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 March 31, 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 May 2, 1997
- ----------------------------- --------------------------
Common stock, $0.01 par value 4,211,836
This Form 10-Q consists of 22 pages.
The exhibit index is on page 18.
1
<PAGE>
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements (unaudited) ------
Consolidated Balance Sheets at
March 31, 1997 and December 31,1996 3
Consolidated Statements of Income for the
Three Months Ended
March 31, 1997 and 1996 4
Consolidated Statement of Stockholders'
Equity for the Three Month Period Ended
March 31, 1997 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997
and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE>
PART I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
Assets 1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 12,754,058 10,583,717
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $126,499,222 and
$134,474,167) 123,924,773 133,355,278
Other marketable securities
(amortized cost $56,174,663 and
$42,360,499) 56,223,639 42,474,810
----------- -----------
180,148,412 175,830,088
----------- -----------
Securities held to maturity:
Mortgage-backed and related securities
(estimated fair value $0 and
$1,904,993) 0 1,805,744
Other marketable securities
(estimated fair value $0 and
$1,000,550) 0 999,812
----------- -----------
0 2,805,556
----------- -----------
Loans held for sale 1,060,571 739,316
Loans receivable, net 341,104,076 349,022,236
Federal Home Loan Bank stock, at cost 5,627,100 5,434,000
Real estate, net 105,578 20,610
Premises and equipment, net 3,961,454 3,581,497
Accrued interest receivable 2,917,906 3,415,152
Deferred income taxes 46,038 0
Prepaid expenses and other assets 5,295,539 3,299,427
----------- -----------
Total assets $ 553,020,732 554,731,599
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 364,122,660 362,476,944
Federal Home Loan Bank advances 105,721,447 106,078,589
Accrued interest payable 1,476,598 1,542,773
Advance payments by borrowers for
taxes and insurance 799,372 518,911
Accrued expenses and other liabilities 2,129,007 2,014,938
----------- -----------
Total liabilities 474,249,084 472,632,155
----------- -----------
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 59,491,535 59,428,768
Retained earnings, subject to
certain restrictions 56,119,867 54,645,387
Net unrealized loss on securities
available for sale (1,506,685) (598,045)
Unearned employee stock ownership
plan shares (4,842,460) (4,938,520)
Unearned compensation restricted
stock awards (736,115) (793,289)
Treasury stock, at cost 1,875,949
and 1,651,615 shares (29,815,352) (25,705,715)
----------- -----------
Total stockholders' equity 78,771,648 82,099,444
----------- -----------
Total liabilities and
stockholders' equity $ 553,020,732 554,731,599
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31,
1997 1996
-------------------------
<S> <C> <C>
Interest Income:
Loans receivable $ 6,908,242 6,138,747
Securities available for sale:
Mortgage-backed and related securities 2,189,210 2,773,690
Other marketable securities 585,242 404,845
Securities held to maturity:
Mortgage-backed and related securities 33,400 267,023
Other marketable securities 10,032 43,448
Cash equivalents 82,160 103,718
Other 94,961 63,981
----------- -----------
Total interest income 9,903,247 9,795,452
----------- -----------
Interest expense:
Deposits 4,572,798 4,818,284
Federal Home Loan Bank advances 1,451,400 1,061,861
----------- -----------
Total interest expense 6,024,198 5,880,145
----------- -----------
Net interest income 3,879,049 3,915,307
Provision for loan losses 75,000 75,000
----------- -----------
Net interest income after provision
for loan losses 3,804,049 3,840,307
----------- -----------
Non-interest income:
Fees and service charges 96,412 77,516
Securities gains, net 270,917 500,550
Gain on sales of loans 153,450 5,949
Other 177,515 117,389
----------- -----------
Total non-interest income 698,294 701,404
----------- -----------
Non-interest expense:
Compensation and benefits 1,315,987 1,105,995
Occupancy 241,147 196,782
Federal deposit insurance premiums 58,977 209,792
Advertising 78,137 72,685
Data processing 124,529 128,453
Provision for real estate losses 2,000 0
Other 293,665 269,113
----------- -----------
Total non-interest expense 2,114,442 1,982,820
----------- -----------
Income before income tax expense 2,387,901 2,558,891
Income tax expense 913,421 972,200
----------- -----------
Net income $ 1,474,480 1,586,691
=========== ===========
Earnings per common share and common share
equivalents $ 0.38 0.33
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Month Period Ended March 31, 1997
(unaudited)
Net
unrealized
(loss) on
Additional securities
Common Paid-in Retained available for
Stock Capital Earnings sale
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045)
Net income 1,474,480
Change in fair value on
securities available
for sale (908,640)
Treasury stock
purchases
Amortization of
restricted stock awards
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 59,237
-------- ----------- ----------- -----------
Balance, March 31, 1997 $ 60,858 59,491,535 56,119,867 (1,506,685)
======== =========== =========== ===========
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 1,474,480
Change in fair value on
securities available
for sale (908,640)
Treasury stock
purchases (4,109,637) (4,109,637)
Amortization of
restricted stock awards 57,174 57,174
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 96,060 155,297
--------- -------- ---------- ----------
Balance, March 31, 1997 (4,842,460) (736,115) (29,815,352) 78,771,648
========= ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1997 1996
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,474,480 1,586,691
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 75,000 75,000
Depreciation 102,879 90,866
Amortization of (discounts) premiums, net (46,804) (7,168)
Amortization of deferred loan fees (87,139) (109,000)
Provision for deferred income taxes 128,200 40,700
Securities gains, net (270,917) (500,550)
Gain on sales of real estate 0 (18,214)
Gain on sales of loans (153,450) (5,949)
Proceeds from sale of loans originated for sale 670,145 0
Amortization of restricted stock awards 57,174 58,350
Decrease in unearned ESOP shares 96,060 99,420
Earned employee stock ownership shares priced
above original cost 59,237 30,508
Decrease in accrued interest receivable 497,246 110,380
Increase (decrease) in accrued interest payable (66,175) 143,960
Equity earnings of limited partnership (73,824) 0
Increase in other assets (705,413) (226,568)
Increase in other liabilities 552,087 877,699
Other, net 33,052 (6,675)
---------- ----------
Net cash provided by operating activities 2,341,838 2,239,450
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 15,902,046 32,850,725
Principal collected on securities available
for sale 2,949,425 3,317,661
Proceeds collected on maturity of securities
available for sale 14,650,000 4,500,000
Purchases of securities available for sale (33,086,600)(31,984,781)
Proceeds from sales of securities held to maturity 348,871 0
Principal collected on securities held to maturity 240,441 347,044
Proceeds collected on maturity of securities held
to maturity 1,000,000 0
Purchases of securities held to maturity 0 (709,765)
Purchase of interest in limited partnership (1,216,875) 0
Purchase of Federal Home Loan Bank stock (193,100) 0
Proceeds from sales of loans receivable 19,406,945 386,649
Net increase in loans receivable (17,149,212) (2,846,197)
Proceeds from sale of real estate 0 87,616
Purchases of premises and equipment (482,836) (7,304)
---------- ----------
Net cash provided by investing activities 2,369,105 5,941,648
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits 1,645,716 (5,146,166)
Purchase of treasury stock (4,109,637) (1,886,582)
Proceeds from Federal Home Loan Bank advances 36,000,000 10,800,000
Repayment of Federal Home Loan Bank advances (36,357,142) (7,183,771)
Increase in advance payments by borrowers for
taxes and insurance 280,461 277,205
---------- ----------
Net cash used by financing activities (2,540,602) (3,139,314)
---------- ----------
Increase in cash and cash equivalents 2,170,341 5,041,784
Cash and cash equivalents, beginning of period 10,583,717 4,334,694
---------- ----------
Cash and cash equivalents, end of period $ 12,754,058 9,376,478
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 6,090,373 5,736,185
Cash paid for income taxes 148,500 200,000
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 19,380,736 0
Transfer of loans to real estate 94,164 22,715
Securities purchased with liability due to broker 0 4,881,250
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1997 and 1996
(1) HMN FINANCIAL, INC.
-------------------
The consolidated financial statements included herein are for 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 ended March 31, 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.
(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
7
<PAGE>
for sale portfolio. The following information summarizes the sale and transfer
of the securities held to maturity during the first quarter of 1997.
Unrealized
Holding
Unrealized Gain,
Amortized Fair Realized Holding Net of Tax,
Cost Value Gain Gain in Equity
------------ -------- ---------- ---------- -----------
Security sold $ 344,139 348,871 4,732
Securities transferred
to available for sale 1,223,753 1,295,147 71,394 42,641
(5) EARNINGS PER SHARE
------------------
Earnings per common share and common share equivalents for the three month
periods ended March 31, 1997 and 1996 were computed by dividing net income for
each period ($1,474,480 and $1,586,691, respectively) by the weighted average
common shares and common share equivalents outstanding (3,927,758 and
4,766,220, 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 March 31, 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 March
31, 1997 and other conditions consistent with the Prompt Corrective Actions
Provisions of the OTS regulations, the Bank would be categorized as well
capitalized.
8
<PAGE>
At March 31, 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 $60,956
Plus:
Net unrealized loss on
certain securities
available for sale 1,982
Less:
Mortgage servicing
rights 418
------
Tangible capital 62,520 11.60% $ 8,085 1.50%
------
Tangible capital to
adjusted total assets 11.60%
Core capital (Tier I) 62,520 11.60% 16,170 3.00%
Tier I capital to risk-
weighted assets 26.92%
Plus:
Allowable allowance for
loan losses 2,421
------
Risk-based capital $64,941 27.96% $18,583 8.00%
======
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 $
Plus:
Net unrealized loss on
certain securities
available for sale
Less:
Mortgage servicing
rights
Tangible capital 54,435 10.10%
Tangible capital to
adjusted total assets $26,951 5.00%
Core capital (Tier I) 46,350 8.60%
Tier I capital to risk-
weighted assets 13,937 6.00%
Plus:
Allowable allowance for
loan losses
Risk-based capital $46,358 19.96% $23,229 10.00%
<FN>
<F1> 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 AND STOCK CONVERSION
------------------------------------------
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.
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 first quarter of 1997 was $1.5 million, a decrease of
$112,000, or 7.1%, compared to $1.6 million for the first quarter of 1996. Net
income decreased primarily due to a $132,000 increase in non-interest expense.
Earnings per common share and common share equivalents were $0.38 for the first
quarter of 1997, an increase of 15.2%, compared to $0.33 per common share and
common share equivalents for the first quarter of 1996. The increased earnings
per share occurred despite a decrease in net income due to the repurchase of
972,404 shares of HMN,s common stock from April 1, 1996 through January 31,
1997.
NET INTEREST INCOME
- -------------------
Net interest income was $3.9 million for both the first quarter of 1997 and the
first quarter of 1996. Net interest income for the two periods remained
similar despite an increase of $7.2 million in interest earning assets due to a
decrease in the net interest margin. Interest income was $9.9 million for the
first quarter of 1997 an increase of $108,000, or 1.1%, compared to $9.8
million for the same period in 1996. The increased interest income was due to
a combination of the increase in interest earning assets and a rise in the
yield on those assets. Interest expense was $6.0 million for the first quarter
of 1997, an increase of $144,000, or 2.4%, compared to $5.9 million for the
first quarter of 1996. Interest on deposits decreased by $141,000 due to a
$8.0 million decrease in average outstanding deposits for the first quarter of
1997 compared to the first quarter of 1996. Interest expense on deposits also
decreased by $104,000 due to a decrease in the rates paid on deposits during
the first quarter of 1997 compared to the first quarter of 1996. Interest
expense on Federal Home Loan Bank (FHLB) advances increased by $421,000 due to
an increase in average FHLB advances of $30.2 million for the first quarter of
1997 compared to the same quarter in 1996. However, interest expense on FHLB
advances decreased by $31,000 due to a decline in the cost of borrowing from
the FHLB in the first quarter of 1997 compared to the first quarter of 1996.
The FHLB advances
10
<PAGE>
replaced funds lost due to deposit outflow and financed the purchase of
additional mortgage loans and the stock repurchase program.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the first quarter of 1997 and 1996 was
$75,000. 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 75,000 75,000
Charge-offs 0 (1,216)
Recoveries 7,000 0
--------- ---------
Balance at March 31, $ 2,422,585 2,264,448
========= =========
NON-INTEREST INCOME
- -------------------
Non-interest income was $698,000 for the first quarter of 1997, a decrease of
$3,000, compared to $701,000 for the first quarter of 1996. The decrease was
principally due to a $230,000 decrease in gain on the sale of securities.
Economic conditions in the first quarter of 1997 did not provide HMN with an
opportunity to sell securities at a gain. During the first quarter of 1997,
HMN reviewed its loan portfolio and decided to reduce its concentration of a
certain loan product by selling $19.4 million of loans. The loan sale was the
principal reason for the increase in gain on the sale of loans of $148,000.
Other income increased by a net of $60,000 principally due to income generated
from the Bank,s interest in a mortgage servicing partnership. Fee income
increased by $19,000.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $2.1 million for the first quarter of 1997, an
increase of $132,000, or 6.6%, from $2.0 million for the first quarter of 1996.
Compensation and benefits expense increased by $210,000, or 6.6%, due to an
increase in HMN,s work force related to opening a mortgage banking office in
Eden Prairie, Minnesota, and normal merit and salary increases. Occupancy
expense increased $44,000 due to the addition of the Eden Prairie office and
added depreciation related to retail bank office remodeling. Federal insurance
deposit premiums decreased by $151,000 due to a decrease in the insurance rates
as the result of the Savings Association Insurance Fund becoming adequately
capitalized during the third quarter of 1996. Other non-interest expenses
increased a net of $28,000 partly due to the opening of the Eden Prairie office
and normal cost increases.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $913,000 for the first quarter of 1997, a decrease of
$59,000, or 6.0%, from $972,000 for the first quarter of 1996. The decrease is
primarily due to a decrease in taxable income between the two periods.
LIQUIDITY
- ---------
For the quarter ended March 31, 1997, the net cash provided from operating
activities was $2.3 million and
11
<PAGE>
net cash provided from investing activities was $2.4 million. For the same
period, HMN had $16.3 million in proceeds from the sale of securities and it
collected another $18.8 million from principal payments and the maturity of
securities. HMN purchased $33.1 million of securities during the first quarter
of 1997. HMN also received proceeds from the sale of loans of $19.4 million
and purchased or originated additional net loans of $17.1 million. During the
first quarter of 1997, the Bank also purchased an additional interest in a
mortgage servicing partnership for $1.2 million. During the first quarter of
1997, deposits increased by $1.6 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 $166.7 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.
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 first quarter of 1998 and 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 March 31, 1997 and December 31, 1996.
March 31, December 31,
(DOLLARS IN THOUSANDS) 1997 1996
----------- ------------
Non-Accruing Loans
One-to-four family real estate $ 209 235
Nonresidential real estate 83 83
Commercial business 12 13
Consumer 22 7
---- ----
Total 326 338
---- ----
Foreclosed Assets
Real estate:
One-to-four family 110 23
---- ----
Total non-performing assets $436 $361
==== ====
Total as a percentage of
total assets 0.08% 0.07%
==== ====
Total non-performing loans $326 $338
==== ====
Total as a percentage of total
loans receivable, net 0.10% 0.10%
==== ====
Total non-performing assets at March 31, 1997 were $436,000, an increase of
$75,000, or 20.1%, from $361,000 at December 31, 1996. The net increase of
$75,000 was the result of a decrease of non-accruing loans brought about
through normal collection efforts 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 next twelve months to determine if
its current level of interest rate risk is acceptable. The
12
<PAGE>
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 14,459 -7.40% -30.00%
+100 15,111 -3.23% -15.00%
0 15,615 0.00% 0.00%
-100 15,797 1.17% -15.00%
-200 15,772 1.01% -30.00%
The table above 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 next twelve months
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 14 for table.
13
<PAGE>
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at March 31, 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>
Securities available for sale:
Mortgage-backed and
related securities<F1> $ 35,651 5,197 16,534 18,324
Other marketable securities 7,948 0 15,131 25,281
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0 0
Other marketable securities 0 0 0 0
Loans held for sale, net 1,061 0 0 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 18,240 16,859 57,858 43,026
Adjustable rate
one-to-four family<F3> 35,041 18,457 11,814 10,120
Multi family 0 2 52 0
Fixed rate commercial real estate 132 119 404 266
Adjustable rate commercial
real estate
4,645 1,936 0 0
Commercial business 716 546 1,593 337
Consumer loans 15,793 1,122 2,134 889
Federal Home Loan Bank stock 0 0 0 0
Cash equivalents 11,754 0 0 0
------- ------- -------- -------
Total interest-earning assets 130,981 44,238 105,520 98,243
------- ------- -------- -------
Non-interest checking 2,361 0 0 0
NOW accounts 18,015 0 0 0
Passbooks 3,180 2,844 8,672 5,550
Money market accounts 1,776 1,586 4,838 3,098
Certificates 93,535 73,151 109,273 20,871
Federal Home Loan Bank advances 59,714 5,714 5,893 34,400
------- ------ ------- -------
Total interest-bearing
liabilities 178,581 83,295 128,676 63,919
------- ------- ------- -------
Interest-earning assets less
interest-bearing liabilities $ (47,600) (39,057) (23,145) 34,324
======= ======= ======= =======
Cumulative interest-rate
sensitivity gap $ (47,600) (86,657) (109,813) (75,489)
======= ======= ======= =======
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1997 (8.61)% (15.67)% (19.86)% (13.65)%
======= ======= ======= =======
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1996 (4.61) (10.66)
======= =======
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1995 (1.07) (7.53)
======= =======
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1994 (2.47) (2.26)
======= =======
Over 5 No Stated
(DOLLARS IN THOUSANDS) Years Maturity Total
----------------------------------------
<S> <C> <C> <C>
Securities available for sale:
Mortgage-backed and
related securities<F1> 50,793 0 126,499
Other marketable securities 0 7,815 56,175
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0
Other marketable securities 0 0 0
Loans held for sale, net 0 0 1,061
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 99,797 0 235,780
Adjustable rate
one-to-four family<F3> 831 0 76,263
Multi family 0 0 54
Fixed rate commercial real estate 542 0 1,463
Adjustable rate commercial
real estate 0 0 6,581
Commercial business 58 0 3,250
Consumer loans 198 0 20,136
Federal Home Loan Bank stock 0 5,627 5,627
Cash equivalents 0 0 11,754
------- ------- -------
Total interest-earning assets 152,219 13,442 544,643
------- ------- -------
Non-interest checking 0 0 2,361
NOW accounts 0 0 18,015
Passbooks 9,865 0 30,111
Money market accounts 5,508 0 16,806
Certificates 0 0 296,830
Federal Home Loan Bank advances 0 0 105,721
Total interest-bearing
liabilities 15,373 0 469,844
Interest-earning assets less
interest-bearing liabilities 136,846 13,442 74,799
Cumulative interest-rate
sensitivity gap 61,357 74,799 74,799
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1997 11.09% 13.53% 13.53%
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1996
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1995
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1994
<FN>
<F1> 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.
<F2> Loans receivable are presented net of loans in process and deferred loan
fees.
<F3> 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>
14
<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. 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 adjustable-
rate mortgages, 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.
15
<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.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits on page 18 of this report.
(b) Reports on Form 8-K. A current report on Form 8-K was filed on
April 17, 1997, reporting first quarter earnings. Filed with H-
(b)11 on April 17, 1997.
16
<PAGE>
<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: 5/13/97 /s/ Roger P. Weise
---------------------- ---------------------------
Roger P. Weise,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: 5/13/97 /s/ James B. Gardner
---------------------- ---------------------------
James B. Gardner,
Executive Vice President
(Principal Financial Officer)
17
PAGE
<PAGE>
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
--------- ---------------------------- -------------
10 Revised Adoption Agreement for 20
Home Federal Savings Bank Employees,
Savings & Profit Sharing Plan
and Trust
11 Computation of Earnings Per 21
Common Share
27 Financial Data Schedule 22
18
<PAGE>
Pentegra
108 Corporate Park Drive
White Plains, NY 10604-3805
Tel: 800-872-3473
Fax: 914-694-9384
ADOPTION AGREEMENT
- -----------------------------------------------------------------
FOR HOME FEDERAL SAVINGS BANK
EMPLOYEES, SAVINGS & PROFIT SHARING PLAN AND TRUST
<PAGE>
Name of Employer: Home Federal Savings Bank
-------------------------
Address: 101 North Broadway, Spring Valley, MN 55975
-------------------------------------------
Phone No.: (507) 346-7345
--------------
Contact Person: Susan Thompson, Assistant Secretary
-----------------------------------
Name of Plan: Home Federal Savings Bank Employees' Savings
& Profit Sharing Plan and Trust
---------------------------------------------
THIS ADOPTION AGREEMENT, upon execution by the Employer and the
Trustee, and subsequent approval by a duly authorized
representative of Pentegra Services, Inc. (the "Sponsor"),
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 (the "Plan"). The terms and provisions of the
Agreement are hereby incorporated herein by this reference;
provided, however, that if there is any conflict between the
Adoption Agreement and the Agreement, this Adoption Agreement
shall control.
The elections hereinafter made by the Employer in this Adoption
Agreement may be changed by the Employer from time to time by
written instrument executed by a duly authorized representative
thereof; but if any other provision hereof or any provision of
the Agreement is changed by the Employer other than to satisfy
the requirements of Section 415 or 416 of the Internal Revenue
Code of 1986, as amended (the "Code"), because of the required
aggregation of multiple plans, or if as a result of any change by
the Employer the Plan fails to obtain or retain its tax-qualified
status under Section 401(a) of the Code, the Employer shall be
deemed to have amended the Plan evidenced hereby and by the
Agreement into an individually designed plan, in which event the
Sponsor shall thereafter have no further responsibility for the
tax-qualified status of the Plan. However, the Sponsor may amend
any term, provision or definition of this Adoption Agreement or
the Agreement in such manner as the Sponsor may deem necessary or
advisable from time to time and the Employer and the Trustee, by
execution hereof, acknowledge and consent thereto.
Notwithstanding the foregoing, no amendment of this Adoption
Agreement or of the Agreement shall increase the duties or
responsibilities of the Trustee without the written consent
thereof.
2
I. EFFECT OF EXECUTION OF ADOPTION AGREEMENT
The Employer, upon execution of this Adoption Agreement by a
duly authorized representative thereof, (choose 1 or 2):
1. / / Establishes as a new plan the [Name of Employer]
Employees' Savings & Profit Sharing Plan and
Trust, effective ________ , 19__.
2. /x/ Amends its existing defined contribution plan and
trust Home Federal Savings Bank Plan
-------------------------------
dated August 1 , 1996, in its entirety into the
-----------------
Home Federal Savings Bank Employees' Savings &
Profit Sharing Plan and Trust, effective
January 1, 1997, except as otherwise provided
---------------
herein or in the Agreement.
II. DEFINITIONS
A. "Contribution Determination Period" for purposes
of determining and allocating Employer profit
sharing contributions means (choose 1,2, 3 or 4):
1. /x/ The Plan Year.
2. / / The Employer's Fiscal Year (defined as
the Plan's "limitation year") being the
twelve (12) consecutive month period
commencing ____ (month/day) and ending
____ (month/day).
3. / / The three (3) consecutive monthly
periods that comprise each of the Plan
Year quarters.
4. / / The three (3) consecutive monthly
periods that comprise each of the
Employer's Fiscal Year quarters.
(Employer's Fiscal Year is the twelve
(12) consecutive month period commencing
(month/day) and ending
_____(month/day).)
3
B. "Effective Date" means January 1, 1997.
---------------
C. Employer
1. "Employer," for purposes of the Plan, shall
mean: Home Federal Savings Bank.
-------------------------
2. The Employer is (choose whichever may apply):
(a) / / A member of a controlled group of
corporations under Section 414(b)
of the Code.
(b) / / A member of a group of entities
under common control under Section
414(c) of the Code.
(c) / / A member of an affiliated service
group under Section 414(m) of the
Code.
(d) /x/ A corporation.
(e) / / A sole proprietorship or
partnership.
(f) / / A Subchapter S corporation.
2
3. Employer's Taxable Year Ends on 12/31.
-----
4. Employer's Federal Taxpayer Identification
Number is 41 - 0318319.
-------------
5. Employer's Plan Number is (enter 3-digit
number) 004.
---
D. "Entry Date" means the first day of the (choose 1
or 2):
1. /x/ Calendar month coinciding with or next
following the date the Employee
satisfies the Eligibility requirements
described in Section III.
2. / / Calendar quarter coinciding with or next
following the date the Employee
satisfies the Eligibility requirements
described in Section III.
E. "Member" means an Employee enrolled in the
membership of the Plan.
F. "Normal Retirement Age" means (choose 1 or 2):
1. /x/ Attainment of age 65 (select an age
not less than 55 and not greater than
65).
2. / / Later of: (i) attainment of age 65 or
(ii) the fifth anniversary of the date
the Member commenced participation in
the Plan.
G. "Normal Retirement Date" means the first day of
the first calendar month coincident with or next
following the date upon which a Member attains his
or her Normal Retirement Age.
H. "Plan Year" means the twelve (12) consecutive
month period beginning on each January 1.
I. "Salary" for benefit purposes under the Plan means
(choose 1, 2 or 3):
1. / / Basic Salary only.
2. / / Basic Salary plus one or more of the
following (if 2 is chosen, then choose
(a), (b) or (c), whichever shall apply):
(a) / / Commissions not in excess of
$_____.
(b) / / Overtime
(c) / / Overtime and bonuses
3. /x/ Total taxable compensation as reported
on Form W-2 (exclusive of any
compensation deferred from a prior year,
exclusive of any restricted stock
awards, and exclusive of taxable income
in the form of spousal expenses and/or
educational expenses.)
Note: Member pre-tax elective deferrals, if
any, are always included in Plan Salary.
J. "Salary" shall not include:
/ / Member pre-tax contributions to a Code
Section 125 cafeteria plan.
3
III. ELIGIBILITY REQUIREMENTS
A. All Employees shall be eligible to participate in
the Plan in accordance with the provisions of
Article II of the Plan, except the following
Employees shall be excluded (choose whichever
shall apply):
1. /x/ Employees who have not attained age 21.
2. /x/ Employees who have not, during the 1
---
consecutive month period (1-11, 12 or
24) beginning with an Employee's Date of
Employment, Date of Reemployment or any
anniversary thereof, completed 83 1/3
-------
number of Hours of Service (determined
by multiplying the number of months
above by 83 1/3).
Note: Employers which permit Members
to make pre-tax elective
deferrals to the Plan (see
V.A.3.) may not elect a 24
month eligibility period.
3. / / Employees included in a unit of
Employees covered by a collective
bargaining agreement, if retirement
benefits were the subject of good faith
bargaining between the Employer and
Employee representatives.
4. / / Employees who are nonresident aliens and
who receive no earned income from the
Employer which constitutes income from
sources within the United States.
5. / / Employees included in the following job
classifications:
(a) / / Hourly Employees
(b) / / Salaried Employees
6. / / Employees of the following employers
which are aggregated under Section
414(b), 414(c) or 414(m) of the Code:
----------------------------------------
----------------------------------------
----------------------------------------
Note: If no entries are made above, all
Employees shall be eligible to
participate in the Plan on the later of:
(i) the Effective Date or (ii) the first
day of the calendar month or calendar
quarter (as designated by the Employer
in Section II.D.) coinciding with or
immediately following the Employee's
Date of Employment or, as applicable,
Date of Reemployment.
B. Such Eligibility Computation Period established
above shall be applicable to (choose 1 or 2):
1. /x/ Both present and future Employees.
2. / / Future Employees only.
4
C. Such Eligibility requirements established above
shall be (choose 1 or 2):
1. /x/ Applied to the designated Employee group
on and after the Effective Date of the
Plan.
2. / / Waived for the consecutive monthly
-------
period (may not exceed 12) beginning on
the Effective Date of the Plan.
IV. HOURS OF EMPLOYMENT AND PRIOR EMPLOYMENT CREDIT
A. The number of Hours of Employment with which an
Employee or Member is credited shall be (choose 1
or 2):
1. /x/ The actual number of Hours of
Employment. (Hour of Service Method)
2. / / 83 1/3 Hours of Employment for every
month of Employment. (Elapsed Time
Method)
B. Prior Employment Credit:
/ / Employment with the following entity or
entities shall be included for
eligibility and vesting purposes:
Note: If this Plan is a continuation of a
Predecessor Plan, service under the
Predecessor Plan shall be counted as
Employment under this Plan.
-------------------------------------
-------------------------------------
-------------------------------------
V. CONTRIBUTIONS
Note: Annual Member pre-tax elective deferrals,
Employer matching contributions, Employer
basic contributions, Employer supplemental
contributions, Employer profit sharing
contributions and Employer Qualified Non-
Elective contributions, in the aggregate, may
not exceed 15% of all Members' Salary
(excluding from Salary Member pre-tax
elective deferrals).
A. Employee Contributions (choose 1 or 2; 3 or 4; 5
and/or 6):
1. / / A Member may make after-tax
contributions to the Plan, based on
multiples of 1% of monthly Salary.
2. /x/ A Member may not make after-tax
contributions to the Plan.
3. /x/ A Member may make pre-tax elective
deferrals to the Plan, based on
multiples of 1% of monthly Salary.
4. / / A Member may not make pre-tax elective
deferrals to the Plan.
5. /x/ The maximum amount of monthly
contributions a Member may make to the
Plan is 12 % (1-20) of the Member's
----
monthly Salary.
6. /x/ An Employee may allocate a rollover
contribution to the Plan prior to
satisfying the Eligibility requirements
described above.
5
B. A Member may change his or her contribution rate
(choose 1 or 2):
1. /x/ 1 time per calendar month.
2. / / 1 time per calendar quarter.
C. Employer Matching Contributions (choose 1, 2, 3 or
4; and fill in 5 if applicable):
1. / / No Employer matching contributions will
be made to the Plan.
2. /x/ The Employer shall allocate to each
contributing Member's Account an amount
equal to 25% (based on 5% increments not
---
to exceed 200%) of the Member's
contributions for that month. Employees
must be employed on 12/31 in order to be
entitled (subject to vesting) to
Employer Matching Contributions.
Employees will be entitled to Employer
Matching Contributions upon death,
disability or retirement.
3. / / The Employer shall allocate to each
contributing Member's Account an amount
determined in accordance with the
following schedule:
Years of Employment Matching%
-------------------- -----------
Less than 3 50%
At least 3, but less than 5 75%
5 or more 100%
4. / / The Employer shall allocate to each
contributing Member's Account an amount
determined in accordance with the
following schedule:
Years of Employment Matching %
--------------------- ----------
Less than 3 100%
At least 3, but less than 5 150%
5 or more 200%
5. The Employer matching contributions under 2,
3 or 4 above shall be based on the Member's
contributions not in excess of 8 % (1-20
----
but not in excess of the percentage specified
in A.5. above) of the Member's Salary.
D. Employer Basic Contributions (choose 1 or 2):
1. /x/ No Employer basic contributions will be
made to the Plan.
2. / / The Employer shall allocate an amount
equal to ___% (based on 1% increments
not to exceed 15%) of Member's Salary
for the month to (choose (a) or (b)):
(a) / / The Accounts of all Members
(b) / / The Accounts of all Members
who were employed with the
Employer on the last day of
such month.
6
E. Employer Supplemental Contributions:
The Employer may make supplemental contributions
for any Plan Year in accordance with Section 3.7
of the Plan.
F. Employer Profit Sharing Contributions (Choose 1,
2, 3, 4, or 5):
1. /x/ No Employer Profit Sharing Contributions
will be made to the Plan.
Non-Integrated Formula
-----------------------
2. / / Profit sharing contributions shall be
allocated to each Member in the same
ratio as each Member's Salary during
such Contribution Determination Period
bears to the total of such Salary of all
Members.
3. / / Profit sharing contributions shall be
allocated to each Member in the same
ratio as each Member,s Salary for the
portion of the Contribution
Determination Period during which the
Member satisfied the Employer,s
eligibility requirement(s) bears to the
total of such Salary of all Members.
Integrated Formula
-------------------
4. / / Profit sharing contributions shall be
allocated to each Member's Account in a
uniform percentage (specified by the
Employer as ____%) of each Member's
Salary during the Contribution
Determination Period up to the Social
Security Taxable Wage Base as defined in
Section ____ of the Plan ("Base Salary")
for the Plan Year that includes such
Contribution Determination Period , plus
a uniform percentage(specified by the
Employer as ____%) of each Member's
Salary for the Contribution
Determination Period in excess of the
Social Security Taxable Wage Base
("Excess Salary") for the Plan Year that
includes such Contribution Determination
Period, in accordance with Article III
of the Plan.
5. / / Profit sharing contributions shall be
allocated to each Member's Account in a
uniform percentage (specified by the
Employer as ____%) of each Member's
Salary for the portion of the
Contribution Determination Period during
which the Member satisfied the
Employer's eligibility requirement(s),
if any, up to the Base Salary for the
Plan Year that includes such
Contribution Determination Period, plus
a uniform percentage (specified by the
Employer as ____ %) of each Member's
Excess Salary for the portion of the
Contribution Determination Period during
which the Member satisfied the
Employer's eligibility requirement(s) in
accordance with Article III of the Plan.
G. Allocation of Employer Profit Sharing
Contributions:
In accordance with Section V, G above, a Member
shall be eligible to share in Employer Profit
Sharing Contributions, if any, as follows (choose
1 or 2):
1. / / A Member shall be eligible for an
allocation of Employer Profit Sharing
Contributions for a Contribution
Determination Period in all events.
7
2. / / A Member shall be eligible for an
allocation of Employer Profit Sharing
Contributions for a Contribution
Determination Period only if he or she
(choose (a), (b) or (c) whichever shall
apply):
(a) / / is employed on the last day of
the Contribution Determination
Period or retired, died or
became totally and permanently
disabled prior to the last day
of the Contribution
Determination Period.
(b) / / completed 1,000 Hours of
Employment if the
Contribution Determination
Period is a period of 12
months (250 Hours of
Employment if the Contribution
Determination Period is a
period of 3 months) or
retired, died or became
totally and permanently
disabled prior to the last day
of the Contribution
Determination Period.
(c) / / is employed on the last day of
the Contribution Determination
Period and, if such period is
12 months, completed 1,000
Hours of Employment (250 Hours
of Employment if the
Contribution Determination
Period is a period of 3
months) or retired, died or
became totally and permanently
disabled prior to the last day
of the Contribution
Determination Period.
H. Employer Qualified Nonelective Contributions:
The Employer may make qualified nonelective
contributions for any Plan Year in accordance with
Section 3.9 of the Plan.
VI. INVESTMENT FUNDS
The Employer hereby selects the following Investment
Funds to be made available under the Plan (choose
whichever shall apply). 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, has any
discretionary authority or control with respect to such
selection process.
1. /x/ 500 Stock Index Fund
2. /x/ Stable Value Fund
3. /x/ MidCap 400 Stock Index Fund
4. /x/ Government Money Market Fund
5. /x/ Bond Index Fund
6. /x/ Employer Stock Fund
8
VII. EMPLOYER SECURITIES
A. If the Employer makes available an Employer Stock
Fund pursuant to Section VI of this Adoption
Agreement, then voting and tender offer rights
with respect to Employer Stock shall be delegated
and exercised as follows (choose 1 or 2):
1. / / The Plan Administrator shall direct the
Trustee as to the voting of all Employer
Stock and as to all rights in the event
of a tender offer involving such
Employer Stock.
2. /x/ Each Member shall be entitled to direct
the Plan Administrator as to the voting
and tender offer rights involving
Employer Stock held in such Member's
Account, and the Plan Administrator
shall follow or cause the Trustee to
follow such directions. If a Member
fails to provide the Plan Administrator
with directions as to voting or tender
offer rights, the Plan Administrator
shall exercise those rights as it
determines in its discretion and shall
direct the Trustee accordingly.
VIII. INVESTMENT DIRECTION
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
6. /x/ No Requirements
B. A Member may change his or her investment
direction (choose 1, 2 or 3):
1. /x/ Daily
2. / / 1 time per calendar month.
3. / / 1 time per calendar quarter.
C. If a Member fails to make an effective investment
direction, the Member's contributions and Employer
contributions made on the Member's behalf shall be
invested in Government Money Market Fund
----------------------------
(insert one of the Investment Funds selected in
Section VI of this Adoption Agreement).
9
IX. VESTING SCHEDULES; YEARS OF EMPLOYMENT FOR VESTING
PURPOSES
A. (Choose 1, 2, 3, 4, 5, 6 or 7)
Schedule Years of Employment Vested %
--------- ------------------- --------
1./ /Immediate Upon Enrollment 100%
2./ /2-6 Year Less than 2 0%
Graded 2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
3./x/5-Year Less than 5 0%
Cliff 5 or more 100%
4./ /3-Year Less than 3 0%
Cliff 3 or more 100%
5./ /4-Year Less than 1 0%
Graded 1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
Schedule Years of Employment Vested %
--------- ------------------- --------
6./ /3-7 Year Less than 3 0%
Graded 3 but less than 4 20%
4 but less than 5 40%
5 but less than 6 60%
6 but less than 7 80%
7 or more 100%
7./ /Other Less than____ 0%
___ but less than ____ ___%
___ but less than ____ ___%
___ but less than ____ ___%
___ but less than ____ ___%
___ or more 100%
B. With respect to the schedules listed above, the
Employer elects (choose 1, 2, 3 and 4; or 5):
1. Schedule / / solely with respect to Employer
matching contributions.
2. Schedule / / solely with respect to Employer
basic contributions.
3. Schedule / / solely with respect to Employer
supplemental contributions.
10
4. Schedule / / solely with respect to Employer
profit sharing contributions.
5. Schedule /x/ with respect to all Employer
contributions. Applies to employees hired
on or after January 1, 1997.
NOTE: Notwithstanding any election by the
Employer to the contrary, each Member
shall acquire a 100% vested interest in
his Account attributable to all Employer
contributions made to the Plan upon the
earlier of (i) attainment of Normal
Retirement Age, (ii) approval for
disability or (iii) death. In addition,
a Member shall at all times have a 100%
vested interest in the Employer
Qualified Non-Elective Contributions, if
any, and in the pre-tax elective
deferrals and nondeductible after-tax
Member Contributions.
C. Years of Employment Excluded for Vesting Purposes
The following Years of Employment shall be
disregarded for vesting purposes (choose whichever
shall apply):
1. / / Years of Employment during any period in
which neither the Plan nor any
predecessor plan was maintained by the
Employer.
2. / / Years of Employment of a Member prior to
attaining age 18.
X. WITHDRAWAL PROVISIONS
A. The following portions of a Member's Account will
be eligible for in-service withdrawals, subject to
the provisions of Article VII of the Plan (choose
whichever shall apply):
1. / / Employee after-tax contributions and the
earnings thereon.
2. / / Employee pre-tax elective deferrals and
the earnings thereon.
3. / / Employee rollover contributions and the
earnings thereon.
4. / / Employer matching contributions and the
earnings thereon.
5. / / Employer basic contributions and the
earnings thereon.
6. / / Employer supplemental contributions and
the earnings thereon.
7. / / Employer profit sharing contributions
and the earnings thereon.
8. / / Employer qualified nonelective
contributions and earnings thereon.
9. /x/ In-service withdrawals permitted only in
the event of (choose (a) and/or (b)):
(a) /x/ Hardship.
(b) /x/ Attainment of age 59 1/2.
10. / / No in-service withdrawals shall be
allowed.
11
B. Notwithstanding any elections made in Subsection A
of this Section X above, the following portions of
a Member's Account shall be excluded from
eligibility for in-service withdrawals (choose
whichever shall apply):
1. / / Employer contributions, and the earnings
thereon, credited to the Employer Stock
Fund.
2. /x/ All contributions and/or deferrals, and
the earnings thereon, credited to the
Employer Stock Fund.
3. / / Other:
XI. DISTRIBUTION OPTION (CHOOSE 1 OR 2)
1. / / Lump Sum and partial lump sum payments only.
2. /x/ Lump Sum and partial lump sum payments plus
one or more of the following (choose (a) and
/or (b)):
(a) /x/ Installment payments.
(b) / / Annuity payments.
XII. LOAN PROGRAM (CHOOSE 1, 2 OR 3)
1. / / No loans will be permitted from the Plan.
2. /x/ Loans will be permitted from the Member's
Account.
3. / / Loans will be permitted from the Member's
Account, EXCLUDING (choose whichever shall
apply):
(a) / / Employer Profit sharing contributions
and the earnings thereon.
(b) / / Employer matching contributions and the
earnings thereon.
(c) / / Employer basic contributions and the
earnings thereon.
(d) / / Employer supplemental contributions and
the earnings thereon.
(e) / / Employee after-tax contributions and the
earnings thereon.
(f) / / Employee pre-tax elective deferrals and
the earnings thereon.
(g) / / Employee rollover contributions and the
earnings thereon.
(h) / / Employer qualified nonelective
contributions and the earnings thereon.
(i) / / Any amounts to the extent invested in
the Employer stock fund.
12
XIII.ADDITIONAL INFORMATION
If additional space is needed to select or describe an
elective feature of the Plan, the Employer should
attach additional pages and use the following format:
The following is hereby made a part of Section --- of
the Adoption Agreement and is thus incorporated into
and made a part of the [Plan Name]
Signature of Employer's Authorized Representative
________________________________________________
Signature of Trustee
________________________________________________
Supplementary Page -- of [total number of pages].
XIV. PLAN ADMINISTRATOR
The Named Plan Administrator under the Plan shall be
the (choose 1, 2, 3 or 4):
Note: Pentegra Services, Inc. may not be appointed
Plan Administrator.
1. /x/ Employer
2. / / Employer's Board of Directors
3. / / Plan's Administrative Committee
4. / / Other (if chosen, then provide the following
information)
Name:_____________________________________
Address:__________________________________
Tel No.___________________________________
Contact:__________________________________
NOTE: IF NO NAMED PLAN ADMINISTRATOR IS DESIGNATED
ABOVE, THE EMPLOYER SHALL BE DEEMED THE NAMED
PLAN ADMINISTRATOR.
XV. TRUSTEE
The Employer hereby appoints the following person or
entity to serve as Trustee under the Plan:
Name: Mellon Bank
-------------
Address: 1 Cabot Road, Medford, MA 02155-5159
------------------------------------
Tel No: (617) 382-2196
--------------
Contact: Jim Peluso
----------
13
EXECUTION OF ADOPTION AGREEMENT
By execution of this Adoption Agreement by a duly authorized
representative of the Employer, the Employer acknowledges that it
has established or, as the case may be, amended a tax-qualified
retirement plan into the [Name of Employer] Employees' Savings &
Profit Sharing Plan and Trust (the "Plan"). The Employer hereby
represents and agrees that it will assume full fiduciary
responsibility for the operation of the Plan and for complying
with all duties and requirements imposed under applicable law,
including, but not limited to, the Employee Retirement Income
Security Act of 1974, as amended, and the Internal Revenue Code
of 1986, as amended. In addition, the Employer represents and
agrees that it will accept full responsibility of complying with
any applicable requirements of federal or state securities law as
such laws may apply to the Plan and to any investments
thereunder. The Employer further acknowledges that any opinion
letter issued with respect to the Adoption Agreement and the
Agreement by the Internal Revenue Service ("IRS") to Pentegra
Services, Inc., as sponsor of the Employees' Savings & Profit
Sharing Plan, does not constitute a ruling or a determination
with respect to the tax-qualified status of the Plan and that the
appropriate application must be submitted to the IRS in order to
obtain such a ruling or determination with respect to the Plan.
THE FAILURE TO PROPERLY COMPLETE THE ADOPTION AGREEMENT MAY
RESULT IN DISQUALIFICATION OF THE PLAN AND TRUST EVIDENCED
THEREBY.
The Sponsor will inform the Employer of any amendments to the
Plan or Trust Agreement or of the discontinuance or abandonment
of the Plan or Trust.
Any inquiries regarding the adoption of the Plan should be
directed to the Sponsor as follows:
Pentegra Services, Inc.
108 Corporate Park Drive
White Plains, New York 10604
(914) 694-1300
IN WITNESS WHEREOF, the Employer has caused this Adoption
Agreement to be executed by its duly authorized officer this
9 day of March, 19 97.
----- ----- --
Home Federal Savings Bank
By: /s/ Roger P. Weise
-------------------
Name: Roger P. Weise
-------------------
Title: President and CEO
------------------
6/96 14<PAGE>
Exhibit 11 - Computation of Earnings Per Common Share
HMN Financial, Inc.
Computation of Earnings Per Common Share
(Unaudited)
Computation of Earnings Per Common Share Three Months Ended March 31,
for Statements of Operations: 1997 1996
- --------------------------------------- ------------- ------------
Net income $ 1,474,480 1,586,691
--------- ---------
Weighted average number of common share
and common share equivalents:
Weighted average common shares
outstanding 3,757,694 4,717,775
Dilutive effect of stock option plans
after application of treasury stock
method 170,064 48,445
--------- ---------
3,927,758 4,766,220
--------- ---------
Earnings per common share and common
share equivalents $ 0.38 0.33
========= =========
Computation of Fully Diluted Earnings
Per Common Share and Common Share
Equivalents<1>
- --------------------------------------
Net income $ 1,474,480 1,586,691
--------- ---------
Weighted average number of common share and
common share equivalents:
Weighted average common shares
outstanding 3,757,694 4,717,775
Dilutive effect of stock option plans
after application of treasury stock
method 170,064 48,445
--------- ---------
3,927,758 4,766,220
--------- ---------
Earnings per common share and common
share equivalents $ 0.38 0.33
========= =========
<1> This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 of paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997 AND DECEMBER 31, 1996 AND
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,164
<INT-BEARING-DEPOSITS> 11,590
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,148
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 344,588
<ALLOWANCE> 2,423
<TOTAL-ASSETS> 553,021
<DEPOSITS> 364,123
<SHORT-TERM> 41,429
<LIABILITIES-OTHER> 4,405
<LONG-TERM> 64,292
0
0
<COMMON> 61
<OTHER-SE> 78,711
<TOTAL-LIABILITIES-AND-EQUITY> 553,021
<INTEREST-LOAN> 6,908
<INTEREST-INVEST> 2,913
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 9,903
<INTEREST-DEPOSIT> 4,573
<INTEREST-EXPENSE> 6,024
<INTEREST-INCOME-NET> 3,879
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 271
<EXPENSE-OTHER> 2,114
<INCOME-PRETAX> 2,388
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,474
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 7.47
<LOANS-NON> 326
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 125
<ALLOWANCE-OPEN> 2,341
<CHARGE-OFFS> 0
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,423
<ALLOWANCE-DOMESTIC> 1,205
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,218
</TABLE>
