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 June 30, 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 55975-0231
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code:
(507) 346-7345
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's common stock
as of the latest practicable date.
Class Outstanding at August 6, 1996
Common stock, .01 par value 4,673,340
This Form 10-Q consists of 87 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
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months Ended and Six Months Ended
June 30, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity
for the Six Month Period Ended June 30, 1996 5
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 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 11-15
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 2: Changes in Securities 16
Item 3: Defaults Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security
Holders 16-17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K, Form 10-C
and Form 11-K 17
Signatures 18
2
PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
ASSETS June 30, December 31,
1996 1995
------------------------
Cash and cash equivalents $ 5,942,504 4,334,694
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $151,722,163 and
$158,517,548) 148,705,801 158,416,201
Other marketable securities
(amortized cost $41,173,928 and
$32,247,959) 40,441,555 31,903,566
----------- -----------
189,147,356 190,319,767
=========== ===========
Securities held to maturity:
Mortgage-backed and related securities
(estimated market value
$13,952,026 and $13,931,879) 13,834,625 13,744,063
Other marketable securities
(estimated market value $996,540
and $3,224,263) 999,343 3,227,729
----------- -----------
14,833,968 16,971,792
=========== ===========
Loans receivable, net 331,649,722 314,850,684
Federal Home Loan Bank stock, at cost 5,157,900 3,801,900
Real estate, net 153,122 279,851
Premises and equipment, net 3,547,124 3,645,536
Accrued interest receivable 3,425,342 3,381,507
Deferred income taxes 635,326 0
Prepaid expenses and other assets 486,959 362,928
----------- -----------
Total assets $ 554,979,323 537,948,659
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 363,194,751 373,539,468
Federal Home Loan Bank advances 101,053,053 68,876,978
Accrued interest payable 1,717,330 1,562,347
Advance payments by borrowers for
taxes and insurance 517,502 550,990
Accrued expenses and other liabilities 1,233,906 1,732,193
----------- -----------
Total liabilities 467,716,542 446,261,976
=========== ===========
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: authorized
500,000 shares; issued and
outstanding none 0 0
Common stock ($.01 par value):
authorized 7,000,000 shares;
issued 6,085,775 shares 60,858 60,858
Additional paid-in capital 59,348,005 59,285,581
Retained earnings, subject to
certain restrictions 53,490,813 50,371,038
Net unrealized loss on securities
available for sale (2,231,697) (265,358)
Unearned employee stock ownership
plan shares (5,137,310) (5,336,150)
Unearned compensation restricted
stock awards (933,605) (1,050,305)
Treasury stock, shares at cost
1,164,575 and 783,850 (17,334,283) (11,378,981)
----------- -----------
Total stockholders' equity 87,262,781 91,686,683
----------- -----------
Total liabilities and stockholders'
equity $ 554,979,323 537,948,659
=========== ===========
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
June 30,
1996 1995
---------------------
Interest Income:
Loans receivable $ 6,409,310 5,727,836
Securities available for sale:
Mortgage-backed and related 2,527,670 2,598,254
Other marketable 580,897 828,629
Securities held to maturity:
Mortgage-backed and related 256,754 163,004
Other marketable 32,405 125,210
Cash equivalents 62,086 132,915
Other 74,648 59,919
--------- ---------
Total interest income 9,943,770 9,635,767
--------- ---------
Interest expense:
Deposits 4,720,966 4,630,653
Federal Home Loan Bank advances 1,227,662 1,025,995
--------- ---------
Total interest expense 5,948,628 5,656,648
--------- ---------
Net interest income 3,995,142 3,979,119
Provision for loan losses 75,000 75,000
--------- ---------
Net interest income after
provision for loan losses 3,920,142 3,904,119
--------- ---------
Non-interest income:
Fees and service charges 81,855 79,342
Securities gains (losses), net 268,487 (5,190)
Gain on sales of loans 1,135 76,951
Other 133,533 30,007
--------- ---------
Total non-interest income 485,010 181,110
--------- ---------
Non-interest expense:
Compensation and benefits 1,099,123 977,992
Occupancy 195,363 186,298
Federal deposit insurance premiums 214,864 198,474
Advertising 79,354 66,650
Data processing 120,743 120,902
Other 274,789 287,016
--------- ---------
Total non-interest expense 1,984,236 1,837,332
--------- ---------
Income before income tax expense 2,420,916 2,247,897
Income tax expense 887,832 842,425
--------- ---------
Net income $ 1,533,084 1,405,472
========= =========
Earnings per common share and common
share equivalents $ 0.34 0.27
========= =========
Six Months Ended
June 30,
1996 1995
----------------------
Interest Income:
Loans receivable $12,548,056 11,182,650
Securities available for sale:
Mortgage-backed and related 5,301,360 5,255,555
Other marketable 985,741 1,377,378
Securities held to maturity:
Mortgage-backed and related 523,777 292,827
Other marketable 75,853 250,963
Cash equivalents 165,804 272,511
Other 138,630 112,368
---------- ----------
Total interest income 19,739,221 18,744,252
---------- ----------
Interest expense:
Deposits 9,539,249 8,917,227
Federal Home Loan Bank advances 2,289,523 1,860,776
---------- ----------
Total interest expense 11,828,772 10,778,003
---------- ----------
Net interest income 7,910,449 7,966,249
Provision for loan losses 150,000 150,000
---------- ----------
Net interest income after
provision for loan losses 7,760,449 7,816,249
---------- ----------
Non-interest income:
Fees and service charges 159,371 153,133
Securities gains (losses), net 769,037 (11,867)
Gain on sales of loans 7,084 76,951
Other 250,922 66,864
---------- ----------
Total non-interest income 1,186,414 285,081
---------- ----------
Non-interest expense:
Compensation and benefits 2,205,118 1,937,821
Occupancy 392,145 365,857
Federal deposit insurance premiums 424,656 396,947
Advertising 152,039 138,138
Data processing 249,196 243,682
Other 543,902 566,220
---------- ----------
Total non-interest expense 3,967,056 3,648,665
---------- ----------
Income before income tax expense 4,979,807 4,452,665
Income tax expense 1,860,032 1,683,768
---------- ----------
Net income $ 3,119,775 2,768,897
========== ==========
Earnings per common share and common
share equivalents $ 0.67 0.52
========== ==========
See accompanying notes to consolidated financial statements.
4
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Month Period Ended June 30, 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 3,119,775
Change in unrealized
loss on securities
available for sale (1,966,339)
Treasury stock
purchases
Amortization of
restricted stock awards
Earned employee stock
ownership plan shares 62,424
------- ---------- ---------- ----------
Balance, June 30, 1996 $ 60,858 59,348,005 53,490,813 (2,231,697)
======= ========== ========== ==========
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 3,119,775
Change in unrealized
loss on securities
available for sale (1,966,339)
Treasury stock
purchases (5,955,302) (5,955,302)
Amortization of
restricted stock awards 116,700 116,700
Earned employee stock
ownership plan shares 198,840 261,264
--------- ----------- ---------- ----------
Balance, June 30, 1996 $(5,137,310) (933,605) (17,334,283) 87,262,781
========= =========== ========== ==========
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
1996 1995
------------------------
Cash flows from operating activities:
Net income $ 3,119,775 2,768,897
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 150,000 150,000
Depreciation 181,971 171,376
Amortization of (discounts) premiums, net (16,163) 32,696
Amortization of deferred loan fees (229,289) (288,648)
Provision for deferred income taxes 147,562 204,389
Securities (gains) losses, net (774,273) 11,867
Gain on sales of real estate (39,100) (5,958)
Gain on sales of loans (7,084) (76,951)
Proceeds from sales of loans originated for sale 362,070 0
Amortization of restricted stock awards 116,700 0
Amortization of unearned ESOP shares 198,840 204,850
Earned employee stock ownership shares priced
above original cost 62,424 33,941
Increase in accrued interest receivable (43,835) (533,024)
Increase in accrued interest payable 154,983 736,953
Increase in other assets (124,031) (175,822)
Increase (decrease) in other liabilities 55,481 (422,242)
Other, net (26,994) (3,517)
--------- ---------
Net cash provided by operating activities 3,289,037 2,808,807
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 49,480,583 31,993,334
Principal collected on securities available
for sale 6,740,657 6,218,086
Proceeds collected on maturity of securities
available for sale 5,500,000 700,000
Purchases of securities available for sale (53,439,412) (44,065,239)
Principal collected on securities held
to maturity 863,649 480,290
Proceeds collected on maturity of securities
held to maturity 2,000,000 1,000,000
Purchase of securities held to maturity (709,765) (5,067,445)
Proceeds from sales of loans receivable 154,612 3,038,421
Purchase of Federal Home Loan Bank stock (1,356,000) (685,100)
Net increase in loans receivable (27,035,570) (19,582,860)
Proceeds from sale of real estate 361,010 110,929
Purchases of premises and equipment (83,559) (352,980)
---------- ----------
Net cash used by investing activities (17,523,795) (26,212,564)
---------- ----------
Cash flows from financing activities:
(Decrease) increase in deposits (10,344,717) 10,269,742
Purchase of treasury stock (5,955,302) (4,040,125)
Proceeds from Federal Home Loan Bank advances 45,700,000 25,000,000
Repayment of Federal Home Loan Bank advances (13,523,925) (7,368,326)
(Decrease) increase in advance payments by
borrowers for taxes and insurance (33,488) 3,047
---------- ----------
Net cash provided by financing activities 15,842,568 23,864,338
---------- ----------
Increase in cash and cash equivalents 1,607,810 460,581
Cash and cash equivalents, beginning of period 4,334,694 12,097,156
---------- ----------
Cash and cash equivalents, end of period $ 5,942,504 12,557,737
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 11,673,789 10,041,500
Cash paid for income taxes 1,780,833 1,358,000
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale $ 9,694,418 0
Transfer of loans to real estate 168,187 115,814
Securities purchased with liability due
to broker 0 6,575,656
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
June 30, 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. The information under the
heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" is written with the presumption that the users of the
interim financial statements have read or have access to the most recent Annual
Report on Form 10-K of HMN Financial, Inc., which contains the latest audited
financial statements and notes thereto, together with "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" as of December
31, 1995 and for the year then ended. 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 and all significant intercompany accounts and transactions have been
eliminated in consolidation. The statements of income for the three month and
six month periods ended June 30, 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.
7
(3) NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES which provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components of financial
assets that existed prior to the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, and must be applied prospectively. Management is currently studying the
effect of adopting SFAS No. 125.
(4) EARNINGS PER SHARE
Earnings per common share and common share equivalent for the three months
ended June 30, 1996 and 1995 were computed by dividing net income for each
period ($1,533,084 and $1,405,472 respectively) by the weighted average common
shares and common share equivalents outstanding (4,580,792 and 5,234,242,
respectively) during each period. Earnings per common share and common share
equivalent for the six months ended June 30, 1996 and 1995 were computed by
dividing net income for each period ($3,119,775 and $2,768,897, respectively)
by the weighted average common shares and common share equivalents outstanding
(4,673,506 and 5,348,554, respectively) during each period.
8
(5) REGULATORY CAPITAL REQUIREMENTS
At June 30, 1996, the Bank met each of the three current minimum regulatory
capital requirements. The following table summarizes the Bank's regulatory
capital position at June 30, 1996:
Amount Percent<F1>
-------- ---------
(Dollars in Thousands)
Tangible Capital:
Actual $70,943 13.10%
Required 8,124 1.50
------ -----
Excess $62,819 11.60%
====== =====
Core Capital:
Actual $70,943 13.10%
Required<F2> 16,248 3.00
------ -----
Excess $54,695 10.10%
====== =====
Risk-Based Capital:
Actual $73,221 32.81%
Required<F3><F4> 17,853 8.00
------ -----
Excess $55,368 24.81%
====== =====
<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 March 31, 1996, the latest date for which such
information is available, this rule would require an $8.5 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
9
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
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 1996, with Board authorization and approval from the Office of Thrift
Supervision (OTS), HMN purchased a total of 380,725 shares of its own common
stock from the open market for $5,955,302. 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 second quarter of 1996 was $1.5 million, or $0.34 per
share compared to net income for the same quarter of 1995 of $1.4 million, or
$0.27 per share. Net income increased by $128,000, or 9.1%, principally due to
an increase of $274,000 in net security gains which was partially offset by an
increase of $121,000 in compensation and benefit expenses. Earnings per share
for the second quarter of 1996 increased $0.07, or 26%, due to the increased
earnings and the repurchase of HMN's own common stock in the open market. Net
income for the six month period ended June 30, 1996 compared to the same period
of 1995 increased by $351,000, or 12.7%, principally due to an increase of
$781,000 in net security gains which was partially offset by an increase of
$267,000 in compensation and benefit expenses.
NET INTEREST INCOME
Net interest income was $4.0 million for both the second quarter of 1996 and
the second quarter of 1995. HMN has been purchasing its own stock in the open
market at an average price that is less than its current book value. The
balance sheet impact of the stock repurchase program has been to reduce equity
and replace it with
11
additional advances and/or deposit growth. Comparing the three month period
ended June 30, 1996 to the same three month period in 1995, average interest-
earning assets increased by $16.2 million due primarily to loan purchases and
average interest-bearing liabilities increased by $24.9 million due to advances
and deposit growth. The changes caused interest income for the three months
ended June 30, 1996, adjusted for interest rate changes, to increase by
$308,000 for the same period in 1995, and interest expense for the three months
ended June 30, 1996, adjusted for interest rate changes, to increase by
$292,000 for the same period in 1995. Net interest income for the six months
ended June 30, 1996 was $7.91 million, a decrease of $56,000, or 0.7%, from
$7.97 million for the six months ended June 30, 1995. Comparing the six month
period ended June 30, 1996 to the same six month period in 1995, average
interest-earning assets increased by $21.8 million due primarily to loan
purchases and average interest-bearing liabilities increased by $29.2 million
due to advances and deposit growth. As a result of the changes, interest
income for the first six months of 1996, adjusted for interest rate changes,
increased by $995,000 for the same period in 1995 and interest expense for the
first six months of 1996, adjusted for interest rate changes, increased by
$1,051,000 for the same period in 1995.
Net interest margin was 2.98%, 2.97%, 2.94%, 2.98% and 3.05%, respectively for
the quarters ended June 30, 1996, March 31, 1996, December 31, 1995, September
30, 1995 and June 30, 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 second quarter of 1996 and 1995 was
$75,000. The provision for loan losses for the six months ended June 30, 1996
and 1995 was $150,000. The provision is the result of management's evaluation
of the loan portfolio, a historically low level of non-performing loans,
minimal loan charge off experience, and its assessment of the general economic
conditions in the geographic area where properties securing the loan portfolio
are located. Management's evaluation did not reveal conditions that would
cause it to increase the provision for loan losses during 1996 compared to
1995. 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 150,000 150,000
Charge-offs (1,216) (1,034)
Recoveries 23 67
---------- ----------
Balance at June 30, $ 2,339,471 2,042,176
========== ==========
NON-INTEREST INCOME
Non-interest income was $485,000 for the second quarter of 1996, an increase of
$304,000, or 168%, compared to $181,000 for the second quarter of 1995. The
increase was principally due to a $274,000 increase in gain on the sale of
securities, a $33,000 increase in commissions earned on the sale of uninsured
products and a
12
$71,000 increase in other income which was partially offset by a $76,000
decrease in gain on sale of loans. During 1996 fixed rate and floating rate
collateralized mortgage obligation securities (CMOs) and other securities were
sold in order to assist in funding the purchase and origination of loans and to
change the interest rate risk profile of the available for sale security
portfolio. Non-interest income for the six months ended June 30, 1996 was
$1.2 million, an increase of $901,000, or 316%, compared to $285,000 for the
six months ended June 30, 1995. The increase was principally due to a $781,000
increase in gain on the sale of securities, a $69,000 increase in commissions
earned on the sale of uninsured products and a $115,000 increase in other
income which was partially offset by a $70,000 decrease in gain on sale of
loans.
NON-INTEREST EXPENSE
Non-interest expense was $1.98 million for the second quarter of 1996, an
increase of $147,000, or 8%, from $1.84 million for the second quarter of 1995.
The majority of the increase in non-interest expense between the two quarters
was due to a $121,000, or 12.4%, increase in compensation and benefits and was
the result of adding new employees, normal merit and salary increases and the
impact of awards granted under the Recognition and Retention Plan adopted in
June of 1995. Non-interest expense for the six months ended June 30, 1996 was
$3.967 million, an increase of $318,000, or 8.7%, from $3.649 million for the
six months ended June 30, 1995. The principal cause for the increase in non-
interest expense between the two periods was due to a $267,000, or 13.8%,
increase in compensation and benefits expense and was the result of adding new
employees, normal merit and salary increases and the impact of awards granted
under the Recognition and Retention Plan adopted in June of 1995.
INCOME TAX EXPENSE
Income tax expense was $888,000 for the second quarter of 1996, an increase of
$45,000, or 5.4%, from $842,000 for the second quarter of 1995 and is primarily
due to an increase in taxable income between the two periods. Income tax
expense for the six months ended June 30, 1996 was $1.9 million, an increase of
$176,000, or 10.5%, from $1.7 million for the same period in 1995 primarily due
to an increase in taxable income.
FINANCIAL CONDITION AND LIQUIDITY
For the six months ended June 30, 1996 the net cash provided from operating
activities was $3.3 million, net cash used for investing activities was $17.5
million and net cash provided by financing activities was $15.8 million. HMN
had $49.5 million in proceeds from the sale of securities and it collected
another $15.1 million from principal payments and the maturity of securities.
HMN purchased $54.1 million of securities during 1996. HMN purchased or
originated additional net loans of $27.0 million and had $517,000 of proceeds
from the sale of loans. During 1996 deposits decreased by $10.3 million which
was offset by net additional borrowing from the FHLB of $32.2 million. HMN
also repurchased 380,725 shares of its own common stock for $5.955 million
during 1996. During July of 1996, HMN completed the purchase of another
240,060 shares of its own common stock in the open market.
13
HMN has certificates of deposit with outstanding balances of $155.8 million
that mature from July of 1996 through June 30, 1997. Based upon past
experience management anticipates that the majority of the deposits will renew
for another term with the Bank. Any deposits which do not renew will be
replaced with deposits from other customers, or funded with advances from the
Federal Home Loan Bank, or will be funded through the sale of securities.
Management does not anticipate that it will have a liquidity problem with the
deposit maturities.
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at June 30, 1996 and December 31, 1995.
June 30, December 31,
1996 1995
---------- ----------
(Dollars in Thousands)
Non-Accruing Loans
One-to-four family real estate $ 20 $ 196
Nonresidential real estate 169 85
Commercial business 116 128
Consumer 10 32
---- ----
Total 315 441
---- ----
Restructured loans 35 94
Foreclosed Assets
Real estate:
One-to-four family 173 315
---- ----
Total non-performing assets $ 523 $ 850
==== ====
Total as a percentage of total assets 0.09 % 0.16 %
==== ====
Total non-performing loans $ 350 $ 535
==== ====
Total as a percentage of total loans
receivable, net 0.11 % 0.17 %
==== ====
Total non-performing assets at June 30, 1996 were $523,000, a decrease of
$327,000, or 38.5%, 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 June 30, 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> $ 64,704 5,129 17,728 28,256
Other marketable securities 22,741 4,340 5,700 1,004
Securities held to maturity:
Mortgage-backed and
related securities<F1> 8,868 2,926 881 595
Other marketable securities 0 999 0 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 18,960 17,308 57,445 40,968
Adjustable rate
one-to-four family<F3> 20,681 32,707 18,447 16,493
Multi family 6 4 48 0
Fixed rate commercial
real estate 216 185 578 336
Adjustable rate commercial
real estate 5,034 2,087 0 0
Commercial business 307 158 293 131
Consumer loans 9,924 1,452 2,925 1,352
Federal Home Loan Bank stock 0 0 0 0
Cash equivalents 4,942 0 0 0
------- ------ ------- ------
Total interest-earning
assets 156,383 67,295 104,045 89,135
------- ------ ------- ------
Non-interest checking 2,228 0 0 0
NOW accounts 15,804 0 0 0
Passbooks 3,246 2,904 8,854 5,667
Money market accounts 1,814 1,622 4,947 3,166
Certificates 101,145 54,669 124,550 16,868
Federal Home Loan Bank advances 64,731 714 11,608 19,000
------- ------ ------- ------
Total interest-bearing
liabilities 188,968 59,909 149,959 44,701
------- ------ ------- ------
Interest-earning assets less
interest-bearing liabilities $(32,585) 7,386 (45,914) 44,434
======= ====== ======= ======
Cumulative interest-rate
sensitivity gap $(32,585) (25,199) (71,113) (26,679)
======= ====== ======= ======
Cumulative interest-rate gap as a
percentage of total assets at
June 30, 1996 (5.87) (4.54) (12.81) (4.81)
======= ====== ======= ======
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1995 (1.07) (7.53)
======= ======
Cumulative interest-rate gap as a
percentage of interest-earning
assets at December 31, 1994 (2.47) (2.26)
======= ======
Over 5 No Stated
(DOLLARS IN THOUSANDS) Years Maturity Total
- ----------------------------------------------------------------------------
Securities available for sale:
Mortgage-backed and
related securities<F1> 35,905 0 151,722
Other marketable securities 0 7,389 41,174
Securities held to maturity:
Mortgage-backed and
related securities<F1> 565 0 13,835
Other marketable securities 0 0 999
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 82,788 0 217,469
Adjustable rate
one-to-four family<F3> 412 644 89,384
Multi family 0 0 58
Fixed rate commercial real estate 541 0 1,856
Adjustable rate commercial
real estate 0 0 7,121
Commercial business 75 0 964
Consumer loans 1,484 0 17,137
Federal Home Loan Bank stock 0 5,158 5,158
Cash equivalents 0 0 4,942
------- ------- -------
Total interest-earning assets 121,770 13,191 551,819
------- ------- -------
Non-interest checking 0 0 2,228
NOW accounts 0 0 15,804
Passbooks 10,074 0 30,745
Money market accounts 5,628 0 17,177
Certificates 9 0 297,241
Federal Home Loan Bank advances 5,000 0 101,053
------- ------ -------
Total interest-bearing
liabilities 20,711 0 464,248
------- ------ -------
Interest-earning assets less
interest-bearing liabilities 101,059 13,191 87,571
======= ====== =======
Cumulative interest-rate
sensitivity gap 74,380 87,571 87,571
======= ====== =======
Cumulative interest-rate gap as a
percentage of total assets at
June 30, 1996 13.40 15.78 15.78 %
======= ====== =======
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
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.
The Second Annual Meeting of Stockholders of HMN Financial, Inc.
(hereinafter referred to as "the Company") was held on April 23,
1996, at 10:00 a.m. at the Best Western Apache Hotel, located at 1517
S.W. 16th Street, Rochester, Minnesota, pursuant to due notice.
According to the certified list of stockholders which was presented
at the Meeting, there were outstanding and entitled to vote at the
Meeting, 5,180,210 shares of Common Stock of the Company.
There were present at the Meeting in person or by proxy the holders
of 4,476,499 shares of Common Stock of the Company constituting a
quorum and more than a majority of the outstanding shares entitled to
vote.
The following is a record of the votes cast in the election of
directors of the Company:
Broker
For Vote Withheld Non-Votes
--------- ------------- ---------
James B. Gardner 4,433,957 42,542 ---
Timothy P. Geisler 4,429,477 47,022 ---
Accordingly, the individuals named above were declared to be duly
elected directors of the Company for terms to expire in 1999,
respectively.
The following is a record of votes cast in respect of the proposal to
ratify the appointment of KPMG Peat Marwick LLP as the Company's
auditors for the fiscal year ending December 31, 1996.
Percentage of Votes
Number Actually
of Votes Cast
---------- ------------------
FOR 4,456,230 99.5%
AGAINST 2,325 0.1%
ABSTAIN 17,944 0.4%
16
Percentage of Votes
Number Actually
of Votes Cast
---------- ------------------
BROKER
NON-VOTES 0 0.0%
Accordingly, the proposal described above was declared to be duly
adopted by the stockholders of the Company.
ITEM 5. Other Information.
(a) Amendment #5 to the Home Federal Savings Bank 401(k) Plan.
(b) Amendment #6 to the Home Federal Savings Bank 401(k) Plan.
(c) Service Agreement for Home Federal Savings Bank Employee's
Savings and Profit Sharing Plan.
(d) Trust Agreement between Home Federal Savings Bank and Mellon
Bank, N.A.
(e) Adoption Agreement for Home Federal Savings Bank Employee's
Savings and Profit Sharing Plan and Trust.
(f) Service Agreement for Home Federal Savings Bank Employee Stock
Ownership Plan.
ITEM 6. Exhibits and Reports on Form 8-K, Form 10-C and Form 11-K.
(a) Exhibits. See Index to Exhibits on page 19 of this report.
(b) Reports on Form 10-C. A current report on Form 10-C was filed
on February 15, 1996, to report completion of the repurchase of
121,715 shares of HMN's common stock which occurred on February
14, 1996.
(c) Reports on Form 8-K. A current report on Form 8-K was filed on
May 3, 1996, to report the intent to repurchase 259,010 shares
of HMN's common stock.
(d) Reports on Form 10-C. A current report on Form 10-C was filed
on May 21, 1996, to report completion of the repurchase of
259,010 shares of HMN's common stock which occurred on May 20,
1996.
(e) Reports on Form 11-K. An annual report on Form 11-K was filed
on June 27, 1996, for the fiscal year ended December 31, 1995.
(f) Reports on Form 8-K. A current report on Form 8-K was filed on
June 27, 1996 to report the intent to repurchase 246,060 shares
of HMN's common stock.
(g) Reports on Form 10-C. A current report on Form 10-C was filed
on July 15, 1996, to report completion of the repurchase of
246,060 shares of HMN's common stock which occurred on July 11,
1996.
(h) Reports on Form 8-K. A current report on Form 8-K was filed on
July 18, 1996, to report the Company's second quarter, semi-
annual earnings.
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: August 12, 1996 /s/ Roger P. Weise
-------------- ----------------------
Roger P. Weise,
Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 1996 /s/ James B. Gardner
-------------- ----------------------
James B. Gardner,
Executive Vice President
(Chief Financial Officer)
18
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
- ------ ------------- ---------------
5a Amendment #5 to the Home Federal Savings Bank 401(k) Plan. 20
5b Amendment #6 to the Home Federal Savings Bank 401(k) Plan. 21
5c Service Agreement for Home Federal Savings Bank Employee's
Savings and Profit Sharing Plan. 22
5d Trust Agreement between Home Federal Savings Bank and
Mellon Bank, N.A. 23
5e Adoption Agreement for Home Federal Savings Bank Employee's
Savings and Profit Sharing Plan and Trust. 24
5f Service Agreement for Home Federal Savings Bank Employee
Stock Ownership Plan. 25
11 Computation of Earnings Per Common Share 26
27 Financial Data Schedule 27
19