UNITED STATES
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, 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 November 1, 1997
Common stock, .01 par value 4,183,436
This Form 10-Q consists of 27 pages.
The exhibit index is on page 24.
1
HMN FINANCIAL, INC.
CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1:Financial Statements (unaudited)
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 . . . 3
Consolidated Statements of Income for the
Three Months Ended and Nine Months Ended
September 30, 1997 and 1996. . . . . . . . . . 4
Consolidated Statement of Stockholders'
Equity for the Nine Month Period Ended
September 30, 1997 . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30,
1997 and 1996. . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . 7
Item 2:Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . .12
PART II - OTHER INFORMATION
Item 1:Legal Proceedings. . . . . . . . . . . . . . .22
Item 2:Changes in Securities. . . . . . . . . . . . .22
Item 3:Defaults Upon Senior Securities. . . . . . . .22
Item 4:Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . .22
Item 5:Other Information. . . . . . . . . . . . . . .22
Item 6:Exhibits and Reports on Form 8-K . . . . . . .22
Signatures. . . . . . . . . . . . . . . . . . . . . .23
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
Assets 1997 1996
-------------------------------
Cash and cash equivalents $ 9,635,956 10,583,717
Securities available for sale:
Mortgage-backed and related
securities (amortized cost
$111,030,951 and $134,474,167) 111,117,282 133,355,278
Other marketable securities
(amortized cost $71,405,849
and $42,360,499) 72,815,033 42,474,810
------------ ------------
183,932,315 175,830,088
------------ ------------
Securities held to maturity:
Mortgage-backed and related
securities (fair value $ 0
and $1,904,993) 0 1,805,744
Other marketable securities
(fair value $ 0 and $1,000,550) 0 999,812
------------ ------------
0 2,805,556
------------ ------------
Loans held for sale 2,089,733 739,316
Loans receivable, net 352,925,376 349,022,236
Federal Home Loan Bank stock,
at cost 6,236,700 5,434,000
Real estate, net 89,334 20,610
Premises and equipment, net 4,230,723 3,581,497
Accrued interest receivable 3,180,525 3,415,152
Prepaid expenses and other assets 6,526,233 3,299,427
------------ ------------
Total assets $568,846,895 554,731,599
============ ============
Liabilities and Stockholders' Equity
Deposits $366,682,349 362,476,944
Federal Home Loan Bank advances 112,007,163 106,078,589
Accrued interest payable 1,147,269 1,542,773
Advance payments by borrowers
for taxes and insurance 758,067 518,911
Accrued expenses and other
liabilities 3,632,564 2,014,938
------------ ------------
Total liabilities 484,227,412 472,632,155
------------ ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock:
authorized 500,000 shares;
Issued and outstanding none 0 0
Common stock ($.01 par value):
authorized shares
7,000,000; issued shares
6,085,775 60,858 60,858
Additional paid-in capital 59,702,833 59,428,768
Retained earnings, subject to
certain restrictions 58,976,197 54,645,387
Net unrealized gain (loss) on
securities available for sale 967,170 (598,045)
Unearned employee stock ownership
plan shares (4,650,340) (4,938,520)
Unearned compensation restricted
stock awards (658,817) (793,289)
Treasury stock, shares at cost
1,873,939 and 1,651,615 (29,778,418) (25,705,715)
------------ ------------
Total stockholders' equity 84,619,483 82,099,444
------------ ------------
Total liabilities and
stockholders' equity $568,846,895 554,731,599
============ ============
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------------------- ---------------------
Interest Income:
Loans receivable $6,939,224 6,461,279 20,730,094 19,009,335
Securities available for
sale:
Mortgage-backed and
related 2,092,964 2,429,330 6,458,996 7,730,690
Other marketable 1,119,452 669,964 2,621,762 1,655,705
Securities held to maturity:
Mortgage-backed and related 0 196,050 33,400 719,827
Other marketable 0 14,250 10,032 90,103
Cash equivalents 55,643 149,819 225,237 315,623
Other 107,187 93,823 304,158 232,453
---------- ---------- ---------- ----------
Total interest income 10,314,470 10,014,515 30,383,679 29,753,736
---------- ---------- ---------- ----------
Interest expense:
Deposits 4,749,737 4,741,907 13,993,332 14,281,156
Federal Home Loan Bank
advances 1,714,642 1,449,492 4,792,552 3,739,015
---------- ---------- ---------- ----------
Total interest expense 6,464,379 6,191,399 18,785,884 18,020,171
---------- ---------- ---------- ----------
Net interest income 3,850,091 3,823,116 11,597,795 11,733,565
Provision for loan losses 75,000 75,000 225,000 225,000
---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 3,775,091 3,748,116 11,372,795 11,508,565
---------- ---------- ---------- ----------
Non-interest income:
Fees and service charges 121,489 94,817 318,346 254,188
Securities gains, net 487,547 192,761 872,159 961,798
Gain on sales of loans 117,302 9,896 334,367 16,980
Other 152,230 114,957 457,786 365,879
---------- ---------- ---------- ----------
Total non-interest income 878,568 412,431 1,982,658 1,598,845
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 1,431,853 1,175,725 4,106,699 3,380,843
Occupancy 245,202 203,071 718,801 595,216
Federal deposit insurance
premiums 57,478 212,020 175,379 636,676
SAIF assessment 0 2,351,563 0 2,351,563
Advertising 62,763 77,696 214,557 229,735
Data processing 129,100 118,949 372,432 368,145
Provision for real estate
losses 0 0 3,000 0
Other 302,449 255,808 879,375 799,710
--------- ---------- --------- ---------
Total non-interest
expense 2,228,845 4,394,832 6,470,243 8,361,888
--------- ---------- --------- ---------
Income (loss) before
income tax expense 2,424,814 (234,285) 6,885,210 4,745,522
Income tax (benefit) expense 900,703 (89,758) 2,554,400 1,770,274
--------- --------- --------- ---------
Net income (loss) $ 1,524,111 (144,527) 4,330,810 2,975,248
========= ========= ========= =========
Primary earnings (loss) per
common share and
common share equivalents $ 0.38 (0.03) 1.10 0.66
==== ==== ==== ====
Fully diluted earnings (loss)
per common share and
common share equivalents $ 0.38 (0.03) 1.09 0.66
==== ==== ==== ====
See accompanying notes to consolidated financial statements.
4
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Month Period Ended September 30, 1997
(unaudited)
Net
Unrealized
Gain (Loss)
Additional on 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 4,330,810
Change in unrealized
gain on securities
available for sale 1,490,289
Unrealized gain on
equity investments 74,926
Treasury stock
purchases
Amortization of
restricted stock awards
Recognition and retention
awards granted 2,250
Employee stock options
exercised (46)
Restricted stock awards
tax benefit 61,092
Employee stock option plan
tax benefit 3,530
Earned employee stock
ownership plan shares 207,239
------- ---------- ---------- --------
Balance, September 30, 1997 $ 60,858 59,702,833 58,976,197 967,170
======= ========== ========== ========
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 4,330,810
Change in unrealized
gain on securities
available for sale 1,490,289
Unrealized gain on
equity investments 74,926
Treasury stock
purchases (4,109,637) (4,109,637)
Amortization of
restricted stock awards 173,472 173,472
Recognition and retention
awards granted (39,000) 36,750 0
Employee stock options
exercised 184 138
Restricted stock awards
tax benefit 61,092
Employee stock option plan
tax benefit 3,530
Earned employee stock
ownership plan shares 288,180 495,419
---------- --------- ---------- ----------
Balance,
September 30, 1997 $(4,650,340) (658,817) (29,778,418) 84,619,483
========== ======== ========== ==========
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
1997 1996
------------------------------
Cash flows from operating activities:
Net income. $ 4,330,810 2,975,248
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses . . . . . . . 225,000 225,000
Provision for real estate losses. . . . 3,000 0
Depreciation. . . . . . . . . . . . . . 314,248 277,043
Amortization of (discounts) premiums, net (175,404) (49,327)
Amortization of deferred loan fees. . . (297,964) (334,698)
Provision for deferred income taxes . . 294,750 190,224
Securities gains, net . . . . . . . . . (872,159) (961,798)
Gain on sales of real estate. . . . . . (3,743) (46,625)
Gain on sales of loans. . . . . . . . . (334,640) (16,980)
Proceeds from sales of loans held for sale..8,267,102 943,096
Amortization of restricted stock awards 173,472 173,874
Amortization of unearned ESOP shares. . 288,180 298,240
BIF/SAIF special assessment . . . . . . 0 2,351,563
Earned employee stock ownership shares
priced above original cost . . . . . . 207,238 96,205
Decrease in accrued interest receivable 234,627 96,650
Decrease in accrued interest payable. . (395,504) (41,371)
Equity earnings of limited partnerships (179,596) 0
Increase in other assets. . . . . . . . (133,526) (81,461)
Increase (decrease) in other liabilities. . .377,696 (874,954)
Other, net. . . . . . . . . . . . . . . 20,721 (54,335)
---------- -----------
Net cash provided by operating activities 12,344,308 5,165,594
---------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available
for sale. 63,095,246 78,362,250
Principal collected on securities available
for sale. 10,496,126 13,375,740
Proceeds collected on maturity of securities
available for sale. . . . . . . . . . . 27,618,412 5,500,000
Purchases of securities available for sale (95,055,935) (81,008,115)
Proceeds from sales of securities held
to maturity. . . . . . . . . . . . . . . 348,871 0
Principal collected on securities held
to maturity. . . . . . . . . . . . . . . 240,441 1,336,500
Proceeds collected on maturity of securities
held to maturity . . . . . . . . . . . . 1,000,000 12,652,343
Purchase of securities held to maturity . 0 (709,765)
Proceeds from sales of loans receivable . 28,977,687 154,612
Purchase interest in mortgage servicing rights. (400,008) 0
Purchase interest in limited partnerships (2,438,750) 0
Purchase of Federal Home Loan Bank stock. (802,700) (1,396,900)
Net increase in loans receivable. . . . . (51,707,248) (34,186,011)
Proceeds from sale of real estate . . . . 35,627 379,789
Purchases of premises and equipment . . . (963,474) (175,560)
---------- ----------
Net cash used by investing activities. (19,555,705) (5,715,117)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in deposits . . . . . 4,205,405 (9,576,370)
Purchase of treasury stock. . . . . . . . (4,109,637) (9,966,878)
Stock options exercised . . . . . . . . . 138 4,833
Proceeds from Federal Home Loan Bank advances121,500,000 108,800,000
Repayment of Federal Home Loan Bank
.advances (115,571,426) (75,844,423)
Increase in advance payments by borrowers
for taxes and insurance. . . . . . . . . 239,156 194,038
----------- ----------
Net cash provided by financing activities. .6,263,636 13,611,200
----------- ----------
Increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . (947,761) 13,061,677
Cash and cash equivalents, beginning of period . 10,583,717 4,334,694
----------- ----------
Cash and cash equivalents, end of period . .$ 9,635,956 17,396,371
=========== ==========
Supplemental cash flow disclosures:
Cash paid for interest. . . . . . . . . .$ 18,390,380 18,061,542
Cash paid for income taxes. . . . . . . . 2,255,500 2,725,433
Supplemental noncash flow disclosures:
Loans securitized and transferred to
securities available for sale . . . . .$ 9,608,294 15,419,810
Loans purchased with liability due to broker 0 11,000,000
Securities held to maturity transferred
to securities available for sale. . . . 1,295,147 0
Loans transferred to loans held for sale. 28,868,154 0
Transfer of loans to real estate. . . . . 188,776 168,187
Transfer of real estate to loans. . . . . 84,772 161,953
Securities purchased with asset due from broker . . . .0 384,228
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1997 and 1996
(1) HMN FINANCIAL, INC.
The consolidated financial statements included herein are for HMN Financial
Inc. (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 and nine month period ended September 30, 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. In 1997, under SFAS No. 128, basic EPS differed from primary EPS by
$(0.01) to $0.03 per share and diluted EPS was equal to or $(0.01) per share
less than fully diluted EPS. When similar comparisons were made from
7
the basic EPS and diluted EPS calculations to previously reported year-to-date
primary EPS and fully diluted EPS, the basic EPS calculations for the same
periods ranged from $0.00 to $0.07 per share greater than primary EPS and
diluted EPS for the same periods ranged from $0.00 to $0.01 per share greater
than fully diluted EPS.
In July 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
which establishes standards of disclosure and financial statement display for
reporting total comprehensive income and the individual components thereof.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners. As used in SFAS No. 130, the term comprehensive income thus
encompasses net income. The term OTHER COMPREHENSIVE INCOME refers to
components of comprehensive income that are excluded from net income under
generally accepted accounting principles. Comprehensive income may be
presented in any of the following financial statements: in a separate
statement of comprehensive income; in a statement of changes in equity; or
below the total of net income or loss in the income statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. Comparative statements for previous years must be
reclassified, although reclassification adjustments are not required to be
shown for such earlier periods. Management will be adopting SFAS No. 130 on
January 1, 1998 and will report comprehensive income in statements issued after
that date.
In July 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION which establishes new standards for
determining a reportable segment and for disclosing information regarding each
such segment. The amount of each segment item reported should be the measure
reported to the chief operating decision maker for purposes of making decisions
about allocating resources to the segment and assessing its performance.
Adjustments and eliminations made in preparing an enterprise's general-purpose
financial statements and allocations of revenues, expenses and gains or losses
should be included in determining reported segment profit or loss only if they
are included in the measure of the segment's profit or loss that is used by the
chief operating decision maker. Similarly, only those assets that are included
in the measure of the segment's assets that is used by the chief operating
decision maker should be reported for that segment. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997, with earlier application
encouraged. Management is currently studying the impact of adopting SFAS No.
131.
(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 for sale portfolio. The following information
summarizes the sale and transfer of the securities held to maturity during
1997.
8
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
Primary earnings per common share and common share equivalents for the three
month periods ended September 30, 1997 and 1996 were computed by dividing net
income (loss) for each period ($1,524,111 and $(144,527), respectively) by the
weighted average common shares and common share equivalents outstanding
(3,972,494 and 4,185,867, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the three months
ended September 30, 1997 and 1996 were computed by dividing net income (loss)
for the period ($1,524,111 and $(144,527), respectively) by the weighted
average common shares and fully diluted common share equivalents outstanding
(3,975,798 and 4,185,867, respectively) during each period.
Primary earnings per common share and common share equivalents for the nine
month periods ended September 30, 1997 and 1996 were computed by dividing net
income for each period ($4,330,810 and $2,975,248, respectively) by the
weighted average common shares and common share equivalents outstanding
(3,938,454 and 4,509,942, respectively) during each period. Fully diluted
earnings per common share and common share equivalents for the nine months
ended September 30, 1997 and 1996 were computed by dividing net income for the
period ($4,330,810 and $2,975,248, respectively) by the weighted average common
shares and fully diluted common share equivalents outstanding (3,977,962 and
4,516,499, respectively) during each period.
(6) SAIF ASSESSMENT
On September 30, 1996, President Clinton signed the Savings Association
Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The
Bank's assessment by the SAIF was a one time charge of $2,351,563. The impact
of the assessment reduced earnings for 1996 by approximately $1.5 million after
tax.
(7) REGULATORY CAPITAL
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.
9
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 September 30, 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
September 30, 1997 and other conditions consistent with the Prompt Corrective
Actions Provisions of the Office of Thrift Supervision (OTS) regulations, the
Bank would be categorized as well capitalized.
At September 30, 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(1) Amount Assets (1)
---------- ---------- ---------- -----------
Bank stockholder's equity $ 58,591
Less:
Net unrealized loss (gain)
on certain securities
available for sale (199)
Excess mortgage servicing
rights 542
-------
Tangible capital 57,850 10.68% $8,124 1.50%
-------
Tangible capital to
adjusted total assets 10.68%
Core capital (Tier I) 57,850 10.68% 16,247 3.00%
Tier I capital to risk-
weighted assets 23.58%
Plus:
Allowable allowance for
loan losses 2,553
-------
Risk-based capital $60,403 24.62% $19,627 8.00%
=======
(1) 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.
To Be Well Capitalized
Under Prompt
Corrective Actions
Excess Capital Provisions
--------------------- -----------------------
(in thousands) Percent of Percent of
Amount Assets(1) Amount Assets(1)
------------------------------------------------
Bank stockholder's equity
Less:
Net unrealized loss (gain)
on certain securities
available for sale
Excess mortgage servicing
rights
Tangible capital $49,726 9.18%
Tangible capital to
adjusted total assets $ 27,078 5.00%
Core capital (Tier I) 41,603 7.68%
Tier I capital to risk-
weighted assets 14,720 6.00%
Plus:
Allowable allowance for
loan losses
Risk-based capital $40,776 16.62% $24,533 10.00%
(1) 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.
(8) STOCKHOLDER'S EQUITY
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.
On June 30, 1997, HMN announced its intention to purchase up to 300,000 shares
of its own common stock in the open market over the next twelve month period.
10
(9) PENDING ACQUISITION
On July 1, 1997, HMN Financial, Inc. and Marshalltown Financial
Corporation (MFC), the thrift holding company for Marshalltown Savings Bank,
FSB, entered into a definitive agreement to merge. Under the agreement, HMN
will acquire in a cash transaction valued at $25.9 million, or $17.51 per
share, all outstanding shares of MFC's common stock. The agreement is subject
to regulatory approvals, a process that is expected to be completed by
November 30, 1997. At September 30, 1997, MFC's consolidated balance sheet had
total assets of $125.5 million of which $66.2 million were in loans receivable,
net and $52.6 million were investment securities or mortgage-backed securities.
MFC's deposits totaled $103.7 million and stockholders' equity totaled $20.3
million.
11
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 income for the third quarter of 1997 was $1.5 million, or $0.38
primary earnings per share, an increase of $1.67 million, compared to a net
loss of $(145,000), or $(0.03) primary loss per share for the same quarter
of 1996. In September of 1996, Congress enacted the Savings Association
Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The
Bank's one time charge was $2.4 million. The Bank's total SAIF assessment
was charged directly to earnings and reduced quarterly earnings by $1.5
million after tax, or $0.34 primary earnings per share. If the SAIF
legislation had not passed, net income for the third quarter of 1996 would
have been $1.3 million, or $0.31 primary earnings per share. Non-interest
income for the third quarter of 1997 was up $466,000 primarily due to gains
recognized on the sale of securities and loans and was partially offset by a
$186,000 increase in non-interest expense primarily related to
compensation and benefits. Net income for the nine month period ended
September 30, 1997 was $4.33 million, or $1.10 primary earnings per share,
an increase of $1.35 million from $2.98 million, or $0.66 primary earnings
per share. The SAIF assessment in September of 1996 had the impact of
decreasing net income for the nine months then
12
ended by $1.5 million after tax, or $0.32 primary earnings per share. If
the SAIF legislation had not passed, net income for the nine months ended
September 30, 1996 would have been $4.5 million or $0.98 primary earnings
per share. Non-interest income for the nine month period ended September
30, 1997 was up $384,000 primarily due to gains recognized on the sale of
loans and was totally offset by a $460,000 net increase in non-interest
expense primarily due to increases in compensation and benefits.
NET INTEREST INCOME
Net interest income for the third quarter of 1997 was $3.85 million, an
increase of $27,000 compared to $3.82 million for the same quarter of 1996.
Interest income for the third quarter of 1997 was $10.3 million, an increase
of $300,000, or 3.0%, compared to $10.0 million for the same quarter of
1996.
The increase in interest income was primarily due to the purchase of loans
that were partially funded by the sale of lower yielding investment
securities or advances from the Federal Home Loan Bank (FHLB). Interest
income increased by $293,000 due to an increase in the size of the loan
portfolio, and it increased by $185,000 due to an increase of the yield
earned on the loan portfolio. The increase in interest income was
partially offset by a $97,000 decrease in interest income earned on the
security portfolio due to a decrease in the average portfolio size and a
decrease in yield. Interest expense for the third quarter of 1997 was
$6.5 million, an increase of $273,000, or 4.4%, compared to $6.2 million
for the third quarter of 1996. The increase in interest expense was
primarily due to an $18.0 million increase in the average outstanding
advances from the FHLB for the third quarter of 1997 compared to the same
quarter of 1996.
Net interest income for the nine months ended September 30, 1997 was $11.6
million, a decrease of $136,000, or 1.2%, compared to $11.7 million for the
same nine month period of 1996. Interest income for the nine months ended
September 30, 1997 was $30.4 million, an increase of $630,000, or 2.1%,
compared to $29.8 million for the same nine month period of 1996. The
increase in interest income was primarily due to the purchase of loans that
were partially funded by the sale of lower yielding investment securities or
advances from the FHLB. Interest income increased by $1.5 million due to an
increase in the size of the loan portfolio and it increased by $189,000 due
to an increase of the yield earned on the loan portfolio. The increase in
interest income was partially offset by a $1.1 million decrease in interest
earned on the security portfolio primarily due to a decrease in the average
portfolio size. Interest expense for the nine months ended September 30,
1997 was $18.8 million, an increase of $766,000, or 4.3%, compared to $18.0
million for the same nine month period of 1996. The increase in interest
expense was primariy due to a $25.0 million increase in the average
outstanding advances from the FHLB for the nine month period of 1997
compared to the same period of 1996. The majority of the funds received
from the FHLB advances were used to purchase the net increase in interest-
earning assets, facilitate the HMN stock repurchases, and purchase loan
servicing assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the third quarters ended September 30,
1997 and 1996 were both $75,000. The provision for loan losses for the
nine months ended September 30, 1997 and 1996 were both $225,000. The
provision is the result of management's
13
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.
For the nine months ended September 30, 1997 and 1996, HMN incurred the
following charge-offs on its loan portfolio:
1997 1996
1-4 Family $ 3,500 0
Commercial 12,300 61,329
Multi-family residential 0 87,591
Consumer 3,777 1,216
Total $ 19,577 150,136
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:
1997 1996
Balance at January 1, $ 2,340,585 2,190,664
Provision 225,000 225,000
Charge-offs (19,577) (150,136)
Recoveries 7,500 57
Balance at September 30, $ 2,553,508 2,265,585
NON-INTEREST INCOME
Non-interest income was $879,000 for the third quarter of 1997, an increase
of $467,000, or 113%, compared to $412,000 for the third quarter of 1996.
The increase was principally due to a $295,000 increase in gain on the sale
of securities and a $107,000 increase in gain on sale of loans. Economic
and certain market conditions allowed HMN to sell securities at a gain
during the third quarter of 1997. Those same conditions were not in
existence during the third quarter of 1996. The increase in the gain on
sale of loans was partly due to the economic and market conditions and
also an increase in mortgage banking activity for the third quarter of
1997, compared to the same quarter of 1996.
Non-interest income for the nine months ended September 30, 1997 was $2.0
million, an increase of $384,000, or 24%, compared to $1.6 million for the
nine months ended September 30, 1996. The increase was principally due to
a $317,000 increase in gain on the sale of loans, a $64,000 increase in
fees and service charges and a $92,000 increase in other income. The
increase in non-interest income was partially offset by a $90,000 decrease
in gain on sale of securities.
14
NON-INTEREST EXPENSE
Non-interest expense was $2.2 million for the third quarter of 1997, a
decrease of $2.2 million from $4.4 million for the third quarter of 1996.
The majority of the decrease in non-interest expense was due to a $2.4
million special one time SAIF assessment that occurred in September of
1996 and a related $155,000 decrease in 1997 SAIF insurance premiums. The
decrease in quarterly non-interest expense was partially offset by a
$256,000 increase in compensation and benefits expense and a $42,000
increase in occupancy expense. During 1997, HMN increased its mortgage
banking activities which required additional staff and increased occupancy
expense. A portion of the increase in compensation and benefits expense is
due to a net increase of 21 employees from the third quarter of 1996 to the
third quarter of 1997 and the remainder is the result of normal merit and
salary increases.
Non-interest expense for the nine months ended September 30, 1997 was $6.5
million, a decrease of $1.9 million, or 23%, from $8.4 million for the
nine months ended September 30, 1996. The majority of the decrease in non-
interest expense was due to a $2.4 million special one time SAIF assessment
that occurred in September of 1996 and a related $461,000 decrease in 1997
SAIF insurance premiums. The decrease in non-interest expense was
partially offset by a $726,000 increase in compensation and benefits
expense and a $124,000 increase in occupancy expense. During 1997, HMN
increased its mortgage banking activities which required additional staff
and increased occupancy expense. A portion of the increase in compensation
is due to a net increase in employees during 1997 and the remainder is the
result of normal merit and salary increases.
INCOME TAX EXPENSE
Income tax expense was $901,000 for the third quarter of 1997, an increase
of $990,000 from a tax benefit of $90,000 for the third quarter of 1996
and is primarily due to an increase in taxable income. Income tax expense
for the nine months ended September 30, 1997 was $2.6 million, an increase
of $784,000, or 44%, from $1.8 million for the same period in 1996 and is
primarily due to an increase in taxable income.
LIQUIDITY
For the nine months ended September 30, 1997, the net cash provided from
operating activities was $12.3 million and net cash used by investing
activities was $19.6 million. For the same period, HMN had $63.4 million
in proceeds from the sale of securities and it collected another $39.4
million from principal payments and the maturity of securities. HMN
purchased $95.1 million of securities during the first nine months of 1997.
HMN also received proceeds from the sale of loans of $29.0 million and
purchased or originated additional net loans of $51.7 million. During the
first nine months of 1997, HMN purchased an additional interest in a
mortgage servicing partnership for $1.9 million and purchased $400,000 in
mortgage servicing assets. It invested $500,000 in a partnership which
invests in the stock of other financial institutions. The Bank purchased
$803,000 of FHLB stock in order to meet its stock requirement under its
membership agreement. It also invested $963,000 in premises and
equipment. During the first nine months of 1997, deposits increased by
$4.2 million and Federal Home Loan Bank
15
advances showed a net increase of $5.9 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 $183.8
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 has entered into an agreement to purchase all of the outstanding
stock of Marshalltown Financial Corporation, a unitary thrift holding
company, for $25.9 million in cash. On November 7, 1997 the transaction
was approved by the stockholders of Marshalltown Financial Corporation.
The Office of Thrift Supervision must approve the transaction. It is
currently reviewing the proposed transaction and should render its opinion
by the end of November.
HMN expects to fund the purchase of the Marshalltown stock from the
proceeds of the sale of securities available for sale or by additional
FHLB advances.
*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 second and third quarter of 1998
and construction funding will come from normal cash flows or the sale of
securities.
*This paragraph contains a forward-looking statement(s). Refer to information
regarding Forward-looking Information on
page 20 of this discussion.
16
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at September 30, 1997 and December 31, 1996.
September 30, December 31,
1997 1996
-------------- ----------------
(Dollars in Thousands)
Non-Accruing Loans
One-to-four family real estate $175 $235
Nonresidential real estate 80 83
Commercial business 0 13
Consumer 22 7
---- ----
Total 277 338
---- ----
Accruing loans delinquent 90 days
One-to-four family real estate 178 0
Restructured loans 0 0
Foreclosed Assets
Real estate:
One-to-four family 94 23
Total non-performing assets $549 $361
Total as a percentage of total assets 0.10% 0.07%
Total non-performing loans $455 $338
Total as a percentage of total loans
receivable, net 0.13% 0.10%
Total non-performing assets at September 30, 1997 were $549,000, an
increase of $188,000, or 52%, from $361,000 at December 31, 1996.
The increase was the result of a delinquent single family loan and
foreclosure of another single family residence.
ASSET/LIABILITY MANAGEMENT
*HMN's management reviews the impact that changing interest rates will
have on its net interest income projected for the twelve months following
September 30, 1997 to determine if its current level of interest rate risk
is acceptable. The following table projects the estimated impact on net
interest income of immediate interest rate changes called rate shocks and
does not include the projected net interest income from the merger with
Marshalltown Financial Corporation.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 13,598 -7.28% -30.00%
+100 14,248 -2.84% -15.00%
0 14,665 0.00% 0.00%
-100 15,069 2.75% -15.00%
-200 15,304 4.36% -30.00%
* This paragraph contains a forward-looking statement(s). Refer to information
regarding Forward-looking Information on page 20 of this discussion.
17
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 19 for table.
18
The following table sets forth the interest rate sensitivity of HMN's assets and
liabilities at September 30, 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
- --------------------------------------------------------------------------------
Cash equivalents 8,636 0 0 0
Securities available for sale:
Mortgage-backed and
related securities(1) $27,794 5,943 29,210 21,951
Other marketable securities 25,749 6,890 6,507 15,320
Securities held to maturity:
Mortgage-backed and
related securities(1) 0 0 0 0
Other marketable securities 0 0 0 0
Loans held for sale, net 2,090 0 0 0
Loans receivable (1)(2)
Fixed rate one-to-four
family(3) 19,154 17,661 60,530 44,601
Adjustable rate
one-to-four family(3) 19,297 20,506 13,661 15,691
Multi family 0 0 0 0
Fixed rate commercial
real estate 141 125 403 257
Adjustable rate commercial
real estate 6,856 60 0 0
Commercial business 1,797 559 1,728 926
Consumer loans 20,157 1,295 2,639 1,200
Federal Home Loan Bank stock 0 0 0 0
Total interest-earning
assets 131,671 53,039 114,678 99,946
Non-interest checking 2,906 0 0 0
NOW accounts 16,753 0 0 0
Passbooks 3,072 2,750 8,387 5,370
Money market accounts 1,656 1,482 4,522 2,895
Certificates 102,437 81,364 99,166 19,234
Federal Home Loan Bank advances 54,714 17,714 19,179 10,000
Total interest-bearing
liabilities 181,538 103,310 131,254 37,499
Interest-earning assets less
interest-bearing liabilities$(49,867) (50,271) (16,576) 62,447
Cumulative interest-rate
sensitivity gap $(49,867) (100,138) (116,714) (54,267)
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1997 (8.77)% (17.60) (20.52) (9.54)
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)
(1) 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.
(2) Loans receivable are presented net of loans in process and deferred loan
fees.
(3) 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.
Maturing or Repricing
--------------------------------------------------
Over 5 No Stated
(Dollars in thousands) Years Maturity Total
- -------------------------------------------------------------------------------
Cash equivalents 0 0 8,636
Securities available for sale:
Mortgage-backed and
related securities(1) $ 26,133 0 111,031
Other marketable securities 155 16,785 71,406
Securities held to maturity:
Mortgage-backed and
related securities(1) 0 0 0
Other marketable securities 0 0 0
Loans held for sale, net 0 0 2,090
Loans receivable (1)(2)
Fixed rate one-to-four family(3) 104,508 0 246,454
Adjustable rate
one-to-four family(3) 988 0 70,143
Multi family 0 0 0
Fixed rate commercial real estate 491 0 1,417
Adjustable rate commercial
real estate 0 0 6,916
Commercial business 55 0 5,065
Consumer loans 193 0 25,484
Federal Home Loan Bank stock 0 6,237 6,237
Total interest-earning assets 132,523 23,022 554,879
Non-interest checking 0 0 2,906
NOW accounts 0 0 16,753
Passbooks 9,543 0 29,122
Money market accounts 5,146 0 15,701
Certificates 0 0 302,201
Federal Home Loan Bank advances 10,400 0 112,007
Total interest-bearing
liabilities 25,089 0 478,690
Interest-earning assets less
interest-bearing liabilities $107,434 23,022 76,189
Cumulative interest-rate
sensitivity gap $ 53,167 76,189 76,189
Cumulative interest-rate gap as a
percentage of total assets at
September 30, 1997 9.35 13.39 13.39
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
(1) 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.
(2) Loans receivable are presented net of loans in process and deferred loan
fees.
(3) 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.
19
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. Adjustable Rate Mortgages
(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 ARMs, 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.
FORWARD-LOOKING INFORMATION
The following statements within Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking
statements and actual results may differ materially from the expectations
disclosed within this Discussion and Analysis. These forward-looking
statements are subject to risks and uncertainties, including those discussed
below. The Company assumes no obligation to publicly release results of any
revision or updates to these forward-looking statements to reflect future
events or unanticipated occurrences.
LIQUIDITY
- HMN has certificates of deposit with outstanding balances of $183.8
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.
Competitive pricing by other institutions, the desire of a competitor to
pay interest rates on deposits that are above the current rates paid by
HMN, or a desire by customers to put more of their funds into
nontraditional bank products such as stocks and bonds could be
circumstances that would cause the $183.8 million of certificates that
mature to become a liquidity problem.
- HMN has entered into an agreement to purchase all of the outstanding stock
of Marshalltown Financial Corporation, a unitary thrift holding company,
for $25.9 million
20
in cash. On November 7, 1997 the transaction was approved by the
stockholders of Marshalltown Financial Corporation. The Office of Thrift
Supervision must approve the transaction. It is currently reviewing the
proposed transaction and should render its opinion by the end of November.
HMN expects to fund the purchase of the Marshalltown stock from the
proceeds of the sale of securities available for sale or by additional
FHLB advances.
OTS approval may not be received by November 30, 1997 due to some
unforeseen regulatory issue.
The funding for the purchase of Marshalltown may not come from the sale of
securities if the market value of the securities decrease drastically from
the current market value at September 30, 1997. Changes in economic
conditions could cause interest rates to rise rapidly which could cause a
drastic decrease in the market value of the security portfolio.
- 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 second or third quarter of
1998 and construction funding will come from normal cash flows or the sale
of securities.
The anticipated occupancy date could change based upon delays experienced
by the contractors for the delivery of construction materials or weather
related issues could cause the occupancy date for Spring Valley and Winona
to be later in 1998. The funding for the construction may not come from
normal cash flows but may be funded either by selling securities or
advances from the FHLB.
ASSET/LIABILITY MANAGEMENT
- HMN's management reviews the impact that changing interest rates will have
on its net interest income projected for the twelve months following
September 30, 1997 to determine if its current level of interest rate risk
is acceptable. The following table projects the estimated impact on net
interest income of immediate interest rate changes called rate shocks and
does not include the projected net interest income of Marshalltown
Financial Corporation.
Rate Shock Net Interest Percentage Board
in Basis Points Income Change Limit
+200 13,598 -7.28% -30.00%
+100 14,248 -2.84% -15.00%
0 14,665 0.00% 0.00%
-100 15,069 2.75% -15.00%
-200 15,304 4.36% -30.00%
The table above is forward-looking and 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 security
purchases along with actual deposit and borrowing activity could cause the
actual net interest income for the twelve month period to be materially
different from the net interest income projected above. The anticipated
merger of Marshalltown Financial Corporation will increase interest-
earning assets by approximately $120 million and interest-bearing
liabilities by approximately $100 million. The increases mentioned above
will have an impact on HMN's net interest income and the related projected
impact of rate shocks on net interest income.
21
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.
At its meeting held on September 23, 1997 the Board of Directors
passed a resolution amending the Bylaws of HMN Financial, Inc.. The
Amended Bylaws are included as Exhibit 3(ii). Since the Bylaws have
not been previously filed in electronic format the complete Amended
Bylaws are included in this item.
At its Board of Directors meeting held on September 23, 1997 the date
for the next annual meeting of shareholders was set for April 28,
1998.
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, Items 5. and
7., was filed on October 17, 1997, to report the Company's third
quarter earnings.
(c) A press release was issued on November 7, 1997 to report the
approval by Marshalltown shareholders of the Agreement and Plan
of Merger dated July 1, 1997 between HMN Financial, Inc. and
Marshalltown Financial Corporation.
22
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 13, 1997 /s/ Roger P. Weise
Roger P. Weise,
Chairman and Chief Executive Officer
(Duly Authorized Officer)
Date: November 13, 1997 /s/ James B. Gardner
James B. Gardner,
Executive Vice President
(Chief Financial Officer)
23
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Reference Sequential
to Prior Page Numbering
Filing or Where Attached
Exhibit Exhibits Are
Regulation S-K Number Located in This
Exhibit Number Document Attached Hereto Form 10-Q Report
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession. N/A N/A
3(a) Articles of Incorporation * N/A
3(b) By-laws 3(ii) Filed
Resolution to Amend By-laws of HMN Financial, Inc. electronically
By-laws of HMN Financial, Inc. as amended
4 Instruments defining the rights of
security holders, Including indentures * N/A
5(a) Amendment to the Home Federal Savings Bank *** N/A
Employees' Savings & Profit Sharing Plan dated
January 28, 1997.
5(b) Amendment to the Adoption Agreement for Home *** N/A
Federal Savings Bank Employees' Savings & Profit
Sharing Plan and Trust effective June 17, 1997.
10.1(a) Employment agreement for Mr. Weise ** N/A
dated June 29, 1994
10.1(b) Extension of employment agreement to
May 20, 2000 *** N/A
10.2(a) Employment agreement for Mr. Gardner ** N/A
dated June 29, 1994
10.2(b) Extension of employment agreement to
May 20, 2000 *** N/A
10.3 Trust Agreement between Home Federal
Savings Bank and the Bank of New York *** N/A
11 Computation of Earnings Per Common Share 11 Filed
electronically
27 Financial Data Schedule 27 Filed
electronically
* Filed April 1, 1994, as exhibits to the Registrant's Form S-1 registration
statement (Registration No. 33-77212) pursuant to the Securities Act of
1933. All of such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
** Filed as an exhibit to the Registrant's Form 10-K for 1994 (file No. 0-
24100). All previously filed documents are hereby incorporated by reference
in accordance with Item 601 of Regulation S-K.
***Filed as an exhibit to Registrant's Form 10-Q for June 30, 1997 (file no. 0-
24100). All previously filed documents are hereby incorporated by reference
in accordance with Item 601 of Regulation S-K.
24