-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dl9Q8aIok/irc9Ir/QmVtzr+xfZZTpBeTkFot9HDNGtRKlTztq/U/fJrahB9u5bB dtCaAHS2Zkm7+5BiYL4WEw== 0000921183-96-000010.txt : 19960813 0000921183-96-000010.hdr.sgml : 19960813 ACCESSION NUMBER: 0000921183-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HMN FINANCIAL INC CENTRAL INDEX KEY: 0000921183 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411777397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24100 FILM NUMBER: 96609039 BUSINESS ADDRESS: STREET 1: 101 N BROADWAY CITY: SPRING VALLEY STATE: MN ZIP: 55975-1223 BUSINESS PHONE: 5073467345 10-Q 1 FORM 10-Q 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 June 30, 1996 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 August 6, 1996 Common stock, .01 par value 4,673,340 This Form 10-Q consists of 87 pages. The exhibit index is on page 19. 1 HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page ---- Item 1: Financial Statements (unaudited) Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 3 Consolidated Statements of Income for the Three Months Ended and Six Months Ended June 30, 1996 and 1995 4 Consolidated Statement of Stockholders' Equity for the Six Month Period Ended June 30, 1996 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7-10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 PART II - OTHER INFORMATION Item 1: Legal Proceedings 16 Item 2: Changes in Securities 16 Item 3: Defaults Upon Senior Securities 16 Item 4: Submission of Matters to a Vote of Security Holders 16-17 Item 5: Other Information 17 Item 6: Exhibits and Reports on Form 8-K, Form 10-C and Form 11-K 17 Signatures 18 2 PART I - FINANCIAL STATEMENTS HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
ASSETS June 30, December 31, 1996 1995 ------------------------ Cash and cash equivalents $ 5,942,504 4,334,694 Securities available for sale: Mortgage-backed and related securities (amortized cost $151,722,163 and $158,517,548) 148,705,801 158,416,201 Other marketable securities (amortized cost $41,173,928 and $32,247,959) 40,441,555 31,903,566 ----------- ----------- 189,147,356 190,319,767 =========== =========== Securities held to maturity: Mortgage-backed and related securities (estimated market value $13,952,026 and $13,931,879) 13,834,625 13,744,063 Other marketable securities (estimated market value $996,540 and $3,224,263) 999,343 3,227,729 ----------- ----------- 14,833,968 16,971,792 =========== =========== Loans receivable, net 331,649,722 314,850,684 Federal Home Loan Bank stock, at cost 5,157,900 3,801,900 Real estate, net 153,122 279,851 Premises and equipment, net 3,547,124 3,645,536 Accrued interest receivable 3,425,342 3,381,507 Deferred income taxes 635,326 0 Prepaid expenses and other assets 486,959 362,928 ----------- ----------- Total assets $ 554,979,323 537,948,659 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 363,194,751 373,539,468 Federal Home Loan Bank advances 101,053,053 68,876,978 Accrued interest payable 1,717,330 1,562,347 Advance payments by borrowers for taxes and insurance 517,502 550,990 Accrued expenses and other liabilities 1,233,906 1,732,193 ----------- ----------- Total liabilities 467,716,542 446,261,976 =========== =========== Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; issued and outstanding none 0 0 Common stock ($.01 par value): authorized 7,000,000 shares; issued 6,085,775 shares 60,858 60,858 Additional paid-in capital 59,348,005 59,285,581 Retained earnings, subject to certain restrictions 53,490,813 50,371,038 Net unrealized loss on securities available for sale (2,231,697) (265,358) Unearned employee stock ownership plan shares (5,137,310) (5,336,150) Unearned compensation restricted stock awards (933,605) (1,050,305) Treasury stock, shares at cost 1,164,575 and 783,850 (17,334,283) (11,378,981) ----------- ----------- Total stockholders' equity 87,262,781 91,686,683 ----------- ----------- Total liabilities and stockholders' equity $ 554,979,323 537,948,659 =========== ===========
See accompanying notes to consolidated financial statements. 3 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Three Months Ended June 30, 1996 1995 --------------------- Interest Income: Loans receivable $ 6,409,310 5,727,836 Securities available for sale: Mortgage-backed and related 2,527,670 2,598,254 Other marketable 580,897 828,629 Securities held to maturity: Mortgage-backed and related 256,754 163,004 Other marketable 32,405 125,210 Cash equivalents 62,086 132,915 Other 74,648 59,919 --------- --------- Total interest income 9,943,770 9,635,767 --------- --------- Interest expense: Deposits 4,720,966 4,630,653 Federal Home Loan Bank advances 1,227,662 1,025,995 --------- --------- Total interest expense 5,948,628 5,656,648 --------- --------- Net interest income 3,995,142 3,979,119 Provision for loan losses 75,000 75,000 --------- --------- Net interest income after provision for loan losses 3,920,142 3,904,119 --------- --------- Non-interest income: Fees and service charges 81,855 79,342 Securities gains (losses), net 268,487 (5,190) Gain on sales of loans 1,135 76,951 Other 133,533 30,007 --------- --------- Total non-interest income 485,010 181,110 --------- --------- Non-interest expense: Compensation and benefits 1,099,123 977,992 Occupancy 195,363 186,298 Federal deposit insurance premiums 214,864 198,474 Advertising 79,354 66,650 Data processing 120,743 120,902 Other 274,789 287,016 --------- --------- Total non-interest expense 1,984,236 1,837,332 --------- --------- Income before income tax expense 2,420,916 2,247,897 Income tax expense 887,832 842,425 --------- --------- Net income $ 1,533,084 1,405,472 ========= ========= Earnings per common share and common share equivalents $ 0.34 0.27 ========= ========= Six Months Ended June 30, 1996 1995 ---------------------- Interest Income: Loans receivable $12,548,056 11,182,650 Securities available for sale: Mortgage-backed and related 5,301,360 5,255,555 Other marketable 985,741 1,377,378 Securities held to maturity: Mortgage-backed and related 523,777 292,827 Other marketable 75,853 250,963 Cash equivalents 165,804 272,511 Other 138,630 112,368 ---------- ---------- Total interest income 19,739,221 18,744,252 ---------- ---------- Interest expense: Deposits 9,539,249 8,917,227 Federal Home Loan Bank advances 2,289,523 1,860,776 ---------- ---------- Total interest expense 11,828,772 10,778,003 ---------- ---------- Net interest income 7,910,449 7,966,249 Provision for loan losses 150,000 150,000 ---------- ---------- Net interest income after provision for loan losses 7,760,449 7,816,249 ---------- ---------- Non-interest income: Fees and service charges 159,371 153,133 Securities gains (losses), net 769,037 (11,867) Gain on sales of loans 7,084 76,951 Other 250,922 66,864 ---------- ---------- Total non-interest income 1,186,414 285,081 ---------- ---------- Non-interest expense: Compensation and benefits 2,205,118 1,937,821 Occupancy 392,145 365,857 Federal deposit insurance premiums 424,656 396,947 Advertising 152,039 138,138 Data processing 249,196 243,682 Other 543,902 566,220 ---------- ---------- Total non-interest expense 3,967,056 3,648,665 ---------- ---------- Income before income tax expense 4,979,807 4,452,665 Income tax expense 1,860,032 1,683,768 ---------- ---------- Net income $ 3,119,775 2,768,897 ========== ========== Earnings per common share and common share equivalents $ 0.67 0.52 ========== ==========
See accompanying notes to consolidated financial statements. 4 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Six Month Period Ended June 30, 1996 (unaudited)
Net Unrealized (Loss) on Additional Securities Common Paid-in Retained Available for Stock Capital Earnings Sale ------------------------------------------------------ Balance, December 31, 1995 $ 60,858 59,285,581 50,371,038 (265,358) Net income 3,119,775 Change in unrealized loss on securities available for sale (1,966,339) Treasury stock purchases Amortization of restricted stock awards Earned employee stock ownership plan shares 62,424 ------- ---------- ---------- ---------- Balance, June 30, 1996 $ 60,858 59,348,005 53,490,813 (2,231,697) ======= ========== ========== ========== Unearned Shares Employee Unearned Stock Compensation Total Ownership Restricted Treasury Stockholders' Plan Stock Awards Stock Equity ------------------------------------------------------ Balance, December 31, 1995 $(5,336,150) (1,050,305) (11,378,981) 91,686,683 Net income 3,119,775 Change in unrealized loss on securities available for sale (1,966,339) Treasury stock purchases (5,955,302) (5,955,302) Amortization of restricted stock awards 116,700 116,700 Earned employee stock ownership plan shares 198,840 261,264 --------- ----------- ---------- ---------- Balance, June 30, 1996 $(5,137,310) (933,605) (17,334,283) 87,262,781 ========= =========== ========== ==========
See accompanying notes to consolidated financial statements. 5 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1996 1995 ------------------------ Cash flows from operating activities: Net income $ 3,119,775 2,768,897 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 150,000 150,000 Depreciation 181,971 171,376 Amortization of (discounts) premiums, net (16,163) 32,696 Amortization of deferred loan fees (229,289) (288,648) Provision for deferred income taxes 147,562 204,389 Securities (gains) losses, net (774,273) 11,867 Gain on sales of real estate (39,100) (5,958) Gain on sales of loans (7,084) (76,951) Proceeds from sales of loans originated for sale 362,070 0 Amortization of restricted stock awards 116,700 0 Amortization of unearned ESOP shares 198,840 204,850 Earned employee stock ownership shares priced above original cost 62,424 33,941 Increase in accrued interest receivable (43,835) (533,024) Increase in accrued interest payable 154,983 736,953 Increase in other assets (124,031) (175,822) Increase (decrease) in other liabilities 55,481 (422,242) Other, net (26,994) (3,517) --------- --------- Net cash provided by operating activities 3,289,037 2,808,807 --------- --------- Cash flows from investing activities: Proceeds from sales of securities available for sale 49,480,583 31,993,334 Principal collected on securities available for sale 6,740,657 6,218,086 Proceeds collected on maturity of securities available for sale 5,500,000 700,000 Purchases of securities available for sale (53,439,412) (44,065,239) Principal collected on securities held to maturity 863,649 480,290 Proceeds collected on maturity of securities held to maturity 2,000,000 1,000,000 Purchase of securities held to maturity (709,765) (5,067,445) Proceeds from sales of loans receivable 154,612 3,038,421 Purchase of Federal Home Loan Bank stock (1,356,000) (685,100) Net increase in loans receivable (27,035,570) (19,582,860) Proceeds from sale of real estate 361,010 110,929 Purchases of premises and equipment (83,559) (352,980) ---------- ---------- Net cash used by investing activities (17,523,795) (26,212,564) ---------- ---------- Cash flows from financing activities: (Decrease) increase in deposits (10,344,717) 10,269,742 Purchase of treasury stock (5,955,302) (4,040,125) Proceeds from Federal Home Loan Bank advances 45,700,000 25,000,000 Repayment of Federal Home Loan Bank advances (13,523,925) (7,368,326) (Decrease) increase in advance payments by borrowers for taxes and insurance (33,488) 3,047 ---------- ---------- Net cash provided by financing activities 15,842,568 23,864,338 ---------- ---------- Increase in cash and cash equivalents 1,607,810 460,581 Cash and cash equivalents, beginning of period 4,334,694 12,097,156 ---------- ---------- Cash and cash equivalents, end of period $ 5,942,504 12,557,737 ========== ========== Supplemental cash flow disclosures: Cash paid for interest $ 11,673,789 10,041,500 Cash paid for income taxes 1,780,833 1,358,000 Supplemental noncash flow disclosures: Loans securitized and transferred to securities available for sale $ 9,694,418 0 Transfer of loans to real estate 168,187 115,814 Securities purchased with liability due to broker 0 6,575,656
See accompanying notes to consolidated financial statements. 6 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) June 30, 1996 and 1995 (1) HMN FINANCIAL, INC. HMN Financial, Inc. (HMN) was incorporated under the laws of the State of Delaware for the purpose of becoming the savings and loan holding company of Home Federal Savings Bank (the Bank) in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, pursuant to its Plan of Conversion. HMN commenced on May 23, 1994, a Subscription and Community Offering of its shares in connection with the conversion of the Bank (the Offering). The Offering was closed on June 22, 1994, and the conversion was consummated on June 29, 1994. The consolidated financial statements included herein are for HMN, Security Finance Corporation (SFC), the Bank and the Bank's wholly owned subsidiary, Osterud Insurance Agency, Inc. During 1995 the Bank owned 100% of the outstanding shares of SFC. On December 29, 1995 the Bank sold all its outstanding shares of common stock in SFC to HMN at SFC's fair value. 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. The information under the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of HMN Financial, Inc., which contains the latest audited financial statements and notes thereto, together with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" as of December 31, 1995 and for the year then ended. 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 and all significant intercompany accounts and transactions have been eliminated in consolidation. The statements of income for the three month and six month periods ended June 30, 1996 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. 7 (3) NEW ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial-components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial- components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and must be applied prospectively. Management is currently studying the effect of adopting SFAS No. 125. (4) EARNINGS PER SHARE Earnings per common share and common share equivalent for the three months ended June 30, 1996 and 1995 were computed by dividing net income for each period ($1,533,084 and $1,405,472 respectively) by the weighted average common shares and common share equivalents outstanding (4,580,792 and 5,234,242, respectively) during each period. Earnings per common share and common share equivalent for the six months ended June 30, 1996 and 1995 were computed by dividing net income for each period ($3,119,775 and $2,768,897, respectively) by the weighted average common shares and common share equivalents outstanding (4,673,506 and 5,348,554, respectively) during each period. 8 (5) REGULATORY CAPITAL REQUIREMENTS At June 30, 1996, the Bank met each of the three current minimum regulatory capital requirements. The following table summarizes the Bank's regulatory capital position at June 30, 1996:
Amount Percent -------- --------- (Dollars in Thousands) Tangible Capital: Actual $70,943 13.10% Required 8,124 1.50 ------ ----- Excess $62,819 11.60% ====== ===== Core Capital: Actual $70,943 13.10% Required 16,248 3.00 ------ ----- Excess $54,695 10.10% ====== ===== Risk-Based Capital: Actual $73,221 32.81% Required 17,853 8.00 ------ ----- Excess $55,368 24.81% ====== ===== Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of risk-weighted assets. In April 1991, the OTS proposed a core capital requirement for savings associations comparable to the requirement for national banks that became effective on December 31, 1990. This core capital ratio is 3% of total adjusted assets for thrifts that receive the highest supervisory rating for safety and soundness ("CAMEL" rating), with a 4% to 5% core capital requirement for all other thrifts. Calculated based on the OTS requirement of 8% of risk-weighted assets. Beginning March 31, 1995, a savings institution whose interest rate risk("IRR") exposure (as calculated under OTS guidelines) exceeds 2% of total assets may be required to deduct an IRR component in calculating its total capital for purposes of determining whether it meets the risk-based capital requirement. The IRR component is an amount equal to one-half of the difference between measured IRR and 2%, multiplied by the estimated economic value of its total assets. Based on the Bank's interest rate risk position at March 31, 1996, the latest date for which such information is available, this rule would require an $8.5 million deduction from the Bank's capital for purposes of calculating risk-based capital. The OTS currently does not require the IRR component to be deducted from the risk-based capital calculation but may require the deduction in accessing the Bank's individual capital requirements at some time in the future. (6) STOCKHOLDERS' EQUITY AND STOCK CONVERSION HMN was incorporated for the purpose of becoming the savings and loan holding company of the Bank in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, pursuant to 9 a Plan of Conversion adopted on February 10, 1994. HMN commenced on May 23, 1994, a Subscription and Community Offering (the Offering) of its shares in connection with the conversion of the Bank. The Offering was closed on June 22, 1994, and the conversion was consummated on June 29, 1994, with the issuance of 6,085,775 shares of HMN's common stock at a price of $10 per share. Total proceeds from the conversion of $59,178,342 net of costs relating to the conversion of $1,679,408, have been recorded as common stock and additional paid-in capital. HMN received all of the capital stock of the Bank in exchange for 50% of the net proceeds of the conversion. During 1996, with Board authorization and approval from the Office of Thrift Supervision (OTS), HMN purchased a total of 380,725 shares of its own common stock from the open market for $5,955,302. All shares were placed in treasury stock. 10 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 HMN's net income for the second quarter of 1996 was $1.5 million, or $0.34 per share compared to net income for the same quarter of 1995 of $1.4 million, or $0.27 per share. Net income increased by $128,000, or 9.1%, principally due to an increase of $274,000 in net security gains which was partially offset by an increase of $121,000 in compensation and benefit expenses. Earnings per share for the second quarter of 1996 increased $0.07, or 26%, due to the increased earnings and the repurchase of HMN's own common stock in the open market. Net income for the six month period ended June 30, 1996 compared to the same period of 1995 increased by $351,000, or 12.7%, principally due to an increase of $781,000 in net security gains which was partially offset by an increase of $267,000 in compensation and benefit expenses. NET INTEREST INCOME Net interest income was $4.0 million for both the second quarter of 1996 and the second quarter of 1995. HMN has been purchasing its own stock in the open market at an average price that is less than its current book value. The balance sheet impact of the stock repurchase program has been to reduce equity and replace it with 11 additional advances and/or deposit growth. Comparing the three month period ended June 30, 1996 to the same three month period in 1995, average interest- earning assets increased by $16.2 million due primarily to loan purchases and average interest-bearing liabilities increased by $24.9 million due to advances and deposit growth. The changes caused interest income for the three months ended June 30, 1996, adjusted for interest rate changes, to increase by $308,000 for the same period in 1995, and interest expense for the three months ended June 30, 1996, adjusted for interest rate changes, to increase by $292,000 for the same period in 1995. Net interest income for the six months ended June 30, 1996 was $7.91 million, a decrease of $56,000, or 0.7%, from $7.97 million for the six months ended June 30, 1995. Comparing the six month period ended June 30, 1996 to the same six month period in 1995, average interest-earning assets increased by $21.8 million due primarily to loan purchases and average interest-bearing liabilities increased by $29.2 million due to advances and deposit growth. As a result of the changes, interest income for the first six months of 1996, adjusted for interest rate changes, increased by $995,000 for the same period in 1995 and interest expense for the first six months of 1996, adjusted for interest rate changes, increased by $1,051,000 for the same period in 1995. Net interest margin was 2.98%, 2.97%, 2.94%, 2.98% and 3.05%, respectively for the quarters ended June 30, 1996, March 31, 1996, December 31, 1995, September 30, 1995 and June 30, 1995. Based upon the current interest rate environment HMN expects the net interest margin to flatten or slightly decline in at least the near term. PROVISION FOR LOAN LOSSES The provision for loan losses for the second quarter of 1996 and 1995 was $75,000. The provision for loan losses for the six months ended June 30, 1996 and 1995 was $150,000. The provision is the result of management's evaluation of the loan portfolio, a historically low level of non-performing loans, minimal loan charge off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located. Management's evaluation did not reveal conditions that would cause it to increase the provision for loan losses during 1996 compared to 1995. Future economic conditions and other unknown factors will impact the need for future provisions for loan losses. As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods. A reconciliation of HMN's allowance for loan losses is summarized as follows:
1996 1995 ---------- ---------- Balance at January 1, $ 2,190,664 1,893,143 Provision 150,000 150,000 Charge-offs (1,216) (1,034) Recoveries 23 67 ---------- ---------- Balance at June 30, $ 2,339,471 2,042,176 ========== ==========
NON-INTEREST INCOME Non-interest income was $485,000 for the second quarter of 1996, an increase of $304,000, or 168%, compared to $181,000 for the second quarter of 1995. The increase was principally due to a $274,000 increase in gain on the sale of securities, a $33,000 increase in commissions earned on the sale of uninsured products and a 12 $71,000 increase in other income which was partially offset by a $76,000 decrease in gain on sale of loans. During 1996 fixed rate and floating rate collateralized mortgage obligation securities (CMOs) and other securities were sold in order to assist in funding the purchase and origination of loans and to change the interest rate risk profile of the available for sale security portfolio. Non-interest income for the six months ended June 30, 1996 was $1.2 million, an increase of $901,000, or 316%, compared to $285,000 for the six months ended June 30, 1995. The increase was principally due to a $781,000 increase in gain on the sale of securities, a $69,000 increase in commissions earned on the sale of uninsured products and a $115,000 increase in other income which was partially offset by a $70,000 decrease in gain on sale of loans. NON-INTEREST EXPENSE Non-interest expense was $1.98 million for the second quarter of 1996, an increase of $147,000, or 8%, from $1.84 million for the second quarter of 1995. The majority of the increase in non-interest expense between the two quarters was due to a $121,000, or 12.4%, increase in compensation and benefits and was the result of adding new employees, normal merit and salary increases and the impact of awards granted under the Recognition and Retention Plan adopted in June of 1995. Non-interest expense for the six months ended June 30, 1996 was $3.967 million, an increase of $318,000, or 8.7%, from $3.649 million for the six months ended June 30, 1995. The principal cause for the increase in non- interest expense between the two periods was due to a $267,000, or 13.8%, increase in compensation and benefits expense and was the result of adding new employees, normal merit and salary increases and the impact of awards granted under the Recognition and Retention Plan adopted in June of 1995. INCOME TAX EXPENSE Income tax expense was $888,000 for the second quarter of 1996, an increase of $45,000, or 5.4%, from $842,000 for the second quarter of 1995 and is primarily due to an increase in taxable income between the two periods. Income tax expense for the six months ended June 30, 1996 was $1.9 million, an increase of $176,000, or 10.5%, from $1.7 million for the same period in 1995 primarily due to an increase in taxable income. FINANCIAL CONDITION AND LIQUIDITY For the six months ended June 30, 1996 the net cash provided from operating activities was $3.3 million, net cash used for investing activities was $17.5 million and net cash provided by financing activities was $15.8 million. HMN had $49.5 million in proceeds from the sale of securities and it collected another $15.1 million from principal payments and the maturity of securities. HMN purchased $54.1 million of securities during 1996. HMN purchased or originated additional net loans of $27.0 million and had $517,000 of proceeds from the sale of loans. During 1996 deposits decreased by $10.3 million which was offset by net additional borrowing from the FHLB of $32.2 million. HMN also repurchased 380,725 shares of its own common stock for $5.955 million during 1996. During July of 1996, HMN completed the purchase of another 240,060 shares of its own common stock in the open market. 13 HMN has certificates of deposit with outstanding balances of $155.8 million that mature from July of 1996 through June 30, 1997. Based upon past experience management anticipates that the majority of the deposits will renew for another term with the Bank. Any deposits which do not renew will be replaced with deposits from other customers, or funded with advances from the Federal Home Loan Bank, or will be funded through the sale of securities. Management does not anticipate that it will have a liquidity problem with the deposit maturities. NON-PERFORMING ASSETS The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at June 30, 1996 and December 31, 1995.
June 30, December 31, 1996 1995 ---------- ---------- (Dollars in Thousands) Non-Accruing Loans One-to-four family real estate $ 20 $ 196 Nonresidential real estate 169 85 Commercial business 116 128 Consumer 10 32 ---- ---- Total 315 441 ---- ---- Restructured loans 35 94 Foreclosed Assets Real estate: One-to-four family 173 315 ---- ---- Total non-performing assets $ 523 $ 850 ==== ==== Total as a percentage of total assets 0.09 % 0.16 % ==== ==== Total non-performing loans $ 350 $ 535 ==== ==== Total as a percentage of total loans receivable, net 0.11 % 0.17 % ==== ====
Total non-performing assets at June 30, 1996 were $523,000, a decrease of $327,000, or 38.5%, from $850,000 at December 31, 1995. The decrease was the result of principal payments received as a result of the sale of properties or loans being brought current through collection efforts. ASSET/LIABILITY MANAGEMENT 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 15 for table. 14 The following table sets forth the interest rate sensitivity of HMN's assets and liabilities at June 30, 1996, using certain assumptions that are described in more detail below:
Maturing or Repricing --------------------- Over 6 6 Months Months to Over 1-3 Over 3-5 (DOLLARS IN THOUSANDS) or Less One Year Years Years - ------------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities $ 64,704 5,129 17,728 28,256 Other marketable securities 22,741 4,340 5,700 1,004 Securities held to maturity: Mortgage-backed and related securities 8,868 2,926 881 595 Other marketable securities 0 999 0 0 Loans receivable, net Fixed rate one-to-four family 18,960 17,308 57,445 40,968 Adjustable rate one-to-four family 20,681 32,707 18,447 16,493 Multi family 6 4 48 0 Fixed rate commercial real estate 216 185 578 336 Adjustable rate commercial real estate 5,034 2,087 0 0 Commercial business 307 158 293 131 Consumer loans 9,924 1,452 2,925 1,352 Federal Home Loan Bank stock 0 0 0 0 Cash equivalents 4,942 0 0 0 ------- ------ ------- ------ Total interest-earning assets 156,383 67,295 104,045 89,135 ------- ------ ------- ------ Non-interest checking 2,228 0 0 0 NOW accounts 15,804 0 0 0 Passbooks 3,246 2,904 8,854 5,667 Money market accounts 1,814 1,622 4,947 3,166 Certificates 101,145 54,669 124,550 16,868 Federal Home Loan Bank advances 64,731 714 11,608 19,000 ------- ------ ------- ------ Total interest-bearing liabilities 188,968 59,909 149,959 44,701 ------- ------ ------- ------ Interest-earning assets less interest-bearing liabilities $(32,585) 7,386 (45,914) 44,434 ======= ====== ======= ====== Cumulative interest-rate sensitivity gap $(32,585) (25,199) (71,113) (26,679) ======= ====== ======= ====== Cumulative interest-rate gap as a percentage of total assets at June 30, 1996 (5.87) (4.54) (12.81) (4.81) ======= ====== ======= ====== Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1995 (1.07) (7.53) ======= ====== Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1994 (2.47) (2.26) ======= ====== Over 5 No Stated (DOLLARS IN THOUSANDS) Years Maturity Total - ---------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities 35,905 0 151,722 Other marketable securities 0 7,389 41,174 Securities held to maturity: Mortgage-backed and related securities 565 0 13,835 Other marketable securities 0 0 999 Loans receivable, net Fixed rate one-to-four family 82,788 0 217,469 Adjustable rate one-to-four family 412 644 89,384 Multi family 0 0 58 Fixed rate commercial real estate 541 0 1,856 Adjustable rate commercial real estate 0 0 7,121 Commercial business 75 0 964 Consumer loans 1,484 0 17,137 Federal Home Loan Bank stock 0 5,158 5,158 Cash equivalents 0 0 4,942 ------- ------- ------- Total interest-earning assets 121,770 13,191 551,819 ------- ------- ------- Non-interest checking 0 0 2,228 NOW accounts 0 0 15,804 Passbooks 10,074 0 30,745 Money market accounts 5,628 0 17,177 Certificates 9 0 297,241 Federal Home Loan Bank advances 5,000 0 101,053 ------- ------ ------- Total interest-bearing liabilities 20,711 0 464,248 ------- ------ ------- Interest-earning assets less interest-bearing liabilities 101,059 13,191 87,571 ======= ====== ======= Cumulative interest-rate sensitivity gap 74,380 87,571 87,571 ======= ====== ======= Cumulative interest-rate gap as a percentage of total assets at June 30, 1996 13.40 15.78 15.78 % ======= ====== ======= 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 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. Loans receivable are presented net of loans in process and deferred loan fees. 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. 15 HMN FINANCIAL, INC. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. ITEM 2. Changes in Securities. Not applicable ITEM 3. Defaults Upon Senior Securities. Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders. The Second Annual Meeting of Stockholders of HMN Financial, Inc. (hereinafter referred to as "the Company") was held on April 23, 1996, at 10:00 a.m. at the Best Western Apache Hotel, located at 1517 S.W. 16th Street, Rochester, Minnesota, pursuant to due notice. According to the certified list of stockholders which was presented at the Meeting, there were outstanding and entitled to vote at the Meeting, 5,180,210 shares of Common Stock of the Company. There were present at the Meeting in person or by proxy the holders of 4,476,499 shares of Common Stock of the Company constituting a quorum and more than a majority of the outstanding shares entitled to vote. The following is a record of the votes cast in the election of directors of the Company: Broker For Vote Withheld Non-Votes --------- ------------- --------- James B. Gardner 4,433,957 42,542 --- Timothy P. Geisler 4,429,477 47,022 --- Accordingly, the individuals named above were declared to be duly elected directors of the Company for terms to expire in 1999, respectively. The following is a record of votes cast in respect of the proposal to ratify the appointment of KPMG Peat Marwick LLP as the Company's auditors for the fiscal year ending December 31, 1996. Percentage of Votes Number Actually of Votes Cast ---------- ------------------ FOR 4,456,230 99.5% AGAINST 2,325 0.1% ABSTAIN 17,944 0.4% 16 Percentage of Votes Number Actually of Votes Cast ---------- ------------------ BROKER NON-VOTES 0 0.0% Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Company. ITEM 5. Other Information. (a) Amendment #5 to the Home Federal Savings Bank 401(k) Plan. (b) Amendment #6 to the Home Federal Savings Bank 401(k) Plan. (c) Service Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan. (d) Trust Agreement between Home Federal Savings Bank and Mellon Bank, N.A. (e) Adoption Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan and Trust. (f) Service Agreement for Home Federal Savings Bank Employee Stock Ownership Plan. ITEM 6. Exhibits and Reports on Form 8-K, Form 10-C and Form 11-K. (a) Exhibits. See Index to Exhibits on page 19 of this report. (b) Reports on Form 10-C. A current report on Form 10-C was filed on February 15, 1996, to report completion of the repurchase of 121,715 shares of HMN's common stock which occurred on February 14, 1996. (c) Reports on Form 8-K. A current report on Form 8-K was filed on May 3, 1996, to report the intent to repurchase 259,010 shares of HMN's common stock. (d) Reports on Form 10-C. A current report on Form 10-C was filed on May 21, 1996, to report completion of the repurchase of 259,010 shares of HMN's common stock which occurred on May 20, 1996. (e) Reports on Form 11-K. An annual report on Form 11-K was filed on June 27, 1996, for the fiscal year ended December 31, 1995. (f) Reports on Form 8-K. A current report on Form 8-K was filed on June 27, 1996 to report the intent to repurchase 246,060 shares of HMN's common stock. (g) Reports on Form 10-C. A current report on Form 10-C was filed on July 15, 1996, to report completion of the repurchase of 246,060 shares of HMN's common stock which occurred on July 11, 1996. (h) Reports on Form 8-K. A current report on Form 8-K was filed on July 18, 1996, to report the Company's second quarter, semi- annual earnings. 17 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: August 12, 1996 /s/ Roger P. Weise -------------- ---------------------- Roger P. Weise, Chairman and Chief Executive Officer (Duly Authorized Officer) Date: August 12, 1996 /s/ James B. Gardner -------------- ---------------------- James B. Gardner, Executive Vice President (Chief Financial Officer) 18 HMN FINANCIAL, INC. INDEX TO EXHIBITS FOR FORM 10-Q
Exhibit Sequentially Number Description Numbered Page - ------ ------------- --------------- 5a Amendment #5 to the Home Federal Savings Bank 401(k) Plan. 20 5b Amendment #6 to the Home Federal Savings Bank 401(k) Plan. 21 5c Service Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan. 22 5d Trust Agreement between Home Federal Savings Bank and Mellon Bank, N.A. 23 5e Adoption Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan and Trust. 24 5f Service Agreement for Home Federal Savings Bank Employee Stock Ownership Plan. 25 11 Computation of Earnings Per Common Share 26 27 Financial Data Schedule 27
19 EX-5 2 Exhibit 5a Amendment #5 to the Home Federal Savings Bank 401(k) Plan 20 AMENDMENT #5 TO THE HOME FEDERAL SAVINGS BANK 401(K) PLAN WHEREAS, Home Federal Savings Bank (hereinafter referred to as the "Employer") did establish a 401(K) Plan on the 1st day of January, 1992; and, WHEREAS, Article VIII of said plan does allow for amendments to said Plan; NOW, THEREFORE, the Employer does hereby amend the Home Federal Savings Bank 401(K) Plan, effective the 1st day of January, 1995, as follows: ARTICLE X PARTICIPATING EMPLOYERS 10.1 ADOPTION BY OTHER EMPLOYERS Notwithstanding anything herein to the contrary, with the consent of the Employer, any other corporation or entity, whether an affiliate or subsidiary or not, may adopt this Plan and all of the provisions hereof, and Participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to the Employer or Participating Employer who contributed such assets. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Combined Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Participants of the Employer or Participating Employer by which the forfeiting Participant was employed, except if the Forfeiture is for an Employee whose Employer is an Affiliated Employer then said Forfeiture shall inure to the benefit of the Participants of those Employers who are Affiliated Employers. Should an Employee of one ("First") Employer be transferred to an associated ("Second") Employer which is an Affiliated Employer, such transfer shall not cause his account balance (generated while an Employer of "First" Employer) in any manner, or by any amount to be forfeited. Such Employee's Participant Combined Account balance for all purposes of the Plan, including length of service, shall be considered as though he had always been employed by the "Second" Employer and as such had received contributions, forfeitures, earnings or losses, and appreciation or depreciation in value of assets totaling the amount so transferred. (e) Any expenses of the Trust which are to be paid by the Employer or to be borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 10.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a party to this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 10.4 EMPLOYEE TRANSFERS It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION Any contribution subject to allocation during each Plan Year shall be allocated only among those Participants of the Employer or Participating Employer making the contribution, except if the contribution is made by an Affiliated Employer, in which event such contribution shall be allocated among all Participants of all Participating Employers who are Affiliated Employers in accordance with the provisions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 10.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 10.7 DISCONTINUANCE OF PARTICIPATION Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plans for its Employees, provided however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 8.1. If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of the Trust, Article VII hereof. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be use for or diverted to purposes other than for the exclusive benefit of the Employees of such Participating Employer. 10.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. NOW, THEREFORE, the Bank and the Trustees of the Home Federal Savings Bank 401(k) Plan (the "Plan") do hereby adopt the following resolutions regarding the Plan. WHEREAS, Home Federal Savings Bank (the "Bank"), sponsors the Plan; and, WHEREAS, the assets of the Plan have heretofore been invested in a group annuity contract offered by Nationwide Life Insurance Company (the "Group Annuity Contract"); and, WHEREAS, the Group Annuity Contract has permitted Plan participants to elect among investment alternatives, consisting of a Interest Bearing Fund, Bond Fund, Balanced Fund, Stock Fund and Growth Stock Fund; and, WHEREAS, the Trustees have determined to cancel the Group Annuity Contract because the Group Annuity Contract does not have the administrative flexibility to satisfy the needs of the Plan's participants, has difficulty meeting the Plan's needs for liquidity, and otherwise no longer meets the needs of the Plan and its participants; and, WHEREAS, the payment of the early cancellation penalty has diminished the investment return of the accounts of Plan participants in proportion to the investment alternative(s) which they have selected, and has generally diminished the accounts of rank and file employees more than the accounts of highly compensated employees (as defined in Section 414 of the Internal Revenue Code of 1986, as amended (the "Code"); and, WHEREAS, the Trustees have determined that the payment of such early cancellation penalties by the accounts of participants is detrimental to the intended purpose of the Plan to provide retirement benefits to its employees, and thus the Bank desires to make a special contribution to the Plan in order to mitigate the effects of the early cancellation penalties; and, WHEREAS, the Bank contributed to the Plan the sum of Nine Thousand Four Hundred Ninety One and 37/100 Dollars ($9,491.37) which is approximately equal to the total amount of the early cancellation penalties paid by the accounts of Plan participants upon cancellation of the Group Annuity Contract; it is RESOLVED, that such contribution shall be allocated to the accounts of participants as provided in Schedule l, which is attached hereto and incorporated by reference, in an amount equal to the early cancellation penalties paid by each participant's separate investment account; and, RESOLVED FURTHER, that, notwithstanding the foregoing, said special contribution shall be reduced, and no special allocation to the account of a participant shall be made, if and to the extent that such an allocation would cause the "annual additions" to a participant's account to exceed the limitation of Section 404 or Section 415 of the Code; and, RESOLVED FURTHER, that such special contribution shall be invested as part of the Participant's Elective Account, and, notwithstanding any other provision of the Plan to the contrary, shall be fully (100%) vested at all times; and, RESOLVED FURTHER, that the President of the Bank, Roger Weise, is hereby authorized and directed to take such other and further action in connection with the foregoing, as shall be deemed necessary or helpful in connection with the foregoing, including but not limited to the submission of the Plan, as amended by the Written Action, to the Internal Revenue Service for a ruling as to the Plan's continued qualification under the Code; and, RESOLVED FURTHER, in the event that the Internal Revenue Service rules that the allocation of the special contribution to the Plan contemplated by this written action is in violation of Section 401(a)(4) or any other section of the Code, then the special allocation contemplated herein shall be allocated to the accounts of participants in the same proportion that each such participant's Plan Compensation for the plan year bears to the total Plan Compensation of all participants for such year. Dated this 9th day of May, 1995. Home Federal Savings Bank By /s/ Roger P. Weise 5-9-95 ------------------------ ------ Roger P. Weise DATE TRUSTEES /s/ Roger P. Weise 5-9-95 ------------------------ ------ Roger P. Weise /s/ James B. Gardner 5-9-95 ------------------------ ------ James B. Gardner /s/ Dwain C. Jorgensen 5-9-95 ------------------------ ------ Dwain C. Jorgensen EX-5 3 Exhibit 5b Amendment #6 to the Home Federal Savings Bank 401(k) Plan 21 AMENDMENT #6 TO THE HOME FEDERAL SAVINGS BANK 401(K) PLAN WHEREAS, Home Federal Savings Bank (hereinafter referred to as "Employer") did establish a 401(k) Profit Sharing Plan on the 1st day of January, 1992; and, WHEREAS, Article VIII of said plan does allow for amendments to said Plan; NOW, THEREFORE, the Employer does hereby amend the Home Federal Savings Bank 401(k) Plan, effective the 1st day of January, 1995, as follows: Roger P. Weise, James B. Gardner and Dwain C. Jorgensen are hereby removed from the position of Plan Trustee. First Banker's Trust Company, N.A. of Quincy, Illinois is here by instated as Plan Trustee. IN WITNESS WHEREOF, Home Federal Savings Bank has caused this Amendment to be effective the 1st day of January, 1995. Home Federal Savings Bank By /s/ Roger P. Weise 6-10-96 EMPLOYER /s/ Carmen Walch 6-14-96 TRUSTEE EX-5 4 Exhibit 5c Service Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan 22 SERVICE AGREEMENT FOR HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN THIS AGREEMENT made as of ____June 17_____, 199__6__ by and between Pentegra Services, Inc. ("Pentegra") and ____Home Federal Savings Bank____ (the "Employer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Pentegra sponsors the Employees' Savings & Profit Sharing Plan and the related Trust Agreement (collectively the "Plan"); and WHEREAS, the Employer desires to adopt the Plan and contract with Pentegra to provide certain administrative services. NOW, THEREFORE, Pentegra, and the Employer agree as follows: STANDARD SERVICES - -Pentegra will provide the following services*: - -Plan Document and related Adoption Agreement. - -Summary Plan Description booklets. - -Representatives to explain the Plan's features so that the Plan will meet your benefit needs. - -Assistance in preparing forms you will need to submit to the Internal Revenue Service in order to request approval of your Plan as a tax-qualified plan and trust under the Internal Revenue Code (the "Code"). - -Administrative manual and the forms and descriptive materials you will need to ease administration of your Plan. - -Initial enrollment/orientation meetings. - -Toll-free number and business hour telephone support from your designated Account Representative. - -Explanation of legislative changes that impact your Plan. - -Assistance with your annual government reporting requirements. - -Processing of all enrollments and transactions for your members. * PLEASE NOTE: IN THIS AGREEMENT, THE TERMS "YOU" AND "YOUR" MEAN THE EMPLOYER. "WE", "US" OR "OUR" MEANS PENTEGRA SERVICES, INC. 1 - -Preparation of all loan documents and calculation and recordkeeping of all loan payments (note that the employee-member bears the cost of administering a loan because 2% is deducted from the interest payments which are credited to the employee-member's account, which 2% is used to offset the cost of processing and recordkeeping with respect to the loan). - -Coordination of all elections and distributions to your members from the Trustee. - -Descriptions of the investment funds selected. - -Monthly and quarterly investment fund performance summaries. - -Member benefit statements and monthly employer summary reports. - -Preliminary (once per year) and year-end Code Section 401(m) and/or 401(k) compliance testing and calculation of all required corrective distributions. - -Performance of Top Heavy and Code Section 415 annual analyses for the Plan and participation in the Financial Institutions Retirement Fund and Financial Institutions Thrift Plan, if any. OPTIONAL SERVICES Pentegra can also provide for the following services, if you so elect: - -Additional employee enrollment/orientation meetings. - -Complete preparation of IRS Form(s) 5300, 5500 and/or 5500-C/R. - -Code Section 401(m) and/or 401(k) preliminary compliance testing in excess of once per year. - -Performance of Top Heavy and Code Section 415 annual analyses for all qualified plans adopted by the Employer. - -Ongoing plan consultation. - -Special services related to a transfer from an existing plan or recordkeeper. STANDARD FEES - -EMPLOYER-PAID ADMINISTRATION The annual employer-paid administration fee of $1,500 plus $40 per eligible employee covers all of the standard services described above. Any special service requests related to your specific Plan not listed as STANDARD will be priced in accordance with the optional service fees as described below. 2 The employer-paid administration fee shall be paid monthly based on eligible employees as of the effective date, but subject to periodic revisions so as to reflect any significant changes in employee count. - -INVESTMENT FEES Asset based fees range between 38 and 60 basis points. OPTIONAL SERVICE FEES Fees for optional services you elect will be billed at market rates in use at the time the service is elected. ELECTION OF SERVICES The package of services governed by this Service Agreement will include the following (choose 1 or 2): 1. ___ The standard package of services only; or 2. _X_ The standard package of services plus one or more of the following (choose whichever shall apply): (a) ___ Additional employee enrollment/orientation meetings. (b) _X_ Complete preparation of IRS Form: (i)___ 5300 (ii)___ 5500 (iii)_X_ 5500-C/R (c) ___ Code Section 401(m) and/or 401(k) preliminary compliance testing in excess of once per year. (d) ___ Performance of Top Heavy and Code Section 415 annual analyses for all qualified plans adopted by the Employer. (e) ___ Ongoing plan consultation. (f) ___ Special services related to a transfer from an existing plan or recordkeeper. Note: The Employer may contract at a later date for Pentegra to provide any of the above optional services. PAYMENT METHODS Payment of the fees for the employer-paid portion of the services selected above will be made in accordance with the following (choose 1 or 2): 1. _X_ The monthly fee shall be paid directly by you. 3 2. ___ The monthly fee shall be paid by you using, to the extent permitted by law, forfeitures available under the Plan, and the remaining fees shall be paid directly by you. This Agreement will be effective (choose 1 or 2): 1. _X_ As of the later of: (i) the date executed below, or (ii) upon receipt in our Office, unless you are otherwise notified within 60 days after our receipt that the Agreement is not acceptable; or 2. ___ As revised, as of the later of: (i) the date executed below, or (ii) upon receipt in our Office, unless you are otherwise notified within 60 days after our receipt that the Agreement is not acceptable. PLEASE NOTE: 1. SERVICES NOT REFLECTED IN THIS AGREEMENT MAY BE PROVIDED UPON MUTUAL CONSENT BETWEEN PENTEGRA AND THE EMPLOYER. THE SERVICES PROVIDED IN ACCORDANCE WITH THIS AGREEMENT AND THE FEES AND EXPENSES ASSOCIATED THEREWITH CAN BE MODIFIED OR TERMINATED UPON 60 DAYS WRITTEN NOTICE FROM PENTEGRA TO THE EMPLOYER. 2. The agreement of Pentegra to provide the services described herein is based on the Employer's adoption of the Plan. Our consultants will prepare the Plan's Adoption Agreement and related documents for review and execution by the Employer based on the Plan information furnished to us by the Employer. We shall be entitled to rely upon the information provided by the Employer in the preparation of the Adoption Agreement. The Employer agrees to indemnify and hold Pentegra, the Financial Institutions Retirement Fund ("FIRF") and any director, officer or employee of either such entity harmless from any damages, liabilities or losses of whatever kind which result from or arise in connection with any inaccurate or incorrect information provided to us or any other action for which the Employer is responsible. 3. The Employer acknowledges that neither Pentegra nor any director, officer or employee thereof provides legal or tax advice to the Employer, any affiliate of the Employer, or any employee thereof. Pentegra advises the Employer to obtain its own legal or tax counsel for advice on the Plan design and specifications appropriate for its situation as well as on legal or tax issues which may arise during the operation of the Plan. The Employer acknowledges that it is solely responsible for certain functions under the Plan, including, but not limited to: a) EMPLOYER AND EMPLOYEE CONTRIBUTIONS. The Employer shall be responsible for implementing pre-tax and after-tax payroll contributions to the Plan for each member and any Employer contribution requirements, and transmitting all such contributions to the Trustee at such times and in such manner as mutually agreed between the parties. b) INFORMATION. The Employer shall be responsible for providing to Pentegra, on a timely basis, all member enrollment information and such other information relating to member accounts as Pentegra may require, including any amendments made to such information by a member. 4 c) INTERPRETATION OF THE PLAN. The Employer shall be responsible generally for resolving questions relating to any interpretation of the Plan's terms and conditions. d) PARTICIPANT CLAIMS. The Employer shall be responsible for handling claims of members relating to the Plan and their accounts established thereunder. e) PLAN QUALIFICATION. The Employer shall be responsible for maintaining the qualification of the Plan, both in its terms and conditions and in its operation pursuant to the Code, the Employee Retirement Income Security Act of 1974 ("ERISA") and all other applicable federal or state laws. f) INVESTMENT DECISIONS. The Employer shall be responsible for selecting and monitoring the Investment Funds made available to members under the Plan and for complying with any applicable Federal or state securities laws. 4. If Pentegra is taking over administration from a prior plan administration firm, we are not responsible for losses resulting from a prior firm's administration, or which are incurred as a result of actions or decisions which were undertaken or made by the prior firm. Pentegra is under no obligation to review prior plan administration work or related tax filings. Where we are retained to provide services during a Plan Year, we shall not be required to verify the accuracy or correctness of work performed in the prior portion of the Plan Year. The Employer agrees to indemnify and hold Pentegra, FIRF and any director, officer or employee of either such entity harmless from any and all liabilities, losses or damages which are the result of or which may arise in connection with any plan administration work performed prior to its retention. This Agreement terminates on the earlier of (i) the date we receive in our Office a revised Agreement which is accepted by us, or (ii) the date which is the first day of the month immediately following 60 days after we receive in our Office a written notice of termination of the Agreement from the Employer. PENTEGRA SERVICES, INC. HOME FEDERAL SAVINGS BANK By: /s/ Herbert C. Grove Jr. By: /s/ Roger P. Weise ----------------------- ---------------------- Name: Herbert C. Grove Jr. Name: Roger P. Weise ----------------------- ---------------------- Title: Senior Vice President Title: President & CEO ------------------------ ---------------------- Date of Execution: July 26, 1996 Date of Execution: June 17, 1996 ------------- -------------- 8/30/95 5 EX-5 5 Exhibit 5d Trust Agreement between Home Federal Savings Bank and Mellon Bank, N.A. 23 TRUST AGREEMENT between HOME FEDERAL SAVINGS BANK and MELLON BANK, N.A. Dated as of July 24, 1996 TABLE OF CONTENTS PAGE SECTION 1. Establishment of Master Trust 1 1.1 The Master Trust 1 1.2 Establishment of Separate Funds 2 1.3 Company as Agent 2 1.4 Title to Assets 2 1.5 Acceptance of Trust 2 1.6 Master Trustee Responsibilities 2 SECTION 2. Investment of Master Fund 2 2.1 Appointment of Investment Managers and Investment Committee 2 2.2 Directed Funds 3 2.3 (a) Permitted Investments 3 2.4 (b) Orders placed with the Master Trustee 4 (c) Brokerage Commissions 4 (d) Investment Instructions 4 2.3 Discretionary Funds 5 2.4 Settlement of Securities Transactions 5 2.5 Cash Balances 5 2.6 Appointment of TPA 5 2.7 Transfer Among Funds 5 2.8 Transfers to Collective Trusts 6 2.9 Insurance Contracts 6 (a) Procuring and Holding Contracts 6 (b) Exercising Rights under Contracts 7 (c) Payment of Premiums 7 (d) Payments under Contracts 7 (e) Liability of Master Trustee; Indemnification 7 2.10 Loans to Participants 8 SECTION 3. Powers of Master Trustee 8 3.1 In General 9 3.2 At Direction of Named Fiduciary 10 3.3 With Respect to Participant-Directed Funds 10 3.4 Administrative Powers 10 SECTION 4. Company Securities 12 4.1 Registration of Company Securities 12 4.2 Voting of Company Securities 12 4.3 Tenders for Company Securities 13 i SECTION 5. Accounts to be Maintained by the Master Trustee; Payments from the Master Trust 15 5.1 Accounts 15 5.2 No Separate Recordkeeping 15 5.3 Payments; Disputes 15 5.4 Direct Deposit of Payments 15 5.5 Responsibility of TPA 15 5.6 Returned and Uncashed Payments 16 5.7 No Liability for Contributions 16 SECTION 6. Valuation of the Master Fund 16 6.1 Valuation 16 6.2 Units 16 SECTION 7. Administrative Expenses, Taxes and Master Trustee's Compensation 17 7.1 In General 17 7.2 Fees of Investment Managers 17 SECTION 8. Master Trustee's Liability; No Duty to Review; Indemnification 17 8.1 Liability of Master Trustee 17 8.2 No Duty to Review 18 8.3 Reliance on Certain Appraisals 18 8.4 Indemnification of Master Trustee 18 8.5 Limitation of Indemnity 19 8.6 Indemnification of Successor Trustee 19 SECTION 9. Settlement of Master Trustee's Accounts 19 9.1 Annual Accounting 19 9.2 Other Accountings 20 9.3 Settlement of Accounts 20 SECTION 10. Segregation of Parts of the Master Trust 20 10.1 Segregation 20 10.2 Segregated Property 20 SECTION 11. Resignation and Removal of Master Trustee 21 SECTION 12. Evidence of Action by Company, Investment Managers, Investment Committee and TPA, and of Appointment of Named Fiduciary, Investment Managers, Investment and Committee and TPA 21 ii SECTION 13. Amendment of Agreement, Termination of Trust, Termination of Plan 22 13.1 Amendment of Agreement 22 13.2 Termination of Master Trust 22 13.3 Termination of the Plan 22 13.4 Exclusive Benefit 23 SECTION 14. Inalienability of Benefits and Interests 23 SECTION 15. No Merger, Consolidation or Transfer of Plan Assets or Liabilities 23 SECTION 16. Governing Law 24 iii TRUST AGREEMENT THIS AGREEMENT made as of July 24, 1996 by and between HOME FEDERAL SAVINGS BANK ("Company"), and MELLON BANK, N.A., a national banking association ("Master Trustee"), WITNESSETH: WHEREAS, the Company and certain of its subsidiaries and affiliates have heretofore adopted or may hereafter adopt a qualified deferred compensation plan for the benefit of its or their employees (such plan, as amended from time to time, is referred to as the "Plan", and the Company and any such subsidiary or affiliate are referred to as the "Employer"); and WHEREAS, the Employer has adopted the Plan as part of certain qualified plan services offered by Pentegra Services, Inc. ("Pentegra") including 401 (k) plan design and administrative services and investment options (the "PSI Program"); and WHEREAS, the Plan provides, among other things, for the financing by means of a trust fund of all or a part of the benefits to be paid pursuant to the Plan to certain employees ("Participants") of the Employer and their beneficiaries ("Beneficiaries"); and WHEREAS, the Company now wishes to appoint Mellon Bank, N.A. as Master Trustee in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). NOW, THEREFORE, the Company and the Master Trustee agree as follows: SECTION 1. ESTABLISHMENT OF MASTER TRUST. 1.1 THE MASTER TRUST. The Company hereby establishes with the Master Trustee a trust (hereinafter referred to as the "Master Trust") which shall comprise all of the funds and other assets deposited herewith, together with such other sums of money and such property acceptable to the Master Trustee as shall from time to time be paid or delivered to the Master Trustee hereafter, all investments made therewith and proceeds thereof and the earnings and profits thereon. "Property" as used herein shall not include any direct interest in real property, leaseholds or mineral interests. All such funds and property, together with such investments, proceeds, earnings and profits, less the payments or other distributions which, at the time of reference, shall have been made by the Master Trustee as authorized herein, are referred to as the "Master Fund". Any Company Securities (as defined in Section 4.1) deposited to the Master Fund or which the Master Trustee is directed to purchase for the Master Fund must satisfy the requirements of Section 407(d) of ERISA. The Master Trustee shall have no duty for any property until it is received and accepted by the Master Trustee. 1.2 ESTABLISHMENT OF SEPARATE FUNDS The Master Fund shall consist initially of a single fund. At any time and from time to time the Master Trustee shall, if so directed by the Company, the party that under the terms of the Plan is the named fiduciary with respect to control or management of the assets thereof (hereinafter referred to as the "Named Fiduciary"), establish within the Master Fund one or more investment funds, each of which shall be invested or reinvested as provided in Section 2. The term "Fund", as used herein, shall mean the initial fund or any other investment fund so established, depending upon the fund to which such provision is being applied at the time, and the term "Master Fund" shall refer to all such funds in the aggregate. The functions of the Named Fiduciary may be divided among more than one person or persons (in which case the term "Named Fiduciary" shall refer to any such person or persons, as the context requires), and the same person or persons may serve as the Named Fiduciary and the Investment Committee. The Master Trustee shall hold, manage, administer, value, make purchases and sales for, distribute, account for, and otherwise deal with each Fund separately. 1.3 COMPANY AS AGENT. Each subsidiary or affiliate of the Company adopting the Plan appoints the Company as its agent for purposes of this Agreement and agrees that it shall be bound by the decisions, actions and directions of the Company, the Named Fiduciary and any Investment Manager, Investment Committee (as defined in Section 2.1) or TPA (as defined in Section 2.6) under this Agreement and that the Master Trustee shall be fully protected in relying upon such decisions, actions and directions and shall in no event be required to give notice to or otherwise deal with such subsidiary or affiliate except by dealing with the Company as agent of such subsidiary or affiliate. 1.4 TITLE TO ASSETS. Neither the Plan nor the Participants or their Beneficiaries shall have any right, title or interest in or to any specific assets of the Master Fund, but shall have an undivided beneficial interest in the Master Fund valued in accordance with Section 6 hereof. Ownership of all the individual assets of the Master Fund shall be by the Master Trustee. The Master Trustee shall not issue any certificate or other documentation representing any interest in the Master Fund or part thereof. 1.5 ACCEPTANCE OF TRUST. The Master Trustee hereby accepts the Master Trust created by this Agreement on the terms and conditions herein set forth. 1.6 MASTER TRUSTEE RESPONSIBILITIES. The Master Trustee is not a party to, and has no duties or responsibilities under, the Plan other than those that may be expressly contained in the Trust Agreement. In any case in which a provision of the Trust Agreement conflicts with any provision in the Plan, this Agreement shall control as to the duties and responsibilities of the Master Trustee. The Master Trustee shall have no duties, responsibilities or liability with respect to the acts or omissions of any prior trustee. 2 SECTION 2. INVESTMENT OF MASTER FUND. 2.1 APPOINTMENT OF INVESTMENT MANAGERS AND INVESTMENT COMMITTEE. At the time each Fund is established, and from time to time thereafter, the Company shall determine and advise the Master Trustee whether the investment of such Fund is to be managed (a) by the Master Trustee in its sole discretion, (b) by an investment manager who (i) is duly appointed by the Named Fiduciary, and (ii) qualifies as an investment manager under Section 3(38)(B) of the Act (an "Investment Manager"), or (c) by an Investment Committee appointed by the Named Fiduciary (the "Investment Committee"). Any Fund that is managed by the Master Trustee is hereinafter referred to as a "Discretionary Fund", and any Fund that is managed by an Investment Manager or Investment Committee is hereinafter referred to as a "Directed Fund". In the event that the Plan provides for allocation of Trust Fund assets to the Funds at the direction of Participants, the Funds in which Participants may direct their investments, whether or not otherwise constituting Directed Funds or Discretionary Funds, shall be referred to herein as "Participant-Directed Funds". In the event the Investment Manager of any Directed Fund resigns or is removed, the Named Fiduciary shall promptly notify the Master Trustee of such resignation or removal and of the appointment of a successor to such Investment Manager. Upon resignation or removal of an Investment Manager, the Master Trustee shall not have or be deemed to have any responsibility to manage and control any asset held in the Directed Fund of such former Investment Manager, except as set out in the sentence immediately following. If an Investment Committee has been appointed, the Master Trustee shall treat such Fund as managed by the Investment Committee pending notification from the Named Fiduciary of the appointment of a different successor to the former Investment Manager; if no Investment Committee has been appointed and if no notification of the appointment of such a successor is received within seven days of notification to the Master Trustee of the former Investment Manager's resignation or removal, the Master Trustee shall thereafter treat such Directed Fund as managed by the Company unless and until it receives other instructions from the Named Fiduciary as to the investment of such Fund. 2.2 DIRECTED FUNDS. (a) PERMITTED INVESTMENTS. Each Directed Fund shall be invested and reinvested, within the parameters of the PSI Program, without distinction between principal and income, in such property as the Master Trustee may be directed by an Investment Manager or the Investment Committee with respect to any Funds managed by such Investment Manager or Committee, including without limitation: any and all common stocks, preferred stocks, bonds, debentures, mortgages on personal property wherever situated, equipment trust certificates, notes or other evidence of indebtedness, or any other securities, certificates of deposit, demand or time deposits (including any such deposits, demand or time deposits which pay a reasonable rate of interest with the Employer and any such deposits, demand or time deposits with the Master Trustee or an affiliate), shares of investment companies and mutual funds (including affiliates of the Master Trustee), interests in partnerships and trusts, insurance policies and contracts, repurchase agreements, and any other property or joint or other part interest in property 3 (including, without limitation, part interests in bonds and mortgages or notes and mortgages), United States or foreign, whither situated within or outside the United States (provided that, except as provided in Section 3.4 hereof, the indicia of ownership thereof are not maintained outside the jurisdiction of the district courts of the United States), and of any kind, class or character, and irrespective in any case of whether the Master Trustee, an affiliate thereof or another, individually or as trustee or agent, is acting as participator of any part interest in property that may be acquired. Such investment and reinvestment shall not be restricted to property authorized for investment by trustees under any present or future law. A Discretionary Fund may be invested and reinvested whether or not the property acquired is productive of income, is marketable or constitutes a wasting asset. Without limiting the generality of the foregoing, a Directed Fund may be invested in stocks of any classification, bonds or other securities issued or guaranteed by the Company, or by any subsidiary or affiliate thereof, which shall be deemed to purport to authorize any investment or reinvestment in violation of the requirements or ERISA. (b) ORDERS PLACED WITH THE MASTER TRUSTEE. An Investment Manager or Investment Committee may direct the Master Trustee to have its trading desk issue orders to a broker for the purchase or sale of securities for any Directed Fund that such Investment Manager or Investment Committee manages. Such directions shall include instructions as to whether such order is to be placed "at market" or for a specific price (including a grand of prices). The Master Trustee shall not be liable for any claim, liability, loss, damage or expense attributable to its inability to place an order at a specific price, whether due to the timing of such order or otherwise, unless the inability to place such order is due to the Master Trustee's own negligence, bad faith or willful misconduct. (c) BROKERAGE COMMISSIONS. In placing securities transactions for a Directed Fund, the Master Trustee's primary objective will be to obtain the most favorable net results, taking into account such factors as the best net price available, the size of and diffuclty in executing the order, and the reliability, efficiency and financial responsibility of the broker or dealer. When it can be done consistently with this goal, the Master Trustee may allocate orders of the Securities Exchange Act of 1934). The Company understands that such brokerage and research generated through commissions paid by such other accounts may be useful in connection with a Discretionary Fund. (d) INVESTMENT INSTRUCTIONS. An Investment Manager or the Investment Committee at any time and from time to time may issue orders directly to a broker for the purchase or sale of securities for any Directed Fund that it manages. The Investment Manager or Investment Committee will promptly give or cause to be given to the Master Trustee notice of the issuance of such order and the broker will confirm such order or cause it to be confirmed to the Master Trustee. Such notice and confirmation may be given in writing, by telecopy or by any other electronic means using a code for the authentication of messages, and may include Trade Reports issued by the Institutional Delivery System of Depository Trust Company. Receipt of a 4 matching notice and confirmation or of such a Trade Report shall be authority for the Master Trustee to settle such trade. Except as provided in Section 2. 1, in the absence of directions or authorization from the Investment Manager or Investment Committee, the Master Trustee shall have no power, duty or authority to invest any Directed Fund. 2.3 DISCRETIONARY FUND [Reserved] 2.4 SETTLEMENT OF SECURITIES TRANSACTIONS. When the Master Trustee is instructed to deliver property against payment, delivery of the property and receipt of payment may not be simultaneous. The risk of non-receipt of payment shall be the Master Trust's and the Master Trustee shall have no liability therefor. All credits to the Master Trust of the anticipated proceeds of sales and redemptions of property and of anticipated income from property shall be conditional upon receipt by the Master Trustee of final payment and may be reversed to the extent final payment is not received. At the discretion of the Master Trustee, the Master Trust may make use of such conditional credits. To the extent such credits do not become unconditional by receipt of final payment, the Master Trust shall reimburse the Master Trustee upon demand for the amount of such conditional credits so used. When the Master Trustee is instructed to receive property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property subject to the Master Trustee's sole order. The Master Trustee may, in its discretion, advance funds to the Master Trust to facilitate the settlement of any trade. In the event of such an advance, the Master Trust shall immediately reimburse the Master Trustee for the amount thereof. 2.5 CASH BALANCES. The Master Trustee may invest all or any portion of any cash balances in any Discretionary Fund, and an Investment Manager or the Investment Committee may, with the prior written acceptance of the Master Trustee, by written authorization delegate to the Master Trustee authority to invest all or any portion of any cash balances in any Directed Fund, in the Master Trustee's sole discretion, including, without limitation, investments in part interests in obligations, irrespective of whether the Master Trustee or another, individually or as trustee or agent, is acting as a participator. The Master Trustee shall not be liable for interest on any cash balances in any Directed Fund that it holds uninvested pending receipt of directions from the Investment Manager or the Investment Committee, in the absence of authorization from the latter to invest the same in the Master Trustee's sole discretion, nor liable for interest on any cash balances it may be authorized to invest in its sole discretion, and may hold uninvested as it deems to be in the best interests of the Master Fund. 2.6 APPOINTMENT OF TPA. The Named Fiduciary hereby certifies to the Master Trustee that Pentegra is the third party administrator (the "TPA") appointed by it or the Company to receive, cumulate and communicate investment and distribution directions with respect to Participant-Directed Funds from Plan Participants, and the Named Fiduciary has delegated such responsibility and authority to Pentegra as specified in this Agreement and as it shall communicate to the Master Trustee from time to time. For the purposes of this Agreement, such TPA shall be a delegee of the Named Fiduciary in accordance with Section 405(c)(1)(B) of the Act. The Master Trustee may rely on such certification and delegation until notified in writing to the contrary by the Named Fiduciary. 5 2.7 TRANSFER AMONG FUNDS. The TPA shall direct the Master Trustee with respect to the allocation of assets to the Funds and with respect to transfers among the Funds. The Master Trustee shall have no duty to invest, and shall not be liable for interest on, any such assets it holds uninvested pending receipt of directions from the TPA to allocate contributions among the Funds. 2.8 TRANSFERS TO COLLECTIVE TRUSTS. Notwithstanding any provision of the Plan or of this Agreement to the contrary, the Master Trustee may, in its sole discretion with respect to any Discretionary Fund and, if authorized or directed by the Investment Manager or Investment Committee of any Directed Fund, with respect to such Directed Fund, transfer all or any part of the assets of such Fund to, or withdraw the same from, any collective investment trust that shall be or shall have been created and administered by the Master Trustee or any collective investment trust maintained by any other bank (including affiliates of the Master Trustee) for the collective investment of the property of employee benefit trusts, provided that such trust is qualified under the provisions of Section 401(a) of the Internal Revenue Code ("Code") and exempt under the provisions of Section 501(a) of the Code. To that end, the Master Trustee is hereby expressly authorized to permit the commingling of any or all of the assets of such Fund with the assets of other trusts eligible to participate in such collective investment trusts. The Master Trustee shall have no responsibility for the custody or safekeeping of assets transferred to any collective investment trust not established and maintained by the Master Trustee. To the extent that property of the Master Fund is invested in any collective investment trust as provided above, the declaration of trust pertaining thereto, as amended from time to time, and the trust thereby created, shall be a part of this Agreement. The Master Trustee shall have, with respect to the interest of such Fund in such collective investment trust, the powers conferred by this Agreement to the extent that such powers are not inconsistent with the provisions of such declaration of trust. For purposes of any valuation of the Master Fund or any valuation of the interest or of the account of any Participant or Beneficiary under the Plan, the interest of the Master Trust in such collective investment trust shall be valued at the times and in the manner prescribed by the declaration by which such trust was created. The Named Fiduciary expressly understands and agrees that any such collective investment fund may provide for the lending of its securities by the collective investment fund trustee and that such collective investment fund trustee will receive compensation for the lending of securities that is separate from any compensation of the Master Trustee hereunder, or any compensation of the collective investment fund trustee for the management of such fund. A copy of the declaration of trust as presently in effect of any collective investment trust to which the assets of the Plan are transferred pursuant to this Section 2.8 shall be provided to the Named Fiduciary and copies of amendments thereto shall be forwarded to the Named Fiduciary promptly after their adoption. 2.9 INSURANCE CONTRACTS. (a) PROCURING AND HOLDING CONTRACTS. The Master Trustee, upon written direction of the Named Fiduciary or an Investment Manager, shall pay from the Master Trust such sums to such insurance company or companies as the Named Fiduciary or an Investment Manager may direct for the purpose of procuring individual or group annuity contracts or other 6 insurance contracts (hereinafter referred to as "Contracts"). The Named Fiduciary or an Investment Manager shall prepare, or cause to be prepared in such form as it shall prescribe, the application for any Contract to be applied for. The Master Trustee shall receive and hold in the Master Trust, subject to the provisions hereinafter set forth in this Section, all Contracts obtained, the proceeds of any sale, assignment or surrender of any such Contract and any and all dividends and other payments of any kind received with respect to any such Contract. (b) EXERCISING RIGHTS UNDER CONTRACTS. The Master Trustee shall be the complete and absolute owner of Contracts held in the Master Trust, provided that the Named Fiduciary or an Investment Manager shall have power to direct the Master Trustee to exercise any and all of rights, options, or privileges that belong to the Master Trustee as such absolute owner or that are granted by the terms of any such Contract or by the terms of this Agreement, and the Master Trustee shall not exercise any of the foregoing powers or take any other action permitted by any such Contract other than upon the written direction of the Named Fiduciary or an Investment Manager. The Master Trustee shall have no duty to exercise any of such power or to take any such action unless and until it shall have received such direction. The Master Trustee, upon the written direction of the Named Fiduciary or an Investment Manager, shall deliver any Contract held in the Master Trust to such person or persons as may be specified in the direction. (c) PAYMENT OF PREMIUMS. Upon the written direction of the Named Fiduciary or an Investment Manager, the Master Trustee shall pay from the Master Trust premiums, assessments, dues, charges and interest, if any, upon any Contract held in the Master Trust. The Master Trustee shall have no duty to make any such payment unless and until it shall have received such direction. (d) PAYMENTS UNDER CONTRACTS. Any sums paid out by any insurance company under the terms of a Contract held in the Master Trust either to the Master Trustee, or, in accordance with its direction, to any other person or persons designated as payees in such Contract shall be a full and complete discharge of the liability to pay such sums, and the insurance company shall have no obligation to look to the disposition of any sums so paid. No insurance company shall be required to look into the terms of this Agreement, or to question any action of the Master Trustee or to see that any action of the Master Trustee is authorized by the terms of this Agreement. (e) LIABILITY OF MASTER TRUSTEE; INDEMNIFICATION. Anything contained herein to the contrary notwithstanding, to the extent permitted by law, the Master Trustee shall not be liable for the refusal of any insurance company to issue or change any Contract or take any other action requested by the Master Trustee; for any assets invested in a Contract at the direction of the Named Fiduciary or an Investment Manager; for the form, terms, genuineness, validity, sufficiency or effect of any Contract held in the Master Trust; for the act of any person or persons that may render any such Contract null and void; for the failure of any insurance company to pay the proceeds of any such Contract as and when the same shall become due and payable; for any delay in payment resulting from any provision contained in any such Contract nor for the fact that for any reason whatsoever (other than the Master Trustee's own negligence, bad faith or 7 willful misconduct) any Contract shall lapse or otherwise become uncollectible. The Company hereby agrees to indemnify the Master Trustee and to hold it harmless from and against any claim, liability, loss, damage or expense that may be asserted against the Master Trustee by reason of any action taken or omitted by the Master Trustee in connection with any Contract at the direction of the Named Fiduciary or an Investment Manager other than such claims, liabilities, losses, damages or expenses that are attributable to the Master Trustee's own negligence, bad faith or willful misconduct in performing duties specifically undertaken herein. 2.10 LOANS TO PARTICIPANTS. (a) On the direction of the TPA, the Master Trustee shall make loans from the assets of the Trust Funds to Participants in the Plan. All promissory notes evidencing such loans shall constitute assets of the trust estate, shall be held in a separate Fund known as the "Loan Fund" and, except as otherwise provided herein, shall be held by the Master Trustee. The Master Trustee shall have no responsibility with respect to the holding, investment or administration of the Loan Fund, except as specified in the written directions of the TPA with respect thereto. (b) Each such loan shall bear a reasonable rate of interest (within the meaning of Regulation Section 2550.408(b)(1) promulgated by the Department of Labor) as determined by the Investment Committee and shall be secured by the Participant's account balance in the Trust Fund. Unless otherwise instructed in writing by the Named Fiduciary, the Master Trustee shall not file a UCC-1 form or take other action in order to perfect its security interest in the accounts of a Participant to whom a loan is made. (c) The Named Fiduciary or the TPA will provide the Master Trustee with such information as may from time to time be required for the Master Trustee to exercise its rights under the documents relating to plan loans including, without limitation, the occurrence of events of default by Participants. (d) The TPA (or, if the Named Fiduciary so directs, the Investment Committee,) is hereby appointed as custodian for the Master Trustee of all original promissory notes and security agreements which shall be held subject to the order of the Master Trustee. In the event that the Master Trustee or the TPA terminates such custodianship (which either may do on written notice to the other), the Named Fiduciary shall retain the originals of all promissory notes and security agreements as custodian for the Master Trustee. (e) In addition to all other indemnities provided to the Master Trustee in this Agreement, the Company hereby indemnifies the Master Trustee and its directors, officers and employees, and holds it and them harmless from and against any claim, liability, loss, damage or expense (including reasonable attorneys' fees) which it may incur by reason of its not filing or otherwise perfecting a security interest granted to the Master Trustee with respect to a loan to a Participant and in connection with the TPA or Named Fiduciary acting as custodian of promissory notes pursuant to paragraph (d) above. 8 SECTION 3. POWERS OF MASTER TRUSTEE. 3.1 IN GENERAL. The Master Trustee is authorized and empowered, in its discretion with respect to a Discretionary Fund, and at the direction of an Investment Manager or the Investment Committee with respect to a Directed Fund managed by such Investment Manager or Committee: (1) to sell, exchange, convey, transfer or otherwise dispose of any property, real or personal, at any time held by the Master Trustee, by private contract or at public auction, for cash or on credit, (in the case of a Directed Fund, upon such conditions, at such prices and in such manner as the Investment Manager or Investment Committee shall direct), and no person dealing with the Master Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or other disposition; (2) to grant options to purchase securities held in the Fund ("covered call options") and other property held in the Fund and options to sell securities and other property to the Fund, as well as combinations of such options to purchase and such options to sell; and to acquire options to purchase securities and other property for the Fund and options to sell securities and other property held in the Fund, as well as combinations of such options to purchase and such options to sell; (3) to sell or exercise any conversion privileges, subscription rights, warrants or other options and to make any payments incidental thereto, and to consent to or otherwise participate in corporate reorganizations, mergers, consolidations or other changes affecting corporate securities and to delegate discretionary powers and to pay any assessments or charges in connection therewith; but the Company understands that, where warrants, options, tenders or other rights have fixed expiration dates, in order for the Master Trustee to act with respect to a Directed Fund, it must receive instructions at its offices, addressed as the Master Trustee may from time to time request, by no later than noon (Eastern Time) at least one business day prior to the last scheduled date to act with respect thereto (or such earlier date or time as the Master Trustee may direct); (4) to compromise, compound, settle or arbitrate any claim, debt or obligation due to or from it as Master Trustee and to reduce the rate of interest on, extend or otherwise modify, or to foreclose upon default or otherwise enforce any such obligation, and, in the case of a Discretionary Fund, to abandon any property determined by it to be worthless; (5) to vote upon any stocks, bonds or other securities and to give general or special proxies or powers of attorney with or without power of substitution, provided that, in the case of Company Securities (as defined in Section 4.1), the provisions of Section 4.2 shall apply and, provided further that, in the case of a Directed Fund (other than one holding Company Securities), unless the Master Trustee is 9 instructed otherwise, all proxies and proxy materials relating to securities held in the Master Fund shall be signed by the Master Trustee without indication of voting preference, and forwarded to the Investment Manager or Investment Committee for the making of all decisions with respect thereto; and to enter into any voting trust or similar agreement; (6) for the purposes of the Master Trust, to engage in transactions involving financial futures, including but not limited to stock index futures, and options on financial futures; and in carrying out such transactions to open accounts to trade in and to make or take delivery of financial futures, to provide original, variation, maintenance and other required margin in the form of moneys, securities, or otherwise, and to exercise options; and (7) generally to exercise any of the powers of an owner with respect to stocks, bonds, securities or other property held in any Fund. 3.2 AT DIRECTION OF NAMED FIDUCIARY. The Master Trustee is authorized and empowered, with the approval of the Named Fiduciary with respect to any Fund: (1) for the purposes of the Master Trust, to borrow money from any person or persons, including the Master Trustee or an affiliate, to issue the Master Trust's promissory note or notes therefor, and to secure the repayment thereof by pledging, mortgaging or otherwise encumbering any property in its possession; (2) to designate the Master Trustee or an affiliate to act on its behalf in lending securities held in the Master Fund to brokers, dealers, banks or other financial institutions, on such terms as are consistent with the Act; and (3) to transfer all or any portion of the Master Fund to another trustee of the Plan which may include the Employer, and, following such transfer, the Master Trustee shall have no responsibility whatsoever with respect to assets so transferred. 3.3 WITH RESPECT TO PARTICIPANT-DIRECTED FUNDS. The Master Trustee is authorized and empowered, at the direction of the TPA (which direction may include standing instructions) with respect to any Participant-Directed Fund, to sell, or to purchase, any property held in such Funds, as appropriate to effectuate transfers among Funds in accordance with Section 2.7, and/or distributions from Funds in accordance with Section 2.10 or 5.3. 3.4 ADMINISTRATIVE POWERS. The Master Trustee is authorized and empowered in its sole administrative discretion with respect to both Discretionary and Directed Funds: (1) to make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers granted herein; 10 (2) to collect all interest, dividends and other income payable with respect to property in the Master Fund, and to surrender securities at maturity or when advised of earlier call for redemption, provided that the Master Trustee shall not be liable for failure to surrender any security in a Directed Fund for redemption prior to maturity or take other action if notice of such redemption or other action was not provided to the Master Trustee by the issuer, the Investment Manager, the Investment Committee or one of the nationally recognized bond or corporate action services to which the Master Trustee subscribes; (3) to exchange securities in temporary form for securities in definitive form, and to effect an exchange of shares where the par value of stock is changed; (4) to hold property in its or an affiliate's vaults, at a domestic or (to the extent permitted by regulations issued by the Secretary of Labor under Section 404(b) of the Act) foreign central depository or clearing corporation, in non-certificated form with the issuer, on Federal Book Entry at the Federal Reserve Bank of New York, with a custodian appointed pursuant to clause (5) below, or, with the approval of the Named Fiduciary, at any other location; (5) to appoint another bank as custodian for any foreign securities or other foreign assets constituting part of the Master Fund, and to arrange for the custody of such securities or assets and the indicia of ownership thereof to be held outside the jurisdiction of the district courts of the United States by such other bank and/or its agents, to the extent permitted by regulations issued by the Secretary of Labor under Section 404(b) of the Act, and to pay the reasonable expenses and compensation of such bank from the Master Fund; (6) to hold property of the Master Trust in its own name or in the name of a nominee, including the nominee of any central depository (including an affiliate of the Master Trustee), clearing corporation or custodian with which securities of the Master Trust may be deposited (and the Company agrees to hold the Master Trustee and any such nominee harmless from any liability as a holder of record), and to hold any investment in bearer form, but the books and records of the Master Trustee shall at all times show that all such investments are part of the Master Trust; (7) to form corporations and to create trusts under the laws of any state for the purpose of acquiring and holding title to any securities or other property, all on such terms and conditions as it deems advisable; (8) to employ suitable agents, including auditors and legal counsel (who may be counsel to the Company or to the Master Trustee in its corporate capacity) or other advisers, without liability for any loss occasioned by any such agent selected with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the 11 conduct of an enterprise of a like character with like aims, and to pay their reasonable expenses and compensation from the Master Fund; (9) to take any action with respect to the Master Fund that it deems necessary in carrying out the purposes of this Agreement. SECTION 4. COMPANY SECURITIES. 4.1 REGISTRATION OF COMPANY SECURITIES. In the event that the property initially delivered to the Master Trustee hereunder includes any stocks of any classification, bonds or other marketable obligations or securities issued or guaranteed by the Company, or by any subsidiary or affiliate thereof ("Company Securities"), or that the Master Trustee purchases for any Discretionary Fund or an Investment Manager or the Investment Committee directs the purchase for any Directed Fund of any such securities, and the Master Trustee should thereafter determine (with respect to a Discretionary Fund) or the Investment Manager or Investment Committee should thereafter direct the Master Trustee (with respect to a Directed Fund) to dispose of any such securities under circumstances which, in the opinion of the Master Trustee, require registration of such securities under the Securities Act of 1933 and/or qualification of such securities under the Blue Sky laws of any state or states, then the Company, at its own expense, will promptly take or cause to be taken any and all action necessary or appropriate to effect such registration and/or qualification; in such event, the Master Trustee shall not be required to dispose of such securities until such registration and/or qualification are complete and effective, and the Master Trustee shall not be liable for any loss or depreciation of the Fund resulting from any delay attributable thereto. The Company will indemnify and hold the Master Trustee and its officers and directors harmless with respect to any claim, liability, loss damage or expense (except any such claims, liabilities, losses, damages or expenses that are attributable to the Master Trustee's own negligence, bad faith or willful misconduct with respect to any duties specifically undertaken herein) incurred as a result of such registration or qualification or as a result of any information in connection therewith furnished by the Company or as a result of any failure by the Company to furnish any such information. 4.2 VOTING OF COMPANY SECURITIES. Notwithstanding any other provision of this Agreement to the contrary, the Master Trustee will have no discretion or authority to vote Company Securities held in the Master Trust by the Master Trustee on any matter presented for a vote by stockholders of the Company except in accordance with the timely directions received by the Master Trustee from Participants who have Company Securities allocated to their individual accounts under the Plan. Each Participant who has been allocated Company Securities will, as a named fiduciary, direct the Master Trustee with respect to the vote of Company Securities allocated to the Participant's individual account. Such directions will be given by the Participants acting in their capacity as named fiduciaries with respect to such Company Securities and, upon timely receipt of such instructions, the Master Trustee will vote the Company Securities held in the Master Trust, pursuant to the direction of Participants giving instructions to the Master Trustee. The Master Trustee will vote any Company Securities for 12 which timely instructions are not received from Participants in proportion with such instructions as are received on a timely basis. The Company and the Master Trustee shall not improperly interfere in any manner with the decision of any Participant regarding the directions of the Participant with respect to the vote of Company Securities allocated to the Participant's individual account, and the Master Trustee shall arrange for such voting to take place on a confidential basis. The Master Trustee will adequately communicate or cause to be communicated to all Participants the provisions of this Agreement relating to the right of Participants to direct the Master Trustee with respect to the voting of Company Securities allocated to their individual accounts under the Plan. The Company will provide the Trustee with such information and assistance as the Master Trustee may reasonably request in connection with any communications or distributions to Participants. The Company will distribute or cause to be distributed to Participants entitled to direct the Master Trustee as to the voting of any Company Securities hereunder and all materials and communications which it provides to other stockholders of the Company in connection with such vote. The Master Trustee may rely on the Company for such distribution and will not be liable for the Company's failure to provide such materials and communications to any Participant. 4.3 TENDERS FOR COMPANY SECURITIES. Notwithstanding any other provision of this Agreement to the contrary, in the event an offer to acquire any shares of Company Securities held in the Master Trust (an "Offer") shall be received by the Master Trustee, the Master Trustee will have no discretion or authority to sell, exchange or transfer any shares of Company Securities held by the Trustee in the Master Trust pursuant to such Offer except to the extent, and only to the extent, that the Master Trustee is timely directed to do so in writing by each Participant to whose individual account any of such Company Securities is allocated, as named fiduciary. Upon timely receipt of instructions, the Master Trustee will sell, exchange or transfer pursuant to such Offer such shares, and only such shares, as to which instructions were given. The failure of any Participant, as named fiduciary, to provide in a timely manner instructions to the Master Trustee with respect to Company Securities allocated to the Participant's individual account will be deemed to constitute instructions to the Master Trustee not to sell, transfer or exchange any of such Company Securities, and the Master Trustee will communicate or cause to be communicated to each Participant the consequences of any failure to provide timely instructions to the Master Trustee. In the event that, under the terms of an Offer to acquire Company Securities or otherwise, any shares of Company Securities tendered for sale, exchange or transfer pursuant to such Offer may be withdrawn from such Offer, the Master Trustee will follow such instructions respecting the withdrawal of such securities from such Offer in the same manner as shall be timely received by the Master Trustee from the Participants entitled under this paragraph to direct the Master Trustee as to the sale, exchange or transfer of securities pursuant to such Offer. 13 In the event that an Offer for fewer than all of the shares of Company Securities held by the Master Trustee in the Master Trust shall be received by the Master Trustee, each Participant who has allocated to an individual account in the Plan Company Securities subject to such Offer shall be entitled to direct the Master Trustee as to the acceptance or rejection of such Offer (as provided above) with respect to the largest portion of such Company Securities as may be possible given the total number or amount of shares of Company Securities the Master Trustee may sell, exchange or transfer pursuant to the Offer based upon the instructions received by the Master Trustee from all other Participants who shall timely instruct the Master Trustee pursuant to this Section to sell, exchange or transfer such shares pursuant to an Offer, each on a pro rata basis in accordance with the number or amount of shares allocated to their individual accounts. In the event that an Offer shall be received by the Master Trustee and instructions shall be solicited from Participants pursuant to this Section regarding such Offer, and prior to the termination of such Offer, another Offer is received by the Master Trustee for securities subject to the first Offer, the Master Trustee shall, if practicable make a reasonable effort under the circumstances to solicit instructions from the Participants to the Master Trustee (i) with respect to securities tendered for sale, exchange or transfer pursuant to the first Offer, whether to withdraw such tender, if possible, and, if withdrawn, whether to tender any securities so withdrawn for sale, exchange or transfer pursuant to the second Offer and (ii) with respect to securities not tendered for sale, exchange, or transfer pursuant to the first Offer, whether to tender or not to tender such securities for sale, exchange or transfer pursuant to the second Offer. The Master Trustee will follow all instructions received in a timely manner from Participants in the same manner as provided in this Section 4.3 above. With respect to any Offer (including successive Offers from one or more existing offers), the Master Trustee shall act in the same manner described above. In the event an Offer for any Company Securities held by the Master Trustee in the Master Trust shall be received by the Master Trustee and the Participants shall be entitled to determine to accept, reject or withdraw an acceptance of such Offer pursuant to this Section 4.3, (i) the Company and the Master Trustee shall not improperly interfere in any manner with the decision of any Participant regarding the action of the Participant with respect to such Offer (hereinafter referred to as the "Investment Decision"), and the Master Trustee shall arrange for such Investment Decision to be made on a confidential basis; and (ii) the Master Trustee will adequately communicate or cause to be communicated to all Participants the provisions of this Agreement relating to the rights of the Participants to direct the Master Trustee with respect to the Company Securities subject to such Offer and the Master Trustee's obligation to follow such directions. The Company will provide the Master Trustee with such information and assistance as the Master Trustee may reasonably request in connection with any communications or distributions to Participants. The Company will distribute or cause to be distributed to Participants any and all communications distributed to other stockholders of the Company in connection with the Offer. The Master Trustee may rely on the Company for such distribution and will not be liable 14 for the Company's failure to provide or cause to be provided such communications to any Participants. Notwithstanding anything elsewhere in this Agreement to the contrary, unless otherwise directed by the Investment Committee, any proceeds received by the Master Trustee as a result of the sale, exchange or transfer of Company Securities pursuant to an Offer shall be reinvested in Company Securities the Master Trustee if such security is available for purchase. SECTION 5. ACCOUNTS TO BE MAINTAINED BY THE MASTER TRUSTEE: PAYMENTS FROM THE MASTER TRUST. 5.1 ACCOUNTS. The Master Trustee may maintain one or more accounts for the purpose of making disbursements at the direction of the TPA and such other purposes, if any, as may be reasonably required for the convenient administration of the Plan or of the Master Trust. 5.2 NO SEPARATE RECORDKEEPING. The Master Trustee shall not be required to maintain any separate records or accounts with respect to the Participants (or their Beneficiaries), and any such records or accounts required to be maintained pursuant to the terms of the Plan shall be maintained by the Employer or by the TPA. 5.3 PAYMENTS: DISPUTES. The Master Trustee, from time to time, upon receipt of a written order from the TPA, shall make payments from the Master Fund to such persons and in such amounts as the Investment Committee or the TPA shall direct, and amounts paid pursuant to such direction thereafter no longer shall constitute a part of the Master Trust. Orders from the TPA need not specify the purpose of the payments so ordered, and the Master Trustee shall not be responsible in any way respecting the purpose or propriety of such payments or for the administration of the Plan. Any such order shall constitute a certification that the payment directed is one which the TPA is authorized to direct, and the Master Trustee need make no further investigation. Payments by the Master Trustee may be made (i) by its check to the order of the payee and mailed to the payee at the address last furnished to the Master Trustee by the TPA or by the payee, or if no such address has been so furnished, to the payee in care of the Company, or (ii) by direct deposit to an account of the payee in accordance with Section 5.4. If a dispute arises as to who is entitled to or should receive any benefit or payment, the Master Trustee may withhold or cause to be withheld such payment until the dispute has been resolved. 5.4 DIRECT DEPOSIT OF PAYMENTS. At the request of any Participant or Beneficiary, the Master Trustee shall deposit periodic payments directly into the bank account of such person, provided that such person and its depository bank shall have entered into a depository agreement with the Master Trustee that is satisfactory to the Master Trustee. The Company hereby agrees to indemnify the Master Trustee and to hold it harmless from and against any claim, liability, loss, damage or expense that may be asserted against it as a result of making any such deposit other than any such claims, liabilities, losses, damages or expenses that are attributable to the Master Trustee's own negligence, bad faith or willful misconduct. 15 5.5 RESPONSIBILITY OF TPA. In directing the Master Trustee to make payments out of the Master Trust, the TPA shall follow the provisions of the Plan, so that it shall be impossible, either during the existence or upon the discontinuance of the Plan, for any part of the Master Fund to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries, at any time prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries, or for any part thereof to be paid or applied to the use of any Employer except, upon the termination of the Plan, to the extent of any surplus resulting from an actuarial error. 5.6 RETURNED AND UNCASHED PAYMENTS. In the event that any payment ordered by the TPA shall be distributed by the Master Trustee in accordance with Section 5.3 or Section 5.4 and (i) such payment shall be returned to the Master Trustee because the payee or the payee's account cannot be located at such address, or (ii) any check so mailed shall not be presented for payment within six months of the date thereof, the Master Trustee shall promptly notify the TPA of such return or failure to present. Upon the expiration of 60 days after such notification such payment order shall become void, and unless and until a further order of such TPA is received by the Master Trustee with respect to such payment, the Master Trustee shall return such payment to the Master Trust and continue to administer the Master Trust as if such order had not been made. The Master Trustee shall not be obligated to search for or ascertain the whereabouts of any such person (or his duly appointed representative). 5.7 NO LIABILITY FOR CONTRIBUTIONS. The Master Trustee shall be under no duty to enforce payment of any contribution and shall not be responsible for the adequacy of the Master Trust to meet and discharge any liabilities under the Plan. SECTION 6. VALUATION OF THE MASTER FUND. 6. l VALUATION. As of the inception of the Master Fund, as of the close of the last business day of each month thereafter, and as of such other time or times as the Master Trustee may deem appropriate (the "Valuation Date"), the Master Trustee shall determine the market value of the Master Fund. Such determination may be made either by the Master Trustee itself or by such person or persons believed by the Master Trustee to be competent to make such determination as the Master Trustee may select, but in accordance with a method consistently followed and uniformly applied. The Master Trustee's determination of the value of the Master Fund shall be conclusive and binding upon the Plan, each Employer, the Named Fiduciary, the Investment Committee, the TPA, and the Participants and their Beneficiaries. 6.2 UNITS. At the direction of the TPA, the Master Trustee shall express the market value of any Fund in whole and fractional units which shall be equal undivided interests in such Fund without priority or preference one over the other. The original unit of participation in a Fund shall be specified by the TPA at the inception of the Fund. As of each Valuation Date the Master Trustee shall determine the value per unit in the Fund by dividing the value of the Fund as determined in accordance with this Section by the number of existing units in the Fund. Transfers of cash and/or property to or from a Fund shall be made only as of a Valuation Date 16 and shall be based upon the value of a unit as of such Date, and the number of units charged or credited to a Fund shall be adjusted accordingly. SECTION 7. ADMINISTRATIVE EXPENSES. TAXES AND MASTER TRUSTEE'S COMPENSATION. 7. l IN GENERAL. All brokerage costs and transfer taxes incurred in connection with the investment and reinvestment of any Fund, all income taxes or other taxes of any kind whatsoever which may be levied or assessed under existing or future laws upon or in respect of such Fund, all expenses incurred in connection with the acquisition or holding of property, any interest therein or mortgage thereon, all other administrative expenses incurred by the Master Trustee in the performance of its duties, including fees for legal services and third party appraisal services rendered to the Master Trustee and fees incurred in the solicitation of directions with respect to voting and tendering Company Securities, and all other proper charges and disbursements of the Master Trustee, shall be paid by the Fund, and, until paid, shall constitute a charge upon the Fund. 7.2 FEES OF INVESTMENT MANAGERS. The Named Fiduciary may direct the Master Trustee to pay from the Master Fund the fees of any Investment Manager and the administrative expenses of the Plan, including but not limited to actuarial fees. SECTION 8. MASTER TRUSTEE'S LIABILITY: NO DUTY TO REVIEW; INDEMNIFICATION. 8. l LIABILITY OF MASTER TRUSTEE. With respect to a Discretionary Fund, the Master Trustee shall not be liable for any loss to or diminution of the Discretionary Fund resulting from any action taken or omitted by the Master Trustee except if due to any failure of the Master Trustee to act in accordance with the requirements of Part 4 of Title I of ERISA or if due to the Master Trustee's own negligence, bad faith or willful misconduct. With respect to any Directed Fund hereunder, the Master Trustee shall not be liable for the making, retention or sale of any investment or reinvestment made or received by it at the direction of an Investment Manager, the Investment Committee or the TPA, as herein provided, nor for any loss to or diminution of the Fund resulting from any action taken, or from any act omitted, by the Master Trustee at the direction of an Investment Manager, the Investment Committee or the TPA as herein provided, except if due to the Master Trustee's negligence, bad faith or willful misconduct. The Master Trustee shall not be liable for any loss to or diminution of the Fund resulting from any action taken or omitted by the Master Trustee, other than at the direction of an Investment Manager, the Investment Committee or the TPA, except if due to any failure of the Master Trustee to act in accordance with the requirements of Part 4 of Title I of ERISA or if due to the Master Trustee's own negligence, bad faith or willful misconduct. The Master Trustee shall not be responsible for the adequacy of any funding policy of the Plan of which it is advised pursuant to Section 2.2(c) or the diversification of the investments of the Plan. Responsibility for monitoring adherence to funding policies and for investment diversification, and for advising the Master Trustee accordingly with respect to any Discretionary Fund and advising the Investment Manager or 17 Investment Committee accordingly with respect to any Directed Fund, shall rest solely with the Named Fiduciary. The Master Trustee may from time to time consult with legal counsel, who may be counsel to the Company or to the Master Trustee in its corporate capacity, and shall be fully protected in acting upon the advice of counsel. To protect the Master Trust from expenses which might otherwise be incurred, the Company shall have sole authority to enforce this Agreement on behalf of all persons claiming any interest in the Master Trust or under the Plan, and no other person may institute or maintain any action or proceeding against the Master Trustee or the Master Trust in the absence of written authority from the Company or a judgment of a court of competent jurisdiction that in refusing authority the Company acted fraudulently or in bad faith. 8.2 NO DUTY TO REVIEW. Supervision of Investment Managers and the Investment Committee shall be the exclusive responsibility of the Named Fiduciary. The Master Trustee shall be under no duty or obligation to review any investment or reinvestment made or received at the direction of an Investment Manager or the Investment Committee nor to make any recommendation as to the disposition or continued retention thereof. Without limiting the generality of the foregoing, in the case of any transaction which is both directed by and executed by or through an Investment Manager or the Investment Committee, the Investment Manager or Investment Committee shall have entire responsibility for assuring that the transaction does not violate the prohibitions of any applicable state or federal law, including Sections 406 and 407 or ERISA. 8.3 RELIANCE ON CERTAIN APPRAISALS. To the extent that the Master Trustee shall be required to value the assets of the Master Fund for any purpose, including without limitation any valuation pursuant to Section 6, any accounting pursuant to Section 9 and any segregation of assets pursuant to Section 10 hereof, the Master Trustee may rely for all purposes of this Agreement upon any certified appraisal or other form of valuation submitted to it by any Investment Manager, the Investment Committee or the TPA and, with respect to any insurance contract referred to in Section 2.9 hereof, by the insurance company issuing such contract, and with respect to an interest in any venture capital organization, by the manager of such organization and, with respect to any mutual funds held in the Master Fund, by the servicing agent of such mutual fund, and, with respect to an interest of the Master Trust in any collective investment trust (other than a collective investment trust established and maintained by Mellon Bank, N.A. or an affiliate), by the trustee or investment manager of such collective investment trust. 8.4 INDEMNIFICATION OF MASTER TRUSTEE. The Company recognizes that a burden of litigation may be imposed upon the Master Trustee, as the result of some act or transaction for which it has no responsibility or over which it has no control under this Agreement. Accordingly, the Company hereby agrees to indemnify the Master Trustee, individually and as Master Trustee under this Agreement, and its directors, officers and employees, and to hold it and them harmless from and against any claim, liability, loss, damage or expense which may be 18 asserted against it or them by reason of any action taken or omitted by or on behalf of the Master Trustee at the direction of any Investment Manager or Investment Committee, the Named Fiduciary, the TPA, or by virtue of being the holder of the Master Trust except for such claims, liabilities, losses, damages or expenses attributable to the Master Trustee's own negligence, bad faith or willful misconduct. 8.5 LIMITATION OF INDEMNITY. Nothing herein is intended to or shall be construed to relieve the Master Trustee from any responsibility or liability it may have under Part 4 of Title I of ERISA. 8.6 INDEMNIFICATION OF SUCCESSOR TRUSTEE. If Mellon Bank, N.A. is acting as a successor trustee or succeeds to responsibilities hereunder for management of plan assets with respect to the Master Fund (or any portion thereof), the Company hereby agrees to hold Mellon Bank, N.A. harmless from and against any tax, claim, liability, loss, damage or expense incurred by or assessed against it as such successor as a direct or indirect result of any act or omission of a predecessor trustee or any other person charged under any agreement affecting Master Fund assets with investment responsibility with respect to such assets, except for such taxes, claims, liabilities, losses, damages or expenses attributable to the negligence, bad faith or willful misconduct of Mellon Bank, N.A. or its affiliates. SECTION 9. SETTLEMENT OF MASTER TRUSTEE'S ACCOUNTS. 9.1 ANNUAL ACCOUNTING. The Master Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, accounting separately for each Fund (in a manner mutually agreeable to Pentegra and the Master Trustee), and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company or the Named Fiduciary. Within 90 days after the close of each fiscal year of the Master Trust (or such other date as may be agreed upon in writing between the Company and the Master Trustee), and within 120 days after the effective date of the removal or resignation of the Master Trustee as provided in Section 11 hereof, the Master Trustee shall file with the Company a written account, setting forth all investments, receipts, disbursements and other transactions effected by it during the year ending on such date (but not including any part of such year for which such an account has previously been filed) and certified as to the accuracy of the information set forth therein. Such account may incorporate by reference any and all schedules and other statements setting forth investments, receipts disbursements and other transactions effected during the period for which such account is rendered which the Master Trustee has furnished to the Company prior to the filing of such account. Each account so filed (and copies of any schedules and statements incorporated therein be reference as aforesaid)shall be open to inspection at the offices of the Company during its regular business hours by the Named Fiduciary, by any person designated by the Company or the Named Fiduciary, by Participants and Beneficiaries of the Plan, by the TPA or Investment Committee, or by any Investment Manager affected thereby, for a period of 60 days immediately following the date on which the account is filed with the Company. If for any reason an account required of the Master Trustee hereunder shall not be filed within the 19 applicable time specified in the preceding sentence, such account may be filed by the Master Trustee after the expiration of such time, provided such account otherwise complies with the requirements of this Agreement, and such account so filed shall be open to inspection as aforesaid by any of the parties aforementioned for a period of 90 days immediately following the date on which the account is filed. In the event that any assets of the Fund have been transferred to a collective investment trust pursuant to Section 2.8 hereof, such account shall include a copy of the latest annual written account of such collective investment trust. 9.2 OTHER ACCOUNTINGS. The Master Trustee shall provide to the Company from time to time such other reports as may be agreed upon between the Master Trustee and the Company. The Company agrees to examine each such report promptly and to file any exceptions thereto within 90 days of the date thereof. 9.3 SETTLEMENT OF ACCOUNTS. Upon the expiration of the 60-day or 90-day period, as the case may be, referred to in Section 9.1 or 9.2, the Master Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to the account or report, including, without limitation, all acts and omissions of the Master Trustee shown or reflected in such account or report, except with respect to any acts or omissions as to which the Company, the Named Fiduciary or the TPA shall have filed written objections with the Master Trustee within such 60-day or 90-day period, as the case may be. Nothing herein contained shall impair the right of the Master Trustee to a judicial settlement of any account of proceedings rendered by it. In any proceeding for such judicial settlement the only necessary parties shall be the Master Trustee, the Company, the Named Fiduciary and any other party or parties whose participation is required by law, and any judgment, decree or final order entered therein shall be conclusive on all persons having or claiming an interest in the Master Trust or the Plan. SECTION 10. SEGREGATION OF PARTS OF THE MASTER TRUST. 10.1 SEGREGATION. The equitable share in the Master Trust of any part of the Plan or the proportionate share of any Participant or group of Participants and their Beneficiaries may be segregated and withdrawn from the Master Trust upon the direction of the Named Fiduciary setting forth the portion of the Plan's equitable share to be so treated or the Participants and Beneficiaries for whose accounts such segregation and withdrawal are to be carried out. The Master Trustee may condition its transfer or distribution of any assets upon the Master Trustee's receiving assurances satisfactory to it that the approval of appropriate governmental or other authorities has been secured and that all notice and other procedures required by applicable law have been complied with. Unless otherwise directed by the Named Fiduciary pursuant to the preceding paragraph, the Master Trustee shall hold, invest and administer the Master Trust as a single fund without identification of any part of the Master Fund with or allocation of any part of the Master Fund to the Company or to any subsidiary or affiliate of the Company designated by it as a participating company under the Plan or to any Participant or group of Participants or their Beneficiaries. 20 10.2 SEGREGATED PROPERTY. Segregation and withdrawal of the equitable share of a Participant or group of Participants shall be made as of the Valuation Date immediately following the date of the notice or instruction referred to in Section 10.1. The selection of the particular assets to be segregated pursuant to Section 10.1 shall be made by the Named Fiduciary. Such property shall be held as a separate trust fund for the exclusive benefit of the withdrawing Participant or group of Participants and their Beneficiaries, under a separate agreement of trust substantially identical to this Agreement. SECTION 11. RESIGNATION AND REMOVAL OF MASTER TRUSTEE. The Master Trustee may resign at any time upon 60 days' notice in writing to the Company and the Named Fiduciary. The Master Trustee may be removed by the Company at any time upon 60 days' notice in writing to the Master Trustee and the Named Fiduciary. If within such 60-day period a successor to the Master Trustee shall not have been appointed, the resigning or removed Master Trustee may apply to any court of competent jurisdiction for the appointment of such successor. Any successor trustee shall have the same powers and duties as those conferred upon the Master Trustee hereunder (other than those relating to any collective investment trust of Mellon Bank, N.A. or an affiliate) and subject to receipt by the Master Trustee of written acceptance of such appointment by the successor trustee, the Master Trustee shall assign, transfer and pay over to such successor trustee the moneys and properties then constituting the Master Fund, withdrawing any part of any Fund then held in any collective investment trust of Mellon Bank, N.A. or an affiliate. The Master Trustee may reserve such sum of money as it may deem advisable for payment of its reasonable fees and expenses in connection with the settlement of its account or otherwise. Payment of such fees and expenses may be withdrawn from such reserve. Any balance of such reserve remaining after the payment of such fees and expenses shall be paid over to the successor trustee. If such reserve shall be insufficient to pay such changes, such resigning or removed Master Trustee shall be entitled to recover the amount of any deficiency from the Company or from the successor trustee or from both the Company and the successor trustee. All provisions of this Agreement shall apply to any successor trustee appointed as aforesaid with the same force and effect as if such successor had been originally named herein as the Master Trustee. SECTION 12. EVIDENCE OF ACTION BY COMPANY, INVESTMENT MANAGERS, INVESTMENT COMMITTEE AND TPA, AND OF APPOINTMENT OF NAMED FIDUCIARY, INVESTMENT MANAGERS, INVESTMENT AND COMMITTEE AND TPA. Except as otherwise herein provided, any action by the Company pursuant to any of the provisions of this Agreement shall be evidenced by a resolution of its Board of Directors (which may include a resolution authorizing one or more officers to act on its behalf) certified by the Secretary or any Assistant Secretary of the Company, and the Master Trustee shall be fully protected in acting in accordance with such resolution so certified to it. The Company shall furnish the Master Trustee from time to time with certified copies of resolutions of its Board of 21 Directors or of other corporate action appointing and terminating the office of the Named Fiduciary, and appointing and terminating any Investment Committee, and appointing successors. The Named Fiduciary shall furnish the Master Trustee with a copy of the instrument duly appointing and terminating the TPA, and appointing and terminating successors thereto and shall certify to the Master Trustee the responsibilities and authorities which the Named Fiduciary has delegated to such TPA. The Named Fiduciary shall furnish the Master Trustee with a copy of the instrument duly appointing and terminating any Investment Committee, and appointing and terminating successors thereto. The Named Fiduciary shall file with the Master Trustee a copy of each Investment Manager's written acceptance of his appointment and acknowledgement that he is a "fiduciary" with respect to the Plan within the meaning of Section 3(21) of ERISA. Any such appointment shall continue to be effective until receipt by the Master Trustee of written notice to the contrary from the Named Fiduciary. Each Investment Manager and the TPA and the Investment Committee shall furnish the Master Trustee from time to time with a certificate setting forth the name and specimen signature of each person authorized to act on its behalf. Unless otherwise provided in a certificate from the Named Fiduciary, all orders, requests and instructions to the Master Trustee from the Named Fiduciary shall be in writing or by telecopy signed by two authorized persons, and all orders, requests and instructions to the Master Trustee from an Investment Manager, the TPA, or the Investment Committee shall be in writing, by telecopy or by any other electronic means using a code for the authentication of messages, and signed or transmitted by an authorized representative of the Investment Manager, TPA, or Investment Committee, and the Master Trustee shall be fully protected in acting in accordance with any such order, request, or instruction. The Master Trustee shall have the right to rely on and shall be fully protected in acting in accordance with any resolution, order, request or instruction which it believes to be genuine and which purports to have been signed or transmitted in accordance with this section. SECTION 13. AMENDMENT OF AGREEMENT, TERMINATION OF TRUST, TERMINATION OF PLAN 13.1 AMENDMENT OF AGREEMENT. Subject to the restrictions set forth below, the Company and the Master Trustee may mutually agree at any time and from time to time to modify, amend or terminate, in whole or in part, any or all of the provisions of this Agreement. 13.2 TERMINATION OF MASTER TRUST. In the event of the termination of the Master Trust, the Master Trustee shall continue to administer the Master Trust as hereinabove provided until all of the purposes for which is has been established have been accomplished or the Master Trustee has disposed of the Master Fund after the payment of or other provision for all expenses incurred in the administration of the Master Trust (including any compensation to which the Master Trustee may be entitled), all in accordance with the written order of the Company or any successor thereto. Until the final distribution of the Master Fund, the Master Trustee shall continue to have and may exercise all of the powers and discretion conferred upon it by this Agreement. Upon any such termination, or the resignation or removal of the Master Trustee under Section 11 hereof, Section 7.1 and all indemnities herein, including without limitation those set forth in Sections 2.9(e), 2.10(e), 3.4(6), 4, 5.4, 8.3, 8.4 and 8.6 hereof, shall remain in full force and effect. 22 13.3 TERMINATION OF THE PLAN. Upon receipt of notice from the Company that the Plan is terminated in whole or in part, with respect to all or any group of Participants and their Beneficiaries, the Master Fund, or the portion thereof with respect to which the Plan is terminated, shall, subject to the provisions of Section 7 hereof, be segregated in accordance with Section 10 and held and/or disposed of by the Master Trustee in accordance with the written order of the Named Fiduciary. The Master Trustee may condition its delivery, transfer or distribution of any assets upon the Master Trustee's receiving assurances satisfactory to it that the approval of appropriate governmental or other authorities has been secured and that all notice and other procedures required by applicable law have been complied with. 13.4 EXCLUSIVE BENEFIT. Anything in this Agreement to the contrary notwithstanding, at no time prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries shall any part of the Master Fund be used for or diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan; provided, however, that nothing herein contained shall preclude the return to an Employer of any contribution whose return is permitted by Section 403(c) of the Act or successor legislation. SECTION 14. INALIENABILITY OF BENEFITS AND INTERESTS No distribution or payment under this Agreement to any Participant or Beneficiary shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, and no attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be valid or recognized by the Master Trustee, nor shall any such distribution or payment be in any way liable for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such distribution or payment, except in the case of any voluntary and revocable assignment of any benefit payment permitted by law and except to such extent as may otherwise be required by law. If the Master Trustee is notified by the Named Fiduciary that any such Participant or Beneficiary has been adjudicated bankrupt or has purported to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any such distribution or payment, voluntarily or involuntarily, the Master Trustee shall, if so directed by the TPA, hold or apply such distribution or payment or any part thereof to or for the benefit of such Participant or Beneficiary in such manner as the TPA shall direct. SECTION 15. NO MERGER CONSOLIDATION OR TRANSFER OF PLAN ASSETS OR LIABILITIES Anything herein to the contrary notwithstanding, the Master Trust shall under no circumstances be so operated as to permit, and nothing herein contained shall be deemed to authorize, any merger, consolidation, or transfer of the assets or liabilities or the Plan with or to any other plan except in compliance with the provisions of the Act and the Code which are applicable to such mergers, consolidations, or transfers, including without limitation Sections 23 208 and 4043(b)(8) of the Act and Sections 401(a)(12), 414(1), and 6058(b) of the Code, and Regulations promulgated pursuant to the foregoing Sections. SECTION 16. GOVERNING LAW. This Agreement shall be administered and construed according to the internal substantive laws (and not the choice of law provisions) of the Commonwealth of Pennsylvania, except as may otherwise be required by Section 514 of ERISA. The invalidity, illegality or lack of enforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision. The Master Trust shall at all times be maintained as a domestic trust in the United States. IN WITNESS WHEREOF, this Agreement has been executed, attested and sealed, as of the date first above written, by the duly authorized officers of the Company and Mellon Bank, N.A.. HOME FEDERAL SAVINGS BANK By: /s/ Roger P. Weise Name: Roger P. Weise Title: President MELLON BANK, N.A. By: /s/ D. C. Crawford Name: David C. Crawford Title: FVP 24 EX-5 6 Exhibit 5e Adoption Agreement for Home Federal Savings Bank Employee's Savings and Profit Sharing Plan and Trust 24 ADOPTION AGREEMENT FOR HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST Name of Employer: Home Federal Savings Bank ----------------------------------------------------- Address: 101 North Broadway, Spring Valley, MN 55975 ----------------------------------------------------- Phone No.: 507-346-7345 ----------------------------------------------------- Contact Person: Susan Thompson, Assistant Secretary ----------------------------------------------------- Name of Plan: Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust ----------------------------------------------------- THIS ADOPTION AGREEMENT, upon execution by the Employer and the Trustee, and subsequent approval by a duly authorized representative of Pentegra Services, Inc. (the "Sponsor"), together with the Sponsor's Employees' Savings & Profit Sharing Plan and Trust Agreement (the "Agreement"), shall constitute the HOME FEDERAL SAVINGS BANK Employees' Savings & Profit Sharing Plan and Trust (the "Plan"). The terms and provisions of the Agreement are hereby incorporated herein by this reference; provided, however, that if there is any conflict between the Adoption Agreement and the Agreement, this Adoption Agreement shall control. The elections hereinafter made by the Employer in this Adoption Agreement may be changed by the Employer from time to time by written instrument executed by a duly authorized representative thereof; but if any other provision hereof or any provision of the Agreement is changed by the Employer other than to satisfy the requirements of Section 415 or 416 of the Internal Revenue Code of 1986, as amended (the "Code"), because of the required aggregation of multiple plans, or if as a result of any change by the Employer the Plan fails to obtain or retain its tax-qualified status under Section 401(a) of the Code, the Employer shall be deemed to have amended the Plan evidenced hereby and by the Agreement into an individually designed plan, in which event the Sponsor shall thereafter have no further responsibility for the tax-qualified status of the Plan. However, the Sponsor may amend any term, provision or definition of this Adoption Agreement or the Agreement in such manner as the Sponsor may deem necessary or advisable from time to time and the Employer and the Trustee, by execution hereof, acknowledge and consent thereto. Notwithstanding the foregoing, no amendment of this Adoption Agreement or of the Agreement shall increase the duties or responsibilities of the Trustee without the written consent thereof. 1 I. EFFECT OF EXECUTION OF ADOPTION AGREEMENT The Employer, upon execution of this Adoption Agreement by a duly authorized representative thereof, (choose 1 or 2): 1. / / Establishes as a new plan the HOME FEDERAL SAVINGS BANK Employees' Savings & Profit Sharing Plan and Trust, effective , 19 . 2. /x/ Amends its existing defined contribution plan and trust (Home Federal Savings Bank 401(k) Plan) dated ------------------------------------- January 2, 19 92 , in its entirety into the Home --------- -- Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust, effective August 1, 19 96, -------- -- except as otherwise provided herein or in the Agreement. II. DEFINITIONS A. "Contribution Determination Period" for purposes of determining and allocating Employer profit sharing contributions means (choose 1,2, 3 or 4): 1. /X/ The Plan Year. 2. / / The Employer's Fiscal Year (defined as the Plan's "limitation year") being the twelve (12) consecutive month period commencing ___ (month/day) and ending month/day). 3. / / The three (3) consecutive monthly periods that comprise each of the Plan Year quarters. 4. / / The three (3) consecutive monthly periods that comprise each of the Employer's Fiscal Year quarters. (Employer's Fiscal Year is the twelve (12) consecutive month period commencing _____________________ (month/day) and ending _____________________ (month/day).) B. "Effective Date" means August 1, 19 96. -------- --- C. Employer 1. "Employer," for purposes of the Plan, shall mean: HOME FEDERAL SAVINGS BANK -------------------------- 2. The Employer is (choose whichever may apply): (a) / / A member of a controlled group of corporations under Section 414(b) of the Code. (b) / / A member of a group of entities under common control under Section 414(c) of the Code. (c) / / A member of an affiliated service group under Section 414(m) of the Code. 2 (d) /x/ A corporation. (e) / / A sole proprietorship or partnership. (f) / / A Subchapter S corporation. 3. Employer's Taxable Year Ends on 12/31 . ----- 4. Employer's Federal Taxpayer Identification Number is 41 - 0318319. ------------ 5. Employer's Plan Number is (enter 3-digit number) 004 . ---- D. "Entry Date" means the first day of the (choose 1 or 2): 1. /x/ Calendar month coinciding with or next following the date the Employee satisfies the Eligibility requirements described in Section III. 2. / / Calendar quarter coinciding with or next following the date the Employee satisfies the Eligibility requirements described in Section III. E. "Member" means an Employee enrolled in the membership of the Plan. F. "Normal Retirement Age" means (choose 1 or 2): 1. /x/ Attainment of age 65 (select an age not less than 55 ------ and not greater than 65). 2. / / Later of: (i) attainment of age 65 or (ii) the fifth anniversary of the date the Member commenced participation in the Plan. G. "Normal Retirement Date" means the first day of the first calendar month coincident with or next following the date upon which a Member attains his or her Normal Retirement Age. H. "Plan Year" means the twelve (12) consecutive month period beginning on each January 1. I. "Salary" for benefit purposes under the Plan means (choose 1, 2 or 3): 1. / / Basic Salary only. 2. / / Basic Salary plus one or more of the following (if 2 is chosen, then choose (a), (b) or (c), whichever shall apply): (a) / / Commissions not in excess of $__________ . (b) / / Overtime (c) / / Overtime and bonuses 3 3. /x/ Total taxable compensation as reported on form W-2 (exclusive of any compensation deferred from a prior year and Exclusive of any RRP compensation.) Note: Member pre-tax elective deferrals, if any, are always included in Plan Salary. J. "Salary" shall not include: / / Member pre-tax contributions to a Code Section 125 cafeteria plan. III. ELIGIBILITY REQUIREMENTS A. All Employees shall be eligible to participate in the Plan in accordance with the provisions of Article II of the Plan, except the following Employees shall be excluded (choose whichever shall apply): 1. /x/ Employees who have not attained age 21. 2. /x/ Employees who have not, during the 12 consecutive --- month period (1-11, 12 or 24) beginning with an Employee's Date of Employment, Date of Reemployment or any anniversary thereof, completed 1,000 number of ------ Hours of Service (determined by multiplying the number of months above by 83 1/3). Note: Employers which permit Members to make pre-tax elective deferrals to the Plan (see V.A.3.) may not elect a 24 month eligibility period. 3. / / Employees included in a unit of Employees covered by a collective bargaining agreement, if retirement benefits were the subject of good faith bargaining between the Employer and Employee representatives. 4. / / Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. 5. / / Employees included in the following job classifications: (a) / / Hourly Employees (b) / / Salaried Employees 6. / / Employees of the following employers which are aggregated under Section 414(b), 414(c) or 414(m) of the Code: -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- 4 Note: If no entries are made above, all Employees shall be eligible to participate in the Plan on the later of: (i) the Effective Date or (ii) the first day of the calendar month or calendar quarter (as designated by the Employer in Section II.D.) coinciding with or immediately following the Employee's Date of Employment or, as applicable, Date of Reemployment. B. Such Eligibility Computation Period established above shall be applicable to (choose 1 or 2): 1. /x/ Both present and future Employees. 2. / / Future Employees only. C. Such Eligibility requirements established above shall be (choose 1 or 2): 1. /x/ Applied to the designated Employee group on and after the Effective Date of the Plan. 2. / / Waived for the ____ consecutive monthly period (may not exceed 12) beginning on the Effective Date of the Plan. IV. HOURS OF EMPLOYMENT AND PRIOR EMPLOYMENT CREDIT A. The number of Hours of Employment with which an Employee or Member is credited shall be (choose 1 or 2): 1. /x/ The actual number of Hours of Employment. (Hour of Service Method) 2. / / 83 1/3 Hours of Employment for every month of Employment. (Elapsed Time Method) B. Prior Employment Credit: / / Employment with the following entity or entities shall be included for eligibility and vesting purposes: Note: If this Plan is a continuation of a Predecessor Plan, service under the Predecessor Plan shall be counted as Employment under this Plan. -------------------------------------------------- -------------------------------------------------- -------------------------------------------------- V. CONTRIBUTIONS Note: Annual Member pre-tax elective deferrals, Employer matching contributions, Employer basic contributions, Employer supplemental contributions, Employer profit sharing contributions and Employer Qualified Non-Elective contributions, in the aggregate, may not exceed 15% of all Members' Salary (excluding from 5 Salary Member pre-tax elective deferrals). A. Employee Contributions (choose 1 or 2; 3 or 4; 5 and/or 6): 1. / / A Member may make after-tax contributions to the Plan, based on multiples of 1% of monthly Salary. 2. /x/ A Member may not make after-tax contributions to the Plan. 3. /x/ A Member may make pre-tax elective deferrals to the Plan, based on multiples of 1% of monthly Salary. 4. / / A Member may not make pre-tax elective deferrals to the Plan. 5. /x/ The maximum amount of monthly contributions a Member may make to the Plan is 12 % (1-20) of the Member's monthly --- Salary. 6. /x/ An Employee may allocate a rollover contribution to the Plan prior to satisfying the Eligibility requirements described above. B. A Member may change his or her contribution rate (choose 1 or 2): 1. /x/ 1 time per calendar month. 2. / / 1 time per calendar quarter. C. Employer Matching Contributions (choose 1, 2, 3 or 4; and fill in 5 if applicable): 1. / / No Employer matching contributions will be made to the Plan. 2. /x/ The Employer shall allocate to each contributing Member's Account an amount equal to 25% (based on 5% increments not to exceed 200%) of the Member's contributions for that month. 3. / / The Employer shall allocate to each contributing Member's Account an amount determined in accordance with the following schedule: Years of Employment Matching % ------------------- ---------- Less than 3 50% At least 3, but less than 5 75% 5 or more 100% 4. / / The Employer shall allocate to each contributing Member's Account an amount determined in accordance with the following schedule: Years of Employment Matching % ------------------ ---------- Less than 3 100% At least 3, but less than 5 150% 5 or more 200% 6 5. The Employer matching contributions under 2, 3 or 4 above shall be based on the Member's contributions not in excess of 8% ---- (1-20 but not in excess of the percentage specified in A.5. above) of the Member's Salary. D. Employer Basic Contributions (choose 1 or 2): 1. /x/ No Employer basic contributions will be made to the Plan. 2. / / The Employer shall allocate an amount equal to % (based on 1% increments not to exceed 15%) of Member's Salary for the month to (choose (a) or (b)): (a) / / The Accounts of all Members (b) / / The Accounts of all Members who were employed with the Employer on the last day of such month. E. Employer Supplemental Contributions: The Employer may make supplemental contributions for any Plan Year in accordance with Section 3.7 of the Plan. F. Employer Profit Sharing Contributions (Choose 1, 2, 3, 4, or 5): 1. /x/ No Employer Profit Sharing Contributions will be made to the Plan. NON-INTEGRATED FORMULA 2. / / Profit sharing contributions shall be allocated to each Member in the same ratio as each Member's Salary during such Contribution Determination Period bears to the total of such Salary of all Members. 3. / / Profit sharing contributions shall be allocated to each Member in the same ratio as each Member's Salary for the portion of the Contribution Determination Period during which the Member satisfied the Employer's eligibility requirement(s) bears to the total of such Salary of all Members. INTEGRATED FORMULA 4. / / Profit sharing contributions shall be allocated to each Member's Account in a uniform percentage (specified by the Employer as %) of each Member's Salary during the Contribution Determination Period up to the Social Security Taxable Wage Base as defined in Section of the Plan ("Base Salary") for the Plan Year that includes such Contribution Determination Period , plus a uniform percentage(specified by the Employer as %) of each Member's Salary for the Contribution Determination Period in excess of the Social Security Taxable Wage Base ("Excess Salary") for the Plan Year that includes such Contribution Determination Period, in accordance with Article III of the Plan. 7 5. / / Profit sharing contributions shall be allocated to each Member's Account in a uniform percentage (specified by the Employer as %) of each Member's Salary for the portion of the Contribution Determination Period during which the Member satisfied the Employer's eligibility requirement(s), if any, up to the Base Salary for the Plan Year that includes such Contribution Determination Period, plus a uniform percentage (specified by the Employer as ____ %) of each Member's Excess Salary for the portion of the Contribution Determination Period during which the Member satisfied the Employer's eligibility requirement(s) in accordance with Article III of the Plan. G. Allocation of Employer Profit Sharing Contributions: In accordance with Section V, G above, a Member shall be eligible to share in Employer Profit Sharing Contributions, if any, as follows (choose 1 or 2): 1. / / A Member shall be eligible for an allocation of Employer Profit Sharing Contributions for a Contribution Determination Period in all events. 2. / / A Member shall be eligible for an allocation of Employer Profit Sharing Contributions for a Contribution Determination Period only if he or she (choose (a), (b) or (c) whichever shall apply): (a) / / is employed on the last day of the Contribution Determination Period or retired, died or became totally and permanently disabled prior to the last day of the Contribution Determination Period. (b) / / completed 1,000 Hours of Employment if the Contribution Determination Period is a period of 12 months (250 Hours of Employment if the Contribution Determination Period is a period of 3 months) or retired, died or became totally and permanently disabled prior to the last day of the Contribution Determination Period. (c) / / is employed on the last day of the Contribution Determination Period and, if such period is 12 months, completed 1,000 Hours of Employment (250 Hours of Employment if the Contribution Determination Period is a period of 3 months) or retired, died or became totally and permanently disabled prior to the last day of the Contribution Determination Period. H. Employer Qualified Nonelective Contributions: The Employer may make qualified nonelective contributions for any Plan Year in accordance with Section 3.9 of the Plan. 8 VI. INVESTMENT FUNDS The Employer hereby selects the following Investment Funds to be made available under the Plan (choose whichever shall apply). The Employer agrees and acknowledges that the selection of Investment Funds made in this Section VI is solely its responsibility, and no other person, including the Sponsor, has any discretionary authority or control with respect to such selection process. 1. /x/ 500 Stock Index Fund 2. /x/ Stable Value Fund 3. /x/ MidCap 400 Stock Index Fund 4. /x/ Government Money Market Fund 5. /x/ Bond Index Fund 6. /x/ Employer Stock Fund VII. EMPLOYER SECURITIES A. If the Employer makes available an Employer Stock Fund pursuant to Section VI of this Adoption Agreement, then voting and tender offer rights with respect to Employer Stock shall be delegated and exercised as follows (choose 1 or 2): 1. / / The Plan Administrator shall direct the Trustee as to the voting of all Employer Stock and as to all rights in the event of a tender offer involving such Employer Stock. 2. /x/ Each Member shall be entitled to direct the Plan Administrator as to the voting and tender offer rights involving Employer Stock held in such Member's Account, and the Plan Administrator shall follow or cause the Trustee to follow such directions. If a Member fails to provide the Plan Administrator with directions as to voting or tender offer rights, the Plan Administrator shall exercise those rights as it determines in its discretion and shall direct the Trustee accordingly. VIII. INVESTMENT DIRECTION A. Members shall be entitled to designate what percentage of employee contributions and employer contributions made on their behalf will be invested in the various Investment Funds offered by the Employer as specified in Section VI of this Adoption Agreement; provided, however, that the following portions of a Member's Account must be invested in the Employer Stock Fund (choose whichever shall apply): 9 1. / / Employer Profit Sharing Contributions 2. / / Employer Matching Contributions 3. / / Employer Basic Contributions 4. / / Employer Supplemental Contributions 5. / / Employer Qualified Nonelective Contributions 6. /x/ No requirements B. A Member may change his or her investment direction (choose 1 or 2): 1. / / 1 time per calendar month. 2. / / 1 time per calendar quarter. 3. /x/ No restrictions. C. If a Member fails to make an effective investment direction, the Member's contributions and Employer contributions made on the Member's behalf shall be invested in GOVERNMENT MONEY MARKET FUND (insert one of the Investment Funds selected in Section VI of this Adoption Agreement). IX. VESTING SCHEDULES; YEARS OF EMPLOYMENT FOR VESTING PURPOSES A. (Choose 1, 2, 3, 4, 5, 6 or 7) Schedule Years of Employment Vested % --------- ------------------- -------- 1. /x/ Immediate Upon Enrollment 100% 2. / / 2-6 Year Graded Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% 3. / / 5-Year Cliff Less than 5 0% 5 or more 100% 4. / / 3-Year Cliff Less than 3 0% 3 or more 100% 5. / / 4-Year Graded Less than 1 0% 1 but less than 2 25% 2 but less than 3 50% 3 but less than 4 75% 4 or more 100% 10 Schedule Years of Employment Vested % --------- ------------------- -------- 6. / / 3-7 Year Graded Less than 3 0% 3 but less than 4 20% 4 but less than 5 40% 5 but less than 6 60% 6 but less than 7 80% 7 or more 100% 7. / / Other Less than ___ 0% ___ but less than ___ ____% ___ but less than ___ ____% ___ but less than ___ ____% ___ but less than ___ ____% ___ or more 100% B. With respect to the schedules listed above, the Employer elects (choose 1, 2, 3 and 4; or 5): 1. Schedule / / solely with respect to Employer matching contributions. 2. Schedule / / solely with respect to Employer basic contributions. 3. Schedule / / solely with respect to Employer supplemental contributions. 4. Schedule / / solely with respect to Employer profit sharing contributions. 5. Schedule /1/ with respect to all Employer contributions. NOTE: Notwithstanding any election by the Employer to the contrary, each Member shall acquire a 100% vested interest in his Account attributable to all Employer contributions made to the Plan upon the earlier of (i) attainment of Normal Retirement Age, (ii) approval for disability or (iii) death. In addition, a Member shall at all times have a 100% vested interest in the Employer Qualified Non-Elective Contributions, if any, and in the pre-tax elective deferrals and nondeductible after-tax Member Contributions. C. Years of Employment Excluded for Vesting Purposes The following Years of Employment shall be disregarded for vesting purposes (choose whichever shall apply): 1. / / Years of Employment during any period in which neither the Plan nor any predecessor plan was maintained by the Employer. 2. / / Years of Employment of a Member prior to attaining age 18. 11 X. WITHDRAWAL PROVISIONS A. The following portions of a Member's Account will be eligible for in- service withdrawals, subject to the provisions of Article VII of the Plan (choose whichever shall apply): 1. / / Employee after-tax contributions and the earnings thereon. 2. / / Employee pre-tax elective deferrals and the earnings thereon. 3. / / Employee rollover contributions and the earnings thereon. 4. / / Employer matching contributions and the earnings thereon. 5. / / Employer basic contributions and the earnings thereon. 6. / / Employer supplemental contributions and the earnings thereon. 7. / / Employer profit sharing contributions and the earnings thereon. 8. / / Employer qualified nonelective contributions and earnings thereon. 9. /x/ In-service withdrawals permitted only in the event of (choose (a) and/or (b)): (a) /x/ Hardship. (b) / / Attainment of age 59 1/2. 10./ / No in-service withdrawals shall be allowed. B. Notwithstanding any elections made in Subsection A of this Section X above, the following portions of a Member's Account shall be excluded from eligibility for in-service withdrawals (choose whichever shall apply): 1. / / Employer contributions, and the earnings thereon, credited to the Employer Stock Fund. 2. /x/ All contributions and/or deferrals, and the earnings thereon, credited to the Employer Stock Fund. 3. / / Other:____________________________________________ XI. DISTRIBUTION OPTION (CHOOSE 1 OR 2) 1. / / Lump Sum and partial lump sum payments only. 2. /x/ Lump Sum and partial lump sum payments plus one or more of the following (choose (a) and /or (b)): 12 (a) /x/ Installment payments. (b) / / Annuity payments. XII. LOAN PROGRAM (CHOOSE 1, 2 OR 3) 1. / / No loans will be permitted from the Plan. 2. /x/ Loans will be permitted from the Member's Account. 3. / / Loans will be permitted from the Member's Account, excluding (choose whichever shall apply): (a)/ / Employer Profit sharing contributions and the earnings thereon. (b)/ / Employer matching contributions and the earnings thereon. (c)/ / Employer basic contributions and the earnings thereon. (d)/ / Employer supplemental contributions and the earnings thereon. (e)/ / Employee after-tax contributions and the earnings thereon. (f)/ / Employee pre-tax elective deferrals and the earnings thereon. (g)/ / Employee rollover contributions and the earnings thereon. (h)/ / Employer qualified nonelective contributions and the earnings thereon. (I)/ / Any amounts to the extent invested in the Employer stock fund. XIII. ADDITIONAL INFORMATION If additional space is needed to select or describe an elective feature of the Plan, the Employer should attach additional pages and use the following format: The following is hereby made a part of Section --- of the Adoption Agreement and is thus incorporated into and made a part of the Home Federal Savings Bank Signature of Employer's Authorized Representative _________________________________________________ Signature of Trustee _________________________________________________ Supplementary Page -- of [total number of pages]. XIV. PLAN ADMINISTRATOR The Named Plan Administrator under the Plan shall be the (choose 1, 2, 3 or 4): Note: Pentegra Services, Inc. may not be appointed Plan Administrator. 13 1. /x/ Employer 2. / / Employer's Board of Directors 3. / / Plan's Administrative Committee 4. / / Other (if chosen, then provide the following information) Name:_______________________________________ Address:____________________________________ Tel No.:____________________________________ Contact:____________________________________ NOTE: IF NO NAMED PLAN ADMINISTRATOR IS DESIGNATED ABOVE, THE EMPLOYER SHALL BE DEEMED THE NAMED PLAN ADMINISTRATOR. XV. TRUSTEE The Employer hereby appoints the following person or entity to serve as Trustee under the Plan: Name: Mellon Bank, NA ---------------- Address: 1 Mellon Bank Center, Pittsburgh, PA 15258 ------------------------------------------ Tel No: ------------------ Contact: Allen Murray ------------- The person or entity named above hereby accepts the appointment as Trustee of the trust created as part of the Plan and agrees to be bound by the terms and conditions of the Plan. MELLON TRUST Dated: August 1, 1996 By: /s/ Robert D. Alin -------------- ---------------------- Name: Robert D. Alin Title: Senior Vice President- Legal & Secretary 14 EXECUTION OF ADOPTION AGREEMENT By execution of this Adoption Agreement by a duly authorized representative of the Employer, the Employer acknowledges that it has established or, as the case may be, amended a tax-qualified retirement plan into the HOME FEDERAL SAVINGS BANK Employees' Savings & Profit Sharing Plan and Trust (the "Plan"). The Employer hereby represents and agrees that it will assume full fiduciary responsibility for the operation of the Plan and for complying with all duties and requirements imposed under applicable law, including, but not limited to, the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. In addition, the Employer represents and agrees that it will accept full responsibility of complying with any applicable requirements of federal or state securities law as such laws may apply to the Plan and to any investments thereunder. The Employer further acknowledges that any opinion letter issued with respect to the Adoption Agreement and the Agreement by the Internal Revenue Service ("IRS") to Pentegra Services, Inc., as sponsor of the Employees' Savings & Profit Sharing Plan, does not constitute a ruling or a determination with respect to the tax- qualified status of the Plan and that the appropriate application must be submitted to the IRS in order to obtain such a ruling or determination with respect to the Plan. THE FAILURE TO PROPERLY COMPLETE THE ADOPTION AGREEMENT MAY RESULT IN DISQUALIFICATION OF THE PLAN AND TRUST EVIDENCED THEREBY. The Sponsor will inform the Employer of any amendments to the Plan or Trust Agreement or of the discontinuance or abandonment of the Plan or Trust. Any inquiries regarding the adoption of the Plan should be directed to the Sponsor as follows: Pentegra Services, Inc. 108 Corporate Park Drive White Plains, New York 10604 (914) 694-1300 IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed by its duly authorized officer this 17th day of June , ----- ------- 19 96 . --- HOME FEDERAL SAVINGS BANK By: /s/ Roger P. Weise --------------------- Name: Roger P. Weise --------------------- Title: President and CEO --------------------- 15 EX-5 7 Exhibit 5f Service Agreement for Home Federal Savings Bank Employee Stock Ownership Plan 25 SERVICE AGREEMENT FOR HOME FEDERAL SAVINGS BANK EMPLOYEES' STOCK OWNERSHIP PLAN THIS AGREEMENT made as of June 17 , 199 6 by and between Pentegra -------- ---- Services, Inc. ("Pentegra") and Home Federal Savings Bank (the ------------------------- "Employer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Employer sponsors the HOME FEDERAL SAVINGS BANK -------------------------- Employees' Stock Ownership Plan and the related Trust Agreement (collectively the "Plan"); and WHEREAS, the Employer desires to contract with Pentegra to provide certain administrative services. NOW, THEREFORE, Pentegra, and the Employer agree as follows: STANDARD SERVICES Pentegra will provide the following services*: - -Administrative manual and the forms and descriptive materials you will need to ease administration of your Plan. - -Participant and transaction recordkeeping. - -Contribution and share allocation processing. - -Earnings allocations. - -Annual participant benefit statements. - -Calculation of distributions and tax data for Trustee. - -Compliance testing for ESOP and other qualified plans administered by Pentegra. - -Toll-free telephone support from designated Account Representative. - -Assistance with annual government reporting requirements. OPTIONAL SERVICES Pentegra can also provide for additional elective services, such as the following: - -Preparation of IRS Form(s) 5300, 5500 and/or 5500-C/R. - -Combined compliance testing for all IRS Qualified plans. - -Legislative and administrative consulting. * PLEASE NOTE: IN THIS AGREEMENT, THE TERMS "YOU" AND "YOUR" MEAN THE EMPLOYER. "WE", "US" OR "OUR" MEANS PENTEGRA SERVICES, INC. 1 STANDARD FEES The employer-paid administration fee of $1,000 plus $10 per eligible employee covers all of the standard services described above. Any special service requests related to your specific Plan not listed as STANDARD will be priced in accordance with the optional services fees schedule. OPTIONAL SERVICE FEES Fees for optional services you elect will be billed at the rate in effect at the time the service is contracted for. An employer may contract at a later date for any optional services. CONVERSION SERVICE FEES Where Pentegra is being retained to assume the recordkeeping for an existing ESOP, there will also be a one-time fee for plan set-up and conversion. The fees for this service are based on the following schedule: $25.00 per participant, with a minimum fee of $500.00 and a maximum fee of $2,000.00. PAYMENT METHODS Payment of the fees for services selected shall be paid directly by you. This Agreement will be effective as of the later of: (I) the date executed below, or (ii) upon receipt in our Office, unless you are otherwise notified within 60 days after our receipt that the Agreement is not acceptable. PLEASE NOTE: 1. SERVICES NOT REFLECTED IN THIS AGREEMENT MAY BE PROVIDED UPON MUTUAL CONSENT BETWEEN PENTEGRA AND THE EMPLOYER. THE SERVICES PROVIDED IN ACCORDANCE WITH THIS AGREEMENT AND THE FEES AND EXPENSES ASSOCIATED THEREWITH CAN BE MODIFIED OR TERMINATED UPON 60 DAYS WRITTEN NOTICE FROM PENTEGRA TO THE EMPLOYER. 2. Pentegras' agreement to provide the services described herein is based on the Employer's adoption of the Service Agreement. We shall be entitled to rely upon the information provided by the Employer in the interpretation of the Plan. The Employer agrees to indemnify and hold Pentegra, the Financial Institutions Retirement Fund ("FIRF") and any director, officer or employee of either such entity harmless from any damages, liabilities or losses of whatever kind which result from or arise in connection with any inaccurate or incorrect information provided to us or any other action for which the Employer is responsible. 3. The Employer acknowledges that neither Pentegra nor any director, officer or employee thereof provides legal or tax advice to the Employer, any affiliate of the Employer, or any employee thereof. Pentegra advises the Employer to obtain its own legal or tax counsel for advice on the Plan design and specifications appropriate for its situation as well as on legal or tax issues which may arise during the operation of the Plan. The Employer acknowledges that it is solely responsible for certain functions under the Plan, including, but not limited to: 2 a) INFORMATION. The Employer shall be responsible for providing to Pentegra, on a timely basis, all member enrollment information and such other information relating to member accounts as Pentegra may require, including any amendments made to such information by a member. b) INTERPRETATION OF THE PLAN. The Employer shall be responsible generally for resolving questions relating to any interpretation of the Plan's terms and conditions. c) PARTICIPANT CLAIMS. The Employer shall be responsible for handling claims of members relating to the Plan and their accounts established thereunder. d) PLAN QUALIFICATION. The Employer shall be responsible for maintaining the qualification of the Plan, both in its terms and conditions and in its operation pursuant to the Code, the Employee Retirement Income Security Act of 1974 ("ERISA") and all other applicable Federal or state laws. e) INVESTMENT DECISIONS. The Employer is responsible for monitoring the Investments in the Trust and for complying with any and all applicable federal and/or state securities laws. 4. If Pentegra is taking over recordkeeping from a prior plan administration firm, we are not responsible for losses resulting from a prior firm's administration, or which are incurred as a result of actions or decisions which were undertaken or made by the prior firm. Pentegra is under no obligation to review prior plan administration work or related tax filings. Where we are retained to provide services during a Plan Year, we shall not be required to verify the accuracy or correctness of work performed in the prior portion of the Plan Year. The Employer agrees to indemnify and hold Pentegra, FIRF and any director, officer or employee of either such entity harmless from any and all liabilities, losses or damages which are the result of or which may arise in connection with any plan administration work performed prior to its retention. This Agreement may be mutually terminated on the date which is the first day of the month immediately following 60 days after receipt of a written notice of termination of the Agreement from either party. PENTEGRA SERVICES, INC. HOME FEDERAL SAVINGS BANK By: /s/ Robert D. Alin By: /s/ Roger P. Weise - ------------------------ ------------------------ Name: Robert D. Alin Name: Roger P. Weise Title: Senior Vice President Title: President & CEO -Legal & Secretary Date of Execution: August 1, 1996 Date of Execution: June 17, 1996 -------------- -------------- 3 EX-11 8 Exhibit 11 Computation of Earnings Per Common Share 26 Exhibit 11 - Computation of Earnings Per Common Share HMN Financial, Inc. Computation of Earnings Per Common Share (Unaudited)
Computation of Earnings Per Common Share for Statements of Operations: Three Months Ended June 30, 1996 1995 - ---------------------------------------- ---------- ---------- Net income $ 1,533,084 1,405,472 ---------- ---------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 4,524,242 5,234,242 Dilutive effect of stock option plans after application of treasury stock method 56,550 --------- ---------- 4,580,792 5,234,242 --------- ---------- Earnings per common share and common share equivalents $ 0.34 0.27 ========= ========== Computation of Fully Diluted Earnings Per Common Share and Common Share Equivalent - ----------------------------------------- Net income $ 1,533,084 1,405,472 --------- ---------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 4,524,242 5,234,242 Dilutive effect of stock option plans after application of treasury stock method 76,734 --------- --------- 4,600,976 5,234,242 --------- --------- Earnings per common share and common share equivalents $ 0.33 0.27 ========= ========= Computation of Earnings Per Six Months Ended Common Share for Statements June 30, of Operations: 1996 1995 - --------------------------------------- ---------- --------- Net income 3,119,775 2,768,897 ---------- ---------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 4,621,008 5,348,554 Dilutive effect of stock option plans after application of treasury stock method 52,498 ---------- ---------- 4,673,506 5,348,554 ---------- ---------- Earnings per common share and common share equivalents 0.67 0.52 ========== ========== Computation of Fully Diluted Earnings Per Common Share and Common Share Equivalent - ---------------------------------------- Net income 3,119,775 2,768,897 --------- --------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 4,621,008 5,348,554 Dilutive effect of stock option plans after application of treasury stock method 76,734 --------- --------- 4,697,742 5,348,554 --------- --------- Earnings per common share and common share equivalents 0.66 0.52 ========= ========= This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by footnote 2 of paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-27 9
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1996 AND DECEMBER 31, 1995 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000921183 HMN FINANCIAL, INC. 1,000 U.S.DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 828 5115 0 0 189147 14834 14949 333989 2339 554979 363195 64429 3469 36624 0 0 61 87202 554979 12548 6887 304 19739 9539 11829 7910 150 769 3967 4980 3120 0 0 3120 .67 .66 7.42 315 0 35 189 2190 1 0 2339 1305 0 1034
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