HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
at September 30, 1997
Pro Forma
----------------------------
ASSETS HMN MFC Adjustments Combined
----------- --------- -------------- -----------
Cash and cash
equivalents $ 9,635,956 4,681,416 14,317,372
Securities available
for sale:
Mortgage-backed and
related securities 111,117,282 0 25,343,907(1)(2) 136,461,189
Other marketable
securities 72,815,033 1,224,396 9,075,182(1)(2) 83,114,611
----------- ---------- ---------- -----------
183,932,315 1,224,396 34,419,089 219,575,800
----------- ---------- ---------- -----------
Securities held to maturity:
Mortgage-backed and
related securities 0 40,105,545 (40,105,545)(2) 0
Other marketable
securities 0 10,087,377 (10,087,377)(2) 0
----------- ---------- ---------- -----------
0 50,192,922 (50,192,922) 0
----------- ---------- ---------- -----------
Loans held for sale 2,089,733 0 2,089,733
Loans receivable, net 352,925,376 66,183,349 1,636,000 (2) 420,744,725
Federal Home Loan Bank
stock, at cost 6,236,700 1,195,500 7,432,200
Real estate, net 89,334 397,466 486,800
Premises and equipment,
net 4,230,723 385,072 370,392 (2) 4,986,187
Investment in limited
partnerships 5,580,797 443,973 6,024,770
Goodwill 4,723,042 (3) 4,723,042
Core deposit intangible 1,567,000 (4) 1,567,000
Accrued interest
receivable 3,180,525 713,098 3,893,623
Prepaid expenses and other
assets 945,436 74,223 1,019,659
----------- ----------- ---------- -----------
Total assets $568,846,895 125,491,415 (7,477,399) 686,860,911
=========== =========== ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits $366,682,349 103,709,881 440,000 (2) 470,832,230
Federal Home Loan Bank
advances 112,007,163 0 10,000,000 (1) 122,007,163
Accrued interest payable 1,147,269 1,031,293 2,178,562
Advance payments by
borrowers for taxes
and insurance 758,067 12,342 770,409
Accrued expenses and
other liabilities 3,632,564 457,170 2,363,330 (5) 6,453,064
----------- ----------- ---------- -----------
Total liabilities 484,227,412 105,210,686 12,803,330 602,241,428
----------- ----------- ---------- -----------
Commitments and contingencies
Stockholders' equity:
HMN serial preferred stock
($.01 par value): authorized
500,000 shares; issued and
outstanding none 0 0 0
HMN common stock ($.01 par
value): authorized shares
7,000,000; issued
shares 6,085,775 60,858 14,115 (14,115) (1) 60,858
Additional paid-in
capital 59,702,833 10,599,090 (10,599,090) (1) 59,702,833
Retained earnings,
subject to certain
restrictions 58,976,197 9,749,169 (9,749,169) (1) 58,976,197
Net unrealized gain on
securities available
for sale 967,170 32,077 (32,077) (1) 967,170
Unearned employee stock
ownership plan shares (4,650,340) 0 (4,650,340)
Unearned compensation
restricted stock awards (658,817) (113,722) 113,722 (1) (658,817)
HMN treasury stock, at
cost, 1,873,939 shares (29,778,418) 0 (29,778,418)
---------- ----------- ----------- -----------
Total stockholders'
equity 84,619,483 20,280,729 (20,280,729) 84,619,483
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $568,846,895 125,491,415 (7,477,399) 686,860,911
=========== =========== =========== ===========
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
Pursuant to the Merger and consistent with generally accepted accounting
principles ("GAAP"), certain purchase method accounting adjustments relating to
MFC will be recorded. The purchase method accounting adjustments are
preliminary estimates and are subject to revision as economic conditions change
or as more information becomes available. The purchase price was $24.8
million, consisting of $23.7 million for 1.35 million outstanding shares of MFC
stock, or $17.51 per share, and $1.1 million for the outstanding MFC options.
HMN owned 60,000 shares at a cost of $1.0 million of MFC stock which were
cancelled upon the completion of the Merger. The following notes further
explain the adjustments.
(1) Represents the planned sale of $14.8 million of securities available for
sale, the planned borrowing of $10.0 million of advances from the Federal
Home Loan Bank of Des Moines and the elimination of HMN's $1.0 million
investment in MFC common stock and the elimination of MFC's stockholders'
equity under the purchase method of accounting.
(2) Represents the mark-to-market adjustments to reflect the fair market value
of the MFC assets acquired and liabilities assumed under the purchase
method of accounting. It also transfers the held to maturity security
portfolio to the available for sale portfolio. The following summarizes
the net mark-to-market premium or (discounts) established for the
following asset categories:
Bank premises and equipment $ 370,392
Securities 73,719
Loans 1,636,000
Deposits (440,000)
----------
Total $1,640,111
==========
(3) Represents the excess of the purchase price paid for MFC over the fair
market value of the tangible and identifiable assets acquired and the fair
value of the liabilities (goodwill) assumed under the purchase method of
accounting. Goodwill is assumed to amortize on a straight-line basis over
25 years.
The merger consideration of $24.8 million plus the cancellation of 60,000
shares of MFC common stock owned by HMN with a historical cost of $1.0
million was allocated as follows:
Net assets at fair value (note 1 & 2) $21,920,840
Core deposit intangible (note 4) 1,567,000
Data processing conversion costs (note 5) (160,000)
Severance and other change of control
costs (note 5) (692,000)
Professional fees (note 5) (380,000)
Other accrued liabilities (note 5) (128,000)
Goodwill 4,723,042
Net deferred tax liabilities (note 5) (1,003,330)
----------
Purchase price $25,847,552
==========
(4) Represents core deposit intangible relating to MFC's deposits. The core
deposit intangible will be amortized using an accelerated method.
(5) Represents accruals for other Merger related costs such as data processing
conversion costs ($160,000), severance and other change of control costs
($692,000), professional fees including investment banker, accountants and
attorneys fees ($380,000), accruals for other liabilities ($128,000) and
net deferred tax liabilities of ($1,003,330).
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1997
HMN MFC Pro Forma
Nine Months Nine Months----------------------------
9-30-97 9-30-97 Adjustments Combined
----------- --------- -------------- -----------
Interest Income:
Loans receivable $20,730,094 3,701,845 (759,742) (1) 23,672,197
Securities available
for sale:
Mortgage-backed and
related 6,458,996 0 6,458,996
Other marketable 2,621,762 53,924 2,675,686
Securities held to maturity:
Mortgage-backed and
related 33,400 2,142,943 (769,104)(2) 1,407,239
Other marketable 10,032 493,454 2,439 (2) 505,925
Cash equivalents 225,237 190,056 415,293
Other 304,158 62,591 366,749
---------- ---------- ---------- ----------
Total interest
income 30,383,679 6,644,813 (1,526,407) 35,502,085
---------- ---------- ---------- ----------
Interest expense:
Deposits 13,993,332 4,115,712 (176,779)(3) 17,932,265
Federal Home Loan Bank
advances 4,792,552 0 450,000 (4) 5,242,552
---------- ---------- ---------- ----------
Total interest
expense 18,785,884 4,115,712 273,221 23,174,817
---------- ---------- ---------- ----------
Net interest
income 11,597,795 2,529,101 (1,799,628) 12,327,268
Provision for loan
losses 225,000 7,500 232,500
---------- ---------- ---------- ----------
Net interest
income after
provision for
loan losses 11,372,795 2,521,601 (1,799,628) 12,094,768
---------- ---------- ---------- ----------
Non-interest income:
Fees and service
charges 318,346 42,885 361,231
Securities gains, net 872,159 2,237 874,396
Gain on sales of loans 334,367 0 334,367
Other 457,786 52,793 510,579
---------- ---------- ---------- ----------
Total non-interest
income 1,982,658 97,915 2,080,573
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and
benefits 4,106,699 1,007,848 5,114,547
Occupancy 718,801 144,348 19,935 (6) 883,084
Federal deposit insurance
premiums 175,379 50,698 226,077
Advertising 214,557 40,887 255,444
Data processing 372,432 77,415 449,847
Provision for real
estate losses 3,000 0 3,000
Other 879,375 424,530 350,744 (5) 1,654,649
---------- ---------- ---------- ----------
Total non-interest
expense 6,470,243 1,745,726 370,679 8,586,648
---------- ---------- ---------- ----------
Income before income
tax expense 6,885,210 873,790 (2,170,307) 5,588,693
Income tax (benefit)
expense 2,554,400 246,526 (677,226) 2,123,700
---------- ---------- ---------- ----------
Net income $ 4,330,810 627,264 (1,493,081) 3,464,993
========== ========== ========== ==========
Primary earnings per
common share and common
share equivalents $ 1.10 0.43 0.88
===== ===== =====
Fully diluted earnings per
common share and common
share equivalents $ 1.09 0.42 0.87
===== ===== =====
Weighted average shares
outstanding:
Primary 3,938,454 1,470,989 3,938,454
Fully diluted 3,977,962 1,477,287 3,977,962
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1996
HMN MFC Pro Forma
Nine Months Nine Months-------------------------
9-30-96 9-30-96 Adjustments Combined
----------- --------- ------------- ----------
Interest Income:
Loans receivable $ 19,009,335 3,328,393 (759,742)(1) 21,577,986
Securities available
for sale:
Mortgage-backed and
related 7,730,690 0 7,730,690
Other marketable 1,655,705 50,984 1,706,689
Securities held to maturity:
Mortgage-backed and related 719,827 2,494,344 (769,104)(2) 2,445,067
Other marketable 90,103 402,683 2,439 (2) 495,225
Cash equivalents 315,623 207,835 523,458
Other 232,453 64,014 296,467
---------- --------- ---------- ----------
Total interest income 29,753,736 6,548,253 (1,526,407) 34,775,582
---------- --------- ---------- ----------
Interest expense:
Deposits 14,281,156 4,174,507 (176,779) (3)18,278,884
Federal Home Loan Bank
advances 3,739,015 0 450,000 (3) 4,189,015
---------- --------- ---------- ----------
Total interest expense 18,020,171 4,174,507 273,221 22,467,899
---------- --------- ---------- ----------
Net interest income 11,733,565 2,373,746 (1,799,628) 12,307,683
Provision for loan losses 225,000 7,500 232,500
---------- --------- ---------- ----------
Net interest income
after provision for
loan losses 11,508,565 2,366,246 (1,799,628) 12,075,183
---------- --------- ---------- ----------
Non-interest income:
Fees and service charges 254,188 47,740 301,928
Securities gains, net 961,798 0 961,798
Gain on sales of loans 16,980 0 16,980
Other 365,879 76,754 442,633
---------- --------- ---------- ----------
Total non-interest income 1,598,845 124,494 1,723,339
---------- --------- ---------- ----------
Non-interest expense:
Compensation and benefits 3,380,843 976,553 4,357,396
Occupancy 595,216 151,283 19,935 (6) 766,434
Federal deposit insurance
premiums 636,676 180,222 816,898
SAIF special assessment 2,351,563 681,920 3,033,483
Advertising 229,735 40,851 270,586
Data processing 368,145 78,078 446,223
Other 799,710 373,518 350,744 (5) 1,523,972
---------- --------- ---------- -----------
Total non-interest
expense 8,361,888 2,482,425 370,679 11,214,992
---------- --------- ---------- -----------
Income (loss) before
income taxes 4,745,522 8,315 (2,170,307) 2,583,530
Income tax (benefit) expense 1,770,274 (12,253) (749,221) 1,008,800
---------- --------- ---------- -----------
Net income (loss) $ 2,975,248 20,568 (1,421,086) 1,574,730
========== ========= ========== ===========
Primary earnings per common
share and common share
equivalents $ 0.66 0.01 0.35
========== ========= ===========
Fully diluted earnings per
common share and common
share equivalents 0.66 0.01 0.35
========== ========= ===========
Weighted average shares
outstanding:
Primary 4,509,942 1,472,722 4,509,942
Fully diluted 4,516,499 1,473,784 4,516,499
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME
For the year ended December 31, 1996
HMN MFC Pro Forma
Nine Months Nine Months----------------------------
12-31-96 9-30-96 Adjustments Combined
----------- --------- -------------- -----------
Interest Income:
Loans receivable $25,721,042 4,386,435 (983,477)(1) 29,347,735
Securities available
for sale:
Mortgage-backed and
related 10,027,438 0 10,027,438
Other marketable 2,424,628 62,312 2,486,940
Securities held to
maturity:
Mortgage-backed
and related 765,120 3,383,557 (1,023,803)(2) 3,379,573
Other marketable 104,448 551,307 2,981 (2) 658,194
Cash equivalents 494,129 279,284 773,413
Other 327,520 93,316 420,836
---------- ---------- --------- ----------
Total interest
income 39,864,325 8,756,211 (2,004,299) 47,094,129
---------- ---------- --------- ----------
Interest expense:
Deposits 18,949,937 5,579,496 (212,430)(3) 24,352,654
Federal Home Loan
Bank advances 5,243,853 0 600,000 (4) 5,693,853
---------- ---------- --------- ----------
Total interest
expense 24,193,790 5,579,496 387,570 30,046,507
---------- ---------- --------- ----------
Net interest income 15,670,535 3,176,715 (2,391,869) 17,047,622
Provision for loan
losses 300,000 10,000 310,000
---------- ---------- --------- ----------
Net interest income
after provision for
loan losses 15,370,535 3,166,715 (2,391,869) 16,737,622
---------- ---------- --------- ----------
Non-interest income:
Fees and service
charges 359,249 62,661 421,910
Securities gains, net 1,029,638 0 1,029,638
Gain on sales of loans 39,306 0 39,306
Other 494,507 89,982 584,489
---------- ---------- --------- ----------
Total non-interest
income 1,922,700 152,643 2,075,343
---------- ---------- --------- ----------
Non-interest expense:
Compensation and
benefits 4,591,367 1,314,115 5,905,482
Occupancy 825,609 200,758 26,580(6) 1,046,302
Federal deposit
insurance premiums 799,890 239,406 1,039,296
SAIF special assessment 2,351,563 681,920 3,033,483
Advertising 308,464 53,995 362,459
Data processing 489,045 103,898 592,943
Other 1,142,948 593,324 467,662(5) 2,087,016
---------- ---------- ---------- ----------
Total non-interest
expense 10,508,886 3,187,416 494,242 14,066,981
---------- ---------- ---------- ----------
Income before
income tax expense 6,784,349 131,942 (2,886,111) 4,745,984
Income tax expense 2,510,000 57,212 (1,009,212) 1,558,000
---------- ---------- ---------- ----------
Net income $4,274,349 74,730 (1,876,899) 2,472,180
========== ========== ========== ==========
Primary earnings per
common share and common
share equivalents $ 0.96 0.05 0.56
========== ========== ==========
Fully diluted earnings
per common share and
common share
equivalents $ 0.95 0.05 0.55
========== ========== ==========
Weighted average
shares outstanding:
Primary 4,436,833 1,472,185 4,436,833
Fully diluted 4,509,566 1,473,784 4,509,566
HMN FINANCIAL, INC. AND SUBSIDIARIES
MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED
CONSOLIDATED STATEMENTS OF INCOME
Pursuant to the Merger and consistent with GAAP, certain adjustments will
be recorded, primarily to accrue for specific, identified costs related to the
merger of MFC. The amounts of the Merger related costs are preliminary
estimates and are subject to revisions as economic conditions change or as more
information becomes available.
HMN expects to achieve operating cost savings primarily through reductions
in staff and the consolidation of certain functions such as data processing,
investments and other back office operations at MFC. The operating cost
savings are expected to be achieved in various amounts at various times during
the years subsequent to the acquisition of MFC and not ratably over, or at the
beginning or end of, such periods. No adjustment has been reflected in the
Unaudited Pro Forma Combined Consolidated Statement of Income for the year
ended December 31, 1996 or for the nine months ended September 30, 1997 and
1996 for the anticipated cost savings.
(1) Represents amortization of MFC mark-to-market adjustments under the
purchase method of accounting for loans.
(2) Represents amortization of MFC mark-to-market adjustments under the
purchase method of accounting for securities, and the forgone interest
income resulting from the planned sale of $15.8 million of securities.
(3) Represents amortization of MFC mark-to-market adjustments under the
purchase method of accounting for deposits.
(4) Represents the net interest cost of borrowing $10.0 million to fund the
MFC acquisition.
(5) Represents amortization of goodwill and core deposit intangible.
(6) Represents the additional depreciation on premises and equipment related
to the MFC mark-to-market adjustments.
Provided the accounting estimates related to the acquisition of MFC are not
revised, the estimated impact of amortizing goodwill and other purchase
accounting adjustments will reduce pretax income by the following amounts in
each of the following years: $1,256,000 for 1998, $593,000 for 1999, $564,000
for 2000, $426,694 for 2001 and $346,674 for 2002.