-----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, T+uVoqbzmf2SdQYYp/ImW4OSIp9OqtSpFNzGyWJXKlcU+4OHcYqPc0OCsuRDYIjH s/MOKwYJW+eLvH5MMUkIeA== 0000921183-97-000014.txt : 19970514 0000921183-97-000014.hdr.sgml : 19970514 ACCESSION NUMBER: 0000921183-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97603009 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 March 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (d) FOR THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File Number 0-24100 HMN FINANCIAL, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 41-1777397 ------------------- ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 101 North Broadway, Spring Valley, Minnesota 55975-0231 -------------------------------------------- ---------- (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code:(507) 346-7345 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's common stock as of the latest practicable date. Class Outstanding at May 2, 1997 - ----------------------------- -------------------------- Common stock, $0.01 par value 4,211,836 This Form 10-Q consists of 22 pages. The exhibit index is on page 18. 1 HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements (unaudited) ------ Consolidated Balance Sheets at March 31, 1997 and December 31,1996 3 Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 4 Consolidated Statement of Stockholders' Equity for the Three Month Period Ended March 31, 1997 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 6 Notes to Consolidated Financial Statements 7-9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 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 Item 5: Other Information 16 Item 6: Exhibits and Reports on Form 8-K 16 Signatures 17 2 PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) March 31, December 31, Assets 1997 1996 ----------- ----------- Cash and cash equivalents $ 12,754,058 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $126,499,222 and $134,474,167) 123,924,773 133,355,278 Other marketable securities (amortized cost $56,174,663 and $42,360,499) 56,223,639 42,474,810 ----------- ----------- 180,148,412 175,830,088 ----------- ----------- Securities held to maturity: Mortgage-backed and related securities (estimated fair value $0 and $1,904,993) 0 1,805,744 Other marketable securities (estimated fair value $0 and $1,000,550) 0 999,812 ----------- ----------- 0 2,805,556 ----------- ----------- Loans held for sale 1,060,571 739,316 Loans receivable, net 341,104,076 349,022,236 Federal Home Loan Bank stock, at cost 5,627,100 5,434,000 Real estate, net 105,578 20,610 Premises and equipment, net 3,961,454 3,581,497 Accrued interest receivable 2,917,906 3,415,152 Deferred income taxes 46,038 0 Prepaid expenses and other assets 5,295,539 3,299,427 ----------- ----------- Total assets $ 553,020,732 554,731,599 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 364,122,660 362,476,944 Federal Home Loan Bank advances 105,721,447 106,078,589 Accrued interest payable 1,476,598 1,542,773 Advance payments by borrowers for taxes and insurance 799,372 518,911 Accrued expenses and other liabilities 2,129,007 2,014,938 ----------- ----------- Total liabilities 474,249,084 472,632,155 ----------- ----------- Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; issued and outstanding none 0 0 Common stock ($.01 par value): authorized 7,000,000 shares; issued 6,085,775 shares 60,858 60,858 Additional paid-in capital 59,491,535 59,428,768 Retained earnings, subject to certain restrictions 56,119,867 54,645,387 Net unrealized loss on securities available for sale (1,506,685) (598,045) Unearned employee stock ownership plan shares (4,842,460) (4,938,520) Unearned compensation restricted stock awards (736,115) (793,289) Treasury stock, at cost 1,875,949 and 1,651,615 shares (29,815,352) (25,705,715) ----------- ----------- Total stockholders' equity 78,771,648 82,099,444 ----------- ----------- Total liabilities and stockholders' equity $ 553,020,732 554,731,599 =========== ===========
See accompanying notes to consolidated financial statements. 3
HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended March 31, 1997 1996 ------------------------- Interest Income: Loans receivable $ 6,908,242 6,138,747 Securities available for sale: Mortgage-backed and related securities 2,189,210 2,773,690 Other marketable securities 585,242 404,845 Securities held to maturity: Mortgage-backed and related securities 33,400 267,023 Other marketable securities 10,032 43,448 Cash equivalents 82,160 103,718 Other 94,961 63,981 ----------- ----------- Total interest income 9,903,247 9,795,452 ----------- ----------- Interest expense: Deposits 4,572,798 4,818,284 Federal Home Loan Bank advances 1,451,400 1,061,861 ----------- ----------- Total interest expense 6,024,198 5,880,145 ----------- ----------- Net interest income 3,879,049 3,915,307 Provision for loan losses 75,000 75,000 ----------- ----------- Net interest income after provision for loan losses 3,804,049 3,840,307 ----------- ----------- Non-interest income: Fees and service charges 96,412 77,516 Securities gains, net 270,917 500,550 Gain on sales of loans 153,450 5,949 Other 177,515 117,389 ----------- ----------- Total non-interest income 698,294 701,404 ----------- ----------- Non-interest expense: Compensation and benefits 1,315,987 1,105,995 Occupancy 241,147 196,782 Federal deposit insurance premiums 58,977 209,792 Advertising 78,137 72,685 Data processing 124,529 128,453 Provision for real estate losses 2,000 0 Other 293,665 269,113 ----------- ----------- Total non-interest expense 2,114,442 1,982,820 ----------- ----------- Income before income tax expense 2,387,901 2,558,891 Income tax expense 913,421 972,200 ----------- ----------- Net income $ 1,474,480 1,586,691 =========== =========== Earnings per common share and common share equivalents $ 0.38 0.33 =========== ===========
See accompanying notes to consolidated financial statements. 4
HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Three Month Period Ended March 31, 1997 (unaudited) Net unrealized (loss) on Additional securities Common Paid-in Retained available for Stock Capital Earnings sale ------------------------------------------------------ Balance, December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045) Net income 1,474,480 Change in fair value on securities available for sale (908,640) Treasury stock purchases Amortization of restricted stock awards Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 59,237 -------- ----------- ----------- ----------- Balance, March 31, 1997 $ 60,858 59,491,535 56,119,867 (1,506,685) ======== =========== =========== =========== Unearned shares Employee Unearned Stock Compensation Total Ownership Restricted Treasury Stockholders' Plan Stock Awards Stock Equity ------------------------------------------------------------ Balance, December 31, 1996 (4,938,520) (793,289) (25,705,715) 82,099,444 Net income 1,474,480 Change in fair value on securities available for sale (908,640) Treasury stock purchases (4,109,637) (4,109,637) Amortization of restricted stock awards 57,174 57,174 Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 96,060 155,297 --------- -------- ---------- ---------- Balance, March 31, 1997 (4,842,460) (736,115) (29,815,352) 78,771,648 ========= ======== ========== ==========
See accompanying notes to consolidated financial statements. 5
HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 1997 1996 ----------------------- Cash flows from operating activities: Net income $1,474,480 1,586,691 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 75,000 75,000 Depreciation 102,879 90,866 Amortization of (discounts) premiums, net (46,804) (7,168) Amortization of deferred loan fees (87,139) (109,000) Provision for deferred income taxes 128,200 40,700 Securities gains, net (270,917) (500,550) Gain on sales of real estate 0 (18,214) Gain on sales of loans (153,450) (5,949) Proceeds from sale of loans originated for sale 670,145 0 Amortization of restricted stock awards 57,174 58,350 Decrease in unearned ESOP shares 96,060 99,420 Earned employee stock ownership shares priced above original cost 59,237 30,508 Decrease in accrued interest receivable 497,246 110,380 Increase (decrease) in accrued interest payable (66,175) 143,960 Equity earnings of limited partnership (73,824) 0 Increase in other assets (705,413) (226,568) Increase in other liabilities 552,087 877,699 Other, net 33,052 (6,675) ---------- ---------- Net cash provided by operating activities 2,341,838 2,239,450 ---------- ---------- Cash flows from investing activities: Proceeds from sales of securities available for sale 15,902,046 32,850,725 Principal collected on securities available for sale 2,949,425 3,317,661 Proceeds collected on maturity of securities available for sale 14,650,000 4,500,000 Purchases of securities available for sale (33,086,600)(31,984,781) Proceeds from sales of securities held to maturity 348,871 0 Principal collected on securities held to maturity 240,441 347,044 Proceeds collected on maturity of securities held to maturity 1,000,000 0 Purchases of securities held to maturity 0 (709,765) Purchase of interest in limited partnership (1,216,875) 0 Purchase of Federal Home Loan Bank stock (193,100) 0 Proceeds from sales of loans receivable 19,406,945 386,649 Net increase in loans receivable (17,149,212) (2,846,197) Proceeds from sale of real estate 0 87,616 Purchases of premises and equipment (482,836) (7,304) ---------- ---------- Net cash provided by investing activities 2,369,105 5,941,648 ---------- ---------- Cash flows from financing activities: Increase (decrease) in deposits 1,645,716 (5,146,166) Purchase of treasury stock (4,109,637) (1,886,582) Proceeds from Federal Home Loan Bank advances 36,000,000 10,800,000 Repayment of Federal Home Loan Bank advances (36,357,142) (7,183,771) Increase in advance payments by borrowers for taxes and insurance 280,461 277,205 ---------- ---------- Net cash used by financing activities (2,540,602) (3,139,314) ---------- ---------- Increase in cash and cash equivalents 2,170,341 5,041,784 Cash and cash equivalents, beginning of period 10,583,717 4,334,694 ---------- ---------- Cash and cash equivalents, end of period $ 12,754,058 9,376,478 ========== ========== Supplemental cash flow disclosures: Cash paid for interest $ 6,090,373 5,736,185 Cash paid for income taxes 148,500 200,000 Supplemental noncash flow disclosures: Loans securitized and transferred to securities available for sale $ 4,781,034 9,694,418 Securities held to maturity transferred to securities available for sale 1,295,147 0 Loans transferred to loans held for sale 19,380,736 0 Transfer of loans to real estate 94,164 22,715 Securities purchased with liability due to broker 0 4,881,250
See accompanying notes to consolidated financial statements. 6 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) March 31, 1997 and 1996 (1) HMN FINANCIAL, INC. ------------------- The consolidated financial statements included herein are for HMN, Security Finance Corporation (SFC), HMN Mortgage Services, Inc., Home Federal Savings Bank (the Bank) and the Bank's wholly owned subsidiary, Osterud Insurance Agency, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. (2) BASIS OF PREPARATION -------------------- The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with generally accepted accounting principles. However, all adjustments consisting of only normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The statements of income for the three month period ended March 31, 1997 are not necessarily indicative of the results which may be expected for the entire year. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current period presentation. (3) NEW ACCOUNTING STANDARDS ------------------------ In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The Statement is effective for financial statements issued for periods ending after December 15, 1997. Management is currently studying the impact of adopting SFAS No. 128. (4) SECURITIES HELD TO MATURITY --------------------------- During the first quarter of 1997 HMN determined that it no longer had the intent to hold its securities classified as held to maturity to the actual maturity date of the securities. Therefore it sold one security and on March 31, 1997 it transferred all the remaining securities in the held to maturity portfolio to the available 7 for sale portfolio. The following information summarizes the sale and transfer of the securities held to maturity during the first quarter of 1997. Unrealized Holding Unrealized Gain, Amortized Fair Realized Holding Net of Tax, Cost Value Gain Gain in Equity ------------ -------- ---------- ---------- ----------- Security sold $ 344,139 348,871 4,732 Securities transferred to available for sale 1,223,753 1,295,147 71,394 42,641 (5) EARNINGS PER SHARE ------------------ Earnings per common share and common share equivalents for the three month periods ended March 31, 1997 and 1996 were computed by dividing net income for each period ($1,474,480 and $1,586,691, respectively) by the weighted average common shares and common share equivalents outstanding (3,927,758 and 4,766,220, respectively) during each period. (6) REGULATORY CAPITAL REQUIREMENTS ------------------------------- The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on HMN's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table on the following page) of Tangible, Core, and Risk-based capital (as defined in the regulations) to total assets (as defined). At March 31, 1997 Management is of the opinion that the Bank meets all capital adequacy requirements to which it is subject. Management believes that based upon the Bank's capital calculations at March 31, 1997 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized. 8 At March 31, 1997 the Bank's capital amounts and ratios are presented for actual capital, required capital, and excess capital including amounts and ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations:
Actual Required ---------------------- ---------------------- Percent of Percent of (IN THOUSANDS) Amount Assets Amount Assets ----------- ---------- ---------- ---------- Bank stockholder's equity $60,956 Plus: Net unrealized loss on certain securities available for sale 1,982 Less: Mortgage servicing rights 418 ------ Tangible capital 62,520 11.60% $ 8,085 1.50% ------ Tangible capital to adjusted total assets 11.60% Core capital (Tier I) 62,520 11.60% 16,170 3.00% Tier I capital to risk- weighted assets 26.92% Plus: Allowable allowance for loan losses 2,421 ------ Risk-based capital $64,941 27.96% $18,583 8.00% ====== To Be Well Capitalized Under Prompt Corrective Actions Excess Capital Provisions ---------------------- --------------------- Percent of Percent of (in thousands) Amount Assets Amount Assets ----------- ---------- ---------- ---------- Bank stockholder's equity $ Plus: Net unrealized loss on certain securities available for sale Less: Mortgage servicing rights Tangible capital 54,435 10.10% Tangible capital to adjusted total assets $26,951 5.00% Core capital (Tier I) 46,350 8.60% Tier I capital to risk- weighted assets 13,937 6.00% Plus: Allowable allowance for loan losses Risk-based capital $46,358 19.96% $23,229 10.00% Based upon the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk- based capital ratio.
9 (7) STOCKHOLDERS' EQUITY AND STOCK CONVERSION ------------------------------------------ During January of 1997 with Board authorization and approval from the Office of Thrift Supervision (OTS) HMN purchased a total of 224,334 shares of its own common stock from the open market for $4.1 million. All shares were placed in treasury stock. 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, gains from sale of loans, service charges, fees and other income. 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 first quarter of 1997 was $1.5 million, a decrease of $112,000, or 7.1%, compared to $1.6 million for the first quarter of 1996. Net income decreased primarily due to a $132,000 increase in non-interest expense. Earnings per common share and common share equivalents were $0.38 for the first quarter of 1997, an increase of 15.2%, compared to $0.33 per common share and common share equivalents for the first quarter of 1996. The increased earnings per share occurred despite a decrease in net income due to the repurchase of 972,404 shares of HMN,s common stock from April 1, 1996 through January 31, 1997. NET INTEREST INCOME - ------------------- Net interest income was $3.9 million for both the first quarter of 1997 and the first quarter of 1996. Net interest income for the two periods remained similar despite an increase of $7.2 million in interest earning assets due to a decrease in the net interest margin. Interest income was $9.9 million for the first quarter of 1997 an increase of $108,000, or 1.1%, compared to $9.8 million for the same period in 1996. The increased interest income was due to a combination of the increase in interest earning assets and a rise in the yield on those assets. Interest expense was $6.0 million for the first quarter of 1997, an increase of $144,000, or 2.4%, compared to $5.9 million for the first quarter of 1996. Interest on deposits decreased by $141,000 due to a $8.0 million decrease in average outstanding deposits for the first quarter of 1997 compared to the first quarter of 1996. Interest expense on deposits also decreased by $104,000 due to a decrease in the rates paid on deposits during the first quarter of 1997 compared to the first quarter of 1996. Interest expense on Federal Home Loan Bank (FHLB) advances increased by $421,000 due to an increase in average FHLB advances of $30.2 million for the first quarter of 1997 compared to the same quarter in 1996. However, interest expense on FHLB advances decreased by $31,000 due to a decline in the cost of borrowing from the FHLB in the first quarter of 1997 compared to the first quarter of 1996. The FHLB advances 10 replaced funds lost due to deposit outflow and financed the purchase of additional mortgage loans and the stock repurchase program. PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses for the first quarter of 1997 and 1996 was $75,000. 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 1997 compared to 1996. Future economic conditions and other unknown factors will impact the need for future provisions for loan losses. As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods. A reconciliation of HMN's allowance for loan losses is summarized as follows: 1997 1996 --------- --------- Balance at January 1, $ 2,340,585 2,190,664 Provision 75,000 75,000 Charge-offs 0 (1,216) Recoveries 7,000 0 --------- --------- Balance at March 31, $ 2,422,585 2,264,448 ========= ========= NON-INTEREST INCOME - ------------------- Non-interest income was $698,000 for the first quarter of 1997, a decrease of $3,000, compared to $701,000 for the first quarter of 1996. The decrease was principally due to a $230,000 decrease in gain on the sale of securities. Economic conditions in the first quarter of 1997 did not provide HMN with an opportunity to sell securities at a gain. During the first quarter of 1997, HMN reviewed its loan portfolio and decided to reduce its concentration of a certain loan product by selling $19.4 million of loans. The loan sale was the principal reason for the increase in gain on the sale of loans of $148,000. Other income increased by a net of $60,000 principally due to income generated from the Bank,s interest in a mortgage servicing partnership. Fee income increased by $19,000. NON-INTEREST EXPENSE - -------------------- Non-interest expense was $2.1 million for the first quarter of 1997, an increase of $132,000, or 6.6%, from $2.0 million for the first quarter of 1996. Compensation and benefits expense increased by $210,000, or 6.6%, due to an increase in HMN,s work force related to opening a mortgage banking office in Eden Prairie, Minnesota, and normal merit and salary increases. Occupancy expense increased $44,000 due to the addition of the Eden Prairie office and added depreciation related to retail bank office remodeling. Federal insurance deposit premiums decreased by $151,000 due to a decrease in the insurance rates as the result of the Savings Association Insurance Fund becoming adequately capitalized during the third quarter of 1996. Other non-interest expenses increased a net of $28,000 partly due to the opening of the Eden Prairie office and normal cost increases. INCOME TAX EXPENSE - ------------------ Income tax expense was $913,000 for the first quarter of 1997, a decrease of $59,000, or 6.0%, from $972,000 for the first quarter of 1996. The decrease is primarily due to a decrease in taxable income between the two periods. LIQUIDITY - --------- For the quarter ended March 31, 1997, the net cash provided from operating activities was $2.3 million and 11 net cash provided from investing activities was $2.4 million. For the same period, HMN had $16.3 million in proceeds from the sale of securities and it collected another $18.8 million from principal payments and the maturity of securities. HMN purchased $33.1 million of securities during the first quarter of 1997. HMN also received proceeds from the sale of loans of $19.4 million and purchased or originated additional net loans of $17.1 million. During the first quarter of 1997, the Bank also purchased an additional interest in a mortgage servicing partnership for $1.2 million. During the first quarter of 1997, deposits increased by $1.6 million. During January 1997, HMN also repurchased 224,334 shares of its own common stock for $4.1 million. HMN has certificates of deposit with outstanding balances of $166.7 million maturing during the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for the same or similar terms. Any funds lost from deposits which do not renew will be replaced with deposits from other customers, advances from the FHLB, or the sale of securities. Management does not anticipate that it will have a liquidity problem resulting from maturing deposits. HMN is in the process of building two new retail banking facilities in Spring Valley and Winona, Minnesota, at an estimated aggregate cost of $3.2 million. Occupancy is scheduled for the first quarter of 1998 and funding will come from normal cash flows or the sale of securities. NON-PERFORMING ASSETS - --------------------- The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at March 31, 1997 and December 31, 1996. March 31, December 31, (DOLLARS IN THOUSANDS) 1997 1996 ----------- ------------ Non-Accruing Loans One-to-four family real estate $ 209 235 Nonresidential real estate 83 83 Commercial business 12 13 Consumer 22 7 ---- ---- Total 326 338 ---- ---- Foreclosed Assets Real estate: One-to-four family 110 23 ---- ---- Total non-performing assets $436 $361 ==== ==== Total as a percentage of total assets 0.08% 0.07% ==== ==== Total non-performing loans $326 $338 ==== ==== Total as a percentage of total loans receivable, net 0.10% 0.10% ==== ==== Total non-performing assets at March 31, 1997 were $436,000, an increase of $75,000, or 20.1%, from $361,000 at December 31, 1996. The net increase of $75,000 was the result of a decrease of non-accruing loans brought about through normal collection efforts and an increase in one-to-four family foreclosed residential homes. ASSET/LIABILITY MANAGEMENT - -------------------------- HMN,s management reviews the impact that changing interest rates will have on its net interest income projected for the next twelve months to determine if its current level of interest rate risk is acceptable. The 12 following table projects the estimated impact on net interest income of immediate interest rate changes called rate shocks. Rate Shock Net Interest Percentage Board in Basis Points Income Change Limit +200 14,459 -7.40% -30.00% +100 15,111 -3.23% -15.00% 0 15,615 0.00% 0.00% -100 15,797 1.17% -15.00% -200 15,772 1.01% -30.00% The table above is only an estimate of the potential impact that changing rates will have on net interest income. The actual new loan activity originated or purchased and securities purchases along with actual deposit and borrowing activity could cause the actual net interest income for the next twelve months to be materially different from the net interest income projected above. 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 14 for table. 13 The following table sets forth the interest rate sensitivity of HMN's assets and liabilities at March 31, 1997, using certain assumptions that are described in more detail below:
- ------------------------------------------------------------------------------- Maturing or Repricing ---------------------------------------------- Over 6 6 Months Months to Over 1-3 Over 3-5 (DOLLARS IN THOUSANDS) or Less One Year Years Years - ------------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities $ 35,651 5,197 16,534 18,324 Other marketable securities 7,948 0 15,131 25,281 Securities held to maturity: Mortgage-backed and related securities 0 0 0 0 Other marketable securities 0 0 0 0 Loans held for sale, net 1,061 0 0 0 Loans receivable, net Fixed rate one-to-four family 18,240 16,859 57,858 43,026 Adjustable rate one-to-four family 35,041 18,457 11,814 10,120 Multi family 0 2 52 0 Fixed rate commercial real estate 132 119 404 266 Adjustable rate commercial real estate 4,645 1,936 0 0 Commercial business 716 546 1,593 337 Consumer loans 15,793 1,122 2,134 889 Federal Home Loan Bank stock 0 0 0 0 Cash equivalents 11,754 0 0 0 ------- ------- -------- ------- Total interest-earning assets 130,981 44,238 105,520 98,243 ------- ------- -------- ------- Non-interest checking 2,361 0 0 0 NOW accounts 18,015 0 0 0 Passbooks 3,180 2,844 8,672 5,550 Money market accounts 1,776 1,586 4,838 3,098 Certificates 93,535 73,151 109,273 20,871 Federal Home Loan Bank advances 59,714 5,714 5,893 34,400 ------- ------ ------- ------- Total interest-bearing liabilities 178,581 83,295 128,676 63,919 ------- ------- ------- ------- Interest-earning assets less interest-bearing liabilities $ (47,600) (39,057) (23,145) 34,324 ======= ======= ======= ======= Cumulative interest-rate sensitivity gap $ (47,600) (86,657) (109,813) (75,489) ======= ======= ======= ======= Cumulative interest-rate gap as a percentage of total assets at March 31, 1997 (8.61)% (15.67)% (19.86)% (13.65)% ======= ======= ======= ======= Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1996 (4.61) (10.66) ======= ======= Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1995 (1.07) (7.53) ======= ======= Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1994 (2.47) (2.26) ======= ======= Over 5 No Stated (DOLLARS IN THOUSANDS) Years Maturity Total ---------------------------------------- Securities available for sale: Mortgage-backed and related securities 50,793 0 126,499 Other marketable securities 0 7,815 56,175 Securities held to maturity: Mortgage-backed and related securities 0 0 0 Other marketable securities 0 0 0 Loans held for sale, net 0 0 1,061 Loans receivable, net Fixed rate one-to-four family 99,797 0 235,780 Adjustable rate one-to-four family 831 0 76,263 Multi family 0 0 54 Fixed rate commercial real estate 542 0 1,463 Adjustable rate commercial real estate 0 0 6,581 Commercial business 58 0 3,250 Consumer loans 198 0 20,136 Federal Home Loan Bank stock 0 5,627 5,627 Cash equivalents 0 0 11,754 ------- ------- ------- Total interest-earning assets 152,219 13,442 544,643 ------- ------- ------- Non-interest checking 0 0 2,361 NOW accounts 0 0 18,015 Passbooks 9,865 0 30,111 Money market accounts 5,508 0 16,806 Certificates 0 0 296,830 Federal Home Loan Bank advances 0 0 105,721 Total interest-bearing liabilities 15,373 0 469,844 Interest-earning assets less interest-bearing liabilities 136,846 13,442 74,799 Cumulative interest-rate sensitivity gap 61,357 74,799 74,799 Cumulative interest-rate gap as a percentage of total assets at March 31, 1997 11.09% 13.53% 13.53% Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1996 Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1995 Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1994 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.
14 The preceding table was prepared utilizing the following assumptions regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 5% to 24%, depending on the coupon and period to maturity. ARMs were assumed to prepay at annual rates of between 3% and 12%, depending on coupon and the period to maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 8% and 27% depending on the coupon and the period to maturity. Mortgage-backed securities and Collateralized Mortgage Obligations (CMOs) were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at an annual rate of 20%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. Although certain assets and liabilities may have similar maturities and periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable- rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase. 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. None. ITEM 5. Other Information. None. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits on page 18 of this report. (b) Reports on Form 8-K. A current report on Form 8-K was filed on April 17, 1997, reporting first quarter earnings. Filed with H- (b)11 on April 17, 1997. 16 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: 5/13/97 /s/ Roger P. Weise ---------------------- --------------------------- Roger P. Weise, Chairman, President and Chief Executive Officer (Duly Authorized Officer) Date: 5/13/97 /s/ James B. Gardner ---------------------- --------------------------- James B. Gardner, Executive Vice President (Principal Financial Officer) 17 PAGE HMN FINANCIAL, INC. INDEX TO EXHIBITS FOR FORM 10-Q Exhibit Sequentially Number Description Numbered Page --------- ---------------------------- ------------- 10 Revised Adoption Agreement for 20 Home Federal Savings Bank Employees, Savings & Profit Sharing Plan and Trust 11 Computation of Earnings Per 21 Common Share 27 Financial Data Schedule 22 18 EX-10 2 Pentegra 108 Corporate Park Drive White Plains, NY 10604-3805 Tel: 800-872-3473 Fax: 914-694-9384 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. 2 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 [Name of Employer] Employees' Savings & Profit Sharing Plan and Trust, effective ________ , 19__. 2. /x/ Amends its existing defined contribution plan and trust Home Federal Savings Bank Plan ------------------------------- dated August 1 , 1996, in its entirety into the ----------------- Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust, effective January 1, 1997, 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).) 3 B. "Effective Date" means January 1, 1997. --------------- 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. (d) /x/ A corporation. (e) / / A sole proprietorship or partnership. (f) / / A Subchapter S corporation. 2 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. /x/ Total taxable compensation as reported on Form W-2 (exclusive of any compensation deferred from a prior year, exclusive of any restricted stock awards, and exclusive of taxable income in the form of spousal expenses and/or educational expenses.) 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. 3 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 1 --- consecutive month period (1-11, 12 or 24) beginning with an Employee's Date of Employment, Date of Reemployment or any anniversary thereof, completed 83 1/3 ------- 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: ---------------------------------------- ---------------------------------------- ---------------------------------------- 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. 4 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 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. 5 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. Employees must be employed on 12/31 in order to be entitled (subject to vesting) to Employer Matching Contributions. Employees will be entitled to Employer Matching Contributions upon death, disability or retirement. 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% 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. 6 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. 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. 7 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. 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 8 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): 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, 2 or 3): 1. /x/ Daily 2. / / 1 time per calendar month. 3. / / 1 time per calendar quarter. 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). 9 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./ /Immediate Upon Enrollment 100% 2./ /2-6 Year Less than 2 0% Graded 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./x/5-Year Less than 5 0% Cliff 5 or more 100% 4./ /3-Year Less than 3 0% Cliff 3 or more 100% 5./ /4-Year Less than 1 0% Graded 1 but less than 2 25% 2 but less than 3 50% 3 but less than 4 75% 4 or more 100% Schedule Years of Employment Vested % --------- ------------------- -------- 6./ /3-7 Year Less than 3 0% Graded 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. 10 4. Schedule / / solely with respect to Employer profit sharing contributions. 5. Schedule /x/ with respect to all Employer contributions. Applies to employees hired on or after January 1, 1997. 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. 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) /x/ Attainment of age 59 1/2. 10. / / No in-service withdrawals shall be allowed. 11 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)): (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. 12 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 [Plan Name] 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. 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 ------------- Address: 1 Cabot Road, Medford, MA 02155-5159 ------------------------------------ Tel No: (617) 382-2196 -------------- Contact: Jim Peluso ---------- 13 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 [Name of Employer] 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 9 day of March, 19 97. ----- ----- -- Home Federal Savings Bank By: /s/ Roger P. Weise ------------------- Name: Roger P. Weise ------------------- Title: President and CEO ------------------ 6/96 14 EX-11 3 Exhibit 11 - Computation of Earnings Per Common Share HMN Financial, Inc. Computation of Earnings Per Common Share (Unaudited) Computation of Earnings Per Common Share Three Months Ended March 31, for Statements of Operations: 1997 1996 - --------------------------------------- ------------- ------------ Net income $ 1,474,480 1,586,691 --------- --------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,757,694 4,717,775 Dilutive effect of stock option plans after application of treasury stock method 170,064 48,445 --------- --------- 3,927,758 4,766,220 --------- --------- Earnings per common share and common share equivalents $ 0.38 0.33 ========= ========= Computation of Fully Diluted Earnings Per Common Share and Common Share Equivalents<1> - -------------------------------------- Net income $ 1,474,480 1,586,691 --------- --------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,757,694 4,717,775 Dilutive effect of stock option plans after application of treasury stock method 170,064 48,445 --------- --------- 3,927,758 4,766,220 --------- --------- Earnings per common share and common share equivalents $ 0.38 0.33 ========= ========= <1> 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%. PAGE EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1997 AND DECEMBER 31, 1996 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1,164 11,590 0 0 180,148 0 0 344,588 2,423 553,021 364,123 41,429 4,405 64,292 0 0 61 78,711 553,021 6,908 2,913 82 9,903 4,573 6,024 3,879 75 271 2,114 2,388 0 0 0 1,474 .38 .38 7.47 326 15 0 125 2,341 0 7 2,423 1,205 0 1,218
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