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, 1997
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 May 2, 1997
- ----------------------------- --------------------------
Common stock, $0.01 par value 4,211,836
This Form 10-Q consists of 22 pages.
The exhibit index is on page 18.
1
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1: Financial Statements (unaudited) ------
Consolidated Balance Sheets at
March 31, 1997 and December 31,1996 3
Consolidated Statements of Income for the
Three Months Ended
March 31, 1997 and 1996 4
Consolidated Statement of Stockholders'
Equity for the Three Month Period Ended
March 31, 1997 5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997
and 1996 6
Notes to Consolidated Financial Statements 7-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
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
Item 5: Other Information 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
Assets 1997 1996
----------- -----------
Cash and cash equivalents $ 12,754,058 10,583,717
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $126,499,222 and
$134,474,167) 123,924,773 133,355,278
Other marketable securities
(amortized cost $56,174,663 and
$42,360,499) 56,223,639 42,474,810
----------- -----------
180,148,412 175,830,088
----------- -----------
Securities held to maturity:
Mortgage-backed and related securities
(estimated fair value $0 and
$1,904,993) 0 1,805,744
Other marketable securities
(estimated fair value $0 and
$1,000,550) 0 999,812
----------- -----------
0 2,805,556
----------- -----------
Loans held for sale 1,060,571 739,316
Loans receivable, net 341,104,076 349,022,236
Federal Home Loan Bank stock, at cost 5,627,100 5,434,000
Real estate, net 105,578 20,610
Premises and equipment, net 3,961,454 3,581,497
Accrued interest receivable 2,917,906 3,415,152
Deferred income taxes 46,038 0
Prepaid expenses and other assets 5,295,539 3,299,427
----------- -----------
Total assets $ 553,020,732 554,731,599
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 364,122,660 362,476,944
Federal Home Loan Bank advances 105,721,447 106,078,589
Accrued interest payable 1,476,598 1,542,773
Advance payments by borrowers for
taxes and insurance 799,372 518,911
Accrued expenses and other liabilities 2,129,007 2,014,938
----------- -----------
Total liabilities 474,249,084 472,632,155
----------- -----------
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 59,491,535 59,428,768
Retained earnings, subject to
certain restrictions 56,119,867 54,645,387
Net unrealized loss on securities
available for sale (1,506,685) (598,045)
Unearned employee stock ownership
plan shares (4,842,460) (4,938,520)
Unearned compensation restricted
stock awards (736,115) (793,289)
Treasury stock, at cost 1,875,949
and 1,651,615 shares (29,815,352) (25,705,715)
----------- -----------
Total stockholders' equity 78,771,648 82,099,444
----------- -----------
Total liabilities and
stockholders' equity $ 553,020,732 554,731,599
=========== ===========
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31,
1997 1996
-------------------------
Interest Income:
Loans receivable $ 6,908,242 6,138,747
Securities available for sale:
Mortgage-backed and related securities 2,189,210 2,773,690
Other marketable securities 585,242 404,845
Securities held to maturity:
Mortgage-backed and related securities 33,400 267,023
Other marketable securities 10,032 43,448
Cash equivalents 82,160 103,718
Other 94,961 63,981
----------- -----------
Total interest income 9,903,247 9,795,452
----------- -----------
Interest expense:
Deposits 4,572,798 4,818,284
Federal Home Loan Bank advances 1,451,400 1,061,861
----------- -----------
Total interest expense 6,024,198 5,880,145
----------- -----------
Net interest income 3,879,049 3,915,307
Provision for loan losses 75,000 75,000
----------- -----------
Net interest income after provision
for loan losses 3,804,049 3,840,307
----------- -----------
Non-interest income:
Fees and service charges 96,412 77,516
Securities gains, net 270,917 500,550
Gain on sales of loans 153,450 5,949
Other 177,515 117,389
----------- -----------
Total non-interest income 698,294 701,404
----------- -----------
Non-interest expense:
Compensation and benefits 1,315,987 1,105,995
Occupancy 241,147 196,782
Federal deposit insurance premiums 58,977 209,792
Advertising 78,137 72,685
Data processing 124,529 128,453
Provision for real estate losses 2,000 0
Other 293,665 269,113
----------- -----------
Total non-interest expense 2,114,442 1,982,820
----------- -----------
Income before income tax expense 2,387,901 2,558,891
Income tax expense 913,421 972,200
----------- -----------
Net income $ 1,474,480 1,586,691
=========== ===========
Earnings per common share and common share
equivalents $ 0.38 0.33
=========== ===========
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, 1997
(unaudited)
Net
unrealized
(loss) on
Additional securities
Common Paid-in Retained available for
Stock Capital Earnings sale
------------------------------------------------------
Balance,
December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045)
Net income 1,474,480
Change in fair value on
securities available
for sale (908,640)
Treasury stock
purchases
Amortization of
restricted stock awards
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 59,237
-------- ----------- ----------- -----------
Balance, March 31, 1997 $ 60,858 59,491,535 56,119,867 (1,506,685)
======== =========== =========== ===========
Unearned
shares
Employee Unearned
Stock Compensation Total
Ownership Restricted Treasury Stockholders'
Plan Stock Awards Stock Equity
------------------------------------------------------------
Balance,
December 31, 1996 (4,938,520) (793,289) (25,705,715) 82,099,444
Net income 1,474,480
Change in fair value on
securities available
for sale (908,640)
Treasury stock
purchases (4,109,637) (4,109,637)
Amortization of
restricted stock awards 57,174 57,174
Employee stock option
plan tax benefit 3,530
Earned employee stock
ownership plan shares 96,060 155,297
--------- -------- ---------- ----------
Balance, March 31, 1997 (4,842,460) (736,115) (29,815,352) 78,771,648
========= ======== ========== ==========
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1997 1996
-----------------------
Cash flows from operating activities:
Net income $1,474,480 1,586,691
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 75,000 75,000
Depreciation 102,879 90,866
Amortization of (discounts) premiums, net (46,804) (7,168)
Amortization of deferred loan fees (87,139) (109,000)
Provision for deferred income taxes 128,200 40,700
Securities gains, net (270,917) (500,550)
Gain on sales of real estate 0 (18,214)
Gain on sales of loans (153,450) (5,949)
Proceeds from sale of loans originated for sale 670,145 0
Amortization of restricted stock awards 57,174 58,350
Decrease in unearned ESOP shares 96,060 99,420
Earned employee stock ownership shares priced
above original cost 59,237 30,508
Decrease in accrued interest receivable 497,246 110,380
Increase (decrease) in accrued interest payable (66,175) 143,960
Equity earnings of limited partnership (73,824) 0
Increase in other assets (705,413) (226,568)
Increase in other liabilities 552,087 877,699
Other, net 33,052 (6,675)
---------- ----------
Net cash provided by operating activities 2,341,838 2,239,450
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale 15,902,046 32,850,725
Principal collected on securities available
for sale 2,949,425 3,317,661
Proceeds collected on maturity of securities
available for sale 14,650,000 4,500,000
Purchases of securities available for sale (33,086,600)(31,984,781)
Proceeds from sales of securities held to maturity 348,871 0
Principal collected on securities held to maturity 240,441 347,044
Proceeds collected on maturity of securities held
to maturity 1,000,000 0
Purchases of securities held to maturity 0 (709,765)
Purchase of interest in limited partnership (1,216,875) 0
Purchase of Federal Home Loan Bank stock (193,100) 0
Proceeds from sales of loans receivable 19,406,945 386,649
Net increase in loans receivable (17,149,212) (2,846,197)
Proceeds from sale of real estate 0 87,616
Purchases of premises and equipment (482,836) (7,304)
---------- ----------
Net cash provided by investing activities 2,369,105 5,941,648
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits 1,645,716 (5,146,166)
Purchase of treasury stock (4,109,637) (1,886,582)
Proceeds from Federal Home Loan Bank advances 36,000,000 10,800,000
Repayment of Federal Home Loan Bank advances (36,357,142) (7,183,771)
Increase in advance payments by borrowers for
taxes and insurance 280,461 277,205
---------- ----------
Net cash used by financing activities (2,540,602) (3,139,314)
---------- ----------
Increase in cash and cash equivalents 2,170,341 5,041,784
Cash and cash equivalents, beginning of period 10,583,717 4,334,694
---------- ----------
Cash and cash equivalents, end of period $ 12,754,058 9,376,478
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 6,090,373 5,736,185
Cash paid for income taxes 148,500 200,000
Supplemental noncash flow disclosures:
Loans securitized and transferred to securities
available for sale $ 4,781,034 9,694,418
Securities held to maturity transferred to
securities available for sale 1,295,147 0
Loans transferred to loans held for sale 19,380,736 0
Transfer of loans to real estate 94,164 22,715
Securities purchased with liability due to broker 0 4,881,250
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1997 and 1996
(1) HMN FINANCIAL, INC.
-------------------
The consolidated financial statements included herein are for HMN, Security
Finance Corporation (SFC), HMN Mortgage Services, Inc., Home Federal Savings
Bank (the Bank) and the Bank's wholly owned subsidiary, Osterud Insurance
Agency, Inc. 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, 1997 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 February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No.
128 establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. The Statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to APB Opinion No. 15.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997. Management is currently studying the impact of
adopting SFAS No. 128.
(4) SECURITIES HELD TO MATURITY
---------------------------
During the first quarter of 1997 HMN determined that it no longer had the
intent to hold its securities classified as held to maturity to the actual
maturity date of the securities. Therefore it sold one security and on March
31, 1997 it transferred all the remaining securities in the held to maturity
portfolio to the available
7
for sale portfolio. The following information summarizes the sale and transfer
of the securities held to maturity during the first quarter of 1997.
Unrealized
Holding
Unrealized Gain,
Amortized Fair Realized Holding Net of Tax,
Cost Value Gain Gain in Equity
------------ -------- ---------- ---------- -----------
Security sold $ 344,139 348,871 4,732
Securities transferred
to available for sale 1,223,753 1,295,147 71,394 42,641
(5) EARNINGS PER SHARE
------------------
Earnings per common share and common share equivalents for the three month
periods ended March 31, 1997 and 1996 were computed by dividing net income for
each period ($1,474,480 and $1,586,691, respectively) by the weighted average
common shares and common share equivalents outstanding (3,927,758 and
4,766,220, respectively) during each period.
(6) REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on HMN's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
on the following page) of Tangible, Core, and Risk-based capital (as defined in
the regulations) to total assets (as defined). At March 31, 1997 Management is
of the opinion that the Bank meets all capital adequacy requirements to which
it is subject.
Management believes that based upon the Bank's capital calculations at March
31, 1997 and other conditions consistent with the Prompt Corrective Actions
Provisions of the OTS regulations, the Bank would be categorized as well
capitalized.
8
At March 31, 1997 the Bank's capital amounts and ratios are presented for
actual capital, required capital, and excess capital including amounts and
ratios in order to qualify as being well capitalized under the Prompt
Corrective Actions regulations:
Actual Required
---------------------- ----------------------
Percent of Percent of
(IN THOUSANDS) Amount Assets <F1> Amount Assets <F1>
----------- ---------- ---------- ----------
Bank stockholder's equity $60,956
Plus:
Net unrealized loss on
certain securities
available for sale 1,982
Less:
Mortgage servicing
rights 418
------
Tangible capital 62,520 11.60% $ 8,085 1.50%
------
Tangible capital to
adjusted total assets 11.60%
Core capital (Tier I) 62,520 11.60% 16,170 3.00%
Tier I capital to risk-
weighted assets 26.92%
Plus:
Allowable allowance for
loan losses 2,421
------
Risk-based capital $64,941 27.96% $18,583 8.00%
======
To Be Well Capitalized
Under Prompt
Corrective Actions
Excess Capital Provisions
---------------------- ---------------------
Percent of Percent of
(in thousands) Amount Assets <F1> Amount Assets <F1>
----------- ---------- ---------- ----------
Bank stockholder's equity $
Plus:
Net unrealized loss on
certain securities
available for sale
Less:
Mortgage servicing
rights
Tangible capital 54,435 10.10%
Tangible capital to
adjusted total assets $26,951 5.00%
Core capital (Tier I) 46,350 8.60%
Tier I capital to risk-
weighted assets 13,937 6.00%
Plus:
Allowable allowance for
loan losses
Risk-based capital $46,358 19.96% $23,229 10.00%
<FN>
<F1> Based upon the Bank's adjusted total assets for the purpose of the tangible
and core capital ratios and risk-weighted assets for the purpose of the risk-
based capital ratio.
</FN>
9
(7) STOCKHOLDERS' EQUITY AND STOCK CONVERSION
------------------------------------------
During January of 1997 with Board authorization and approval from the Office of
Thrift Supervision (OTS) HMN purchased a total of 224,334 shares of its own
common stock from the open market for $4.1 million. All shares were placed in
treasury stock.
HMN FINANCIAL, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
HMN's net income is dependent primarily on its net interest income, which is
the difference between interest earned on its loans and investments and the
interest paid on interest-bearing liabilities. Net interest income is
determined by (i) the difference between the yield earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread)
and (ii) the relative amounts of interest-earning assets and interest-bearing
liabilities. HMN's interest rate spread is affected by regulatory, economic
and competitive factors that influence interest rates, loan demand and deposit
flows. Net interest margin is calculated by dividing net interest income by
the average interest-earning assets and is normally expressed as a percentage.
Net interest income and net interest margin are affected by changes in interest
rates, the volume and the mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. HMN's net income is also
affected by the generation of non-interest income, which primarily consists of
gains from the sale of securities, gains from sale of loans, service charges,
fees and other income. In addition, net income is affected by the level of
operating expenses and establishment of a provision for loan losses.
The operations of financial institutions, including the Bank, are significantly
affected by prevailing economic conditions, competition and the monetary and
fiscal policies of governmental agencies. Lending activities are influenced by
the demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest primarily on competing
investments, account maturities and the levels of personal income and savings
in the market area of the Bank.
NET INCOME
- ----------
HMN,s net income for the first quarter of 1997 was $1.5 million, a decrease of
$112,000, or 7.1%, compared to $1.6 million for the first quarter of 1996. Net
income decreased primarily due to a $132,000 increase in non-interest expense.
Earnings per common share and common share equivalents were $0.38 for the first
quarter of 1997, an increase of 15.2%, compared to $0.33 per common share and
common share equivalents for the first quarter of 1996. The increased earnings
per share occurred despite a decrease in net income due to the repurchase of
972,404 shares of HMN,s common stock from April 1, 1996 through January 31,
1997.
NET INTEREST INCOME
- -------------------
Net interest income was $3.9 million for both the first quarter of 1997 and the
first quarter of 1996. Net interest income for the two periods remained
similar despite an increase of $7.2 million in interest earning assets due to a
decrease in the net interest margin. Interest income was $9.9 million for the
first quarter of 1997 an increase of $108,000, or 1.1%, compared to $9.8
million for the same period in 1996. The increased interest income was due to
a combination of the increase in interest earning assets and a rise in the
yield on those assets. Interest expense was $6.0 million for the first quarter
of 1997, an increase of $144,000, or 2.4%, compared to $5.9 million for the
first quarter of 1996. Interest on deposits decreased by $141,000 due to a
$8.0 million decrease in average outstanding deposits for the first quarter of
1997 compared to the first quarter of 1996. Interest expense on deposits also
decreased by $104,000 due to a decrease in the rates paid on deposits during
the first quarter of 1997 compared to the first quarter of 1996. Interest
expense on Federal Home Loan Bank (FHLB) advances increased by $421,000 due to
an increase in average FHLB advances of $30.2 million for the first quarter of
1997 compared to the same quarter in 1996. However, interest expense on FHLB
advances decreased by $31,000 due to a decline in the cost of borrowing from
the FHLB in the first quarter of 1997 compared to the first quarter of 1996.
The FHLB advances
10
replaced funds lost due to deposit outflow and financed the purchase of
additional mortgage loans and the stock repurchase program.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the first quarter of 1997 and 1996 was
$75,000. The provision is the result of management's evaluation of the loan
portfolio, a historically low level of non-performing loans, minimal loan
charge-off experience, and its assessment of the general economic conditions in
the geographic area where properties securing the loan portfolio are located.
Management,s evaluation did not reveal conditions that would cause it to
increase the provision for loan losses during 1997 compared to 1996. 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:
1997 1996
--------- ---------
Balance at January 1, $ 2,340,585 2,190,664
Provision 75,000 75,000
Charge-offs 0 (1,216)
Recoveries 7,000 0
--------- ---------
Balance at March 31, $ 2,422,585 2,264,448
========= =========
NON-INTEREST INCOME
- -------------------
Non-interest income was $698,000 for the first quarter of 1997, a decrease of
$3,000, compared to $701,000 for the first quarter of 1996. The decrease was
principally due to a $230,000 decrease in gain on the sale of securities.
Economic conditions in the first quarter of 1997 did not provide HMN with an
opportunity to sell securities at a gain. During the first quarter of 1997,
HMN reviewed its loan portfolio and decided to reduce its concentration of a
certain loan product by selling $19.4 million of loans. The loan sale was the
principal reason for the increase in gain on the sale of loans of $148,000.
Other income increased by a net of $60,000 principally due to income generated
from the Bank,s interest in a mortgage servicing partnership. Fee income
increased by $19,000.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense was $2.1 million for the first quarter of 1997, an
increase of $132,000, or 6.6%, from $2.0 million for the first quarter of 1996.
Compensation and benefits expense increased by $210,000, or 6.6%, due to an
increase in HMN,s work force related to opening a mortgage banking office in
Eden Prairie, Minnesota, and normal merit and salary increases. Occupancy
expense increased $44,000 due to the addition of the Eden Prairie office and
added depreciation related to retail bank office remodeling. Federal insurance
deposit premiums decreased by $151,000 due to a decrease in the insurance rates
as the result of the Savings Association Insurance Fund becoming adequately
capitalized during the third quarter of 1996. Other non-interest expenses
increased a net of $28,000 partly due to the opening of the Eden Prairie office
and normal cost increases.
INCOME TAX EXPENSE
- ------------------
Income tax expense was $913,000 for the first quarter of 1997, a decrease of
$59,000, or 6.0%, from $972,000 for the first quarter of 1996. The decrease is
primarily due to a decrease in taxable income between the two periods.
LIQUIDITY
- ---------
For the quarter ended March 31, 1997, the net cash provided from operating
activities was $2.3 million and
11
net cash provided from investing activities was $2.4 million. For the same
period, HMN had $16.3 million in proceeds from the sale of securities and it
collected another $18.8 million from principal payments and the maturity of
securities. HMN purchased $33.1 million of securities during the first quarter
of 1997. HMN also received proceeds from the sale of loans of $19.4 million
and purchased or originated additional net loans of $17.1 million. During the
first quarter of 1997, the Bank also purchased an additional interest in a
mortgage servicing partnership for $1.2 million. During the first quarter of
1997, deposits increased by $1.6 million. During January 1997, HMN also
repurchased 224,334 shares of its own common stock for $4.1 million.
HMN has certificates of deposit with outstanding balances of $166.7 million
maturing during the next 12 months. Based upon past experience, management
anticipates that the majority of the deposits will renew for the same or
similar terms. Any funds lost from deposits which do not renew will be
replaced with deposits from other customers, advances from the FHLB, or the
sale of securities. Management does not anticipate that it will have a
liquidity problem resulting from maturing deposits.
HMN is in the process of building two new retail banking facilities in Spring
Valley and Winona, Minnesota, at an estimated aggregate cost of $3.2 million.
Occupancy is scheduled for the first quarter of 1998 and funding will come from
normal cash flows or the sale of securities.
NON-PERFORMING ASSETS
- ---------------------
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at March 31, 1997 and December 31, 1996.
March 31, December 31,
(DOLLARS IN THOUSANDS) 1997 1996
----------- ------------
Non-Accruing Loans
One-to-four family real estate $ 209 235
Nonresidential real estate 83 83
Commercial business 12 13
Consumer 22 7
---- ----
Total 326 338
---- ----
Foreclosed Assets
Real estate:
One-to-four family 110 23
---- ----
Total non-performing assets $436 $361
==== ====
Total as a percentage of
total assets 0.08% 0.07%
==== ====
Total non-performing loans $326 $338
==== ====
Total as a percentage of total
loans receivable, net 0.10% 0.10%
==== ====
Total non-performing assets at March 31, 1997 were $436,000, an increase of
$75,000, or 20.1%, from $361,000 at December 31, 1996. The net increase of
$75,000 was the result of a decrease of non-accruing loans brought about
through normal collection efforts and an increase in one-to-four family
foreclosed residential homes.
ASSET/LIABILITY MANAGEMENT
- --------------------------
HMN,s management reviews the impact that changing interest rates will have on
its net interest income projected for the next twelve months to determine if
its current level of interest rate risk is acceptable. The
12
following table projects the estimated impact on net interest income of
immediate interest rate changes called rate shocks.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 14,459 -7.40% -30.00%
+100 15,111 -3.23% -15.00%
0 15,615 0.00% 0.00%
-100 15,797 1.17% -15.00%
-200 15,772 1.01% -30.00%
The table above is only an estimate of the potential impact that changing rates
will have on net interest income. The actual new loan activity originated or
purchased and securities purchases along with actual deposit and borrowing
activity could cause the actual net interest income for the next twelve months
to be materially different from the net interest income projected above.
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 14 for table.
13
The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at March 31, 1997, 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> $ 35,651 5,197 16,534 18,324
Other marketable securities 7,948 0 15,131 25,281
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0 0
Other marketable securities 0 0 0 0
Loans held for sale, net 1,061 0 0 0
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 18,240 16,859 57,858 43,026
Adjustable rate
one-to-four family<F3> 35,041 18,457 11,814 10,120
Multi family 0 2 52 0
Fixed rate commercial real estate 132 119 404 266
Adjustable rate commercial
real estate
4,645 1,936 0 0
Commercial business 716 546 1,593 337
Consumer loans 15,793 1,122 2,134 889
Federal Home Loan Bank stock 0 0 0 0
Cash equivalents 11,754 0 0 0
------- ------- -------- -------
Total interest-earning assets 130,981 44,238 105,520 98,243
------- ------- -------- -------
Non-interest checking 2,361 0 0 0
NOW accounts 18,015 0 0 0
Passbooks 3,180 2,844 8,672 5,550
Money market accounts 1,776 1,586 4,838 3,098
Certificates 93,535 73,151 109,273 20,871
Federal Home Loan Bank advances 59,714 5,714 5,893 34,400
------- ------ ------- -------
Total interest-bearing
liabilities 178,581 83,295 128,676 63,919
------- ------- ------- -------
Interest-earning assets less
interest-bearing liabilities $ (47,600) (39,057) (23,145) 34,324
======= ======= ======= =======
Cumulative interest-rate
sensitivity gap $ (47,600) (86,657) (109,813) (75,489)
======= ======= ======= =======
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1997 (8.61)% (15.67)% (19.86)% (13.65)%
======= ======= ======= =======
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1996 (4.61) (10.66)
======= =======
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> 50,793 0 126,499
Other marketable securities 0 7,815 56,175
Securities held to maturity:
Mortgage-backed and
related securities<F1> 0 0 0
Other marketable securities 0 0 0
Loans held for sale, net 0 0 1,061
Loans receivable, net<F1><F2>
Fixed rate one-to-four family<F3> 99,797 0 235,780
Adjustable rate
one-to-four family<F3> 831 0 76,263
Multi family 0 0 54
Fixed rate commercial real estate 542 0 1,463
Adjustable rate commercial
real estate 0 0 6,581
Commercial business 58 0 3,250
Consumer loans 198 0 20,136
Federal Home Loan Bank stock 0 5,627 5,627
Cash equivalents 0 0 11,754
------- ------- -------
Total interest-earning assets 152,219 13,442 544,643
------- ------- -------
Non-interest checking 0 0 2,361
NOW accounts 0 0 18,015
Passbooks 9,865 0 30,111
Money market accounts 5,508 0 16,806
Certificates 0 0 296,830
Federal Home Loan Bank advances 0 0 105,721
Total interest-bearing
liabilities 15,373 0 469,844
Interest-earning assets less
interest-bearing liabilities 136,846 13,442 74,799
Cumulative interest-rate
sensitivity gap 61,357 74,799 74,799
Cumulative interest-rate gap as a
percentage of total assets at
March 31, 1997 11.09% 13.53% 13.53%
Cumulative interest-rate gap as a
percentage of interest-earning assets
at December 31, 1996
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>
14
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.
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.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index to Exhibits on page 18 of this report.
(b) Reports on Form 8-K. A current report on Form 8-K was filed on
April 17, 1997, reporting first quarter earnings. Filed with H-
(b)11 on April 17, 1997.
16
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: 5/13/97 /s/ Roger P. Weise
---------------------- ---------------------------
Roger P. Weise,
Chairman, President and
Chief Executive Officer
(Duly Authorized Officer)
Date: 5/13/97 /s/ James B. Gardner
---------------------- ---------------------------
James B. Gardner,
Executive Vice President
(Principal Financial Officer)
17
PAGE
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
--------- ---------------------------- -------------
10 Revised Adoption Agreement for 20
Home Federal Savings Bank Employees,
Savings & Profit Sharing Plan
and Trust
11 Computation of Earnings Per 21
Common Share
27 Financial Data Schedule 22
18