SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 1996
Common stock, .01 par value 4,666,782
This Form 10-Q consists of 90 pages.
The exhibit index is on page 19.
1
PAGE
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1: Financial Statements (unaudited)
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months Ended and Nine Months Ended
September 30, 1996 and 1995 4
Consolidated Statement of Stockholders' Equity
for the Nine Month Period Ended September 30, 1996 5
Consolidated Statements of Cash Flows for
the Nine Months Ended September 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 11-16
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
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
ASSETS 1996 1995
-----------------------------------
Cash and cash equivalents $ 17,396,371 4,334,694
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $137,847,323 and
$158,517,548) 135,191,304 158,416,201
Other marketable securities
(amortized cost $53,015,288 and
$32,247,959) 52,515,628 31,903,566
------------- -------------
187,706,932 190,319,767
------------- -------------
Securities held to maturity:
Mortgage-backed and related securities
(estimated market value $2,461,365
and $13,931,879) 2,337,548 13,744,063
Other marketable securities
(estimated market value $999,250
and $3,224,263) 999,530 3,227,729
------------- -------------
3,337,078 16,971,792
------------- -------------
Loans receivable, net 343,735,917 314,850,684
Federal Home Loan Bank stock, at cost 5,198,800 3,801,900
Real estate, net 0 279,851
Premises and equipment, net 3,544,053 3,645,536
Accrued interest receivable 3,284,857 3,381,507
Deferred income taxes 352,667 0
Prepaid expenses and other assets 828,617 362,928
------------- -------------
Total assets $ 565,385,292 537,948,659
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 363,963,098 373,539,468
Federal Home Loan Bank advances 101,832,555 68,876,978
Accrued interest payable 1,520,976 1,562,347
Advance payments by borrowers for
taxes and insurance 745,028 550,990
Accrued expenses and other liabilities 13,655,034 1,732,193
------------- -------------
Total liabilities 481,716,691 446,261,976
------------- -------------
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 59,392,608 59,285,581
Retained earnings, subject to
certain restrictions 53,346,286 50,371,038
Net unrealized loss on securities
available for sale (1,878,639) (265,358)
Unearned employee stock ownership
plan shares (5,037,910) (5,336,150)
Unearned compensation restricted
stock awards (850,463) (1,050,305)
Treasury stock, at cost 1,412,085
and 783,850 shares (21,364,139) (11,378,981)
------------- -------------
Total stockholders' equity 83,668,601 91,686,683
------------- -------------
Total liabilities and
stockholders' equity $ 565,385,292 537,948,659
============= =============
See accompanying notes to consolidated financial statements.
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------------------- -----------------------
Interest Income:
Loans receivable $6,461,279 6,009,885 19,009,335 17,192,535
Securities available for sale:
Mortgage-backed and related2,429,330 2,489,073 7,730,690 7,744,628
Other marketable 669,964 875,861 1,655,705 2,253,239
Securities held to maturity:
Mortgage-backed and related 196,050 204,919 719,827 497,746
Other marketable 14,250 82,975 90,103 333,938
Cash equivalents 149,819 76,124 315,623 348,635
Other 93,823 65,702 232,453 178,070
---------- ---------- ---------- ----------
Total interest income 10,014,515 9,804,539 29,753,736 28,548,791
========== ========== ========== ==========
Interest expense:
Deposits 4,741,907 4,786,359 14,281,156 13,703,586
Federal Home Loan Bank
advances 1,449,492 1,086,272 3,739,015 2,947,048
---------- ---------- ---------- ----------
Total interest expense 6,191,399 5,872,631 18,020,171 16,650,634
---------- ---------- ---------- ----------
Net interest income 3,823,116 3,931,908 11,733,565 11,898,157
Provision for loan losses 75,000 75,000 225,000 225,000
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 3,748,116 3,856,908 11,508,565 11,673,157
---------- ---------- ---------- ----------
Non-interest income:
Fees and service charges 94,817 89,192 254,188 242,325
Securities gains, net 192,761 148,152 961,798 136,284
Gain on sales of loans 9,896 22,391 16,980 99,341
Other 114,957 32,528 365,879 99,394
---------- ---------- ---------- ----------
Total non-interest income 412,431 292,263 1,598,845 577,344
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 1,175,725 1,108,509 3,380,843 3,046,330
Occupancy 203,071 191,718 595,216 557,575
Federal deposit insurance
premiums 212,020 205,806 636,676 602,753
SAIF assessment 2,351,563 0 2,351,563 0
Advertising 77,696 74,408 229,735 212,546
Data processing 118,949 115,520 368,145 359,202
Other 255,808 210,736 799,710 776,956
---------- ---------- ---------- ----------
Total non-interest expense 4,394,832 1,906,697 8,361,888 5,555,362
---------- ---------- ---------- ----------
Income (loss) before
income taxes (234,285) 2,242,474 4,745,522 6,695,139
Income tax (benefit) expense (89,758) 828,380 1,770,274 2,512,148
---------- ---------- ---------- ----------
Net income (loss) $ (144,527) 1,414,094 2,975,248 4,182,991
========== ========== ========== ==========
Earnings (loss) per common
share and common share
equivalents $ (0.03) 0.28 0.66 0.79
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Month Period Ended September 30, 1996
(unaudited)
Net
Unrealized
(Loss) on
Additional Securities
Common Paid-in Retained Available
Stock Capital Earnings for Sale
------- ---------- --------- ----------
Balance, December 31, 1995 $60,858 59,285,581 50,371,038 (265,358)
Net income 2,975,248
Change in unrealized
loss on securities
available for sale (1,613,281)
Treasury stock
purchases.
Stock options exercised (2,047)
Restricted stock
awards cancelled (808)
Amortization of
restricted stock awards
Restricted stock awards tax
benefit in excess of basis 13,677
Earned employee stock
ownership plan shares 96,205
------- ---------- ---------- ----------
Balance, September 30, 1996 $60,858 59,392,608 53,346,286 (1,878,639)
======= ========== ========== ==========
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 2,975,248
Change in unrealized
loss on securities
available for sale (1,613,281)
Treasury stock purchases (9,966,878) (9,966,878)
Stock options exercised 6,880 4,833
Restricted stock
awards cancelled 25,968 (25,160) 0
Amortization of
restricted stock awards 173,874 173,874
Restricted stock awards tax
benefit in excess of basis 13,677
Earned employee stock
ownership plan shares 298,240 394,445
---------- ----------- ----------- ----------
Balance, September 30,
1996 (5,037,910) (850,463) (21,364,139) 83,668,601
========== =========== =========== ==========
See accompanying note to consolidated financial statements.
5
PAGE
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
1996 1995
-------------------------
Cash flows from operating activities:
Net income $ 2,975,248 4,182,991
Adjustments to reconcile net income
to cash provided by operating activities:
Provision for loan losses 225,000 225,000
Depreciation 277,043 262,476
Amortization of (discounts) premiums, net (49,327) (62,499)
Amortization of deferred loan fees (334,698) (473,471)
Provision for deferred income taxes 190,224 281,906
Securities gains, net (961,798) (136,284)
Gain on sales of real estate (46,625) (5,958)
Gain on sales of loans (16,980) (99,341)
Proceeds from sales of loans originated for sale 943,096 0
Amortization of restricted stock awards 173,874 58,350
Amortization of unearned ESOP shares 298,240 307,280
SAIF assessment 2,351,563 0
Earned employee stock ownership shares
priced above original cost 96,205 60,729
Decrease (increase) in accrued interest receivable 96,650 (13,630)
Increase (decrease) in accrued interest payable (41,371) 730,711
Increase in other assets (81,461) (167,178)
Decrease in other liabilities (874,954) (368,598)
Other, net (54,335) (26,237)
---------- ----------
Net cash provided by operating activities 5,165,594 4,756,247
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 78,362,250 55,062,598
Principal collected on securities available
for sale 13,375,740 12,435,728
Proceeds collected on maturity of securities
available for sale 5,500,000 8,615,000
Purchases of securities available for sale (81,008,115) (69,436,467)
Principal collected on securities held to
maturity 1,336,500 693,948
Proceeds collected on maturity of securities
held to maturity 12,652,343 4,000,000
Purchase of securities held to maturity (709,765) (7,589,887)
Proceeds from sales of loans receivable 154,612 4,049,249
Purchase of Federal Home Loan Bank stock (1,396,900) (685,100)
Net increase in loans receivable (34,186,011) (34,981,518)
Proceeds from sale of real estate 379,789 110,929
Purchases of premises and equipment (175,560) (432,571)
---------- ----------
Net cash used by investing activities (5,715,117) (28,158,091)
---------- ----------
Cash flows from financing activities:
(Decrease) increase in deposits (9,576,370) 13,021,181
Purchase of treasury stock (9,966,878) (9,656,542)
Treasury stock options exercised 4,833 0
Proceeds from Federal Home Loan Bank advances 108,800,000 58,350,000
Repayment of Federal Home Loan Bank advances (75,844,423) (41,436,085)
Increase in advance payments by borrowers
for taxes and insurance 194,038 256,824
---------- ----------
Net cash provided by financing activities1 13,611,200 20,535,378
---------- ----------
Increase (decrease) in cash and cash equivalents 13,061,677 (2,866,466)
Cash and cash equivalents, beginning of period 4,334,694 12,097,156
---------- ----------
Cash and cash equivalents, end of period $ 17,396,371 9,230,690
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 18,061,542 15,919,923
Cash paid for income taxes 2,725,433 2,344,755
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale $ 15,419,810 0
Loans purchased with liability due to broker 11,000,000 0
Transfer of loans to real estate 168,187 413,853
Transfer of real estate to loans 161,953 0
Securities purchased with liability due to broker 0 1,120,250
Securities sold with asset due from broker 384,228 0
See accompanying notes to consolidated financial statements.
6
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HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
September 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.
The consolidated financial statements included herein are for HMN,
Security Finance Corporation (SFC), HMN Mortgage Services, Inc., 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 nine month periods ended September 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
PAGE
(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. The effect of adopting SFAS No. 125 on January 1, 1997 is
not anticipated to have a material impact on HMN's financial condition or
the results of its operations.
(4) EARNINGS PER SHARE
Earnings per common share and common share equivalent for the three months
ended September 30, 1996 and 1995 were computed by dividing net income
(loss) for each period ($(144,527) and $1,414,094, respectively) by the
weighted average common shares and common share equivalents outstanding
(4,185,867 and 5,125,856, respectively) during each period. Earnings per
common share and common share equivalent for the nine months ended
September 30, 1996 and 1995 were computed by dividing net income for each
period ($2,975,248 and $4,182,991, respectively) by the weighted average
common shares and common share equivalents outstanding (4,509,942 and
5,273,428, respectively) during each period.
(5) SAIF ASSESSMENT
On September 30, 1996, President Clinton signed the Savings Association
Insurance Fund (SAIF) legislation which assessed a one time charge of
$2,351,563 to the Bank in order to recapitalize the SAIF. The impact of
the assessment was to reduce earnings by approximately $1.5 million after
tax.
8
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(6) REGULATORY CAPITAL REQUIREMENTS
At September 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 September 30, 1996:
Amount Percent<F1>
(Dollars in Thousands)
Tangible Capital:
Actual $60,603 11.13%
Required 8,165 1.50
------- -----
Excess $52,438 9.63%
======= =====
Core Capital:
Actual $60,603 11.13%
Required<F2> 16,329 3.00
------- -----
Excess $44,274 8.13%
======= =====
Risk-Based Capital:
Actual $62,868 27.52%
Required<F3><F4> 18,273 8.00
------- -----
Excess $44,595 19.52%
======= =====
- ----------------------------
<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 June 30, 1996, the latest date for which such information
is available, this rule would require an $8.0 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>
9
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(7) 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 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 the first nine months of 1996, with Board authorization and
approval from the Office of Thrift Supervision (OTS), HMN purchased a
total of 626,785 shares of its common stock in the open market for
$9,966,878. All shares were placed in treasury stock. On October 3,
1996, HMN announced its intention to repurchase 467,334 shares of its
stock in the open market during the next 12 month period.
10
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HMN FINANCIAL, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
HMN's net income is dependent primarily on its net interest income, which
is the difference between interest earned on its loans and investments and
the interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between the yield earned on interest-
earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. HMN's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. Net interest margin is calculated
by dividing net interest income by the average interest-earning assets and
is normally expressed as a percentage. Net interest income and net
interest margin are affected by changes in interest rates, the volume and
the mix of interest-earning assets and interest-bearing liabilities, and
the level of non-performing assets. HMN's net income is also affected by
the generation of non-interest income, which primarily consists of gains
from the sale of securities, fees and service charges. In addition, net
income is affected by the level of operating expenses and establishment of
a provision for loan losses.
The operations of financial institutions, including the Bank, are
significantly affected by prevailing economic conditions, competition and
the monetary and fiscal policies of governmental agencies. Lending
activities are influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are influenced by
prevailing market rates of interest primarily on competing investments,
account maturities and the levels of personal income and savings in the
market area of the Bank.
NET INCOME (LOSS)
HMN's net loss for the third quarter of 1996 was $(145,000), or $(0.03)
per share, compared to net income for the same quarter of 1995 of $1.4
million, or $0.28 per share. Net income decreased by $1.6 million, or
110%, principally due to the passage of the Savings Association Insurance
Fund (SAIF) legislation which assessed a one time charge of $2.4 million
to the Bank in order to recapitalize the SAIF. The total SAIF assessment
was charged to earnings in the third quarter of 1996 and reduced the
quarterly earnings by $1.5 million after tax, or $0.34 per share. Net
income for the nine month period ended September 30, 1996 was $3.0
million, or $0.66 per share compared to the same period of 1995 of $4.2
million, or $0.79 per share. Net income for the nine month period
decreased by $1.2 million, or 28.9%, and was principally due to the SAIF
assessment which reduced earnings for the nine month period by $1.5
million after tax, or $0.32 per share. The impact of the SAIF assessment
was partially offset by an increase of $1.0 million in other non-interest
income and was partially offset by an increase of $455,000 in non-interest
expense and a decrease of $165,000 in net interest income.
11
NET INTEREST INCOME
Net interest income was $3.8 million for the third quarter of 1996, a
decrease of $109,000, or 2.8%, compared to $3.9 million for the third
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 additional advances and/or deposit growth. Comparing the
three month period ended September 30, 1996 to the same three month period
in 1995, average interest-earning assets increased by $24.9 million due
primarily to loan purchases and average interest-bearing liabilities
increased by $32.7 million due to additional advances and/or deposit
growth. The changes caused interest income for the three months ended
September 30, 1996, adjusted for interest rate changes, to increase by
$210,000 from the same period in 1995, and interest expense for the three
months ended September 30, 1996, adjusted for interest rate changes, to
increase by $319,000 for the same period in 1995. Net interest income for
the nine months ended September 30, 1996 was $11.7 million, a decrease of
$165,000, or 1.4%, from $11.9 million for the nine months ended September
30, 1995. Comparing the nine month period ended September 30, 1996 to the
same nine month period in 1995, average interest-earning assets increased
by $22.9 million due primarily to loan purchases and average interest-
bearing liabilities increased by $30.3 million due to advances and deposit
growth. As a result of the changes, interest income for the first nine
months of 1996, adjusted for interest rate changes, increased by $1.2
million for the same period in 1995 and interest expense for the first
nine months of 1996, adjusted for interest rate changes, increased by $1.4
million for the same period in 1995.
Net interest margin was 2.77%, 2.98%, 2.97%, 2.94%, and 2.98%,
respectively for the quarters ended September 30, 1996, June 30, 1996,
March 31, 1996, December 31, 1995, and September 30, 1995. Based upon the
current interest rate environment, HMN expects the net interest margin to
decline in at least the near term.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarter of 1996 and 1995 was
$75,000. The provision for loan losses for the nine months ended
September 30, 1996 and 1995 was $225,000. 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.
During the first nine months of 1996, HMN incurred the following charge-
offs on its loan portfolio:
Commercial $ 61,329
Multi-family residential 87,591
Consumer 1,216
-------
Total $ 150,136
=======
12
The charge-offs were anticipated and resulted in the removal of the
properties from the loan portfolio.
A reconciliation of HMN's allowance for loan losses is summarized as
follows:
1996 1995
------------- -------------
Balance at January 1, $ 2,190,664 1,893,143
Provision 225,000 225,000
Charge-offs (150,136) (2,612)
Recoveries 57 117
---------- ---------
Balance at September 30, $ 2,265,585 2,115,648
========== =========
NON-INTEREST INCOME
Non-interest income was $412,000 for the third quarter of 1996, an
increase of $120,000, or 41%, compared to $292,000 for the third quarter
of 1995. The increase was principally due to a $44,000 increase in gain
on the sale of securities, a $35,000 increase in commissions earned on the
sale of uninsured products and a $47,000 increase in other income which
was partially offset by a $12,000 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 securities portfolio.
Non-interest income for the nine months ended September 30, 1996 was $1.6
million, an increase of $1.0 million, or 177%, compared to $577,000 for
the nine months ended September 30, 1995. The increase was principally
due to an $826,000 increase in gain on the sale of securities, a $103,000
increase in commissions earned on the sale of uninsured products and a
$163,000 increase in other income which was partially offset by an $82,000
decrease in gain on sale of loans.
NON-INTEREST EXPENSE
Non-interest expense was $4.4 million for the third quarter of 1996, an
increase of $2.5 million, or 130%, from $1.9 million for the third quarter
of 1995. The majority of the increase in non-interest expense between the
two quarters was due to a $2.4 million special one time SAIF assessment.
Compensation and benefits expense increase by $67,000, or 6%, and was the
result of adding new employees and normal merit and salary increases.
Non-interest expense for the nine months ended September 30, 1996 was $8.4
million, an increase of $2.8 million, or 51%, from $5.6 million for the
nine months ended September 30, 1995. The principal cause for the
increase in non-interest expense between the two periods was the SAIF
assessment of $2.4 million. Compensation and benefits expense increased by
$335,000, or 11%, 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 benefit was $90,000 for the third quarter of 1996, a decrease
of $918,000, or 111%, from $828,000 for the third quarter of 1995 and is
primarily due to a decrease in taxable income related to the SAIF
assessment. Income tax expense for the nine months
13
ended September 30, 1996 was $1.8 million, a decrease of $742,000, or
30%,from $2.5 million for the same period in 1995 primarily due to the tax
impact of the SAIF assessment.
FINANCIAL CONDITION AND LIQUIDITY
For the nine months ended September 30, 1996 the net cash provided from
operating activities was $5.2 million, net cash used for investing
activities was $5.7 million and net cash provided by financing activities
was $13.6 million. HMN had $78.3 million in proceeds from the sale of
securities and it collected another $27.4 million from principal payments
and the maturity of securities. HMN purchased $81.7 million of securities
during 1996. HMN purchased or originated additional net loans of $34.2
million and had $155,000 of proceeds from the sale of loans. During 1996
deposits decreased by $9.6 million which was offset by net additional
borrowing from the Federal Home Loan Bank (FHLB) of $33.0 million. HMN
also repurchased 626,785 shares of its own common stock for $9.967
million. During October of 1996, HMN announced its intention to
repurchase 467,334 shares of common stock in the open market. The common
stock will be repurchased from the proceeds of the sale of cash
equivalents and/or securities available for sale.
HMN has committed to purchase $11.0 million of single family residential
mortgage loans from a third party broker. It is also required to pay the
$2.4 million special SAIF assessment in November of 1996. Both
obligations will be funded by the sale of cash equivalents and/or
securities available for sale.
HMN has certificates of deposit with outstanding balances of $157.2
million that mature from October of 1996 through September 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 FHLB, or will be funded through the sale of
securities. Management does not anticipate that it will have a liquidity
problem with the deposit maturities.
CURRENT REGULATORY ENVIRONMENT
Provided the SAIF assessment increases the SAIF to its proper level, the
SAIF insurance premiums for years starting after December 31, 1996 are
anticipated to decrease from the current level of 24 basis points to a
range of 5 to 10 basis points of eligible deposits.
Congress, through its Banking Committee, is studying the viability of the
current thrift charter and the related bank charter to determine if the
thrift charter is actually necessary. The study is also considering the
possibility of making a third charter which would be a combination of the
best elements of both the thrift and bank charters. The committee is
supposed to be presenting its findings to Congress in March or April of
1997. The ultimate outcome of any legislation regarding the thrift
charter will have an impact on HMN, but it is too early to determine the
nature of the impact at this time.
14
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-
performing assets in the Bank's portfolio at September 30, 1996 and
December 31, 1995.
September 30, December 31,
1996 1995
------------- -------------
(Dollars in Thousands)
Non-Accruing Loans
One-to-four family real estate $ 246 $ 196
Nonresidential real estate 84 85
Commercial business 61 128
Consumer 35 32
---- ----
Total 426 441
---- ----
Restructured loans 0 94
Foreclosed Assets
Real estate:
One-to-four family 0 315
---- ----
Total non-performing assets $ 426 $ 850
==== ====
Total as a percentage of total
assets 0.08 % 0.16 %
==== ====
Total non-performing loans $ 426 $ 535
==== ====
Total as a percentage of total
loans receivable, net 0.12 % 0.17 %
==== ====
Total non-performing assets at September 30, 1996 were $426,000, a
decrease of $424,000, or 50%, 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 16 for table.
15
PAGE
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at September 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> $ 43,417 5,546 20,445 28,184
Other marketable securities 27,717 7,691 7,713 2,997
Securities held to maturity:
Mortgage-backed and
related securities<F1> 162 247 807 554
Other marketable securities 1,000 0 0 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four
family<F3> 19,043 17,385 57,717 41,055
Adjustable rate
one-to-four family<F3> 20,241 32,883 19,762 21,536
Multi family 6 4 48 0
Fixed rate commercial
real estate 164 139 446 272
Adjustable rate commercial
real estate 6,625 67 0 0
Commercial business 289 153 290 131
Consumer loans 12,121 1,407 2,830 1,293
Federal Home Loan Bank stock 0 0 0 0
Cash equivalents 16,396 0 0 0
-------- ------- --------- --------
Total interest-
earning assets 147,181 65,522 110,058 96,022
-------- ------- --------- --------
Non-interest checking 1,975 0 0 0
NOW accounts 16,355 0 0 0
Passbooks 3,184 2,848 8,687 5,559
Money market accounts 1,833 1,640 5,000 3,200
Certificates 95,067 62,179 122,395 18,459
Federal Home Loan Bank
advances 60,511 5,714 11,608 19,000
-------- ------- -------- --------
Total interest-
bearing liabilities 178,925 72,381 147,690 46,218
-------- ------- -------- --------
Interest-earning assets less
interest-bearing liabilities$(31,744) (6,859) (37,632) 49,804
======== ======= ======== ========
Cumulative interest-rate
sensitivity gap $(31,744) (38,603) (76,235) (26,431)
======== ======= ======== ========
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1996 (5.61) % (6.83) (13.48) (4.67)
======== ======= ======== ========
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> 40,255 0 137,847
Other marketable securities 0 6,897 53,015
Securities held to maturity:
Mortgage-backed and
related securities<F1> 568 0 2,338
Other marketable securities 0 0 1,000
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 83,252 0 218,452
Adjustable rate
one-to-four family<F3> 4,818 0 99,240
Multi family 0 0 58
Fixed rate commercial real estate 512 0 1,533
Adjustable rate commercial
real estate 0 0 6,692
Commercial business 73 0 936
Consumer loans 1,439 0 19,090
Federal Home Loan Bank stock 0 5,199 5,199
Cash equivalents 0 0 16,396
------- ------- -------
Total interest-earning assets 130,917 12,096 561,796
------- ------- -------
Non-interest checking 0 0 1,975
NOW accounts 0 0 16,355
Passbooks 9,884 0 30,162
Money market accounts 5,689 0 17,362
Certificates 9 0 298,109
Federal Home Loan Bank advances 5,000 0 101,833
------- ------ -------
Total interest-bearing
liabilities 20,582 0 465,796
------- ------ -------
Interest-earning assets less
interest-bearing liabilities 110,335 12,096 96,000
======= ====== =======
Cumulative interest-rate
sensitivity gap 83,904 96,000 96,000
======= ====== =======
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1996 14.84 16.98 16.98%
======= ====== ======
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>
16
PAGE
HMN FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
Not applicable.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
Employees' Savings & Profit Sharing Plan Basic Plan Document - see
Exhibit 10. New plan adopted.
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, Item 5,
was filed on October 3, 1996, to report the intent to
repurchase up to 10%, or 467,334 shares of HMN's common
stock.
(c) Reports on Form 8-K. A current report on Form 8-K, Item 5,
was filed on October 17, 1996, to report the Company's
third quarter earnings.
17
PAGE
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMN FINANCIAL, INC.
Registrant
Date: November 14, 1996 /s/ Roger P. Weise
Roger P. Weise,
Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 1996 /s/ James B. Gardner
James B. Gardner,
Executive Vice President
(Chief Financial Officer)
18
PAGE
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
- ------ ------------------------------------- -------------
10 Employees' Savings & Profit Sharing Plan Basic 20
Plan Document (Whole plan newly adopted)
11 Computation of Earnings Per Common Share 21
27 Financial Data Schedule 22
19