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, 1997. 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 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- HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Financial Statements December 31, 1997, 1996, and 1995 [logo] KPMG Peat Marwick LLP 4200 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 INDEPENDENT AUDITORS' REPORT The Plan Administrator Home Federal Savings Bank Employees' Savings & Profit Sharing Plan: We have audited the accompanying statements of net assets available for benefits of the Home Federal Savings Bank Employees' Savings & Profit Sharing Plan (the Plan) as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the changes in net assets available for benefits for each of the years in the three-year period ended December 31, 1997, 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. KPMG Peat Marwick LLP Minneapolis, Minnesota June 19, 1998 HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Net Assets Available for Benefits December 31, 1997 Participant Directed Funds - ----------------------------------------------------------------------------- S&P MidCap S&P 500 HMN Stock Stock Stable Money Bond Financial, Index Index Value Market Market Inc. Fund Fund Fund Fund Fund Stock - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $1,075,385) $ 287,831 335,885 76,535 25,954 41,998 827,112 Contributions receivable: Employer 0 0 0 0 0 0 Employee 0 0 0 0 0 0 - ----------------------------------------------------------------------------- Net assets available for benefits $ 287,831 335,885 76,535 25,954 41,998 827,112 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- International Growth & Stock Income Growth Fund Fund Fund - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $1,090,269) 20,762 2,572 2,577 Contributions receivable: Employer 0 0 0 Employee 0 0 0 - ----------------------------------------------------------------------------- Net assets available for benefits 20,762 2,572 2,577 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Participant Loans Unallocated Total - ----------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $1,090,269) 11,689 0 1,632,915 Contributions receivable: Employer 0 4,416 4,416 Employee 0 18,931 18,931 - ----------------------------------------------------------------------------- Net assets available for benefits 11,689 23,347 1,656,262 - ----------------------------------------------------------------------------- See accompanying notes to financial statements. 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 Index Index Value Market Fund Fund Fund Fund - ---------------------------------------------------------------------------- Investments: Total investments at fair market value (total cost of $810,844) $156,747 214,731 77,542 27,069 Contributions receivable: Employer 0 0 0 0 Employee 0 0 0 0 - ---------------------------------------------------------------------------- Net assets available for benefits $156,747 214,731 77,542 27,069 - ---------------------------------------------------------------------------- Participant Directed Funds - ------------------------------------------------------------------------------ HMN Bond Financial, Market Inc. Participant Fund Stock Loans Unallocated Total - ------------------------------------------------------------------------------ Investments: Total investments at fair market value (total cost of $810,844) $ 45,003 371,719 4,931 0 897,742 Contributions receivable: Employer 0 0 0 35,288 35,288 Employee 0 0 0 13,062 13,062 - ------------------------------------------------------------------------------- Net assets available for benefits $ 45,003 371,719 4,931 48,350 946,092 - ------------------------------------------------------------------------------- See accompanying notes to financial statements. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Statement of Changes in Net Assets Available for Benefits Year ended December 31, 1997 Participant Directed Funds ----------------------------------------------------------------- HMN S&P MidCap S&P 500 Stable Money Bond Financial Stock Index Stock Index Value Market Market Inc. Fund Fund Fund Fund Fund Stock - ---------------------------------------------------------------------------- Contributions: Employer $ 12,392 12,903 2,825 4,945 1,762 8,101 Employee 53,036 54,201 11,354 18,973 7,191 37,531 Rollover 2,081 2,081 283 362 63 1,137 - ----------------------------------------------------------------------------- Total contributions 67,509 69,185 14,462 24,280 9,016 46,769 - ----------------------------------------------------------------------------- Withdrawals (12,973) (6,531) (21) (13) (88) (2,431) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation (depreciation) on fair market value of investments 50,208 64,883 18,653 10,611 10,904 316,272 Interest 0 0 0 1,595 1,848 1,696 Dividends 5,097 3,098 0 0 0 0 Realized gains (losses) 8,050 13,982 (13,127) (10,602) (6,383) 4,514 Less asset management fees (1,097) (1,507) (425) (95) (275) (1,157) - ----------------------------------------------------------------------------- Net investment income 62,258 80,456 5,101 1,509 6,094 321,325 - ----------------------------------------------------------------------------- Transfers among funds 14,290 (21,956) (20,549) (26,891) (18,027) 89,730 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 131,084 121,154 (1,007) (1,115) (3,005) 455,393 Beginning of year 156,747 214,731 77,542 27,069 45,003 371,719 - ----------------------------------------------------------------------------- End of year $ 287,831 335,885 76,535 25,954 41,998 827,112 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- International Growth & Stock Income Growth Fund Fund Fund - ----------------------------------------------------------------------------- Contributions: Employer 292 39 41 Employee 1,189 157 164 Rollover 0 0 0 - ----------------------------------------------------------------------------- Total contributions 1,481 196 205 - ----------------------------------------------------------------------------- Withdrawals 0 0 0 - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation (depreciation) on fair market value of investments (1,058) 81 78 Interest 0 0 0 Dividends 0 0 0 Realized gains (losses) 0 0 0 Less asset management fees (46) (10) (11) - ----------------------------------------------------------------------------- Net investment income (1,104) 71 67 - ----------------------------------------------------------------------------- Transfers among funds 20,385 2,305 2,305 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 20,762 2,572 2,577 Beginning of year 0 0 0 - ----------------------------------------------------------------------------- End of year 20,762 2,572 2,577 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Participant Loans Unallocated Total - ----------------------------------------------------------------------------- Contributions: Employer 0 4,416 47,716 Employee 0 18,931 202,727 Rollover 0 0 6,007 - ----------------------------------------------------------------------------- Total contributions 0 23,347 256,450 - ----------------------------------------------------------------------------- Withdrawals 0 0 (22,057) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation (depreciation) on fair market value of investments 0 0 470,632 Interest 0 0 5,139 Dividends 0 0 8,195 Realized gains (losses) 0 0 (3,566) Less asset management fees 0 0 (4,623) - ----------------------------------------------------------------------------- Net investment income 0 0 475,777 - ----------------------------------------------------------------------------- Transfers among funds 6,758 (48,350) 0 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 6,758 (25,003) 710,170 Beginning of year 4,931 48,350 946,092 - ----------------------------------------------------------------------------- End of year 11,689 23,347 1,656,262 - ----------------------------------------------------------------------------- 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 Federated Fidelity Fidelity S&P MidCap Pooled Fidelity Capital Equity Retirement Stock GIC Asset Preservation Income II Growth Index Fund Manager Fund Fund Fund Fund - ----------------------------------------------------------------------------- Contributions: Employer $ 0 0 0 0 0 0 Employee 0 13,547 5,862 16,362 11,353 16,535 Rollover 0 0 0 0 0 2,412 - ----------------------------------------------------------------------------- Total contributions 0 13,547 5,862 16,362 11,353 18,947 - ----------------------------------------------------------------------------- Withdrawals (105) (19,237) (294) (3,470) (4,143) (2,474) - ----------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 0 0 0 0 0 14,264 Interest 0 19 16 14 14 49 Dividends 0 1,782 702 1,308 0 0 Realized gains (losses) (829) 2,020 930 6,396 416 368 Less asset management fees 0 0 0 0 0 (181) - ----------------------------------------------------------------------------- Net investment income (829) 3,821 1,648 7,718 430 14,500 - ----------------------------------------------------------------------------- Transfers among funds (111,661) (120,364) (29,735) (127,087) (60,738) 125,774 - ----------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (112,595) (122,233) (22,519) (106,477) (53,098) 156,747 Beginning of year 112,595 122,233 22,519 106,477 53,098 0 - ----------------------------------------------------------------------------- End of year $ 0 0 0 0 0 156,747 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- S&P 500 Stock Stable Money Bond 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 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------- 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, 1995 Participant Directed Funds --------------------------------------------------------------- 20th Nationwide 20th Nation- Century Federated Pooled Century Fidelity wide Growth Capital GIC U.S. Gov't. Asset Stock Stock Preservation Fund Bond Fund Manager Fund Fund Fund - ----------------------------------------------------------------------------- Contributions: Employer $ 0 0 0 0 0 0 Employee 0 0 17,769 0 0 17,997 - ---------------------------------------------------------------------------- Total contributions 0 0 17,769 0 0 17,997 - ---------------------------------------------------------------------------- Withdrawals (12,526) 0 (5,321) 0 0 (2,155) - ---------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 0 0 13,818 0 0 1 Interest 6,626 0 0 0 0 301 Dividends 0 0 3,399 0 0 512 Realized gains 0 216 428 1,056 246 0 Less asset management fees (187) (354) (4,112) (2,725) (983) (106) - ---------------------------------------------------------------------------- Net investment income 6,439 (138) 13,533 (1,669) (737) 708 - ---------------------------------------------------------------------------- Transfers among funds (10,389) (20,135) (63,131)(79,418) (22,760) 5,969 - ---------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits (16,476) (20,273) (37,150)(81,087) (23,497) 22,519 Beginning of year 129,071 20,273 159,383 81,087 23,497 0 - ---------------------------------------------------------------------------- End of year $ 112,595 0 122,233 0 0 22,519 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Federated Fidelity Fidelity HMN Short Term Equity Retirement Financial, Income Income II Growth Inc. Fund Fund Fund Stock - ---------------------------------------------------------------------------- Contributions: Employer 0 0 0 0 Employee 2,115 24,149 13,946 0 - ---------------------------------------------------------------------------- Total contributions 2,115 24,149 13,946 0 - ---------------------------------------------------------------------------- Withdrawals (60) (627) (1,271) (77) - ---------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 413 13,127 3,195 46,040 Interest 0 0 0 0 Dividends 600 4,146 4,565 0 Realized gains 19 747 473 243 Less asset management fees (80) (532) (258) 0 - ---------------------------------------------------------------------------- Net investment income 952 17,488 7,975 46,283 - ---------------------------------------------------------------------------- Transfers among funds 11,162 65,467 32,448 177,059 - ---------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 14,169 106,477 53,098 223,265 Beginning of year 0 0 0 0 - ---------------------------------------------------------------------------- End of year 14,169 106,477 53,098 223,265 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Participant Loans Unallocated Total - ---------------------------------------------------------------------------- Contributions: Employer 0 40,453 40,453 Employee 0 48,287 124,263 - ---------------------------------------------------------------------------- Total contributions 0 88,740 164,716 - ---------------------------------------------------------------------------- Withdrawal 0 (1) (22,038) - ---------------------------------------------------------------------------- Investment income: Unrealized appreciation on fair market value of investments 0 0 76,594 Interest 0 502 7,429 Dividends 0 0 13,222 Realized gains 0 3,428 Less asset management fees 0 (3,600) (12,937) - ---------------------------------------------------------------------------- Net investment income 0 (3,098) 87,736 - ---------------------------------------------------------------------------- Transfers among funds 1,519 (97,791) 0 - ---------------------------------------------------------------------------- Increase (decrease) in net assets available for plan benefits 1,519 (12,150) 230,414 Beginning of year 0 50,783 464,094 - ---------------------------------------------------------------------------- End of year 1,519 38,633 694,508 - ---------------------------------------------------------------------------- See accompanying notes to financial statements. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Notes to Financial Statements December 31, 1997, 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 Bank of New York 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 fair market value. Investments in mutual funds or commingled 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 ranging between 38 and 85 basis points are assessed annually on average Net Asset Values and are deducted from the individual funds. Administrative expenses totaling $5,100 and $7,511 were paid by the Company in 1997 and 1996 respectively. (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 who have attained the age of 21 are eligible to participate in the Plan if during the one month period following the date of employment (or any anniversary thereof) the employee completes 83 1/3 or more hours of service. 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 1997 and 1996, and $9,240 during 1995. The Company matches 25% of each participant's contribution not in excess of 8% of the participant's salary. 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 1997, 1996, or 1995. 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 actual earnings thereon. Participants must be employed on December 31 of the plan year to be entitled to the Company's match for the year. Employees hired prior to January 1, 1997 are immediately vested in the employer contributions at December 31 of the plan year. Employees hired January 1, 1997 and thereafter are subject to 5 year cliff vesting for the employer matching contribution. Forfeited amounts for 1997 totaled $593. Employer match amounts not vested at December 31, 1997 totaled $3,111. 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 vested 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 prior to 1996. The contributions to the Plan for each employer participating in the Plan during 1997 were as follows: Employer Employee Rollover -------- -------- -------- Home Federal Savings Bank $ 45,772 194,954 6,007 Osterud Insurance Agency, Inc. 1,944 7,773 0 ------ ------- ----- 47,716 202,727 6,007 ====== ======= ===== (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 1%. S&P MIDCAP STOCK INDEX FUND - The fund invests 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. This fund was available in 1997 and 1996 S&P 500 STOCK INDEX FUND - The fund invests 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. This fund was available in 1997 and 1996. STABLE VALUE FUND - The fund invests 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. This fund was available in 1997 and 1996. MONEY MARKET FUND - The fund invests 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. This fund was available in 1997 and 1996. BOND MARKET FUND - The fund invests in a portfolio of high quality bonds including U.S. Treasury, agency, corporate, mortgage and asset backed securities. This fund was available in 1997 and 1996. HMN FINANCIAL, INC. STOCK - The fund invests in the common stock of HMN Financial, Inc., the Holding Company of Home Federal Savings Bank. Three to six percent of the fund is maintained in a Short Term Investment Fund for liquidity purposes. This fund was available in 1997, 1996, and 1995. INTERNATIONAL STOCK FUND - The fund invests in foreign stocks in countries based in Europe, Australia and the Far East. The fund is designed to approximate the performance of the Morgan Stanley Capital International (MSCI) EAFE (Europe, Australia, Far East) Index. This fund became available in June 1997. ASSET ALLOCATION FUNDS - Income Plus Fund - The fund invests in a broad range of stable value securities to reduce short term risk, and in a broad range of large U.S. and international companies to capture growth potential. This fund became available in June 1997. Growth & Income Fund - The fund invests in U.S. and international stock, U.S. bonds, and stable value investments to pursue long term appreciation and short term stability. This fund became available in June 1997. Growth Fund - The fund invests in a broad range of domestic and international stock. This fund became available in June 1997. NATIONWIDE POOLED GIC FUND - The fund invests in a guaranteed investment contract with an insurance company. This investment option was available in 1996 and 1995. FEDERATED CAPITAL PRESERVATION FUND - The fund invests in guaranteed investment contracts and other stable value products to preserve principal while earning a competitive rate-of-return. This investment option was available in 1996 and 1995. FEDERATED SHORT TERM INCOME FUND - The fund invests 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 available in 1996 and 1995. FIDELITY ASSET MANAGER - The fund invests in stocks, bonds, and short term instruments to achieve maximum total return. This investment option was available in 1996 and 1995. FIDELITY EQUITY INCOME II FUND - The fund invests primarily in equity security with above-average yields to provide current income. This investment option was available in 1996 and 1995. FIDELITY RETIREMENT GROWTH - The fund invests primarily in equity securities of companies with earnings that are expected to grow at an above-average rate. This investment option was available in 1996 and 1995. 20TH CENTURY U.S. GOVERNMENT BOND FUND - The fund invests primarily in securities of the U.S. Government and it's agencies with a weighted maturity of four years or less. This invesment option was available in 1995. NATIONWIDE STOCK FUND - The fund invests primarily in the common stock of larger companies to achieve capital growth. This investment option was available in 1995. 20TH CENTURY GROWTH STOCK FUND - The fund invests primarily in common stocks to achieve capital growth. This investment option was available in 1995. (5) NUMBER OF PARTICIPANTS The number of participants in each investment option as of December 31, 1997 and 1996 were as follows: 1997 1996 ----- ----- HMN Financial, Inc. Stock 78 55 Participant Loans 7 3 S&P MidCap Stock Index Fund 92 70 S&P 500 Stock Index Fund 95 74 Stable Value Fund 33 27 Money Market Fund 17 10 Bond Market Fund 35 29 International Stock Fund 11 0 Growth & Income 1 0 Growth 2 0 The total number of participants in the Plan were 111 and 88 at December 31, 1997 and 1996 respectively. (6) INVESTMENTS The following investments equal or exceed 5% of net assets available for plan benefits at December 31, 1997 or 1996: December 31, 1997 December 31, 1996 ---------------------------- --------------------------- Fair Fair market Unrealized market Unrealized Description Cost value appreciation Cost value appreciation - ----------------------------------------------------------------------------- S&P MidCap Stock Index Fund 223,471 287,831 64,360 142,595 156,747 14,152 S&P 500 Stock Index Fund 250,167 335,885 85,718 193,896 214,731 20,835 Stable Value Fund ** 75,898 77,542 1,644 HMN Financial, Inc. Stock 462,319 827,112 364,793 323,198 371,719 48,521 ** Not applicable in 1997. Fund is less than 5% of net assets. (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 In December, 1997, the Bank purchased Marshalltown Savings Bank (MSB) of Marshalltown, Iowa. MSB maintained two branches in Marshalltown and one branch in Toledo, Iowa. Thirty-three full time employees at the three branches became eligible to participate in the Plan on February 1, 1998. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Item 27a - Schedule of Assets Held for Investment Purposes December 31, 1997 Net Asset Fair Value market Description Units Per Unit Cost value - ----------------------------------------------------------------------------- S&P MidCap Stock Index Fund 13,758 20.9217 223,471 287,831 S&P 500 Stock Index Fund 11,990 28.0148 250,167 335,885 Stable Value Fund 9,874 7.7513 56,237 76,535 Money Market Fund 4,469 5.8075 14,896 25,954 Bond Market Fund 5,938 7.0726 29,796 41,998 International Stock Fund 2,253 9.2146 21,820 20,762 Growth & Income Fund 248 10.3729 2,491 2,572 Growth Fund 248 10.3771 2,499 2,577 *HMN Financial, Inc. Common Stock 41,307 20.0233 462,319 827,112 Participant Loans (9.25% to 10.5%) --- --- 11,689 11,689 - ----------------------------------------------------------------------------- Total investments 1,075,385 1,632,915 - ----------------------------------------------------------------------------- *Party-in-interest See accompanying independent auditors' report. HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN Item 27-d - Schedule of Reportable 5% Transactions Series of Transactions (Involving One Security) Which Exceed 5% of Net Assets Available for Benefits Year ended December 31, 1997 Total Total Number dollar Number dollar Total of value of of value cost of Net Description of asset purchases purchases sales of sales sales gain - ----------------------------------------------------------------------------- S&P MidCap Stock Index Fund 23 131,874 34 59,048 50,998 8,050 S&P 500 Stock Index Fund 25 140,287 33 97,998 84,016 13,982 *HMN Financial, Inc. Common Stock 29 154,449 23 19,842 15,328 4,514 *Party-in-interest There were no individual transactions for the year ended December 31, 1997 that exceeded 5% of net assets available for benefits. 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 29, 1998 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