UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 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) 346-1100
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's common stock
as of the latest practicable date.
Class Outstanding at May 8, 1998
- -------------------------------------- ----------------------------
Common stock, $0.01 par value 5,909,052*
*Gives effect to a 50% stock dividend to be distributed on May 22, 1998 to
holders of record on May 8, 1998.
<PAGE>
<PAGE>
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements (unaudited)
Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statement of Stockholders' Equity
for the Three Month Period Ended March 31, 1998 5
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-13
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Item 3: Quantitative and Qualitative Disclosures about
Market Risk Discussion included in Item 2
under Market Risk 17
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 23
Item 2: Changes in Securities 23
Item 3: Defaults Upon Senior Securities 23
Item 4: Submission of Matters to a Vote of
Security Holders 23
Item 5: Other Information 23
Item 6: Exhibits and Reports on Form 8-K 23
Signatures 24
2
<PAGE>
<PAGE>
PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents. . . . . . . .$ 21,267,061 9,364,635
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $137,263,165
and $135,598,404). . . . . . . . . 137,473,527 135,935,482
Other marketable securities
(amortized cost $80,170,535 and
$68,356,926) . . . . . . . . . . . 81,648,096 69,923,477
----------- -----------
219,121,623 205,858,959
----------- -----------
Loans held for sale. . . . . . . . . . . 8,317,565 2,287,265
Loans receivable, net. . . . . . . . . . 450,209,710 442,068,600
Federal Home Loan Bank stock, at cost. . 8,488,000 7,432,200
Real estate, net . . . . . . . . . . . . 75,177 133,939
Premises and equipment, net. . . . . . . 6,515,713 5,880,710
Accrued interest receivable. . . . . . . 3,870,744 4,038,131
Investment in limited partnerships . . . 6,222,467 5,989,399
Goodwill . . . . . . . . . . . . . . . . 4,476,510 4,500,873
Core deposit intangible. . . . . . . . . 1,474,516 1,546,273
Mortgage servicing rights. . . . . . . . 1,096,724 781,005
Prepaid expenses and other assets. . . . 982,545 1,349,521
----------- -----------
Total assets . . . . . . . . . . .$ 732,118,355 691,231,510
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY .
Deposits . . . . . . . . . . . . . . . .$ 466,998,386 467,347,688
Federal Home Loan Bank advances. . . . . 167,292,879 127,650,021
Accrued interest payable . . . . . . . . 2,104,569 1,365,064
Advance payments by borrowers for
taxes and insurance . . . . . . . . . 862,984 786,619
Accrued expenses and other liabilities . 5,967,389 6,056,356
Due to stockholders of Marshalltown
Financial Corporation. . . . . . . . . 192,890 3,555,352
Due to brokers . . . . . . . . . . . . . 3,745,250 0
----------- -----------
Total liabilities. . . . . . . . . 647,164,347 606,761,100
----------- -----------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: authorized
500,000 shares; issued and
outstanding none. . . . . . . . . . 0 0
Common stock ($.01 par value):
authorized 11,000,000 shares;
issued 9,128,662 shares . . . . . . 91,287 91,287
Additional paid-in capital. . . . . . 59,800,424 59,698,661
Retained earnings, subject to certain
restrictions. . . . . . . . . . . . 61,887,608 60,224,253
Accumulated other comprehensive
income. . . . . . . . . . . . . . . 1,031,926 1,129,818
Unearned employee stock ownership
plan shares . . . . . . . . . . . . (5,799,632) (4,554,280)
Unearned compensation restricted stock
awards. . . . . . . . . . . . . . . (538,944) (600,668)
Treasury stock, at cost 2,912,110
shares. . . . . . . . . . . . . . . (31,518,661) (31,518,661)
----------- -----------
Total stockholders' equity . . . . 84,954,008 84,470,410
----------- -----------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . .$ 732,118,355 691,231,510
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------------------------------
<S> <C> <C>
Interest Income:
Loans receivable. . . . . . . . . . . . . $ 8,642,372 6,908,242
Securities available for sale:. . . . . .
Mortgage-backed and related . . . . . . 2,218,698 2,189,210
Other marketable. . . . . . . . . . . . 956,472 585,242
Securities held to maturity:. . . . . . .
Mortgage-backed and related . . . . . . 0 33,400
Other marketable. . . . . . . . . . . . 0 10,032
Cash equivalents. . . . . . . . . . . . . 161,324 82,160
Other . . . . . . . . . . . . . . . . . . 122,334 94,961
----------- -----------
Total interest income. . . . . . . . . 12,101,200 9,903,247
----------- -----------
Interest expense:. . . . . . . . . . . . . .
Deposits. . . . . . . . . . . . . . . . . 5,703,524 4,572,798
Federal Home Loan Bank advances . . . . . 2,084,466 1,451,400
----------- -----------
Total interest expense . . . . . . . . 7,787,990 6,024,198
----------- -----------
Net interest income . . . . . . . 4,313,210 3,879,049
Provision for loan losses. . . . . . . . . . 75,000 75,000
----------- -----------
Net interest income after
provision for loan losses. . . . 4,238,210 3,804,049
----------- -----------
Non-interest income: . . . . . . . . . . . .
Fees and service charges. . . . . . . . . 201,756 96,412
Securities gains, net . . . . . . . . . . 896,447 270,917
Gain on sales of loans. . . . . . . . . . 366,244 153,450
Other . . . . . . . . . . . . . . . . . . 197,722 177,515
----------- -----------
Total non-interest income. . . . . . . 1,662,169 698,294
----------- -----------
Non-interest expense:. . . . . . . . . . . .
Compensation and benefits . . . . . . . . 1,852,480 1,315,987
Occupancy . . . . . . . . . . . . . . . . 364,721 241,147
Federal deposit insurance premiums. . . . 73,831 58,977
Advertising . . . . . . . . . . . . . . . 92,981 78,137
Data processing . . . . . . . . . . . . . 174,055 124,529
Provision for real estate losses. . . . . 0 2,000
Other . . . . . . . . . . . . . . . . . . 695,956 293,665
----------- -----------
Total non-interest expense . . . . . . 3,254,024 2,114,442
----------- -----------
Income before income tax expense . . . 2,646,355 2,387,901
Income tax expense . . . . . . . . . . . . . 983,000 913,421
----------- -----------
Net income . . . . . . . . . . . . . . $ 1,663,355 1,474,480
=========== ===========
Basic earnings per share . . . . . . . . . . $ 0.31 0.27
=========== ===========
Diluted earnings per share . . . . . . . . . $ 0.28 0.25
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<PAGE>
HMN FINANCIAL, INC.
Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------------------ ---------------------
<S> <C> <C> <C> <C>
Net income $ 1,663,355 1,474,480
Other comprehensive income,
net of tax:
Unrealized gains (losses) on
securities:
Unrealized holding gains
(losses) arising during
period 452,347 (747,358)
Less: reclassification
adjustment for gains
included in net income (550,239) (161,282)
-------- --------
Other comprehensive income (97,892) (908,640)
--------- -------
Comprehensive income $ 1,565,463 565,840
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income
---------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1997 $ 91,287 59,698,661 60,224,253 1,129,818
Net income 1,663,355
Other
comprehensive
income (97,892)
Amortization of
restricted stock
awards
Shares purchased
for employee
stock ownership
plan
Earned employee
stock
ownership plan
shares 101,763
----------- ----------- ----------- -----------
Balance,
March 31, 1998 $ 91,287 59,800,424 61,887,608 1,031,926
=========== =========== =========== ===========
<CAPTION>
Unearned
Employee
Stock Unearned
Ownership Compensation Total
Plan Restricted Treasury Stockholders'
Shares Stock Awards Stock Equity
--------------------------------------------------------
<S>
Balance,
December 31, 1997 $(4,554,280) (600,668) (31,518,661) 84,470,410
Net income 1,663,355
Other comprehensive
income (97,892)
Amortization of
restricted stock
awards
61,724 61,724
Shares purchased
for employee
stock ownership
plan (1,361,595) (1,361,595)
Earned employee
stock ownership
plan shares 116,243 218,006
----------- --------- ----------- ------------
Balance,
March 31, 1998 $ (5,799,632) (538,944) (31,518,661) 84,954,008
=========== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5<PAGE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,663,355 1,474,480
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 75,000 75,000
Depreciation 144,845 102,879
Amortization of (discounts) premiums, net (20,916) (46,804)
Amortization of deferred loan fees (148,028) (87,139)
Amortization of goodwill 45,159 0
Amortization of core deposit intangible 71,757 0
Amortization of loans and deposits mark to
market on MFC 184,119 0
Amortization of mortgage servicing rights 137,110 0
Provision for deferred income taxes 90,000 128,200
Securities gains, net (896,447) (270,917)
Gain on sales of real estate (2,768) 0
Gain on sales of loans (366,244) (153,450)
Proceeds from sale of loans held for sale 34,212,150 867,032
Disbursements on loans held for sale (28,386,755) (276,008)
Amortization of restricted stock awards 61,724 57,174
Amortization of unearned ESOP shares 116,243 96,060
Earned employee stock ownership shares priced
above original cost 101,763 59,237
Decrease in accrued interest receivable 167,387 497,246
Increase (decrease) in accrued interest payable 739,505 (66,175)
Equity earnings of limited partnership (51,943) (73,824)
Decrease (increase) in other assets 481,381 (705,413)
Increase in other liabilities (61,153) 552,087
Other, net (105,926) 33,052
---------- ----------
Net cash provided by operating activities 8,251,318 2,390,917
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 61,083,048 15,902,046
Principal collected on securities available
for sale 6,290,945 2,949,425
Proceeds collected on maturity of securities
available for sale 6,100,000 14,650,000
Purchases of securities available for sale (82,365,386) (33,086,600)
Proceeds from sales of securities held to
maturity 0 348,871
Principal collected on securities held
to maturity 0 240,441
Proceeds collected on maturity of securities
held to maturity 0 1,000,000
Proceeds from sales of loans receivable 1,965,018 19,210,058
Purchases of mortgage servicing rights (356,744) 0
Purchase of interest in limited partnerships (181,125) (1,216,875)
Purchase of Federal Home Loan Bank stock (1,055,800) (193,100)
Net increase in loans receivable (21,711,768) (16,873,204)
Proceeds from sale of real estate 50,574 0
Purchases of premises and equipment (779,848) (482,836)
Decrease in due to shareholders of
Marshalltown Financial Corporation (3,362,462) 0
---------- ----------
Net cash provided by investing activities (34,323,548) 2,448,226
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits (268,567) 1,645,716
Purchase of treasury stock 0 (4,109,637)
Increase in unearned ESOP shares (1,361,595) 0
Payments to ESOP trustee to purchase
additional HMN shares (114,405) 0
Proceeds from Federal Home Loan Bank advances 62,500,000 36,000,000
Repayment of Federal Home Loan Bank advances (22,857,142) (36,357,142)
Increase in advance payments by borrowers for
taxes and insurance 76,365 280,461
---------- ----------
Net cash provided (used) by financing
activities 37,974,656 (2,540,602)
---------- ----------
Increase in cash and cash equivalents 11,902,426 2,170,341
Cash and cash equivalents, beginning of period 9,364,635 10,583,717
---------- ----------
Cash and cash equivalents, end of period $ 21,267,061 12,754,058
========== ==========
6
<PAGE>
Supplemental cash flow disclosures:
Cash paid for interest $ 7,048,485 6,090,373
Cash paid for income taxes 175,000 148,500
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale $ 0 4,781,034
Securities held to maturity transferred to
securities available for sale 0 1,295,147
Loans transferred to loans held for sale 11,495,290 897,559
Transfer of loans to real estate 0 94,164
Securities purchased with liability due
to broker 3,745,250 0
Due to stockholders of Marshalltown
Financial, Inc. 192,890 0
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
March 31, 1998 and 1997
(1) HMN FINANCIAL, INC.
HMN Financial, Inc.(HMN) is a stock savings bank holding company which owns
100 percent of Home Federal Savings Bank (the Bank or Home Federal). Home
Federal has a community banking philosophy and operates retail banking
facilities in Minnesota and Iowa. The Bank has two wholly owned
subsidiaries, Osterud Insurance Agency, Inc. (OAI) and MSL Financial
Corporation (MSL), which offer financial planning products and services. HMN
has two other wholly owned subsidiaries, Security Finance Corporation (SFC)
and HMN Mortgage Services, Inc. (MSI). SFC invests in commercial loans and
commercial real-estate loans located throughout the United States which were
originated by third parties. MSI operates mortgage banking and mortgage
brokerage facilities located in Eden Prairie and Brooklyn Park, Minnesota.
The consolidated financial statements included herein are for HMN, SFC, MSI,
the Bank and the Bank's wholly owned subsidiaries, OAI and MSL. 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 statement of income for the three month
period ended March 31, 1998 is 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
Effective January 1, 1998 HMN adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. The statement
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be disclosed in
the financial statements. Comprehensive income is defined as the change in
equity during a period from transactions and other events from nonowner
sources. Comprehensive income is the total of net income and other
comprehensive income, which for HMN is comprised entirely of unrealized gains
and losses on securities available for sale.
The gross unrealized holding gains for the first quarter of 1998 were
$681,000, the income tax expense would have been $228,000 and therefore, the
net gain was $452,000. The gross reclassification adjustment for the first
quarter of 1998 was $896,000, the income tax expense would have been $346,000
and therefore, the net reclassification adjustment was $550,000. The gross
unrealized holding losses for the first quarter of 1997 were $1,321,000, the
income tax benefit would have been $574,000 and therefore, the net loss was
$747,000. The gross reclassification adjustment for the first quarter of
1997 was $271,000, the income tax expense would have been $110,000 and
therefore, the net reclassification adjustment was $161,000.
8
<PAGE>
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS which revises employers'
disclosures about pension and other Postretirement benefit plans. It does
not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other Postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligation and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer as
useful as they were when FASB Statements No. 87, EMPLOYERS' ACCOUNTING FOR
PENSIONS, No. 88, EMPLOYERS' ACCOUNTING FOR SETTLEMENT AND CURTAILMENTS OF
DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS, and No. 106,
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, were
issued. SFAS No. 132 suggests combined formats for presentation of pension
and other postretirement benefit disclosures. It is effective for fiscal
years beginning after December 15, 1997. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available. Adopting the disclosure requirements
of SFAS No. 132 will not have a material impact on HMN's financial condition
or the results of its operations.
(4) STOCK SPLIT
In February of 1998 HMN authorized a three-for-two stock split in the form of
a fifty percent stock dividend subject to stockholder approval to increase
HMN's authorized common stock from 7.0 million shares to 11.0 million shares.
At the annual meeting on April 28, 1998 the stockholders approved the
increase in authorized common stock. The Board of Directors then declared
that the stock dividend will be distributed on May 22, 1998 to stockholders
of record on May 8, 1998.
The stock split increased HMN's outstanding common shares from 6,085,775 to
9,128,662 shares. Stockholders' equity has been restated to give retroactive
effect to the stock split for all periods presented by reclassifying from
additional paid-in capital to common stock the par value of the additional
shares arising from the stock split. In addition all references in the
Consolidated Financial Statements and Notes thereto to number of shares, per-
share amounts, stock option data and market prices of HMN's common stock have
been restated giving retroactive recognition to the stock split.
The Board also announced a cash dividend of $0.06 per share, payable on June
12, 1998 to stockholders of record on May 27, 1998.
(5) MERGERS AND ACQUISITIONS
On December 5, 1997 HMN, through its wholly owned subsidiary, Home Federal,
completed its merger (the Merger) with Marshalltown Financial Corporation
(MFC) pursuant to a merger agreement dated July 1, 1997. The aggregate
consideration per the merger agreement was $24.8 million, consisting of $23.7
million for 1.35 million outstanding shares of MFC stock, or $17.51 per
share, and $1.1 million for the outstanding MFC options. HMN owned 60,000
shares of MFC stock with a historical cost of $1.0 million which were
cancelled upon the completion of the merger.
The following Unaudited Pro Forma Condensed Combined Consolidated Statements
of Income for the three months ended March 31, 1997 combine HMN's income
statement with MFC's income statement. The statement is presented as if the
Merger had been effective at the beginning of the period presented, after
giving effect to certain pro forma adjustments described in the accompanying
notes.
The Unaudited Pro Forma Condensed Combined Financial Information and notes
thereto (the Information) reflect the application of the purchase method of
accounting for the Merger. Under this method, the assets acquired and
liabilities assumed from MFC and its subsidiaries are recorded at their fair
market values on the date of the Merger. The amount of the purchase price in
excess of the fair market value of the tangible and identifiable intangible
assets acquired less the fair market value of the liabilities assumed is
recorded as goodwill. Certain historical information of the consolidated MFC
has been reclassified to conform to HMN's financial statement presentation.
The Information is not necessarily indicative of the results of future
operations of the combined entity or the actual results that would have been
achieved had the Merger of MFC been consummated prior to the period
indicated.
9
<PAGE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
Three months ended March 31, 1997
<TABLE>
<CAPTION>
Pro Forma
---------------------------
HMN MFC Adjustments Combined
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Total interest income $ 9,903,247 2,200,332 (501,075)(1)(2) 11,602,504
Total interest expense 6,024,198 1,364,688 96,893 (3)(4) 7,485,779
---------- ---------- ---------- ----------
Net interest income 3,879,049 835,644 (597,968) 4,116,725
Provision for loan losses 75,000 2,500 77,500
Non-interest income 698,294 36,874 735,168
Non-interest expense 2,114,442 593,036 123,561 (5)(6) 2,831,039
---------- ---------- ---------- ----------
Income before income tax
expense 2,387,901 276,982 (721,529) 1,943,354
Income tax expense 913,421 33,904 (247,718) 699,607
---------- ---------- ---------- ----------
Net income $1,474,480 243,078 (473,811) 1,243,747
========== ========== ========== ==========
Basic earnings per share $ 0.27 0.17 0.22
Diluted earnings per share $ 0.25 0.17 0.21
Weighted average shares
outstanding:
Basic 5,550,215 1,411,475 5,550,215
Diluted 5,888,815 1,469,290 5,888,815
</TABLE>
Pursuant to the Merger and consistent with GAAP, certain adjustments were
recorded, primarily to accrue for specific, identified costs related to the
merger of MFC. The amounts of the Merger related costs are subject to
revisions as economic conditions change or as more information becomes
available.
HMN expects to achieve operating cost savings primarily through reductions in
staff and the consolidation of certain functions such as data processing,
investments and other back office operations at MFC. The operating cost
savings are expected to be achieved in various amounts at various times
during the years subsequent to the acquisition of MFC and not ratably over,
or at the beginning or end of, such periods. No adjustment has been
reflected in the Unaudited Pro Forma Condensed Combined Consolidated
Statement of Income for the three months ended March 31, 1997 for the
anticipated cost savings.
(1) Represents amortization of MFC mark-to-market adjustments
under the purchase method of accounting for loans.
(2) Represents amortization of MFC mark-to-market adjustments
under the purchase method of accounting for securities, and
the forgone interest income resulting from the planned sale of
$15.8 million of securities.
(3) Represents amortization of MFC mark-to-market adjustments
under the purchase method of accounting for deposits.
(4) Represents the net interest cost of borrowing $10.0 million to
fund the MFC acquisition.
(5) Represents amortization of goodwill and core deposit
intangible.
(6) Represents the additional depreciation on premises and
equipment related to the MFC mark-to-market adjustments.
10
<PAGE>
(6) EARNINGS PER SHARE
The following table reconciles the weighted average shares outstanding and
the income available to common shareholders used for basic and diluted EPS:
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
-----------------------------
<S> <C> <C>
Weighted average number of common shares
outstanding used in basic earnings per
common share calculation . . . . . . . . 5,447,501 5,550,215
Net dilutive effect of:
Options . . . . . . . . . . . . . . . . . 403,037 255,093
Restricted stock awards . . . . . . . . . 61,395 83,507
--------- ---------
Weighted average number of shares
outstanding adjusted for effect of
dilutive securities . . . . . . . . . . . 5,911,933 5,888,815
========= =========
Income available to common shareholders. . $1,663,355 1,474,480
Basic earnings per common share. . . . . . $0.31 0.27
Diluted earnings per common share. . . . . $0.28 0.25
</TABLE>
The earnings per share calculations reflected above are presented as if the
split had been completed at the beginning of each period presented for the
weighted average number of shares outstanding for each period.
(7) EMPLOYEE BENEFITS
During 1994 HMN adopted an Employee Stock Ownership Plan (the ESOP) which met
the requirements of Section 4975(e)(7) of the Internal Revenue Code and
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), and, as such the ESOP was empowered to borrow in order to
finance purchases of the common stock of HMN. The ESOP borrowed $6,085,770
from HMN to purchase 912,865 post stock split shares of common stock of HMN
on the date of the conversion. The ESOP debt requires quarterly payments of
principal plus interest at 7.52%. HMN has committed to make quarterly
contributions to the ESOP necessary to repay the loan including interest.
As the debt is repaid, ESOP shares which were initially pledged as collateral
for its debt, are committed to be released from collateral and allocated to
active employees, based on the proportion of debt service paid in the year.
HMN accounts for its ESOP in accordance with Statement of Position 93-6,
EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the
shares pledged as collateral are reported as unearned ESOP shares in
stockholders' equity. As shares are determined to be ratably released from
collateral, HMN reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. During the first quarter of 1998 HMN loaned $1,476,000 to the
ESOP to purchase additional shares of HMN stock. The stock purchased by the
ESOP will be used to provide a benefit to the employees that were added as
the result of the MFC Merger.
In June of 1995, HMN as part of a Recognition and Retention Plan (RRP)
awarded 126,729 post stock split shares of restricted common stock to its
officers and directors. The shares vest over a five year period and were
issued from treasury stock. In April 1997, 3,000 post stock split shares of
restricted common stock were awarded to a director. Those shares vest over a
five year period beginning in 1998. At March 31, 1998 there are 73,062 post
stock split shares that vest over the next four years.
In June 1995, HMN adopted its only stock option plan, the 1995 Stock Option
and Incentive Plan (the SOP). During 1995, options exercisable for 821,569
post stock split shares of HMN common stock were granted to certain officers
and directors at an exercise price of $9.21 per share. The options vest over
a five year period and may be exercised within 10 years of the grant date.
In December 1996, options exercisable for 1,500 post stock split shares of
common stock were granted to officers at an exercise price of $12.08. In
April
11
<PAGE>
1997, options for 18,000 post stock split shares of common stock were granted
to a director at an exercise price of $13.00.
A summary of stock option activity under the SOP on a post stock split basis
is detailed as follows:
- ---------------------------------------------------------------------------
<TABLE>
<CATION>
Weighted
Options average
available for Options exercise
grant outstanding price
---------- ----------- -------
<S> <C> <C> <C>
December 31, 1997 90,054 802,200 $9.30
Exercised 0
---------- ----------- -------
March 31, 1998 90,054 802,200 $9.30
========== =========== =======
</TABLE>
The following table summarizes information about stock options on a post
split basis outstanding at March 31, 1998:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------
Weighted average
Exercise Number remaining contractual
price outstanding life in years Number Price
------------- ----------- --------------------- --------- ---------
<C> <C> <C> <C> <C>
$9.21 782,700 7.1 303,458 $9.21
12.08 1,500 8.6 300 12.08
13.00 18,000 9.0 3,600 13.00
-------- --------
802,200 307,358
======== ========
- -----------------------------------------------------------------------------
</TABLE>
(8) 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.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tangible, Tier I (Core), and Risk-based capital (as
defined in the regulations) to adjusted total assets and risk-weighted assets
(as defined). Management believes, as of March 31, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
Management believes that based upon the Bank's capital calculations at March
31, 1998 and other conditions consistent with the Prompt Corrective Actions
Provisions of the OTS regulations, the Bank would be categorized as well
capitalized.
On March 31, 1998 the Bank's tangible assets and adjusted total assets were
$691,231,000 and its risk-weighted assets were $321,833,000. The following
table presents the Bank's capital amounts and ratios at Mach 31, 1998 for
actual capital, required capital and excess capital including ratios in order
to qualify as being well capitalized under the Prompt Corrective Actions
regulations.
12
<PAGE>
<TABLE>
<CAPTION>
Required to be
Adequately
Actual Capitalized
--------------------- ----------------------
(in thousands) Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Bank stockholder's equity $ 52,193
Plus:
Net unrealized loss (gain)
on certain securities
available for sale (466)
Less:
Goodwill and other
intangibles 5,951
Excess mortgage
servicing rights 539
---------
Tier I or core capital 45,237 $27,649
---------
Tier I capital to
adjusted total assets
6.54% 4.00%
Tier I capital to risk-
weighted assets
14.06%
Less:
Equity investments and
other assets required to
be deducted (263)
Plus:
Allowable allowance for
loan losses 2,819
----------
Risk-based capital $47,793 $25,747
==========
Risk-based capital to risk-
weighted assets
14.85% 8.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Excess Capital Actions Provisions
(in thousands) Amount Percent Amount Percent
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Bank stockholder's equity $
Plus:
Net unrealized loss (gain)
on certain securities
available for sale
Less:
Goodwill and other
intangibles
Excess mortgage
servicing rights
Tier I or core capital $17,588
Tier I capital to
adjusted total assets
2.54% 5.00%
Tier I capital to risk-
weighted assets 6.00%
Less:
Equity investments and
other assets required
to be deducted
Plus:
Allowable allowance for
loan losses
Risk-based capital $22,046
Risk-based capital to risk-
weighted assets 6.85% 10.00%
</TABLE>
The tangible capital of the Bank was in excess of the minimum 2% required at
March 31, 1998 but is not reflected in the table above.
13
<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, gains from
sale of loans, service charges, fees and other income. In addition, net
income is affected by the level of operating expenses and establishment of a
provision for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Lending activities
are influenced by the demand for and supply of housing, competition among
lenders, the level of interest rates and the availability of funds. Deposit
flows and costs of funds are influenced by prevailing market rates of
interest primarily on competing investments, account maturities and the
levels of personal income and savings in the market area of the Bank.
NET INCOME
HMN's net income for the first quarter of 1998 was $1.7 million, an increase
of $189,000, or 12.8%, compared to $1.5 million for the first quarter of
1997. Net income increased by $434,000 due to an increase in net interest
income and by $964,000 due to increased non-interest income. The increased
income was partially off-set by a $1.1 million increase in non-interest
expense. Basic earnings per share was $0.31 for the quarter ended March 31,
1998, an increase of $0.04 per share, or 14.8%, from $0.27 basic earnings per
share for the same quarter of 1997. Diluted earnings per share was $0.28 per
share for the first quarter of 1998, an increase of $0.03, or 12.0% from
$0.25 diluted earnings per share for the first quarter of 1997.
In February of 1998 HMN announced that its Board of Directors had authorized
a three-for-two stock split in the form of a fifty percent stock dividend
subject to stockholder approval at the annual meeting of stockholders held on
April 28, 1998 to increase HMN's authorized common stock from 7.0 million
shares to 11.0 million shares. At the annual meeting the stockholders
approved the increase in authorized common stock. The Board of Directors then
declared that the split will be distributed on May 22, 1998 to shareholders
of record on May 8, 1998. The financial statements included in this Form 10-
Q have been presented assuming that the stock split had taken place on March
31, 1998 as required by generally accepted accounting principles. Earnings
per share calculations were based upon post split weighted average
outstanding share information.
NET INTEREST INCOME
Net interest income for the first quarter of 1998 was $4.3 million an
increase of $434,000, or 11.2%, compared to $3.9 million for the first
quarter of 1997. Interest income for the first quarter of 1998 was $12.1
million, an increase of $2.2 million, or 22.2%, compared to $9.9 million for
the first quarter of 1997. Interest income increased primarily due to the
interest-bearing assets that were acquired from the Marshalltown Financial
Corporation (MFC) merger which occurred on December 5, 1997 and the
additional
14
<PAGE>
interest-bearing assets which were purchased with the $39.6 million of net
additional Federal Home Loan Bank of Des Moines (FHLB) advances which were
taken out during the first quarter of 1998. The average outstanding balances
for interest-bearing assets increased by $98.7 million for loans receivable,
$30.1 million for the securities portfolio, and $8.3 million for other
interest bearing assets. The increase in average outstanding interest
earning assets caused interest income to increase by $2.45 million and was
partially off-set by a decline in interest income of $253,000 caused by
declining yields on interest bearing assets.
Interest expense was $7.8 million for the first quarter of 1998 an increase
of $1.8 million, or 29.3%, compared to $6.0 million for the same quarter of
1997. The increase in interest expense is primarily due to the additional
deposits as a result of the MFC merger and the additional net advances taken
out from the FHLB. The average outstanding deposits for the first quarter of
1998 was $99.4 million larger than the average outstanding deposits for the
same quarter in 1997 and therefore caused interest expense to increase by
$1.1 million. The average outstanding FHLB advances for the first quarter of
1998 was $44.2 million larger than the average outstanding FHLB advances for
the same quarter in 1997 and therefore caused interest expense to increase by
$633,000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first quarter of 1998 and 1997 was
$75,000. The provision is the result of management's evaluation of the loan
portfolio, a historically low level of non-performing loans, minimal loan
charge-off experience, and its assessment of the general economic conditions
in the geographic area where properties securing the loan portfolio are
located. Management's evaluation did not reveal conditions that would cause
it to increase the provision for loan losses during 1998 compared to 1997.
Future economic conditions and other unknown factors will impact the need for
future provisions for loan losses. As a result, no assurances can be given
that increases in the allowance for loan losses will not be required during
future periods.
A reconciliation of HMN's allowance for loan losses is summarized as follows:
1998 1997
--------- ----------
Balance at January 1, $ 2,748,219 2,340,585
Provision 75,000 75,000
Recoveries 1,576 7,000
--------- ----------
Balance at March 31, $ 2,824,795 2,422,585
========= ==========
NON-INTEREST INCOME
Non-interest income was $1.7 million for the first quarter of 1998, an
increase of $964,000, or 138.0% compared to $698,000 for the first quarter of
1997. The increase in non-interest income is primarily due to $105,000
increase in fees earned related to mortgage banking activities and additional
fees on deposits as the result of the MFC merger, $626,000 increase in gain
on the sale of securities and a $213,000 increase in gain on the sale of
loans. The Bank and HMN Mortgage Services, Inc. (MSI) have increased their
mortgage banking activities during the first quarter of 1998 compared to the
first quarter of 1997 and therefore fee income related to mortgage banking
activities and gain on the sale of loans has increased substantially. A
favorable interest rate environment allowed HMN to sell many securities that
were in portfolio at a gain.
NON-INTEREST EXPENSE
Non-interest expense was $3.3 million for the first quarter of 1998, an
increase of $1.2 million, or 57.1%, compared to $2.1 million for the same
quarter of 1997. Compensation and benefit expense increased by $536,000
primarily due to an increase in HMN's work force as a result of the MFC
merger, increased staff added to the mortgage banking operations of MSI and
the Bank and normal annual compensation increases to Bank employees.
Occupancy costs increased by $124,000 due to three buildings added by the MFC
merger, the addition of a mortgage banking office in Brooklyn Park, Minnesota
and increased occupancy costs related to opening a new retail facility in
Spring Valley. Other non-interest expense increased by $402,000 due to
15
<PAGE>
additional operating costs incurred related to the MFC merger, the mortgage
banking expansion in Brooklyn Park and amortization of goodwill and core
deposit intangibles of $117,000 related to the MFC merger.
INCOME TAX EXPENSE
Income tax expense was $983,000 for the first quarter of 1998 an increase of
$70,000 compared to $913,000 for the first quarter of 1997. The increase is
primarily due to an increase in taxable income between the two periods.
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in Thousands) 1998 1997
---------- -----------
<S> <C> <C>
Non-Accruing Loans
One-to-four family real estate $ 297 177
Nonresidential real estate 78 79
Commercial business 14 0
Consumer 8 7
---- ----
Total 397 263
---- ----
Accruing loans delinquent 90
days or more 383 402
Foreclosed Assets
Real estate:
One-to-four family 83 142
---- ----
Total non-performing assets $863 $807
==== ====
Total as a percentage of total assets 0.12% 0.12%
==== ====
Total non-performing loans $780 $665
==== ====
Total as a percentage of total
loans receivable, net 0.17% 0.15%
==== ====
</TABLE>
Total non-performing assets at March 31, 1998 were $863,000, an increase of
$56,000, from $807,000 at December 31, 1997. The net increase of $56,000 was
the result of an increase of non-accruing loans and the sale of foreclosed
residential homes.
DIVIDENDS
In February of 1998, the Board of Directors of HMN authorized a stock split
in the form of a 50% stock dividend subject to HMN stockholder approval of an
increase in the number of authorized shares of common stock from 7.0 million
to 11.0 million at the annual meeting of stockholders on April 28, 1998.
HMN also declared a cash dividend of $.06 per share, payable on June 12, 1998
to shareholders of record on May 27, 1998. The dividend will be approximately
$352,000.
LIQUIDITY
For the quarter ended March 31, 1998, the net cash provided by operating
activities was $8.3 million. HMN collected $61.1 million from the sale of
securities, it collected $12.4 million in principal repayments or on the
maturity of securities during the quarter. HMN also collected $2.0 million
on the sale of loans receivable during the quarter. It purchased $82.4
million of securities, funded a net increase in loans receivable of $21.7
million, purchased $1.1 million of FHLB stock and paid $3.6 million to the
MFC stockholders related to the MFC merger. HMN had additional net borrowing
from the FHLB of $39.4 million and loaned $1.48 million to its employee stock
ownership plan to repurchase HMN stock for the purpose of providing a benefit
to the employees added as a result of the MFC merger.
16
<PAGE>
*HMN has certificates of deposits with outstanding balances of $263.9 million
that come due over the next 12 months. Based upon past experience management
anticipates that the majority of the deposits will renew for another term.
HMN believes that deposits which do not renew will be replaced with deposits
from other
customers, or funded with advances from the FHLB, or will be funded through
the sale of securities. Management does not anticipate that it will have a
liquidity problem due to maturing deposits.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. HMN's market risk arises primarily from interest rate risk inherent
in its investing, lending and deposit taking activities. Management actively
monitors and manages its interest rate risk exposure.
HMN's profitability is affected by fluctuations in interest rates. A sudden
and substantial increase in interest rates may adversely impact HMN's
earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the
same basis. HMN monitors how its assets will mature or reprice in comparison
to how its liabilities will mature or reprice. The Maturity or Repricing
Table located in the Asset/Liability Management section of this report is
used as part of the monitoring process. HMN also monitors the projected
changes in net interest income that would occur if interest rates were to
suddenly change up or down. The Rate Shock Table located in the
Asset/Liability Management section of this report discloses HMN's projected
changes in net interest income based upon immediate interest rate changes
called rate shocks.
*HMN utilizes a model which uses the discounted cash flows from its interest-
earning assets and its interest-bearing liabilities to calculate the current
market value of those assets and liabilities. The model also calculates the
changes in market value of the interest-earning assets and interest-bearing
liabilities due to different interest rate changes. HMN believes that over
the next twelve months interest rates could conceivably fluctuate in a range
of 200 basis points up or down from where the rates were at March 31, 1998.
HMN does not have a trading portfolio. The following table discloses the
projected changes in market value to HMN's interest-earning assets and
interest-bearing liabilities based upon incremental 100 basis point changes
in interest rates from interest rates in effect on March 31, 1998.
* This paragraph contains a forward-looking statement(s). Refer to
information regarding Forward-looking Information on page 21 of this
discussion.
17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Other than trading portfolio Market Value
------------------------------------------------
(Dollars in thousands)
Basis point change in
interest rates -200 -100 0 +100 +200
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash equivalents $20,293 20,276 20,258 20,242 20,226
Fixed-rate CMOs 62,434 62,107 61,507 59,965 57,957
Variable-rate CMOs 59,773 60,535 61,984 60,651 58,315
Fixed-rate available for
sale mortgage-backed
and related securities 12,288 12,159 12,011 11,851 11,620
Variable-rate available
for sale mortgage-
backed and related
securities 2,023 1,997 1,982 1,969 1,951
Fixed-rate available for
sale other marketable
securities 89,459 86,200 83,018 79,970 77,064
Variable-rate available
for sale other marketable
securities 6,971 6,953 6,936 6,919 6,902
Fixed-rate loans held
for sale 8,331 8,324 8,317 8,310 8,303
Fixed-rate real estate
loans 337,024 334,400 325,524 314,007 302,020
Variable-rate real estate
loans 85,614 84,314 82,616 81,023 79,262
Fixed-rate other loans 18,059 17,890 17,695 17,504 17,316
Variable-rate other loans 38,079 38,084 38,140 38,209 38,241
------- ------- ------- ------- -------
Total market risk
sensitive assets 740,348 733,239 719,988 700,620 679,177
------- ------- ------- ------- -------
NOW deposits 22,961 22,942 22,923 22,904 22,885
Passbook deposits 36,076 34,511 33,077 31,757 30,538
Money market deposits 35,798 34,505 33,327 32,245 31,250
Certificate deposits 383,083 379,270 375,529 371,870 368,285
Fixed-rate Federal Home
Loan Bank advances 130,496 126,578 122,828 119,236 115,793
Variable-rate Federal
Home Loan Bank advances 44,148 44,062 43,976 43,890 43,805
------- ------- ------- ------- -------
Total market risk
sensitive liabilities 652,562 641,868 631,660 621,902 612,556
------- ------- ------- ------- -------
Off-balance sheet
financial instruments:
Commitments to extend
credit 42 42 41 40 38
------- ------- ------ ------ ------
Net market risk $ 87,828 91,413 88,369 78,758 66,659
======= ======= ======= ====== ======
Percentage change from
current market value (0.61)% 3.44% 0.00% (10.88)% (24.57)%
======= ======= ======= ======= ======
- --------------------------------------------------------------------------
</TABLE>
The preceding table was prepared utilizing the following assumptions (the
"Model 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 7% to 31%, depending on the coupon and
period to maturity. Adjustable rate mortgages ("ARMs") were assumed to
prepay at annual rates of between 12% and 23%, depending on coupon and the
period to maturity. Growing Equity Mortgage (GEM) loans were assumed to
prepay at annual rates of between 17% and 38% 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. 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. The model assumes that the difference
between the current interest rate being earned or paid compared to a treasury
instrument or other interest index with a similar term to maturity (the
"Interest Spread") will remain
18
<PAGE>
constant over the interest changes disclosed in the table. Changes in
Interest Spread could impact projected market value changes. Certain assets,
such as ARMs, have features which restrict changes in interest rates on a
short-term basis and over the life of the assets. The market value of the
interest-bearing assets which are approaching their lifetime interest rate
caps could be different from the values disclosed in the table. In the event
of a change in interest rates, prepayment and early withdrawal levels may
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.
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 March
31, 1998 to determine if its current level of interest rate risk is
acceptable. The following table projects the estimated annual impact on net
interest income of immediate interest rate changes called rate shocks.
Rate Shock Net Interest Percentage
in Basis Points Income Change
---------------- ------------ ----------
+200 15,947 -1.24%
+100 16,122 -0.16%
0 16,148 0.00%
-100 15,956 -1.19%
-200 15,223 -5.73%
The preceding table was prepared utilizing the Model Assumptions regarding
prepayment and decay ratios which were determined by management based upon
their review of historical prepayment speeds and future prepayment
projections.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. 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 a substantial increase in interest
rates and could impact net interest income.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors interest rate risk. The Bank has an Asset/Liability
Committee consisting of executive officers which meets at least quarterly to
review the interest rate risk position and projected profitability. The
committee makes recommendations for adjustments to the asset liability
position of the Bank to the Board of Directors of the Bank. This committee
also reviews the Bank's portfolio, formulates investment strategies and
oversees the timing and implementation of transactions to assure attainment
of the Board's objectives in the most effective manner. In addition, the
Board reviews on a quarterly basis the Bank's asset/liability position,
including simulations of the effect on the Bank's capital of various interest
rate scenarios.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions
and consumer preference, may place more emphasis on managing net interest
margin than on better matching the interest rate sensitivity of its assets
and liabilities in an effort to enhance net interest income. Management
believes that the increased net interest income resulting from a mismatch in
the maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify
the increased exposure to sudden and unexpected increases in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and has taken a number of steps to
restructure its assets and liabilities. The Bank has primarily focused its
fixed rate one-to-four family residential lending program on loans with
contractual terms of 20 years or less. The Bank generally follows the
practice of selling all of its fixed rate single family loans with
*This paragraph contains a forward-looking statement(s). Refer to information
regarding Forward-looking Information on page 22 of this discussion.
19
<PAGE>
contractual maturities of thirty years. At times, depending on its interest
rate sensitivity, the Bank may sell fixed rate single family loans with
shorter contractual maturities than thirty years in order to reduce interest
rate risk and record a gain on the sale of loans.
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at March 31, 1998, using certain assumptions that are
described in more detail below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Maturing or Repricing
---------------------------------------------------
Over 6
6 Months Months to Over 1-3
(Dollars in thousands) or Less One Year Years
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
Mortgage-backed and
related securities<F1> $ 74,478 9,302 31,239
Other marketable securities 12,837 329 8,767
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0
Other marketable securities 0 0 0
Loans held for sale, net 8,318 0 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 27,201 25,030 83,332
Adjustable rate
one-to-four family<F3> 29,083 20,077 17,590
Multi family 364 366 1,128
Fixed rate commercial real
estate 2,703 396 662
Adjustable rate commercial
real estate 5,512 2,095 720
Commercial business 2,109 715 1,636
Consumer loans 26,539 1,515 3,471
Federal Home Loan Bank stock 0 0 0
Cash equivalents 20,267 0 0
Total interest-earning
assets 209,411 59,825 148,545
Non-interest checking 7,558 0 0
NOW accounts 22,973 0 0
Passbooks 3,600 3,600 10,366
Money market accounts 2,694 2,694 7,762
Certificates 138,154 125,776 87,273
Federal Home Loan Bank advances 61,714 5,179 24,000
Total interest-bearing
liabilities 236,693 137,249 129,401
Interest-earning assets less
interest-bearing liabilities $ (27,282) (77,424) 19,144
Cumulative interest-rate
sensitivity gap $ (27,282) (104,706) (85,562)
Cumulative interest-rate gap
as a percentage of total
assets at March 31, 1998 (3.95)% (15.15)% (12.38)%
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1997 (6.36) (15.38)
<FN>
<FN1>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.
<FN2> Loans receivable are presented net of loans in process and deferred
loan fees.
<FN3>Construction and development loans are all one-to-four family loans and
therefore have been included in the fixed rate one-to-four family and
adjustable rate one-to-four family lines.
</FN>
<CAPTION>
Over 3-5 Over 5 No Stated
(Dollars in thousands) Years Years Maturity Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed and
related securities<F1>$ 13,600 8,644 0 137,263
Other marketable securities 30,410 15,577 12,251 80,171
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0 0
Other marketable securities 0 0 0 0
Loans held for sale, net 0 0 0 8,318
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 59,697 115,189 0 310,449
Adjustable rate
one-to-four family<F3> 18,972 3,378 0 89,100
Multi family 506 522 0 2,886
Fixed rate commercial real
estate 195 42 0 3,998
Adjustable rate commercial
real estate 0 0 0 8,327
Commercial business 696 85 0 5,241
Consumer loans 1,534 (26) 0 33,033
Federal Home Loan Bank stock 0 0 8,488 8,488
Cash equivalents 0 0 0 20,267
Total interest-earning
assets 125,610 143,411 20,739 707,541
Non-interest checking 0 0 0 7,558
NOW accounts 0 0 0 22,973
Passbooks 6,635 11,795 0 35,996
Money market accounts 4,968 8,832 0 26,950
Certificates 19,884 2,434 0 373,521
Federal Home Loan Bank
advances 66,000 10,400 0 167,293
Total interest-bearing
liabilities 97,487 33,461 0 634,291
Interest-earning assets less
interest-bearing
liabilities $ 28,123 109,950 20,739 73,250
Cumulative interest-rate
sensitivity gap $ (57,439) 52,511 73,250 73,250
Cumulative interest-rate
gap as a percentage of
total assets at
March 31, 1998 (8.31)% 7.60 % 10.60 % 10.60%
Cumulative interest-rate gap
as a percentage of interest-
earning assets
at December 31, 1997
<FN>
<FN1> 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.
<FN2> Loans receivable are presented net of loans in process and deferred
loan fees.
<FN3>Construction and development loans are all one-to-four family loans and
therefore have been included in the fixed rate one-to-four family and
adjustable rate one-to-four family lines.
</FN>
</TABLE>
20
<PAGE>
<PAGE>
The preceding table was prepared utilizing the Model 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 7% to 31%, depending on the coupon and period to maturity. ARMs were
assumed to prepay at annual rates of between 12% and 23%, depending on coupon
and the period to maturity. GEM loans were assumed to prepay at annual rates
of between 17% and 38% depending on the coupon and the period to maturity.
Mortgage-backed securities and CMOs were projected to have prepayments based
upon the underlying collateral securing the instrument. Certificate accounts
were assumed not to be withdrawn until maturity. Passbook and money market
accounts were assumed to decay at an annual rate of 20%.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. Although certain assets and liabilities may have similar
maturities and periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable-
rate mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the foregoing table. The
ability of many borrowers to service their debt may decrease in the event of
an interest rate increase.
Refer to Regulatory Capital Requirements above for a discussion of the Bank's
interest rate risk component.
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. HMN assumes no obligations 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 $263.9
million that come due during 1998. Based upon past experience
management anticipates that the majority of the deposits will renew for
another term. Any deposits which do not renew will be replaced with
deposits from other customers, or funded with advances from the FHLB, or
will be funded through the sale of securities. Management does not
anticipate that it will have a liquidity problem due to 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 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 maturing certificates to become a
liquidity problem
MARKET RISK
HMN believes that over the next twelve months interest rates could
conceivably fluctuate in a range of 200 basis points up or down from
where the rates were at March 31, 1998. HMN's actual market value
changes for interest earnings assets and interest bearing liabilities
may differ from the projected market values disclosed in the table in
the Market Risk Section.
Actual interest rates could fluctuate by more than 200 basis points up
or down from rates in effect on March 31, 1998 due to unanticipated
occurrences such as the start of another war in the gulf. Many Asian
countries are experiencing economic difficulties which may have a larger
impact on the economy of the United States than is currently anticipated
and thereby cause general interest rates to fluctuate by more than 200
basis points.
21
<PAGE>
Certain shortcomings are inherent in the method of analysis in the table
presented in the Market Risk section above. 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.
The model assumes that the difference between the current interest rate
being earned or paid compared to a treasury instrument or other interest
rate index with a similar term to maturity (the Interest Spread) will
remain constant over the interest changes disclosed in the table.
Changes in Interest Spread could impact projected market value changes.
Certain assets, such as ARMs, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets.
The market value of the interest-bearing assets which are approaching
their life time interest rate caps could be different from the values
disclosed in the table. In the event of a change in interest rates,
prepayment and early withdrawal levels may 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.
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 March 31, 1998 to determine if its current level of
interest rate risk is acceptable. HMN's actual net interest income
caused by interest rate changes may differ from the amounts reflected in
the table which projects the estimated impact on net interest income of
immediate interest rate changes called rate shocks. HMN's actual
maturing and repricing results of its interest-earning assets and
interest-bearing liabilities may differ from the amounts reflected in
the gap table.
Certain shortcomings are inherent in the method of analysis presented in
each of the tables. 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 a substantial increase in interest rates and could impact net
interest income.
22
<PAGE>
<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 April 28, 1998 the Board of Directors
passed a resolution amending the Certificate of Incorporation of
HMN Financial, Inc.. The Amended Certificate of Incorporation is
included as Exhibit 3(I). Since the Certificate of Incorporation
has not been previously filed in electronic format the complete
Amended Articles of Incorporation are included in this item.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits on page 25 of this report.
(b) Reports on Form 8-K - None.
23
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMN FINANCIAL, INC.
Registrant
Date: May 14, 1998 /s/ Roger P. Weise
------------------- ------------------------
Roger P. Weise,
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 /s/ James B. Gardner
------------------- ------------------------
James B. Gardner,
Executive Vice President
(Principal Financial Officer)
24
<PAGE>
<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
Certificate of Incorporation as amended. 3(i) Filed
electronically
3(b) By-laws *3 N/A
Resolution to Amend By-laws of HMN Financial, Inc.
By-laws of HMN Financial, Inc. as amended
4 Instruments defining the rights of
security holders, Including indentures *1 N/A
5(a) Amendment to the Home Federal Savings *2 N/A
Bank Employees' Savings & Profit Sharing
Plan dated January 28, 1997.
5(b) Amendment to the Adoption Agreement for *2 N/A
Home Federal Savings Bank Employees'
Savings & Profit Sharing Plan and Trust
effective June 17, 1997.
11 Computation of Earnings Per Common Share 11 Filed
electronically
27 Financial Data Schedule 27 Filed
electronically
*1 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.
*2 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.
*3 Filed as an exhibit to Registrant's Form 10-Q for September 30, 1997
(file no. 0-24100). All previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation
S-K.
25
CERTIFICATE OF INCORPORATION
OF
HMN FINANCIAL, INC.
As amended April 28, 1998
FIRST:The name of the Corporation is HMN Financial, Inc. (hereinafter sometimes
referred to as the "Corporation").
SECOND:The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD:The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
FOURTH:
A.The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 11.5 million consisting of:
1. Five hundred thousand shares of Preferred Stock, $.01 par value per share
(the "Preferred Stock"); and
2. Eleven million shares of Common Stock, $.01 par value per share (the "Common
Stock").
B.The Board of Directors is authorized, subject to any limitations presented by
law, to provide for the issuance of the shares of Preferred Stock in series,
and by filing a certificate pursuant to the applicable law of the State of
Delaware (such certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of authorized shares of the
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the Common Stock, without a vote of the holders of the Preferred
Stock, or of any series thereof, unless a vote of any such holders is required
pursuant to the terms of any Preferred Stock Designation.
C.1.Notwithstanding any other provision of this Certificate of Incorporation,
in no event shall any record owner of any outstanding Common Stock which is
beneficially owned, directly or indirectly, by a person who, as of any record
date for the determination of stockholders entitled to vote on any matter,
beneficially owns in excess of 10% of the then-outstanding shares of Common
Stock (the "Limit"), be entitled, or permitted to any vote in respect of the
shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such
<PAGE>
class or series beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
2.The following definitions shall apply to this Section C of this Article
FOURTH:
(a)An "affiliate" of a specified person shall mean a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, the person specified.
(b)"Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Securities Exchange Act of 1934 (or any
successor rule or statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or statutory provision thereto,
pursuant to said Rule 13d-3 as in effect on the date this Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware
("Filing Date"); PROVIDED, HOWEVER, that a person shall, in any event, also be
deemed the "beneficial owner" of any Common Stock:
(1)which such person or any of its affiliates beneficially owns, directly or
indirectly; or
(2)which such person or any of its affiliates has (i) the right to acquire
(whether such right is exercisable immediately or only after the passage of
time), pursuant to any agreement, arrangement or understanding (but shall not
be deemed to be the beneficial owner of any voting shares solely by reason of
an agreement, contract, or other arrangement with this Corporation to effect
any transaction which is described in any one or more of the clauses of Section
A of Article EIGHTH) or upon the exercise of conversion rights, exchange
rights, warrants, or options or otherwise, or (ii) sole or shared voting or
investment power with respect thereto pursuant to any agreement, arrangement
understanding, relationship or otherwise (but shalt not be deemed to be the
beneficial owner of any voting shares solely by reason of a revocable proxy
granted for a particular meeting of stockholders, pursuant to a public
solicitation of proxies for such meeting, with respect to shares of which
neither such person nor any such affiliate is otherwise deemed the beneficial
owner); or
(3)which is beneficially owned, directly or indirectly, by any other person
with which such first mentioned person or any of its affiliates acts as a
partnership, limited partnership, syndicate or other group pursuant to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of any shares of capital stock of this Corporation; and
provided further, however, that (i) no director or officer
2
<PAGE>
of this Corporation (or any affiliate of any such director or officer) shall,
solely by reason of any or all of such directors or officers acting in their
capacities as such, be deemed, for any purposes hereof, to beneficially own any
Common Stock beneficially owned by any other such director or officer (or any
affiliate thereof) and (ii) neither any employee stock ownership or similar
plan of this Corporation or any subsidiary of this Corporation nor any trustee
with respect thereto (or any affiliate of such trustee) shall, solely by reason
of such capacity of such trustee, be deemed, for any purposes hereof, to
beneficially own any Common Stock held under any such plan. For purposes of
computing the percentage of Common Stock beneficially owned by a person, the
outstanding Common Stock shall include shares deemed owned by such person
through application of this subsection but shall not include any other Common
Stock which may be issuable by this Corporation pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise. For all
other purposes, the outstanding Common Stock shall include only Common Stock
then outstanding and shall not include any Common Stock which may be issuable
by this Corporation pursuant to any agreement, or upon the exercise of
conversion rights, warrants or options, or otherwise.
(c)A "person" shall mean any individual, firm, corporation, or other entity
(d)The Board of Directors shall have the power to construe and apply the
provisions of this section and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (1) the number of shares of Common Stock beneficially owned by
any person, (2) whether a person is an affiliate of another, (3) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (4) the
application of any other definition or operative provision of this Section to
the given facts, or (5) any other matter relating to the applicability or
effect of this Section.
3.The Board of Directors shall have the right to demand that any person who is
reasonably believed to beneficially own Common Stock in excess of the Limit (or
holds of record Common Stock beneficially owned by any person in excess of the
Limit (a "Holder in Excess") supply the Corporation with complete information
as to (a) the record owner(s) of all shares beneficially owned by such Holder
in Excess and (b) any other factual matter relating to the applicability or
effect of this section as may reasonably be requested of such Holder in Excess.
The Board of Directors shall further have the right to receive from any Holder
in Excess reimbursement for all expenses incurred by the Board in connection
with its investigation of any matters relating to the applicability or effect
of this section on such Holder in Excess, to the extent such investigation is
deemed appropriate by the Board of Directors as a result of the Holder in
Excess refusing to supply the Corporation with the information described in the
previous sentence.
3
<PAGE>
4. Except as otherwise provided by law or expressly provided in this Section C,
the presence, in person or by proxy, of the holders of record of shares of
capital stock of the Corporation entitling the holders thereof to cast one
third of the votes (after giving effect, if required, to the provisions of this
Section) entitled to be cast by the holders of shares of capital stock of the
Corporation entitled to vote shall constitute a quorum at all meetings of the
stockholders. Every reference in this Certificate of Incorporation to a
majority or other proportion of outstanding capital stock (or the holders
thereof) or voting power for purposes of determining any quorum requirement or
any requirement for stockholder consent or approval shall be deemed to refer to
such percentage or other proportion of the votes (or the holders thereof) then
entitled to be cast in respect of such capital stock after giving effect to the
provisions of this Section whether or not the holders of capital stock are
present in person or by proxy.
5.Any constructions, applications, or determinations made by the Board of
Directors, pursuant to this Section in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose,
shall be conclusive and binding upon the Corporation and its stockholders.
6.In the event any provision (or portion thereof) of this Section C shall be
found to be invalid, prohibited or unenforceable for any reason, the remaining
provisions (or portions thereof) of this Section shall remain in full force and
effect, and shall be construed as if such invalid, prohibited or unenforceable
provision had been stricken here from or otherwise rendered inapplicable, it
being the intent of this Corporation and its stockholders that each such
remaining provision (or portion thereof) of this Section C remain, to the
fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH:
The following provisions are inserted for the management of the business and
the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
(A)The business and affairs of the Corporation shall be managed by or under the
direction of the Board of Directors. In addition to the powers and authority
expressly conferred upon them by Statute or by this Certificate of
Incorporation or the By-laws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
(B)The directors of the Corporation need not be elected by written ballot
unless the By-laws so provide.
(C)Any action required or permitted to be taken by the stockholders of the
Corporation, subject to the rights of holders of any class or series of
Preferred Stock of the Corporation, must be effected at a duly called annual or
special meeting of stockholders of the
4
<PAGE>
Corporation and may not be effected by any consent in writing by such
stockholders.
(D)Special meetings of stockholders of the Corporation, subject to the rights
of holders of any class or series of Preferred Stock 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 (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) (the "Whole Board").
SIXTH:
A.The number of directors shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority of the Whole
Board. 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 conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the
conclusion of the annual meeting of stockholders one year thereafter and the
term of office of the third class to expire at the conclusion of the annual
meeting of stockholders two years thereafter. 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 conclusion of 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.
B.Subject to the rights of the holders of any 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 of
Directors shall shorten the term of any incumbent director.
C.Advance notice of stockholder nominations for the election of directors and
of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
By-laws of the Corporation.
D.Subject to the rights of the holders of any series of Preferred Stock then
outstanding, any directors, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least 80% of the voting power of all of the then-outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (after giving effect to the provisions of Article FOURTH
of this Certificate of Incorporation), voting together as a single class.
5
<PAGE>
SEVENTH:The Board of Directors is expressly empowered to adopt, amend or repeal
the By-laws of the Corporation. Any adoption, amendment or repeal of the By-
laws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the By-laws of the Corporation. In addition to any vote
of the holders of any class or series of stock of this Corporation required by
law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least 80% of the voting power of all of the then-outstanding
shares of the capital stock of the Corporation entitled to vote generally in
the election of directors (after giving effect to the provisions of Article
FOURTH hereof), voting together as a single class, shall be required to adopt,
amend or repeal any provisions of the By-laws of the Corporation.
EIGHTH:
A.In addition to any affirmative vote required by law or this Certificate of
Incorporation, and except as otherwise expressly provided in this Section:
1.any merger or consolidation of the Corporation or any Subsidiary (as
hereinafter deemed) with (i) any Interested Stockholder (as hereinafter
defined) or (ii) any other corporation (whether or not itself an Interested
Stockholder) which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested Stockholder; or
2.any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) to or with any Interested
Stockholder, or any Affiliate of any Interested Stockholder, of any assets of
the Corporation or any Subsidiary having an aggregate Fair Market Value (as
hereafter defined) equaling or exceeding 25% or more of the combined assets of
the Corporation and its Subsidiaries; or
3.the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation
or any Subsidiary to any Interested Stockholder or any Affiliate of any
Interested Stockholder in exchange for cash, securities or other property (or a
combination thereof) having an aggregate Fair Market Value equaling or
exceeding 25% of the combined assets of the Corporation and its Subsidiaries
except pursuant to an employee benefit plan of the Corporation or any
Subsidiary thereof; or
4.the adoption of any plan or proposal for the liquidation or dissolution of
the Corporation proposed by or on behalf of any Interested Stockholder or any
Affiliate of any Interested Stockholder; or
5.any reclassification of securities (including any reverse stock split), or
recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any other transaction (whether or
not with or into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class of equity or
6
<PAGE>
convertible securities of the Corporation or any Subsidiary which is directly
or indirectly owned by any Interested Stockholder or any Affiliate of any
Interested Stockholder; shall require the affirmative vote of the holders of at
least 80% of the voting power of the then-outstanding shares of stock of the
Corporation entitled to vote in the election of directors (the "Voting Stock"),
voting together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or by any other provisions of this
Certificate of Incorporation or any Preferred Stock Designation or in any
agreement with any national securities exchange or quotation system or
otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean any
transaction which is referred to in any one or more of paragraphs 1 through 5
of Section A of this Article EIGHTH.
B.The provisions of Section A of this Article EIGHTH shall not be applicable to
any particular Business Combination, and such Business Combination shall
require only the affirmative vote of the majority of the outstanding shares of
capital stock entitled to vote, or such vote as is required by law or by this
Certificate of Incorporation, if, in the case of any Business Combination that
does not involve any cash or other consideration being received by the
stockholders of the Corporation solely in their capacity as stockholders of the
Corporation, the condition specified in the following paragraph 1 is met or, in
the case of any other Business Combination, either the condition specified in
the following paragraph 1 is met or all of the conditions specified in the
following; paragraph 2 are met:
1.The Business Combination shall have been approved by a majority of the
Disinterested Directors (as hereinafter defined).
2.All of the following conditions shall have been met:
(a)The aggregate amount of the cash and the Fair Market Value as of the date of
the consummation of the Business Combination of consideration other than cash
to be received per share by the holders of Common Stock in such Business
Combination shall at least be equal to the higher of the following:
(1)(if applicable) the Highest Per Share Price, including any brokerage
commissions, transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder or any of its Affiliates for any shares of Common Stock
acquired by it (i) within the two-year period immediately prior to the first
public announcement of the proposal of the Business Combination (the
"Announcement Date"), or (ii) in the transaction in which it became an
Interested Stockholder, whichever is higher.
(2)the Fair Market Value per share of Common Stock on the Announcement Date or
on the date on which the Interested Stockholder became an Interested
Stockholder (such latter date is referred to in this Article EIGHTH as the
"Determination Date"), whichever is higher.
7
<PAGE>
(b)The aggregate amount of the cash and the Fair Market Value as of the date of
the consummation of the Business Combination of consideration other than cash
to be received per share by holders of shares of any class of outstanding
Voting Stock other than Common Stock shall be at least equal to the highest of
the following (it being intended that the requirements of this subparagraph (b)
shall be required to be met with respect to every such class of outstanding
Voting Stock, whether or not the Interested Stockholder has previously acquired
any shares of a particular class of Voting Stock):
(1)(if applicable) the Highest Per Share Price (as hereinafter defined),
including any brokerage commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder for any shares of such class of Voting
Stock acquired by it (i) within the two-year period immediately prior to the
Announcement Date, or (ii) in the transaction in which it became an Interested
Stockholder, whichever is higher;
(2)(if applicable) the highest preferential amount per share to which the
holders of shares of such class of Voting Stock are entitled in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(3)the Fair Market Value per share of such class of Voting Stock on the
Announcement Date or on the Determination Date, whichever is higher.
(c)The consideration to be received by holders of a particular class of
outstanding Voting Stock (including Common Stock) shall be in cash or in the
same form as the Interested Stockholder has previously paid for shares of such
class of Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration to be received per share by holders of shares of such class of
Voting Stock shall be either cash or the form used to acquire the largest
number of shares of such class of Voting Stock previously acquired by the
Interested Stockholder. The price determined in accordance with subparagraph
B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the
event of any stock dividend, stock split, combination of shares or similar
event.
(d)After such Interested Stockholder has become an Interested Stockholder and
prior to the consummation of such Business Combination; (1) except as approved
by a majority of the Disinterested Directors, there shall have been no failure
to declare and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on any outstanding stock having preference over the
Common Stock as to dividends or liquidation; (2) there shall have been (i) no
reduction in the annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock), except as approved
by
8
<PAGE>
a majority of the Disinterested Directors, (ii) an increase in such annual rate
of dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding shares
of Common Stock, unless the failure to so increase such annual rate is approved
by a majority of the Disinterested Directors; and (3) neither such Interested
Stockholder nor any of its Affiliates shall have become the beneficial owner of
any additional shares of Voting Stock except as part of the transaction which
results in such Interested Stockholder becoming an Interested Stockholder.
(e)After such Interested Stockholder has become an Interested Stockholder, such
Interested Stockholder shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or other
tax advantages provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(f)A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934, as amended, and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be mailed
to stockholders of the Corporation at least 30 days prior to the consummation
of such Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or subsequent
provisions).
C.For the purposes of this Article EIGHTH:
1.A "Person" shall include an individual, a group acting in concert, a
corporation, a partnership, an association, a joint venture, a pool, a joint
stock company, a trust, an unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities.
2."Interested Stockholder" shall mean any Person (other than the Corporation or
any holding company or Subsidiary thereof) who or which:
(a)is the beneficial owner, directly or indirectly, of more than 10% of the
voting power of the outstanding Voting Stock; or
(b)is an Affiliate of the Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then-
outstanding Voting Stock; or
(c)is an assignee of or has otherwise succeeded to any shares of Voting Stock
which were at any time within the two-year period immediately prior to the date
in question beneficially owned by any Interested Stockholder, if such
9
<PAGE>
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the meaning of
the Securities Act of 1933, as amended.
3.A Person shall be a beneficial owner of any Voting Stock:
(a)which such Person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect
on the Filing Date; or
(b)which such Person or any of its Affiliates or Associates has (1) the right
to acquire (whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or options,
or otherwise, or (2) the right to vote pursuant to any agreement, arrangement
or understanding (but neither such Person nor any such Affiliate or Associate
shall be deemed to be the beneficial owner of any shares of Voting Stock solely
by reason of a revocable proxy granted for a particular meeting of
stockholders, pursuant to a public solicitation of proxies for such meeting,
and with respect to which shares neither such Person nor any such Affiliate or
Associate is otherwise deemed the beneficial owner); or
(c)which are beneficially owned, directly or indirectly within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as in effect
on the Filing Date, by any other Person with which such Person or any of its
Affiliates or Associates has any agreement, arrangement or understanding for
the purposes of acquiring, holding, voting (other than solely by reason of a
revocable proxy as described in Subparagraph (b) of this Paragraph 3) or in
disposing of any shares of Voting Stock;
provided, however, that, in the case of any employee stock ownership or similar
plan of the Corporation or of any Subsidiary in which the beneficiaries thereof
possess the right to vote any shares of Voting Stock held by such plan, no such
plan nor any trustee with respect thereto (nor any Affiliate of such trustee),
solely by reason of such capacity of such trustee, shall be deemed, for any
purposes hereof, to beneficially own any shares of Voting Stock held under any
such plan.
4.For the purpose of determining whether a Person is an Interested Stockholder
pursuant to Paragraph 2 of this Section C, the number of shares of Voting Stock
deemed to be outstanding shall include shares deemed owned through application
of Paragraph 3 of this Section C but shall not include any other shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
5."Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the
10
<PAGE>
Securities Exchange Act of 1934, as amended, as in effect on the Filing Date.
6."Subsidiary" means any corporation of which a majority of any class of equity
security is owned, directly or indirectly, by the Corporation; provided,
however, that for the purposes of the definition of Interested Stockholder set
forth in Paragraph 2 of this Section C, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
7."Disinterested Director" means any member of the Board of Directors who is
unaffiliated with the Interested Stockholder and was a member of the Board of
Directors prior to the time that the Interested Stockholder became an
Interested Stockholder, and any director who is thereafter chosen to fill any
vacancy on the Board of Directors or who is elected and who, in either event,
is unaffiliated with the Interested Stockholder, and in connection with his or
her initial assumption of office is recommended for appointment or election by
a majority of Disinterested Directors then on the Board of Directors.
8."Fair Market Value" means: (a) with respect to any class of stock,
appropriately adjusted for any dividend or distribution in shares of such stock
or in any combination or reclassification of outstanding shares of such stock
into a smaller number of shares of such stock, the highest closing sale price
of the stock during the 30-day period immediately preceding the date in
question of a share of such stock on the National Association of Securities
Dealers Automated Quotations ("NASDAQ") System or any system then in use, or,
if such stock is admitted to trading on a principal United States securities
exchange registered under the Securities Exchange Act of 1934, as amended, Fair
Market Value shall be the highest sale price reported during the 30-day period
preceding the date in question, or, if no such prices are available, the Fair
Market Value on the date in question of a share of such stock as determined by
the Board of Directors in good faith; and (b) in the case of property other
than cash or stock, the Fair Market Value of such property on the date in
question as determined by the Board of Directors in good faith.
9.Reference to "Highest Per Share Price" means with respect to any class of
stock, the highest price per share, appropriately adjusted for any dividend or
distribution in shares of such stock or any stock split or reclassification of
outstanding shares of such stock into a greater number of shares of such stock
or any combination or reclassification of outstanding shares of such stock into
a smaller number of shares of such stock.
10.In the event of any Business Combination in which the Corporation survives,
the phrase "other consideration to be received" as used in Subparagraphs (a)
and (b) of Paragraph 2 of Section B of this Article EIGHTH shall include the
shares of Common Stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
D.A majority of the Disinterested Directors of the Corporation shall have the
power and duty to determine for the purposes of this Article EIGHTH, on the
basis of information known to them after reasonable inquiry, (1) whether a
person is an Interested Stockholder; (2) the
11
<PAGE>
number of shares of Voting Stock beneficially owned by any person; (3) whether
a person is an Affiliate or Associate of another; and (4) whether the assets
which are the subject of any Business Combination have, or the consideration to
be received for the issuance or transfer of securities by the Corporation or
any Subsidiary in any Business Combination has an aggregate Fair Market Value
equaling or exceeding 25% of the combined assets of the Corporation and its
Subsidiaries. A majority of the Disinterested Directors shall have the further
power to interpret all of the terms and provisions of this Article EIGHTH.
E.Nothing contained in this Article EIGHTH shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
F.Notwithstanding any other provisions of this Certificate of Incorporation or
any provision of law which might otherwise permit a lesser vote or no vote, but
in addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, this Certificate of Incorporation
or any Preferred Stock Designation, the affirmative vote of the holders of at
least 80% of the voting power of all of the then-outstanding shares of the
Voting Stock, voting together as a single class, shall be required to alter,
amend or repeal this Article EIGHTH.
NINTH:The Board of Directors of the Corporation, when evaluating any offer of
another Person (as defined in Article EIGHTH hereof) to (A) make a tender or
exchange offer for any equity security of the Corporation, (B) merge or
consolidate the Corporation with another corporation or entity or (C) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Corporation, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effect of acceptance of such offer
on the Corporation's present and future customers and employees and those of
its Subsidiaries (as defined in Article EIGHTH hereof); on the communities in
which the Corporation and its Subsidiaries operate or are located; on the
ability of the Corporation to fulfill its corporate objectives as a financial
institution holding company and on the ability of its subsidiary financial
institution to fulfill the objectives of a federally insured financial
institution under applicable statutes and regulations.
TENTH:
A.Except as set forth in Section B of this Article TENTH, in addition to any
affirmative vote of stockholders required by law or this Certificate of
Incorporation, any direct or indirect purchase or other acquisition by the
Corporation of any Equity Security (as hereinafter defined) of any class from
any Interested Person (as hereinafter defined) shall require the affirmative
vote of the holders of at least 80% of the Voting Stock of the Corporation that
is not beneficially owned (for purposes of this Article TENTH beneficial
ownership shall be determined in accordance with Section C.2(b) of Article
FOURTH hereof) by such Interested Person, voting together as a single class.
Such affirmative vote shall be required notwithstanding the fact that no vote
may be required, or that a lesser percentage may be specified, by law or by any
other provisions of this Certificate of Incorporation or any Preferred Stock
Designation or in any agreement with any national securities exchange or
quotation system, or otherwise. Certain defined
12
<PAGE>
terms used in this Article TENTH are as set forth in Section C below.
B.The provisions of Section A of this Article TENTH shall not be applicable
with respect to:
(1)any purchase or other acquisition of securities made as part of a tender or
exchange offer by the Corporation or a Subsidiary (which term, as used in this
Article TENTH, is as defined in the first clause of Section C.6 of Article
EIGHTH hereof) of the Corporation to purchase securities of the same class made
on the same terms to all holders of such securities and complying with the
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (or any subsequent provision replacing
such Act, rules or regulations);
(2)any purchase or acquisition made pursuant to an open market purchase program
approved by a majority of the Board of Directors, including a majority of the
Disinterested Directors (which term, as used in this Article TENTH, is as
defined in Article EIGHTH hereof); or
(3)any purchase or acquisition which is approved by a majority of the Board of
Directors, including a majority of the Disinterested Directors, and which is
made at no more than the Market Price (as hereinafter defined), on the date
that the understanding between the Corporation and the Interested Person is
reached with respect to such purchase (whether or not such purchase is made or
a written agreement relating to such purchase is executed on such date), of
shares of the class of Equity Security to be purchased.
C.For the purposes of this Article TENTH:
(i)The term Interested Person shall mean any Person (other than the
Corporation, Subsidiaries of the Corporation, pension, profit sharing, employee
stock ownership or other employee benefit plans of the Corporation and its
Subsidiaries, entities organized or established by the Corporation or any of
its Subsidiaries pursuant to the terms of such plans and trustees and
fiduciaries with respect to any such plan acting in such capacity) that is the
direct or indirect beneficial owner of 5% or more of the Voting Stock of the
Corporation, and any Affiliate or Associate of any such person.
(ii)The Market Price of shares of a class of Equity Security on any day shall
mean the highest sale price of shares of such class of Equity Security on such
day, or, if that day is not a trading day, on the trading day immediately
preceding such day, on the national securities exchange or the NASDAQ System or
any other system then in use on which such class of Equity Security is traded.
(iii)The term Equity Security shall mean any security described in Section
3(a)(11) of the Securities Exchange Act of 1934, as in effect on December 31,
1991, which is traded on a national securities exchange or the NASDAQ System or
any other system then in use.
13
<PAGE>
(iv)For purposes of this Article TENTH, all references to the term Interested
Stockholder in the definition of Disinterested Director shall be deemed to
refer to the term Interested Person.
ELEVENTH:
A.Each director or officer (or former director or former officer) of the
Corporation who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; PROVIDED, HOWEVER, that,
except as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.
B.The right to indemnification conferred in Section A of this Article shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); PROVIDED, HOWEVER, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"),
by or on behalf of such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which there is
no further right to appeal (hereinafter a ''final adjudication"), that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C.If a claim under Section A or B of this Article is not paid in full by the
Corporation within sixty days after a written claim has been received by the
Corporation, except
14
<PAGE>
in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall also be entitled to be paid
the expense of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the Corporation
to recover an advancement of expenses pursuant to the terms of an undertaking
the Corporation shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article or otherwise shall be on the Corporation.
D.The rights to indemnification and to the advancement of expenses conferred in
this Article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Corporation's Certificate of
Incorporation, By-laws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E.The Corporation may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
F.The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of
expenses to the fullest extent of the provisions of this Article with respect
to the indemnification and advancement of expenses of directors and officers of
the Corporation to any employee or agent or former employee or agent of the
Corporation or any person who is or was serving at the request of the
Corporation as an employee or agent of any other corporation, partnership,
joint venture, trust or other enterprise, including an employee benefit plan.
TWELFTH:A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its
15
<PAGE>
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. If the Delaware General
Corporation Law is hereafter amended to further eliminate or limit, or to
authorize corporate action further limiting or eliminating, the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
THIRTEENTH:
No amendment, addition, alteration, change or repeal of any provision of this
Certificate of Incorporation shall be made, unless such is first proposed by
the Board of Directors of the Corporation, upon the affirmative vote of at
least two-thirds of the directors then in office at a duly constituted meeting
of the Board of Directors called expressly for such purpose, and thereafter
approved by the stockholders by a majority of the total votes eligible to be
cast at a duly constituted meeting of stockholders called expressly for such
purpose; PROVIDED, HOWEVER that, notwithstanding any other provision of this
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any vote of the holders of
any class or series of the stock of this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders of at least
80% of the voting power of all of the then-outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of
directors (after giving effect to the provisions of Article FOURTH), voting
together as a single class, shall be required to amend or repeal this Article
THIRTEENTH, clause C.1. of Article FOURTH, clauses (C) or (D) of Article FIFTH,
Article SIXTH, Article SEVENTH, Article EIGHTH, Article NINTH, Article TENTH,
Article ELEVENTH or Article TWELFTH.
FOURTEENTH:The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
Roger P. Weise 101 N. Broadway
Spring Valley, Minnesota 55975
16
<PAGE>
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and, accordingly, have hereto set my hand this 23RD day of MARCH, l994.
And as amended April 28, 1998.
/s/ Roger P. Weise
- --------------------------------
Roger P. Weise, Incorporator
17
Exhibit 11
HMN Financial, Inc.
Computation of Earnings Per Common Share
Three Months Ended March 31,
-----------------------------
Computation of Earnings
Per Common Share: 1998 1997
-----------------------------
Weighted average number of common
shares outstanding used in basic
earnings per common share
calculation . . . . . . . . . . . . 5,447,501 5,550,215
Net dilutive effect of:
Options . . . . . . . . . . . . . . 403,037 255,093
Restricted stock awards . . . . . . 61,395 83,507
----------- ---------
Weighted average number of shares
outstanding adjusted for effect of
dilutive securities . . . . . . . . 5,911,933 5,888,815
=========== =========
Income available to common shareholders$1,663,355 1,474,480
Basic earnings per common share. . . $0.37 0.27
Diluted earnings per common share. . $0.28 0.25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 AND DECEMBER 31, 1997 AND
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,267
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 219,122
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 458,527
<ALLOWANCE> (2,825)
<TOTAL-ASSETS> 732,118
<DEPOSITS> 467,998
<SHORT-TERM> 37,893
<LIABILITIES-OTHER> 12,873
<LONG-TERM> 129,400
0
0
<COMMON> <F1> 91
<OTHER-SE> 84,863
<TOTAL-LIABILITIES-AND-EQUITY> 732,118
<INTEREST-LOAN> 8,642
<INTEREST-INVEST> 3,175
<INTEREST-OTHER> 284
<INTEREST-TOTAL> 12,101
<INTEREST-DEPOSIT> 5,703
<INTEREST-EXPENSE> 7,788
<INTEREST-INCOME-NET> 4,313
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 896
<EXPENSE-OTHER> 3,254
<INCOME-PRETAX> 2,646
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,663
<EPS-PRIMARY> <F1><F2> 0.31
<EPS-DILUTED> <F1> 0.28
<YIELD-ACTUAL> 7.27
<LOANS-NON> 397
<LOANS-PAST> 383
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 95
<ALLOWANCE-OPEN> 2,748
<CHARGE-OFFS> 0
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 2,825
<ALLOWANCE-DOMESTIC> 962
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,863
<FN>
<F1>AS THE RESULT OF A STOCK SPLIT STOCKHOLDERS EQUITY AND EARNINGS PER SHARE
DATA HAVE BEEN RESTATED TO RETROACTIVELY RESTATE THE IMPACT OF THE SPLIT.
<F2>AMOUNT REPORTED UNDER "EPS PRIMARY" IS ACTUALLY "EPS BASIC".
</FN>
</TABLE>
