UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
December 5, 1997
HMN FINANCIAL, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 0-24100 41-1777397
(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification
incorporation) Number)
101 NORTH BROADWAY, SPRING VALLEY, MINNESOTA 55975
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 346-7345
N/A
_________________________________________________________________
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
On December 5, 1997 HMN Financial, Inc. ("HMN"), through its wholly owned
subsidiary, Home Federal Savings Bank ("HFSB") completed "the Merger" with
Marshalltown Financial Corporation ("MFC") pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"), previously filed with HMN's Current Report on
Form 8-K dated July 1, 1997 (File No. 0-24100). This Form 8-K/A includes as
Exhibits certain financial information required under Item 7 which was not
contained in the previously filed Form 8-K dated December 5, 1997 (File No. 0-
24100).
(a) Financial Statements of Business Acquired.
Financial statements for Marshalltown Financial Corporation as of and
for the year ended September 30, 1997 are attached hereto as Exhibit
99.1 and are incorporated herein by reference.
(b) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
On December 5, 1997 HMN, through its wholly owned subsidiary, HFSB,
completed its merger with MFC pursuant to the Merger Agreement. The
aggregate consideration per the Merger 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 which were cancelled upon the
completion of the Merger. The Merger will be accounted for utilizing
the purchase method of accounting.
The transaction was funded through a combination of the sale of
securities, and short-term borrowings from the Federal Home Loan Bank
of Des Moines ("FHLB"). Additional information regarding the Merger
is included in HMN's Current Report on Form 8-K dated December 5,
1997 (File No. 0-24100).
The following Unaudited Pro Forma Combined Financial Information
reflects the Merger. The Unaudited Proforma Combined Consolidated
Balance Sheet as of September 30, 1997 combines the historical
consolidated balance sheets of HMN and MFC as if the Merger had been
effective on September 30, 1997, after giving effect to certain pro
forma adjustments described in the accompanying notes.
The following Unaudited Pro Forma Combined Consolidated Statements of
Income for the year ended December 31, 1996 and for the nine months
ended September 30, 1997 and 1996 are presented as if the Merger had
been effective at the beginning of each period presented, after
giving effect to certain pro forma adjustments described in the
accompanying notes.
The Unaudited Pro Forma Combined Financial Information and notes
thereto 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 sub-sidiaries are recorded at
their fair market values on the
<PAGE>
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 Unaudited Pro Forma Combined Financial Information (the
"Information") included in Exhibit 99.2 is incorporated herein by
reference. The Information is not necessarily indicative of the
consolidated financial position or 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 periods
indicated. The Unaudited Pro Forma Financial Information should be
read in conjunction with and are qualified in their entirety by the
separate historical consolidated financial statements and notes
thereto of HMN's (i) Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 0-24100) and (ii) Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 (File No. 0-
24100), and of MFC and its subsidiaries, which are included in Item
7(a) of this Current Report on Form 8-K/A.
(c) EXHIBITS
23 Consent of McGladrey & Pullen LLP dated February 11,
1998
99.1 Financial statements for Marshalltown Financial Corporation as
of and for the year ended September 30, 1997.
99.2 Unaudited pro forma combined financial information consisting
of:
Unaudited Pro Forma Combined Consolidated Balance Sheet as of
September 30, 1997 and related notes
Unaudited Pro Forma Combined Consolidated Statements of Income
for the nine months ended September 30, 1997
Unaudited Pro Forma Combined Consolidated Statements of Income
for the nine months ended September 30, 1996
Unaudited Pro Forma Combined Consolidated Statements of Income
for the twelve months ended December 31, 1996 for HMN, and for
the twelve months ended September 30, 1996 for MFC
and the related notes to the above mentioned Statements of
Income.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This Current Report and other written and oral statements made by or on
behalf of HMN contain, or may contain, certain "forward-looking statements,"
including statements concerning plans, objectives and future events or
performance, and other statements which are other than statements of historical
fact. Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, but are not limited
to, the following: (i) failure to fully realize or to realize within the
expected time frame expected cost savings from the Merger; (ii) lower than
expected income or revenues following the Merger, or higher than expected
operating costs; (iii) a significant increase in competitive pressure in the
banking and financial services industry; (iv) business disruption related to
the Merger; (v) greater than expected costs or difficulties related to the
integration of the MFC employees into HMN; (vi) litigation costs and delays
caused by litigation; (vii) higher than anticipated costs in completing the
Merger; (viii) unanticipated regulatory constraints arising from the Merger;
(ix) reduction in interest margins due to changes in the interest rate
environment; (x) poorer than expected general economic conditions, including
acquisition and growth opportunities, in the states which HMN does business;
(xi) legislation or regulatory changes which adversely affect the businesses in
which HMN is engaged; and (xii) other unanticipated occurrences which increase
the costs related to the Merger or decrease the expected financial benefits of
the Merger.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: February 11, 1998 By: /s/ Roger P. Weise
----------------------
Roger P. Weise, Chairman
and Chief Executive Officer
[McGladrey & Pullen, LLP logo]
MCGLADREY & PULLEN, LLP
--------------------------------------------
Certified Public Accountants and Consultants
The Board of Directors
HMN Financial Inc.
We consent to the incorporation by reference of our report dated October 14,
1997, relating to the consolidated statements of financial condition of
Marshalltown Financial Corporation as of September 30, 1997 and 1996 and the
related statements of income, stockholders' equity and cash flows for the
years then ended, which report appears in Form 8-K/A filed on or about February
11, 1998 by HMN Financial, Inc. related to the acquisition of Marshalltown
Financial Corporation by HMN Financial Inc., in the following Registration
Statements of HMN Financial Inc.: Nos. 33-88228, 33-94388, and 33-94386 on
Form S-8.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Des Moines, Iowa
February 11, 1998
MARSHALLTOWN FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
SEPTEMBER 30, 1997
<PAGE>
Contents
------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated statements of financial condition 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 - 6
Notes to consolidated financial statements 7 - 22
------------------------------------------------------------
<PAGE>
[McGladrey & Pullen, LLP logo]
MCGLADREY & PULLEN, LLP
-------------------------
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Marshalltown Financial Corporation
Marshalltown, Iowa
We have audited the accompanying consolidated statements of financial condition
of Marshalltown Financial Corporation and subsidiaries as of September 30, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marshalltown
Financial Corporation and subsidiaries as of September 30, 1997 and 1996,
and the results of their operations and cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Des Moines, Iowa
October 14, 1997
1
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-bearing deposits $ 4,017,660 $ 1,811,278
Noninterest-bearing deposits 663,756 474,786
Securities available for sale (Note 2) 2,419,896 2,314,172
Securities held to maturity (Note 2) 10,087,377 9,484,506
Mortgage-backed securities held to
maturity (Note 2) 40,105,545 47,513,070
Investment in limited partnerships 443,973 482,283
Loans receivable, net (Notes 3 and 4) 66,183,349 60,284,275
Accrued interest receivable 713,098 747,918
Real estate acquired for investment 397,466 406,187
Premises and equipment, net (Note 5) 385,072 435,536
Deferred tax asset (Note 7) - 57,741
Other assets 74,223 171,340
---------------------------
$125,491,415 $124,183,092
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Notes 2 and 6):
Demand $ 3,903,924 $ 4,086,063
Savings and money market 16,122,783 17,272,240
Certificates of deposit 83,683,174 81,681,395
---------------------------
TOTAL DEPOSITS 103,709,881 103,039,698
Advances from borrowers for
taxes and insurance 12,342 22,870
Income taxes (Note 7):
Current 33,000 48,972
Deferred 232,852
Accrued expenses and other
liabilities 1,222,611 1,733,543
---------------------------
105,210,686 104,845,083
---------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 8)
Common stock, par value $.01 per
share; authorized 3,250,000 shares;
issued and outstanding 1,411,475
shares (Notes 10 and 13) 14,115 14,115
Additional paid-in capital 10,599,090 10,599,090
Retained earnings, substantially
restricted (Note 7) 9,749,169 8,902,114
Unrealized gain on securities
available for sale, net (Note 2) 32,077 12,384
Less deferred recognition and
retention plan (Note 10) (113,722) (189,694)
---------------------------
20,280,729 19,338,009
---------------------------
$125,491,415 $124,183,092
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans receivable $ 4,897,620 $ 4,386,435
Securities available for sale 157,015 148,600
Securities held to maturity 650,295 551,307
Mortgage-backed securities
held to maturity 2,912,742 3,383,557
Other interest-earning assets 232,123 286,312
------------------------------
8,849,795 8,756,211
Interest expense, deposits 5,484,065 5,579,496
------------------------------
NET INTEREST INCOME 3,365,730 3,176,715
Provision for loan losses (Note 3) 10,000 10,000
------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,355,730 3,166,715
------------------------------
Noninterest income:
Service charges 57,423 62,661
Other, net 119,057 73,930
------------------------------
TOTAL NONINTEREST INCOME 176,480 136,591
------------------------------
Noninterest expense:
Compensation and benefits 1,364,422 1,314,115
Occupancy and equipment 193,128 200,758
SAIF deposit insurance premium 90,827 239,406
SAIF special assessment - 681,920
Data processing 102,576 103,898
Other 602,431 631,267
-----------------------------
TOTAL NONINTEREST EXPENSE 2,353,384 3,171,364
-----------------------------
INCOME BEFORE INCOME TAX EXPENSE 1,178,826 131,942
Income tax expense (Note 7) 331,771 57,212
-----------------------------
NET INCOME $ 847,055 $ 74,730
=============================
Earnings per common share $ 0.57 $ 0.05
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
- -----------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1995 $ 14,115 $ 10,599,090 $ 8,827,384
Net change in unrealized gain
on securities available for
sale, net - - -
Vesting of shares of stock of
retention and recognition
plan (Note 10) - - -
Net income - - 74,730
--------------------------------------
Balance, September 30, 1996 14,115 10,599,090 8,902,114
Net change in unrealized gain
on securities available for
sale, net - - -
Vesting of shares of stock of
retention and recognition
plan (Note 10) - - -
Net income - - 847,055
--------------------------------------
BALANCE, SEPTEMBER 30, 1997 $ 14,115 $ 10,599,090 $ 9,749,169
======================================
<CAPTION>
Unrealized Deferred
Gain on Retention
Securities and
Available for Recognition
Sale, Net Plan Total
----------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1995 $ 17,801 $ (265,666) $ 19,192,724
Net change in unrealized gain
on securities available for
sale, net (5,417) - (5,417)
Vesting of shares of stock of
retention and recognition
plan (Note 10) - 75,972 75,972
Net income - - 74,730
----------------------------------------
Balance, September 30, 1996 12,384 (189,694) 19,338,009
Net change in unrealized gain
on securities available for
sale, net 19,693 - 19,693
Vesting of shares of stock of
retention and recognition
plan (Note 10) - 75,972 75,972
Net income - - 847,055
----------------------------------------
BALANCE, SEPTEMBER 30, 1997 $ 32,077 $ (113,722) $ 20,280,729
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 847,055 $ 74,730
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 84,640 90,291
Amortization of RRP 75,972 75,972
Provision for loan losses 10,000 10,000
Stock dividend on stock in Federal
Home Loan Bank - (23,600)
Loss on investments in limited partnerships 25,530 16,052
Net accretion of investment and mortgage-
backed securities premiums and discounts (50,669) (34,791)
Deferred taxes 277,462 (205,000)
Net realized gain on available for sale
security (2,237) -
Amortization of loan fees (38,000) (32,274)
Change in assets and liabilities:
Decrease in accrued interest receivable 34,820 43,345
Decrease in other assets 97,117 9,349
Increase (decrease) in income taxes payable (15,972) 36,913
Increase (decrease) in accrued expenses
and other liabilities (510,932) 713,757
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 834,786 774,744
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of security available
for sale 378,737 -
Proceeds from maturities of securities held
to maturity 4,000,000 6,500,000
Purchase of securities available for sale (449,400) (499,700)
Purchase of securities held to maturity (4,591,922) (6,500,000)
Principal collected on mortgage-backed
securities 8,974,705 10,203,547
Purchase of mortgage-backed securities (1,527,460) (2,480,362)
Cash distributions received from limited
partnerships 12,780 1,665
Net increase in loans receivable (5,871,074) (9,876,065)
Purchase of premises and equipment (21,350) (1,003)
Proceeds from sale of equipment 694 -
Proceeds from sale of foreclosed real estate - 22,220
Purchase of real estate acquired for investment (4,799) (12,871)
--------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 900,911 (2,642,569)
--------------------------
(Continued)
5
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 670,183 $ (81,357)
Decrease in advances from borrowers
for taxes and insurance (10,528) (161,695)
----------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 659,655 (243,052)
----------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,395,352 (2,110,877)
CASH AND CASH EQUIVALENTS
Beginning 2,286,064 4,396,941
----------------------------
Ending $ 4,681,416 $ 2,286,064
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 5,339,300 $ 5,589,869
Income taxes 70,281 225,299
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Marshalltown Financial Corporation (the Company), located
in Marshalltown, Iowa, owns 100% of the outstanding common stock issued by
Marshalltown Savings Bank (the Bank), in connection with its conversion from a
federally chartered mutual institution to a federally chartered stock
institution. The only significant assets are investment securities and stock of
the Bank.
The Bank provides a full range of banking services to individual and corporate
customers from its office located in Marshalltown, Iowa and branches located in
Marshalltown and Toledo, Iowa.
MSL Financial Corporation, THE BANK'S WHOLLY-OWNED SUBSIDIARY, offers annuities
to the Bank's customers and members of the general public.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Marshalltown Financial Corporation and its wholly-owned
subsidiaries, Marshalltown Savings Bank and MSL Financial Corporation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
ACCOUNTING ESTIMATES AND ASSUMPTIONS: The consolidated financial statements
have been prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the
date of the financial statements and revenues and expenses for the period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand
and interest-bearing and noninterest-bearing deposits in banks.
SECURITIES AVAILABLE FOR SALE: Securities to be held for indefinite periods
of time, including debt securities that management intends to use as part of
its asset/liability strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk, the need to increase regulatory
capital or other similar factors, are classified as available for sale.
Securities available for sale are carried at fair value. Unrealized gains or
losses, net of the related deferred tax effect, are reported as increases or
decreases in stockholders' equity. Realized gains and losses are determined
using the specific identification method of specific securities sold and are
included in earnings. Premiums or discounts are recognized in interest income
using the interest method over the period to maturity.
SECURITIES HELD TO MATURITY: Securities which management has the intent and
the Company has the ability to hold to maturity are carried at cost, adjusted
for purchase premiums or discounts. Purchase premiums or discounts are
recognized in interest income using the interest method over the period to
maturity.
LOANS RECEIVABLE: The Bank grants real estate loans, consumer and other loans
to customers meeting board-approved underwriting guidelines. Most of these
loans are made on properties in Marshall County or the western half of Tama
County, Iowa. Additionally, at September 30, 1997, approximately
7
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
22% of the Bank's real estate mortgage loans consist of loans purchased
outside the Bank's lending area. The loans are secured by the underlying
properties and are subject to the same underwriting guidelines as loans
originated internally. The majority of these loans are single - family
mortgages and are all located in Wisconsin.
Loans receivable that management has the intent and ability to hold for the
foreseeable future, or until maturity or payoff, are stated at unpaid
principal balances less the allowance for loan losses, loans in process, any
deferred fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
The allowance for loan losses is increased by provisions charged to income and
decreased by charge-offs, net of recoveries. Management's periodic evaluation
of the adequacy of the allowance is based on past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic conditions.
Uncollectible interest on loans that are contractually 90 days past due is
charged off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued, and income is subsequently recognized only
to the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is no
longer in doubt, in which case the loan is returned to accrual status.
Loan fees and certain direct loan origination costs are capitalized, and the
net fee or cost is recognized as an adjustment to interest income using the
interest method over the contractual life of the loans, adjusted for
prepayments when they occur.
REAL ESTATE ACQUIRED FOR INVESTMENT: Real estate properties acquired for
investment are carried at the lower of cost, including cost of improvements
and amenities incurred subsequent to acquisition, or fair value less cost to
sell. Costs relating to development and improvement of property are
capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its fair value less cost to sell. The allowance for losses
may be reduced for subsequent increases in the estimated fair value less cost
to sell, but not below zero.
PREMISES AND EQUIPMENT: Premises and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets.
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
difference between the reported amounts of assets and liabilities and their
income tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
8
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
RECOGNITION AND RETENTION PLAN (RRP): Deferred RRP is carried as a reduction
of stockholders' equity. The deferred RRP is being amortized as it is earned.
STOCK OPTION PLAN: In October 1995, the FASB issued SFAS No. 123, "Accounting
for Stock-Based Compensation," which establishes a fair value based method for
financial accounting and reporting for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to
acquire goods and services from nonemployees. However, the new standard allows
compensation to continue to be measured by using the intrinsic value based
method of accounting prescribed by Accounting Principle Board opinion (APB)
No. 25, "Accounting for Stock Issued to Employees," but requires expanded
disclosures. The Company has elected to apply the intrinsic value based method
of accounting for stock options issued to employees. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
EARNINGS PER SHARE: Earnings per share are calculated by dividing net income
by the weighted-average number of common shares and common equivalent shares
outstanding. The weighted-average number of shares outstanding for the
calculation of earnings per share for the years ended September 30, 1997 and
1996 was 1,477,287 and 1,411,475, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS: In accordance with generally accepted
accounting principles, the Company discloses fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. Certain financial
instruments and all nonfinancial instruments are excluded from disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents approximates
fair value.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY: Fair
values for securities, excluding restricted equity securities, are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying value of restricted equity securities
approximates fair value.
INVESTMENT IN LIMITED PARTNERSHIP: The fair value of investment in
limited partnerships approximates its carrying value.
9
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
LOANS RECEIVABLE, NET: For variable-rate loans that reprice frequently
and that have experienced no significant change in credit risk, fair
values are based on carrying values. Fair values for all other loans are
estimated based on discounted cash flows analysis, using interest rates
currently being offered for loans with similar terms to borrowers with
similar credit quality.
ACCRUED INTEREST RECEIVABLE: The fair value of accrued interest
receivable approximates its carrying amount.
DEPOSITS: Fair values disclosed for demand, savings and money market
deposits equal their carrying amounts, which represent the amount payable
on demand. Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregate expected monthly
maturities on time deposits.
OFF-BALANCE SHEET INSTRUMENTS: Fair values for off-balance sheet
instruments (guarantees, letters of credit and lending commitments) are
based on quoted fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
NOTE 2. DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the consolidated statements
of financial condition according to management's intent. The carrying amount of
securities and their approximate fair values at September 30, 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
--------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Federal Home Loan Mortgage
Corporation, Preferred Stock A $ 221,829 $18,046 $ - $ 239,875
Federal Home Loan Mortgage
Corporation, Preferred Stock 375,000 13,271 - 388,271
Federal National Mortgage
Association, Preferred Stock A 249,700 10,925 - 260,625
Federal National Mortgage
Association, Preferred Stock B 250,000 10,625 - 260,625
Bank America, Preferred Stock A 74,400 600 - 75,000
Federal Home Loan Bank Stock 1,195,500 - - 1,195,500
------------------------------------------
$2,366,429 $53,467 $ - $2,419,896
==========================================
</TABLE>
10
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS (LOSSES) FAIR VALUE
---------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Obligations of U.S. Government
corporations and agencies $ 9,091,392 $ 15,649 $ (20,034) $ 9,087,007
Obligations of state and
political subdivisions 995,985 8,585 - 1,004,570
---------------------------------------------
$10,087,377 $ 24,234 $ (20,034) $10,091,577
=============================================
Mortgage-backed securities $40,105,545 $443,262 $(432,350) $40,116,457
============================================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
--------------------------------------------- <S>
<C> <C> <C> <C>
Securities available for sale:
Federal Home Loan Mortgage
Corporation, Preferred Stock A $ 221,829 $15,671 $ $ 237,500
Federal Home Loan Mortgage
Corporation, Preferred Stock 376,500 4,125 380,625
Federal National Mortgage
Association, Preferred Stock A 249,700 300 250,000
Federal National Mortgage
Association, Preferred Stock B 250,000 547 250,547
Federal Home Loan Bank Stock 1,195,500 1,195,500
-------------------------------------------
$2,293,529 $20,643 $ $2,314,172
===========================================
</TABLE>
11
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
----------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Obligations of U.S. Government
corporations and agencies $ 8,490,707 $ 6,118 $ (90,804) $ 8,406,021
Obligations of state and
political subdivisions 993,799 2,451 996,250
----------------------------------------------
$ 9,484,506 $ 8,569 $ (90,804) $ 9,402,271
==============================================
Mortgage-backed securities $47,513,070 $320,833 $(803,996) $47,029,907
==============================================
</TABLE>
The amortized cost and fair value of securities available for sale and held to
maturity as of September 30, 1997 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities will differ from contractual maturities in
mortgage-backed securities because mortgages underlying the securities may be
called or prepaid without call or prepayment penalties. Therefore, these
securities are not included in the maturity categories in the following
maturity summary. Equity securities have also been excluded from the maturity
table because they do not have contractual maturities associated with debt
securities.
<TABLE>
<CAPTION>
Securities Available Securities Held
for Sale to Maturity
---------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Due after one year
through five years $ - $ - $ 8,589,147 $ 8,585,854
Due after five to
ten years - - 1,498,230 1,505,723
---------------------------------------------------
- - 10,087,377 10,091,577
Equity securities 2,366,429 2,419,896 - -
---------------------------------------------------
$ 2,366,429 $2,419,896 $10,087,377 $10,091,577
===================================================
Mortgage-backed securities$ - $ - $40,105,545 $40,116,457
===================================================
</TABLE>
Investment securities with carrying amounts of $1,241,604 at September 30, 1997
are pledged as collateral on public deposits and for other purposes as required
by law. There were $552,738 of public deposits at September 30, 1997.
Gross realized gains and gross realized losses on sales of available-for-sale
securities were $2,237 and none, respectively, in 1997. There were no realized
gains or losses in 1996.
12
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 3. LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------
<S> <C> <C>
First mortgage loans
(principally conventional):
Principal balances:
Secured by one to four-family residences $ 59,344,216 $ 52,685,102
Secured by other property 4,602,863 5,618,684
Construction loans 297,000 700,000
----------------------------
64,244,079 59,003,786
Less:
Undisbursed portion of construction loans (143,733) (205,744)
Net deferred loan origination fees (287,710) (302,690)
----------------------------
Total first mortgage loans 63,812,636 58,495,352
----------------------------
Consumer and other loans:
Principal balances:
Home equity and second mortgage 2,434,768 1,869,212
Other 89,798 113,525
----------------------------
2,524,566 1,982 737
Less loans in process (31,353) (81,314)
----------------------------
Total consumer and other loans 2,493,213 1,901,423
----------------------------
Less allowance for loan losses (122,500) (112,500)
----------------------------
$ 66,183,349 $ 60,284,275
============================
Activity in the allowance for loan losses is summarized as follows for the
years ended September 30:
1997 1996
----------------------------
Balance, beginning $ 112,500 $ 102,500
Provision charged to income 10,000 10,000
----------------------------
Balance, ending $ 122,500 $ 112,500
============================
</TABLE>
The Company had no impaired loans as of September 30, 1997 and 1996 and there
was no interest related to nonaccrual loans for the years then ended.
13
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Mortgage loans underlying FHLMC
pass-through securities $ 1,906,941 $ 2,481,676
Mortgage loan portfolios serviced for
the Iowa Housing Finance Authority 567,358 704,211
--------------------------
$ 2,474,299 $ 3,185,887
==========================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $11,305 and $10,327 at September 30, 1997 and 1996,
respectively.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
At cost:
Land and land improvements $ 135,517 $ 135,517
Buildings 809,179 800,826
Leasehold improvements 23,378 23,378
Furniture and equipment 490,588 497,386
--------------------------
1,458,662 1,457,107
Accumulated depreciation 1,073,590 1,021,571
--------------------------
$ 385,072 $ 435,536
==========================
</TABLE>
NOTE 6. DEPOSITS
The scheduled maturities of certificate accounts are as follows as of September
30, 1997:
September 30:
1998 $ 47,787,392
1999 26,876,855
2000 3,815,914
2001 1,623,300
2002 898,046
Thereafter 2,681,667
------------
$ 83,683,174
============
Certificate of deposit accounts with balances of $100,000 and above totaled
$5,197,766 and $4,369,073 at September 30, 1997 and 1996, respectively.
14
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 7. INCOME TAXES
Under previously existing provisions of the Internal Revenue Code and similar
sections of the Iowa income tax law, the Bank was allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through September 30, 1996, the provisions of the
Code permitted the Bank to deduct from taxable income an allowance for bad
debts based on 8% of taxable income before such deduction or actual loss
experience. The Bank used the percentage of taxable income method to compute
its deductions for the year ended September 30, 1996. Legislation passed in
1996 eliminated the percentage of taxable income method as an option for
computing bad debt deductions for the year ended September 30, 1997 and in all
future years. The Bank will still be permitted to take deductions for bad
debts, but will be required to compute such deductions using the specific
charge-off method.
Due to the 1996 legislation, the Bank must also recapture its tax bad debt
reserves which have accumulated since December 31, 1987 amounting to
approximately $539,000. The tax associated with the recaptured reserves is
approximately $201,000 and will be paid over a six year period beginning
September 30, 1997. Deferred income taxes have been previously established for
the taxes associated with the recaptured reserves.
Retained earnings at September 30, 1997 and 1996, include a bad debt deduction
of approximately $2,240,000 for which no deferred federal income tax liability
has been recognized. These amounts represent an allocation of income to bad
debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from carryback
of net operating losses would create income for tax purposes only, which would
be subject to the then current corporate income tax rate. The unrecorded
deferred income tax liability on the above amount for financial statements is
approximately $805,000 at September 30, 1997 and 1996.
The net deferred tax asset (liability) consists of the following components as
of September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Deferred tax assets:
SAIF special assessment $ $ 245,000
Other 31,000
------------------------------
276,000
------------------------------
Deferred tax liabilities:
FHLB stock dividends (104,000) (100,000)
Unrealized gain on securities
available for sale, net (21,390) (8,259)
Allowance for loan losses, net (67,000) (49,000)
Premises and equipment (29,000) (31,000)
Other (11,462) (30,000)
------------------------------
(232,852) (218,259)
------------------------------
NET DEFERRED TAX ASSET (LIABILITY) $ (232,852) $ 57,741
==============================
</TABLE>
15
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Income tax expense for the years ended September 30 is summarized as follows:
1997 1996
----------------------------
Current $ 54,309 $ 262,212
Deferred 277,462 (205,000)
----------------------------
$ 331,771 $ 57,212
============================
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before income taxes as a result
of the following for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
AMOUNT PERCENTAGE Amount Percentage
-------------------------------------
<S> <C> <C> <C> <C>
Income taxes at federal income
tax rate $ 400,801 34.0% $ 44,860 34.0%
State tax, net of federal income
tax benefit 18,111 1.5 4,400 3.3
Nondeductible expenses
36,582 3.1 55,039 41.7
RRP plan expenses (12,773) (1.1) (20,886) (15.8)
Expenses relating to abandoned
merger transaction (66,798) (5.7) - -
Tax-exempt dividends (17,466) (1.5) (14,830) (11.2)
Tax credits from housing projects (80,566) (6.8) (30,475) (23.1)
Other 53,880 4.6 19,104 14.5
------------------------------------
Federal and state income taxes $ 331,771 28.1% $ 57,212 43.4%
------------------------------------
</TABLE>
NOTE 8. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possible additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank'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 regulation to ensure capital adequacy,
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total, Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier I capital (as defined) to average
assets (as defined) and tangible capital to adjusted assets. Management
believes, as of September 30, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
16
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Total capital (to risk
weighted assets) $15,009 33.0% $3,640 8.0% $4,550 10.0%
Tier 1 Capital (to risk
weighted assets) 15,003 33.0 1,820 4.0 2,730 6.0
Tier 1 (Core) Capital
(to adjusted assets) 15,003 12.5 3,609 3.0 6,015 5.0
Tangible capital (to
adjusted assets) 15,003 12.5 1,805 1.5 - -
As of September 30, 1996:
Total capital (to risk
weighted assets) 14,312 33.7% 3,395 8.0% 4,244 10.0%
Tier 1 Capital (to risk
weighted assets) 14,316 33.7 1,698 4.0 2,546 6.0
Tier 1 (Core) Capital
(to adjusted assets) 14,316 12.0 3,590 3.0 5,984 5.0
Tangible capital (to
adjusted assets) 14,316 12.0 1,795 1.5 - -
</TABLE>
NOTE 9. EMPLOYEE BENEFIT PLAN
The Bank has a profit-sharing plan for eligible employees. The annual
contribution to the plan is the amount allowed under Internal Revenue Service
regulations which at the present time is 15% of gross salary. The Bank can
terminate the plan with a written notice to the trustee. The Bank's expense
under this plan amounted to $123,627 and $119,950 the years ended September
30, 1997 and 1996, respectively.
NOTE 10. RECOGNITION AND RETENTION PLAN (RRP)
In conjunction with the stock conversion, the Company established a RRP as
a method of providing directors, officers and other key employees of the
Company with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company. Eligible directors,
officers and other key employees of the Company will earn (i.e., become
vested in) shares of common stock covered by the award at a rate of
20% per year starting one year from the date of the grant. The maximum number
of shares with respect to which awards may be made under the RRP is 4% of the
total shares sold in the conversion. A total of 47,725 shares were issued under
the RRP. Expense of $75,972 was recorded for the RRP for each of the years
ended September 30, 1997 and 1996.
17
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 11. MARSHALLTOWN FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30, 1997 and 1996
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,030,492 $ 856,488
Securities available for sale 1,110,771 1,006,172
Securities held to maturity 1,597,321 1,491,936
Mortgage-backed securities held to maturity 682,690 845,314
Investment in limited partnerships 443,973 482,283
Investment in subsidiaries 15,006,828 14,319,130
Income tax receivable 126,221 11,690
Other assets 323,457 352,526
-----------------------------
$ 20,321,753 $ 19,365,539
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 41,024 $ 27,530
-----------------------------
Stockholders' equity:
Common stock, at par value 14,115 14,115
Additional paid-in capital 10,599,090 10,599,090
Retained earnings 9,749,169 8,902,114
Unrealized gain on securities available
for sale, net 32,077 12,384
Less deferred recognition and retention plan (113,722) (189,694)
-----------------------------
20,280,729 19,338,009
-----------------------------
$ 20,321,753 $ 19,365,539
=============================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended September 30, 1997 and 1996
1997 1996
------------------------------
<S> <C> <C>
Income:
Equity in net income of subsidiaries $ 687,023 $ 87,854
Interest 285,049 269,432
Other 100,893 26,921
------------------------------
1,072,965 384,207
Operating expenses 347,539 360,167
------------------------------
Income before income taxes (credits) 725,426 24,040
Income taxes (credits) (121,629) (50,690)
------------------------------
Net income $ 847,055 $ 74,730
==============================
</TABLE>
18
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
1997 1996
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 847,055 $ 74,730
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (687,023) (87,854)
Amortization of RRP 75,972 75,972
Net realized gain on available for sale security
(2,237) -
Loss on investment in limited partnerships 25,530 16,052
Net accretion of investment and mortgage-backed
securities premiums and discounts (12,562) (6,511)
Increase in income tax receivable (114,531) (10,690)
Decrease in other assets and liabilities, net 34,681 32,205
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 166,885 93,904
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of security available for sale 378,737 -
Proceeds from maturities of securities
held to maturity 1,500,000 1,500,000
Purchase of securities available for sale (449,400) (499,700)
Purchase of securities held to maturity (1,597,312) (1,500,000)
Principal collected on mortgage-backed
securities 167,113 104,017
Cash distributions received from limited
partnerships 12,780 1,665
Purchase of real estate acquired for investment (4,799) (12,451)
-------------------------
NET CASH PROVIDED BY (USED IN) INVESTMENT
ACTIVITIES 7,119 (406,469)
-------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 174,004 (312,565)
CASH AND CASH EQUIVALENTS
Beginning 856,488 1,169,053
-------------------------
Ending $ 1,030,492 $ 856,488
=========================
</TABLE>
19
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Company's financial
instruments as of September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,681 $ 4,681 $ 2,286 $ 2,286
Securities available for sale 2,420 2,420 2,314 2,314
Securities held to maturity 10,087 10,092 9,485 9,402
Mortgage-backed securities held
to maturity 40,106 40,116 47,513 47,030
Investment in limited
partnerships 444 444 482 500
Loans receivable, net 66,183 65,484 60,284 58,925
Accrued interest receivable 713 713 748 748
Financial liabilities:
Deposits 103,710 104,067 103,040 103,385
Off balance sheet financial
instruments:
Commitments to extend credit - - - -
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK
The Company is a party to financial instruments with off-statement of
consolidated financial condition risk in the normal course of business to meet
the financing needs of its customers. These financial instruments consist
primarily of commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of consolidated financial condition. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-statement of financial condition instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Unless noted otherwise, the Company requires collateral or other security to
support financial instruments with credit risk.
At September 30, 1997, the Company had outstanding loan commitments totaling
$1,252,700. The outstanding loan commitments consisted of $1,251,600 of fixed
rate loans with rates ranging from 7.00% to 8.625%, and $1,100 of adjustable
rate loan commitments.
20
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment letter.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but
normally includes real estate.
NOTE 14. STOCK OPTION PLAN
The Company has adopted a qualified stock option plan with 122,730 shares of
common stock reserved for the grant of options to key employees. These options
were granted at a price of $8 per share, which approximated the market value at
the date of the grant. As of September 30, 1997, options had been granted for
122,730 shares of common stock and are currently exercisable through January
2005. No options have been exercised at September 30, 1997 and 1996 and no
compensation has been recognized for the options.
NOTE 15. AGREEMENT TO MERGE AND PLAN OF REORGANIZATION
On July 1, 1997, the Company signed an "Agreement to Merge and Plan of Merger"
(the Agreement) with HMN Financial, Inc., a bank holding company headquartered
in Spring Valley, Minnesota. The Agreement calls for Company stockholders to
receive $17.51 in cash for each outstanding share of common stock. Individual
holders of options to purchase Company stock at $8 per share will have the
right to receive $9.51 in cash for each option share held at the effective date
of the Agreement. The Agreement is subject to regulatory approval and is
cancelable only if certain conditions are met, as specified in the Agreement.
The Agreement also states that the Company is obligated to pay HMN Financial,
Inc. $750,000 in the event of termination of this Agreement and there has been
no material breach by HMN Financial, Inc.
The Company's "Agreement to Merge and Plan of Reorganization" (the Agreement)
with BancSecurity Corporation dated November 3, 1995 was abandoned as
regulatory approval from the Federal Reserve Board was not received. In
accordance with the Agreement, the Company received $75,000 from BancSecurity
Corporation when the transaction was not consummated.
21
<PAGE>
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 16. PENDING ACCOUNTING PRONOUNCEMENTS AND REGULATIONS
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to all
entities that have issued publicly-held common stock or potential common stock.
SFAS No. 128 requires the entities to present basic earnings per share and
diluted earnings per share on the face of the statements of income. Basic
earnings per share replaces "primary" earnings per share and diluted earnings
per share replaces "fully diluted" earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. The Company does not expect SFAS No. 128 to materially affect its
computation of earnings per share and since the requirements of SFAS No. 128
are disclosure related, its implementation will have no impact on the Company's
financial condition or results of operations.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information About Capital Structure" (SFAS No.
129). SFAS No. 129 requires separate disclosure about the capital structure of
the entity. While this statement codifies and contains a few more specifics, it
does not expand, in any significant manner, previously existing disclosure
requirements. SFAS No. 129 is effective for periods ending after December 15,
1997. As the requirements of SFAS No. 129 are disclosure related, its
implementation will have no impact on the Company's financial condition or
results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires
that all items that are components of comprehensive income defined as "the
change in equity [net assets] of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources,
including all changes in equity during a period except those resulting from
investments by owners and distributions to owners," be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Companies will be required to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, and requires reclassification of prior periods presented. As
the requirements of SFAS No. 130 are disclosure related, its implementation
will have no impact on the Company's financial condition or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information (SFAS
No. 131). SFAS No. 131 requires that enterprises report certain financial and
descriptive information about operating segments in complete sets of financial
statements of the Company and in condensed financial statements of interim
periods issued to shareholders. It also requires that a Company report certain
information about their products and services, geographic areas in which they
operate and their major customers. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. As the requirements of SFAS No. 131 are
disclosure related, its implementation will have no impact on the Company's
financial condition or results of operations.
22
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
at September 30, 1997
<TABLE>
<CAPTION>
Pro Forma
----------------------------
ASSETS HMN MFC Adjustments Combined
----------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 9,635,956 4,681,416 14,317,372
Securities available
for sale:
Mortgage-backed and
related securities 111,117,282 0 25,343,907(1)(2) 136,461,189
Other marketable
securities 72,815,033 1,224,396 9,075,182(1)(2) 83,114,611
----------- ---------- ---------- -----------
183,932,315 1,224,396 34,419,089 219,575,800
----------- ---------- ---------- -----------
Securities held to maturity:
Mortgage-backed and
related securities 0 40,105,545 (40,105,545)(2) 0
Other marketable
securities 0 10,087,377 (10,087,377)(2) 0
----------- ---------- ---------- -----------
0 50,192,922 (50,192,922) 0
----------- ---------- ---------- -----------
Loans held for sale 2,089,733 0 2,089,733
Loans receivable, net 352,925,376 66,183,349 1,636,000 (2) 420,744,725
Federal Home Loan Bank
stock, at cost 6,236,700 1,195,500 7,432,200
Real estate, net 89,334 397,466 486,800
Premises and equipment,
net 4,230,723 385,072 370,392 (2) 4,986,187
Investment in limited
partnerships 5,580,797 443,973 6,024,770
Goodwill 4,723,042 (3) 4,723,042
Core deposit intangible 1,567,000 (4) 1,567,000
Accrued interest
receivable 3,180,525 713,098 3,893,623
Prepaid expenses and other
assets 945,436 74,223 1,019,659
----------- ----------- ---------- -----------
Total assets $568,846,895 125,491,415 (7,477,399) 686,860,911
=========== =========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $366,682,349 103,709,881 440,000 (2) 470,832,230
Federal Home Loan Bank
advances 112,007,163 0 10,000,000 (1) 122,007,163
Accrued interest payable 1,147,269 1,031,293 2,178,562
Advance payments by
borrowers for taxes
and insurance 758,067 12,342 770,409
Accrued expenses and
other liabilities 3,632,564 457,170 2,363,330 (5) 6,453,064
----------- ----------- ---------- -----------
Total liabilities 484,227,412 105,210,686 12,803,330 602,241,428
----------- ----------- ---------- -----------
Commitments and contingencies
Stockholders' equity:
HMN serial preferred stock
($.01 par value): authorized
500,000 shares; issued and
outstanding none 0 0 0
HMN common stock ($.01 par
value): authorized shares
7,000,000; issued
shares 6,085,775 60,858 14,115 (14,115) (1) 60,858
Additional paid-in
capital 59,702,833 10,599,090 (10,599,090) (1) 59,702,833
Retained earnings,
subject to certain
restrictions 58,976,197 9,749,169 (9,749,169) (1) 58,976,197
Net unrealized gain on
securities available
for sale 967,170 32,077 (32,077) (1) 967,170
Unearned employee stock
ownership plan shares (4,650,340) 0 (4,650,340)
Unearned compensation
restricted stock awards (658,817) (113,722) 113,722 (1) (658,817)
HMN treasury stock, at
cost, 1,873,939 shares (29,778,418) 0 (29,778,418)
---------- ----------- ----------- -----------
Total stockholders'
equity 84,619,483 20,280,729 (20,280,729) 84,619,483
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $568,846,895 125,491,415 (7,477,399) 686,860,911
=========== =========== =========== ===========
</TABLE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
Pursuant to the Merger and consistent with generally accepted accounting
principles ("GAAP"), certain purchase method accounting adjustments relating to
MFC will be recorded. The purchase method accounting adjustments are
preliminary estimates and are subject to revision as economic conditions change
or as more information becomes available. The purchase price 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 at a cost of $1.0 million of MFC stock which were
cancelled upon the completion of the Merger. The following notes further
explain the adjustments.
(1) Represents the planned sale of $14.8 million of securities available for
sale, the planned borrowing of $10.0 million of advances from the Federal
Home Loan Bank of Des Moines and the elimination of HMN's $1.0 million
investment in MFC common stock and the elimination of MFC's stockholders'
equity under the purchase method of accounting.
(2) Represents the mark-to-market adjustments to reflect the fair market value
of the MFC assets acquired and liabilities assumed under the purchase
method of accounting. It also transfers the held to maturity security
portfolio to the available for sale portfolio. The following summarizes
the net mark-to-market premium or (discounts) established for the
following asset categories:
Bank premises and equipment $ 370,392
Securities 73,719
Loans 1,636,000
Deposits (440,000)
----------
Total $1,640,111
==========
(3) Represents the excess of the purchase price paid for MFC over the fair
market value of the tangible and identifiable assets acquired and the fair
value of the liabilities (goodwill) assumed under the purchase method of
accounting. Goodwill is assumed to amortize on a straight-line basis over
25 years.
The merger consideration of $24.8 million plus the cancellation of 60,000
shares of MFC common stock owned by HMN with a historical cost of $1.0
million was allocated as follows:
Net assets at fair value (note 1 & 2) $21,920,840
Core deposit intangible (note 4) 1,567,000
Data processing conversion costs (note 5) (160,000)
Severance and other change of control
costs (note 5) (692,000)
Professional fees (note 5) (380,000)
Other accrued liabilities (note 5) (128,000)
Goodwill 4,723,042
Net deferred tax liabilities (note 5) (1,003,330)
----------
Purchase price $25,847,552
==========
(4) Represents core deposit intangible relating to MFC's deposits. The core
deposit intangible will be amortized using an accelerated method.
(5) Represents accruals for other Merger related costs such as data processing
conversion costs ($160,000), severance and other change of control costs
($692,000), professional fees including investment banker, accountants and
attorneys fees ($380,000), accruals for other liabilities ($128,000) and
net deferred tax liabilities of ($1,003,330).
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
HMN MFC Pro Forma
Nine Months Nine Months----------------------------
9-30-97 9-30-97 Adjustments Combined
----------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $20,730,094 3,701,845 (759,742) (1) 23,672,197
Securities available
for sale:
Mortgage-backed and
related 6,458,996 0 6,458,996
Other marketable 2,621,762 53,924 2,675,686
Securities held to maturity:
Mortgage-backed and
related 33,400 2,142,943 (769,104)(2) 1,407,239
Other marketable 10,032 493,454 2,439 (2) 505,925
Cash equivalents 225,237 190,056 415,293
Other 304,158 62,591 366,749
---------- ---------- ---------- ----------
Total interest
income 30,383,679 6,644,813 (1,526,407) 35,502,085
---------- ---------- ---------- ----------
Interest expense:
Deposits 13,993,332 4,115,712 (176,779)(3) 17,932,265
Federal Home Loan Bank
advances 4,792,552 0 450,000 (4) 5,242,552
---------- ---------- ---------- ----------
Total interest
expense 18,785,884 4,115,712 273,221 23,174,817
---------- ---------- ---------- ----------
Net interest
income 11,597,795 2,529,101 (1,799,628) 12,327,268
Provision for loan
losses 225,000 7,500 232,500
---------- ---------- ---------- ----------
Net interest
income after
provision for
loan losses 11,372,795 2,521,601 (1,799,628) 12,094,768
---------- ---------- ---------- ----------
Non-interest income:
Fees and service
charges 318,346 42,885 361,231
Securities gains, net 872,159 2,237 874,396
Gain on sales of loans 334,367 0 334,367
Other 457,786 52,793 510,579
---------- ---------- ---------- ----------
Total non-interest
income 1,982,658 97,915 2,080,573
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and
benefits 4,106,699 1,007,848 5,114,547
Occupancy 718,801 144,348 19,935 (6) 883,084
Federal deposit insurance
premiums 175,379 50,698 226,077
Advertising 214,557 40,887 255,444
Data processing 372,432 77,415 449,847
Provision for real
estate losses 3,000 0 3,000
Other 879,375 424,530 350,744 (5) 1,654,649
---------- ---------- ---------- ----------
Total non-interest
expense 6,470,243 1,745,726 370,679 8,586,648
---------- ---------- ---------- ----------
Income before income
tax expense 6,885,210 873,790 (2,170,307) 5,588,693
Income tax (benefit)
expense 2,554,400 246,526 (677,226) 2,123,700
---------- ---------- ---------- ----------
Net income $ 4,330,810 627,264 (1,493,081) 3,464,993
========== ========== ========== ==========
Primary earnings per
common share and common
share equivalents $ 1.10 0.43 0.88
===== ===== =====
Fully diluted earnings per
common share and common
share equivalents $ 1.09 0.42 0.87
===== ===== =====
Weighted average shares
outstanding:
Primary 3,938,454 1,470,989 3,938,454
Fully diluted 3,977,962 1,477,287 3,977,962
</TABLE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
HMN MFC Pro Forma
Nine Months Nine Months-------------------------
9-30-96 9-30-96 Adjustments Combined
----------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 19,009,335 3,328,393 (759,742)(1) 21,577,986
Securities available
for sale:
Mortgage-backed and
related 7,730,690 0 7,730,690
Other marketable 1,655,705 50,984 1,706,689
Securities held to maturity:
Mortgage-backed and related 719,827 2,494,344 (769,104)(2) 2,445,067
Other marketable 90,103 402,683 2,439 (2) 495,225
Cash equivalents 315,623 207,835 523,458
Other 232,453 64,014 296,467
---------- --------- ---------- ----------
Total interest income 29,753,736 6,548,253 (1,526,407) 34,775,582
---------- --------- ---------- ----------
Interest expense:
Deposits 14,281,156 4,174,507 (176,779) (3)18,278,884
Federal Home Loan Bank
advances 3,739,015 0 450,000 (3) 4,189,015
---------- --------- ---------- ----------
Total interest expense 18,020,171 4,174,507 273,221 22,467,899
---------- --------- ---------- ----------
Net interest income 11,733,565 2,373,746 (1,799,628) 12,307,683
Provision for loan losses 225,000 7,500 232,500
---------- --------- ---------- ----------
Net interest income
after provision for
loan losses 11,508,565 2,366,246 (1,799,628) 12,075,183
---------- --------- ---------- ----------
Non-interest income:
Fees and service charges 254,188 47,740 301,928
Securities gains, net 961,798 0 961,798
Gain on sales of loans 16,980 0 16,980
Other 365,879 76,754 442,633
---------- --------- ---------- ----------
Total non-interest income 1,598,845 124,494 1,723,339
---------- --------- ---------- ----------
Non-interest expense:
Compensation and benefits 3,380,843 976,553 4,357,396
Occupancy 595,216 151,283 19,935 (6) 766,434
Federal deposit insurance
premiums 636,676 180,222 816,898
SAIF special assessment 2,351,563 681,920 3,033,483
Advertising 229,735 40,851 270,586
Data processing 368,145 78,078 446,223
Other 799,710 373,518 350,744 (5) 1,523,972
---------- --------- ---------- -----------
Total non-interest
expense 8,361,888 2,482,425 370,679 11,214,992
---------- --------- ---------- -----------
Income (loss) before
income taxes 4,745,522 8,315 (2,170,307) 2,583,530
Income tax (benefit) expense 1,770,274 (12,253) (749,221) 1,008,800
---------- --------- ---------- -----------
Net income (loss) $ 2,975,248 20,568 (1,421,086) 1,574,730
========== ========= ========== ===========
Primary earnings per common
share and common share
equivalents $ 0.66 0.01 0.35
========== ========= ===========
Fully diluted earnings per
common share and common
share equivalents 0.66 0.01 0.35
========== ========= ===========
Weighted average shares
outstanding:
Primary 4,509,942 1,472,722 4,509,942
Fully diluted 4,516,499 1,473,784 4,516,499
</TABLE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 1996
<TABLE>
<CAPTION>
HMN MFC Pro Forma
Nine Months Nine Months----------------------------
12-31-96 9-30-96 Adjustments Combined
----------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable $25,721,042 4,386,435 (983,477)(1) 29,347,735
Securities available
for sale:
Mortgage-backed and
related 10,027,438 0 10,027,438
Other marketable 2,424,628 62,312 2,486,940
Securities held to
maturity:
Mortgage-backed
and related 765,120 3,383,557 (1,023,803)(2) 3,379,573
Other marketable 104,448 551,307 2,981 (2) 658,194
Cash equivalents 494,129 279,284 773,413
Other 327,520 93,316 420,836
---------- ---------- --------- ----------
Total interest
income 39,864,325 8,756,211 (2,004,299) 47,094,129
---------- ---------- --------- ----------
Interest expense:
Deposits 18,949,937 5,579,496 (212,430)(3) 24,352,654
Federal Home Loan
Bank advances 5,243,853 0 600,000 (4) 5,693,853
---------- ---------- --------- ----------
Total interest
expense 24,193,790 5,579,496 387,570 30,046,507
---------- ---------- --------- ----------
Net interest income 15,670,535 3,176,715 (2,391,869) 17,047,622
Provision for loan
losses 300,000 10,000 310,000
---------- ---------- --------- ----------
Net interest income
after provision for
loan losses 15,370,535 3,166,715 (2,391,869) 16,737,622
---------- ---------- --------- ----------
Non-interest income:
Fees and service
charges 359,249 62,661 421,910
Securities gains, net 1,029,638 0 1,029,638
Gain on sales of loans 39,306 0 39,306
Other 494,507 89,982 584,489
---------- ---------- --------- ----------
Total non-interest
income 1,922,700 152,643 2,075,343
---------- ---------- --------- ----------
Non-interest expense:
Compensation and
benefits 4,591,367 1,314,115 5,905,482
Occupancy 825,609 200,758 26,580(6) 1,046,302
Federal deposit
insurance premiums 799,890 239,406 1,039,296
SAIF special assessment 2,351,563 681,920 3,033,483
Advertising 308,464 53,995 362,459
Data processing 489,045 103,898 592,943
Other 1,142,948 593,324 467,662(5) 2,087,016
---------- ---------- ---------- ----------
Total non-interest
expense 10,508,886 3,187,416 494,242 14,066,981
---------- ---------- ---------- ----------
Income before
income tax expense 6,784,349 131,942 (2,886,111) 4,745,984
Income tax expense 2,510,000 57,212 (1,009,212) 1,558,000
---------- ---------- ---------- ----------
Net income $4,274,349 74,730 (1,876,899) 2,472,180
========== ========== ========== ==========
Primary earnings per
common share and common
share equivalents $ 0.96 0.05 0.56
========== ========== ==========
Fully diluted earnings
per common share and
common share
equivalents $ 0.95 0.05 0.55
========== ========== ==========
Weighted average
shares outstanding:
Primary 4,436,833 1,472,185 4,436,833
Fully diluted 4,509,566 1,473,784 4,509,566
</TABLE>
<PAGE>
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED STATEMENTS OF INCOME
Pursuant to the Merger and consistent with GAAP, certain adjustments will
be recorded, primarily to accrue for specific, identified costs related to the
merger of MFC. The amounts of the Merger related costs are preliminary
estimates and 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 Combined Consolidated Statement of Income for the year
ended December 31, 1996 or for the nine months ended September 30, 1997 and
1996 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.
Provided the accounting estimates related to the acquisition of MFC are not
revised, the estimated impact of amortizing goodwill and other purchase
accounting adjustments will reduce pretax income by the following amounts in
each of the following years: $1,256,000 for 1998, $593,000 for 1999, $564,000
for 2000, $426,694 for 2001 and $346,674 for 2002.
