-----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, K7YzI6IVnsY8kELs51M8oPlN4lFjXX6IIIDz7JxEji1iXr9FJEV9kgTMEvg7uHx5 FNZqJWUxk2l7Yaz2acQvBA== 0000921183-97-000038.txt : 19971117 0000921183-97-000038.hdr.sgml : 19971117 ACCESSION NUMBER: 0000921183-97-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-24100 FILM NUMBER: 97717692 BUSINESS ADDRESS: STREET 1: 101 N BROADWAY CITY: SPRING VALLEY STATE: MN ZIP: 55975-1223 BUSINESS PHONE: 5073467345 10-Q 1 FORM 10-Q UNITED STATES 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 September 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 November 1, 1997 Common stock, .01 par value 4,183,436 This Form 10-Q consists of 27 pages. The exhibit index is on page 24. 1 HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page ---- Item 1:Financial Statements (unaudited) Consolidated Balance Sheets at September 30, 1997 and December 31, 1996 . . . 3 Consolidated Statements of Income for the Three Months Ended and Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . 4 Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended September 30, 1997 . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . 7 Item 2:Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . .12 PART II - OTHER INFORMATION Item 1:Legal Proceedings. . . . . . . . . . . . . . .22 Item 2:Changes in Securities. . . . . . . . . . . . .22 Item 3:Defaults Upon Senior Securities. . . . . . . .22 Item 4:Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . .22 Item 5:Other Information. . . . . . . . . . . . . . .22 Item 6:Exhibits and Reports on Form 8-K . . . . . . .22 Signatures. . . . . . . . . . . . . . . . . . . . . .23 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
September 30, December 31, Assets 1997 1996 ------------------------------- Cash and cash equivalents $ 9,635,956 10,583,717 Securities available for sale: Mortgage-backed and related securities (amortized cost $111,030,951 and $134,474,167) 111,117,282 133,355,278 Other marketable securities (amortized cost $71,405,849 and $42,360,499) 72,815,033 42,474,810 ------------ ------------ 183,932,315 175,830,088 ------------ ------------ 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 2,089,733 739,316 Loans receivable, net 352,925,376 349,022,236 Federal Home Loan Bank stock, at cost 6,236,700 5,434,000 Real estate, net 89,334 20,610 Premises and equipment, net 4,230,723 3,581,497 Accrued interest receivable 3,180,525 3,415,152 Prepaid expenses and other assets 6,526,233 3,299,427 ------------ ------------ Total assets $568,846,895 554,731,599 ============ ============ Liabilities and Stockholders' Equity Deposits $366,682,349 362,476,944 Federal Home Loan Bank advances 112,007,163 106,078,589 Accrued interest payable 1,147,269 1,542,773 Advance payments by borrowers for taxes and insurance 758,067 518,911 Accrued expenses and other liabilities 3,632,564 2,014,938 ------------ ------------ Total liabilities 484,227,412 472,632,155 ------------ ------------ Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; Issued and outstanding none 0 0 Common stock ($.01 par value): authorized shares 7,000,000; issued shares 6,085,775 60,858 60,858 Additional paid-in capital 59,702,833 59,428,768 Retained earnings, subject to certain restrictions 58,976,197 54,645,387 Net unrealized gain (loss) on securities available for sale 967,170 (598,045) Unearned employee stock ownership plan shares (4,650,340) (4,938,520) Unearned compensation restricted stock awards (658,817) (793,289) Treasury stock, shares at cost 1,873,939 and 1,651,615 (29,778,418) (25,705,715) ------------ ------------ Total stockholders' equity 84,619,483 82,099,444 ------------ ------------ Total liabilities and stockholders' equity $568,846,895 554,731,599 ============ ============
See accompanying notes to consolidated financial statements. 3 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ------------------------- --------------------- Interest Income: Loans receivable $6,939,224 6,461,279 20,730,094 19,009,335 Securities available for sale: Mortgage-backed and related 2,092,964 2,429,330 6,458,996 7,730,690 Other marketable 1,119,452 669,964 2,621,762 1,655,705 Securities held to maturity: Mortgage-backed and related 0 196,050 33,400 719,827 Other marketable 0 14,250 10,032 90,103 Cash equivalents 55,643 149,819 225,237 315,623 Other 107,187 93,823 304,158 232,453 ---------- ---------- ---------- ---------- Total interest income 10,314,470 10,014,515 30,383,679 29,753,736 ---------- ---------- ---------- ---------- Interest expense: Deposits 4,749,737 4,741,907 13,993,332 14,281,156 Federal Home Loan Bank advances 1,714,642 1,449,492 4,792,552 3,739,015 ---------- ---------- ---------- ---------- Total interest expense 6,464,379 6,191,399 18,785,884 18,020,171 ---------- ---------- ---------- ---------- Net interest income 3,850,091 3,823,116 11,597,795 11,733,565 Provision for loan losses 75,000 75,000 225,000 225,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 3,775,091 3,748,116 11,372,795 11,508,565 ---------- ---------- ---------- ---------- Non-interest income: Fees and service charges 121,489 94,817 318,346 254,188 Securities gains, net 487,547 192,761 872,159 961,798 Gain on sales of loans 117,302 9,896 334,367 16,980 Other 152,230 114,957 457,786 365,879 ---------- ---------- ---------- ---------- Total non-interest income 878,568 412,431 1,982,658 1,598,845 ---------- ---------- ---------- ---------- Non-interest expense: Compensation and benefits 1,431,853 1,175,725 4,106,699 3,380,843 Occupancy 245,202 203,071 718,801 595,216 Federal deposit insurance premiums 57,478 212,020 175,379 636,676 SAIF assessment 0 2,351,563 0 2,351,563 Advertising 62,763 77,696 214,557 229,735 Data processing 129,100 118,949 372,432 368,145 Provision for real estate losses 0 0 3,000 0 Other 302,449 255,808 879,375 799,710 --------- ---------- --------- --------- Total non-interest expense 2,228,845 4,394,832 6,470,243 8,361,888 --------- ---------- --------- --------- Income (loss) before income tax expense 2,424,814 (234,285) 6,885,210 4,745,522 Income tax (benefit) expense 900,703 (89,758) 2,554,400 1,770,274 --------- --------- --------- --------- Net income (loss) $ 1,524,111 (144,527) 4,330,810 2,975,248 ========= ========= ========= ========= Primary earnings (loss) per common share and common share equivalents $ 0.38 (0.03) 1.10 0.66 ==== ==== ==== ==== Fully diluted earnings (loss) per common share and common share equivalents $ 0.38 (0.03) 1.09 0.66 ==== ==== ==== ====
See accompanying notes to consolidated financial statements. 4 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Nine Month Period Ended September 30, 1997 (unaudited)
Net Unrealized Gain (Loss) Additional on Securities Common Paid-in Retained Available for Stock Capital Earnings Sale -------------------------------------------------- Balance, December 31, 1996 $ 60,858 59,428,768 54,645,387 (598,045) Net income 4,330,810 Change in unrealized gain on securities available for sale 1,490,289 Unrealized gain on equity investments 74,926 Treasury stock purchases Amortization of restricted stock awards Recognition and retention awards granted 2,250 Employee stock options exercised (46) Restricted stock awards tax benefit 61,092 Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 207,239 ------- ---------- ---------- -------- Balance, September 30, 1997 $ 60,858 59,702,833 58,976,197 967,170 ======= ========== ========== ======== 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 4,330,810 Change in unrealized gain on securities available for sale 1,490,289 Unrealized gain on equity investments 74,926 Treasury stock purchases (4,109,637) (4,109,637) Amortization of restricted stock awards 173,472 173,472 Recognition and retention awards granted (39,000) 36,750 0 Employee stock options exercised 184 138 Restricted stock awards tax benefit 61,092 Employee stock option plan tax benefit 3,530 Earned employee stock ownership plan shares 288,180 495,419 ---------- --------- ---------- ---------- Balance, September 30, 1997 $(4,650,340) (658,817) (29,778,418) 84,619,483 ========== ======== ========== ==========
See accompanying notes to consolidated financial statements. 5 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1997 1996 ------------------------------ Cash flows from operating activities: Net income. $ 4,330,810 2,975,248 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses . . . . . . . 225,000 225,000 Provision for real estate losses. . . . 3,000 0 Depreciation. . . . . . . . . . . . . . 314,248 277,043 Amortization of (discounts) premiums, net (175,404) (49,327) Amortization of deferred loan fees. . . (297,964) (334,698) Provision for deferred income taxes . . 294,750 190,224 Securities gains, net . . . . . . . . . (872,159) (961,798) Gain on sales of real estate. . . . . . (3,743) (46,625) Gain on sales of loans. . . . . . . . . (334,640) (16,980) Proceeds from sales of loans held for sale..8,267,102 943,096 Amortization of restricted stock awards 173,472 173,874 Amortization of unearned ESOP shares. . 288,180 298,240 BIF/SAIF special assessment . . . . . . 0 2,351,563 Earned employee stock ownership shares priced above original cost . . . . . . 207,238 96,205 Decrease in accrued interest receivable 234,627 96,650 Decrease in accrued interest payable. . (395,504) (41,371) Equity earnings of limited partnerships (179,596) 0 Increase in other assets. . . . . . . . (133,526) (81,461) Increase (decrease) in other liabilities. . .377,696 (874,954) Other, net. . . . . . . . . . . . . . . 20,721 (54,335) ---------- ----------- Net cash provided by operating activities 12,344,308 5,165,594 ---------- ----------- Cash flows from investing activities: Proceeds from sales of securities available for sale. 63,095,246 78,362,250 Principal collected on securities available for sale. 10,496,126 13,375,740 Proceeds collected on maturity of securities available for sale. . . . . . . . . . . 27,618,412 5,500,000 Purchases of securities available for sale (95,055,935) (81,008,115) Proceeds from sales of securities held to maturity. . . . . . . . . . . . . . . 348,871 0 Principal collected on securities held to maturity. . . . . . . . . . . . . . . 240,441 1,336,500 Proceeds collected on maturity of securities held to maturity . . . . . . . . . . . . 1,000,000 12,652,343 Purchase of securities held to maturity . 0 (709,765) Proceeds from sales of loans receivable . 28,977,687 154,612 Purchase interest in mortgage servicing rights. (400,008) 0 Purchase interest in limited partnerships (2,438,750) 0 Purchase of Federal Home Loan Bank stock. (802,700) (1,396,900) Net increase in loans receivable. . . . . (51,707,248) (34,186,011) Proceeds from sale of real estate . . . . 35,627 379,789 Purchases of premises and equipment . . . (963,474) (175,560) ---------- ---------- Net cash used by investing activities. (19,555,705) (5,715,117) ---------- ---------- Cash flows from financing activities: Increase (decrease) in deposits . . . . . 4,205,405 (9,576,370) Purchase of treasury stock. . . . . . . . (4,109,637) (9,966,878) Stock options exercised . . . . . . . . . 138 4,833 Proceeds from Federal Home Loan Bank advances121,500,000 108,800,000 Repayment of Federal Home Loan Bank .advances (115,571,426) (75,844,423) Increase in advance payments by borrowers for taxes and insurance. . . . . . . . . 239,156 194,038 ----------- ---------- Net cash provided by financing activities. .6,263,636 13,611,200 ----------- ---------- Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . (947,761) 13,061,677 Cash and cash equivalents, beginning of period . 10,583,717 4,334,694 ----------- ---------- Cash and cash equivalents, end of period . .$ 9,635,956 17,396,371 =========== ========== Supplemental cash flow disclosures: Cash paid for interest. . . . . . . . . .$ 18,390,380 18,061,542 Cash paid for income taxes. . . . . . . . 2,255,500 2,725,433 Supplemental noncash flow disclosures: Loans securitized and transferred to securities available for sale . . . . .$ 9,608,294 15,419,810 Loans purchased with liability due to broker 0 11,000,000 Securities held to maturity transferred to securities available for sale. . . . 1,295,147 0 Loans transferred to loans held for sale. 28,868,154 0 Transfer of loans to real estate. . . . . 188,776 168,187 Transfer of real estate to loans. . . . . 84,772 161,953 Securities purchased with asset due from broker . . . .0 384,228
See accompanying notes to consolidated financial statements. 6 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) September 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 nine month period ended September 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. In 1997, under SFAS No. 128, basic EPS differed from primary EPS by $(0.01) to $0.03 per share and diluted EPS was equal to or $(0.01) per share less than fully diluted EPS. When similar comparisons were made from 7 the basic EPS and diluted EPS calculations to previously reported year-to-date primary EPS and fully diluted EPS, the basic EPS calculations for the same periods ranged from $0.00 to $0.07 per share greater than primary EPS and diluted EPS for the same periods ranged from $0.00 to $0.01 per share greater than fully diluted EPS. 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 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 will be adopting SFAS No. 130 on January 1, 1998 and will report comprehensive income in statements issued after that date. 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 segment'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. 8 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 September 30, 1997 and 1996 were computed by dividing net income (loss) for each period ($1,524,111 and $(144,527), respectively) by the weighted average common shares and common share equivalents outstanding (3,972,494 and 4,185,867, respectively) during each period. Fully diluted earnings per common share and common share equivalents for the three months ended September 30, 1997 and 1996 were computed by dividing net income (loss) for the period ($1,524,111 and $(144,527), respectively) by the weighted average common shares and fully diluted common share equivalents outstanding (3,975,798 and 4,185,867, respectively) during each period. Primary earnings per common share and common share equivalents for the nine month periods ended September 30, 1997 and 1996 were computed by dividing net income for each period ($4,330,810 and $2,975,248, respectively) by the weighted average common shares and common share equivalents outstanding (3,938,454 and 4,509,942, respectively) during each period. Fully diluted earnings per common share and common share equivalents for the nine months ended September 30, 1997 and 1996 were computed by dividing net income for the period ($4,330,810 and $2,975,248, respectively) by the weighted average common shares and fully diluted common share equivalents outstanding (3,977,962 and 4,516,499, respectively) during each period. (6) SAIF ASSESSMENT On September 30, 1996, President Clinton signed the Savings Association Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The Bank's assessment by the SAIF was a one time charge of $2,351,563. The impact of the assessment reduced earnings for 1996 by approximately $1.5 million after tax. (7) REGULATORY CAPITAL 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. 9 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 September 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 September 30, 1997 and other conditions consistent with the Prompt Corrective Actions Provisions of the Office of Thrift Supervision (OTS) regulations, the Bank would be categorized as well capitalized. At September 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(1) Amount Assets (1) ---------- ---------- ---------- ----------- Bank stockholder's equity $ 58,591 Less: Net unrealized loss (gain) on certain securities available for sale (199) Excess mortgage servicing rights 542 ------- Tangible capital 57,850 10.68% $8,124 1.50% ------- Tangible capital to adjusted total assets 10.68% Core capital (Tier I) 57,850 10.68% 16,247 3.00% Tier I capital to risk- weighted assets 23.58% Plus: Allowable allowance for loan losses 2,553 ------- Risk-based capital $60,403 24.62% $19,627 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 --------------------- ----------------------- (in thousands) Percent of Percent of Amount Assets(1) Amount Assets(1) ------------------------------------------------ Bank stockholder's equity Less: Net unrealized loss (gain) on certain securities available for sale Excess mortgage servicing rights Tangible capital $49,726 9.18% Tangible capital to adjusted total assets $ 27,078 5.00% Core capital (Tier I) 41,603 7.68% Tier I capital to risk- weighted assets 14,720 6.00% Plus: Allowable allowance for loan losses Risk-based capital $40,776 16.62% $24,533 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. (8) STOCKHOLDER'S 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. 10 (9) 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, a process that is expected to be completed by November 30, 1997. At September 30, 1997, MFC's consolidated balance sheet had total assets of $125.5 million of which $66.2 million were in loans receivable, net and $52.6 million were investment securities or mortgage-backed securities. MFC's deposits totaled $103.7 million and stockholders' equity totaled $20.3 million. 11 HMN FINANCIAL, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL HMN's net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and the interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between the yield earned on interest- earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. HMN's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net interest margin is calculated by dividing net interest income by the average interest-earning assets and is normally expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. HMN's net income is also affected by the generation of non-interest income, which primarily consists of gains from the sale of securities, fees and service charges. In addition, net income is affected by the level of operating expenses and establishment of a provision for loan losses. The operations of financial institutions, including the Bank, are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of personal income and savings in the market area of the Bank. NET INCOME (LOSS) HMN's net income for the third quarter of 1997 was $1.5 million, or $0.38 primary earnings per share, an increase of $1.67 million, compared to a net loss of $(145,000), or $(0.03) primary loss per share for the same quarter of 1996. In September of 1996, Congress enacted the Savings Association Insurance Fund (SAIF) legislation in order to recapitalize the SAIF. The Bank's one time charge was $2.4 million. The Bank's total SAIF assessment was charged directly to earnings and reduced quarterly earnings by $1.5 million after tax, or $0.34 primary earnings per share. If the SAIF legislation had not passed, net income for the third quarter of 1996 would have been $1.3 million, or $0.31 primary earnings per share. Non-interest income for the third quarter of 1997 was up $466,000 primarily due to gains recognized on the sale of securities and loans and was partially offset by a $186,000 increase in non-interest expense primarily related to compensation and benefits. Net income for the nine month period ended September 30, 1997 was $4.33 million, or $1.10 primary earnings per share, an increase of $1.35 million from $2.98 million, or $0.66 primary earnings per share. The SAIF assessment in September of 1996 had the impact of decreasing net income for the nine months then 12 ended by $1.5 million after tax, or $0.32 primary earnings per share. If the SAIF legislation had not passed, net income for the nine months ended September 30, 1996 would have been $4.5 million or $0.98 primary earnings per share. Non-interest income for the nine month period ended September 30, 1997 was up $384,000 primarily due to gains recognized on the sale of loans and was totally offset by a $460,000 net increase in non-interest expense primarily due to increases in compensation and benefits. NET INTEREST INCOME Net interest income for the third quarter of 1997 was $3.85 million, an increase of $27,000 compared to $3.82 million for the same quarter of 1996. Interest income for the third quarter of 1997 was $10.3 million, an increase of $300,000, or 3.0%, compared to $10.0 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 or advances from the Federal Home Loan Bank (FHLB). Interest income increased by $293,000 due to an increase in the size of the loan portfolio, and it increased by $185,000 due to an increase of the yield earned on the loan portfolio. The increase in interest income was partially offset by a $97,000 decrease in interest income earned on the security portfolio due to a decrease in the average portfolio size and a decrease in yield. Interest expense for the third quarter of 1997 was $6.5 million, an increase of $273,000, or 4.4%, compared to $6.2 million for the third quarter of 1996. The increase in interest expense was primarily due to an $18.0 million increase in the average outstanding advances from the FHLB for the third quarter of 1997 compared to the same quarter of 1996. Net interest income for the nine months ended September 30, 1997 was $11.6 million, a decrease of $136,000, or 1.2%, compared to $11.7 million for the same nine month period of 1996. Interest income for the nine months ended September 30, 1997 was $30.4 million, an increase of $630,000, or 2.1%, compared to $29.8 million for the same nine month 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 or advances from the FHLB. Interest income increased by $1.5 million due to an increase in the size of the loan portfolio and it increased by $189,000 due to an increase of the yield earned on the loan portfolio. The increase in interest income was partially offset by a $1.1 million decrease in interest earned on the security portfolio primarily due to a decrease in the average portfolio size. Interest expense for the nine months ended September 30, 1997 was $18.8 million, an increase of $766,000, or 4.3%, compared to $18.0 million for the same nine month period of 1996. The increase in interest expense was primariy due to a $25.0 million increase in the average outstanding advances from the FHLB for the nine month period of 1997 compared to the same period of 1996. The majority of the funds received from the FHLB advances were used to purchase the net increase in interest- earning assets, facilitate the HMN stock repurchases, and purchase loan servicing assets. PROVISION FOR LOAN LOSSES The provision for loan losses for the third quarters ended September 30, 1997 and 1996 were both $75,000. The provision for loan losses for the nine months ended September 30, 1997 and 1996 were both $225,000. The provision is the result of management's 13 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. For the nine months ended September 30, 1997 and 1996, HMN incurred the following charge-offs on its loan portfolio: 1997 1996 1-4 Family $ 3,500 0 Commercial 12,300 61,329 Multi-family residential 0 87,591 Consumer 3,777 1,216 Total $ 19,577 150,136 The charge-offs were anticipated and resulted in the removal of the properties from the loan portfolio. 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 225,000 225,000 Charge-offs (19,577) (150,136) Recoveries 7,500 57 Balance at September 30, $ 2,553,508 2,265,585 NON-INTEREST INCOME Non-interest income was $879,000 for the third quarter of 1997, an increase of $467,000, or 113%, compared to $412,000 for the third quarter of 1996. The increase was principally due to a $295,000 increase in gain on the sale of securities and a $107,000 increase in gain on sale of loans. Economic and certain market conditions allowed HMN to sell securities at a gain during the third quarter of 1997. Those same conditions were not in existence during the third quarter of 1996. The increase in the gain on sale of loans was partly due to the economic and market conditions and also an increase in mortgage banking activity for the third quarter of 1997, compared to the same quarter of 1996. Non-interest income for the nine months ended September 30, 1997 was $2.0 million, an increase of $384,000, or 24%, compared to $1.6 million for the nine months ended September 30, 1996. The increase was principally due to a $317,000 increase in gain on the sale of loans, a $64,000 increase in fees and service charges and a $92,000 increase in other income. The increase in non-interest income was partially offset by a $90,000 decrease in gain on sale of securities. 14 NON-INTEREST EXPENSE Non-interest expense was $2.2 million for the third quarter of 1997, a decrease of $2.2 million from $4.4 million for the third quarter of 1996. The majority of the decrease in non-interest expense was due to a $2.4 million special one time SAIF assessment that occurred in September of 1996 and a related $155,000 decrease in 1997 SAIF insurance premiums. The decrease in quarterly non-interest expense was partially offset by a $256,000 increase in compensation and benefits expense and a $42,000 increase in occupancy expense. During 1997, HMN increased its mortgage banking activities which required additional staff and increased occupancy expense. A portion of the increase in compensation and benefits expense is due to a net increase of 21 employees from the third quarter of 1996 to the third quarter of 1997 and the remainder is the result of normal merit and salary increases. Non-interest expense for the nine months ended September 30, 1997 was $6.5 million, a decrease of $1.9 million, or 23%, from $8.4 million for the nine months ended September 30, 1996. The majority of the decrease in non- interest expense was due to a $2.4 million special one time SAIF assessment that occurred in September of 1996 and a related $461,000 decrease in 1997 SAIF insurance premiums. The decrease in non-interest expense was partially offset by a $726,000 increase in compensation and benefits expense and a $124,000 increase in occupancy expense. During 1997, HMN increased its mortgage banking activities which required additional staff and increased occupancy expense. A portion of the increase in compensation is due to a net increase in employees during 1997 and the remainder is the result of normal merit and salary increases. INCOME TAX EXPENSE Income tax expense was $901,000 for the third quarter of 1997, an increase of $990,000 from a tax benefit of $90,000 for the third quarter of 1996 and is primarily due to an increase in taxable income. Income tax expense for the nine months ended September 30, 1997 was $2.6 million, an increase of $784,000, or 44%, from $1.8 million for the same period in 1996 and is primarily due to an increase in taxable income. LIQUIDITY For the nine months ended September 30, 1997, the net cash provided from operating activities was $12.3 million and net cash used by investing activities was $19.6 million. For the same period, HMN had $63.4 million in proceeds from the sale of securities and it collected another $39.4 million from principal payments and the maturity of securities. HMN purchased $95.1 million of securities during the first nine months of 1997. HMN also received proceeds from the sale of loans of $29.0 million and purchased or originated additional net loans of $51.7 million. During the first nine months of 1997, HMN purchased an additional interest in a mortgage servicing partnership for $1.9 million and purchased $400,000 in mortgage servicing assets. It invested $500,000 in a partnership which invests in the stock of other financial institutions. The Bank purchased $803,000 of FHLB stock in order to meet its stock requirement under its membership agreement. It also invested $963,000 in premises and equipment. During the first nine months of 1997, deposits increased by $4.2 million and Federal Home Loan Bank 15 advances showed a net increase of $5.9 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 $183.8 million maturing during the next 12 months. Based upon past experience, management anticipates that the majority of the deposits will renew for the same or similar terms. Any funds lost from deposits which do not renew will be replaced with deposits from other customers, advances from the FHLB , or the sale of securities. Management does not anticipate that it will have a liquidity problem resulting from maturing deposits. *HMN 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. On November 7, 1997 the transaction was approved by the stockholders of Marshalltown Financial Corporation. The Office of Thrift Supervision must approve the transaction. It is currently reviewing the proposed transaction and should render its opinion by the end of November. HMN expects to fund the purchase of the Marshalltown stock from the proceeds of the sale of securities available for sale or by additional FHLB advances. *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 and third quarter of 1998 and construction funding will come from normal cash flows or the sale of securities. *This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 20 of this discussion. 16 NON-PERFORMING ASSETS The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at September 30, 1997 and December 31, 1996. September 30, December 31, 1997 1996 -------------- ---------------- (Dollars in Thousands) Non-Accruing Loans One-to-four family real estate $175 $235 Nonresidential real estate 80 83 Commercial business 0 13 Consumer 22 7 ---- ---- Total 277 338 ---- ---- Accruing loans delinquent 90 days One-to-four family real estate 178 0 Restructured loans 0 0 Foreclosed Assets Real estate: One-to-four family 94 23 Total non-performing assets $549 $361 Total as a percentage of total assets 0.10% 0.07% Total non-performing loans $455 $338 Total as a percentage of total loans receivable, net 0.13% 0.10% Total non-performing assets at September 30, 1997 were $549,000, an increase of $188,000, or 52%, from $361,000 at December 31, 1996. The increase was the result of a delinquent single family loan and foreclosure of another single family residence. 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 September 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 and does not include the projected net interest income from the merger with Marshalltown Financial Corporation. Rate Shock Net Interest Percentage Board in Basis Points Income Change Limit +200 13,598 -7.28% -30.00% +100 14,248 -2.84% -15.00% 0 14,665 0.00% 0.00% -100 15,069 2.75% -15.00% -200 15,304 4.36% -30.00% * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 20 of this discussion. 17 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 19 for table. 18 The following table sets forth the interest rate sensitivity of HMN's assets and liabilities at September 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 8,636 0 0 0 Securities available for sale: Mortgage-backed and related securities(1) $27,794 5,943 29,210 21,951 Other marketable securities 25,749 6,890 6,507 15,320 Securities held to maturity: Mortgage-backed and related securities(1) 0 0 0 0 Other marketable securities 0 0 0 0 Loans held for sale, net 2,090 0 0 0 Loans receivable (1)(2) Fixed rate one-to-four family(3) 19,154 17,661 60,530 44,601 Adjustable rate one-to-four family(3) 19,297 20,506 13,661 15,691 Multi family 0 0 0 0 Fixed rate commercial real estate 141 125 403 257 Adjustable rate commercial real estate 6,856 60 0 0 Commercial business 1,797 559 1,728 926 Consumer loans 20,157 1,295 2,639 1,200 Federal Home Loan Bank stock 0 0 0 0 Total interest-earning assets 131,671 53,039 114,678 99,946 Non-interest checking 2,906 0 0 0 NOW accounts 16,753 0 0 0 Passbooks 3,072 2,750 8,387 5,370 Money market accounts 1,656 1,482 4,522 2,895 Certificates 102,437 81,364 99,166 19,234 Federal Home Loan Bank advances 54,714 17,714 19,179 10,000 Total interest-bearing liabilities 181,538 103,310 131,254 37,499 Interest-earning assets less interest-bearing liabilities$(49,867) (50,271) (16,576) 62,447 Cumulative interest-rate sensitivity gap $(49,867) (100,138) (116,714) (54,267) Cumulative interest-rate gap as a percentage of total assets at September 30, 1997 (8.77)% (17.60) (20.52) (9.54) Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1996 (4.61)% (10.66) Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1995 (1.07)% (7.53) Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1994 (2.47)% (2.26) (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 8,636 Securities available for sale: Mortgage-backed and related securities(1) $ 26,133 0 111,031 Other marketable securities 155 16,785 71,406 Securities held to maturity: Mortgage-backed and related securities(1) 0 0 0 Other marketable securities 0 0 0 Loans held for sale, net 0 0 2,090 Loans receivable (1)(2) Fixed rate one-to-four family(3) 104,508 0 246,454 Adjustable rate one-to-four family(3) 988 0 70,143 Multi family 0 0 0 Fixed rate commercial real estate 491 0 1,417 Adjustable rate commercial real estate 0 0 6,916 Commercial business 55 0 5,065 Consumer loans 193 0 25,484 Federal Home Loan Bank stock 0 6,237 6,237 Total interest-earning assets 132,523 23,022 554,879 Non-interest checking 0 0 2,906 NOW accounts 0 0 16,753 Passbooks 9,543 0 29,122 Money market accounts 5,146 0 15,701 Certificates 0 0 302,201 Federal Home Loan Bank advances 10,400 0 112,007 Total interest-bearing liabilities 25,089 0 478,690 Interest-earning assets less interest-bearing liabilities $107,434 23,022 76,189 Cumulative interest-rate sensitivity gap $ 53,167 76,189 76,189 Cumulative interest-rate gap as a percentage of total assets at September 30, 1997 9.35 13.39 13.39 Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1996 Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1995 Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1994
(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. 19 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 results may differ materially from the expectations disclosed within this Discussion and Analysis. These forward-looking statements are subject to risks and uncertainties, including those discussed below. The Company assumes no obligation to publicly release results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences. LIQUIDITY - HMN has certificates of deposit with outstanding balances of $183.8 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 $183.8 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 20 in cash. On November 7, 1997 the transaction was approved by the stockholders of Marshalltown Financial Corporation. The Office of Thrift Supervision must approve the transaction. It is currently reviewing the proposed transaction and should render its opinion by the end of November. HMN expects to fund the purchase of the Marshalltown stock from the proceeds of the sale of securities available for sale or by additional FHLB advances. OTS approval may not be received by November 30, 1997 due to some unforeseen regulatory issue. 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 September 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 experienced by the contractors for the delivery of construction materials or weather related issues could cause the occupancy date for Spring Valley and Winona to be later in 1998. The funding for the construction may not come from normal cash flows but may be funded either by selling securities or advances from the FHLB. 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 September 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 and does not include the projected net interest income of Marshalltown Financial Corporation. Rate Shock Net Interest Percentage Board in Basis Points Income Change Limit +200 13,598 -7.28% -30.00% +100 14,248 -2.84% -15.00% 0 14,665 0.00% 0.00% -100 15,069 2.75% -15.00% -200 15,304 4.36% -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 security 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. The anticipated merger of Marshalltown Financial Corporation will increase interest- earning assets by approximately $120 million and interest-bearing liabilities by approximately $100 million. The increases mentioned above will have an impact on HMN's net interest income and the related projected impact of rate shocks on net interest income. 21 HMN FINANCIAL, INC. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. ITEM 2. Changes in Securities. Not applicable. ITEM 3. Defaults Upon Senior Securities. Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders. None. ITEM 5. Other Information. At its meeting held on September 23, 1997 the Board of Directors passed a resolution amending the Bylaws of HMN Financial, Inc.. The Amended Bylaws are included as Exhibit 3(ii). Since the Bylaws have not been previously filed in electronic format the complete Amended Bylaws are included in this item. At its Board of Directors meeting held on September 23, 1997 the date for the next annual meeting of shareholders was set for April 28, 1998. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Index to Exhibits on page 19 of this report. (b) Reports on Form 8-K. A current report on Form 8-K, Items 5. and 7., was filed on October 17, 1997, to report the Company's third quarter earnings. (c) A press release was issued on November 7, 1997 to report the approval by Marshalltown shareholders of the Agreement and Plan of Merger dated July 1, 1997 between HMN Financial, Inc. and Marshalltown Financial Corporation. 22 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: November 13, 1997 /s/ Roger P. Weise Roger P. Weise, Chairman and Chief Executive Officer (Duly Authorized Officer) Date: November 13, 1997 /s/ James B. Gardner James B. Gardner, Executive Vice President (Chief Financial Officer) 23 HMN FINANCIAL, INC. INDEX TO EXHIBITS FOR FORM 10-Q Reference Sequential to Prior Page Numbering Filing or Where Attached Exhibit Exhibits Are Regulation S-K Number Located in This Exhibit Number Document Attached Hereto Form 10-Q Report 2 Plan of acquisition, reorganization, arrangement, liquidation or succession. N/A N/A 3(a) Articles of Incorporation * N/A 3(b) By-laws 3(ii) Filed Resolution to Amend By-laws of HMN Financial, Inc. electronically By-laws of HMN Financial, Inc. as amended 4 Instruments defining the rights of security holders, Including indentures * N/A 5(a) Amendment to the Home Federal Savings Bank *** N/A Employees' Savings & Profit Sharing Plan dated January 28, 1997. 5(b) Amendment to the Adoption Agreement for Home *** N/A Federal Savings Bank Employees' 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 May 20, 2000 *** N/A 10.2(a) Employment agreement for Mr. Gardner ** N/A dated June 29, 1994 10.2(b) Extension of employment agreement to May 20, 2000 *** N/A 10.3 Trust Agreement between Home Federal Savings Bank and the Bank of New York *** N/A 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 Registrant's Form 10-Q for June 30, 1997 (file no. 0- 24100). All previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. 24 EX-3 2 HMN FINANCIAL, INC. RESOLUTION TO AMEND BY-LAWS RESOLUTION #HMN9709-01 SEPTEMBER 23, 1997 WHEREAS, the Board of Directors, after consultation with counsel, has considered various amendments to the By-Laws of the Corporation; and WHEREAS, the Board has determined that increasing the time period required for notice by stockholders of nominations for directors and the submission of stockholder proposals would help assure that all stockholders will have adequate information and sufficient time to consider proposals advanced by stockholders or stockholder nominees, will give the Board of Directors sufficient time to evaluate nominees and proposals and include its recommendations in its proxy statement and will assist the Corporation in effecting orderly stockholders meetings; WHEREAS, given that the Corporation's main business is effected through its wholly-owned subsidiary, Home Federal Savings Bank, and that the principal business of Home Federal Savings Bank is conducted through full service branch offices which specialize in meeting the needs of its customers in local communities; WHEREAS, the Board of Directors believes that requiring directors to be primarily domiciled in the counties where Home Federal Savings Bank has full service branch offices will benefit the Corporation by ensuring that the directors of the Corporation are knowledgeable of and actively involved in the Corporation's primary market areas and should not unreasonably infringe on or impede the ability of the Corporation and its stockholders to identify and recruit qualified candidates for the Board of Directors; WHEREAS, the Corporation's Certificate of Incorporation expressly empowers the Board to adopt, amend or repeal the By-Laws of the Corporation; and WHEREAS, the Board of Directors believes that amending the By- Laws consistent with the foregoing recitals will be in the best interests of the Corporation and its stockholders as a whole. NOW, THEREFORE, BE IT RESOLVED, that the By-Laws of the Corporation be restated in the form reviewed and approved by the Board and that a copy of the Restated By-Laws be included with the minutes of this meeting and the corporate records of the Corporation. RESOLVED FURTHER, that the officers of the Corporation, or any one of them, are hereby authorized to take such further action in connection with the adoption of such Restated By-Laws as they, or any one of them, deem necessary or advisable, including any necessary or advisable filings with the Security and Exchange Commission or the Office of Thrift Supervision. HMN FINANCIAL, INC. RESTATED BY-LAWS ARTICLE I STOCKHOLDERS Section 1. ANNUAL MEETING. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 2. SPECIAL MEETINGS. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. NOTICE OF MEETINGS. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4. QUORUM. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. ORGANIZATION. Such person as the Board of Directors may have designated or, in the absence of such a person, the President of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. CONDUCT OF BUSINESS. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the BUSINESS MUST RELATE TO A PROPER SUBJECT MATTER FOR STOCKHOLDER ACTION AND THE stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than NINETY (90) days prior to the date of the annual meeting; provided, however, that in the event that less than ONE HUNDRED (100) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, WHICHEVER OCCURS FIRST. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF AN ADJOURNMENT OF AN ANNUAL MEETING COMMENCE A NEW TIME PERIOD FOR THE GIVING OF A STOCKHOLDER'S NOTICE. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder who proposed such business, (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder and (iv)A DESCRIPTION OF ALL ARRANGEMENTS OR UNDERSTANDINGS BETWEEN SUCH STOCKHOLDER AND ANY OTHER PERSON OR PERSONS (INCLUDING THEIR NAMES) IN CONNECTION WITH THE PROPOSAL OF SUCH BUSINESS BY SUCH STOCKHOLDER AND any material interest of such BUSINESS, AND (V) A REPRESENTATION THAT SUCH STOCKHOLDER INTENDS TO APPEAR IN PERSON OR BY PROXY AT THE ANNUAL MEETING TO BRING SUCH BUSINESS BEFORE THE MEETING. Notwithstanding anything in these By-laws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. (c) Only persons who are nominated in accordance with the procedures set forth in these By- laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than NINETY (90) days prior to the date of the meeting; provided, however, that in the event that less than ONE HUNDRED (100) days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, WHICHEVER OCCURS FIRST. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF AN ADJOURNMENT OF AN ANNUAL MEETING COMMENCE A NEW TIME PERIOD FOR THE GIVING OF A STOCKHOLDER'S NOTICE. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice: (x) the name and address, as they appear on the Corporation's books, of such stockholder and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the provisions of this Section 6(c). The officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with such provisions and, if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 7. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing (or as otherwise permitted under applicable law) by the stockholder or his duly authorized attorney-in-fact filed in accordance with the procedure established for the meeting. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or in the absence of such direction, as determined by a majority of the Board of Directors. No proxy shall be valid after eleven months from the date of its execution except for a proxy coupled with an interest under Delaware law. Each stockholder shall have one (1) vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or in the Certificate of Incorporation of the Corporation or as required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefore by a stockholder entitled to vote or his or her proxy, a written vote shall be taken. Every written vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballot shall be counted by a properly appointed inspector or inspectors of election. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or as provided in the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. STOCK LIST. The officer who has charge of the stock transfer books of the Corporation shall prepare and make, in the time and manner required by applicable law, a list of stockholders entitled to vote and shall make such list available for such purposes, at such places, at such times and to such persons as required by applicable law. The stock transfer books shall be the only evidence as to the identity of the stockholders entitled to examine the stock transfer books or to vote in person or by proxy at any meeting of stockholders. Section 9. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Section 10. INSPECTORS OF ELECTION. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more persons as inspectors of election, to act at the meeting or any adjournment thereof and make a written report thereof, in accordance with applicable law. In the event the Board of Directors fails to so appoint, the chairman presiding at the meeting shall appoint one or more persons as inspectors of election. ARTICLE II BOARD OF DIRECTORS Section 1. GENERAL POWERS, NUMBER, TERM OF OFFICE AND QUALIFICATIONS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors shall annually elect a Chairman of the Board and a President from among its members and shall designate, when present, either the Chairman of the Board or the President to preside at its meetings. The directors, other than those who may be elected by the holders of any class or series of preferred stock, shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the first annual meeting, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. DIRECTORS SHALL, IN ORDER TO QUALIFY AS SUCH, HAVE THEIR PRIMARY DOMICILE IN A COUNTY IN WHICH HOME FEDERAL SAVINGS BANK, A WHOLLY-OWNED SUBSIDIARY OF THE CORPORATION, HAS A FULL-SERVICE BRANCH. Section 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to the rights of the holders of any class or series of preferred stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent director. Section 3. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by one-third (1/3) of the directors then in office (rounded up to the nearest whole number) or by the Chairman of the Board or the President and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given to each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business maybe transacted at a special meeting. Section 5. QUORUM. At any meeting of the Board of Directors, a majority of the authorized number of directors then constituting the Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. CONDUCT OF BUSINESS. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8. POWERS. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these By-laws, for the management of the Corporation's business and affairs. Section 9. COMPENSATION OF DIRECTORS. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. ARTICLE III COMMITTEES Section 1. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designated the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. CONDUCT OF BUSINESS. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. NOMINATING COMMITTEE. The Board of Directors shall appoint a Nominating Committee of the Board, consisting of three (3) members. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in order to determine compliance with such By-law and (b) to recommend to the Whole Board nominees for election to the Board of Directors to replace those directors whose terms expire at the annual meeting of stockholders next ensuing. ARTICLE IV OFFICERS Section 1. GENERALLY. (a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer and from time to time may choose such other officers as it may deem proper. The Chairman of the Board shall be chosen from among the directors. Any number of offices may be held by the same person. (b) The term of office of all officers shall-be until the next annual election of officers and until their respective successors are chosen, but any officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of directors then constituting the Board of Directors. (c) All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors of the Corporation shall preside at all meetings of the Corporation and the Executive Committee meetings of the Board of Directors. He may sign account books, deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except where otherwise provided by other resolutions of the Board of Directors or by these Bylaws or Certificate of Incorporation of the Corporation. Section 3. PRESIDENT. The President shall be the chief executive officer and, subject to the control of the Board of Directors, shall have general power over the management and oversight of the administration and operation of the Corporation's business and general supervisory power and authority over its policies and affairs. He shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. Each meeting of the stockholders and of the Board of Directors shall be presided over by such officer as has been designated by the Board of Directors or, in his absence, by such officer or other person as is chosen at the meeting. The Secretary or, in his absence, the General Counsel of the Corporation or such officer as has been designated by the Board of Directors or, in his absence, such officer or other person as is chosen by the person presiding, shall act as secretary of each such meeting. Section 4. VICE PRESIDENT. The Vice President or Vice Presidents shall perform the duties of the President in his absence or during his disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. Section 5. SECRETARY. The Secretary or an Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such offices and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or the President. Section 6. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division of the Corporation which has a treasurer or financial officer appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Chief Financial Officer with such banks or trust companies as the Board of Directors from time to time shall designate. He shall sign or countersign such instruments as require his signature, shall perform all such duties and have all such powers as are usually incident to such office and/or such other duties and powers as are properly assigned to him by the Board of Directors, the Chairman of the Board or the President, and may be required to give bond for the faithful performance of his duties in such sum and with such surety as may be required by the Board of Directors. Section 7. ASSISTANT SECRETARIES AND OTHER OFFICERS. The Board of Directors may appoint one or more assistant secretaries and one or more assistants to the Chief Financial Officer, or one appointee to both such positions, which officers shall have such powers and shall perform such duties as are provided in these By-laws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other Corporation. ARTICLE V STOCK Section 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these By-laws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefore. Section 3. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 1. NOTICES. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mail, postage paid, or by sending such notice by prepaid telegram or mailgram. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mail or by telegram or mailgram, shall be the time of the giving of the notice. Section 2. WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 1. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these By- laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 5. TIME PERIODS. In applying any provision of these By-laws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included. ARTICLE VIII AMENDMENTS The By-laws of the Corporation may be adopted, amended or repealed as provided in Article SEVENTH of the Certificate of Incorporation of the Corporation. EX-11 3 HMN Financial, Inc. Computation of Earnings Per Common Share (Unaudited)
Computation of Earnings Per Common Share for Statements of Operations: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 - -------------------------------------------------------------------- Net income (loss) $1,524,111 (144,527) 4,330,810 2,975,248 Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,740,468 4,185,867 3,742,802 4,474,903 Dilutive effect of stock option plans after application of treasury stock method 232,026 195,652 35,039 3,972,494 4,185,867 3,938,454 4,509,942 Earnings (loss) per common share and common share equivalents $ 0.38 (0.03) 1.10 0.66 Computation of Fully Diluted Earnings Per Common Share and Common Share Equivalent(1) - ------------------------------ Net income (loss) $ 1,524,111 (144,527) 4,330,810 2,975,248 Weighted average number of common share and common share equivalents: Weighted average common shares outstanding 3,740,468 4,185,867 3,742,802 4,474,903 Dilutive effect of stock option plans after application of treasury stock method 235,330 235,160 41,596 3,975,798 4,185,867 3,977,962 4,516,499 Earnings (loss) per common share and common share equivalents $ 0.38 (0.03) 1.09 0.66
EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ETRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000921183 HMN FINANCIAL INC 1000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 2,156 7,480 0 0 0 0 0 357,569 2,554 568,847 366,682 43,429 5,539 68,578 0 0 61 84,558 568,847 20,730 9,125 529 30,384 13,993 18,786 11,598 225 872 6,470 6,885 0 0 0 4,331 1.10 1.09 7.43 455 178 0 118 2,341 20 7 2,554 1,336 0 1,218
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