SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________________ to _____________________________ Commission file number 0-24100 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: Home Federal Savings Bank Employees' Savings and Profit Sharing Plan B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: HMN Financial, Inc. 101 North Broadway Spring Valley, MN 55975-0231 PAGE REQUIRED INFORMATION The financial statements filed as a part of the annual report of the plan include: 1. Audited statements of net assets available for benefits as filed under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); 2. Audited statements of changes in net assets available for benefits as filed under ERISA. -2- PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Financial Statements December 31, 1996 and 1995 KPMG Peat Marwick LLP 4200 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 INDEPENDENT AUDITORS' REPORT The Plan Administrator Home Federal Savings Bank Employee's Savings and Profit Sharing Plan: We have audited the accompanying statements of net assets available for benefits of the Home Federal Savings Bank Employees' Savings and Profit Sharing Plan (the Plan) as of December 31, 1996 and 1995, and the related statements of changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1996 and 1995, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The fund information in the statements of net assets available for benefits and the statements of changes in net assets available for benefits of each fund. The supplemental schedules and fund information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota June 13, 1997 Member Firm of KPMG International HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Net Assets Available for Benefits December 31, 1996 Participant Directed Funds ------------------------------------------------------- S&P Midcap S&P 500 Stock Stock Stable Money Bond Index Index Value Market Market Fund Fund Fund Fund Fund - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $810,844) $156,747 214,731 77,542 27,069 45,003 Contributions receivable: Employer -0- -0- -0- -0- -0- Employee -0- -0- -0- -0- -0- - ----------------------------------------------------------------------------- Net assets available for benefits $156,747 214,731 77,542 27,069 45,003 - ----------------------------------------------------------------------------- Participant Directed Funds ---------------------------------------------------- HMN Financial, Inc. Participant Stock Loans Unallocated Total - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $810,844) 371,719 4,931 -0- 897,742 Contributions receivable: Employer -0- -0- 35,288 35,288 Employee -0- -0- 13,062 13,062 - ----------------------------------------------------------------------------- Net assets available for benefits $371,719 4,931 48,350 946,092 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Net Assets Available for Benefits December 31, 1995 Participant Directed Funds ---------------------------------------------------- Nationwide Federated Federated Fidelity Pooled Capital Short Term Fidelity Equity GIC Preservation Income Asset Income II Fund Fund Fund Manager Fund - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $586,953)$112,595 22,519 14,169 122,233 106,477 Contributions receivable: Employer -0- -0- -0- -0- -0- - ----------------------------------------------------------------------------- Net assets available for benefits $112,595 22,519 14,169 122,233 106,477 - ----------------------------------------------------------------------------- Participant Directed Funds ------------------------------------------------------ Fidelity HMN Retirement Financial, Growth Inc. Participant Fund Stock Loans Unallocated Total - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $586,953) $ 53,098 223,265 1,519 7,671 663,546 Contributions receivable: Employer -0- -0- -0- 30,962 30,962 - ----------------------------------------------------------------------------- Net assets available for benefits $ 53,098 223,265 1,519 38,633 694,508 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits Year ended December 31, 1996 Participant Directed Funds ------------------------------------------------------- Nationwide Fidelity Federated Pooled GIC Asset Capital Preservation Fund Manager Fund - ----------------------------------------------------------------------------- Contributions: Employer $ -0- -0- -0- Employee -0- 13,547 5,862 Rollover -0- -0- -0- - ----------------------------------------------------------------------------- Total contributions -0- 13,547 5,862 - ----------------------------------------------------------------------------- Withdrawals (105) (19,237) (294) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments -0- -0- -0- Interest -0- 19 16 Dividends -0- 1,782 702 Realized gains (losses) (829) 2,020 930 Less asset management fees -0- -0- -0- - ----------------------------------------------------------------------------- Net investment income (829) 3,821 1,648 - ----------------------------------------------------------------------------- Transfers among funds (111,661) (120,364) (29,735) - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (112,595) (122,233) (22,519) Beginning of year 112,595 122,233 22,519 - ----------------------------------------------------------------------------- End of year $ -0- -0- -0- - ----------------------------------------------------------------------------- Participant Directed Funds ---------------------------------------------------- Fidelity Equity Fidelity S&P Midcap Income II Retirement Growth Stock Index Fund Fund Fund - ----------------------------------------------------------------------------- Contributions: Employer $ -0- -0- -0- Employee 16,362 11,353 16,535 Rollover -0- -0- 2,412 - ----------------------------------------------------------------------------- Total contributions 16,362 11,353 18,947 - ----------------------------------------------------------------------------- Withdrawals (3,470) (4,143) (2,474) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments -0- -0- 14,264 Interest 14 14 49 Dividends 1,308 -0- -0- Realized gains (losses) 6,396 416 368 Less asset management fees -0- -0- (181) - ----------------------------------------------------------------------------- Net investment income 7,718 430 14,500 - ----------------------------------------------------------------------------- Transfers among funds (127,087) (60,738) 125,774 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (106,477) (53,098) 156,747 Beginning of year 106,477 53,098 -0- - ----------------------------------------------------------------------------- End of year $ -0- -0- 156,747 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits (con't.) Year ended December 31, 1996 Participant Directed Funds - ------------------------------------------------------------------------ S&P 500 Stable Money Bond Stock Index Value Market Market Fund Fund Fund Fund - ------------------------------------------------------------------------ Contributions: Employer -0- -0- -0- -0- Employee 19,214 5,366 7,051 4,300 Rollover 3,673 -0- -0- 308 - ------------------------------------------------------------------------ Total contributions 22,887 5,366 7,051 4,608 - ------------------------------------------------------------------------ Withdrawals (1,078) (1,146) -0- -0- - ------------------------------------------------------------------------ Investment income: Unrealized appreciation on fair market value of investments 17,899 1,840 -0- 759 Interest 1,136 75 494 662 Dividends 2,147 -0- -0- 436 Realized gains (losses) 202 18 57 (154) Less asset management fees (314) (198) (25) (60) - ------------------------------------------------------------------------ Net investment income 21,070 1,735 526 1,643 - ------------------------------------------------------------------------ Transfers among funds 171,852 71,587 19,492 24,583 - ------------------------------------------------------------------------ Increase (decrease) in net assets available for plan benefits 214,731 77,542 27,069 30,834 Beginning of year -0- -0- -0- 14,169 - ------------------------------------------------------------------------ End of year 214,731 77,542 27,069 45,003 - ------------------------------------------------------------------------ Participant Directed Funds - -------------------------------------------------------------------- HMN Financial, Inc. Participant Stock Loans Unallocated Total - ----------------------------------------------------------------------------- Contributions: Employer -0- -0- 35,288 35,288 Employee 15,477 -0- 34,190 149,257 Rollover 2,124 -0- -0- 8,517 - ----------------------------------------------------------------------------- Total contributions 17,601 -0- 69,478 193,062 - ----------------------------------------------------------------------------- Withdrawals (4,091) -0- (30) (36,068) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 48,503 -0- -0- 83,265 Interest 7 -0- -0- 2,486 Dividends -0- -0- 26 6,401 Realized gains (losses) (6,219) -0- 11 3,216 Less asset management fees -0- -0- -0- (778) - ----------------------------------------------------------------------------- Net investment income 42,291 -0- 37 94,590 - ----------------------------------------------------------------------------- Transfers among funds 92,653 3,412 (59,768) -0- - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 148,454 3,412 9,717 251,584 Beginning of year 223,265 1,519 38,633 694,508 - ----------------------------------------------------------------------------- End of year 371,719 4,931 48,350 946,092 - ----------------------------------------------------------------------------- PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits Year ended December 31, 1995 Participant Directed Funds ------------------------------------------------------- Nationwide 20th Century Fidelity Pooled GIC U.S. Government Asset Fund Bond Fund Manager - -------------------------------------------------------------------------- Contributions: Employer $ -0- -0- -0- Employee -0- -0- 17,769 - -------------------------------------------------------------------------- Total contributions -0- -0- 17,769 - -------------------------------------------------------------------------- Withdrawals (12,526) -0- (5,321) - -------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments -0- -0- 13,818 Interest 6,626 -0- -0- Dividends -0- -0- 3,399 Realized gains -0- 216 428 Less asset management fees (187) (354) (4,112) - -------------------------------------------------------------------------- Net investment income 6,439 (138) 13,533 - -------------------------------------------------------------------------- Transfers among funds (10,389) (20,135) (63,131) - -------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (16,476) (20,273) (37,150) Beginning of year 129,071 20,273 159,383 - -------------------------------------------------------------------------- End of year $ 112,595 -0- 122,233 - -------------------------------------------------------------------------- Participant Directed Funds -------------------------------------------------------------- Nationwide 20th Century Federated Stock Growth Stock Capital Preservation Fund Fund Fund - -------------------------------------------------------------------------- Contributions: Employer $ -0- -0- -0- Employee -0- -0- 17,997 - -------------------------------------------------------------------------- Total contributions -0- -0- 17,997 - -------------------------------------------------------------------------- Withdrawals -0- -0- (2,155) - -------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments -0- -0- 1 Interest -0- -0- 301 Dividends -0- -0- 512 Realized gains 1,056 246 -0- Less asset management fees (2,725) (983) (106) - --------------------------------------------------------------------------- Net investment income (1,669) (737) 708 - --------------------------------------------------------------------------- Transfers among funds (79,418) (22,760) 5,969 - --------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (81,087) (23,497) 22,519 Beginning of year 81,087 23,497 -0- - --------------------------------------------------------------------------- End of year $ -0- -0- 22,519 - --------------------------------------------------------------------------- See accompanying notes to financial statements. PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits (con't.) Year ended December 31, 1995 Participant Directed Funds - ----------------------------------------------------------------------------- Federated Fidelity Equity Fidelity Short Term Income Income II Retirement Growth Fund Fund Fund - ----------------------------------------------------------------------------- Contributions: Employer -0- -0- -0- Employee 2,115 24,149 13,946 - ----------------------------------------------------------------------------- Total contributions 2,115 24,149 13,946 - ----------------------------------------------------------------------------- Withdrawals (60) (627) (1,271) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 413 13,127 3,195 Interest -0- -0- -0- Dividends 600 4,146 4,565 Realized gains 19 747 473 Less asset management fees (80) (532) (258) - ----------------------------------------------------------------------------- Net investment income 952 17,488 7,975 - ----------------------------------------------------------------------------- Transfers among funds 11,162 65,467 32,448 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 14,169 106,477 53,098 Beginning of year -0- -0- -0- - ----------------------------------------------------------------------------- End of year 14,169 106,477 53,098 - ----------------------------------------------------------------------------- Participant Directed Funds -------------------------------------------------------------- HMN Financial, Inc. Participant Stock Loans Unallocated Total - ----------------------------------------------------------------------------- Contributions: Employer -0- -0- 40,453 40,453 Employee -0- -0- 48,287 124,263 - ----------------------------------------------------------------------------- Total contributions -0- -0- 88,740 164,716 - ----------------------------------------------------------------------------- Withdrawals (77) -0- (1) (22,038) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 46,040 -0- -0- 76,594 Interest -0- -0- 502 7,429 Dividends -0- -0- -0- 13,222 Realized gains 243 -0- -0- 3,428 Less asset management fees -0- -0- (3,600) (12,937) - ----------------------------------------------------------------------------- Net investment income 46,283 -0- (3,098) 87,736 - ----------------------------------------------------------------------------- Transfers among funds 177,059 1,519 (97,791) -0- - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 223,265 1,519 (12,150) 230,414 Beginning of year -0- -0- 50,783 464,094 - ----------------------------------------------------------------------------- End of year 223,265 1,519 38,633 694,508 - ----------------------------------------------------------------------------- PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits Year ended December 31, 1994 Participant Directed Funds ------------------------------------------------------- Nationwide 20th Century American Fidelity Pooled GIC U.S. Government Balanced Asset Fund Bond Fund Manager - ---------------------------------------------------------------------------- Contributions: Employer $ -0- -0- -0- -0- Employee 32,655 4,389 30,269 15,804 Rollover 8,261 -0- 7,473 -0- - ---------------------------------------------------------------------------- Total contributions 40,916 4,389 37,742 15,804 - ---------------------------------------------------------------------------- Withdrawals (3,403) (5,367) (5,995) -0- - ---------------------------------------------------------------------------- Investment income: Unrealized depreciation on fair market value of investments -0- (265) -0- (6,837) Interest 5,165 -0- -0- -0- Realized gains (losses) -0- 3 911 (2) Less asset management fees -0- (51) (385) -0- - ---------------------------------------------------------------------------- Net investment income 5,165 (313) 526 (6,839) - ---------------------------------------------------------------------------- Transfers among funds 7,810 (1,986) (150,619) 150,418 - ---------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 50,488 (3,277) (118,346) 159,383 - ---------------------------------------------------------------------------- Beginning of year 78,583 23,550 118,346 -0- - ---------------------------------------------------------------------------- End of year $ 129,071 20,273 -0- 159,383 - ---------------------------------------------------------------------------- Participant Directed Funds -------------------------------------------- Nationwide 20th Century Stock Growth Stock Fund Fund Unallocated Total - ----------------------------------------------------------------------------- Contributions: Employer $ -0- -0- 31,304 31,304 Employee 19,742 12,850 10,627 126,336 Rollover 6,515 3,112 8,852 34,213 - ---------------------------------------------------------------------------- Total contributions 26,257 15,962 50,783 191,853 - ---------------------------------------------------------------------------- Withdrawals -0- -0- -0- (14,765) - ---------------------------------------------------------------------------- Investment income: Unrealized depreciation on fair market value of investments (311) (470) -0- (7,883) Interest -0- -0- -0- 5,165 Realized gains (losses) 5 82 -0- 999 Less asset management fees (173) (7) -0- (616) - ----------------------------------------------------------------------------- Net investment income (479) (395) -0- (2,335) - ----------------------------------------------------------------------------- Transfers among funds 486 (6,109) -0- -0- - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 26,264 9,458 50,783 174,753 - ----------------------------------------------------------------------------- Beginning of year 54,823 14,039 -0- 289,341 - ----------------------------------------------------------------------------- End of year $ 81,087 23,497 50,783 464,094 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Notes to Financial Statements December 31, 1996 and 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements have been prepared on the accrual basis of accounting. CUSTODIAN OF INVESTMENTS Mellon Bank, N.A. is the trustee and custodian of all Plan assets. PLAN ADMINISTRATION Home Federal Savings Bank (the Company) is the administrator of the Plan and Pentegra Services, Inc. performs the participant accounting. VALUATION OF INVESTMENTS Investments are stated at their approximate fair market value. Investments in mutual funds of comingled trusts are valued using daily net asset value calculations performed by the funds and published by the National Association of Securities Dealers. Investments in common stock are valued at the quoted market price. Participant notes are valued at cost which approximates fair value. Purchases and sales of securities are recorded on a trade date basis. Net realized gains or losses are recognized by the Plan upon the sale of its investments or portions thereof on the basis of a first-in, first- out flow assumption. COSTS AND EXPENSES Asset management fees are deducted from the individual funds as they are incurred. Administrative expenses totaling $7,511 and $4,646 were paid by the Company in 1996 and 1995 respectively. RECLASSIFICATIONS Certain amounts in the financial statements for prior years have been reclassified to conform with the current-year presentation. (2) DESCRIPTION OF THE PLAN The following description of the Plan provides only general information. Participants should refer to the Summary Plan Description for more complete information. GENERAL The Plan is a defined contribution plan, qualified under section 401(a) of the Internal Revenue Code. The Plan includes 401(k) provisions which allow participants to direct the Company to contribute a portion of their compensation to the Plan on a pretax basis through payroll deductions. The Plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA). Company employees are eligible to participate in the Plan after one year of continuous service of 1,000 hours or more and upon reaching 21 years of age. FUNDING POLICY Since August 1, 1996, participants have had the ability to contribute up to 12% of their monthly compensation on a pretax basis to the Plan. The maximum monthly contribution prior to this date was 8% of their compensation. Participant contributions are subject to the Internal Revenue Service maximum annual limits of $9,500 during 1996 and $9,240 during 1995 and 1994. The Company matches 25% of each participant's contributions up to a maximum of 8% of compensation. The Company may, in its sole discretion, contribute to the Plan an amount to be determined from year to year (the Non-Elective Contribution). Such contributions would be allocated to the accounts of participants in the ratio that each participant's compensation for the plan year bears to the total compensation of all participants for the plan year. There were no such contributions during 1996, 1995, or 1994. PARTICIPANT ACCOUNTS Each participant's account is credited with the participant's contribution and allocations of the Company's contribution and Plan earnings. Allocations are based on participant contributions or account balances, as defined. VESTING Participants are immediately vested in their contributions and the Company's contributions, plus actual earnings thereon. PARTICIPANT LOANS Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their account balance. Loan terms range from 1-5 years, except loans used to purchase a primary residence may have a term up to 15 years. All loans are secured by the balance in the participant's account and bear interest at a rate commensurate with local prevailing rates as determined by the Plan administrator. Principal and interest payments must be made monthly. DISTRIBUTIONS Upon termination of employment for any reason the participant's account balance becomes fully payable. PARTICIPATING EMPLOYERS The Company is a member of a controlled group of corporations as defined in Section 414(b) of the Internal Revenue Code. No members of the group other than the Company participated in the Plan during 1995. The contributions to the Plan for each employer participating in the Plan during 1996 were as follows: Employer Employee Rollover ---------- ---------- ---------- Home Federal Savings Bank $ 34,348 145,497 8,517 Osterud Insurance Agency, Inc. 940 3,760 -0- -------- ------- ------- $ 35,288 149,257 8,517 ======== ======= ======= (3) PLAN TERMINATION The Company, by action of its board of directors, may terminate the Plan. All participants at the time of such termination shall be 100% vested in their accounts and shall be entitled to a benefit equal to the value of their accounts as determined as of the valuation date following termination. (4) DESCRIPTION OF INVESTMENT OPTIONS Participant contributions are invested by the Plan Trustee in accordance with participant elections, in one or more of the investment options the Plan offers in increments of 10%. NATIONWIDE POOLED GIC FUND - Funds are invested in a guaranteed investment contract with an insurance company. This investment option was not available at December 31, 1996. FEDERATED CAPITAL PRESERVATION FUND - Funds are invested in guaranteed investment contracts and other stable value products to preserve principal while earning a competitive rate-of-return. This investment option was not available at December 31, 1996. FEDERATED SHORT TERM INCOME FUND - Funds are invested in a blend of mortgage-backed securities, treasuries, and agency securities to provide income. The activity in this fund has been aggregated with the Bond Market Fund in the Statement of Changes in Net Assets Available for Benefits. This investment option was not available at December 31, 1996. FIDELITY ASSET MANAGER - Funds are invested in stocks, bonds, and short term instruments to achieve maximum total return. This investment option was not available at December 31, 1996. FIDELITY EQUITY INCOME II FUND - Funds are invested primarily in equity security with above-average yields to provide current income. This investment option was not available at December 31, 1996. FIDELITY RETIREMENT GROWTH - Funds are invested primarily in equity securities of companies with earnings that are expected to grow at an above-average rate. This investment option was not available at December 31, 1996. S&P MIDCAP STOCK INDEX FUND - Funds are invested in the stocks that make up the Standard & Poor's MidCap 400 Index. The fund is designed to approximate the total return of the S&P MidCap 400 Index, including reinvestment of dividends. S&P 500 STOCK INDEX FUND - Funds are invested in the stocks that make up the Standard & Poor's 500 Index. The fund is designed to approximate the total return of the S&P 500 Index, including reinvestment of dividends. STABLE VALUE FUND - Funds are invested in a diversified portfolio of fixed income securities with high quality ratings by major rating services such as Moody's Investors Service and Standard & Poor's. MONEY MARKET FUND - Funds are invested primarily in AAA short-term securities issued by corporations. The average range of weighted portfolio maturities varies from one to ninety days with most securities held to maturity. BOND MARKET FUND - Funds are invested in a portfolio of high quality bonds including U.S. Treasury, agency, corporate, mortgage and asset backed securities. HMN FINANCIAL, INC. STOCK - Funds are invested in the common stock of HMN Financial, Inc., the Holding Company of Home Federal Savings Bank. (5) NUMBER OF PARTICIPANTS The number of participants in each investment option as of December 31, 1996 and 1995 were as follows: 1996 1995 ------ ------ Nationwide Pooled GIC Fund -0- 47 Fidelity Asset Manager -0- 54 Federated Capital Preservation Fund -0- 47 Federated Short Term Income Fund -0- 18 Fidelity Equity Income II Fund -0- 58 Fidelity Retirement Growth Fund -0- 43 HMN Financial, Inc. Stock 55 45 Participant Loans 3 1 S&P MidCap Stock Index Fund 70 -0- S&P 500 Stock Index Fund 74 -0- Stable Value Fund 27 -0- Money Market Fund 10 -0- Bond Market Fund 29 -0- The total number of participants in the Plan were 88 and 78 at December 31, 1996 and 1995 respectively. (6) INVESTMENTS The following investments equal or exceed 5% of net assets available for plan benefits at December 31, 1996 and 1995: December 31, 1996 ------------------------------- Fair market Unrealized Description Cost value appreciation - ------------------------------------------------------------------------ S&P MidCap Stock Index Fund 142,595 156,747 14,152 S&P 500 Stock Index Fund 193,896 214,731 20,835 Stable Value Fund 75,898 77,542 1,644 HMN Financial, Inc. Stock 323,198 371,719 48,521 Nationwide Pooled GIC Fund -0- -0- -0- Fidelity Asset Manager -0- -0- -0- Fidelity Equity Income II Fund -0- -0- -0- Fidelity Retirement Growth Fund -0- -0- -0- December 31, 1995 ------------------------------ Fair market Unrealized Description Cost value appreciation - ------------------------------------------------------------------------ S&P MidCap Stock Index Fund -0- -0- -0- S&P 500 Stock Index Fund -0- -0- -0- Stable Value Fund -0- -0- -0- HMN Financial, Inc. Stock 177,225 223,265 46,040 Nationwide Pooled GIC Fund 112,595 112,595 -0- Fidelity Asset Manager 108,415 122,233 13,818 Fidelity Equity Income II Fund 93,350 106,477 13,127 Fidelity Retirement Growth Fund 49,903 53,098 3,195 (7) INCOME TAX STATUS The Internal Revenue Service determined and informed the Company by a letter dated May 11, 1994, that the Plan and related trust, as then designed, were in compliance with the provisions of 401(a) of the Internal Revenue Code (IRC) and were thereby exempt from federal income taxes under Section 501(a) of the code. The Plan has been amended in its entirety since receiving the determination letter. However, the Plan administrator and the third party administrator believe that the Plan is designed and is being operated in compliance with the applicable requirements of the IRC. Therefore, no provision for income taxes has been included in the Plan's financial statements. An employee's pretax contributions under the Plan will reduce the participant's taxable income for federal and state income tax purposes. Each participant's portion of earnings from investments made with contributions under the Plan, generally, are not taxable until distributed or withdrawn. (8) PARTY-IN-INTEREST TRANSACTIONS The Plan engages in investment transactions involving the acquisition or disposition of HMN Financial, Inc. common stock. HMN Financial, Inc. is the holding company of Home Federal Savings Bank and is a party-in- interest. These transactions are covered by an exemption from the "prohibited transactions" provisions of ERISA and the IRC. (9) SUBSEQUENT EVENTS Effective January 1, 1997, the Plan was amended to allow company employees to participate in the Plan after one month of employment and the attainment of age 21. Participant vesting in the Company's contribution was also changed to a five year cliff vesting schedule for all employees hired after January 1, 1997. Effective June 17, 1997, The Bank of New York was designated by the Plan Administrator to serve as the Trustee of the Plan. PAGE HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Item 27a - Schedule of Assets Held for Investment Purposes December 31, 1996 Net Asset Fair Value market Description Units Per Unit Cost value - --------------------------------------------------------------------------- S&P MidCap Stock Index Fund 10,568 $14.8325 142,595 $156,747 S&P 500 Stock Index Fund 12,583 17.0651 193,896 214,731 Stable Value Fund 6,507 11.9161 75,897 77,542 Money Market Fund 2,331 11.6118 26,622 27,069 Bond Market Fund 3,862 11.6528 43,705 45,003 *HMN Financial, Inc. Common Stock 32,171 11.5543 323,198 371,719 Participant Loans (9.25% to 10.5%) 4,931 1.0000 4,931 4,931 - --------------------------------------------------------------------------- Total investment $ 810,844 $ 897,742 - --------------------------------------------------------------------------- *Party-in-interest See accompanying independent auditors' report. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Item 27-d - Schedule of Reportable Transactions Series of Transactions (Involving One Security) Which Exceed 5% of Net Assets Available for Benefits Year ended December 31, 1996 Total dollar Total Total Description Number of value of dollar value cost of Net ---------------- of asset Purchases Sales purchases of sales sales gain - ---------------------------------------------------------------------------- Fidelity Asset Manager 20 9 $ 24,167 147,660 145,640 2,020 Federated Capital Preservation Fund 25 11 133,369 146,147 145,217 930 Fidelity Equity Income II Fund 22 9 29,795 140,809 134,413 6,396 Fidelity Retirement Growth Fund 18 8 18,097 70,259 69,843 416 S&P MidCap Stock Index Fund 16 6 146,462 4,166 3,798 368 S&P 500 Stock Index Fund 17 5 197,614 3,882 3,680 202 Stable Value Fund 11 6 79,408 3,527 3,509 18 Money Market Fund 9 6 51,992 25,425 25,368 57 Bond Market Fund 13 1 43,709 4 158 (154) *HMN Financial, Inc. Common Stock 13 6 83,386 8,014 14,233 (6,219) *Party-in-interest See accompanying independent auditors' report. SIGNATURES THE PLAN. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN Date: June 25, 1997 By: /s/ Roger P. Weise ----------------------------- Roger P. Weise Title: Chief Executive Officer, Home Federal Savings Bank EXHIBIT INDEX Exhibit Number 23 Consent of KPMG Peat Marwick LLP, certified public accountants