is primarily due to a decrease in taxable income between the two
quarters. Income tax expense was $1.7 million for the six month period ended
June 30, 1997, a decrease of $206,000, or 11.1%, from $1.9 million for the
same period in 1996.
LIQUIDITY
For the six months ended June 30, 1997, the net cash provided from operating
activities was $4.7 million and net cash used for investing activities was
$10.8 million. For the same period, HMN had $33.7 million in proceeds from
the sale of securities and it collected another $23.8 million from principal
payments and the maturity of securities. HMN purchased $60.4 million of
securities during the first six months of 1997. HMN also received proceeds
from the sale of loans of $25.3 million and purchased or originated
additional net loans of $29.6 million. During the first six month period of
1997, the Bank also purchased an additional interest in a mortgage servicing
partnership for $1.9 million. During the first six months of 1997, deposits
increased by $2.9 million and Federal Home Loan Bank advances showed a net
increase $8.29 million. During January 1997, HMN also repurchased 224,334
shares of its own common stock for $4.1 million.
*HMN has certificates of deposit with outstanding balances of $169.9 million
maturing during the next 12 months. Based upon past experience, management
anticipates that the majority of the deposits will renew for the same or
similar terms. Any funds lost from deposits which do not renew will be
replaced with deposits
* This paragraph contains a forward-looking statement(s). Refer to
information regarding Forward-looking Information on page 17 of this
discussion.
13
<PAGE>
from other customers, advances from the FHLB, or the sale of securities.
Management does not anticipate that it will have a liquidity problem
resulting from maturing deposits.
*HMN has entered into an agreement to purchase all of the outstanding stock
of Marshalltown Financial Corporation, a unitary thrift holding company, for
$25.9 million in cash. The transaction is subject to the approval of the
stockholders of Marshalltown Financial Corporation and the Office of Thrift
Supervision. The approval is anticipated to be received by December 31,
1997. HMN expects to fund the purchase of the Marshalltown stock from the
proceeds of the sale of securities available for sale.
*HMN is in the process of building two new retail banking facilities in
Spring Valley and Winona, Minnesota, at an estimated aggregate cost of $3.2
million. Occupancy is scheduled for the second or third quarter of 1998 and
construction funding will come from normal cash flows or the sale of
securities.
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at June 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in Thousands) 1997 1996
---------- ----------
<S> <C> <C>
Non-Accruing Loans
One-to-four family real estate $ 240 235
Nonresidential real estate 82 83
Commercial business 39 13
Consumer 13 7
--- ---
Total 374 338
--- ---
Foreclosed Assets
Real estate:
One-to-four family 92 23
--- ---
Total non-performing assets $466 $ 361
=== ===
Total as a percentage of
total assets 0.08% 0.07%
==== ====
Total non-performing loans $ 374 $ 338
==== ====
Total as a percentage of total
loans receivable, net 0.11% 0.10%
==== ====
</TABLE>
Total non-performing assets at June 30, 1997 were $466,000, an increase of
$105,000, or 29.1%, from $361,000 at December 31, 1996. The net increase of
$105,000 was the result of an increase of non-accruing loans and an increase
in one-to-four family foreclosed residential homes.
ASSET/LIABILITY MANAGEMENT
*HMN's management reviews the impact that changing interest rates will have
on its net interest income projected for the twelve months following June 30,
1997 to determine if its current level of interest rate risk is acceptable.
The following table projects the estimated impact on net interest income of
immediate interest rate changes called rate shocks.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 14,265 -8.88% -30.00%
+100 15,021 -4.06% -15.00%
0 15,656 0.00% 0.00%
-100 15,943 1.83% -15.00%
-200 16,240 3.73% -30.00%
* This paragraph contains a forward-looking statement(s). Refer to
information regarding Forward-looking Information on page 17 of this
discussion.
14
<PAGE>
The table above is forward-looking and is only an estimate of the potential
impact that changing rates will have on net interest income. The actual new
loan activity originated or purchased and securities purchases along with
actual deposit and borrowing activity could cause the actual net interest
income for the twelve month period to be materially different from the net
interest income projected above.
HMN continues to focus its fixed-rate one-to-four family residential loan
program on loans with contractual terms of 20 years or less. HMN also
originates and purchases adjustable rate mortgages which have initial fixed
rate terms of one to five years and then adjust annually each year
thereafter.
Refer to page 16 for table.
15
<PAGE>
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at June 30, 1997, using certain assumptions that are
described in more detail below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Maturing or Repricing
---------------------------------------------------
Over 6
6 Months Months to Over 1-3 Over 3-5
(Dollars in thousands) or Less One Year Years Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash equivalents $ 10,570 0 0 0
Securities available for
sale:
Mortgage-backed and
related securities<F1> 24,923 5,325 26,611 25,757
Other marketable
securities 18,045 1,905 10,561 30,324
Loans held for sale 1,205 0 0 0
Loans receivable, net:<F1><F2>
Fixed rate one-to-four
family<F3> 18,627 17,176 58,860 43,535
Adjustable rate
one-to-four family<F3> 26,946 21,658 12,283 12,570
Fixed rate commercial
real estate 143 126 405 260
Adjustable rate commercial
real estate 4,600 2,277 0 0
Commercial business 1,421 352 1,030 236
Consumer loans 18,372 1,163 2,431 1,057
Federal Home Loan Bank stock 0 0 0 0
------- ------- ------- -------
Total interest-earning
assets 124,852 49,982 112,181 113,739
------- ------- ------- -------
Non-interest checking 2,822 0 0 0
NOW accounts 16,459 0 0 0
Passbooks 3,113 2,784 8,492 5,435
Money market accounts 1,669 1,494 4,554 2,914
Certificates 103,434 66,491 110,904 19,977
Federal Home Loan Bank
advances 64,000 9,000 15,964 15,000
------- ------- ------- -------
Total interest-bearing
liabilities 191,497 79,769 139,914 43,326
------- ------- ------- -------
Interest-earning assets
less interest-bearing
liabilities $ (66,645) (29,787) (27,733) 70,413
======= ======= ======= =======
Cumulative interest-rate
sensitivity gap $ (66,645) (96,432) (124,165) (53,752)
======= ======= ======= =======
Cumulative interest-rate
gap as a percentage of
total assets at
June 30, 1997 (11.76)% (17.01)% (21.90)% (9.48)%
======= ======= ======= =======
Cumulative interest-rate gap
as a percentage of total
assets at December 31, 1996 (4.61) (10.66)
======= =======
Cumulative interest-rate gap as a
percentage of total assets
at December 31, 1995 (1.06) (7.42)
======= =======
Cumulative interest-rate gap as a
percentage of total
assets at December 31, 1994 (2.47) (2.26)
======= =======
<FN>
<1> Schedule prepared based upon the earlier of contractual maturity or
repricing date, if applicable, adjusted for scheduled repayments of
principal and projected prepayments of principal based upon experience.
<2> Loans receivable are presented net of loans in process and deferred loan
fees.
<3> Construction and development loans are all one-to-four family loans and
therefore have been included in the fixed rate one-to-four
family and adjustable rate one-to-four family lines.
</FN>
<CAPTION>
- -----------------------------------------------------------------------------
Maturing or Repricing
------------------------------------------------
Over 5 No Stated
(Dollars in thousands) Years Maturity Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Cash equivalents $ 0 0 10,570
Securities available for sale:
Mortgage-backed and
related securities<F1> 33,066 0 115,682
Other marketable securities 136 12,380 73,351
Loans held for sale 0 0 1,205
Loans receivable, net:<F1><F2>
Fixed rate one-to-four family<F3> 100,747 0 238,945
Adjustable rate
one-to-four family<F3> 930 0 74,387
Fixed rate commercial real estate 504 0 1,438
Adjustable rate commercial
real estate 0 0 6,877
Commercial business 56 0 3,095
Consumer loans 230 0 23,253
Federal Home Loan Bank stock 0 5,940 5,940
------- ------- -------
Total interest-earning assets 135,669 18,320 554,743
------- ------- -------
Non-interest checking 0 0 2,822
NOW accounts 0 0 16,459
Passbooks 9,662 0 29,486
Money market accounts 5,181 0 15,812
Certificates 0 0 300,806
Federal Home Loan Bank advances 10,400 0 114,364
------- ------- -------
Total interest-bearing liabilities 25,243 0 479,749
------- ------- -------
Interest-earning assets less
interest-bearing liabilities $ 110,426 18,320 74,994
======= ======= =======
Cumulative interest-rate
sensitivity gap $ 56,674 74,994 74,994
======= ======= =======
Cumulative interest-rate gap as a
percentage of total assets at
June 30, 1997 10.00% 13.23% 13.23%
======= ======= =======
Cumulative interest-rate gap as a
percentage of total assets
at December 31, 1996
Cumulative interest-rate gap as a
percentage of total assets
at December 31, 1995
Cumulative interest-rate gap as a
percentage of total
assets at December 31, 1994
<FN>
<1> Schedule prepared based upon the earlier of contractual maturity or
repricing date, if applicable, adjusted for scheduled repayments of
principal and projected prepayments of principal based upon experience.
<2> Loans receivable are presented net of loans in process and deferred loan
fees.
<3> Construction and development loans are all one-to-four family loans and
therefore have been included in the fixed rate one-to-four
family and adjustable rate one-to-four family lines.
</FN>
</TABLE>
16
<PAGE>
The preceding table was prepared utilizing the following assumptions
regarding prepayment and decay ratios which were determined by management
based upon their review of historical prepayment speeds and future prepayment
projections. Fixed rate loans were assumed to prepay at annual rates of
between 5% to 24%, depending on the coupon and period to maturity.
Adjustable Rate Mortgages (ARMs) were assumed to prepay at annual rates of
between 3% and 12%, depending on coupon and the period to maturity. Growing
Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between
8% and 27% depending on the coupon and the period to maturity. Mortgage-
backed securities and Collateralized Mortgage Obligations (CMOs) were
projected to have prepayments based upon the underlying collateral securing
the instrument. Certificate accounts were assumed not to be withdrawn until
maturity. Passbook and money market accounts were assumed to decay at an
annual rate of 20%.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. Although certain assets and liabilities may have similar
maturities and periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as ARMs, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the foregoing table. The ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
FORWARD-LOOKING INFORMATION
The following statements within Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking
statements and actual future results may differ materially from the
expectations disclosed within this discussion and analysis. The following
are forward-looking statements followed by comments of events which may
prevent the forward-looking statements from occurring:
LIQUIDITY
HMN has certificates of deposit with outstanding balances of $169.9
million maturing during the next 12 months. Based upon past experience,
management anticipates that the majority of the deposits will renew for
the same or similar terms. Any funds lost from deposits which do not
renew will be replaced with deposits from other customers, advances from
the FHLB, or the sale of securities. Management does not anticipate
that it will have a liquidity problem resulting from maturing deposits.
Competitive pricing by other institutions, the desire of a competitor to
pay interest rates on deposits that are above the current rates paid by
HMN, or a desire by customers to put more of their funds into
nontraditional bank products such as stocks and bonds could be
circumstances that would cause the $169.9 million of certificates that
mature to become a liquidity problem.
HMN has entered into an agreement to purchase all of the outstanding
stock of Marshalltown Financial Corporation, a unitary thrift holding
company, for $25.9 million in cash. The transaction is subject to the
approval of the stockholders of Marshalltown Financial Corporation and
the Office of Thrift Supervision (OTS). The approval is anticipated to
be received by December 31, 1997. HMN expects to fund the purchase of
the Marshalltown stock from the proceeds of the sale of securities
available for sale.
The approval may not be received by December 31, 1997 if Marshalltown's
shareholders do not approve the transaction or if the OTS is not able to
timely review or approve the transaction due to some unforeseen
regulatory issue.
17
<PAGE>
The funding for the purchase of Marshalltown may not come from the sale
of securities if the market value of the securities decrease drastically
from the current market value at June 30, 1997. Changes in economic
conditions could cause interest rates to rise rapidly which could cause
a drastic decrease in the market value of the security portfolio.
HMN is in the process of building two new retail banking facilities in
Spring Valley and Winona, Minnesota, at an estimated aggregate cost of
$3.2 million. Occupancy is scheduled for the second or third quarter of
1998 and construction funding will come from normal cash flows or the
sale of securities.
The anticipated occupancy date could change based upon delays related to
the acquisition of the land for the Winona building site. Delays
experienced by the contractors for the delivery of construction
materials or weather related issues could also cause the occupancy date
for Spring Valley and Winona to be later in 1998.
ASSET/LIABILITY MANAGEMENT
HMN's management reviews the impact that changing interest rates will
have on its net interest income projected for the twelve months
following June 30, 1997 to determine if its current level of interest
rate risk is acceptable. The following table projects the estimated
impact on net interest income of immediate interest rate changes called
rate shocks.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 14,265 -8.88% -30.00%
+100 15,021 -4.06% -15.00%
0 15,656 0.00% 0.00%
-100 15,943 1.83% -15.00%
-200 16,240 3.73% -30.00%
The table above is forward-looking and is only an estimate of the
potential impact that changing rates will have on net interest income.
The actual new loan activity originated or purchased and securities
purchases along with actual deposit and borrowing activity could cause
the actual net interest income for the twelve month period to be
materially different from the net interest income projected above.
18
<PAGE>
HMN FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
Not applicable
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Third Annual Meeting of Stockholders of the Company was held on
April 22, 1997 at 10:00 a.m..
The following is a record of the votes cast in the election of
directors of the Company:
BROKER
FOR VOTE WITHHELD NON-VOTES
---------- ------------- ---------
Duane D. Benson 3,104,694 6,375 --
Irma R. Rathbun 3,107,744 3,325 --
Accordingly, the individuals named above were declared to be duly
elected directors of the Company for terms to expire in 2000,
respectively.
The following is a record of the votes cast in respect of the proposal
to ratify the appointment of KPMG Peat Marwick, LLP as the Company's
auditors for the fiscal year ending December 31, 1997.
NUMBER PERCENTAGE OF VOTES
OF VOTES ACTUALLY CAST
---------- --------------------
FOR 3,106,813 99.86%
AGAINST 325 .01%
ABSTAIN 3,931 .13%
BROKER
NON-VOTES -- --%
19
<PAGE>
ITEM 5. Other Information.
(a) Amendment to the Home Federal Savings Bank Employees' Savings
& Profit Sharing Plan dated January 28, 1997. Refer to Exhibit
5(a).
(b) Amendment to the Adoption Agreement for Home Federal Savings
Bank Employees' Savings & Profit Sharing Plan and Trust
effective June 17, 1997. Refer to Exhibit 5(b).
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits on page 21 of this report.
(b) Reports on Form 11-K. An annual report on Form 11-K was filed
on June 25, 1997, for the fiscal year ended December 31, 1996.
(c) Reports on Form 8-K. A current report on Form 8-K was filed
on June 30, 1997, to report the intent to repurchase 300,000
shares of HMN's common stock.
(d) Reports on Form 8-K. A current report on Form 8-K was filed
on July 10, 1997, related to the press release dated July 1,
1997, to report a proposed merger of HMN and Marshalltown
Financial Corporation.
(e) Reports on Form 8-K. A current report on Form 8-K was filed
on July 18, 1997, reporting second quarter, semi-annual
earnings.
20
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMN FINANCIAL, INC.
Registrant
Date: 8/13/97 /s/ Roger P. Weise
----------- ------------------------
Roger P. Weise,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: 8/13/97 /s/ James B. Gardner
----------- -----------------------
James B. Gardner,
Executive Vice President
(Principal Financial Officer)
21
<PAGE>
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Reference Sequential
to Prior Page Numbering
Regulation Filing or Where Attached
S-K Exhibit Exhibits Are
Exhibit Number Located in This
Number Document Attached Hereto Form 10-Q Report
- ----------- -------- --------------- ----------------
2 Plan of acquisition, reorganization, N/A N/A
arrangement, liquidation or succession.
3(a) Articles of Incorporation * N/A
3(b) By-laws * N/A
4 Instruments defining the rights of * N/A
security holders, Including indentures
5(a) Amendment to the Home Federal Savings 5(a) Filed
Bank Employees' Savings & Profit electronically
Sharing Plan dated January 28, 1997.
5(b) Amendment to the Adoption Agreement for 5(b) Filed
Home Federal Savings Bank Employees' electronically
Savings & Profit Sharing Plan and Trust
effective June 17, 1997.
10.1(a)Employment agreement for Mr. Weise ** N/A
dated June 29, 1994
10.1(b)Extension of employment agreement to 10.1(b) Filed
May 20, 2000 electronically
10.2(a)Employment agreement for Mr. Gardner ** N/A
dated June 29, 1994
10.2(b)Extension of employment agreement to 10.2(b) Filed
May 20, 2000 electronically
10.3 Trust Agreement between Home Federal 10.3 Filed
Savings Bank and the Bank of New York electronically
11 Computation of Earnings Per Common Share 11 Filed
electronically
27 Financial Data Schedule 27 Filed
electronically
* Filed April 1, 1994, as exhibits to the Registrant's Form S-1
registration statement (Registration No. 33-77212) pursuant to the
Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601
of Regulation S-K.
** Filed as an exhibit to the Registrant's Form 10-K for 1994 (file
No. 0-24100). All previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation
S-K.
*** Filed as an exhibit to the Registrant's Form 10-K for 1995 (file
no. 0-24100). All previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation
S-K.
**** Filed as an exhibit to Registration's Form 10-K for 1996 (file no.
0-24100). All previously filed documents are hereby incorporated
by reference in accordance with Item 601 of Regulation S-K.
22
<PAGE>
Exhibit 5(a)
HOME FEDERAL SAVINGS BANK
HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS &
PROFIT SHARING PLAN AND TRUST AMENDMENTS
RESOLUTION #9701-04
JANUARY 28, 1997
WHEREAS, Home Federal Savings Bank (the "Bank") currently offers a
401(k) Plan (the "Plan") to its employees, and
WHEREAS, the Bank acknowledged Pentegra's Basic Plan Document
through the execution of an Adoption Agreement, effective August 1,
1996. This execution amended the existing Plan Document dated
January 2, 1992 in its entirety.
WHEREAS, the Adoption Agreement is hereby amended as indicated
below, effective January 1, 1997:
For those employees hired prior to January 1, 1997:
1) the eligibility date will be the 1st of the month
following 30 days of employment.
2) the employer match will be calculated monthly and paid
annually.
For those employees hired on or after January 1, 1997:
1) the eligibility date will be the 1st of the month
following 30 days of employment.
2) the employer match will be calculated monthly and paid
annually.
3) the vesting schedule relating to the employer match will
be a 5 year cliff vesting.
NOW THEREFORE BE IT RESOLVED, that the Board of Directors hereby
approve the above amendments to the Plan.
RESOLVED FURTHER, that a copy of this resolution be given to the
Administrator of the Bank's 401(k) Plan and that all participants
in the Plan are notified of these amendments.
Exhibit 5(b)
Amendment to Adoption Agreement
for
HOME FEDERAL SAVINGS BANK
EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST
H04
Effective June 17, 1997, the Adoption Agreement for Home Federal Savings Bank
Employees' Savings & Profit Sharing Plan and Trust is amended as follows:
1. SECTION VI Investment Funds is replaced by the following Section VI:
--------------------------------------------------------
SECTION VI: Investment Funds:
The Employer hereby appoints Barclays Global Investors, N.A. to serve as
Investment Manager under the Plan.
The Employer hereby selects the following Investment Funds to be made
available under the Plan (choose whichever shall apply) and consent to
the lending of securities by such funds to brokers and other borrowers.
The Employer agrees and acknowledges that the selection of Investment
Funds made in this Section VI is solely its responsibility, and no other
person, including the Sponsor or Investment Manager, has any
discretionary authority or control with respect to such selection
process. The Employer hereby holds Investment Manager harmless from,
and indemnifies it against, any liability Investment Manager may incur
with respect to such Investment Funds so long as Investment Manager is
not negligent and has not breached its fiduciary duties.
1. /x/ S&P 500 Stock Fund
2. /x/ Stable Value Fund
3. /x/ S&P MidCap Stock Fund
4. /x/ Money Market Fund
5. /x/ Government Bond Fund
6. /x/ International Stock Fund
7. /x/ Asset Allocation Funds (3)
- Income Plus
- Growth & Income
- Growth
HMN Financial, Inc.
8. /x/ (Name of Employer) Stock Fund (the "Employer Stock Fund")
9. / / (Name of Employer) Certificate of Deposit Fund
Note: Investment Funds 6 and 7 above will be implemented on July 2,
1997.
2. SECTION VIII Investment Direction is replaced by the following
-------------------------------------------------
Section VIII:
------------
SECTION VIII: Investment Direction/Transfers:
<PAGE>
A. Members shall be entitled to designate what percentage of employee
contributions and employer contributions made on their behalf will
be invested in the various Investment Funds offered by the Employer
as specified in Section VI of this Adoption Agreement; provided,
however, that the following portions of a Member's Account must be
invested in the Employer Stock Fund (choose whichever shall apply):
1. / / Employer Profit Sharing Contributions
2. / / Employer Matching Contributions
3. / / Employer Basic Contributions
4. / / Employer Supplemental Contributions
5. / / Employer Qualified Nonelective Contributions
B. --- Amounts invested in the Employer Stock Fund may not be
transferred to any other Investment Fund.
C. A Member may change his or her investment direction (choose 1,2, or
3):
1. / / 1 time per business day.
2. / / 1 time per calendar month.
3. / / 1 time per calendar quarter.
D. If a Member fails to make an effective investment direction, the
employee's contributions and employer contributions made on the
Member's behalf shall be invested in Money Market Fund
-----------------
(insert one of the Investment Funds selected in Section VI of this
Adoption Agreement).
3. SECTION XV Trustee is replaced by the following Section XV:
-----------------------------------------------
SECTION XV: Trustee:
The Employer hereby appoints The Bank of New York to serve as Trustee
for all Investment Funds under the Plan except the Employer Stock Fund.
The Employer hereby appoints the following person or entity to serve as
Trustee under the Plan for the Employer Stock Fund.*
Name: Bank of New York
---------------------------------
Address:
------------------------------
Telephone No: Contact:
------------------------- ----------------------
----------------------------------------
Signature of Trustee
(Required only if the Employer is serving as its own Trustee)
* Subject to approval by The Bank of New York, if The Bank of New
York is appointed as Trustee for the Employer Stock Fund.
2
<PAGE>
The Employer hereby appoints The Bank of New York to serve as Custodian
under the Plan for the Employer Stock Fund in the event The Bank of New
York does not serve as Trustee for such Trust.
EXECUTION OF AMENDMENT TO THE ADOPTION AGREEMENT
------------------------------------------------
Upon execution by the Employer of this Amendment, the Adoption Agreement, as
amended, together with the Sponsor's Employees' Savings & Profit Sharing Plan
and Trust Agreement (the "Agreement"), shall constitute the Home Federal
Savings Bank Employees' Savings & Profit Sharing Plan and Trust.
IN WITNESS WHEREOF, the Employer has caused this Amendment to the Adoption
Agreement to be executed by its duly authorized officer this 28 day of May,
1997.
HOME FEDERAL SAVINGS BANK
By: /s/ Roger P. Weise
-------------------------
Name: Roger P. Weise
-------------------------
Title: President
-------------------------
H04
3
<PAGE>
Exhibit 10.1(b)
MEMORANDUM
TO: Roxanne M. Hellickson
FROM: Home Federal Savings Bank
DATE: May 20, 1997
RE: Notice of Extension of Employment Contract
- -----------------------------------------------------------------
The Board of Directors (the Board) of Home Federal Savings
Bank has reviewed your formal performance evaluation performed by
selected members of the Board. In connection therewith and
pursuant to Section 1 of your contract, on May 20, 1997, the
Board determined to extend your employment contract until May 20,
2000.
HOME FEDERAL SAVINGS BANK
By: /s/ M.F. Schumann
------------------------
M.F. Schumann
Director
EMPLOYEE ACKNOWLEDGEMENT
I hereby acknowledge receipt of this notice of extension of
the above-referenced contract and accept the extension of the
term of such contract.
EMPLOYEE
Dated: 7-22-97 By: /s/ Roger P. Weise
------------- --------------------
(Correction from 5-20-97) Roger P. Weise
Exhibit 10.2(b)
MEMORANDUM
TO: Roxanne M. Hellickson
FROM: Home Federal Savings Bank
DATE: May 20, 1997
RE: Notice of Extension of Employment Contract
- -----------------------------------------------------------------
The Board of Directors (the Board) of Home Federal Savings
Bank has reviewed your formal performance evaluation performed by
selected members of the Board. In connection therewith and
pursuant to Section 1 of your contract, on May 20, 1997, the
Board determined to extend your employment contract until May 20,
2000.
HOME FEDERAL SAVINGS BANK
By: /s/ Roger P. Weise
--------------------
Roger P. Weise
President and
Chief Executive Officer
EMPLOYEE ACKNOWLEDGEMENT
I hereby acknowledge receipt of this notice of extension of
the above-referenced contract and accept the extension of the
term of such contract.
EMPLOYEE
Dated: 7-22-97 By: /s/ James B. Gardner
------------- ----------------------
(Correction from 5-20-97) James B. Gardner
Exhibit 10.3
=====================================
TRUST AGREEMENT
by and between
HOME FEDERAL SAVINGS BANK
and
THE BANK OF NEW YORK
=====================================
TABLE OF CONTENTS
Page
----
SECTION 1 - GENERAL . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . 1
1.2 Compliance With Law . . . . . . . . . . . . . . . 2
SECTION 2 - ESTABLISHMENT OF TRUST . . . . . . . . . . . . 2
2.1 Appointment and Acceptance of Trustee . . . . . . 2
2.2 Trustee Responsibilities . . . . . . . . . . . . 3
2.3 Contribution . . . . . . . . . . . . . . . . . . 3
2.4 Exclusive Benefit . . . . . . . . . . . . . . . . 3
2.5 Return of Contributions . . . . . . . . . . . . . 3
2.6 Distributions . . . . . . . . . . . . . . . . . . 4
SECTION 3 - AUTHORITIES . . . . . . . . . . . . . . . . . . 5
3.1 Authorized Parties . . . . . . . . . . . . . . . 5
3.2 Authorized Instructions . . . . . . . . . . . . . 5
SECTION 4 - INVESTMENT AND ADMINISTRATION OF THE FUND . . . 5
4.1 Investment Funds . . . . . . . . . . . . . . . . 5
4.2 Discretionary Powers and Duties of Trustee . . . 6
4.3 Directed Powers of Trustee . . . . . . . . . . . 8
4.4 Employer Stock . . . . . . . . . . . . . . . . . 10
4.5 Standard of Care . . . . . . . . . . . . . . . . 12
4.6 Force Majeure . . . . . . . . . . . . . . . . . . 12
SECTION 5 - APPOINTMENT AND AUTHORITY OF PENTEGRA . . . . . 12
5.1 Appointment and Delegation . . . . . . . . . . . 12
5.2 Allocation and Investment Directions to . . . . . 12
5.3 Custody of Participant Loan Documents . . . . . . 13
5.4 Designation for Authorized Instructions . . . . . 13
5.5 Resignation or Removal of Pentegra . . . . . . . 13
SECTION 6 - REPORTING AND RECORDKEEPING . . . . . . . . . . 13
6.1 Records and Accounts . . . . . . . . . . . . . . 13
6.2 Non-Fund Assets . . . . . . . . . . . . . . . . . 14
SECTION 7 - COMPENSATION, EXPENSES, TAXES, INDEMNIFICATION 14
7.1 Compensation and Expenses . . . . . . . . . . . . 14
7.2 Tax Obligations . . . . . . . . . . . . . . . . . 15
7.3 Indemnification . . . . . . . . . . . . . . . . . 15
SECTION 8 - AMENDMENT, TERMINATION, RESIGNATION, REMOVAL 16
8.1 Amendment . . . . . . . . . . . . . . . . . . . . 16
8.2 Removal or Resignation of Trustee . . . . . . . . 16
8.3 Property Not Transferred . . . . . . . . . . . . 16
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<PAGE>
SECTION 9 - ADDITIONAL PROVISIONS . . . . . . . . . . . . . 17
9.1 No Merger, Consolidation or Transfer of Plan
Assets or Liabilities . . . . . . . . . . . . . . 17
9.2 Assignment or Alienation . . . . . . . . . . . . 17
9.3 Successors and Assigns . . . . . . . . . . . . . 17
9.4 Governing Law . . . . . . . . . . . . . . . . . . 17
9.5 Necessary Parties . . . . . . . . . . . . . . . . 17
9.6 No Third Party Beneficiaries . . . . . . . . . . 18
9.7 Execution in Counterparts . . . . . . . . . . . . 18
9.8 No Additional Rights . . . . . . . . . . . . . . 18
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<PAGE>
TRUST AGREEMENT
THIS TRUST AGREEMENT, effective as of June 17, 1997 by
and between HOME FEDERAL SAVINGS BANK (the "Company") and THE
BANK OF NEW YORK (the "Trustee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to an Adoption Agreement, the Company
has adopted a qualified retirement plan for the benefit of its
employees and the employees of certain of the Company's
affiliates which have heretofore or may hereafter adopt such plan
(such plan, as amended from time to time, is referred to herein
as the "Plan");
WHEREAS, the Company has established or desires to
establish a trust constituting a part of the Plan, pursuant to
which assets will be held to provide for the funding of, and
payment of benefits under, the Plan (the "Trust");
WHEREAS, the Company desires to appoint the Trustee as
trustee of the Trust and the Trustee is willing to accept such
appointment; and
WHEREAS, the Plan provides for one or more fiduciaries
named in the Plan having the power to manage and control the
assets of the Plan (the "Named Fiduciary");
NOW, THEREFORE, the Company and the Trustee, each
intending to be legally bound, agree as follows:
SECTION 1
GENERAL
1.1 DEFINITIONS. The terms used herein shall have the
following meanings:
(a) "AGREEMENT" means this instrument. including all
amendments thereto.
(b) "CODE" means the Internal Revenue Code of 1986, as
amended.
(c) "EMPLOYER" means the Company and any affiliate of
the Company which has heretofore adopted, or may hereafter adopt,
<PAGE>
the Plan. Each affiliate of the Company adopting the Plan
appoints the Company as its agent for purposes of this Agreement
and agrees that it shall be bound by the decisions, actions and
directions of the Company and the Named Fiduciary under this
Agreement and that the Trustee shall be fully protected in
relying upon such decisions, actions and directions and shall in
no event be required to give notice to or otherwise deal with
such affiliate except by dealing with the Company as agent of
such affiliate.
(d) "EMPLOYER STOCK" shall mean securities of the
Employer which constitute "qualifying employer securities" with
respect to the Plan within the meaning of Section 407 of ERISA.
(e) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
(f) "FUND" means the assets held pursuant to this
Agreement as such assets shall exist from time to time.
(g) "TAX OBLIGATIONS" means the responsibility for
payment of taxes, withholding, certification and reporting
requirements, claims for exemptions or refund, interest,
penalties and other related expenses of the Fund.
1.2 COMPLIANCE WITH LAW. The Plan and Trust are
intended to comply with ERISA and to be tax-exempt under Section
501(a) of the Code. The Company assumes full responsibility to
establish and maintain the Plan as a plan meeting the
qualification requirements of Section 401(a) of the Code and
shall immediately notify the Trustee if the Plan ceases to be
qualified.
SECTION 2
ESTABLISHMENT OF TRUST
2.1 APPOINTMENT AND ACCEPTANCE OF TRUSTEE. The
Company hereby appoints THE BANK OF NEW YORK as Trustee of the
Trust with respect to the Fund. The Company shall provide to
Trustee a resolution of its Board of Directors (which may include
a resolution authorizing one or more officers authorized to act
on its behalf) certified by the Secretary or any Assistant
Secretary of the Company ("Certified Resolutions") appointing The
Bank of New York as Trustee hereunder. The Fund shall consist of
all monies and other property acceptable to the Trustee in its
sole discretion as may be paid or delivered to the Trustee from
time to time, together with any and all increments thereto,
proceeds and reinvestments thereof, and income thereon, less
payments and distributions therefrom. The Fund shall be held by
the Trustee in trust and dealt with in accordance with the
provisions of this Agreement without distinction between
principal and income. The Trustee hereby accepts its appointment
-2-
<PAGE>
as trustee, acknowledges that it assumes the duties established
by this Agreement and agrees to be bound by the terms contained
herein.
2.2 TRUSTEE RESPONSIBILITIES. The Trustee shall hold
the assets of, and collect the income and make payments from the
Fund, all as hereinafter provided. Except to the extent that
assets of the Fund have been deposited in a collective investment
fund maintained by the Trustee, the Trustee shall not be
responsible, directly or indirectly, for the investment or
reinvestment of the assets of the Fund, which shall be the sole
responsibility of the Named Fiduciary. The Trustee is not a
party to, and has no duties or responsibilities under, the Plan
other than those that may be expressly contained in this
Agreement. As to the responsibilities of the Trustee, in any
case in which a provision of this Agreement conflicts with any
provision in the Plan, this Agreement shall control. The Trustee
shall have no duties, responsibilities or liability with respect
to the acts or omissions of any prior trustee.
2.3 CONTRIBUTIONS. The Trustee shall have no
authority or duty to determine the adequacy of or enforce the
collection of contributions under the Plan, shall not be
responsible for the adequacy of the Trust to meet and discharge
any liabilities under the Plan and shall have no responsibility
for any property until such cash or property is received and
accepted by the Trustee. The Employer and the Named Fiduciary
shall have the sole duty and responsibility for ensuring the
adequacy of the Trust to discharge the liabilities under the
Plan, determining the adequacy of the contributions to be made
under the Plan, transmitting the contributions to the Trustee and
ensuring compliance with any statute, regulation or rule
applicable to contributions.
2.4 EXCLUSIVE BENEFIT. Except as may be permitted by
law or by the terms of the Plan or this Agreement, at no time
prior to the satisfaction of all liabilities with respect to
participants and their beneficiaries under the Plan shall any
part of the Trust be used for or diverted to any purpose other
than for the exclusive benefit of the participants and their
beneficiaries. The assets of the Trust shall be held for the
exclusive purposes of providing benefits to participants of the
Plan and their beneficiaries and defraying the reasonable
expenses of administering the Plan and the Trust.
2.5 RETURN OF CONTRIBUTIONS. Notwithstanding any
other provision of this Agreement: (i) if a contribution is
conditioned upon a favorable determination as to the qualified
status of the Plan under Code Section 401 and the Plan receives
an adverse determination with respect to its initial
qualification, then any such contribution may be returned to the
Employer within one year after the date of determination; (ii) a
contribution made by the Employer based upon mistake of fact may
be returned to the Employer within one year after the date of
-3-
<PAGE>
such contribution; and (iii) if a contribution to the Plan is
conditioned upon its deductibility under the Code and a deduction
for such a contribution is disallowed, such contribution may be
returned to the Employer within one year after the date of the
disallowance of such deduction.
In the case of the return of a contribution *ue to
mistake of fact or the disallowance of a deduction, the amount
which may be returned is the excess of the amount contributed
over the amount that would have been contributed had there not
been a mistake or disallowance. Earnings attributable to the
excess contributions may not be returned to the Employer but
losses attributable thereto must reduce the amount to be so
returned. Any return of contribution made by the Trustee
pursuant to this Section shall be made only upon the direction
the Named Fiduciary, which shall have exclusive responsibility
for determining whether the conditions of such return have been
satisfied and for the amount to be returned.
2.6 DISTRIBUTIONS. The Trustee shall make
distributions and payments out of the Fund as directed by the
Named Fiduciary and amounts distributed or paid pursuant to such
direction thereafter no longer shall constitute a part of the
Fund. The Named Fiduciary may direct such distributions and
payments to be made to any person, including the Named Fiduciary
or an Employer, or to any paying agent designated by the Named
Fiduciary, in such amounts and in such form (including, without
limitation, shares of Employer Stock) and for such purposes as
the Named Fiduciary shall direct. Any such order shall
constitute a certification that the payment is one the Named
Fiduciary is authorized to direct. The Named Fiduciary shall
have the exclusive responsibility, and the Trustee shall not have
any responsibility or duty under this Agreement, for ensuring
that any payment made from the Fund at the direction of the Named
Fiduciary does not constitute a diversion of the assets of the
Fund and for determining that any such distribution is in
accordance with the terms of the Plan and applicable law,
including, without limitation, determining the amount, timing or
method of payment and the identity of each person to whom such
payments shall be made. The Trustee shall have no responsibility
or duty to determine the tax effect of any payment or to see to
the application of any payment. The Trustee shall not be
required to make any payment from the Fund in excess of the net
realizable value of the assets of the Fund or to make any payment
in cash unless there is sufficient cash in the Fund or the Named
Fiduciary has provided written instructions as to the assets to
be converted to cash for the purpose of making the distribution.
If a dispute arises as to who is entitled to or should receive
any benefit or payment, the Trustee may withhold or cause to be
withheld such payment until the dispute is resolved.
-4-
<PAGE>
SECTION 3
AUTHORITIES
3.1 AUTHORIZED PARTIES. The Company shall identify
the Named Fiduciary to the Trustee and shall furnish the Trustee
with a written list of the names, signatures and extent of
authority of all persons authorized to direct the Trustee and
otherwise act on behalf of the Company under the terms of this
Agreement. The Named Fiduciary will provide the Trustee with a
written list of the names, signatures and extent of authority of
all persons authorized to act on behalf of the Named Fiduciary.
The Trustee shall be entitled to rely on and shall be fully
protected in acting upon direction from an authorized party until
notified in writing by the Company or the Named Fiduciary, as
appropriate, of a change of the identity of an authorized party.
3.2 AUTHORIZED INSTRUCTIONS. All directions and
instructions to the Trustee from a party who has been authorized
to act on behalf of the Company or the Named Fiduciary pursuant
to Section 3.1 or from Pentegra (as provided for in Section 5.4)
shall be in writing, transmitted by mail or by facsimile or shall
be an electronic transmission, provided the Trustee may, in its
discretion, accept oral directions and instructions and may
require confirmation in writing of any such oral directions and
instructions. The Trustee shall be entitled to rely on and shall
be fully protected in acting in accordance with all such
directions and instructions which the Trustee reasonably believes
to have been given by a party who has been authorized to ___ _
behalf of the Company or the Named Fiduciary pursuant to Section
3.1 or by Pentegra (pursuant to Section 5.4) and in failing to
act in the absence thereof.
SECTION 4
INVESTMENT AND ADMINISTRATION OF THE FUND
4.1 INVESTMENT FUNDS. The Named Fiduciary, from time
to time and in accordance with the provisions of the Plan, shall
direct the Trustee to establish one or more separate investment
accounts under the Trust (each such separate account hereinafter
referred to as an "Investment Fund"). The Trustee shall transfer
to each such Investment Fund such portion of the assets of the
Fund as the Named Fiduciary directs. The assets which have been
allocated to an Investment Fund shall be invested and reinvested
in accordance with the instructions of the Named Fiduciary, which
shall have exclusive responsibility therefor. The Trustee shall
be under no duty to question, and shall not incur any liability
on account of following, the instructions of the Named Fiduciary,
with respect to any Investment Fund or the investment or
reinvestment of any assets of the Fund or any Investment Fund,
nor to make suggestions to the Named Fiduciary in connection
therewith or to determine the compliance of such instructions
-5-
<PAGE>
with the Plan or applicable law, including, without limitation,
the requirements of Sections 406 and 407 of ERISA. The Trustee
shall not be liable for any losses, costs or expenses (including,
without limitation, any opportunity costs) resulting from any
investment directions given or omitted by the named Fiduciary and
the Trustee shall not be liable for any losses, cost or expenses
associated with the investment decisions of the Named Fiduciary,
including, without limitation, any losses, costs or expenses
associated with the selection of investments by the Named
Fiduciary, actual investments directed by the Named Fiduciary and
the market risks associated with such selections and directions.
If the Trustee is directed to deliver property against payment,
the Trustee shall have no liability for non-receipt of such
payment.
Unless the Trustee is otherwise directed by the Named
Fiduciary, all interest, dividends and other income received with
respect to, and all proceeds received from the sale or other
disposition of, assets of an Investment Fund shall be credited to
and reinvested in such Investment Fund, and all expenses of the
Fund which are properly allocable to a particular Investment Fund
shall be so allocated and charged. Subject to the provisions of
the Plan, the Named Fiduciary may direct the Trustee to eliminate
an Investment Fund or Funds, and the Trustee thereupon shall
dispose of the assets of such Investment Fund or Funds and
reinvest the proceeds thereof in accordance with the instructions
of the Named Fiduciary.
4.2 DISCRETIONARY POWERS AND DUTIES OF TRUSTEE.
Subject to the provisions and limitations contained elsewhere
herein, in administering the Trust, the Trustee shall be
specifically authorized in its sole administrative discretion to:
(a) Appoint subtrustees or depositories, domestic or
foreign (including affiliates of the Trustee), as to part or all
of the Fund, except that the indicia of ownership of any asset of
the Fund shall not be held outside the jurisdiction of the
district courts of the United States unless in compliance with
Section 404(b) of ERISA and regulations thereunder;
(b) Appoint one or more individuals or corporations as
a custodian of any property of the Fund and, as part of its
reimbursable expenses under this Agreement, to pay the reasonable
compensation and expenses of any such custodian;
(c) Hold property in nominee name, in bearer form, or
in book entry form, in a clearinghouse corporation or in a
depository (including an affiliate of the Trustee), so long
the Trustee's records clearly indicate that the assets held
part of the Fund;
(d) Collect income payable to and distributions due to
the Fund and sign on behalf of the Trust any declarations,
affidavits, certificates of ownership and other documents
-6-
<PAGE>
required to collect income and principal payments, including but
not limited to, tax reclamations, rebates and other withheld
amounts;
(e) Collect proceeds from securities, certificates of
deposit or other investments which may mature or be called and
surrender such securities at maturity or when called; provided,
however, that the Trustee shall not be liable for failure to
surrender any security for redemption prior to maturity or take
other action if notice of such redemption or other action was not
provided to the Trustee by the issuer, the Named Fiduciary or one
of the nationally recognized bond or corporate action services to
which the Master Trustee subscribes;
(f) Exchange securities in temporary form for
securities in definitive form, and to effect an exchange of
shares where the par value of stock is changed;
(g) Submit or cause to be submitted to the Named
Fiduciary, on a best efforts basis, all information received by
the Trustee regarding ownership rights pertaining to property
held in the Fund;
(h) Attend to involuntary corporate actions;
(i) Determine, or cause to be determined, the fair
market value of the Fund daily, or for such other period as may
be mutually agreed upon, in accordance with methods consistently
followed and uniformly applied;
(j) Render periodic statements for property held
hereunder;
(k) Commence or defend suits or legal proceedings and
represent the Fund in all suits or legal proceedings in any court
or before any other body or tribunal as the Trustee shall deem
necessary to protect the Fund (provided, however, that the
Trustee shall have no obligation to take any legal action for the
benefit of the Fund unless it shall first be indemnified for all
expenses in connection therewith, including without limitation
counsel fees);
(l) Employ suitable agents and legal counsel, who may
be counsel for an Employer, and, as a part of its reimbursable
expenses under this Agreement, to pay their reasonable
compensation and expenses. The Trustee shall be entitled to rely
on and may act upon advice of counsel on all matters, and shall
be without liability for any action reasonably taken or omitted
pursuant to such advice;
(m) Subject to the requirements of applicable law,
take all action necessary to settle authorized transactions;
-7-
<PAGE>
(n) Form corporations and create trusts under the laws
of any state for the purpose of acquiring and holding title to
any securities or other property, all on such terms and
conditions as the Trustee deems advisable;
(o) Make, execute and deliver any and all documents,
agreements or other instruments in writing as are necessary or
desirable for the accomplishment of any of the powers and duties
in this Agreement; and
(p) Generally take all action, whether or not
expressly authorized, which the Trustee may deem necessary or
desirable for the fulfillment of its duties hereunder.
4.3 DIRECTED POWERS OF TRUSTEE. In addition to the
powers enumerated in Section 4.2, the Trustee shall have the
following powers and authority in the administration of the Fund
to be exercised solely as directed by the Named Fiduciary:
(a) Invest and reinvest in any securities or other
property including Employer Stock, provided that in no case
without the consent of the Trustee will the assets of the Fund be
invested in assets other than Employer Stock or units of
collective investment funds;
(b) Settle purchases and sales and engage in other
transactions, including free receipts and deliveries, exchanges
and other voluntary corporate actions, with respect to securities
or other property received by the Trustee;
(c) Redeem, transfer or exchange securities of the
Fund; sell, exchange, convey, transfer or otherwise dispose of
any other property of the Fund; and make, execute and deliver to
the purchasers thereof good and sufficient legal documents of
conveyance therefor, and all assignments, transfers and other
legal instruments, either necessary or convenient for passing the
title and ownership of such securities and other property, and no
person dealing with the Trustee shall be bound to see to the
application of the purchase money or to inquire into the
validity, expediency or propriety of any such sale or
disposition;
(d) Deliver notices, prospectuses and proxy statements
to the Named Fiduciary, and, subject to Section 4.4, vote in
person or by proxy with respect to any securities held by the
Trust Fund in accordance with the written directions of the Named
Fiduciary; and in accordance with such power, exercise
subscription, conversion and other rights and options and make
payments incidental thereto and take action or refrain from
taking any action with respect to any reorganization,
consolidation, merger, dissolution or other recapitalization or
refinancing and pay any assessments or charges in connection
therewith and delegate discretionary powers with respect thereto;
but the Company understands that, where options, tenders or other
-8-
<PAGE>
rights have fixed expiration dates, in order for the Trustee to
act, it must receive instructions at its offices, addressed as
the Trustee may from time to time request, by no later than noon
(N.Y. City time) at least one business day prior to the last
scheduled date to act with respect thereto (or such earlier date
or time as the Trustee may direct);
(e) Hold any part of the Fund in cash or cash balances
and the Trustee shall not be responsible for the payment of
interest on such balances;
(f) Make loans from the Fund to participants in the
Plan, which shall be secured by the participants account balance;
however, the Named Fiduciary shall have full and exclusive
responsibility for loans made to participants, including, without
limitation, full and exclusive responsibility for the following:
development of procedures and documentation for such loans;
acceptance of loan applications; approval of loan applications;
disclosure of interest rate information required by Regulation Z
of the Federal Reserve Board promulgated pursuant to the Truth in
Lending Act, 15 U.S.C. Section 1601 et seq.; ensuring that such loans
shall bear a reasonable rate of interest (within the meaning of
Regulation Section 2550.408(b)(1) promulgated by the Department of
Labor); acting as agent of the Trustee for the physical custody
and safekeeping of the promissory notes and other -loan documents;
performing necessary and appropriate recordkeeping and accounting
functions with respect to loan transactions; enforcement of
promissory note terms, including, but not limited to, directing
the Trustee to take specified actions to enforce its rights under
the documents relating to plan loans, including, without
limitation, the occurrence of events of default and maintenance
of accounts and records regarding interest and principal payments
von notes. The Trustee shall not in any way be responsible for
holding or reviewing such documents, records and procedures and
shall be entitled to rely upon such information as is provided by
the Named Fiduciary or its own sub-agent or recordkeeper without
any requirement or responsibility to inquire as to the
completeness or accuracy thereof, but may from time to time
examine such documents, records and procedures as it deems
appropriate. Unless otherwise instructed in writing by the Named
Fiduciary, the Trustee shall have no duty or responsibility to
file a UCC-1 form or take other action in order to perfect its
security interest in the accounts of a Participant to whom a loan
is made. The Company shall indemnify and hold the Trustee and
its directors, officers and employees harmless from all claims,
liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees, arising out of any action or inaction
of the Named Fiduciary with respect to its agency
responsibilities described herein with respect to participant
loans and this indemnification shall survive the termination of
this Agreement;
(g) Execute proxies for any securities held in the
Fund;
-9-
<PAGE>
(h) Deposit cash in interest bearing accounts in the
banking department of the Trustee, the Company (provided that the
Company meets the requirements of S 408(b)(4) of ERISA) or in
affiliated banking organization of the Trustee or the Company;
(i) Compromise, compound, settle or arbitrate any
claim, debt or obligation due to or from the Trustee and to
reduce the rate of interest on, extend or otherwise modify, or to
foreclose upon default or otherwise enforce any such obligation;
and to abandon any property determined by the Named Fiduciary to
be worthless;
(j) Invest in any collective investment fund,
including any collective investment fund maintained by the
Trustee or an affiliate. The Trustee shall have no
responsibility for the custody or safekeeping of assets
transferred to any collective investment trust not maintained by
the Trustee. To the extent that any investment is made in any
such collective investment fund, the terms of the collective
trust indenture shall solely govern the investment duties,
responsibilities and powers of the trustee of such collective
investment fund and, to the extent required by law or by such
indenture, such terms, responsibilities and powers shall be
incorporated herein by reference and shall be a part of this
Agreement. For purposes of valuation, the value of the interest
maintained by the Fund in any such collective investment fund
shall be the fair market value of the collective investment fund
units held, determined in accordance with generally recognized
valuation procedures. The Company expressly understands and
agrees that any such collective investment fund may provide for
the lending of its securities by the collective investment fund
trustee and that such collective investment fund trustee will
receive compensation from the borrowers for the lending of
securities that is separate from any compensation of the Trustee
hereunder, or any compensation of the collective investment fund
trustee for the management of such fund; and
(k) For the purposes of the Fund, to borrow money from
any person or persons, including The Bank of New York, to issue
the Fund's promissory note or notes therefor, and to secure the
repayment thereof by pledging, mortgaging or otherwise
encumbering any property in its possession.
4.4 EMPLOYER STOCK.
(a) The Named Fiduciary may direct that all or a
portion of the Fund or any Investment Fund be invested in
Employer Stock and the Trustee shall act in accordance with any
such directions. Except as otherwise required under ERISA, the
Trustee shall have no discretionary authority or responsibility
to exercise voting rights, or rights in the event of a tender
offer, with respect to such Employer Stock but instead shall be
subject to the directions of the Named Fiduciary in the exercise
of such rights.
-10-
<PAGE>
To the extent that the Plan provides for the voting or
tendering of Employer Securities by Plan participants, the Named
Fiduciary shall not improperly interfere in any manner regarding
the decisions by or directions of any participant with respect to
the vote of or response to a tender offer for Employer Securities
allocated to the participant's account, and the Named Fiduciary
shall arrange for such voting or participant's decision regarding
the participant's action with respect to an offer to take place
on a confidential basis. The Named Fiduciary will adequately
communicate or cause to be communicated to all participants the
provisions of the Plan and this Agreement relating to the right
of participants with respect to Employer Stock under the Plan.
The Company will provide the Named Fiduciary with such
information and assistance as the Named Fiduciary may reasonably
request, in connection with any communications or distributions
to participants.
The Company will distribute or cause to be distributed
to participants entitled to direct the Named Fiduciary with
respect to Employer Stock, all materials and communications which
it provides to other stockholders of the Company in connection
with such vote. The Trustee may rely on the Company for such
distribution and will not be liable for the Company's failure to
provide such materials and communications to any such
participant.
(b) In the event that the Trustee is directed to
dispose of any Employer Stock under circumstances which, in the
opinion of the Trustee, require registration of such securities
under the Securities Act of 1933 and/or qualification of such
securities under the Blue Sky laws of any state or states, then
the Company, at its own expense, will promptly take or cause to
be taken any and all action necessary or appropriate to effect
such registration and/or qualification. In such event, the
Trustee shall not be required to dispose of such securities until
such registration and/or qualification are complete and
effective, and the Trustee shall not be liable for any loss or
depreciation of the Fund resulting from any delay attributable
thereto. The Company will indemnify and hold the Trustee and its
officers, directors and employees harmless with respect to any
claim, liability, loss, damage or expense (except any such
claims, liabilities, losses, damages or expenses that are
attributable to the Trustee's own gross negligence, bad faith or
willful misconduct with respect to any duties specifically
undertaken herein) incurred as a result of such registration or
qualification or as a result of any information in connection
therewith furnished by the Company or as a result of any failure
by the Company to furnish any such information. This
indemnification shall survive termination of this Agreement.
Unless otherwise directed by the Named Fiduciary, any proceeds
received by the Trustee as a result of the sale, exchange or
transfer of Employer Stock pursuant to a tender offer shall be
reinvested in Employer Stock by the Trustee if such security is
available for purchase.
-11-
<PAGE>
4.5 STANDARD OF CARE. The Trustee shall discharge its
duties under this Agreement with the care and skill required
under ERISA with respect to its duties. The Trustee shall not be
responsible for the title, validity or genuineness of any
property or evidence of title thereto received by it or delivered
by it pursuant to this Agreement and shall be held harmless in
acting upon any notice, request, direction, instruction, consent,
certification or other instrument believed by it to be genuine
and delivered by the proper party or parties. The duties of the
Trustee shall only be those specifically undertaken pursuant to
this Agreement or by separate written agreement.
4.6 FORCE MAJEURE. The Trustee shall not be
responsible or liable for any losses to the Fund resulting from
nationalization, expropriation, devaluation, seizure, or similar
action by any governmental authority,
DE FACTO or DE NURE; or
enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange
controls, levies or other charges affecting the Fund's property;
or acts of war, terrorism, insurrection or revolution; or acts of
God; or any other similar event beyond the control of the Trustee
or its agents. This Section shall survive the termination of
this Agreement.
SECTION 5
APPOINTMENT AND AUTHORITY OF PENTEGRA
5.1 APPOINTMENT AND DELEGATION. The Company hereby
certifies to the Trustee that Pentegra Services, Inc.
("Pentegra") is the third party administrator appointed by the
Named Fiduciary or the Company to receive, cumulate and
communicate investment and distribution directions of the
participants and beneficiaries of the Plan with respect to the
Fund or the Investment Funds, and the Named Fiduciary has
delegated such responsibility and authority exclusively to
Pentegra. For purposes of this Agreement, Pentegra shall be a
delegee of the Named Fiduciary in accordance with Section
405(c)(1)(B) of ERISA. Except as provided in Section 5.5, the
Trustee shall act solely on the directions and instructions
communicated to the Trustee by Pentegra and the Trustee shall not
be liable for any failure to act on any direction or instruction .
of any other party.
5.2 ALLOCATION AND INVESTMENT DIRECTIONS TO TRUSTEE.
Pentegra shall direct the Trustee with respect to the allocation -
of assets to the Investment Funds, transfers among the Investment
Funds and investment and reinvestment of the assets of the Fund
and each Investment Fund. The Trustee shall have no duty to
invest, and shall not be liable for any interest on, any such
assets it holds uninvested pending receipt of directions from
Pentegra to invest or reinvest assets of the Fund.
-12-
<PAGE>
5.3 CUSTODY OF PARTICIPANT LOAN DOCUMENTS. Pentegra
is further authorized and is hereby appointed by the Named
Fiduciary and the Company to act as custodian for the Trustee of
all original promissory notes and security agreements which shall
be held subject to the order of the Trustee. In the event that
such custodianship is terminated by Pentegra, the Named Fiduciary
or the Trustee, the Named Fiduciary shall retain the originals of
all promissory notes and security agreements as custodian for the
Trustee.
5.4 DESIGNATION FOR AUTHORIZED INSTRUCTIONS. Pentegra
shall furnish the Trustee with a written list of the names,
signatures and extent of authority of all persons authorized to
act on behalf of Pentegra. The Trustee shall be entitled to rely
on and shall be fully protected in acting upon direction
reasonably believed by it to be from an authorized party (or
omitting to act in the absence of direction) until notified in
writing by Pentegra, of a change in the identity of an authorized
party. Directions of an authorized party shall be governed by
Section 3.2 of this Agreement.
5.5 RESIGNATION OR REMOVAL OF PENTEGRA. In the event
Pentegra resigns or is removed as third party administrator under
the Plan, or Pentegra's authority is circumscribed in any manner,
the Company shall promptly notify the Trustee of such
resignation, removal or circumscription of authority and shall
furnish the Trustee with Certified Resolutions identifying the
Named Fiduciary and any other persons authorized to assume the
duties and responsibilities of Pentegra with respect to the Plan.
The Trustee shall not have or be deemed to have any
responsibility to assume the functions and duties of Pentegra,
shall have no duty or responsibility to invest or reinvest the
assets of the Fund and shall not be liable for any losses to the
Fund (including any opportunity costs) as a result of its failure
to act prior to receiving the foregoing Certified Resolution.
SECTION 6
REPORTING AND RECORDKEEPING
6.1 RECORDS AND ACCOUNTS. The Trustee shall keep full
and accurate records of all receipts, investments, disbursements,
and other transactions hereunder, including such specific records
as may be agreed upon in writing between the Company and the
Trustee. Within ninety (90) days after the end of each fiscal
year of the Trust or within ninety (90) days after its removal or
resignation or the termination of this Agreement, the Trustee
shall file with the Company a written account of the
administration of the Fund showing all transactions effected by
the Trustee and all property held by the Fund at its fair market
value for the accounting period. If, within ninety (90) days
after the Trustee mails such account to the Company, the Company
has not given the Trustee written notice of any exception or
-13-
<PAGE>
objection thereto, the statement shall be deemed to have been
approved, and in such case, the Trustee shall not be liable for
any matters in such statements. Upon prior written notice, the
Company or its agent shall have the right at its own expense to
inspect the Trustee's books and records directly relating to the
Fund during normal business hours. If for any reason the Trustee
fails to file an account required of the Trustee within the
applicable times specified hereunder, such account shall be filed
by the Trustee after the expiration of such time as soon as is
reasonably practicable. To the extent that the Trustee shall be
required to value the assets of the Fund, the Trustee may rely
for all purposes of this Agreement upon any certified appraisal
or other form of valuation submitted by the Named Fiduciary,
Pentegra, any investment manager or other third party appointed
by the Named Fiduciary. Nothing in this Section shall impair
Trustee's right to judicial settlement of any account rendered by
it. In any such proceeding the only necessary parties shall be
the Trustee, the Company and any other party whose participation
is required by law, and any judgment, decree or final order
entered shall be conclusive on all persons having an interest in
the trust.
The fiscal year of the Trust shall be the plan year as
established under the terms of the Plan.
6.2 NON-FUND ASSETS. The duties of the Trustee shall
be limited to the assets held in the Fund, and the Trustee shall
have no duties with respect to assets held by any other person
including, without limitation, any other trustee for the Plan
unless otherwise agreed in writing. The Company hereby agrees
that the Trustee shall not serve as, and shall not be deemed to
be, a co-trustee under any circumstances. The Named Fiduciary
may request the Trustee to perform a recordkeeping service with
respect to property held by others and not otherwise subject to
the terms of this Agreement. To the extent the Trustee shall
agree to perform this service, its sole responsibility shall be
to accurately reflect information on its books which it has
received from the Named Fiduciary.
SECTION 7
COMPENSATION, EXPENSES, TAXES, INDEMNIFICATION
7.1 COMPENSATION AND EXPENSES. The Trustee shall be
entitled to compensation for services under this Agreement as
mutually agreed by the Company and the Trustee. The Trustee
shall also be entitled to reimbursement for reasonable expenses
incurred by it in the discharge of its duties under this
Agreement. The Trustee is authorized to charge ar,d collect from
the Fund any and all such fees and expenses to the extent such
fees and expenses are not paid directly by the Company, another
Employer or by Pentegra (acting on behalf of the Company or such
other Employer).
All amounts (including taxes) paid from the Fund which
are allocable to an Investment Fund shall be charged to such
Investment Fund in accordance with Section 4.1 of this Agreement.
All such expenses which are not so allocable shall be charged
against each of the Investment Funds in the same proportion as
the value of the total assets held in such Investment Fund bears
to the value of the total assets in the Fund.
To the extent the Trustee advances funds to the Fund
for disbursements or to effect the settlement of purchase
transactions, the Trustee shall be entitled to collect from the
Fund an amount equal to what would have been earned on the sums
advanced (an amount approximating the "federal funds" interest
rate).
7.2 TAX OBLIGATIONS. To the extent that the Company
or Named Fiduciary has provided necessary information to the
Trustee, the Trustee shall use reasonable efforts to assist the
Company or the Named Fiduciary with respect to any Tax
Obligations. The Company or Named Fiduciary shall notify the
Trustee of any Tax Obligations. Notwithstanding the foregoing,
the Trustee shall have no responsibility or liability for any Tax
Obligations now or hereafter imposed on any Employer or the Fund
by any taxing authorities, domestic or foreign, except as
provided by applicable law.
To the extent the Trustee is responsible under any
applicable law for any Tax Obligation, the Company or the Named
Fiduciary shall inform the Trustee of all Tax Obligations, shall
direct the Trustee with respect to the performance of such Tax
Obligations, and shall provide the Trustee with all information
required by the Trustee to meet such Tax Obligations. All such
tax Obligations shall be paid from the Fund unless paid by the
Company or another Employer.
7.3 INDEMNIFICATION. The Company shall indemnify and
hold harmless the Trustee and its directors, officers and
employees from all claims, liabilities, losses, damages and
expenses, including reasonable attorneys' fees and expenses,
incurred by the Trustee in connection with this Agreement, except
those resulting from the Trustee's gross negligence, bad faith or
willful misconduct. This indemnification (as well as any other
indemnification in this Agreement) shall survive the termination
of this Agreement. If the Trustee is acting as a successor
trustee or succeeds to responsibilities hereunder for trusteeship
of plan assets with respect to the Fund (or any portion thereof),
the Company hereby agrees to hold the Trustee harmless from and
against any tax, claim, liability, loss, damage or expense
incurred by or assessed against it as such successor as a direct
or indirect result of any act or omission of a predecessor
trustee or any other person charged under any agreement affecting
Fund assets with investment responsibility with respect to such
assets, except for such taxes, claims, liabilities, losses,
-15-
<PAGE>
damages or expenses attributable to the Trustee's own gross
negligence, bad faith or willful misconduct.
SECTION 8
AMENDMENT, TERMINATION, RESIGNATION, REMOVAL
8.1 AMENDMENT. This Agreement may be amended by
written agreement signed by the Company and the Trustee. This
Agreement may be terminated at any time by the Company by written
instrument delivered to the Trustee. Thereafter, the Trustee
shall distribute all assets of the Fund, less any fees and
expenses payable from the Fund with respect to the Plan, pursuant
to instructions of the Named Fiduciary. The Trustee may
condition its delivery, transfer or distribution of any assets
upon the Trustee's receiving assurances reasonably satisfactory
to it that the approval of appropriate governmental or other
authorities has been secured and that all notices and other
procedures required by applicable law have been complied with.
The Trustee shall be entitled to assume that such distributions
are in full compliance with and not in violation of the terms of
the Plan or any applicable law.
8.2 REMOVAL OR RESIGNATION OF TRUSTEE. The Trustee
may be removed with respect to all or part of the Fund upon
receipt of sixty (60) days' written notice (unless a shorter or
longer period is agreed upon) from the Company. The Trustee may
resign as Trustee hereunder upon sixty (60) days' written notice
(unless a shorter or longer period is agreed upon) delivered to
the Company. In the event of such removal or resignation, a
successor trustee will be appointed and the retiring Trustee
shall transfer the Fund, less such amounts as may be reasonable
and necessary to cover its compensation and expenses. In the
event the Company fails to appoint a successor trustee within
sixty (60) days of receipt of written notice of resignation, the
Trustee reserves the right to seek the appointment of a successor
trustee from a court of competent jurisdiction. The Trustee
shall have no duties, responsibilities or liability with respect
to the acts or omissions of any successor :
8.3 PROPERTY NOT TRANSFERRED. The Trustee reserves
the right to retain such property as is not suitable for
distribution or transfer at the time of the termination of a Plan
or this Agreement and shall hold such property for the benefit of
those persons or other entities entitled to such property until
such time as the Trustee is able to make distribution. Upon the .
appointment and acceptance of a successor trustee, the Trustee's
sole duties shall be those of a custodian with respect to any
property not transferred to the successor trustee.
-16-
<PAGE>
SECTION 9
ADDITIONAL PROVISIONS
9.1 NO MERGER, CONSOLIDATION OR TRANSFER OF PLAN
ASSETS OR LIABILITIES. Notwithstanding anything to the contrary
contained herein, no merger, consolidation or transfer of the
assets or liabilities of the Plan with or to any other plan shall
be permitted, except in compliance with the provisions of ERISA
and the Code which are applicable to such mergers, consolidations
or transfers, including, without limitation, Sections 208 and
4043(b)(8) of ERISA and-Sections 401(a)-(12), 414(1) and 6058(b)
of the Code, and the regulations thereunder.
9.2 ASSIGNMENT OR ALIENATION. Except as may be
required by law or permitted by the Plan, the Fund shall not be
subject to any form of attachment, garnishment, seauestration or
other actions of collection afforded creditors of the Employer,
participants or beneficiaries under the Plan. The Trustee shall
not recognize any permitted assignment or alienation of benefits
unless directed to do so by the Named Fiduciary or required to do
so by applicable law.
9.3 SUCCESSORS AND ASSIGNS. Neither the Company nor
the Trustee may assign this Agreement without the prior written
consent of the other, except that the Trustee may assign its
rights and delegate its duties hereunder to any corporation or
entity which directly or indirectly is controlled by, or is under
common control with, the Trustee. This Agreement shall be
binding upon, and inure to the benefit of, the Company and the
Trustee and their respective successors and permitted assigns.
Any entity which shall by merger, consolidation, purchase, or
'otherwise, succeed to substantially all the trust business of the
Trustee shall, upon such succession and without any appointment
or other action by the Company, be and become successor trustee
hereunder, upon notification to the Company.
9.4 GOVERNING LAW. This Agreement shall be construed
in accordance with and governed by the laws of the State of New
York (without giving effect to conflict of law principles
thereof) to the extent not preempted by Federal law.
9.5 NECESSARY PARTIES. The Trustee reserves the right
to seek a judicial or administrative determination as to its
proper course of action under this Agreement. Nothing contained
herein will be construed or interpreted to deny the Trustee or
the Company the right to have the Trustee's account judicially
determined. To the extent permitted by law, only the Trustee and
the Company shall be necessary parties in any application to the
courts for an interpretation of this Agreement or for an
accounting by the Trustee, and no participant or beneficiary
under the Plan or other person having an interest in the Fund
shall be entitled to any notice or service of process. Any final
-17-
<PAGE>
judgment entered in such an action or proceeding shall, to the
extent permitted by law, be conclusive upon all persons.
9.6 NO THIRD PARTY BENEFICIARIES. The provisions of
this Agreement are intended to benefit only the parties hereto,
their respective successors and assigns, and participants and
their beneficiaries under the Plan. There are no other third
party beneficiaries.
9.7 EXECUTION LN COUNTERPARTS. This Agreement may be
executed in any number of counterparts, each of which shall be
deemed an original, and-said counterparts shall constitute but
one and the same instrument and may be sufficiently evidenced by
one counterpart.
9.8 NO ADDITIONAL RIGHTS. Neither the establishment
of the Fund nor this Agreement shall be considered as giving any
Plan participant or any other person any legal or equitable
rights against the Employer, the Named Fiduciary, the Trustee or
the assets, whether corpus or income, of the Fund unless such
right is specifically provided for in this Agreement or the Plan,
nor shall it be considered as giving any Plan participant or
other employee of the Employer the right to continue in the
service of the Employer in any capacity.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the effective date set forth above.
Authorized Signer of:
HOME FEDERAL SAVINGS BANK THE BANK OF NEW YORK
By: /s/ Roger P. Weise By: /s/ Betty A. Good
Name: Roger P. Weise Name: Betty A. Good
Title: President/CEO Title: Vice President
Date: 5/28/97
-18-
Exhibit 11 - Computation of Earnings Per Common Share
HMN Financial, Inc.
Computation of Earnings Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Computation of Earnings Per
Common Share for Statements Three Months Ended Six Months Ended
of Operations: June 30, June 30,
1997 1996 1997 1996
- ---------------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,332,220 1,533,084 2,806,700 3,119,775
---------- ----------- ----------- -----------
Weighted average number of
common share and common
share equivalents:
Weighted average common
shares outstanding 3,730,435 4,524,242 3,743,989 4,621,008
Dilutive effect of stock
option plans after
application of treasury
stock method 184,867 56,550 177,466 52,498
---------- ----------- ----------- -----------
3,915,302 4,580,792 3,921,455 4,673,506
---------- ----------- ----------- -----------
Earnings per common share
and common share
equivalents $ 0.34 0.34 0.72 0.67
========== =========== =========== ===========
Computation of Fully Diluted
Earnings Per Common Share and
Common Share Equivalent
- ----------------------------
Net income $ 1,332,220 1,533,084 2,806,700 3,119,775
---------- ----------- ----------- -----------
Weighted average number of
common share and common
share equivalents:
Weighted average common
shares outstanding 3,730,435 4,524,242 3,743,989 4,621,008
Dilutive effect of stock
option plans after
application of treasury
stock method 212,618 76,734 212,433 76,734
---------- ----------- ----------- -----------
3,943,053 4,600,976 3,956,422 4,697,742
---------- ----------- ----------- -----------
Fully diluted earnings per
common share and common
share equivalents $ 0.34 0.33 0.71 0.66
========== =========== ============ ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND DECEMBER 31, 1996 AND
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE
30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000921183
<NAME> HMN FINANCIAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,405
<INT-BEARING-DEPOSITS> 10,165
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 347,996
<ALLOWANCE> 2,479
<TOTAL-ASSETS> 566,865
<DEPOSITS> 365,385
<SHORT-TERM> 45,429
<LIABILITIES-OTHER> 5,318
<LONG-TERM> 68,935
0
0
<COMMON> 61
<OTHER-SE> 81,737
<TOTAL-LIABILITIES-AND-EQUITY> 566,865
<INTEREST-LOAN> 13,791
<INTEREST-INVEST> 6,109
<INTEREST-OTHER> 170
<INTEREST-TOTAL> 20,069
<INTEREST-DEPOSIT> 9,244
<INTEREST-EXPENSE> 12,322
<INTEREST-INCOME-NET> 7,748
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 385
<EXPENSE-OTHER> 4,241
<INCOME-PRETAX> 4,460
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,807
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 7.46
<LOANS-NON> 374
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 86
<ALLOWANCE-OPEN> 2,341
<CHARGE-OFFS> 19
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,479
<ALLOWANCE-DOMESTIC> 1,284
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,195
</TABLE>
