SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (d) FOR THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-24100
HMN FINANCIAL, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 41-1777397
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 NORTH BROADWAY, SPRING VALLEY, MINNESOTA 55975-1223
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
(507) 346-7345
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's common stock
as of the latest practicable date.
CLASS OUTSTANDING AT MAY 3, 1996
Common stock, $0.01 par value 5,180,210
This Form 10-Q consists of 23 pages.
The exhibit index is on page 19.
1
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
Item 1: Financial Statements (unaudited)
Consolidated Balance Sheets at
March 31, 1996 and December 31,1995...................3
Consolidated Statements of Income for the
Three Months Ended
March 31, 1996 and 1995...............................4
Consolidated Statement of Stockholders' Equity
for the Three Month Period Ended
March 31,1996.........................................5
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1996 and 1995........6
Notes to Consolidated Financial Statements.........7-10
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............11-16
PART II - OTHER INFORMATION
Item 1: Legal Proceedings....................................17
Item 2: Changes in Securities................................17
Item 3: Defaults Upon Senior Securities......................17
Item 4: Submission of Matters to a Vote of Security
Holders..............................................17
Item 5: Other Information....................................17
Item 6: Exhibits and Reports on Form 8-K.....................17
Signatures.....................................................18
2
PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
ASSETS March 31, December 31,
1996 1995
----------- -----------
Cash and cash equivalents $ 9,376,478 4,334,694
Securities available for sale:
Mortgage-backed and related
securities (amortized cost
$164,339,560 and $158,517,548) 163,273,034 158,416,201
Other marketable securities
(amortized cost $32,793,446
and $32,247,959) 32,244,727 31,903,566
----------- -----------
195,517,761 190,319,767
----------- -----------
Securities held to maturity:
Mortgage-backed and related securities
(estimated market value
$14,272,794 and $13,931,879) 14,114,594 13,744,063
Other marketable securities
(estimated market value
$3,224,178 and $3,224,263) 3,226,964 3,227,729
----------- -----------
17,341,558 16,971,792
----------- -----------
Loans receivable, net 307,658,285 314,850,684
Federal Home Loan Bank stock, at cost 3,801,900 3,801,900
Real estate, net 239,839 279,851
Premises and equipment, net 3,561,974 3,645,536
Accrued interest receivable 3,271,127 3,381,507
Deferred income taxes 653,657 0
Prepaid expenses and other assets 589,496 362,928
----------- -----------
Total assets $542,012,075 537,948,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $368,393,302 373,539,468
Federal Home Loan Bank advances 72,493,207 68,876,978
Accrued interest payable 1,706,307 1,562,347
Due to Broker 4,881,250 0
Advance payments by borrowers for
taxes and insurance 828,195 550,990
Accrued expenses and other liabilities 2,830,974 1,732,193
----------- -----------
Total liabilities 451,133,235 446,261,976
----------- -----------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock:
($.01 par value): authorized
500,000 shares; issued and
outstanding none 0 0
Common stock ($.01 par value):
authorized 7,000,000 shares;
6,085,775 shares issued 60,858 60,858
Additional paid-in capital 59,316,089 59,285,581
Retained earnings, subject to
certain restrictions 51,957,729 50,371,038
Net unrealized loss on securities
available for sale (961,588) (265,358)
Unearned employee stock ownership
plan shares (5,236,730) (5,336,150)
Unearned compensation restricted
stock awards (991,955) (1,050,305)
Treasury stock, at cost 905,565
and 783,850 shares (13,265,563) (11,378,981)
----------- -----------
Total stockholders' equity 90,878,840 91,686,683
----------- -----------
Total liabilities and
stockholders' equity $542,012,075 537,948,659
=========== ===========
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31,
1996 1995
Interest Income: --------- ---------
Loans receivable $6,138,747 5,454,814
Securities available for sale:
Mortgage-backed and related securities 2,773,690 2,657,301
Other marketable securities 404,845 548,749
Securities held to maturity:
Mortgage-backed and related securities 267,023 129,823
Other marketable securities 43,448 125,753
Cash equivalents 103,718 139,596
Other 63,981 52,449
--------- ---------
Total interest income 9,795,452 9,108,485
Interest expense: --------- ---------
Deposits 4,818,284 4,286,574
Federal Home Loan Bank advances 1,061,861 834,781
--------- ---------
Total interest expense 5,880,145 5,121,355
--------- ---------
Net interest income 3,915,307 3,987,130
Provision for loan losses 75,000 75,000
--------- ---------
Net interest income after
provision for loan losses 3,840,307 3,912,130
--------- ---------
Non-interest income:
Fees and service charges 77,516 73,791
Securities gains (losses), net 500,550 (6,677)
Gain on sales of loans 5,949 0
Other 117,389 36,857
--------- ---------
Total non-interest income 701,404 103,971
--------- ---------
Non-interest expense:
Compensation and benefits 1,105,995 959,829
Occupancy 196,782 179,559
Federal deposit insurance premiums 209,792 198,473
Advertising 72,685 71,488
Data processing 128,453 122,780
Other 269,113 279,204
--------- ---------
Total non-interest expense 1,982,820 1,811,333
--------- ---------
Income before income tax expense 2,558,891 2,204,768
Income tax expense 972,200 841,343
--------- ---------
Net income $ 1,586,691 1,363,425
========= =========
Earnings per common share and common
share equivalents $ 0.33 0.25
========= =========
See accompanying notes to consolidated financial statements.
4
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Month Period Ended March 31, 1996
(unaudited)
Net unrealized
(loss) on
Additional securities
Common Paid-in Retained available for
Stock Capital Earnings sale
------- ---------- ---------- -------------
Balance,
December 31, 1995 $ 60,858 59,285,581 50,371,038 (265,358)
Net income 1,586,691
Change in unrealized
loss on securities
available for sale (696,230)
Treasury stock
purchases
Amortization of
restricted stock awards
Earned employee stock
ownership plan shares 30,508
------- ---------- ---------- ---------
Balance,
March 31, 1996 $ 60,858 59,316,089 51,957,729 (961,588)
======= ========== ========== =========
Unearned
shares
Employee Unearned
Stock Compensation Total
Ownership Restricted Treasury Stockholders'
Plan Stock Awards Stock Equity
--------- ------------ -------- ------------
Balance,
December 31, 1995 (5,336,150)(1,050,305) (11,378,981) 91,686,683
Net income 1,586,691
Change in unrealized
loss on securities
available for sale (696,230)
Treasury stock
purchases (1,886,582) (1,886,582)
Amortization of
restricted stock awards 58,350 58,350
Earned employee
stock ownership
plan shares 99,420 129,928
----------- -------- ----------- -----------
Balance,
March 31, 1996 $(5,236,730) (991,955)(13,265,563) 90,878,840
========= ======= ========== ===========
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1996 1995
---------- ----------
Cash flows from operating activities:
Net income $1,586,691 1,363,425
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 75,000 75,000
Depreciation 90,866 82,512
Amortization of (discounts)
premiums, net (7,168) 25,904
Amortization of deferred loan fees (109,000) (136,802)
Provision for deferred income taxes 40,700 66,032
Securities (gains) losses, net (500,550) 6,677
Gain on sales of real estate (18,214) (5,958)
Gain on sales of loans (5,949) 0
Amortization of restricted stock awards 58,350 0
Earned employee stock ownership shares
priced above original cost 30,508 14,351
Decrease (increase) in accrued interest
receivable 110,380 (41,557)
Increase in accrued interest payable 143,960 210,660
Increase in other assets (226,568) (242,620)
Increase in other liabilities 877,699 146,130
Other, net (6,675) (2,436)
--------- ---------
Net cash provided (used) by
operating activities 2,140,030 1,561,318
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 32,850,725 7,427,311
Principal collected on securities
available for sale 3,317,661 3,448,841
Proceeds collected on maturity of
securities available for sale 4,500,000 500,000
Purchases of securities available
for sale (31,984,781)(17,349,948)
Principal collected on securities
held to maturity 347,044 278,604
Proceeds collected on maturity of
securities held to maturity 0 1,000,000
Purchase of securities held to maturity (709,765) (2,566,225)
Proceeds from sales of loans receivable 386,649 0
Net increase in loans receivable (2,846,197) (7,315,430)
Proceeds from sale of real estate 87,616 110,929
Purchases of premises and equipment (7,304) (113,560)
---------- ----------
Net cash provided (used) by
investing activities 5,941,648 (14,579,478)
---------- ----------
Cash flows from financing activities:
(Decrease) increase in deposits (5,146,166) 6,718,351
Decrease in unearned ESOP shares 99,420 102,420
Purchase of treasury stock (1,886,582) (4,040,125)
Proceeds from Federal Home Loan Bank
advances 10,800,000 5,000,000
Repayment of Federal Home Loan Bank
advances (7,183,771) (681,102)
Increase in advance payments by
borrowers for taxes and insurance 277,205 265,020
---------- ----------
Net cash provided (used) by
financing activities (3,039,894) 7,364,564
---------- ----------
Increase (decrease) in cash
and cash equivalents 5,041,784 (5,653,596)
Cash and cash equivalents,
beginning of period 4,334,694 12,097,156
---------- ----------
Cash and cash equivalents,
end of period $9,376,478 6,443,560
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $5,736,185 4,910,695
Cash paid for income taxes 200,000 200,000
Supplemental noncash flow disclosures:
Loans securitized and transferred
to securities available for sale $9,694,418 0
Transfer of loans to real estate 22,715 115,814
Securities purchased with
liability due to broker 4,881,250 0
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1996 and 1995
(1) HMN FINANCIAL, INC.
HMN Financial, Inc. (HMN) was incorporated under the laws of the State of
Delaware for the purpose of becoming the savings and loan holding company of
Home Federal Savings Bank (the Bank) in connection with the Bank's conversion
from a federally chartered mutual savings bank to a federally chartered stock
savings bank, pursuant to its Plan of Conversion. HMN commenced on May 23,
1994, a Subscription and Community Offering of its shares in connection with
the conversion of the Bank (the Offering). The Offering was closed on June 22,
1994, and the conversion was consummated on June 29, 1994.
The consolidated financial statements included herein are for HMN, Security
Finance Corporation (SFC), the Bank and the Bank's wholly owned subsidiary,
Osterud Insurance Agency, Inc. During 1995 the Bank owned 100% of the
outstanding shares of SFC. On December 29, 1995 the Bank sold all its
outstanding shares of common stock in SFC to HMN at SFC's fair value. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(2) BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and therefore, do not include all
disclosures necessary for a complete presentation of the consolidated balance
sheets, consolidated statements of income, consolidated statements of
stockholders' equity and consolidated statements of cash flows in conformity
with generally accepted accounting principles. However, all adjustments
consisting of only normal recurring adjustments which are, in the opinion of
management, necessary for the fair presentation of the interim financial
statements have been included. The statements of income for the three month
period ended March 31, 1996 are not necessarily indicative of the results
which may be expected for the entire year.
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform with the current period presentation.
(3) NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. SFAS No. 121 applies to all entities and to long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and to long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 does not apply to financial instruments, long-term
customer relationships of a financial institution (for example, deposit base
intangibles and credit cardholder intangibles), mortgage and other servicing
rights, deferred policy acquisition costs, or deferred tax assets. Under the
provisions of SFAS No. 121, an entity shall review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 applies to financial statements issued for fiscal
years beginning after December 15, 1995, with earlier application encouraged.
The effect of adopting SFAS No. 121 on
7
January 1, 1996 did not have a material impact on HMN's financial condition or
the results of its operations.
In May 1995, the FASB issued SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING
RIGHTS. Under the provisions of SFAS No. 122, entities are required to
recognize as separate assets rights to service mortgage loans for others,
however, those servicing rights are acquired. An entity that either purchases
or originates mortgage loans and subsequently sells or securitizes the mortgage
loans and retains the mortgage servicing rights is required to allocate the
total cost of the mortgage loans to the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights) based on their relative
fair values. SFAS No. 122 also requires that capitalized mortgage servicing
rights be assessed for impairment based on the fair value of those rights. HMN
adopted SFAS No. 122 effective January 1, 1996. The effect of adopting SFAS
No. 122 did not have a material impact on HMN's financial condition or the
results of its operations.
In October 1995 the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION which establishes a fair value based method of accounting for
stock-based compensation plans. It encourages entities to adopt that method in
place of the provisions of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, for all arrangements under which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of its stock. During 1996, as
permitted by SFAS No. 123, HMN will continue using the accounting methods
prescribed by APB Opinion No. 25 and will disclose in the footnotes to the
annual report the information on a fair value basis for its stock-based
compensation plans.
(4) EARNINGS PER SHARE
Earnings per common share and common share equivalent for the three month
periods ended March 31, 1996 and 1995 were computed by dividing net income for
each period ($1,586,691 and $1,363,425, respectively) by the weighted average
common shares and common share equivalents outstanding (4,766,220 and
5,464,135, respectively) during each period.
8
(5) REGULATORY CAPITAL REQUIREMENTS
At March 31, 1996 the Bank met each of the three current minimum regulatory
capital requirements. The following table summarizes the Bank's regulatory
capital position at March 31, 1996:
AMOUNT PERCENT<F1>
(Dollars in Thousands)
Tangible Capital:
Actual $75,142 14.22%
Required 7,925 1.50
------ -----
Excess $67,217 12.72%
======= =====
Core Capital:
Actual $75,142 14.22%
Required<F2> 15,850 3.00
------ -----
Excess $59,292 11.22%
======= =====
Risk-Based Capital:
Actual $77,344 35.97%
Required<3><4> 17,204 8.00
------ -----
Excess $60,140 27.97%
======= =====
<FN>
<F1>Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
<F2> In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective on December 31, 1990. This core capital ratio is 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness ("CAMEL" rating), with a 4% to 5% core capital
requirement for all other thrifts.
<F3> Calculated based on the OTS requirement of 8% of risk-weighted assets.
<F4> Beginning March 31, 1995, a savings institution whose interest rate
risk("IRR") exposure (as calculated under OTS guidelines) exceeds 2% of
total assets may be required to deduct an IRR component in calculating its
total capital for purposes of determining whether it meets the risk-based
capital requirement. The IRR component is an amount equal to one-half of
the difference between measured IRR and 2%, multiplied by the estimated
economic value of its total assets. Based on the Bank's interest rate
risk position at December 31, 1995, the latest date for which such
information is available, this rule would require a $5.5 million deduction
from the Bank's capital for purposes of calculating risk-based capital.
The OTS currently does not require the IRR component to be deducted from
the risk-based capital calculation but may require the deduction in
accessing the Bank's individual capital requirements at some time in the
future.
</FN>
(6) STOCKHOLDERS' EQUITY AND STOCK CONVERSION
HMN was incorporated for the purpose of becoming the savings and loan
holding company of the Bank in connection with the Bank's conversion from
a federally chartered mutual savings bank to a federally chartered stock
savings bank, pursuant to a Plan of Conversion adopted on February 10,
1994. HMN commenced on May 23, 1994, a Subscription and Community
Offering (the Offering) of its shares in
9
connection with the conversion of the Bank. The Offering was closed on
June 22, 1994, and the conversion was consummated on June 29, 1994, with
the issuance of 6,085,775 shares of HMN's common stock at a price of $10
per share. Total proceeds from the conversion of $59,178,342 net of costs
relating to the conversion of $1,679,408, have been recorded as common
stock and additional paid-in capital. HMN received all of the capital
stock of the Bank in exchange for 50% of the net proceeds of the
conversion.
During February of 1996 with Board authorization and approval from the
Office of Thrift Supervision (OTS) HMN purchased a total of 121,715 shares
of its own common stock from the open market for $1.9 million. All shares
were placed in treasury stock.
10
HMN FINANCIAL, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
HMN's net income is dependent primarily on its net interest income, which
is the difference between interest earned on its loans and investments and
the interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between the yield earned on interest-
earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. HMN's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. Net interest margin is calculated
by dividing net interest income by the average interest-earning assets and
is normally expressed as a percentage. Net interest income and net
interest margin are affected by changes in interest rates, the volume and
the mix of interest-earning assets and interest-bearing liabilities, and
the level of non-performing assets. HMN's net income is also affected by
the generation of non-interest income, which primarily consists of gains
from the sale of securities, fees and service charges. In addition, net
income is affected by the level of operating expenses and establishment of
a provision for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition and
the monetary and fiscal policies of governmental agencies. Lending
activities are influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest primarily on competing investments,
account maturities and the levels of personal income and savings in the
market area of the Bank.
NET INCOME
HMN's net income for the first quarter of 1996 was $1.6 million, or $0.33
per share compared to net income for the same period of 1995 of $1.4
million, or $0.25 per share. Net income increased by $223,000, or 16.4%,
principally due to an increase of $507,000 in net security gains which was
partially offset by an increase of $146,000 in compensation and benefit
expenses.
NET INTEREST INCOME
Net interest income for the first quarter of 1996 was $3.9 million, a
decrease of $72,000, or 1.8%, from $4.0 million for the first quarter of
1995. Interest income for the first quarter of 1996 was $9.8 million, an
increase of $687,000, or 7.5%, from the $9.1 million for the first quarter
of 1995. Interest income increased by $790,000 due to additional loan
originations and loan purchases which caused the average outstanding
balance of loans receivable, net between the two quarters to increase by
$37.5 million. The average yield on the loan portfolio decreased by 15
basis points which caused interest income to decrease by $106,000. The
yield decreased because many of the loans purchased during 1995 and 1996
were adjustable
11
rate loans that had low initial rates that will adjust
upward in later years. Interest expense for the first quarter of 1996 was
$5.9 million, an increase of $759,000, or 14.8%, from $5.1 million for the
first quarter of 1995. Interest expense increased by $283,000 due to an
increase in the outstanding balance of deposits. Interest expense
increased by $248,000 because HMN paid higher interest rates in order to
retain its deposits in the face of increased competition. Interest
expense on Federal Home Loan Bank (FHLB) advances increased by $227,000
due primarily to additional borrowing from the FHLB.
Net interest margin was 2.97%, 2.94%, 2.98%, 3.05%, and 3.21%,
respectively for the quarters ended March 31, 1996, December 31, 1995,
September 30, 1995, June 30, 1995 and March 31, 1995. Based upon the
current interest rate environment HMN expects the net interest margin to
flatten or slightly decline in at least the near term.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the first quarter of 1996 and 1995 was
$75,000. The provision is the result of management's evaluation of the
loan portfolio and its assessment of the general economic conditions in
the geographic area where properties securing the loan portfolio are
located. 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:
1996 1995
----------- ----------
Balance at January 1, $ 2,190,664 1,893,143
Provision 75,000 75,000
Charge-offs (1,216) (1,034)
Recoveries 0 17
----------- ----------
Balance at March 31, $ 2,264,448 1,967,126
=========== ==========
NON-INTEREST INCOME
Non-interest income was $701,000 for the first quarter of 1996, an
increase of $597,000, or 575%, compared to $104,000 for the first quarter
of 1995. The increase was principally due to a $507,000 increase in gain
on the sale of securities, a $35,000 increase in commission on the sales
of uninsured investment products and a $42,000 non-recurring dividend
payment.
NON-INTEREST EXPENSE
Non-interest expense was $2.0 million for the first quarter of 1996, an
increase of $171,000, or 9.5%, from $1.8 million for the first quarter of
1995. Non-interest expense increased by $146,000, or 15%, due to an
increase of two employees, normal merit and salary increases and the
impact of the Recognition and Retention Plan adopted in June of 1995.
12
INCOME TAX EXPENSE
Income tax expense was $972,000 for the first quarter of 1996, an increase
of $131,000, or 15.6%, from $841,000 for the first quarter of 1995. The
increase is primarily due to an increase in taxable income between the two
periods.
FINANCIAL CONDITION AND LIQUIDITY
For the quarter ended March 31, 1996 the net cash provided from operating
activities was $2.1 million and net cash provided from investing
activities was $5.9 million. HMN had $32.9 million in proceeds from the
sale of securities and it collected another $8.1 million from principal
payments and the maturity of securities. HMN purchased $32.7 million of
securities during the first quarter of 1996. HMN purchased or originated
additional net loans of $2.8 million and had $387,000 of proceeds from the
sale of loans. During the first quarter of 1996 deposits decreased by
$5.1 million which was partially offset by net additional borrowing from
the FHLB of $3.6 million. HMN also repurchased 121,715 shares of its own
common stock for $1.9 million in the first quarter of 1996. On May 3,
1996, HMN announced its intention to repurchase 259,010 shares of its
outstanding shares in the open market over the next 12 month period.
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-
performing assets in the Bank's portfolio at March 31, 1996 and December
31, 1995.
March 31, December 31,
1996 1995
-------- -----------
(Dollars in Thousands)
Non-Accruing Loans
One-to-four family real estate $ 72 $196
Nonresidential real estate 170 85
Commercial business 127 128
Consumer 33 32
---- ----
Total 402 441
---- ----
Restructured loans 64 94
Foreclosed Assets
Real estate:
One-to-four family 274 315
---- ----
Total non-performing assets $740 $850
==== ====
Total as a percentage of
total assets 0.14% 0.16%
==== ====
Total non-performing loans $466 $535
==== ====
Total as a percentage of total
loans receivable, net 0.15% 0.17%
==== ====
13
Total non-performing assets at March 31, 1996 were $740,000 a decrease of
$110,000, or 12.9%, from $850,000 at December 31, 1995. The decrease was the
result of principal payments received as a result of the sale of properties or
loans being brought current through collection efforts.
ASSET/LIABILITY MANAGEMENT
HMN continues to focus its fixed-rate one-to-four family residential loan
program on loans with contractual terms of 20 years or less. HMN also
originates and purchases adjustable rate mortgages which have initial fixed
rate terms of one to five years and then adjust annually each year thereafter.
Refer to page 15 for table.
14
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at March 31, 1996, using certain assumptions that are described
in more detail below:
Maturing or Repricing
-------------------------------------------
Over 6
6 Months Months to Over 1-3 Over 3-5
(DOLLARS IN THOUSANDS) or less One Year Years Years
- - -----------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and
related securities<F1> $ 80,224 5,334 22,725 29,436
Other marketable securities 12,655 5,135 5,901 600
Securities held to maturity:
Mortgage-backed and
related securities<F1> 11,335 596 941 633
Other marketable securities 1,000 1,000 1,227 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 18,802 17,131 56,727 40,278
Adjustable rate
one-to-four family<F3> 22,835 19,998 15,998 11,701
Multi family 6 4 49 0
Fixed rate commercial
real estate 211 181 550 321
Adjustable rate commercial
real estate 5,016 2,160 0 0
Commercial business 282 153 305 135
Consumer loans 7,656 1,533 3,142 1,553
Federal Home Loan Bank stock 0 0 0 0
Cash equivalents 8,376 0 0 0
------- ------ ------- ------
Total interest-earning
assets 168,398 53,225 107,565 84,657
------- ------ ------- ------
Non-interest checking 2,017 0 0 0
NOW accounts 15,966 0 0 0
Passbooks 3,210 2,870 8,753 5,602
Money market accounts 1,920 1,718 5,242 3,355
Certificates 115,277 55,936 115,765 14,830
Federal Home Loan Bank advances 33,814 7,714 6,965 19,000
------- ------ ------- ------
Total interest-bearing
liabilities 172,204 68,238 136,725 42,787
------- ------ ------- ------
Interest-earning assets less
interest-bearing liabilities $ (3,806) (15,013) (29,160) 41,870
======= ====== ====== ======
Cumulative interest-rate
sensitivity gap $ (3,806) (18,819) (47,979) (6,109)
======= ====== ====== ======
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1996 (0.72)% (3.55)% (9.06)% (1.15)%
======= ====== ======= ======
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1995 (1.07) (7.53)
======= ======
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1994 (2.47) (2.26)
======= ======
Maturing or Repricing
-------------------------------------
Over 5 No Stated
(DOLLARS IN THOUSANDS) Years Maturity Total
- - ------------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and
related securities<F1> $ 26,621 0 164,340
Other marketable securities 0 8,502 32,793
Securities held to maturity:
Mortgage-backed and
related securities<F1> 610 0 14,115
Other marketable securities 0 0 3,227
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 80,925 0 213,863
Adjustable rate
one-to-four family<F3> 0 0 70,532
Multi family 0 0 59
Fixed rate commercial
real estate 501 0 1,764
Adjustable rate commercial
real estate 0 0 7,176
Commercial business 79 0 954
Consumer loans 1,690 0 15,574
Federal Home Loan Bank stock 0 3,802 3,802
Cash equivalents 0 0 8,376
------- ------ -------
Total interest-earning
assets 110,426 12,304 536,575
------- ------ -------
Non-interest checking 0 0 2,017
NOW accounts 0 0 15,966
Passbooks 9,959 0 30,394
Money market accounts 5,964 0 18,199
Certificates 9 0 301,817
Federal Home Loan Bank advances 5,000 0 72,493
------- ------- -------
Total interest-bearing
liabilities 20,932 0 440,886
------- ------- -------
Interest-earning assets less
interest-bearing liabilities $ 89,494 12,304 95,689
======= ======= =======
Cumulative interest-rate
sensitivity gap $ 83,385 95,689 95,689
======= ======= =======
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1996 15.74% 18.07% 18.07%
===== ===== =====
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1995
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1994
<FN>
<F1>Schedule prepared based upon the earlier of contractual maturity or
repricing date, if applicable, adjusted for scheduled repayments of
principal and projected prepayments of principal based upon experience.
<F2>Loans receivable are presented net of loans in process and deferred loan
fees.
<F3>Construction and development loans are all one-to-four family loans and
therefore have been included in the fixed rate one-to-four family and
adjustable rate one-to-four family lines.
</FN>
15
The preceding table was prepared utilizing the following assumptions regarding
prepayment and decay ratios which were determined by management based upon
their review of historical prepayment speeds and future prepayment projections.
Fixed rate loans were assumed to prepay at annual rates of between 5% to 24%,
depending on the coupon and period to maturity. ARMs were assumed to prepay at
annual rates of between 3% and 12%, depending on coupon and the period to
maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual
rates of between 8% and 27% depending on the coupon and the period to maturity.
Mortgage-backed securities and Collateralized Mortgage Obligations (CMOs) were
projected to have prepayments based upon the underlying collateral securing the
instrument. Certificate accounts were assumed not to be withdrawn until
maturity. Passbook and money market accounts were assumed to decay at an
annual rate of 20%.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. Although certain assets and liabilities may have similar
maturities and periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable-
rate mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the foregoing table. The
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
16
HMN FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
Not applicable
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits on page 19 of this report.
(b) Reports on Form 8-K. A current report on Form 8-K was filed on
February 9, 1996, to report the intent to repurchase 121,715
shares of HMN's
common stock.
17
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 10, 1996 /s/ Roger P. Weise
-------------------
Roger P. Weise,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 1996 /s/ James B. Gardner
---------------------
James B. Gardner,
Executive Vice President
(Principal Financial Officer)
18
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
- - ------- ----------- -------------
11 Computation of Earnings Per Common Share 21
27 Financial Data Schedule 23
19