UNITED STATES
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 September 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 November 1, 1997
Common stock, .01 par value 4,183,436
This Form 10-Q consists of 27 pages.
The exhibit index is on page 24.
1
<PAGE>
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1:Financial Statements (unaudited)
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 . . . 3
Consolidated Statements of Income for the
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996. . . . . . . . . . 4
Consolidated Statement of Stockholders'
Equity for the Nine Month Period Ended
September 30, 1997 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30,
1997 and 1996. . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . 7
Item 2:Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . .12
PART II - OTHER INFORMATION
Item 1:Legal Proceedings. . . . . . . . . . . . . . .22
Item 2:Changes in Securities. . . . . . . . . . . . .22
Item 3:Defaults Upon Senior Securities. . . . . . . .22
Item 4:Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . .22
Item 5:Other Information. . . . . . . . . . . . . . .22
Item 6:Exhibits and Reports on Form 8-K . . . . . . .22
Signatures. . . . . . . . . . . . . . . . . . . . . .23
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1997 1996
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 9,635,956 10,583,717
Securities available for sale:
Mortgage-backed and related
securities (amortized cost
$111,030,951 and $134,474,167) 111,117,282 133,355,278
Other marketable securities
(amortized cost $71,405,849
and $42,360,499) 72,815,033 42,474,810
------------ ------------
183,932,315 175,830,088
------------ ------------
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 2,089,733 739,316
Loans receivable, net 352,925,376 349,022,236
Federal Home Loan Bank stock,
at cost 6,236,700 5,434,000
Real estate, net 89,334 20,610
Premises and equipment, net 4,230,723 3,581,497
Accrued interest receivable 3,180,525 3,415,152
Prepaid expenses and other assets 6,526,233 3,299,427
------------ ------------
Total assets $568,846,895 554,731,599
============ ============
Liabilities and Stockholders' Equity
Deposits $366,682,349 362,476,944
Federal Home Loan Bank advances 112,007,163 106,078,589
Accrued interest payable 1,147,269 1,542,773
Advance payments by borrowers
for taxes and insurance 758,067 518,911
Accrued expenses and other
liabilities 3,632,564 2,014,938
------------ ------------
Total liabilities 484,227,412 472,632,155
------------ ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock:
authorized 500,000 shares;
Issued and outstanding none 0 0
Common stock ($.01 par value):
authorized shares
7,000,000; issued shares
6,085,775 60,858 60,858
Additional paid-in capital 59,702,833 59,428,768
Retained earnings, subject to
certain restrictions 58,976,197 54,645,387
Net unrealized gain (loss) on
securities available for sale 967,170 (598,045)
Unearned employee stock ownership
plan shares (4,650,340) (4,938,520)
Unearned compensation restricted
stock awards (658,817) (793,289)
Treasury stock, shares at cost
1,873,939 and 1,651,615 (29,778,418) (25,705,715)
------------ ------------
Total stockholders' equity 84,619,483 82,099,444
------------ ------------
Total liabilities and
stockholders' equity $568,846,895 554,731,599
============ ============
</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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------------- ---------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $6,939,224 6,461,279 20,730,094 19,009,335
Securities available for
sale:
Mortgage-backed and
related 2,092,964 2,429,330 6,458,996 7,730,690
Other marketable 1,119,452 669,964 2,621,762 1,655,705
Securities held to maturity:
Mortgage-backed and related 0 196,050 33,400 719,827
Other marketable 0 14,250 10,032 90,103
Cash equivalents 55,643 149,819 225,237 315,623
Other 107,187 93,823 304,158 232,453
---------- ---------- ---------- ----------
Total interest income 10,314,470 10,014,515 30,383,679 29,753,736
---------- ---------- ---------- ----------
Interest expense:
Deposits 4,749,737 4,741,907 13,993,332 14,281,156
Federal Home Loan Bank
advances 1,714,642 1,449,492 4,792,552 3,739,015
---------- ---------- ---------- ----------
Total interest expense 6,464,379 6,191,399 18,785,884 18,020,171
---------- ---------- ---------- ----------
Net interest income 3,850,091 3,823,116 11,597,795 11,733,565
Provision for loan losses 75,000 75,000 225,000 225,000
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 3,775,091 3,748,116 11,372,795 11,508,565
---------- ---------- ---------- ----------
Non-interest income:
Fees and service charges 121,489 94,817 318,346 254,188
Securities gains, net 487,547 192,761 872,159 961,798
Gain on sales of loans 117,302 9,896 334,367 16,980
Other 152,230 114,957 457,786 365,879
---------- ---------- ---------- ----------
Total non-interest income 878,568 412,431 1,982,658 1,598,845
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 1,431,853 1,175,725 4,106,699 3,380,843
Occupancy 245,202 203,071 718,801 595,216
Federal deposit insurance
premiums 57,478 212,020 175,379 636,676
SAIF assessment 0 2,351,563 0 2,351,563
Advertising 62,763 77,696 214,557 229,735
Data processing 129,100 118,949 372,432 368,145
Provision for real estate
losses 0 0 3,000 0
Other 302,449 255,808 879,375 799,710
--------- ---------- --------- ---------
Total non-interest
expense 2,228,845 4,394,832 6,470,243 8,361,888
--------- ---------- --------- ---------
Income (loss) before
income tax expense 2,424,814 (234,285) 6,885,210 4,745,522
Income tax (benefit) expense 900,703 (89,758) 2,554,400 1,770,274
--------- --------- --------- ---------
Net income (loss) $ 1,524,111 (144,527) 4,330,810 2,975,248
========= ========= ========= =========
Primary earnings (loss) per
common share and
common share equivalents $ 0.38 (0.03) 1.10 0.66
==== ==== ==== ====
Fully diluted earnings (loss)
per common share and
common share equivalents $ 0.38 (0.03) 1.09 0.66
==== ==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Month Period Ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Additional on 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 4,330,810
Change in unrealized
gain on securities
available for sale 1,490,289
Unrealized gain on
equity investments 74,926
Treasury stock
purchases
Amortization of
restricted stock awards
Recognition and retention
awards granted 2,250
Employee stock options
exercised (46)
Restricted stock awards
tax benefit 61,092
Employee stock option plan
tax benefit 3,530
Earned employee stock
ownership plan shares 207,239
------- ---------- ---------- --------
Balance, September 30, 1997 $ 60,858 59,702,833 58,976,197 967,170
======= ========== ========== ========
<CAPTION>
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 4,330,810
Change in unrealized
gain on securities
available for sale 1,490,289
Unrealized gain on
equity investments 74,926
Treasury stock
purchases (4,109,637) (4,109,637)
Amortization of
restricted stock awards 173,472 173,472
Recognition and retention
awards granted (39,000) 36,750 0
Employee stock options
exercised 184 138
Restricted stock awards
tax benefit 61,092
Employee stock option plan
tax benefit 3,530
Earned employee stock
ownership plan shares 288,180 495,419
---------- --------- ---------- ----------
Balance,
September 30, 1997 $(4,650,340) (658,817) (29,778,418) 84,619,483
========== ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income. $ 4,330,810 2,975,248
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses . . . . . . . 225,000 225,000
Provision for real estate losses. . . . 3,000 0
Depreciation. . . . . . . . . . . . . . 314,248 277,043
Amortization of (discounts) premiums, net (175,404) (49,327)
Amortization of deferred loan fees. . . (297,964) (334,698)
Provision for deferred income taxes . . 294,750 190,224
Securities gains, net . . . . . . . . . (872,159) (961,798)
Gain on sales of real estate. . . . . . (3,743) (46,625)
Gain on sales of loans. . . . . . . . . (334,640) (16,980)
Proceeds from sales of loans held for sale..8,267,102 943,096
Amortization of restricted stock awards 173,472 173,874
Amortization of unearned ESOP shares. . 288,180 298,240
BIF/SAIF special assessment . . . . . . 0 2,351,563
Earned employee stock ownership shares
priced above original cost . . . . . . 207,238 96,205
Decrease in accrued interest receivable 234,627 96,650
Decrease in accrued interest payable. . (395,504) (41,371)
Equity earnings of limited partnerships (179,596) 0
Increase in other assets. . . . . . . . (133,526) (81,461)
Increase (decrease) in other liabilities. . .377,696 (874,954)
Other, net. . . . . . . . . . . . . . . 20,721 (54,335)
---------- -----------
Net cash provided by operating activities 12,344,308 5,165,594
---------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale. 63,095,246 78,362,250
Principal collected on securities available
for sale. 10,496,126 13,375,740
Proceeds collected on maturity of securities
available for sale. . . . . . . . . . . 27,618,412 5,500,000
Purchases of securities available for sale (95,055,935) (81,008,115)
Proceeds from sales of securities held
to maturity. . . . . . . . . . . . . . . 348,871 0
Principal collected on securities held
to maturity. . . . . . . . . . . . . . . 240,441 1,336,500
Proceeds collected on maturity of securities
held to maturity . . . . . . . . . . . . 1,000,000 12,652,343
Purchase of securities held to maturity . 0 (709,765)
Proceeds from sales of loans receivable . 28,977,687 154,612
Purchase interest in mortgage servicing rights. (400,008) 0
Purchase interest in limited partnerships (2,438,750) 0
Purchase of Federal Home Loan Bank stock. (802,700) (1,396,900)
Net increase in loans receivable. . . . . (51,707,248) (34,186,011)
Proceeds from sale of real estate . . . . 35,627 379,789
Purchases of premises and equipment . . . (963,474) (175,560)
---------- ----------
Net cash used by investing activities. (19,555,705) (5,715,117)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits . . . . . 4,205,405 (9,576,370)
Purchase of treasury stock. . . . . . . . (4,109,637) (9,966,878)
Stock options exercised . . . . . . . . . 138 4,833
Proceeds from Federal Home Loan Bank advances121,500,000 108,800,000
Repayment of Federal Home Loan Bank
.advances (115,571,426) (75,844,423)
Increase in advance payments by borrowers
for taxes and insurance. . . . . . . . . 239,156 194,038
----------- ----------
Net cash provided by financing activities. .6,263,636 13,611,200
----------- ----------
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . (947,761) 13,061,677
Cash and cash equivalents, beginning of period . 10,583,717 4,334,694
----------- ----------
Cash and cash equivalents, end of period . .$ 9,635,956 17,396,371
=========== ==========
Supplemental cash flow disclosures:
Cash paid for interest. . . . . . . . . .$ 18,390,380 18,061,542
Cash paid for income taxes. . . . . . . . 2,255,500 2,725,433
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale . . . . .$ 9,608,294 15,419,810
Loans purchased with liability due to broker 0 11,000,000
Securities held to maturity transferred
to securities available for sale. . . . 1,295,147 0
Loans transferred to loans held for sale. 28,868,154 0
Transfer of loans to real estate. . . . . 188,776 168,187
Transfer of real estate to loans. . . . . 84,772 161,953
Securities purchased with asset due from broker . . . .0 384,228
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
September 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 nine month period ended September 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. In 1997, under SFAS No. 128, basic EPS differed from primary EPS by
$(0.01) to $0.03 per share and diluted EPS was equal to or $(0.01) per share
less than fully diluted EPS. When similar comparisons were made from
7
<PAGE>
the basic EPS and diluted EPS calculations to previously reported year-to-date
primary EPS and fully diluted EPS, the basic EPS calculations for the same
periods ranged from $0.00 to $0.07 per share greater than primary EPS and
diluted EPS for the same periods ranged from $0.00 to $0.01 per share greater
than fully diluted EPS.
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 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 will be adopting SFAS No. 130 on
January 1, 1998 and will report comprehensive income in statements issued after
that date.
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 segment'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.
8
<PAGE>
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
Primary earnings per common share and common share equivalents for the three
month periods ended September 30, 1997 and 1996 were computed by dividing net
income (loss) for each period ($1,524,111 and $(144,527), respectively) by the
weighted average common shares and common share equivalents outstanding
(3,972,494 and 4,185,867, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the three months
ended September 30, 1997 and 1996 were computed by dividing net income (loss)
for the period ($1,524,111 and $(144,527), respectively) by the weighted
average common shares and fully diluted common share equivalents outstanding
(3,975,798 and 4,185,867, respectively) during each period.
Primary earnings per common share and common share equivalents for the nine
month periods ended September 30, 1997 and 1996 were computed by dividing net
income for each period ($4,330,810 and $2,975,248, respectively) by the
weighted average common shares and common share equivalents outstanding
(3,938,454 and 4,509,942, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the nine months
ended September 30, 1997 and 1996 were computed by dividing net income for the
period ($4,330,810 and $2,975,248, respectively) by the weighted average common
shares and fully diluted common share equivalents outstanding (3,977,962 and
4,516,499, respectively) during each period.
(6) SAIF ASSESSMENT
On September 30, 1996, President Clinton signed the Savings Association
Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The
Bank's assessment by the SAIF was a one time charge of $2,351,563. The impact
of the assessment reduced earnings for 1996 by approximately $1.5 million after
tax.
(7) REGULATORY CAPITAL
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.
9
<PAGE>
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 September 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
September 30, 1997 and other conditions consistent with the Prompt Corrective
Actions Provisions of the Office of Thrift Supervision (OTS) regulations, the
Bank would be categorized as well capitalized.
At September 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(1) Amount Assets (1)
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Bank stockholder's equity $ 58,591
Less:
Net unrealized loss (gain)
on certain securities
available for sale (199)
Excess mortgage servicing
rights 542
-------
Tangible capital 57,850 10.68% $8,124 1.50%
-------
Tangible capital to
adjusted total assets 10.68%
Core capital (Tier I) 57,850 10.68% 16,247 3.00%
Tier I capital to risk-
weighted assets 23.58%
Plus:
Allowable allowance for
loan losses 2,553
-------
Risk-based capital $60,403 24.62% $19,627 8.00%
=======
(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.
<CAPTION>
To Be Well Capitalized
Under Prompt
Corrective Actions
Excess Capital Provisions
--------------------- -----------------------
(in thousands) Percent of Percent of
Amount Assets(1) Amount Assets(1)
------------------------------------------------
<S> <C> <C> <C> <C>
Bank stockholder's equity
Less:
Net unrealized loss (gain)
on certain securities
available for sale
Excess mortgage servicing
rights
Tangible capital $49,726 9.18%
Tangible capital to
adjusted total assets $ 27,078 5.00%
Core capital (Tier I) 41,603 7.68%
Tier I capital to risk-
weighted assets 14,720 6.00%
Plus:
Allowable allowance for
loan losses
Risk-based capital $40,776 16.62% $24,533 10.00%
</TABLE>
(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.
(8) STOCKHOLDER'S 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.
10
<PAGE>
(9) 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, a process that is expected to be completed by
November 30, 1997. At September 30, 1997, MFC's consolidated balance sheet had
total assets of $125.5 million of which $66.2 million were in loans receivable,
net and $52.6 million were investment securities or mortgage-backed securities.
MFC's deposits totaled $103.7 million and stockholders' equity totaled $20.3
million.
11<PAGE>
<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, fees and service
charges. 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 (LOSS)
HMN's net income for the third quarter of 1997 was $1.5 million, or $0.38
primary earnings per share, an increase of $1.67 million, compared to a net
loss of $(145,000), or $(0.03) primary loss per share for the same quarter
of 1996. In September of 1996, Congress enacted the Savings Association
Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The
Bank's one time charge was $2.4 million. The Bank's total SAIF assessment
was charged directly to earnings and reduced quarterly earnings by $1.5
million after tax, or $0.34 primary earnings per share. If the SAIF
legislation had not passed, net income for the third quarter of 1996 would
have been $1.3 million, or $0.31 primary earnings per share. Non-interest
income for the third quarter of 1997 was up $466,000 primarily due to gains
recognized on the sale of securities and loans and was partially offset by a
$186,000 increase in non-interest expense primarily related to
compensation and benefits. Net income for the nine month period ended
September 30, 1997 was $4.33 million, or $1.10 primary earnings per share,
an increase of $1.35 million from $2.98 million, or $0.66 primary earnings
per share. The SAIF assessment in September of 1996 had the impact of
decreasing net income for the nine months then
12
<PAGE>
ended by $1.5 million after tax, or $0.32 primary earnings per share. If
the SAIF legislation had not passed, net income for the nine months ended
September 30, 1996 would have been $4.5 million or $0.98 primary earnings
per share. Non-interest income for the nine month period ended September
30, 1997 was up $384,000 primarily due to gains recognized on the sale of
loans and was totally offset by a $460,000 net increase in non-interest
expense primarily due to increases in compensation and benefits.
NET INTEREST INCOME
Net interest income for the third quarter of 1997 was $3.85 million, an
increase of $27,000 compared to $3.82 million for the same quarter of 1996.
Interest income for the third quarter of 1997 was $10.3 million, an increase
of $300,000, or 3.0%, compared to $10.0 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 or advances from the Federal Home Loan Bank (FHLB). Interest
income increased by $293,000 due to an increase in the size of the loan
portfolio, and it increased by $185,000 due to an increase of the yield
earned on the loan portfolio. The increase in interest income was
partially offset by a $97,000 decrease in interest income earned on the
security portfolio due to a decrease in the average portfolio size and a
decrease in yield. Interest expense for the third quarter of 1997 was
$6.5 million, an increase of $273,000, or 4.4%, compared to $6.2 million
for the third quarter of 1996. The increase in interest expense was
primarily due to an $18.0 million increase in the average outstanding
advances from the FHLB for the third quarter of 1997 compared to the same
quarter of 1996.
Net interest income for the nine months ended September 30, 1997 was $11.6
million, a decrease of $136,000, or 1.2%, compared to $11.7 million for the
same nine month period of 1996. Interest income for the nine months ended
September 30, 1997 was $30.4 million, an increase of $630,000, or 2.1%,
compared to $29.8 million for the same nine month 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 or
advances from the FHLB. Interest income increased by $1.5 million due to an
increase in the size of the loan portfolio and it increased by $189,000 due
to an increase of the yield earned on the loan portfolio. The increase in
interest income was partially offset by a $1.1 million decrease in interest
earned on the security portfolio primarily due to a decrease in the average
portfolio size. Interest expense for the nine months ended September 30,
1997 was $18.8 million, an increase of $766,000, or 4.3%, compared to $18.0
million for the same nine month period of 1996. The increase in interest
expense was primariy due to a $25.0 million increase in the average
outstanding advances from the FHLB for the nine month period of 1997
compared to the same period of 1996. The majority of the funds received
from the FHLB advances were used to purchase the net increase in interest-
earning assets, facilitate the HMN stock repurchases, and purchase loan
servicing assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarters ended September 30,
1997 and 1996 were both $75,000. The provision for loan losses for the
nine months ended September 30, 1997 and 1996 were both $225,000. The
provision is the result of management's
13
<PAGE>
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.
For the nine months ended September 30, 1997 and 1996, HMN incurred the
following charge-offs on its loan portfolio:
1997 1996
1-4 Family $ 3,500 0
Commercial 12,300 61,329
Multi-family residential 0 87,591
Consumer 3,777 1,216
Total $ 19,577 150,136
The charge-offs were anticipated and resulted in the removal of the
properties from the loan portfolio.
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 225,000 225,000
Charge-offs (19,577) (150,136)
Recoveries 7,500 57
Balance at September 30, $ 2,553,508 2,265,585
NON-INTEREST INCOME
Non-interest income was $879,000 for the third quarter of 1997, an increase
of $467,000, or 113%, compared to $412,000 for the third quarter of 1996.
The increase was principally due to a $295,000 increase in gain on the sale
of securities and a $107,000 increase in gain on sale of loans. Economic
and certain market conditions allowed HMN to sell securities at a gain
during the third quarter of 1997. Those same conditions were not in
existence during the third quarter of 1996. The increase in the gain on
sale of loans was partly due to the economic and market conditions and
also an increase in mortgage banking activity for the third quarter of
1997, compared to the same quarter of 1996.
Non-interest income for the nine months ended September 30, 1997 was $2.0
million, an increase of $384,000, or 24%, compared to $1.6 million for the
nine months ended September 30, 1996. The increase was principally due to
a $317,000 increase in gain on the sale of loans, a $64,000 increase in
fees and service charges and a $92,000 increase in other income. The
increase in non-interest income was partially offset by a $90,000 decrease
in gain on sale of securities.
14
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense was $2.2 million for the third quarter of 1997, a
decrease of $2.2 million from $4.4 million for the third quarter of 1996.
The majority of the decrease in non-interest expense was due to a $2.4
million special one time SAIF assessment that occurred in September of
1996 and a related $155,000 decrease in 1997 SAIF insurance premiums. The
decrease in quarterly non-interest expense was partially offset by a
$256,000 increase in compensation and benefits expense and a $42,000
increase in occupancy expense. During 1997, HMN increased its mortgage
banking activities which required additional staff and increased occupancy
expense. A portion of the increase in compensation and benefits expense is
due to a net increase of 21 employees from the third quarter of 1996 to the
third quarter of 1997 and the remainder is the result of normal merit and
salary increases.
Non-interest expense for the nine months ended September 30, 1997 was $6.5
million, a decrease of $1.9 million, or 23%, from $8.4 million for the
nine months ended September 30, 1996. The majority of the decrease in non-
interest expense was due to a $2.4 million special one time SAIF assessment
that occurred in September of 1996 and a related $461,000 decrease in 1997
SAIF insurance premiums. The decrease in non-interest expense was
partially offset by a $726,000 increase in compensation and benefits
expense and a $124,000 increase in occupancy expense. During 1997, HMN
increased its mortgage banking activities which required additional staff
and increased occupancy expense. A portion of the increase in compensation
is due to a net increase in employees during 1997 and the remainder is the
result of normal merit and salary increases.
INCOME TAX EXPENSE
Income tax expense was $901,000 for the third quarter of 1997, an increase
of $990,000 from a tax benefit of $90,000 for the third quarter of 1996
and is primarily due to an increase in taxable income. Income tax expense
for the nine months ended September 30, 1997 was $2.6 million, an increase
of $784,000, or 44%, from $1.8 million for the same period in 1996 and is
primarily due to an increase in taxable income.
LIQUIDITY
For the nine months ended September 30, 1997, the net cash provided from
operating activities was $12.3 million and net cash used by investing
activities was $19.6 million. For the same period, HMN had $63.4 million
in proceeds from the sale of securities and it collected another $39.4
million from principal payments and the maturity of securities. HMN
purchased $95.1 million of securities during the first nine months of 1997.
HMN also received proceeds from the sale of loans of $29.0 million and
purchased or originated additional net loans of $51.7 million. During the
first nine months of 1997, HMN purchased an additional interest in a
mortgage servicing partnership for $1.9 million and purchased $400,000 in
mortgage servicing assets. It invested $500,000 in a partnership which
invests in the stock of other financial institutions. The Bank purchased
$803,000 of FHLB stock in order to meet its stock requirement under its
membership agreement. It also invested $963,000 in premises and
equipment. During the first nine months of 1997, deposits increased by
$4.2 million and Federal Home Loan Bank
15
<PAGE>
advances showed a net increase of $5.9 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 $183.8
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 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. On November 7, 1997 the transaction
was approved by the stockholders of Marshalltown Financial Corporation.
The Office of Thrift Supervision must approve the transaction. It is
currently reviewing the proposed transaction and should render its opinion
by the end of November.
HMN expects to fund the purchase of the Marshalltown stock from the
proceeds of the sale of securities available for sale or by additional
FHLB advances.
*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 and third quarter of 1998
and construction funding will come from normal cash flows or the sale of
securities.
*This paragraph contains a forward-looking statement(s). Refer to information
regarding Forward-looking Information on
page 20 of this discussion.
16
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at September 30, 1997 and December 31, 1996.
September 30, December 31,
1997 1996
-------------- ----------------
(Dollars in Thousands)
Non-Accruing Loans
One-to-four family real estate $175 $235
Nonresidential real estate 80 83
Commercial business 0 13
Consumer 22 7
---- ----
Total 277 338
---- ----
Accruing loans delinquent 90 days
One-to-four family real estate 178 0
Restructured loans 0 0
Foreclosed Assets
Real estate:
One-to-four family 94 23
Total non-performing assets $549 $361
Total as a percentage of total assets 0.10% 0.07%
Total non-performing loans $455 $338
Total as a percentage of total loans
receivable, net 0.13% 0.10%
Total non-performing assets at September 30, 1997 were $549,000, an
increase of $188,000, or 52%, from $361,000 at December 31, 1996.
The increase was the result of a delinquent single family loan and
foreclosure of another single family residence.
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
September 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 and
does not include the projected net interest income from the merger with
Marshalltown Financial Corporation.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 13,598 -7.28% -30.00%
+100 14,248 -2.84% -15.00%
0 14,665 0.00% 0.00%
-100 15,069 2.75% -15.00%
-200 15,304 4.36% -30.00%
* This paragraph contains a forward-looking statement(s). Refer to information
regarding Forward-looking Information on page 20 of this discussion.
17
<PAGE>
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 19 for table.
18
<PAGE>
The following table sets forth the interest rate sensitivity of HMN's assets and
liabilities at September 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 8,636 0 0 0
Securities available for sale:
Mortgage-backed and
related securities(1) $27,794 5,943 29,210 21,951
Other marketable securities 25,749 6,890 6,507 15,320
Securities held to maturity:
Mortgage-backed and
related securities(1) 0 0 0 0
Other marketable securities 0 0 0 0
Loans held for sale, net 2,090 0 0 0
Loans receivable (1)(2)
Fixed rate one-to-four
family(3) 19,154 17,661 60,530 44,601
Adjustable rate
one-to-four family(3) 19,297 20,506 13,661 15,691
Multi family 0 0 0 0
Fixed rate commercial
real estate 141 125 403 257
Adjustable rate commercial
real estate 6,856 60 0 0
Commercial business 1,797 559 1,728 926
Consumer loans 20,157 1,295 2,639 1,200
Federal Home Loan Bank stock 0 0 0 0
Total interest-earning
assets 131,671 53,039 114,678 99,946
Non-interest checking 2,906 0 0 0
NOW accounts 16,753 0 0 0
Passbooks 3,072 2,750 8,387 5,370
Money market accounts 1,656 1,482 4,522 2,895
Certificates 102,437 81,364 99,166 19,234
Federal Home Loan Bank advances 54,714 17,714 19,179 10,000
Total interest-bearing
liabilities 181,538 103,310 131,254 37,499
Interest-earning assets less
interest-bearing liabilities$(49,867) (50,271) (16,576) 62,447
Cumulative interest-rate
sensitivity gap $(49,867) (100,138) (116,714) (54,267)
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1997 (8.77)% (17.60) (20.52) (9.54)
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)
(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.
<CAPTION>
Maturing or Repricing
--------------------------------------------------
Over 5 No Stated
(Dollars in thousands) Years Maturity Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash equivalents 0 0 8,636
Securities available for sale:
Mortgage-backed and
related securities(1) $ 26,133 0 111,031
Other marketable securities 155 16,785 71,406
Securities held to maturity:
Mortgage-backed and
related securities(1) 0 0 0
Other marketable securities 0 0 0
Loans held for sale, net 0 0 2,090
Loans receivable (1)(2)
Fixed rate one-to-four family(3) 104,508 0 246,454
Adjustable rate
one-to-four family(3) 988 0 70,143
Multi family 0 0 0
Fixed rate commercial real estate 491 0 1,417
Adjustable rate commercial
real estate 0 0 6,916
Commercial business 55 0 5,065
Consumer loans 193 0 25,484
Federal Home Loan Bank stock 0 6,237 6,237
Total interest-earning assets 132,523 23,022 554,879
Non-interest checking 0 0 2,906
NOW accounts 0 0 16,753
Passbooks 9,543 0 29,122
Money market accounts 5,146 0 15,701
Certificates 0 0 302,201
Federal Home Loan Bank advances 10,400 0 112,007
Total interest-bearing
liabilities 25,089 0 478,690
Interest-earning assets less
interest-bearing liabilities $107,434 23,022 76,189
Cumulative interest-rate
sensitivity gap $ 53,167 76,189 76,189
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1997 9.35 13.39 13.39
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
</TABLE>
(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.
19
<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 results may differ materially from the expectations
disclosed within this Discussion and Analysis. These forward-looking
statements are subject to risks and uncertainties, including those discussed
below. The Company assumes no obligation to publicly release results of any
revision or updates to these forward-looking statements to reflect future
events or unanticipated occurrences.
LIQUIDITY
- HMN has certificates of deposit with outstanding balances of $183.8
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 $183.8 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
20
<PAGE>
in cash. On November 7, 1997 the transaction was approved by the
stockholders of Marshalltown Financial Corporation. The Office of Thrift
Supervision must approve the transaction. It is currently reviewing the
proposed transaction and should render its opinion by the end of November.
HMN expects to fund the purchase of the Marshalltown stock from the
proceeds of the sale of securities available for sale or by additional
FHLB advances.
OTS approval may not be received by November 30, 1997 due to some
unforeseen regulatory issue.
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 September 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 experienced
by the contractors for the delivery of construction materials or weather
related issues could cause the occupancy date for Spring Valley and Winona
to be later in 1998. The funding for the construction may not come from
normal cash flows but may be funded either by selling securities or
advances from the FHLB.
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
September 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 and
does not include the projected net interest income of Marshalltown
Financial Corporation.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 13,598 -7.28% -30.00%
+100 14,248 -2.84% -15.00%
0 14,665 0.00% 0.00%
-100 15,069 2.75% -15.00%
-200 15,304 4.36% -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 security
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. The anticipated
merger of Marshalltown Financial Corporation will increase interest-
earning assets by approximately $120 million and interest-bearing
liabilities by approximately $100 million. The increases mentioned above
will have an impact on HMN's net interest income and the related projected
impact of rate shocks on net interest income.
21
<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.
At its meeting held on September 23, 1997 the Board of Directors
passed a resolution amending the Bylaws of HMN Financial, Inc.. The
Amended Bylaws are included as Exhibit 3(ii). Since the Bylaws have
not been previously filed in electronic format the complete Amended
Bylaws are included in this item.
At its Board of Directors meeting held on September 23, 1997 the date
for the next annual meeting of shareholders was set for April 28,
1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits on page 19 of this report.
(b) Reports on Form 8-K. A current report on Form 8-K, Items 5. and
7., was filed on October 17, 1997, to report the Company's third
quarter earnings.
(c) A press release was issued on November 7, 1997 to report the
approval by Marshalltown shareholders of the Agreement and Plan
of Merger dated July 1, 1997 between HMN Financial, Inc. and
Marshalltown Financial Corporation.
22
<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: November 13, 1997 /s/ Roger P. Weise
Roger P. Weise,
Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1997 /s/ James B. Gardner
James B. Gardner,
Executive Vice President
(Chief Financial Officer)
23
<PAGE>
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Reference Sequential
to Prior Page Numbering
Filing or Where Attached
Exhibit Exhibits Are
Regulation S-K Number Located in This
Exhibit Number Document Attached Hereto Form 10-Q Report
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession. N/A N/A
3(a) Articles of Incorporation * N/A
3(b) By-laws 3(ii) Filed
Resolution to Amend By-laws of HMN Financial, Inc. electronically
By-laws of HMN Financial, Inc. as amended
4 Instruments defining the rights of
security holders, Including indentures * N/A
5(a) Amendment to the Home Federal Savings Bank *** N/A
Employees' Savings & Profit Sharing Plan dated
January 28, 1997.
5(b) Amendment to the Adoption Agreement for Home *** N/A
Federal Savings Bank Employees' 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
May 20, 2000 *** N/A
10.2(a) Employment agreement for Mr. Gardner ** N/A
dated June 29, 1994
10.2(b) Extension of employment agreement to
May 20, 2000 *** N/A
10.3 Trust Agreement between Home Federal
Savings Bank and the Bank of New York *** N/A
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 Registrant's Form 10-Q for June 30, 1997 (file no. 0-
24100). All previously filed documents are hereby incorporated by reference
in accordance with Item 601 of Regulation S-K.
24
<PAGE>
HMN FINANCIAL, INC.
RESOLUTION TO AMEND BY-LAWS
RESOLUTION #HMN9709-01
SEPTEMBER 23, 1997
WHEREAS, the Board of Directors, after consultation with counsel,
has considered various amendments to the By-Laws of the
Corporation; and
WHEREAS, the Board has determined that increasing the time period
required for notice by stockholders of nominations for directors
and the submission of stockholder proposals would help assure
that all stockholders will have adequate information and
sufficient time to consider proposals advanced by stockholders or
stockholder nominees, will give the Board of Directors sufficient
time to evaluate nominees and proposals and include its
recommendations in its proxy statement and will assist the
Corporation in effecting orderly stockholders meetings;
WHEREAS, given that the Corporation's main business is effected
through its wholly-owned subsidiary, Home Federal Savings Bank,
and that the principal business of Home Federal Savings Bank is
conducted through full service branch offices which specialize in
meeting the needs of its customers in local communities;
WHEREAS, the Board of Directors believes that requiring directors
to be primarily domiciled in the counties where Home Federal
Savings Bank has full service branch offices will benefit the
Corporation by ensuring that the directors of the Corporation are
knowledgeable of and actively involved in the Corporation's
primary market areas and should not unreasonably infringe on or
impede the ability of the Corporation and its stockholders to
identify and recruit qualified candidates for the Board of
Directors;
WHEREAS, the Corporation's Certificate of Incorporation expressly
empowers the Board to adopt, amend or repeal the By-Laws of the
Corporation; and
WHEREAS, the Board of Directors believes that amending the By-
Laws consistent with the foregoing recitals will be in the best
interests of the Corporation and its stockholders as a whole.
NOW, THEREFORE, BE IT RESOLVED, that the By-Laws of the
Corporation be restated in the form reviewed and approved by the
Board and that a copy of the Restated By-Laws be included with
the minutes of this meeting and the corporate records of the
Corporation.
RESOLVED FURTHER, that the officers of the Corporation, or any
one of them, are hereby authorized to take such further action in
connection with the adoption of such Restated By-Laws as they, or
any one of them, deem necessary or advisable, including any
necessary or advisable filings with the Security and Exchange
Commission or the Office of Thrift Supervision.
<PAGE>
HMN FINANCIAL, INC.
RESTATED
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. ANNUAL MEETING.
An annual meeting of the stockholders, for the election of
directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before
the meeting, shall be held at such place, on such date, and at
such time as the Board of Directors shall each year fix, which
date shall be within thirteen (13) months subsequent to the later
of the date of incorporation or the last annual meeting of
stockholders.
Section 2. SPECIAL MEETINGS.
Subject to the rights of the holders of any class or series
of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called only by the Board
of Directors pursuant to a resolution adopted by a majority of
the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter
the "Whole Board").
Section 3. NOTICE OF MEETINGS.
Written notice of the place, date, and time of all meetings
of the stockholders shall be given, not less than ten (10) nor
more than sixty (60) days before the date on which the meeting is
to be held, to each stockholder entitled to vote at such meeting,
except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the
Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time,
written notice need not be given of the adjourned meeting if the
place, date and time thereof are announced at the meeting at
which the adjournment is taken; provided, however, that if the
date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written
notice of the place, date and time of the adjourned meeting shall
be given in conformity herewith. At any adjourned meeting, any
business may be transacted which might have been transacted at
the original meeting.
Section 4. QUORUM.
At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at
the meeting, present in person or by proxy, shall constitute a
quorum for all purposes, unless or except to the extent that the
presence of a larger number may be required by law. Where a
separate vote by a class or classes is required, a majority of
the shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take
action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman
of the meeting or the holders of a majority of the shares of
stock entitled to vote who are present, in person or by proxy,
may adjourn the meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders
is sent to all stockholders entitled to vote thereat, stating
that it will be held with those present constituting a quorum,
then except as otherwise required by law, those present at such
adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such
meeting.
Section 5. ORGANIZATION.
Such person as the Board of Directors may have designated
or, in the absence of such a person, the President of the
Corporation or, in his or her absence, such person as may be
chosen by the holders of a majority of the shares entitled to
vote who are present, in person or by proxy, shall call to order
any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the
secretary of the meeting shall be such person as the chairman
appoints.
Section 6. CONDUCT OF BUSINESS.
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct
of discussion as seem to him or her in order.
(b) At any annual meeting of the stockholders, only
such business shall be conducted as shall have been brought
before the meeting (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is
entitled to vote with respect thereto and who complies with the
notice procedures set forth in this Section 6(b). For business to
be properly brought before an annual meeting by a stockholder,
the BUSINESS MUST RELATE TO A PROPER SUBJECT MATTER FOR
STOCKHOLDER ACTION AND THE stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the
Corporation not less than NINETY (90) days prior to the date of
the annual meeting; provided, however, that in the event that
less than ONE HUNDRED (100) days' notice or prior public
disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be
received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made, WHICHEVER
OCCURS FIRST. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF AN
ADJOURNMENT OF AN ANNUAL MEETING COMMENCE A NEW TIME PERIOD FOR
THE GIVING OF A STOCKHOLDER'S NOTICE. A stockholder's notice to
the Secretary shall set forth as to each matter such stockholder
proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at
the annual meeting, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder who proposed such
business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such
stockholder and (iv)A DESCRIPTION OF ALL ARRANGEMENTS OR
UNDERSTANDINGS BETWEEN SUCH STOCKHOLDER AND ANY OTHER PERSON OR
PERSONS (INCLUDING THEIR NAMES) IN CONNECTION WITH THE PROPOSAL
OF SUCH BUSINESS BY SUCH STOCKHOLDER AND any material interest of
such BUSINESS, AND (V) A REPRESENTATION THAT SUCH STOCKHOLDER
INTENDS TO APPEAR IN PERSON OR BY PROXY AT THE ANNUAL MEETING TO
BRING SUCH BUSINESS BEFORE THE MEETING. Notwithstanding anything
in these By-laws to the contrary, no business shall be brought
before or conducted at an annual meeting except in accordance
with the provisions of this Section 6(b). The officer of the
Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he
should so determine, he shall so declare to the meeting and any
such business so determined to be not properly brought before the
meeting shall not be transacted. At any special meeting of the
stockholders, only such business shall be conducted as shall have
been brought before the meeting by or at the direction of the
Board of Directors.
(c) Only persons who are nominated in accordance with
the procedures set forth in these By- laws shall be eligible for
election as directors. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a meeting of
stockholders at which directors are to be elected only (i) by or
at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election
of directors at the meeting who complies with the notice
procedures set forth in this Section 6(c). Such nominations,
other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered or mailed to and received at the
principal executive offices of the Corporation not less than
NINETY (90) days prior to the date of the meeting; provided,
however, that in the event that less than ONE HUNDRED (100) days'
notice or prior disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must
be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made, WHICHEVER
OCCURS FIRST. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF AN
ADJOURNMENT OF AN ANNUAL MEETING COMMENCE A NEW TIME PERIOD FOR
THE GIVING OF A STOCKHOLDER'S NOTICE. Such stockholder's notice
shall set forth (i) as to each person whom such stockholder
proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including
such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected);
and (ii) as to the stockholder giving the notice: (x) the name
and address, as they appear on the Corporation's books, of such
stockholder and (y) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director
shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be
eligible for election as a director of the Corporation unless
nominated in accordance with the provisions of this Section 6(c).
The officer of the Corporation or other person presiding at the
meeting shall, if the facts so warrant, determine that a
nomination was not made in accordance with such provisions and,
if he or she should so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
Section 7. PROXIES AND VOTING.
At any meeting of the stockholders, every stockholder
entitled to vote may vote in person or by proxy authorized by an
instrument in writing (or as otherwise permitted under applicable
law) by the stockholder or his duly authorized attorney-in-fact
filed in accordance with the procedure established for the
meeting. Proxies solicited on behalf of the management shall be
voted as directed by the stockholder or in the absence of such
direction, as determined by a majority of the Board of Directors.
No proxy shall be valid after eleven months from the date of its
execution except for a proxy coupled with an interest under
Delaware law.
Each stockholder shall have one (1) vote for every share of
stock entitled to vote which is registered in his or her name on
the record date for the meeting, except as otherwise provided
herein or in the Certificate of Incorporation of the Corporation
or as required by law.
All voting, including on the election of directors but
excepting where otherwise required by law, may be by a voice
vote; provided, however, that upon demand therefore by a
stockholder entitled to vote or his or her proxy, a written vote
shall be taken. Every written vote shall be taken by ballot, each
of which shall state the name of the stockholder or proxy voting
and such other information as may be required under the procedure
established for the meeting. Every vote taken by ballot shall be
counted by a properly appointed inspector or inspectors of
election.
All elections shall be determined by a plurality of the
votes cast, and except as otherwise required by law or as
provided in the Certificate of Incorporation, all other matters
shall be determined by a majority of the votes cast.
Section 8. STOCK LIST.
The officer who has charge of the stock transfer books of
the Corporation shall prepare and make, in the time and manner
required by applicable law, a list of stockholders entitled to
vote and shall make such list available for such purposes, at
such places, at such times and to such persons as required by
applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to
examine the stock transfer books or to vote in person or by proxy
at any meeting of stockholders.
Section 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING.
Subject to the rights of the holders of any class or series
of preferred stock of the Corporation, any action required or
permitted to be taken by the stockholders of the Corporation must
be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
Section 10. INSPECTORS OF ELECTION.
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of
election, to act at the meeting or any adjournment thereof and
make a written report thereof, in accordance with applicable law.
In the event the Board of Directors fails to so appoint, the
chairman presiding at the meeting shall appoint one or more
persons as inspectors of election.
ARTICLE II
BOARD OF DIRECTORS
Section 1. GENERAL POWERS, NUMBER, TERM OF OFFICE AND
QUALIFICATIONS.
The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. The Board of
Directors shall annually elect a Chairman of the Board and a
President from among its members and shall designate, when
present, either the Chairman of the Board or the President to
preside at its meetings.
The directors, other than those who may be elected by the
holders of any class or series of preferred stock, shall be
divided into three classes, as nearly equal in number as
reasonably possible, with the term of office of the first class
to expire at the first annual meeting of stockholders, the term
of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the
third class to expire at the annual meeting of stockholders two
years thereafter, with each director to hold office until his or
her successor shall have been duly elected and qualified. At each
annual meeting of stockholders, commencing with the first annual
meeting, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their
election, with each director to hold office until his or her
successor shall have been duly elected and qualified.
DIRECTORS SHALL, IN ORDER TO QUALIFY AS SUCH, HAVE THEIR
PRIMARY DOMICILE IN A COUNTY IN WHICH HOME FEDERAL SAVINGS BANK,
A WHOLLY-OWNED SUBSIDIARY OF THE CORPORATION, HAS A FULL-SERVICE
BRANCH.
Section 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS.
Subject to the rights of the holders of any class or series
of preferred stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or
other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and
directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the
class to which they have been elected expires, and until such
director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting
the Board shall shorten the term of any incumbent director.
Section 3. REGULAR MEETINGS.
Regular meetings of the Board of Directors shall be held at
such place or places, on such date or dates, and at such time or
times as shall have been established by the Board of Directors
and publicized among all directors. A notice of each regular
meeting shall not be required.
Section 4. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by
one-third (1/3) of the directors then in office (rounded up to
the nearest whole number) or by the Chairman of the Board or the
President and shall be held at such place, on such date, and at
such time as they or he or she shall fix. Notice of the place,
date, and time of each such special meeting shall be given to
each director by whom it is not waived by mailing written notice
not less than five (5) days before the meeting or by telegraphing
or telexing or by facsimile transmission of the same not less
than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business maybe
transacted at a special meeting.
Section 5. QUORUM.
At any meeting of the Board of Directors, a majority of the
authorized number of directors then constituting the Board shall
constitute a quorum for all purposes. If a quorum shall fail to
attend any meeting, a majority of those present may adjourn the
meeting to another place, date, or time, without further notice
or waiver thereof.
Section 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee
thereof, may participate in a meeting of such Board or committee
by means of conference telephone or similar communications
equipment by means of which all persons participating in the
meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. CONDUCT OF BUSINESS.
At any meeting of the Board of Directors, business shall be
transacted in such order and manner as the Board may from time to
time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise
provided herein or required by law. Action may be taken by the
Board of Directors without a meeting if all members thereof
consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors.
Section 8. POWERS.
The Board of Directors may, except as otherwise required by
law, exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation, including, without
limiting the generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in
accordance with law;
(2) To purchase or otherwise acquire any property,
rights or privileges on such terms as it shall
determine;
(3) To authorize the creation, making and issuance, in
such form as it may determine, of
written obligations of every kind, negotiable or non-negotiable,
secured or unsecured, and to do all things necessary
in connection therewith;
(4) To remove any officer of the Corporation with or
without cause, and from time to time to devolve the powers and
duties of any officer upon any other person for the time being;
(5) To confer upon any officer of the Corporation the
power to appoint, remove and suspend subordinate officers,
employees and agents;
(6) To adopt from time to time such stock, option,
stock purchase, bonus or other compensation plans for directors,
officers, employees and agents of the Corporation and its
subsidiaries as it may determine;
(7) To adopt from time to time such insurance,
retirement, and other benefit plans for directors, officers,
employees and agents of the Corporation and its subsidiaries as
it may determine; and,
(8) To adopt from time to time regulations, not
inconsistent with these By-laws, for the management of the
Corporation's business and affairs.
Section 9. COMPENSATION OF DIRECTORS.
Directors, as such, may receive, pursuant to resolution of
the Board of Directors, fixed fees and other compensation for
their services as directors, including, without limitation, their
services as members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 1. COMMITTEES OF THE BOARD OF DIRECTORS.
The Board of Directors, by a vote of a majority of the Board
of Directors, may from time to time designate committees of the
Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a
director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members
who may replace any absent or disqualified member at any meeting
of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a
certificate of ownership and merger pursuant to Section 253 of
the Delaware General Corporation Law if the resolution which
designated the committee or a supplemental resolution of the
Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the
committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may
by unanimous vote appoint another member of the Board of
Directors to act at the meeting in the place of the absent or
disqualified member.
Section 2. CONDUCT OF BUSINESS.
Each committee may determine the procedural rules for
meeting and conducting its business and shall act in accordance
therewith, except as otherwise provided herein or required by
law. Adequate provision shall be made for notice to members of
all meetings; one-third (1/3) of the members shall constitute a
quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum;
and all matters shall be determined by a majority vote of the
members present. Action may be taken by any committee without a
meeting if all members thereof consent thereto in writing, and
the writing or writings are filed with the minutes of the
proceedings of such committee.
Section 3. NOMINATING COMMITTEE.
The Board of Directors shall appoint a Nominating Committee
of the Board, consisting of three (3) members. The Nominating
Committee shall have authority (a) to review any nominations for
election to the Board of Directors made by a stockholder of the
Corporation pursuant to Section 6(c)(ii) of Article I of these
By-laws in order to determine compliance with such By-law and (b)
to recommend to the Whole Board nominees for election to the
Board of Directors to replace those directors whose terms expire
at the annual meeting of stockholders next ensuing.
ARTICLE IV
OFFICERS
Section 1. GENERALLY.
(a) The Board of Directors as soon as may be
practicable after the annual meeting of stockholders shall choose
a Chairman of the Board, a President, one or more Vice
Presidents, a Secretary and a Chief Financial Officer and from
time to time may choose such other officers as it may deem
proper. The Chairman of the Board shall be chosen from among the
directors. Any number of offices may be held by the same person.
(b) The term of office of all officers shall-be until
the next annual election of officers and until their respective
successors are chosen, but any officer may be removed from office
at any time by the affirmative vote of a majority of the
authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors
shall each have such powers and duties as generally pertain to
their respective offices, subject to the specific provisions of
this Article IV. Such officers shall also have such powers and
duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. CHAIRMAN OF THE BOARD OF DIRECTORS.
The Chairman of the Board of Directors of the Corporation
shall preside at all meetings of the Corporation and the
Executive Committee meetings of the Board of Directors. He may
sign account books, deeds, mortgages, bonds, contracts or other
instruments which the Board of Directors has authorized to be
executed, except where otherwise provided by other resolutions of
the Board of Directors or by these Bylaws or Certificate of
Incorporation of the Corporation.
Section 3. PRESIDENT.
The President shall be the chief executive officer and,
subject to the control of the Board of Directors, shall have
general power over the management and oversight of the
administration and operation of the Corporation's business and
general supervisory power and authority over its policies and
affairs. He shall see that all orders and resolutions of the
Board of Directors and of any committee thereof are carried into
effect.
Each meeting of the stockholders and of the Board of
Directors shall be presided over by such officer as has been
designated by the Board of Directors or, in his absence, by such
officer or other person as is chosen at the meeting. The
Secretary or, in his absence, the General Counsel of the
Corporation or such officer as has been designated by the Board
of Directors or, in his absence, such officer or other person as
is chosen by the person presiding, shall act as secretary of each
such meeting.
Section 4. VICE PRESIDENT.
The Vice President or Vice Presidents shall perform the
duties of the President in his absence or during his disability
to act. In addition, the Vice Presidents shall perform the duties
and exercise the powers usually incident to their respective
offices and/or such other duties and powers as may be properly
assigned to them from time to time by the Board of Directors, the
Chairman of the Board or the President.
Section 5. SECRETARY.
The Secretary or an Assistant Secretary shall issue notices
of meetings, shall keep their minutes, shall have charge of the
seal and the corporate books, shall perform such other duties and
exercise such other powers as are usually incident to such
offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
Section 6. CHIEF FINANCIAL OFFICER.
The Chief Financial Officer shall have charge of all monies
and securities of the Corporation, other than monies and
securities of any division of the Corporation which has a
treasurer or financial officer appointed by the Board of
Directors, and shall keep regular books of account. The funds of
the Corporation shall be deposited in the name of the Corporation
by the Chief Financial Officer with such banks or trust companies
as the Board of Directors from time to time shall designate. He
shall sign or countersign such instruments as require his
signature, shall perform all such duties and have all such powers
as are usually incident to such office and/or such other duties
and powers as are properly assigned to him by the Board of
Directors, the Chairman of the Board or the President, and may be
required to give bond for the faithful performance of his duties
in such sum and with such surety as may be required by the Board
of Directors.
Section 7. ASSISTANT SECRETARIES AND OTHER OFFICERS.
The Board of Directors may appoint one or more assistant
secretaries and one or more assistants to the Chief Financial
Officer, or one appointee to both such positions, which officers
shall have such powers and shall perform such duties as are
provided in these By-laws or as may be assigned to them by the
Board of Directors, the Chairman of the Board or the President.
Section 8. ACTION WITH RESPECT TO SECURITIES OF OTHER
CORPORATIONS
Unless otherwise directed by the Board of Directors, the
President or any officer of the Corporation authorized by the
President shall have power to vote and otherwise act on behalf of
the Corporation, in person or by proxy, at any meeting of
stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold
securities and otherwise to exercise any and all rights and
powers which this Corporation may possess by reason of its
ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. CERTIFICATES OF STOCK.
Each stockholder shall be entitled to a certificate signed
by, or in the name of the Corporation by, the President or a Vice
President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the number of
shares owned by him or her. Any or all of the signatures on the
certificate may be by facsimile.
Section 2. TRANSFERS OF STOCK.
Transfers of stock shall be made only upon the transfer
books of the Corporation kept at an office of the Corporation or
by transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in
accordance with Section 4 of Article V of these By-laws, an
outstanding certificate for the number of shares involved shall
be surrendered for cancellation before a new certificate is
issued therefore.
Section 3. RECORD DATE.
In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders, or to receive payment of any dividend or other
distribution or allotment of any rights or to exercise any rights
in respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the
date on which the resolution fixing the record date is adopted
and which record date shall not be more than sixty (60) nor less
than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however,
that if no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any
dividend or other distribution or allotment of rights or to
exercise any rights of change, conversion or exchange of stock or
for any other purpose, the record date shall be at the close of
business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event of the loss, theft or destruction of any
certificate of stock, another may be issued in its place pursuant
to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. REGULATIONS.
The issue, transfer, conversion and registration of
certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 1. NOTICES.
Except as otherwise specifically provided herein or required
by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may
in every instance be effectively given by hand delivery to the
recipient thereof, by depositing such notice in the mail, postage
paid, or by sending such notice by prepaid telegram or mailgram.
Any such notice shall be addressed to such stockholder, director,
officer, employee or agent at his or her last known address as
the same appears on the books of the Corporation. The time when
such notice is received, if hand delivered, or dispatched, if
delivered through the mail or by telegram or mailgram, shall be
the time of the giving of the notice.
Section 2. WAIVERS.
A written waiver of any notice, signed by a stockholder,
director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be
deemed equivalent to the notice required to be given to such
stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such
a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. FACSIMILE SIGNATURES.
In addition to the provisions for use of facsimile
signatures elsewhere specifically authorized in these By- laws,
facsimile signatures of any officer or officers of the
Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. CORPORATE SEAL.
The Board of Directors may provide a suitable seal,
containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board
of Directors or a committee thereof, duplicates of the seal may
be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS.
Each director, each member of any committee designated by
the Board of Directors, and each officer of the Corporation
shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or
other records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by
any of its officers or employees, or committees of the Board of
Directors so designated, or by any other person as to matters
which such director or committee member reasonably believes are
within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the
Corporation.
Section 4. FISCAL YEAR.
The fiscal year of the Corporation shall be as fixed by the
Board of Directors.
Section 5. TIME PERIODS.
In applying any provision of these By-laws which requires
that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a
specified number of days prior to an event, calendar days shall
be used, the day of the doing of the act shall be excluded and
the day of the event shall be included.
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or
repealed as provided in Article SEVENTH of the Certificate of
Incorporation of the Corporation.
HMN Financial, Inc.
Computation of Earnings Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Computation of Earnings Per
Common Share for Statements
of Operations: Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $1,524,111 (144,527) 4,330,810 2,975,248
Weighted average
number of common share
and common share
equivalents:
Weighted average common
shares outstanding 3,740,468 4,185,867 3,742,802 4,474,903
Dilutive effect of
stock option plans
after application
of treasury stock
method 232,026 195,652 35,039
3,972,494 4,185,867 3,938,454 4,509,942
Earnings (loss) per
common share and
common share equivalents $ 0.38 (0.03) 1.10 0.66
Computation of Fully Diluted
Earnings Per Common Share and
Common Share Equivalent(1)
- ------------------------------
Net income (loss) $ 1,524,111 (144,527) 4,330,810 2,975,248
Weighted average number
of common share
and common share equivalents:
Weighted average common shares
outstanding 3,740,468 4,185,867 3,742,802 4,474,903
Dilutive effect of
stock option plans
after application of
treasury stock method 235,330 235,160 41,596
3,975,798 4,185,867 3,977,962 4,516,499
Earnings (loss) per common
share and common share
equivalents $ 0.38 (0.03) 1.09 0.66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ETRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000921183
<NAME> HMN FINANCIAL INC
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,156
<INT-BEARING-DEPOSITS> 7,480
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 357,569
<ALLOWANCE> 2,554
<TOTAL-ASSETS> 568,847
<DEPOSITS> 366,682
<SHORT-TERM> 43,429
<LIABILITIES-OTHER> 5,539
<LONG-TERM> 68,578
0
0
<COMMON> 61
<OTHER-SE> 84,558
<TOTAL-LIABILITIES-AND-EQUITY> 568,847
<INTEREST-LOAN> 20,730
<INTEREST-INVEST> 9,125
<INTEREST-OTHER> 529
<INTEREST-TOTAL> 30,384
<INTEREST-DEPOSIT> 13,993
<INTEREST-EXPENSE> 18,786
<INTEREST-INCOME-NET> 11,598
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 872
<EXPENSE-OTHER> 6,470
<INCOME-PRETAX> 6,885
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,331
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 7.43
<LOANS-NON> 455
<LOANS-PAST> 178
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 118
<ALLOWANCE-OPEN> 2,341
<CHARGE-OFFS> 20
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,554
<ALLOWANCE-DOMESTIC> 1,336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,218
</TABLE>
