-----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, KHzlUe2QOr4WguqEl7vfsAjSR2r1R0J14YsPICI9yM4VRAkL6ahx7DIxBn3Zj19I uo0v6uc7aV2EaDqlCWMPBg== 0000921183-97-000033.txt : 19970814 0000921183-97-000033.hdr.sgml : 19970814 ACCESSION NUMBER: 0000921183-97-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 97659713 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, 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 August 5, 1997 - ----------------------------- ----------------------------- Common stock, $0.01 par value 4,211,836 This Form 10-Q consists of 55 pages. The exhibit index is on page 22. 1 HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements (unaudited) ---- Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 3 Consolidated Statements of Income for the Three Months Ended and Six Months Ended June 30, 1997 and 1996 4 Consolidated Statement of Stockholders' Equity for the Six Month Period Ended June 30, 1997 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7-10 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 PART II - OTHER INFORMATION Item 1: Legal Proceedings 19 Item 2: Changes in Securities 19 Item 3: Defaults Upon Senior Securities 19 Item 4: Submission of Matters to a Vote of Security Holders 19 Item 5: Other Information 20 Item 6: Exhibits and Reports on Form 8-K and Form 11-K 20 Signatures 21 2 PART I - FINANCIAL STATEMENTS HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
June 30, December 31, Assets 1997 1996 ----------- ----------- Cash and cash equivalents $ 11,569,823 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $115,681,542 and $134,474,167) 115,016,213 133,355,278 Other marketable securities (amortized cost $73,350,810 and $42,360,499) 73,860,262 42,474,810 ----------- ----------- 188,876,475 175,830,088 ----------- ----------- Securities held to maturity: Mortgage-backed and related securities (fair value $0 and $1,904,993) 0 1,805,744 Other marketable securities (fair value $0 and $1,000,550) 0 999,812 ----------- ----------- 0 2,805,556 ----------- ----------- Loans held for sale 1,205,315 739,316 Loans receivable, net 345,516,286 349,022,236 Federal Home Loan Bank stock, at cost 5,939,500 5,434,000 Real estate, net 89,287 20,610 Premises and equipment, net 4,090,908 3,581,497 Accrued interest receivable 3,762,219 3,415,152 Prepaid expenses and other assets 5,815,165 3,299,427 ----------- ----------- Total assets $ 566,864,978 554,731,599 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 365,385,386 362,476,944 Federal Home Loan Bank advances 114,364,305 106,078,589 Accrued interest payable 1,207,541 1,542,773 Advance payments by borrowers for taxes and insurance 506,268 518,911 Accrued expenses and other liabilities 2,403,310 2,014,938 Due to brokers 1,200,000 0 ----------- ----------- Total liabilities 485,066,810 472,632,155 ----------- ----------- 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 59,620,004 59,428,768 Retained earnings, subject to certain restrictions 57,452,087 54,645,387 Net unrealized loss on securities available for sale (92,998) (598,045) Unearned employee stock ownership plan shares (4,746,400) (4,938,520) Unearned compensation restricted stock awards (716,965) (793,289) Treasury stock, shares at cost 1,873,939 and 1,651,615 shares (29,778,418) (25,705,715) ----------- ----------- Total stockholders' equity 81,798,168 82,099,444 ----------- ----------- Total liabilities and stockholders' equity $ 566,864,978 554,731,599 =========== ===========
See accompanying notes to consolidated financial statements. 3 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 -------------------- ---------------------- Interest Income: Loans receivable $ 6,882,628 6,409,310 13,790,870 12,548,056 Securities available for sale: Mortgage-backed and related 2,176,822 2,527,670 4,366,032 5,301,360 Other marketable 917,067 580,897 1,502,309 985,741 Securities held to maturity: Mortgage-backed and related 0 256,754 33,400 523,777 Other marketable 0 32,405 10,032 75,853 Cash equivalents 87,434 62,086 169,594 165,804 Other 102,011 74,648 196,972 138,630 ---------- ---------- ---------- ---------- Total interest income 10,165,962 9,943,770 20,069,209 19,739,221 ---------- ---------- ---------- ---------- Interest expense: Deposits 4,670,797 4,720,966 9,243,595 9,539,249 Federal Home Loan Bank advances 1,626,510 1,227,662 3,077,910 2,289,523 ---------- --------- ---------- ---------- Total interest expense 6,297,307 5,948,628 12,321,505 11,828,772 ---------- --------- ---------- ---------- Net interest income 3,868,655 3,995,142 7,747,704 7,910,449 Provision for loan losses 75,000 75,000 150,000 150,000 ---------- --------- ---------- ---------- Net interest income after provision for loan losses 3,793,655 3,920,142 7,597,704 7,760,449 ---------- --------- ---------- ---------- Non-interest income: Fees and service charges 100,445 81,855 196,857 159,371 Securities gains, net 113,695 268,487 384,612 769,037 Gain on sales of loans 63,614 1,135 217,064 7,084 Other 128,042 133,533 305,557 250,922 ---------- --------- ---------- ---------- Total non-interest income 405,796 485,010 1,104,090 1,186,414 ---------- --------- ---------- ---------- Non-interest expense: Compensation and benefits 1,358,859 1,099,123 2,674,846 2,205,118 Occupancy 232,451 195,363 473,598 392,145 Federal deposit insurance premiums 58,924 214,864 117,901 424,656 Advertising 73,658 79,354 151,795 152,039 Data processing 118,803 120,743 243,332 249,196 Provision for real estate losses 1,000 0 3,000 0 Other 283,260 274,789 576,925 543,902 ---------- --------- ---------- ---------- Total non-interest expense 2,126,955 1,984,236 4,241,397 3,967,056 ---------- --------- ---------- ---------- Income before income tax expense 2,072,496 2,420,916 4,460,397 4,979,807 Income tax expense 740,276 887,832 1,653,697 1,860,032 ---------- --------- ---------- ---------- Net income $ 1,332,220 1,533,084 2,806,700 3,119,775 ========== ========= ========== ========== Primary earnings per common share and common share equivalents $ 0.34 0.34 0.72 0.67 ========== ========= ========== ========== Fully diluted earnings per common share and common share equivalents $ 0.34 0.33 0.71 0.66 ========== ========= ========== ==========
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, 1997 (unaudited)
Net unrealized Additional (loss) on Common Paid-in Retained securities Stock Capital Earnings available for sale ----------------------------------------------------- Balance, December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045) Net income 2,806,700 Change in fair value on securities available for sale 505,047 Treasury stock purchases Amortization of restricted stock awards Retirement and retention awards granted 2,250 Employee stock option exercised (46) Restricted stock awards tax benefit 61,092 Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 124,410 ------- ---------- ---------- ---------- Balance, June 30, 1997 $ 60,858 59,620,004 57,452,087 (92,998) ======= ========== ========== ========== 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 2,806,700 Change in fair value on securities available for sale 505,047 Treasury stock purchases (4,109,637) (4,109,637) Amortization of restricted stock awards 115,324 115,324 Retirement and retention awards granted (39,000) 36,750 0 Employee stock option exercised 184 138 Restricted stock awards tax benefit 61,092 Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 192,120 316,530 ---------- --------- ---------- ---------- Balance, June 30, 1997 $ (4,746,400) (716,965) (29,778,418) 81,798,168 ========== ========= ========== ==========
See accompanying notes to consolidated financial statements. 5 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1997 1996 ------------------------- Cash flows from operating activities: Net income $ 2,806,700 3,119,775 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 150,000 150,000 Provision for real estate losses 3,000 0 Depreciation 207,634 181,971 Amortization of (discounts) premiums, net (107,808) (16,163) Amortization of deferred loan fees (183,614) (229,289) Provision for deferred income taxes 258,698 147,562 Securities gains, net (384,612) (774,273) Gain on sales of real estate (3,743) (39,100) Gain on sales of loans (217,064) (7,084) Proceeds from sale of loans originated for sale 2,739,372 362,070 Amortization of restricted stock awards 115,324 116,700 Amortization of unearned ESOP shares 192,120 198,840 Earned employee stock ownership shares priced above original cost 124,410 62,424 Increase in accrued interest receivable (347,067) (43,835) (Decrease) increase in accrued interest payable (335,232) 154,983 Equity earnings of limited partnership (112,487) 0 Increase in other assets (94,493) (124,031) (Decrease) increase in other liabilities (149,358) 55,481 Other, net 20,768 (26,994) ---------- ---------- Net cash provided by operating activities 4,682,548 3,289,037 ---------- ---------- Cash flows from investing activities: Proceeds from sales of securities available for sale 33,311,951 49,480,583 Principal collected on securities available for sale 6,657,798 6,740,657 Proceeds collected on maturity of securities available for sale 15,868,412 5,500,000 Purchases of securities available for sale (60,433,633) (53,439,412) Proceeds from sales of securities held to maturity 348,871 0 Principal collected on securities held to maturity 240,441 863,649 Proceeds collected on maturity of securities held to maturity 1,000,000 2,000,000 Purchases of securities held to maturity 0 (709,765) Proceeds from sales of loans receivable 25,341,959 154,612 Purchase interest in mortgage servicing rights (370,008) 0 Purchase interest in limited partnership (1,938,750) 0 Purchase of Federal Home Loan Bank stock (505,500) (1,356,000) Net increase in loans receivable (29,608,581) (27,035,570) Proceeds from sale of real estate 35,627 361,010 Purchases of premises and equipment (717,045) (83,559) ---------- ---------- Net cash used by investing activities (10,768,458) (17,523,795) ---------- ---------- Cash flows from financing activities: Increase (decrease) in deposits 2,908,442 (10,344,717) Purchase of treasury stock (4,109,637) (5,955,302) Stock options exercised 138 0 Proceeds from Federal Home Loan Bank advances 74,800,000 45,700,000 Repayment of Federal Home Loan Bank advances(66,514,284) (13,523,925) Decrease in advance payments by borrowers for taxes and insurance (12,643) (33,488) ---------- ---------- Net cash provided by financing activities 7,072,016 15,842,568 ---------- ---------- Increase in cash and cash equivalents 986,106 1,607,810 Cash and cash equivalents, beginning of period 10,583,717 4,334,694 ---------- ---------- Cash and cash equivalents, end of period $ 11,569,823 5,942,504 ========== ========== Supplemental cash flow disclosures: Cash paid for interest $ 12,656,737 11,673,789 Cash paid for income taxes 1,445,500 1,780,833 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 25,277,122 0 Transfer of loans to real estate 188,776 168,187 Transfer of real estate to loans 84,772 0 Securities purchased with liability due to broker 1,200,000 0
See accompanying notes to consolidated financial statements. 6 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) June 30, 1997 and 1996 (1) HMN FINANCIAL, INC. The consolidated financial statements included herein are for HMN Financial Inc. (HMN), Security Finance Corporation (SFC), HMN Mortgage Services, Inc., Home Federal Savings Bank (the Bank) and the Bank's wholly owned subsidiary, Osterud Insurance Agency, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. (2) BASIS OF PREPARATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with generally accepted accounting principles. However, all adjustments consisting of only normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The statements of income for the three month period and six month period ended June 30, 1997 are not necessarily indicative of the results which may be expected for the entire year. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current period presentation. (3) NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The Statement is effective for financial statements issued for periods ending after December 15, 1997. Management is currently studying the impact of adopting SFAS No. 128. In July 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME which establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual 7 components thereof. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. As used in SFAS No. 130, the term comprehensive income thus encompasses net income. The term OTHER COMPREHENSIVE INCOME refers to components of comprehensive income that are excluded from net income under generally accepted accounting principles. Comprehensive income may be presented in any of the following financial statements: in a separate statement of comprehensive income; in a statement of changes in equity; or below the total of net income or loss in the income statement. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. Comparative statements for previous years must be reclassified, although reclassification adjustments are not required to be shown for such earlier periods. Management is currently studying the impact of adopting SFAS No. 130. In July 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which establishes new standards for determining a reportable segment and for disclosing information regarding each such segment. The amount of each segment item reported should be the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing an enterprise's general-purpose financial statements and allocations of revenues, expenses , and gains or losses should be included in determining reported segment profit or loss only if they are included in the measure of the segments's profit or loss that is used by the chief operating decision maker. Similarly, only those assets that are included in the measure of the segment's assets that is used by the chief operating decision maker should be reported for that segment. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. Management is currently studying the impact of adopting SFAS No. 131. (4) SECURITIES HELD TO MATURITY During the first quarter of 1997, HMN determined that it no longer had the intent to hold its securities classified as held to maturity to the actual maturity date of the securities. Therefore it sold one security and on March 31, 1997 it transferred all the remaining securities in the held to maturity portfolio to the available for sale portfolio. The following information summarizes the sale and transfer of the securities held to maturity during 1997.
Unrealized Holding Unrealized Gain, Amortized Fair Realized Holding Net of Tax, Cost Value Gain Gain in Equity --------- ------- --------- --------- ----------- Security sold $ 344,139 348,871 4,732 Securities transferred to available for sale $1,223,753 1,295,147 71,394 42,641
(5) EARNINGS PER SHARE Primary earnings per common share and common share equivalents for the three month periods ended June 30, 1997 and 1996 were computed by dividing net income for each period ($1,332,220 and $1,533,084, respectively) by the weighted average common shares and common share equivalents outstanding (3,915,302 and 4,580,792, respectively) during each period. Fully diluted earnings per common share and common share equivalents for the three months ended June 30, 1997 and 1996 were computed by dividing net income for the period ($1,332,220 and $1,533,084, respectively) by the weighted average common shares and fully diluted common share equivalents outstanding (3,943,053 and 4,600,976, respectively) during each period. Primary earnings per common share and common share equivalents for the six month periods ended June 30, 1997 and 1996 were computed by dividing net income for each period ($2,806,700 and $3,119,775, respectively) by the weighted average common shares and common share equivalents outstanding (3,921,455 and 4,673,506, respectively) during each period. Fully diluted earnings per common share and common share equivalents for the six months ended June 30, 1997 and 1996 were computed by dividing net income for the period ($2,806,700 and $3,119,775, 8 respectively) by the weighted average common shares and fully diluted common share equivalents outstanding (3,956,422 and 4,697,742, 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 June 30, 1997 Management is of the opinion that the Bank meets all capital adequacy requirements to which it is subject. Management believes that based upon the Bank's capital calculations at June 30, 1997 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized. At June 30, 1997 the Bank's capital amounts and ratios are presented for actual capital, required capital, and excess capital including amounts and ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations: - ---------------------------------------------------------------------------
Actual Required ------------------- ------------------- Percent of Percent of (in thousands) Amount Assets Amount Assets -------- ---------- -------- ----------- Bank stockholder's equity $ 60,965 Less: Net unrealized gain on certain securities available for sale 977 Excess mortgage servicing rights 533 ------- Tangible capital 59,455 10.95% $ 8,146 1.50% ------- Tangible capital to adjusted total assets 10.95% Core capital (Tier I) 59,455 10.95% 16,291 3.00% Tier I capital to risk- weighted assets 24.44% Plus: Allowable allowance for loan losses 2,479 Risk-based capital $ 61,934 25.46% $ 19,463 8.00% <1> Based upon the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. - ----------------------------------------------------------------------------- To Be Well Capitalized Under Prompt Corrective Actions Excess Capital Provisions ------------------- -------------------- Percent of Percent of (in thousands) Amount Assets Amount Assets -------- ---------- ------- ----------- Bank stockholder's equity Less: Net unrealized gain on certain securities available for sale Excess mortgage servicing rights Tangible capital $ 51,309 9.45% Tangible capital to adjusted total assets $ 27,152 5.00% Core capital (Tier I) 43,164 7.95% Tier I capital to risk- weighted assets 14,598 6.00% Plus: Allowable allowance for loan losses Risk-based capital $ 42,471 17.46% $ 24,329 10.00% <1> Based upon the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. - -----------------------------------------------------------------------------
9 (7) STOCKHOLDERS' EQUITY During January of 1997, with Board authorization and approval from the Office of Thrift Supervision (OTS), HMN purchased a total of 224,334 shares of its own common stock from the open market for $4.1 million. All shares were placed in treasury stock. On June 30, 1997, HMN announced its intention to purchase up to 300,000 shares of its own common stock in the open market over the next twelve month period. (8) PENDING ACQUISITION On July 1, 1997, HMN Financial, Inc. and Marshalltown Financial Corporation (MFC), the thrift holding company for Marshalltown Savings Bank, FSB, entered into a definitive agreement to merge. Under the agreement, HMN will acquire in a cash transaction valued at $25.9 million, or $17.51 per share, all outstanding shares of MFC's common stock. The agreement is subject to regulatory approvals, as well as approval of MFC's shareholders, a process that is expected to be completed by the end of the year. At June 30, 1997, MFC's consolidated balance sheet had total assets of $127.5 million of which $63.4 million were in loans receivable, net and $56.1 million were investment securities or mortgage-backed securities. MFC's deposits totaled $106.4 million and stockholders' equity totaled $20.1 million. 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, 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 second quarter of 1997 was $1.3 million, or $0.34 primary earnings per share, a decrease of $201,000, or 13.1% compared to net income of $1.5 million, or $0.34 primary earnings per share for the second quarter of 1996. The decrease in net income was principally due to a decrease of $126,000 in net interest income, a decrease of $79,000 in non- interest income and an increase of $143,000 in non-interest expense. Primary earnings per share for the second quarter of 1997 remained the same as the second quarter of 1996 despite a decrease in net income because HMN purchased 972,404 shares of its own common stock in the open market from April 1, 1996 through January 31, 1997. Net income for the six-month period ended June 30, 1997 was $2.8 million, or $0.72 primary earnings per share, a decrease of $313,000, or 10.0%, compared to $3.1 million, or $0.67 primary earnings per share, for the same six month period of 1996. The decrease in net income was principally due to a decrease of $163,000 in net interest income, a decrease of $82,000 in non-interest income and an increase of $274,000 in non-interest expense. Primary earnings per share for the six month period ended June 30, 1997 increased by $0.05 compared to the same period in 1996 despite a decrease in net income between the periods because HMN purchased 1,094,119 shares of its own common stock in the open market from January 1, 1996 through January 31, 1997. NET INTEREST INCOME Net interest income for the second quarter of 1997 was $3.9 million, a decrease of $126,000, or 3.2%, compared to $4.0 million for the same quarter of 1996. Interest income for the second quarter of 1997 was $10.2 million, an increase of $222,000, or 2.2%, compared to $9.9 million for the same quarter of 1996. The increase in interest income was primarily due to the purchase of loans that were partially funded by the sale of lower yielding investment securities. Average interest-earning assets were $547.7 million for the 11 second quarter of 1997, an increase of $8.8 million compared to average interest-earning assets of $538.9 million for the same quarter of 1996. Interest expense for the second quarter of 1997 was $6.3 million an increase of $349,000, or 5.9%, compared to $5.9 million for the same quarter of 1996. The increase in interest expense was caused primarily by an increase in average interest-bearing liabilities. Average interest-bearing liabilities for the second quarter of 1997 were $474.6 million, an increase of $23.9 million, or 5.3%, compared to $450.7 million for the second quarter of 1996. The majority of the funds received from the increase in interest-bearing liabilities were used to purchase the net increase in average interest- bearing assets, facilitate the HMN stock repurchases, and purchase loan servicing assets. Net interest income for the six months ended June 30, 1997 was $7.7 million, a decrease of $163,000, or 2.1%, from $7.9 million for the same period of 1996. Interest income for the six month period ended June 30, 1997 was $20.1 million, an increase of $330,000, or 1.7%, compared to $19.7 million for the same period of 1996. The increase in interest income was primarily due to the purchase of loans that were partially funded by the sale of lower yielding investment securities. Average interest-earning assets were $542.9 million for the six months ended June 30, 1997, an increase of $8.1 million compared to average interest-earning assets of $534.8 million for the same period of 1996. Interest expense for the six month period ended June 30, 1997 was $12.3 million, an increase of $493,000, or 4.2%, compared to $11.8 million for the same period of 1996. The increase in interest expense was caused primarily by an increase in average interest-bearing liabilities. Average interest-bearing liabilities for the six month period ended June 30, 1997 were $469.2 million, an increase of $23.1 million, or 5.2%, compared to $446.1 million for the same period of 1996. The majority of the funds received from the increase in interest-bearing liabilities were used to purchase the net increase in average interest-bearing assets, facilitate the HMN stock repurchases, and purchase loan servicing assets. PROVISION FOR LOAN LOSSES The provision for loan losses for the second quarters ended June 30, 1997 and 1996 were both $75,000. The provision for loan losses for the six months ended June 30, 1997 and 1996 were both $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 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 150,000 150,000 Charge-offs (19,009) (1,216) Recoveries 7,250 23 --------- --------- Balance at June 30, $ 2,478,826 2,339,471 ========= ========= NON-INTEREST INCOME Non-interest income for the second quarter of 1997 was $406,000, a decrease of $79,000, or 16.3%, from $485,000 for the same quarter of 1996. The decrease in non-interest income was principally due to a decrease of $155,000 in gain on the sale of securities and was partially offset by increased fee income of $19,000 and an increase in gain on the sale of loans of $62,000. Economic conditions and certain market conditions reduced the ability to sell securities at a gain during the second quarter of 1997 compared to the same period in 1996. 12 Non-interest income for the six months ended June 30, 1997 was $1.1 million, a decrease of $82,000, or 6.9%, from $1.2 million for the same period of 1996. The decrease was principally due to a $384,000 decrease in gain on the sale of securities and was partially offset by a $37,000 increase in fee income, a $210,000 increase in gain on sale of loans, and a $55,000 increase in other income. The increased income recognized on the sale of loans is the direct result of increased mortgage banking activity. The increase in other income for the six months ended June 30, 1997 compared to the same period in 1996 was principally due to an increase in commissions earned by Osterud Insurance Agency, which is a subsidiary of the Bank. NON-INTEREST EXPENSE Non-interest expense was $2.1 million for the second quarter of 1997, an increase of $143,000, or 7.2%, from $2.0 million for the second quarter of 1996. The majority of the increase in non-interest expense between the two quarters was due to a $260,000, or 23.6%, increase in compensation and benefits and was the result of adding new employees, plus normal merit and salary increases. Besides the increase in compensation, occupancy also increased $37,000 between the two quarters. These increases were partially offset by a $156,000 decrease in federal deposit insurance premiums for the second quarter of 1997 compared to the second quarter of 1996. The decrease in premium expense is the result of the Savings Association Insurance Fund (SAIF) now being fully funded. Non-interest expense for the six months ended June 30, 1997 was $4.2 million, an increase of $274,000, or 6.9%, from $4.0 million for the six months ended June 30, 1996. The principal cause for the increase in non-interest expense between the two periods was due to a $470,000, or 21.3%, increase in compensation and benefits expense and was the result of adding new employees and normal merit and salary increases. Occupancy also increased $81,000 for the six-month period ended June 30, 1997 compared to the same period ended June 30, 1996 partially because of continued remodeling of offices. These increases were partially offset by a $307,000 decrease in federal deposit insurance premiums between the two periods because the SAIF insurance fund is now fully funded. INCOME TAX EXPENSE Income tax expense was $740,000 for the second quarter of 1997, a decrease of $148,000, or 16.6%, from $888,000 for the second quarter of 1996. The decrease is primarily due to a decrease in taxable income between the two quarters. Income tax expense was $1.7 million for the six month period ended June 30, 1997, a decrease of $206,000, or 11.1%, from $1.9 million for the same period in 1996. LIQUIDITY For the six months ended June 30, 1997, the net cash provided from operating activities was $4.7 million and net cash used for investing activities was $10.8 million. For the same period, HMN had $33.7 million in proceeds from the sale of securities and it collected another $23.8 million from principal payments and the maturity of securities. HMN purchased $60.4 million of securities during the first six months of 1997. HMN also received proceeds from the sale of loans of $25.3 million and purchased or originated additional net loans of $29.6 million. During the first six month period of 1997, the Bank also purchased an additional interest in a mortgage servicing partnership for $1.9 million. During the first six months of 1997, deposits increased by $2.9 million and Federal Home Loan Bank advances showed a net increase $8.29 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 $169.9 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 * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 17 of this discussion. 13 from other customers, advances from the FHLB, or the sale of securities. Management does not anticipate that it will have a liquidity problem resulting from maturing deposits. *HMN has entered into an agreement to purchase all of the outstanding stock of Marshalltown Financial Corporation, a unitary thrift holding company, for $25.9 million in cash. The transaction is subject to the approval of the stockholders of Marshalltown Financial Corporation and the Office of Thrift Supervision. The approval is anticipated to be received by December 31, 1997. HMN expects to fund the purchase of the Marshalltown stock from the proceeds of the sale of securities available for sale. *HMN is in the process of building two new retail banking facilities in Spring Valley and Winona, Minnesota, at an estimated aggregate cost of $3.2 million. Occupancy is scheduled for the second or third quarter of 1998 and construction funding will come from normal cash flows or the sale of securities. NON-PERFORMING ASSETS The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at June 30, 1997 and December 31, 1996.
June 30, December 31, (Dollars in Thousands) 1997 1996 ---------- ---------- Non-Accruing Loans One-to-four family real estate $ 240 235 Nonresidential real estate 82 83 Commercial business 39 13 Consumer 13 7 --- --- Total 374 338 --- --- Foreclosed Assets Real estate: One-to-four family 92 23 --- --- Total non-performing assets $466 $ 361 === === Total as a percentage of total assets 0.08% 0.07% ==== ==== Total non-performing loans $ 374 $ 338 ==== ==== Total as a percentage of total loans receivable, net 0.11% 0.10% ==== ====
Total non-performing assets at June 30, 1997 were $466,000, an increase of $105,000, or 29.1%, from $361,000 at December 31, 1996. The net increase of $105,000 was the result of an increase of non-accruing loans 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 twelve months following June 30, 1997 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income of immediate interest rate changes called rate shocks. Rate Shock Net Interest Percentage Board in Basis Points Income Change Limit +200 14,265 -8.88% -30.00% +100 15,021 -4.06% -15.00% 0 15,656 0.00% 0.00% -100 15,943 1.83% -15.00% -200 16,240 3.73% -30.00% * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 17 of this discussion. 14 The table above is forward-looking and is only an estimate of the potential impact that changing rates will have on net interest income. The actual new loan activity originated or purchased and securities purchases along with actual deposit and borrowing activity could cause the actual net interest income for the twelve month period to be materially different from the net interest income projected above. 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 16 for table. 15 The following table sets forth the interest rate sensitivity of HMN's assets and liabilities at June 30, 1997, using certain assumptions that are described in more detail below:
- ----------------------------------------------------------------------------- Maturing or Repricing --------------------------------------------------- Over 6 6 Months Months to Over 1-3 Over 3-5 (Dollars in thousands) or Less One Year Years Years - ----------------------------------------------------------------------------- Cash equivalents $ 10,570 0 0 0 Securities available for sale: Mortgage-backed and related securities 24,923 5,325 26,611 25,757 Other marketable securities 18,045 1,905 10,561 30,324 Loans held for sale 1,205 0 0 0 Loans receivable, net: Fixed rate one-to-four family 18,627 17,176 58,860 43,535 Adjustable rate one-to-four family 26,946 21,658 12,283 12,570 Fixed rate commercial real estate 143 126 405 260 Adjustable rate commercial real estate 4,600 2,277 0 0 Commercial business 1,421 352 1,030 236 Consumer loans 18,372 1,163 2,431 1,057 Federal Home Loan Bank stock 0 0 0 0 ------- ------- ------- ------- Total interest-earning assets 124,852 49,982 112,181 113,739 ------- ------- ------- ------- Non-interest checking 2,822 0 0 0 NOW accounts 16,459 0 0 0 Passbooks 3,113 2,784 8,492 5,435 Money market accounts 1,669 1,494 4,554 2,914 Certificates 103,434 66,491 110,904 19,977 Federal Home Loan Bank advances 64,000 9,000 15,964 15,000 ------- ------- ------- ------- Total interest-bearing liabilities 191,497 79,769 139,914 43,326 ------- ------- ------- ------- Interest-earning assets less interest-bearing liabilities $ (66,645) (29,787) (27,733) 70,413 ======= ======= ======= ======= Cumulative interest-rate sensitivity gap $ (66,645) (96,432) (124,165) (53,752) ======= ======= ======= ======= Cumulative interest-rate gap as a percentage of total assets at June 30, 1997 (11.76)% (17.01)% (21.90)% (9.48)% ======= ======= ======= ======= Cumulative interest-rate gap as a percentage of total assets at December 31, 1996 (4.61) (10.66) ======= ======= Cumulative interest-rate gap as a percentage of total assets at December 31, 1995 (1.06) (7.42) ======= ======= Cumulative interest-rate gap as a percentage of total assets at December 31, 1994 (2.47) (2.26) ======= ======= <1> Schedule prepared based upon the earlier of contractual maturity or repricing date, if applicable, adjusted for scheduled repayments of principal and projected prepayments of principal based upon experience. <2> Loans receivable are presented net of loans in process and deferred loan fees. <3> Construction and development loans are all one-to-four family loans and therefore have been included in the fixed rate one-to-four family and adjustable rate one-to-four family lines. - ----------------------------------------------------------------------------- Maturing or Repricing ------------------------------------------------ Over 5 No Stated (Dollars in thousands) Years Maturity Total - ----------------------------------------------------------------------------- Cash equivalents $ 0 0 10,570 Securities available for sale: Mortgage-backed and related securities 33,066 0 115,682 Other marketable securities 136 12,380 73,351 Loans held for sale 0 0 1,205 Loans receivable, net: Fixed rate one-to-four family 100,747 0 238,945 Adjustable rate one-to-four family 930 0 74,387 Fixed rate commercial real estate 504 0 1,438 Adjustable rate commercial real estate 0 0 6,877 Commercial business 56 0 3,095 Consumer loans 230 0 23,253 Federal Home Loan Bank stock 0 5,940 5,940 ------- ------- ------- Total interest-earning assets 135,669 18,320 554,743 ------- ------- ------- Non-interest checking 0 0 2,822 NOW accounts 0 0 16,459 Passbooks 9,662 0 29,486 Money market accounts 5,181 0 15,812 Certificates 0 0 300,806 Federal Home Loan Bank advances 10,400 0 114,364 ------- ------- ------- Total interest-bearing liabilities 25,243 0 479,749 ------- ------- ------- Interest-earning assets less interest-bearing liabilities $ 110,426 18,320 74,994 ======= ======= ======= Cumulative interest-rate sensitivity gap $ 56,674 74,994 74,994 ======= ======= ======= Cumulative interest-rate gap as a percentage of total assets at June 30, 1997 10.00% 13.23% 13.23% ======= ======= ======= Cumulative interest-rate gap as a percentage of total assets at December 31, 1996 Cumulative interest-rate gap as a percentage of total assets at December 31, 1995 Cumulative interest-rate gap as a percentage of total assets at December 31, 1994 <1> Schedule prepared based upon the earlier of contractual maturity or repricing date, if applicable, adjusted for scheduled repayments of principal and projected prepayments of principal based upon experience. <2> Loans receivable are presented net of loans in process and deferred loan fees. <3> Construction and development loans are all one-to-four family loans and therefore have been included in the fixed rate one-to-four family and adjustable rate one-to-four family lines.
16 The preceding table was prepared utilizing the following assumptions regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 5% to 24%, depending on the coupon and period to maturity. Adjustable Rate Mortgages (ARMs) were assumed to prepay at annual rates of between 3% and 12%, depending on coupon and the period to maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 8% and 27% depending on the coupon and the period to maturity. Mortgage- backed securities and Collateralized Mortgage Obligations (CMOs) were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at an annual rate of 20%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. Although certain assets and liabilities may have similar maturities and periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase. FORWARD-LOOKING INFORMATION The following statements within Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements and actual future results may differ materially from the expectations disclosed within this discussion and analysis. The following are forward-looking statements followed by comments of events which may prevent the forward-looking statements from occurring: LIQUIDITY HMN has certificates of deposit with outstanding balances of $169.9 million maturing during the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for the same or similar terms. Any funds lost from deposits which do not renew will be replaced with deposits from other customers, advances from the FHLB, or the sale of securities. Management does not anticipate that it will have a liquidity problem resulting from maturing deposits. Competitive pricing by other institutions, the desire of a competitor to pay interest rates on deposits that are above the current rates paid by HMN, or a desire by customers to put more of their funds into nontraditional bank products such as stocks and bonds could be circumstances that would cause the $169.9 million of certificates that mature to become a liquidity problem. HMN has entered into an agreement to purchase all of the outstanding stock of Marshalltown Financial Corporation, a unitary thrift holding company, for $25.9 million in cash. The transaction is subject to the approval of the stockholders of Marshalltown Financial Corporation and the Office of Thrift Supervision (OTS). The approval is anticipated to be received by December 31, 1997. HMN expects to fund the purchase of the Marshalltown stock from the proceeds of the sale of securities available for sale. The approval may not be received by December 31, 1997 if Marshalltown's shareholders do not approve the transaction or if the OTS is not able to timely review or approve the transaction due to some unforeseen regulatory issue. 17 The funding for the purchase of Marshalltown may not come from the sale of securities if the market value of the securities decrease drastically from the current market value at June 30, 1997. Changes in economic conditions could cause interest rates to rise rapidly which could cause a drastic decrease in the market value of the security portfolio. HMN is in the process of building two new retail banking facilities in Spring Valley and Winona, Minnesota, at an estimated aggregate cost of $3.2 million. Occupancy is scheduled for the second or third quarter of 1998 and construction funding will come from normal cash flows or the sale of securities. The anticipated occupancy date could change based upon delays related to the acquisition of the land for the Winona building site. Delays experienced by the contractors for the delivery of construction materials or weather related issues could also cause the occupancy date for Spring Valley and Winona to be later in 1998. ASSET/LIABILITY MANAGEMENT HMN's management reviews the impact that changing interest rates will have on its net interest income projected for the twelve months following June 30, 1997 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income of immediate interest rate changes called rate shocks. Rate Shock Net Interest Percentage Board in Basis Points Income Change Limit +200 14,265 -8.88% -30.00% +100 15,021 -4.06% -15.00% 0 15,656 0.00% 0.00% -100 15,943 1.83% -15.00% -200 16,240 3.73% -30.00% The table above is forward-looking and is only an estimate of the potential impact that changing rates will have on net interest income. The actual new loan activity originated or purchased and securities purchases along with actual deposit and borrowing activity could cause the actual net interest income for the twelve month period to be materially different from the net interest income projected above. 18 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 Third Annual Meeting of Stockholders of the Company was held on April 22, 1997 at 10:00 a.m.. The following is a record of the votes cast in the election of directors of the Company: BROKER FOR VOTE WITHHELD NON-VOTES ---------- ------------- --------- Duane D. Benson 3,104,694 6,375 -- Irma R. Rathbun 3,107,744 3,325 -- Accordingly, the individuals named above were declared to be duly elected directors of the Company for terms to expire in 2000, respectively. The following is a record of the 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, 1997. NUMBER PERCENTAGE OF VOTES OF VOTES ACTUALLY CAST ---------- -------------------- FOR 3,106,813 99.86% AGAINST 325 .01% ABSTAIN 3,931 .13% BROKER NON-VOTES -- --% 19 ITEM 5. Other Information. (a) Amendment to the Home Federal Savings Bank Employees' Savings & Profit Sharing Plan dated January 28, 1997. Refer to Exhibit 5(a). (b) Amendment to the Adoption Agreement for Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust effective June 17, 1997. Refer to Exhibit 5(b). ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits on page 21 of this report. (b) Reports on Form 11-K. An annual report on Form 11-K was filed on June 25, 1997, for the fiscal year ended December 31, 1996. (c) Reports on Form 8-K. A current report on Form 8-K was filed on June 30, 1997, to report the intent to repurchase 300,000 shares of HMN's common stock. (d) Reports on Form 8-K. A current report on Form 8-K was filed on July 10, 1997, related to the press release dated July 1, 1997, to report a proposed merger of HMN and Marshalltown Financial Corporation. (e) Reports on Form 8-K. A current report on Form 8-K was filed on July 18, 1997, reporting second quarter, semi-annual earnings. 20 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: 8/13/97 /s/ Roger P. Weise ----------- ------------------------ Roger P. Weise, Chairman, President and Chief Executive Officer (Duly Authorized Officer) Date: 8/13/97 /s/ James B. Gardner ----------- ----------------------- James B. Gardner, Executive Vice President (Principal Financial Officer) 21 HMN FINANCIAL, INC. INDEX TO EXHIBITS FOR FORM 10-Q Reference Sequential to Prior Page Numbering Regulation Filing or Where Attached S-K Exhibit Exhibits Are Exhibit Number Located in This Number Document Attached Hereto Form 10-Q Report - ----------- -------- --------------- ---------------- 2 Plan of acquisition, reorganization, N/A N/A arrangement, liquidation or succession. 3(a) Articles of Incorporation * N/A 3(b) By-laws * N/A 4 Instruments defining the rights of * N/A security holders, Including indentures 5(a) Amendment to the Home Federal Savings 5(a) Filed Bank Employees' Savings & Profit electronically Sharing Plan dated January 28, 1997. 5(b) Amendment to the Adoption Agreement for 5(b) Filed Home Federal Savings Bank Employees' electronically Savings & Profit Sharing Plan and Trust effective June 17, 1997. 10.1(a)Employment agreement for Mr. Weise ** N/A dated June 29, 1994 10.1(b)Extension of employment agreement to 10.1(b) Filed May 20, 2000 electronically 10.2(a)Employment agreement for Mr. Gardner ** N/A dated June 29, 1994 10.2(b)Extension of employment agreement to 10.2(b) Filed May 20, 2000 electronically 10.3 Trust Agreement between Home Federal 10.3 Filed Savings Bank and the Bank of New York electronically 11 Computation of Earnings Per Common Share 11 Filed electronically 27 Financial Data Schedule 27 Filed electronically * Filed April 1, 1994, as exhibits to the Registrant's Form S-1 registration statement (Registration No. 33-77212) pursuant to the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ** Filed as an exhibit to the Registrant's Form 10-K for 1994 (file No. 0-24100). All previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. *** Filed as an exhibit to the Registrant's Form 10-K for 1995 (file no. 0-24100). All previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. **** Filed as an exhibit to Registration's Form 10-K for 1996 (file no. 0-24100). All previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. 22 EX-5 2 Exhibit 5(a) HOME FEDERAL SAVINGS BANK HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST AMENDMENTS RESOLUTION #9701-04 JANUARY 28, 1997 WHEREAS, Home Federal Savings Bank (the "Bank") currently offers a 401(k) Plan (the "Plan") to its employees, and WHEREAS, the Bank acknowledged Pentegra's Basic Plan Document through the execution of an Adoption Agreement, effective August 1, 1996. This execution amended the existing Plan Document dated January 2, 1992 in its entirety. WHEREAS, the Adoption Agreement is hereby amended as indicated below, effective January 1, 1997: For those employees hired prior to January 1, 1997: 1) the eligibility date will be the 1st of the month following 30 days of employment. 2) the employer match will be calculated monthly and paid annually. For those employees hired on or after January 1, 1997: 1) the eligibility date will be the 1st of the month following 30 days of employment. 2) the employer match will be calculated monthly and paid annually. 3) the vesting schedule relating to the employer match will be a 5 year cliff vesting. NOW THEREFORE BE IT RESOLVED, that the Board of Directors hereby approve the above amendments to the Plan. RESOLVED FURTHER, that a copy of this resolution be given to the Administrator of the Bank's 401(k) Plan and that all participants in the Plan are notified of these amendments. EX-5 3 Exhibit 5(b) Amendment to Adoption Agreement for HOME FEDERAL SAVINGS BANK EMPLOYEES' SAVINGS & PROFIT SHARING PLAN AND TRUST H04 Effective June 17, 1997, the Adoption Agreement for Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust is amended as follows: 1. SECTION VI Investment Funds is replaced by the following Section VI: -------------------------------------------------------- SECTION VI: Investment Funds: The Employer hereby appoints Barclays Global Investors, N.A. to serve as Investment Manager under the Plan. The Employer hereby selects the following Investment Funds to be made available under the Plan (choose whichever shall apply) and consent to the lending of securities by such funds to brokers and other borrowers. 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 or Investment Manager, has any discretionary authority or control with respect to such selection process. The Employer hereby holds Investment Manager harmless from, and indemnifies it against, any liability Investment Manager may incur with respect to such Investment Funds so long as Investment Manager is not negligent and has not breached its fiduciary duties. 1. /x/ S&P 500 Stock Fund 2. /x/ Stable Value Fund 3. /x/ S&P MidCap Stock Fund 4. /x/ Money Market Fund 5. /x/ Government Bond Fund 6. /x/ International Stock Fund 7. /x/ Asset Allocation Funds (3) - Income Plus - Growth & Income - Growth HMN Financial, Inc. 8. /x/ (Name of Employer) Stock Fund (the "Employer Stock Fund") 9. / / (Name of Employer) Certificate of Deposit Fund Note: Investment Funds 6 and 7 above will be implemented on July 2, 1997. 2. SECTION VIII Investment Direction is replaced by the following ------------------------------------------------- Section VIII: ------------ SECTION VIII: Investment Direction/Transfers: 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 B. --- Amounts invested in the Employer Stock Fund may not be transferred to any other Investment Fund. C. A Member may change his or her investment direction (choose 1,2, or 3): 1. / / 1 time per business day. 2. / / 1 time per calendar month. 3. / / 1 time per calendar quarter. D. If a Member fails to make an effective investment direction, the employee's contributions and employer contributions made on the Member's behalf shall be invested in Money Market Fund ----------------- (insert one of the Investment Funds selected in Section VI of this Adoption Agreement). 3. SECTION XV Trustee is replaced by the following Section XV: ----------------------------------------------- SECTION XV: Trustee: The Employer hereby appoints The Bank of New York to serve as Trustee for all Investment Funds under the Plan except the Employer Stock Fund. The Employer hereby appoints the following person or entity to serve as Trustee under the Plan for the Employer Stock Fund.* Name: Bank of New York --------------------------------- Address: ------------------------------ Telephone No: Contact: ------------------------- ---------------------- ---------------------------------------- Signature of Trustee (Required only if the Employer is serving as its own Trustee) * Subject to approval by The Bank of New York, if The Bank of New York is appointed as Trustee for the Employer Stock Fund. 2 The Employer hereby appoints The Bank of New York to serve as Custodian under the Plan for the Employer Stock Fund in the event The Bank of New York does not serve as Trustee for such Trust. EXECUTION OF AMENDMENT TO THE ADOPTION AGREEMENT ------------------------------------------------ Upon execution by the Employer of this Amendment, the Adoption Agreement, as amended, 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. IN WITNESS WHEREOF, the Employer has caused this Amendment to the Adoption Agreement to be executed by its duly authorized officer this 28 day of May, 1997. HOME FEDERAL SAVINGS BANK By: /s/ Roger P. Weise ------------------------- Name: Roger P. Weise ------------------------- Title: President ------------------------- H04 3 EX-10 4 Exhibit 10.1(b) MEMORANDUM TO: Roxanne M. Hellickson FROM: Home Federal Savings Bank DATE: May 20, 1997 RE: Notice of Extension of Employment Contract - ----------------------------------------------------------------- The Board of Directors (the Board) of Home Federal Savings Bank has reviewed your formal performance evaluation performed by selected members of the Board. In connection therewith and pursuant to Section 1 of your contract, on May 20, 1997, the Board determined to extend your employment contract until May 20, 2000. HOME FEDERAL SAVINGS BANK By: /s/ M.F. Schumann ------------------------ M.F. Schumann Director EMPLOYEE ACKNOWLEDGEMENT I hereby acknowledge receipt of this notice of extension of the above-referenced contract and accept the extension of the term of such contract. EMPLOYEE Dated: 7-22-97 By: /s/ Roger P. Weise ------------- -------------------- (Correction from 5-20-97) Roger P. Weise EX-10 5 Exhibit 10.2(b) MEMORANDUM TO: Roxanne M. Hellickson FROM: Home Federal Savings Bank DATE: May 20, 1997 RE: Notice of Extension of Employment Contract - ----------------------------------------------------------------- The Board of Directors (the Board) of Home Federal Savings Bank has reviewed your formal performance evaluation performed by selected members of the Board. In connection therewith and pursuant to Section 1 of your contract, on May 20, 1997, the Board determined to extend your employment contract until May 20, 2000. HOME FEDERAL SAVINGS BANK By: /s/ Roger P. Weise -------------------- Roger P. Weise President and Chief Executive Officer EMPLOYEE ACKNOWLEDGEMENT I hereby acknowledge receipt of this notice of extension of the above-referenced contract and accept the extension of the term of such contract. EMPLOYEE Dated: 7-22-97 By: /s/ James B. Gardner ------------- ---------------------- (Correction from 5-20-97) James B. Gardner EX-10 6 Exhibit 10.3 ===================================== TRUST AGREEMENT by and between HOME FEDERAL SAVINGS BANK and THE BANK OF NEW YORK ===================================== TABLE OF CONTENTS Page ---- SECTION 1 - GENERAL . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . 1 1.2 Compliance With Law . . . . . . . . . . . . . . . 2 SECTION 2 - ESTABLISHMENT OF TRUST . . . . . . . . . . . . 2 2.1 Appointment and Acceptance of Trustee . . . . . . 2 2.2 Trustee Responsibilities . . . . . . . . . . . . 3 2.3 Contribution . . . . . . . . . . . . . . . . . . 3 2.4 Exclusive Benefit . . . . . . . . . . . . . . . . 3 2.5 Return of Contributions . . . . . . . . . . . . . 3 2.6 Distributions . . . . . . . . . . . . . . . . . . 4 SECTION 3 - AUTHORITIES . . . . . . . . . . . . . . . . . . 5 3.1 Authorized Parties . . . . . . . . . . . . . . . 5 3.2 Authorized Instructions . . . . . . . . . . . . . 5 SECTION 4 - INVESTMENT AND ADMINISTRATION OF THE FUND . . . 5 4.1 Investment Funds . . . . . . . . . . . . . . . . 5 4.2 Discretionary Powers and Duties of Trustee . . . 6 4.3 Directed Powers of Trustee . . . . . . . . . . . 8 4.4 Employer Stock . . . . . . . . . . . . . . . . . 10 4.5 Standard of Care . . . . . . . . . . . . . . . . 12 4.6 Force Majeure . . . . . . . . . . . . . . . . . . 12 SECTION 5 - APPOINTMENT AND AUTHORITY OF PENTEGRA . . . . . 12 5.1 Appointment and Delegation . . . . . . . . . . . 12 5.2 Allocation and Investment Directions to . . . . . 12 5.3 Custody of Participant Loan Documents . . . . . . 13 5.4 Designation for Authorized Instructions . . . . . 13 5.5 Resignation or Removal of Pentegra . . . . . . . 13 SECTION 6 - REPORTING AND RECORDKEEPING . . . . . . . . . . 13 6.1 Records and Accounts . . . . . . . . . . . . . . 13 6.2 Non-Fund Assets . . . . . . . . . . . . . . . . . 14 SECTION 7 - COMPENSATION, EXPENSES, TAXES, INDEMNIFICATION 14 7.1 Compensation and Expenses . . . . . . . . . . . . 14 7.2 Tax Obligations . . . . . . . . . . . . . . . . . 15 7.3 Indemnification . . . . . . . . . . . . . . . . . 15 SECTION 8 - AMENDMENT, TERMINATION, RESIGNATION, REMOVAL 16 8.1 Amendment . . . . . . . . . . . . . . . . . . . . 16 8.2 Removal or Resignation of Trustee . . . . . . . . 16 8.3 Property Not Transferred . . . . . . . . . . . . 16 -i- SECTION 9 - ADDITIONAL PROVISIONS . . . . . . . . . . . . . 17 9.1 No Merger, Consolidation or Transfer of Plan Assets or Liabilities . . . . . . . . . . . . . . 17 9.2 Assignment or Alienation . . . . . . . . . . . . 17 9.3 Successors and Assigns . . . . . . . . . . . . . 17 9.4 Governing Law . . . . . . . . . . . . . . . . . . 17 9.5 Necessary Parties . . . . . . . . . . . . . . . . 17 9.6 No Third Party Beneficiaries . . . . . . . . . . 18 9.7 Execution in Counterparts . . . . . . . . . . . . 18 9.8 No Additional Rights . . . . . . . . . . . . . . 18 -ii- TRUST AGREEMENT THIS TRUST AGREEMENT, effective as of June 17, 1997 by and between HOME FEDERAL SAVINGS BANK (the "Company") and THE BANK OF NEW YORK (the "Trustee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to an Adoption Agreement, the Company has adopted a qualified retirement plan for the benefit of its employees and the employees of certain of the Company's affiliates which have heretofore or may hereafter adopt such plan (such plan, as amended from time to time, is referred to herein as the "Plan"); WHEREAS, the Company has established or desires to establish a trust constituting a part of the Plan, pursuant to which assets will be held to provide for the funding of, and payment of benefits under, the Plan (the "Trust"); WHEREAS, the Company desires to appoint the Trustee as trustee of the Trust and the Trustee is willing to accept such appointment; and WHEREAS, the Plan provides for one or more fiduciaries named in the Plan having the power to manage and control the assets of the Plan (the "Named Fiduciary"); NOW, THEREFORE, the Company and the Trustee, each intending to be legally bound, agree as follows: SECTION 1 GENERAL 1.1 DEFINITIONS. The terms used herein shall have the following meanings: (a) "AGREEMENT" means this instrument. including all amendments thereto. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "EMPLOYER" means the Company and any affiliate of the Company which has heretofore adopted, or may hereafter adopt, the Plan. Each 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 and the Named Fiduciary under this Agreement and that the 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 affiliate except by dealing with the Company as agent of such affiliate. (d) "EMPLOYER STOCK" shall mean securities of the Employer which constitute "qualifying employer securities" with respect to the Plan within the meaning of Section 407 of ERISA. (e) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (f) "FUND" means the assets held pursuant to this Agreement as such assets shall exist from time to time. (g) "TAX OBLIGATIONS" means the responsibility for payment of taxes, withholding, certification and reporting requirements, claims for exemptions or refund, interest, penalties and other related expenses of the Fund. 1.2 COMPLIANCE WITH LAW. The Plan and Trust are intended to comply with ERISA and to be tax-exempt under Section 501(a) of the Code. The Company assumes full responsibility to establish and maintain the Plan as a plan meeting the qualification requirements of Section 401(a) of the Code and shall immediately notify the Trustee if the Plan ceases to be qualified. SECTION 2 ESTABLISHMENT OF TRUST 2.1 APPOINTMENT AND ACCEPTANCE OF TRUSTEE. The Company hereby appoints THE BANK OF NEW YORK as Trustee of the Trust with respect to the Fund. The Company shall provide to Trustee a resolution of its Board of Directors (which may include a resolution authorizing one or more officers authorized to act on its behalf) certified by the Secretary or any Assistant Secretary of the Company ("Certified Resolutions") appointing The Bank of New York as Trustee hereunder. The Fund shall consist of all monies and other property acceptable to the Trustee in its sole discretion as may be paid or delivered to the Trustee from time to time, together with any and all increments thereto, proceeds and reinvestments thereof, and income thereon, less payments and distributions therefrom. The Fund shall be held by the Trustee in trust and dealt with in accordance with the provisions of this Agreement without distinction between principal and income. The Trustee hereby accepts its appointment -2- as trustee, acknowledges that it assumes the duties established by this Agreement and agrees to be bound by the terms contained herein. 2.2 TRUSTEE RESPONSIBILITIES. The Trustee shall hold the assets of, and collect the income and make payments from the Fund, all as hereinafter provided. Except to the extent that assets of the Fund have been deposited in a collective investment fund maintained by the Trustee, the Trustee shall not be responsible, directly or indirectly, for the investment or reinvestment of the assets of the Fund, which shall be the sole responsibility of the Named Fiduciary. The Trustee is not a party to, and has no duties or responsibilities under, the Plan other than those that may be expressly contained in this Agreement. As to the responsibilities of the Trustee, in any case in which a provision of this Agreement conflicts with any provision in the Plan, this Agreement shall control. The Trustee shall have no duties, responsibilities or liability with respect to the acts or omissions of any prior trustee. 2.3 CONTRIBUTIONS. The Trustee shall have no authority or duty to determine the adequacy of or enforce the collection of contributions under the Plan, shall not be responsible for the adequacy of the Trust to meet and discharge any liabilities under the Plan and shall have no responsibility for any property until such cash or property is received and accepted by the Trustee. The Employer and the Named Fiduciary shall have the sole duty and responsibility for ensuring the adequacy of the Trust to discharge the liabilities under the Plan, determining the adequacy of the contributions to be made under the Plan, transmitting the contributions to the Trustee and ensuring compliance with any statute, regulation or rule applicable to contributions. 2.4 EXCLUSIVE BENEFIT. Except as may be permitted by law or by the terms of the Plan or this Agreement, at no time prior to the satisfaction of all liabilities with respect to participants and their beneficiaries under the Plan shall any part of the Trust be used for or diverted to any purpose other than for the exclusive benefit of the participants and their beneficiaries. The assets of the Trust shall be held for the exclusive purposes of providing benefits to participants of the Plan and their beneficiaries and defraying the reasonable expenses of administering the Plan and the Trust. 2.5 RETURN OF CONTRIBUTIONS. Notwithstanding any other provision of this Agreement: (i) if a contribution is conditioned upon a favorable determination as to the qualified status of the Plan under Code Section 401 and the Plan receives an adverse determination with respect to its initial qualification, then any such contribution may be returned to the Employer within one year after the date of determination; (ii) a contribution made by the Employer based upon mistake of fact may be returned to the Employer within one year after the date of -3- such contribution; and (iii) if a contribution to the Plan is conditioned upon its deductibility under the Code and a deduction for such a contribution is disallowed, such contribution may be returned to the Employer within one year after the date of the disallowance of such deduction. In the case of the return of a contribution *ue to mistake of fact or the disallowance of a deduction, the amount which may be returned is the excess of the amount contributed over the amount that would have been contributed had there not been a mistake or disallowance. Earnings attributable to the excess contributions may not be returned to the Employer but losses attributable thereto must reduce the amount to be so returned. Any return of contribution made by the Trustee pursuant to this Section shall be made only upon the direction the Named Fiduciary, which shall have exclusive responsibility for determining whether the conditions of such return have been satisfied and for the amount to be returned. 2.6 DISTRIBUTIONS. The Trustee shall make distributions and payments out of the Fund as directed by the Named Fiduciary and amounts distributed or paid pursuant to such direction thereafter no longer shall constitute a part of the Fund. The Named Fiduciary may direct such distributions and payments to be made to any person, including the Named Fiduciary or an Employer, or to any paying agent designated by the Named Fiduciary, in such amounts and in such form (including, without limitation, shares of Employer Stock) and for such purposes as the Named Fiduciary shall direct. Any such order shall constitute a certification that the payment is one the Named Fiduciary is authorized to direct. The Named Fiduciary shall have the exclusive responsibility, and the Trustee shall not have any responsibility or duty under this Agreement, for ensuring that any payment made from the Fund at the direction of the Named Fiduciary does not constitute a diversion of the assets of the Fund and for determining that any such distribution is in accordance with the terms of the Plan and applicable law, including, without limitation, determining the amount, timing or method of payment and the identity of each person to whom such payments shall be made. The Trustee shall have no responsibility or duty to determine the tax effect of any payment or to see to the application of any payment. The Trustee shall not be required to make any payment from the Fund in excess of the net realizable value of the assets of the Fund or to make any payment in cash unless there is sufficient cash in the Fund or the Named Fiduciary has provided written instructions as to the assets to be converted to cash for the purpose of making the distribution. If a dispute arises as to who is entitled to or should receive any benefit or payment, the Trustee may withhold or cause to be withheld such payment until the dispute is resolved. -4- SECTION 3 AUTHORITIES 3.1 AUTHORIZED PARTIES. The Company shall identify the Named Fiduciary to the Trustee and shall furnish the Trustee with a written list of the names, signatures and extent of authority of all persons authorized to direct the Trustee and otherwise act on behalf of the Company under the terms of this Agreement. The Named Fiduciary will provide the Trustee with a written list of the names, signatures and extent of authority of all persons authorized to act on behalf of the Named Fiduciary. The Trustee shall be entitled to rely on and shall be fully protected in acting upon direction from an authorized party until notified in writing by the Company or the Named Fiduciary, as appropriate, of a change of the identity of an authorized party. 3.2 AUTHORIZED INSTRUCTIONS. All directions and instructions to the Trustee from a party who has been authorized to act on behalf of the Company or the Named Fiduciary pursuant to Section 3.1 or from Pentegra (as provided for in Section 5.4) shall be in writing, transmitted by mail or by facsimile or shall be an electronic transmission, provided the Trustee may, in its discretion, accept oral directions and instructions and may require confirmation in writing of any such oral directions and instructions. The Trustee shall be entitled to rely on and shall be fully protected in acting in accordance with all such directions and instructions which the Trustee reasonably believes to have been given by a party who has been authorized to ___ _ behalf of the Company or the Named Fiduciary pursuant to Section 3.1 or by Pentegra (pursuant to Section 5.4) and in failing to act in the absence thereof. SECTION 4 INVESTMENT AND ADMINISTRATION OF THE FUND 4.1 INVESTMENT FUNDS. The Named Fiduciary, from time to time and in accordance with the provisions of the Plan, shall direct the Trustee to establish one or more separate investment accounts under the Trust (each such separate account hereinafter referred to as an "Investment Fund"). The Trustee shall transfer to each such Investment Fund such portion of the assets of the Fund as the Named Fiduciary directs. The assets which have been allocated to an Investment Fund shall be invested and reinvested in accordance with the instructions of the Named Fiduciary, which shall have exclusive responsibility therefor. The Trustee shall be under no duty to question, and shall not incur any liability on account of following, the instructions of the Named Fiduciary, with respect to any Investment Fund or the investment or reinvestment of any assets of the Fund or any Investment Fund, nor to make suggestions to the Named Fiduciary in connection therewith or to determine the compliance of such instructions -5- with the Plan or applicable law, including, without limitation, the requirements of Sections 406 and 407 of ERISA. The Trustee shall not be liable for any losses, costs or expenses (including, without limitation, any opportunity costs) resulting from any investment directions given or omitted by the named Fiduciary and the Trustee shall not be liable for any losses, cost or expenses associated with the investment decisions of the Named Fiduciary, including, without limitation, any losses, costs or expenses associated with the selection of investments by the Named Fiduciary, actual investments directed by the Named Fiduciary and the market risks associated with such selections and directions. If the Trustee is directed to deliver property against payment, the Trustee shall have no liability for non-receipt of such payment. Unless the Trustee is otherwise directed by the Named Fiduciary, all interest, dividends and other income received with respect to, and all proceeds received from the sale or other disposition of, assets of an Investment Fund shall be credited to and reinvested in such Investment Fund, and all expenses of the Fund which are properly allocable to a particular Investment Fund shall be so allocated and charged. Subject to the provisions of the Plan, the Named Fiduciary may direct the Trustee to eliminate an Investment Fund or Funds, and the Trustee thereupon shall dispose of the assets of such Investment Fund or Funds and reinvest the proceeds thereof in accordance with the instructions of the Named Fiduciary. 4.2 DISCRETIONARY POWERS AND DUTIES OF TRUSTEE. Subject to the provisions and limitations contained elsewhere herein, in administering the Trust, the Trustee shall be specifically authorized in its sole administrative discretion to: (a) Appoint subtrustees or depositories, domestic or foreign (including affiliates of the Trustee), as to part or all of the Fund, except that the indicia of ownership of any asset of the Fund shall not be held outside the jurisdiction of the district courts of the United States unless in compliance with Section 404(b) of ERISA and regulations thereunder; (b) Appoint one or more individuals or corporations as a custodian of any property of the Fund and, as part of its reimbursable expenses under this Agreement, to pay the reasonable compensation and expenses of any such custodian; (c) Hold property in nominee name, in bearer form, or in book entry form, in a clearinghouse corporation or in a depository (including an affiliate of the Trustee), so long the Trustee's records clearly indicate that the assets held part of the Fund; (d) Collect income payable to and distributions due to the Fund and sign on behalf of the Trust any declarations, affidavits, certificates of ownership and other documents -6- required to collect income and principal payments, including but not limited to, tax reclamations, rebates and other withheld amounts; (e) Collect proceeds from securities, certificates of deposit or other investments which may mature or be called and surrender such securities at maturity or when called; provided, however, that the Trustee shall not be liable for failure to surrender any security for redemption prior to maturity or take other action if notice of such redemption or other action was not provided to the Trustee by the issuer, the Named Fiduciary or one of the nationally recognized bond or corporate action services to which the Master Trustee subscribes; (f) 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; (g) Submit or cause to be submitted to the Named Fiduciary, on a best efforts basis, all information received by the Trustee regarding ownership rights pertaining to property held in the Fund; (h) Attend to involuntary corporate actions; (i) Determine, or cause to be determined, the fair market value of the Fund daily, or for such other period as may be mutually agreed upon, in accordance with methods consistently followed and uniformly applied; (j) Render periodic statements for property held hereunder; (k) Commence or defend suits or legal proceedings and represent the Fund in all suits or legal proceedings in any court or before any other body or tribunal as the Trustee shall deem necessary to protect the Fund (provided, however, that the Trustee shall have no obligation to take any legal action for the benefit of the Fund unless it shall first be indemnified for all expenses in connection therewith, including without limitation counsel fees); (l) Employ suitable agents and legal counsel, who may be counsel for an Employer, and, as a part of its reimbursable expenses under this Agreement, to pay their reasonable compensation and expenses. The Trustee shall be entitled to rely on and may act upon advice of counsel on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice; (m) Subject to the requirements of applicable law, take all action necessary to settle authorized transactions; -7- (n) Form corporations and 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 the Trustee deems advisable; (o) Make, execute and deliver any and all documents, agreements or other instruments in writing as are necessary or desirable for the accomplishment of any of the powers and duties in this Agreement; and (p) Generally take all action, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the fulfillment of its duties hereunder. 4.3 DIRECTED POWERS OF TRUSTEE. In addition to the powers enumerated in Section 4.2, the Trustee shall have the following powers and authority in the administration of the Fund to be exercised solely as directed by the Named Fiduciary: (a) Invest and reinvest in any securities or other property including Employer Stock, provided that in no case without the consent of the Trustee will the assets of the Fund be invested in assets other than Employer Stock or units of collective investment funds; (b) Settle purchases and sales and engage in other transactions, including free receipts and deliveries, exchanges and other voluntary corporate actions, with respect to securities or other property received by the Trustee; (c) Redeem, transfer or exchange securities of the Fund; sell, exchange, convey, transfer or otherwise dispose of any other property of the Fund; and make, execute and deliver to the purchasers thereof good and sufficient legal documents of conveyance therefor, and all assignments, transfers and other legal instruments, either necessary or convenient for passing the title and ownership of such securities and other property, and no person dealing with the 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 disposition; (d) Deliver notices, prospectuses and proxy statements to the Named Fiduciary, and, subject to Section 4.4, vote in person or by proxy with respect to any securities held by the Trust Fund in accordance with the written directions of the Named Fiduciary; and in accordance with such power, exercise subscription, conversion and other rights and options and make payments incidental thereto and take action or refrain from taking any action with respect to any reorganization, consolidation, merger, dissolution or other recapitalization or refinancing and pay any assessments or charges in connection therewith and delegate discretionary powers with respect thereto; but the Company understands that, where options, tenders or other -8- rights have fixed expiration dates, in order for the Trustee to act, it must receive instructions at its offices, addressed as the Trustee may from time to time request, by no later than noon (N.Y. City 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 Trustee may direct); (e) Hold any part of the Fund in cash or cash balances and the Trustee shall not be responsible for the payment of interest on such balances; (f) Make loans from the Fund to participants in the Plan, which shall be secured by the participants account balance; however, the Named Fiduciary shall have full and exclusive responsibility for loans made to participants, including, without limitation, full and exclusive responsibility for the following: development of procedures and documentation for such loans; acceptance of loan applications; approval of loan applications; disclosure of interest rate information required by Regulation Z of the Federal Reserve Board promulgated pursuant to the Truth in Lending Act, 15 U.S.C. Section 1601 et seq.; ensuring that such loans shall bear a reasonable rate of interest (within the meaning of Regulation Section 2550.408(b)(1) promulgated by the Department of Labor); acting as agent of the Trustee for the physical custody and safekeeping of the promissory notes and other -loan documents; performing necessary and appropriate recordkeeping and accounting functions with respect to loan transactions; enforcement of promissory note terms, including, but not limited to, directing the Trustee to take specified actions to enforce its rights under the documents relating to plan loans, including, without limitation, the occurrence of events of default and maintenance of accounts and records regarding interest and principal payments von notes. The Trustee shall not in any way be responsible for holding or reviewing such documents, records and procedures and shall be entitled to rely upon such information as is provided by the Named Fiduciary or its own sub-agent or recordkeeper without any requirement or responsibility to inquire as to the completeness or accuracy thereof, but may from time to time examine such documents, records and procedures as it deems appropriate. Unless otherwise instructed in writing by the Named Fiduciary, the Trustee shall have no duty or responsibility to 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. The Company shall indemnify and hold the Trustee and its directors, officers and employees harmless from all claims, liabilities, losses, damages, costs and expenses, including reasonable attorneys' fees, arising out of any action or inaction of the Named Fiduciary with respect to its agency responsibilities described herein with respect to participant loans and this indemnification shall survive the termination of this Agreement; (g) Execute proxies for any securities held in the Fund; -9- (h) Deposit cash in interest bearing accounts in the banking department of the Trustee, the Company (provided that the Company meets the requirements of S 408(b)(4) of ERISA) or in affiliated banking organization of the Trustee or the Company; (i) Compromise, compound, settle or arbitrate any claim, debt or obligation due to or from the 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 to abandon any property determined by the Named Fiduciary to be worthless; (j) Invest in any collective investment fund, including any collective investment fund maintained by the Trustee or an affiliate. The Trustee shall have no responsibility for the custody or safekeeping of assets transferred to any collective investment trust not maintained by the Trustee. To the extent that any investment is made in any such collective investment fund, the terms of the collective trust indenture shall solely govern the investment duties, responsibilities and powers of the trustee of such collective investment fund and, to the extent required by law or by such indenture, such terms, responsibilities and powers shall be incorporated herein by reference and shall be a part of this Agreement. For purposes of valuation, the value of the interest maintained by the Fund in any such collective investment fund shall be the fair market value of the collective investment fund units held, determined in accordance with generally recognized valuation procedures. The Company 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 from the borrowers for the lending of securities that is separate from any compensation of the Trustee hereunder, or any compensation of the collective investment fund trustee for the management of such fund; and (k) For the purposes of the Fund, to borrow money from any person or persons, including The Bank of New York, to issue the Fund's promissory note or notes therefor, and to secure the repayment thereof by pledging, mortgaging or otherwise encumbering any property in its possession. 4.4 EMPLOYER STOCK. (a) The Named Fiduciary may direct that all or a portion of the Fund or any Investment Fund be invested in Employer Stock and the Trustee shall act in accordance with any such directions. Except as otherwise required under ERISA, the Trustee shall have no discretionary authority or responsibility to exercise voting rights, or rights in the event of a tender offer, with respect to such Employer Stock but instead shall be subject to the directions of the Named Fiduciary in the exercise of such rights. -10- To the extent that the Plan provides for the voting or tendering of Employer Securities by Plan participants, the Named Fiduciary shall not improperly interfere in any manner regarding the decisions by or directions of any participant with respect to the vote of or response to a tender offer for Employer Securities allocated to the participant's account, and the Named Fiduciary shall arrange for such voting or participant's decision regarding the participant's action with respect to an offer to take place on a confidential basis. The Named Fiduciary will adequately communicate or cause to be communicated to all participants the provisions of the Plan and this Agreement relating to the right of participants with respect to Employer Stock under the Plan. The Company will provide the Named Fiduciary with such information and assistance as the Named Fiduciary 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 Named Fiduciary with respect to Employer Stock, all materials and communications which it provides to other stockholders of the Company in connection with such vote. The 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 such participant. (b) In the event that the Trustee is directed to dispose of any Employer Stock under circumstances which, in the opinion of the 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 Trustee shall not be required to dispose of such securities until such registration and/or qualification are complete and effective, and the 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 Trustee and its officers, directors and employees 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 Trustee's own gross 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. This indemnification shall survive termination of this Agreement. Unless otherwise directed by the Named Fiduciary, any proceeds received by the Trustee as a result of the sale, exchange or transfer of Employer Stock pursuant to a tender offer shall be reinvested in Employer Stock by the Trustee if such security is available for purchase. -11- 4.5 STANDARD OF CARE. The Trustee shall discharge its duties under this Agreement with the care and skill required under ERISA with respect to its duties. The Trustee shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement and shall be held harmless in acting upon any notice, request, direction, instruction, consent, certification or other instrument believed by it to be genuine and delivered by the proper party or parties. The duties of the Trustee shall only be those specifically undertaken pursuant to this Agreement or by separate written agreement. 4.6 FORCE MAJEURE. The Trustee shall not be responsible or liable for any losses to the Fund resulting from nationalization, expropriation, devaluation, seizure, or similar action by any governmental authority, DE FACTO or DE NURE; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, levies or other charges affecting the Fund's property; or acts of war, terrorism, insurrection or revolution; or acts of God; or any other similar event beyond the control of the Trustee or its agents. This Section shall survive the termination of this Agreement. SECTION 5 APPOINTMENT AND AUTHORITY OF PENTEGRA 5.1 APPOINTMENT AND DELEGATION. The Company hereby certifies to the Trustee that Pentegra Services, Inc. ("Pentegra") is the third party administrator appointed by the Named Fiduciary or the Company to receive, cumulate and communicate investment and distribution directions of the participants and beneficiaries of the Plan with respect to the Fund or the Investment Funds, and the Named Fiduciary has delegated such responsibility and authority exclusively to Pentegra. For purposes of this Agreement, Pentegra shall be a delegee of the Named Fiduciary in accordance with Section 405(c)(1)(B) of ERISA. Except as provided in Section 5.5, the Trustee shall act solely on the directions and instructions communicated to the Trustee by Pentegra and the Trustee shall not be liable for any failure to act on any direction or instruction . of any other party. 5.2 ALLOCATION AND INVESTMENT DIRECTIONS TO TRUSTEE. Pentegra shall direct the Trustee with respect to the allocation - of assets to the Investment Funds, transfers among the Investment Funds and investment and reinvestment of the assets of the Fund and each Investment Fund. The Trustee shall have no duty to invest, and shall not be liable for any interest on, any such assets it holds uninvested pending receipt of directions from Pentegra to invest or reinvest assets of the Fund. -12- 5.3 CUSTODY OF PARTICIPANT LOAN DOCUMENTS. Pentegra is further authorized and is hereby appointed by the Named Fiduciary and the Company to act as custodian for the Trustee of all original promissory notes and security agreements which shall be held subject to the order of the Trustee. In the event that such custodianship is terminated by Pentegra, the Named Fiduciary or the Trustee, the Named Fiduciary shall retain the originals of all promissory notes and security agreements as custodian for the Trustee. 5.4 DESIGNATION FOR AUTHORIZED INSTRUCTIONS. Pentegra shall furnish the Trustee with a written list of the names, signatures and extent of authority of all persons authorized to act on behalf of Pentegra. The Trustee shall be entitled to rely on and shall be fully protected in acting upon direction reasonably believed by it to be from an authorized party (or omitting to act in the absence of direction) until notified in writing by Pentegra, of a change in the identity of an authorized party. Directions of an authorized party shall be governed by Section 3.2 of this Agreement. 5.5 RESIGNATION OR REMOVAL OF PENTEGRA. In the event Pentegra resigns or is removed as third party administrator under the Plan, or Pentegra's authority is circumscribed in any manner, the Company shall promptly notify the Trustee of such resignation, removal or circumscription of authority and shall furnish the Trustee with Certified Resolutions identifying the Named Fiduciary and any other persons authorized to assume the duties and responsibilities of Pentegra with respect to the Plan. The Trustee shall not have or be deemed to have any responsibility to assume the functions and duties of Pentegra, shall have no duty or responsibility to invest or reinvest the assets of the Fund and shall not be liable for any losses to the Fund (including any opportunity costs) as a result of its failure to act prior to receiving the foregoing Certified Resolution. SECTION 6 REPORTING AND RECORDKEEPING 6.1 RECORDS AND ACCOUNTS. The Trustee shall keep full and accurate records of all receipts, investments, disbursements, and other transactions hereunder, including such specific records as may be agreed upon in writing between the Company and the Trustee. Within ninety (90) days after the end of each fiscal year of the Trust or within ninety (90) days after its removal or resignation or the termination of this Agreement, the Trustee shall file with the Company a written account of the administration of the Fund showing all transactions effected by the Trustee and all property held by the Fund at its fair market value for the accounting period. If, within ninety (90) days after the Trustee mails such account to the Company, the Company has not given the Trustee written notice of any exception or -13- objection thereto, the statement shall be deemed to have been approved, and in such case, the Trustee shall not be liable for any matters in such statements. Upon prior written notice, the Company or its agent shall have the right at its own expense to inspect the Trustee's books and records directly relating to the Fund during normal business hours. If for any reason the Trustee fails to file an account required of the Trustee within the applicable times specified hereunder, such account shall be filed by the Trustee after the expiration of such time as soon as is reasonably practicable. To the extent that the Trustee shall be required to value the assets of the Fund, the Trustee may rely for all purposes of this Agreement upon any certified appraisal or other form of valuation submitted by the Named Fiduciary, Pentegra, any investment manager or other third party appointed by the Named Fiduciary. Nothing in this Section shall impair Trustee's right to judicial settlement of any account rendered by it. In any such proceeding the only necessary parties shall be the Trustee, the Company and any other party whose participation is required by law, and any judgment, decree or final order entered shall be conclusive on all persons having an interest in the trust. The fiscal year of the Trust shall be the plan year as established under the terms of the Plan. 6.2 NON-FUND ASSETS. The duties of the Trustee shall be limited to the assets held in the Fund, and the Trustee shall have no duties with respect to assets held by any other person including, without limitation, any other trustee for the Plan unless otherwise agreed in writing. The Company hereby agrees that the Trustee shall not serve as, and shall not be deemed to be, a co-trustee under any circumstances. The Named Fiduciary may request the Trustee to perform a recordkeeping service with respect to property held by others and not otherwise subject to the terms of this Agreement. To the extent the Trustee shall agree to perform this service, its sole responsibility shall be to accurately reflect information on its books which it has received from the Named Fiduciary. SECTION 7 COMPENSATION, EXPENSES, TAXES, INDEMNIFICATION 7.1 COMPENSATION AND EXPENSES. The Trustee shall be entitled to compensation for services under this Agreement as mutually agreed by the Company and the Trustee. The Trustee shall also be entitled to reimbursement for reasonable expenses incurred by it in the discharge of its duties under this Agreement. The Trustee is authorized to charge ar,d collect from the Fund any and all such fees and expenses to the extent such fees and expenses are not paid directly by the Company, another Employer or by Pentegra (acting on behalf of the Company or such other Employer). All amounts (including taxes) paid from the Fund which are allocable to an Investment Fund shall be charged to such Investment Fund in accordance with Section 4.1 of this Agreement. All such expenses which are not so allocable shall be charged against each of the Investment Funds in the same proportion as the value of the total assets held in such Investment Fund bears to the value of the total assets in the Fund. To the extent the Trustee advances funds to the Fund for disbursements or to effect the settlement of purchase transactions, the Trustee shall be entitled to collect from the Fund an amount equal to what would have been earned on the sums advanced (an amount approximating the "federal funds" interest rate). 7.2 TAX OBLIGATIONS. To the extent that the Company or Named Fiduciary has provided necessary information to the Trustee, the Trustee shall use reasonable efforts to assist the Company or the Named Fiduciary with respect to any Tax Obligations. The Company or Named Fiduciary shall notify the Trustee of any Tax Obligations. Notwithstanding the foregoing, the Trustee shall have no responsibility or liability for any Tax Obligations now or hereafter imposed on any Employer or the Fund by any taxing authorities, domestic or foreign, except as provided by applicable law. To the extent the Trustee is responsible under any applicable law for any Tax Obligation, the Company or the Named Fiduciary shall inform the Trustee of all Tax Obligations, shall direct the Trustee with respect to the performance of such Tax Obligations, and shall provide the Trustee with all information required by the Trustee to meet such Tax Obligations. All such tax Obligations shall be paid from the Fund unless paid by the Company or another Employer. 7.3 INDEMNIFICATION. The Company shall indemnify and hold harmless the Trustee and its directors, officers and employees from all claims, liabilities, losses, damages and expenses, including reasonable attorneys' fees and expenses, incurred by the Trustee in connection with this Agreement, except those resulting from the Trustee's gross negligence, bad faith or willful misconduct. This indemnification (as well as any other indemnification in this Agreement) shall survive the termination of this Agreement. If the Trustee is acting as a successor trustee or succeeds to responsibilities hereunder for trusteeship of plan assets with respect to the Fund (or any portion thereof), the Company hereby agrees to hold the Trustee 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 Fund assets with investment responsibility with respect to such assets, except for such taxes, claims, liabilities, losses, -15- damages or expenses attributable to the Trustee's own gross negligence, bad faith or willful misconduct. SECTION 8 AMENDMENT, TERMINATION, RESIGNATION, REMOVAL 8.1 AMENDMENT. This Agreement may be amended by written agreement signed by the Company and the Trustee. This Agreement may be terminated at any time by the Company by written instrument delivered to the Trustee. Thereafter, the Trustee shall distribute all assets of the Fund, less any fees and expenses payable from the Fund with respect to the Plan, pursuant to instructions of the Named Fiduciary. The Trustee may condition its delivery, transfer or distribution of any assets upon the Trustee's receiving assurances reasonably satisfactory to it that the approval of appropriate governmental or other authorities has been secured and that all notices and other procedures required by applicable law have been complied with. The Trustee shall be entitled to assume that such distributions are in full compliance with and not in violation of the terms of the Plan or any applicable law. 8.2 REMOVAL OR RESIGNATION OF TRUSTEE. The Trustee may be removed with respect to all or part of the Fund upon receipt of sixty (60) days' written notice (unless a shorter or longer period is agreed upon) from the Company. The Trustee may resign as Trustee hereunder upon sixty (60) days' written notice (unless a shorter or longer period is agreed upon) delivered to the Company. In the event of such removal or resignation, a successor trustee will be appointed and the retiring Trustee shall transfer the Fund, less such amounts as may be reasonable and necessary to cover its compensation and expenses. In the event the Company fails to appoint a successor trustee within sixty (60) days of receipt of written notice of resignation, the Trustee reserves the right to seek the appointment of a successor trustee from a court of competent jurisdiction. The Trustee shall have no duties, responsibilities or liability with respect to the acts or omissions of any successor : 8.3 PROPERTY NOT TRANSFERRED. The Trustee reserves the right to retain such property as is not suitable for distribution or transfer at the time of the termination of a Plan or this Agreement and shall hold such property for the benefit of those persons or other entities entitled to such property until such time as the Trustee is able to make distribution. Upon the . appointment and acceptance of a successor trustee, the Trustee's sole duties shall be those of a custodian with respect to any property not transferred to the successor trustee. -16- SECTION 9 ADDITIONAL PROVISIONS 9.1 NO MERGER, CONSOLIDATION OR TRANSFER OF PLAN ASSETS OR LIABILITIES. Notwithstanding anything to the contrary contained herein, no merger, consolidation or transfer of the assets or liabilities of the Plan with or to any other plan shall be permitted, except in compliance with the provisions of ERISA and the Code which are applicable to such mergers, consolidations or transfers, including, without limitation, Sections 208 and 4043(b)(8) of ERISA and-Sections 401(a)-(12), 414(1) and 6058(b) of the Code, and the regulations thereunder. 9.2 ASSIGNMENT OR ALIENATION. Except as may be required by law or permitted by the Plan, the Fund shall not be subject to any form of attachment, garnishment, seauestration or other actions of collection afforded creditors of the Employer, participants or beneficiaries under the Plan. The Trustee shall not recognize any permitted assignment or alienation of benefits unless directed to do so by the Named Fiduciary or required to do so by applicable law. 9.3 SUCCESSORS AND ASSIGNS. Neither the Company nor the Trustee may assign this Agreement without the prior written consent of the other, except that the Trustee may assign its rights and delegate its duties hereunder to any corporation or entity which directly or indirectly is controlled by, or is under common control with, the Trustee. This Agreement shall be binding upon, and inure to the benefit of, the Company and the Trustee and their respective successors and permitted assigns. Any entity which shall by merger, consolidation, purchase, or 'otherwise, succeed to substantially all the trust business of the Trustee shall, upon such succession and without any appointment or other action by the Company, be and become successor trustee hereunder, upon notification to the Company. 9.4 GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of New York (without giving effect to conflict of law principles thereof) to the extent not preempted by Federal law. 9.5 NECESSARY PARTIES. The Trustee reserves the right to seek a judicial or administrative determination as to its proper course of action under this Agreement. Nothing contained herein will be construed or interpreted to deny the Trustee or the Company the right to have the Trustee's account judicially determined. To the extent permitted by law, only the Trustee and the Company shall be necessary parties in any application to the courts for an interpretation of this Agreement or for an accounting by the Trustee, and no participant or beneficiary under the Plan or other person having an interest in the Fund shall be entitled to any notice or service of process. Any final -17- judgment entered in such an action or proceeding shall, to the extent permitted by law, be conclusive upon all persons. 9.6 NO THIRD PARTY BENEFICIARIES. The provisions of this Agreement are intended to benefit only the parties hereto, their respective successors and assigns, and participants and their beneficiaries under the Plan. There are no other third party beneficiaries. 9.7 EXECUTION LN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and-said counterparts shall constitute but one and the same instrument and may be sufficiently evidenced by one counterpart. 9.8 NO ADDITIONAL RIGHTS. Neither the establishment of the Fund nor this Agreement shall be considered as giving any Plan participant or any other person any legal or equitable rights against the Employer, the Named Fiduciary, the Trustee or the assets, whether corpus or income, of the Fund unless such right is specifically provided for in this Agreement or the Plan, nor shall it be considered as giving any Plan participant or other employee of the Employer the right to continue in the service of the Employer in any capacity. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the effective date set forth above. Authorized Signer of: HOME FEDERAL SAVINGS BANK THE BANK OF NEW YORK By: /s/ Roger P. Weise By: /s/ Betty A. Good Name: Roger P. Weise Name: Betty A. Good Title: President/CEO Title: Vice President Date: 5/28/97 -18- EX-11 7 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 Three Months Ended Six Months Ended of Operations: June 30, June 30, 1997 1996 1997 1996 - ---------------------------- ---------- ----------- ----------- ----------- Net income $ 1,332,220 1,533,084 2,806,700 3,119,775 ---------- ----------- ----------- ----------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,730,435 4,524,242 3,743,989 4,621,008 Dilutive effect of stock option plans after application of treasury stock method 184,867 56,550 177,466 52,498 ---------- ----------- ----------- ----------- 3,915,302 4,580,792 3,921,455 4,673,506 ---------- ----------- ----------- ----------- Earnings per common share and common share equivalents $ 0.34 0.34 0.72 0.67 ========== =========== =========== =========== Computation of Fully Diluted Earnings Per Common Share and Common Share Equivalent - ---------------------------- Net income $ 1,332,220 1,533,084 2,806,700 3,119,775 ---------- ----------- ----------- ----------- Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,730,435 4,524,242 3,743,989 4,621,008 Dilutive effect of stock option plans after application of treasury stock method 212,618 76,734 212,433 76,734 ---------- ----------- ----------- ----------- 3,943,053 4,600,976 3,956,422 4,697,742 ---------- ----------- ----------- ----------- Fully diluted earnings per common share and common share equivalents $ 0.34 0.33 0.71 0.66 ========== =========== ============ ==========
EX-27 8
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND DECEMBER 31, 1996 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000921183 HMN FINANCIAL, INC. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1,405 10,165 0 0 0 0 0 347,996 2,479 566,865 365,385 45,429 5,318 68,935 0 0 61 81,737 566,865 13,791 6,109 170 20,069 9,244 12,322 7,748 150 385 4,241 4,460 0 0 0 2,807 .72 .71 7.46 374 0 0 86 2,341 19 7 2,479 1,284 0 1,195
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