-----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, Dw38bnhHdCi8ZBdzIbFTkPX0r3Aca+EmxrGXrZzjKGyc9VtDHL5ITp3U1ev/UHsr h+trNtKLtuEa883wPYLRTw== 0000921183-98-000005.txt : 19980212 0000921183-98-000005.hdr.sgml : 19980212 ACCESSION NUMBER: 0000921183-98-000005 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971205 ITEM INFORMATION: FILED AS OF DATE: 19980211 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-24100 FILM NUMBER: 98532631 BUSINESS ADDRESS: STREET 1: 101 N BROADWAY CITY: SPRING VALLEY STATE: MN ZIP: 55975-1223 BUSINESS PHONE: 5073467345 8-K/A 1 AMENDMENT TO 8-K 12-5-97 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) December 5, 1997 HMN FINANCIAL, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 0-24100 41-1777397 (State or other (Commission File No.) (IRS Employer jurisdiction of Identification incorporation) Number) 101 NORTH BROADWAY, SPRING VALLEY, MINNESOTA 55975 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (507) 346-7345 N/A _________________________________________________________________ (Former name or former address, if changed since last report) ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS On December 5, 1997 HMN Financial, Inc. ("HMN"), through its wholly owned subsidiary, Home Federal Savings Bank ("HFSB") completed "the Merger" with Marshalltown Financial Corporation ("MFC") pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), previously filed with HMN's Current Report on Form 8-K dated July 1, 1997 (File No. 0-24100). This Form 8-K/A includes as Exhibits certain financial information required under Item 7 which was not contained in the previously filed Form 8-K dated December 5, 1997 (File No. 0- 24100). (a) Financial Statements of Business Acquired. Financial statements for Marshalltown Financial Corporation as of and for the year ended September 30, 1997 are attached hereto as Exhibit 99.1 and are incorporated herein by reference. (b) UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION On December 5, 1997 HMN, through its wholly owned subsidiary, HFSB, completed its merger with MFC pursuant to the Merger Agreement. The aggregate consideration per the Merger was $24.8 million, consisting of $23.7 million for 1.35 million outstanding shares of MFC stock, or $17.51 per share, and $1.1 million for the outstanding MFC options. HMN owned 60,000 shares of MFC stock which were cancelled upon the completion of the Merger. The Merger will be accounted for utilizing the purchase method of accounting. The transaction was funded through a combination of the sale of securities, and short-term borrowings from the Federal Home Loan Bank of Des Moines ("FHLB"). Additional information regarding the Merger is included in HMN's Current Report on Form 8-K dated December 5, 1997 (File No. 0-24100). The following Unaudited Pro Forma Combined Financial Information reflects the Merger. The Unaudited Proforma Combined Consolidated Balance Sheet as of September 30, 1997 combines the historical consolidated balance sheets of HMN and MFC as if the Merger had been effective on September 30, 1997, after giving effect to certain pro forma adjustments described in the accompanying notes. The following Unaudited Pro Forma Combined Consolidated Statements of Income for the year ended December 31, 1996 and for the nine months ended September 30, 1997 and 1996 are presented as if the Merger had been effective at the beginning of each period presented, after giving effect to certain pro forma adjustments described in the accompanying notes. The Unaudited Pro Forma Combined Financial Information and notes thereto reflect the application of the purchase method of accounting for the Merger. Under this method, the assets acquired and liabilities assumed from MFC and its sub-sidiaries are recorded at their fair market values on the date of the Merger. The amount of the purchase price in excess of the fair market value of the tangible and identifiable intangible assets acquired less the fair market value of the liabilities assumed is recorded as goodwill. Certain historical information of the consolidated MFC has been reclassified to conform to HMN's financial statement presentation. The Unaudited Pro Forma Combined Financial Information (the "Information") included in Exhibit 99.2 is incorporated herein by reference. The Information is not necessarily indicative of the consolidated financial position or results of future operations of the combined entity or the actual results that would have been achieved had the Merger of MFC been consummated prior to the periods indicated. The Unaudited Pro Forma Financial Information should be read in conjunction with and are qualified in their entirety by the separate historical consolidated financial statements and notes thereto of HMN's (i) Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-24100) and (ii) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 0- 24100), and of MFC and its subsidiaries, which are included in Item 7(a) of this Current Report on Form 8-K/A. (c) EXHIBITS 23 Consent of McGladrey & Pullen LLP dated February 11, 1998 99.1 Financial statements for Marshalltown Financial Corporation as of and for the year ended September 30, 1997. 99.2 Unaudited pro forma combined financial information consisting of: Unaudited Pro Forma Combined Consolidated Balance Sheet as of September 30, 1997 and related notes Unaudited Pro Forma Combined Consolidated Statements of Income for the nine months ended September 30, 1997 Unaudited Pro Forma Combined Consolidated Statements of Income for the nine months ended September 30, 1996 Unaudited Pro Forma Combined Consolidated Statements of Income for the twelve months ended December 31, 1996 for HMN, and for the twelve months ended September 30, 1996 for MFC and the related notes to the above mentioned Statements of Income. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Current Report and other written and oral statements made by or on behalf of HMN contain, or may contain, certain "forward-looking statements," including statements concerning plans, objectives and future events or performance, and other statements which are other than statements of historical fact. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following: (i) failure to fully realize or to realize within the expected time frame expected cost savings from the Merger; (ii) lower than expected income or revenues following the Merger, or higher than expected operating costs; (iii) a significant increase in competitive pressure in the banking and financial services industry; (iv) business disruption related to the Merger; (v) greater than expected costs or difficulties related to the integration of the MFC employees into HMN; (vi) litigation costs and delays caused by litigation; (vii) higher than anticipated costs in completing the Merger; (viii) unanticipated regulatory constraints arising from the Merger; (ix) reduction in interest margins due to changes in the interest rate environment; (x) poorer than expected general economic conditions, including acquisition and growth opportunities, in the states which HMN does business; (xi) legislation or regulatory changes which adversely affect the businesses in which HMN is engaged; and (xii) other unanticipated occurrences which increase the costs related to the Merger or decrease the expected financial benefits of the Merger. SIGNATURES Pursuant to the requirements 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. Date: February 11, 1998 By: /s/ Roger P. Weise ---------------------- Roger P. Weise, Chairman and Chief Executive Officer EX-23 2 CONSENT OF MCGLADREY AND PULLEN LLP [McGladrey & Pullen, LLP logo] MCGLADREY & PULLEN, LLP -------------------------------------------- Certified Public Accountants and Consultants The Board of Directors HMN Financial Inc. We consent to the incorporation by reference of our report dated October 14, 1997, relating to the consolidated statements of financial condition of Marshalltown Financial Corporation as of September 30, 1997 and 1996 and the related statements of income, stockholders' equity and cash flows for the years then ended, which report appears in Form 8-K/A filed on or about February 11, 1998 by HMN Financial, Inc. related to the acquisition of Marshalltown Financial Corporation by HMN Financial Inc., in the following Registration Statements of HMN Financial Inc.: Nos. 33-88228, 33-94388, and 33-94386 on Form S-8. /s/ McGladrey & Pullen, LLP McGLADREY & PULLEN, LLP Des Moines, Iowa February 11, 1998 EX-99 3 EX-99.1 MARSHALLTOWN FINANCIAL STATEMENTS 9-30-97 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL REPORT SEPTEMBER 30, 1997 Contents ------------------------------------------------------------ INDEPENDENT AUDITOR'S REPORT 1 ------------------------------------------------------------ FINANCIAL STATEMENTS Consolidated statements of financial condition 2 Consolidated statements of income 3 Consolidated statements of stockholders' equity 4 Consolidated statements of cash flows 5 - 6 Notes to consolidated financial statements 7 - 22 ------------------------------------------------------------ [McGladrey & Pullen, LLP logo] MCGLADREY & PULLEN, LLP ------------------------- Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT To the Board of Directors Marshalltown Financial Corporation Marshalltown, Iowa We have audited the accompanying consolidated statements of financial condition of Marshalltown Financial Corporation and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marshalltown Financial Corporation and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Des Moines, Iowa October 14, 1997 1 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 1997 AND 1996
ASSETS 1997 1996 - -------------------------------------------------------------- Cash and cash equivalents: Interest-bearing deposits $ 4,017,660 $ 1,811,278 Noninterest-bearing deposits 663,756 474,786 Securities available for sale (Note 2) 2,419,896 2,314,172 Securities held to maturity (Note 2) 10,087,377 9,484,506 Mortgage-backed securities held to maturity (Note 2) 40,105,545 47,513,070 Investment in limited partnerships 443,973 482,283 Loans receivable, net (Notes 3 and 4) 66,183,349 60,284,275 Accrued interest receivable 713,098 747,918 Real estate acquired for investment 397,466 406,187 Premises and equipment, net (Note 5) 385,072 435,536 Deferred tax asset (Note 7) - 57,741 Other assets 74,223 171,340 --------------------------- $125,491,415 $124,183,092 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits (Notes 2 and 6): Demand $ 3,903,924 $ 4,086,063 Savings and money market 16,122,783 17,272,240 Certificates of deposit 83,683,174 81,681,395 --------------------------- TOTAL DEPOSITS 103,709,881 103,039,698 Advances from borrowers for taxes and insurance 12,342 22,870 Income taxes (Note 7): Current 33,000 48,972 Deferred 232,852 Accrued expenses and other liabilities 1,222,611 1,733,543 --------------------------- 105,210,686 104,845,083 --------------------------- COMMITMENTS AND CONTINGENCIES (Note 13) STOCKHOLDERS' EQUITY (Note 8) Common stock, par value $.01 per share; authorized 3,250,000 shares; issued and outstanding 1,411,475 shares (Notes 10 and 13) 14,115 14,115 Additional paid-in capital 10,599,090 10,599,090 Retained earnings, substantially restricted (Note 7) 9,749,169 8,902,114 Unrealized gain on securities available for sale, net (Note 2) 32,077 12,384 Less deferred recognition and retention plan (Note 10) (113,722) (189,694) --------------------------- 20,280,729 19,338,009 --------------------------- $125,491,415 $124,183,092 ===========================
See Notes to Consolidated Financial Statements. 2 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996 - ------------------------------------------------------------------------- Interest income: Loans receivable $ 4,897,620 $ 4,386,435 Securities available for sale 157,015 148,600 Securities held to maturity 650,295 551,307 Mortgage-backed securities held to maturity 2,912,742 3,383,557 Other interest-earning assets 232,123 286,312 ------------------------------ 8,849,795 8,756,211 Interest expense, deposits 5,484,065 5,579,496 ------------------------------ NET INTEREST INCOME 3,365,730 3,176,715 Provision for loan losses (Note 3) 10,000 10,000 ------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,355,730 3,166,715 ------------------------------ Noninterest income: Service charges 57,423 62,661 Other, net 119,057 73,930 ------------------------------ TOTAL NONINTEREST INCOME 176,480 136,591 ------------------------------ Noninterest expense: Compensation and benefits 1,364,422 1,314,115 Occupancy and equipment 193,128 200,758 SAIF deposit insurance premium 90,827 239,406 SAIF special assessment - 681,920 Data processing 102,576 103,898 Other 602,431 631,267 ----------------------------- TOTAL NONINTEREST EXPENSE 2,353,384 3,171,364 ----------------------------- INCOME BEFORE INCOME TAX EXPENSE 1,178,826 131,942 Income tax expense (Note 7) 331,771 57,212 ----------------------------- NET INCOME $ 847,055 $ 74,730 ============================= Earnings per common share $ 0.57 $ 0.05 =============================
See Notes to Consolidated Financial Statements. 3 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Additional Common Paid-in Retained Stock Capital Earnings - ----------------------------------------------------------------- Balance, September 30, 1995 $ 14,115 $ 10,599,090 $ 8,827,384 Net change in unrealized gain on securities available for sale, net - - - Vesting of shares of stock of retention and recognition plan (Note 10) - - - Net income - - 74,730 -------------------------------------- Balance, September 30, 1996 14,115 10,599,090 8,902,114 Net change in unrealized gain on securities available for sale, net - - - Vesting of shares of stock of retention and recognition plan (Note 10) - - - Net income - - 847,055 -------------------------------------- BALANCE, SEPTEMBER 30, 1997 $ 14,115 $ 10,599,090 $ 9,749,169 ====================================== Unrealized Deferred Gain on Retention Securities and Available for Recognition Sale, Net Plan Total ---------------------------------------- Balance, September 30, 1995 $ 17,801 $ (265,666) $ 19,192,724 Net change in unrealized gain on securities available for sale, net (5,417) - (5,417) Vesting of shares of stock of retention and recognition plan (Note 10) - 75,972 75,972 Net income - - 74,730 ---------------------------------------- Balance, September 30, 1996 12,384 (189,694) 19,338,009 Net change in unrealized gain on securities available for sale, net 19,693 - 19,693 Vesting of shares of stock of retention and recognition plan (Note 10) - 75,972 75,972 Net income - - 847,055 ---------------------------------------- BALANCE, SEPTEMBER 30, 1997 $ 32,077 $ (113,722) $ 20,280,729 ========================================
See Notes to Consolidated Financial Statements. 4 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996 - ---------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 847,055 $ 74,730 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 84,640 90,291 Amortization of RRP 75,972 75,972 Provision for loan losses 10,000 10,000 Stock dividend on stock in Federal Home Loan Bank - (23,600) Loss on investments in limited partnerships 25,530 16,052 Net accretion of investment and mortgage- backed securities premiums and discounts (50,669) (34,791) Deferred taxes 277,462 (205,000) Net realized gain on available for sale security (2,237) - Amortization of loan fees (38,000) (32,274) Change in assets and liabilities: Decrease in accrued interest receivable 34,820 43,345 Decrease in other assets 97,117 9,349 Increase (decrease) in income taxes payable (15,972) 36,913 Increase (decrease) in accrued expenses and other liabilities (510,932) 713,757 ------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 834,786 774,744 ------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of security available for sale 378,737 - Proceeds from maturities of securities held to maturity 4,000,000 6,500,000 Purchase of securities available for sale (449,400) (499,700) Purchase of securities held to maturity (4,591,922) (6,500,000) Principal collected on mortgage-backed securities 8,974,705 10,203,547 Purchase of mortgage-backed securities (1,527,460) (2,480,362) Cash distributions received from limited partnerships 12,780 1,665 Net increase in loans receivable (5,871,074) (9,876,065) Purchase of premises and equipment (21,350) (1,003) Proceeds from sale of equipment 694 - Proceeds from sale of foreclosed real estate - 22,220 Purchase of real estate acquired for investment (4,799) (12,871) -------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 900,911 (2,642,569) -------------------------- (Continued) 5 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1997 AND 1996 1997 1996 - ---------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits $ 670,183 $ (81,357) Decrease in advances from borrowers for taxes and insurance (10,528) (161,695) ---------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 659,655 (243,052) ---------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,395,352 (2,110,877) CASH AND CASH EQUIVALENTS Beginning 2,286,064 4,396,941 ---------------------------- Ending $ 4,681,416 $ 2,286,064 ============================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 5,339,300 $ 5,589,869 Income taxes 70,281 225,299
See Notes to Consolidated Financial Statements. 6 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS: Marshalltown Financial Corporation (the Company), located in Marshalltown, Iowa, owns 100% of the outstanding common stock issued by Marshalltown Savings Bank (the Bank), in connection with its conversion from a federally chartered mutual institution to a federally chartered stock institution. The only significant assets are investment securities and stock of the Bank. The Bank provides a full range of banking services to individual and corporate customers from its office located in Marshalltown, Iowa and branches located in Marshalltown and Toledo, Iowa. MSL Financial Corporation, THE BANK'S WHOLLY-OWNED SUBSIDIARY, offers annuities to the Bank's customers and members of the general public. SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Marshalltown Financial Corporation and its wholly-owned subsidiaries, Marshalltown Savings Bank and MSL Financial Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. ACCOUNTING ESTIMATES AND ASSUMPTIONS: The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and revenues and expenses for the period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand and interest-bearing and noninterest-bearing deposits in banks. SECURITIES AVAILABLE FOR SALE: Securities to be held for indefinite periods of time, including debt securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors, are classified as available for sale. Securities available for sale are carried at fair value. Unrealized gains or losses, net of the related deferred tax effect, are reported as increases or decreases in stockholders' equity. Realized gains and losses are determined using the specific identification method of specific securities sold and are included in earnings. Premiums or discounts are recognized in interest income using the interest method over the period to maturity. SECURITIES HELD TO MATURITY: Securities which management has the intent and the Company has the ability to hold to maturity are carried at cost, adjusted for purchase premiums or discounts. Purchase premiums or discounts are recognized in interest income using the interest method over the period to maturity. LOANS RECEIVABLE: The Bank grants real estate loans, consumer and other loans to customers meeting board-approved underwriting guidelines. Most of these loans are made on properties in Marshall County or the western half of Tama County, Iowa. Additionally, at September 30, 1997, approximately 7 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- 22% of the Bank's real estate mortgage loans consist of loans purchased outside the Bank's lending area. The loans are secured by the underlying properties and are subject to the same underwriting guidelines as loans originated internally. The majority of these loans are single - family mortgages and are all located in Wisconsin. Loans receivable that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are stated at unpaid principal balances less the allowance for loan losses, loans in process, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. The allowance for loan losses is increased by provisions charged to income and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Uncollectible interest on loans that are contractually 90 days past due is charged off or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is no longer in doubt, in which case the loan is returned to accrual status. Loan fees and certain direct loan origination costs are capitalized, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for prepayments when they occur. REAL ESTATE ACQUIRED FOR INVESTMENT: Real estate properties acquired for investment are carried at the lower of cost, including cost of improvements and amenities incurred subsequent to acquisition, or fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its fair value less cost to sell. The allowance for losses may be reduced for subsequent increases in the estimated fair value less cost to sell, but not below zero. PREMISES AND EQUIPMENT: Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred 8 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. RECOGNITION AND RETENTION PLAN (RRP): Deferred RRP is carried as a reduction of stockholders' equity. The deferred RRP is being amortized as it is earned. STOCK OPTION PLAN: In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes a fair value based method for financial accounting and reporting for stock-based employee compensation plans and for transactions in which an entity issues its equity instruments to acquire goods and services from nonemployees. However, the new standard allows compensation to continue to be measured by using the intrinsic value based method of accounting prescribed by Accounting Principle Board opinion (APB) No. 25, "Accounting for Stock Issued to Employees," but requires expanded disclosures. The Company has elected to apply the intrinsic value based method of accounting for stock options issued to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. EARNINGS PER SHARE: Earnings per share are calculated by dividing net income by the weighted-average number of common shares and common equivalent shares outstanding. The weighted-average number of shares outstanding for the calculation of earnings per share for the years ended September 30, 1997 and 1996 was 1,477,287 and 1,411,475, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS: In accordance with generally accepted accounting principles, the Company discloses fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: CASH AND CASH EQUIVALENTS: The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates fair value. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of restricted equity securities approximates fair value. INVESTMENT IN LIMITED PARTNERSHIP: The fair value of investment in limited partnerships approximates its carrying value. 9 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------- LOANS RECEIVABLE, NET: For variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated based on discounted cash flows analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. ACCRUED INTEREST RECEIVABLE: The fair value of accrued interest receivable approximates its carrying amount. DEPOSITS: Fair values disclosed for demand, savings and money market deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits. OFF-BALANCE SHEET INSTRUMENTS: Fair values for off-balance sheet instruments (guarantees, letters of credit and lending commitments) are based on quoted fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. NOTE 2. DEBT AND EQUITY SECURITIES Debt and equity securities have been classified in the consolidated statements of financial condition according to management's intent. The carrying amount of securities and their approximate fair values at September 30, 1997 and 1996 are summarized below:
SEPTEMBER 30, 1997 -------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS (LOSSES) FAIR VALUE -------------------------------------------- Securities available for sale: Federal Home Loan Mortgage Corporation, Preferred Stock A $ 221,829 $18,046 $ - $ 239,875 Federal Home Loan Mortgage Corporation, Preferred Stock 375,000 13,271 - 388,271 Federal National Mortgage Association, Preferred Stock A 249,700 10,925 - 260,625 Federal National Mortgage Association, Preferred Stock B 250,000 10,625 - 260,625 Bank America, Preferred Stock A 74,400 600 - 75,000 Federal Home Loan Bank Stock 1,195,500 - - 1,195,500 ------------------------------------------ $2,366,429 $53,467 $ - $2,419,896 ==========================================
10 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------
SEPTEMBER 30, 1997 --------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS (LOSSES) FAIR VALUE --------------------------------------------- Securities held to maturity: Obligations of U.S. Government corporations and agencies $ 9,091,392 $ 15,649 $ (20,034) $ 9,087,007 Obligations of state and political subdivisions 995,985 8,585 - 1,004,570 --------------------------------------------- $10,087,377 $ 24,234 $ (20,034) $10,091,577 ============================================= Mortgage-backed securities $40,105,545 $443,262 $(432,350) $40,116,457 ============================================
September 30, 1996 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains (Losses) Fair Value --------------------------------------------- Securities available for sale: Federal Home Loan Mortgage Corporation, Preferred Stock A $ 221,829 $15,671 $ $ 237,500 Federal Home Loan Mortgage Corporation, Preferred Stock 376,500 4,125 380,625 Federal National Mortgage Association, Preferred Stock A 249,700 300 250,000 Federal National Mortgage Association, Preferred Stock B 250,000 547 250,547 Federal Home Loan Bank Stock 1,195,500 1,195,500 ------------------------------------------- $2,293,529 $20,643 $ $2,314,172 ===========================================
11 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------
September 30, 1996 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains (Losses) Fair Value ---------------------------------------------- Securities held to maturity: Obligations of U.S. Government corporations and agencies $ 8,490,707 $ 6,118 $ (90,804) $ 8,406,021 Obligations of state and political subdivisions 993,799 2,451 996,250 ---------------------------------------------- $ 9,484,506 $ 8,569 $ (90,804) $ 9,402,271 ============================================== Mortgage-backed securities $47,513,070 $320,833 $(803,996) $47,029,907 ==============================================
The amortized cost and fair value of securities available for sale and held to maturity as of September 30, 1997 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities will differ from contractual maturities in mortgage-backed securities because mortgages underlying the securities may be called or prepaid without call or prepayment penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary. Equity securities have also been excluded from the maturity table because they do not have contractual maturities associated with debt securities.
Securities Available Securities Held for Sale to Maturity --------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------------------------------------------------- Due after one year through five years $ - $ - $ 8,589,147 $ 8,585,854 Due after five to ten years - - 1,498,230 1,505,723 --------------------------------------------------- - - 10,087,377 10,091,577 Equity securities 2,366,429 2,419,896 - - --------------------------------------------------- $ 2,366,429 $2,419,896 $10,087,377 $10,091,577 =================================================== Mortgage-backed securities$ - $ - $40,105,545 $40,116,457 ===================================================
Investment securities with carrying amounts of $1,241,604 at September 30, 1997 are pledged as collateral on public deposits and for other purposes as required by law. There were $552,738 of public deposits at September 30, 1997. Gross realized gains and gross realized losses on sales of available-for-sale securities were $2,237 and none, respectively, in 1997. There were no realized gains or losses in 1996. 12 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 3. LOANS RECEIVABLE Loans receivable at September 30 are summarized as follows:
1997 1996 ---------------------------- First mortgage loans (principally conventional): Principal balances: Secured by one to four-family residences $ 59,344,216 $ 52,685,102 Secured by other property 4,602,863 5,618,684 Construction loans 297,000 700,000 ---------------------------- 64,244,079 59,003,786 Less: Undisbursed portion of construction loans (143,733) (205,744) Net deferred loan origination fees (287,710) (302,690) ---------------------------- Total first mortgage loans 63,812,636 58,495,352 ---------------------------- Consumer and other loans: Principal balances: Home equity and second mortgage 2,434,768 1,869,212 Other 89,798 113,525 ---------------------------- 2,524,566 1,982 737 Less loans in process (31,353) (81,314) ---------------------------- Total consumer and other loans 2,493,213 1,901,423 ---------------------------- Less allowance for loan losses (122,500) (112,500) ---------------------------- $ 66,183,349 $ 60,284,275 ============================ Activity in the allowance for loan losses is summarized as follows for the years ended September 30: 1997 1996 ---------------------------- Balance, beginning $ 112,500 $ 102,500 Provision charged to income 10,000 10,000 ---------------------------- Balance, ending $ 122,500 $ 112,500 ============================
The Company had no impaired loans as of September 30, 1997 and 1996 and there was no interest related to nonaccrual loans for the years then ended. 13 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 4. LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans at September 30 are summarized as follows:
1997 1996 --------------------------- Mortgage loans underlying FHLMC pass-through securities $ 1,906,941 $ 2,481,676 Mortgage loan portfolios serviced for the Iowa Housing Finance Authority 567,358 704,211 -------------------------- $ 2,474,299 $ 3,185,887 ==========================
Custodial escrow balances maintained in connection with the foregoing loan servicing were $11,305 and $10,327 at September 30, 1997 and 1996, respectively. NOTE 5. PREMISES AND EQUIPMENT Premises and equipment consisted of the following at September 30:
1997 1996 -------------------------- At cost: Land and land improvements $ 135,517 $ 135,517 Buildings 809,179 800,826 Leasehold improvements 23,378 23,378 Furniture and equipment 490,588 497,386 -------------------------- 1,458,662 1,457,107 Accumulated depreciation 1,073,590 1,021,571 -------------------------- $ 385,072 $ 435,536 ==========================
NOTE 6. DEPOSITS The scheduled maturities of certificate accounts are as follows as of September 30, 1997: September 30: 1998 $ 47,787,392 1999 26,876,855 2000 3,815,914 2001 1,623,300 2002 898,046 Thereafter 2,681,667 ------------ $ 83,683,174 ============ Certificate of deposit accounts with balances of $100,000 and above totaled $5,197,766 and $4,369,073 at September 30, 1997 and 1996, respectively. 14 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 7. INCOME TAXES Under previously existing provisions of the Internal Revenue Code and similar sections of the Iowa income tax law, the Bank was allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. Through September 30, 1996, the provisions of the Code permitted the Bank to deduct from taxable income an allowance for bad debts based on 8% of taxable income before such deduction or actual loss experience. The Bank used the percentage of taxable income method to compute its deductions for the year ended September 30, 1996. Legislation passed in 1996 eliminated the percentage of taxable income method as an option for computing bad debt deductions for the year ended September 30, 1997 and in all future years. The Bank will still be permitted to take deductions for bad debts, but will be required to compute such deductions using the specific charge-off method. Due to the 1996 legislation, the Bank must also recapture its tax bad debt reserves which have accumulated since December 31, 1987 amounting to approximately $539,000. The tax associated with the recaptured reserves is approximately $201,000 and will be paid over a six year period beginning September 30, 1997. Deferred income taxes have been previously established for the taxes associated with the recaptured reserves. Retained earnings at September 30, 1997 and 1996, include a bad debt deduction of approximately $2,240,000 for which no deferred federal income tax liability has been recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for financial statements is approximately $805,000 at September 30, 1997 and 1996. The net deferred tax asset (liability) consists of the following components as of September 30, 1997 and 1996:
1997 1996 ------------------------------ Deferred tax assets: SAIF special assessment $ $ 245,000 Other 31,000 ------------------------------ 276,000 ------------------------------ Deferred tax liabilities: FHLB stock dividends (104,000) (100,000) Unrealized gain on securities available for sale, net (21,390) (8,259) Allowance for loan losses, net (67,000) (49,000) Premises and equipment (29,000) (31,000) Other (11,462) (30,000) ------------------------------ (232,852) (218,259) ------------------------------ NET DEFERRED TAX ASSET (LIABILITY) $ (232,852) $ 57,741 ==============================
15 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Income tax expense for the years ended September 30 is summarized as follows: 1997 1996 ---------------------------- Current $ 54,309 $ 262,212 Deferred 277,462 (205,000) ---------------------------- $ 331,771 $ 57,212 ============================ Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income taxes as a result of the following for the years ended September 30:
1997 1996 ------------------------------------- AMOUNT PERCENTAGE Amount Percentage ------------------------------------- Income taxes at federal income tax rate $ 400,801 34.0% $ 44,860 34.0% State tax, net of federal income tax benefit 18,111 1.5 4,400 3.3 Nondeductible expenses 36,582 3.1 55,039 41.7 RRP plan expenses (12,773) (1.1) (20,886) (15.8) Expenses relating to abandoned merger transaction (66,798) (5.7) - - Tax-exempt dividends (17,466) (1.5) (14,830) (11.2) Tax credits from housing projects (80,566) (6.8) (30,475) (23.1) Other 53,880 4.6 19,104 14.5 ------------------------------------ Federal and state income taxes $ 331,771 28.1% $ 57,212 43.4% ------------------------------------
NOTE 8. REGULATORY CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures, established by regulation to ensure capital adequacy, require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of Tier I capital (as defined) to average assets (as defined) and tangible capital to adjusted assets. Management believes, as of September 30, 1997, that the Bank meets all capital adequacy requirements to which it is subject. 16 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under Minimum For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------- (000's) (000's) (000's) As of September 30, 1997: Total capital (to risk weighted assets) $15,009 33.0% $3,640 8.0% $4,550 10.0% Tier 1 Capital (to risk weighted assets) 15,003 33.0 1,820 4.0 2,730 6.0 Tier 1 (Core) Capital (to adjusted assets) 15,003 12.5 3,609 3.0 6,015 5.0 Tangible capital (to adjusted assets) 15,003 12.5 1,805 1.5 - - As of September 30, 1996: Total capital (to risk weighted assets) 14,312 33.7% 3,395 8.0% 4,244 10.0% Tier 1 Capital (to risk weighted assets) 14,316 33.7 1,698 4.0 2,546 6.0 Tier 1 (Core) Capital (to adjusted assets) 14,316 12.0 3,590 3.0 5,984 5.0 Tangible capital (to adjusted assets) 14,316 12.0 1,795 1.5 - -
NOTE 9. EMPLOYEE BENEFIT PLAN The Bank has a profit-sharing plan for eligible employees. The annual contribution to the plan is the amount allowed under Internal Revenue Service regulations which at the present time is 15% of gross salary. The Bank can terminate the plan with a written notice to the trustee. The Bank's expense under this plan amounted to $123,627 and $119,950 the years ended September 30, 1997 and 1996, respectively. NOTE 10. RECOGNITION AND RETENTION PLAN (RRP) In conjunction with the stock conversion, the Company established a RRP as a method of providing directors, officers and other key employees of the Company with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Company. Eligible directors, officers and other key employees of the Company will earn (i.e., become vested in) shares of common stock covered by the award at a rate of 20% per year starting one year from the date of the grant. The maximum number of shares with respect to which awards may be made under the RRP is 4% of the total shares sold in the conversion. A total of 47,725 shares were issued under the RRP. Expense of $75,972 was recorded for the RRP for each of the years ended September 30, 1997 and 1996. 17 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 11. MARSHALLTOWN FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION September 30, 1997 and 1996 1997 1996 ----------------------------- ASSETS Cash and cash equivalents $ 1,030,492 $ 856,488 Securities available for sale 1,110,771 1,006,172 Securities held to maturity 1,597,321 1,491,936 Mortgage-backed securities held to maturity 682,690 845,314 Investment in limited partnerships 443,973 482,283 Investment in subsidiaries 15,006,828 14,319,130 Income tax receivable 126,221 11,690 Other assets 323,457 352,526 ----------------------------- $ 20,321,753 $ 19,365,539 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 41,024 $ 27,530 ----------------------------- Stockholders' equity: Common stock, at par value 14,115 14,115 Additional paid-in capital 10,599,090 10,599,090 Retained earnings 9,749,169 8,902,114 Unrealized gain on securities available for sale, net 32,077 12,384 Less deferred recognition and retention plan (113,722) (189,694) ----------------------------- 20,280,729 19,338,009 ----------------------------- $ 20,321,753 $ 19,365,539 =============================
STATEMENTS OF INCOME Years Ended September 30, 1997 and 1996 1997 1996 ------------------------------ Income: Equity in net income of subsidiaries $ 687,023 $ 87,854 Interest 285,049 269,432 Other 100,893 26,921 ------------------------------ 1,072,965 384,207 Operating expenses 347,539 360,167 ------------------------------ Income before income taxes (credits) 725,426 24,040 Income taxes (credits) (121,629) (50,690) ------------------------------ Net income $ 847,055 $ 74,730 ==============================
18 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS Years Ended September 30, 1997 and 1996 1997 1996 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 847,055 $ 74,730 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (687,023) (87,854) Amortization of RRP 75,972 75,972 Net realized gain on available for sale security (2,237) - Loss on investment in limited partnerships 25,530 16,052 Net accretion of investment and mortgage-backed securities premiums and discounts (12,562) (6,511) Increase in income tax receivable (114,531) (10,690) Decrease in other assets and liabilities, net 34,681 32,205 ------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 166,885 93,904 ------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of security available for sale 378,737 - Proceeds from maturities of securities held to maturity 1,500,000 1,500,000 Purchase of securities available for sale (449,400) (499,700) Purchase of securities held to maturity (1,597,312) (1,500,000) Principal collected on mortgage-backed securities 167,113 104,017 Cash distributions received from limited partnerships 12,780 1,665 Purchase of real estate acquired for investment (4,799) (12,451) ------------------------- NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES 7,119 (406,469) ------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 174,004 (312,565) CASH AND CASH EQUIVALENTS Beginning 856,488 1,169,053 ------------------------- Ending $ 1,030,492 $ 856,488 =========================
19 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair values of the Company's financial instruments as of September 30, 1997 and 1996 are as follows:
1997 1996 ------------------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------------------------ (in thousands) (in thousands) Financial assets: Cash and cash equivalents $ 4,681 $ 4,681 $ 2,286 $ 2,286 Securities available for sale 2,420 2,420 2,314 2,314 Securities held to maturity 10,087 10,092 9,485 9,402 Mortgage-backed securities held to maturity 40,106 40,116 47,513 47,030 Investment in limited partnerships 444 444 482 500 Loans receivable, net 66,183 65,484 60,284 58,925 Accrued interest receivable 713 713 748 748 Financial liabilities: Deposits 103,710 104,067 103,040 103,385 Off balance sheet financial instruments: Commitments to extend credit - - - -
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-STATEMENT OF FINANCIAL CONDITION RISK The Company is a party to financial instruments with off-statement of consolidated financial condition risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of consolidated financial condition. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-statement of financial condition instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Unless noted otherwise, the Company requires collateral or other security to support financial instruments with credit risk. At September 30, 1997, the Company had outstanding loan commitments totaling $1,252,700. The outstanding loan commitments consisted of $1,251,600 of fixed rate loans with rates ranging from 7.00% to 8.625%, and $1,100 of adjustable rate loan commitments. 20 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment letter. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but normally includes real estate. NOTE 14. STOCK OPTION PLAN The Company has adopted a qualified stock option plan with 122,730 shares of common stock reserved for the grant of options to key employees. These options were granted at a price of $8 per share, which approximated the market value at the date of the grant. As of September 30, 1997, options had been granted for 122,730 shares of common stock and are currently exercisable through January 2005. No options have been exercised at September 30, 1997 and 1996 and no compensation has been recognized for the options. NOTE 15. AGREEMENT TO MERGE AND PLAN OF REORGANIZATION On July 1, 1997, the Company signed an "Agreement to Merge and Plan of Merger" (the Agreement) with HMN Financial, Inc., a bank holding company headquartered in Spring Valley, Minnesota. The Agreement calls for Company stockholders to receive $17.51 in cash for each outstanding share of common stock. Individual holders of options to purchase Company stock at $8 per share will have the right to receive $9.51 in cash for each option share held at the effective date of the Agreement. The Agreement is subject to regulatory approval and is cancelable only if certain conditions are met, as specified in the Agreement. The Agreement also states that the Company is obligated to pay HMN Financial, Inc. $750,000 in the event of termination of this Agreement and there has been no material breach by HMN Financial, Inc. The Company's "Agreement to Merge and Plan of Reorganization" (the Agreement) with BancSecurity Corporation dated November 3, 1995 was abandoned as regulatory approval from the Federal Reserve Board was not received. In accordance with the Agreement, the Company received $75,000 from BancSecurity Corporation when the transaction was not consummated. 21 MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------- NOTE 16. PENDING ACCOUNTING PRONOUNCEMENTS AND REGULATIONS In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). SFAS No. 128 applies to all entities that have issued publicly-held common stock or potential common stock. SFAS No. 128 requires the entities to present basic earnings per share and diluted earnings per share on the face of the statements of income. Basic earnings per share replaces "primary" earnings per share and diluted earnings per share replaces "fully diluted" earnings per share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect SFAS No. 128 to materially affect its computation of earnings per share and since the requirements of SFAS No. 128 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure" (SFAS No. 129). SFAS No. 129 requires separate disclosure about the capital structure of the entity. While this statement codifies and contains a few more specifics, it does not expand, in any significant manner, previously existing disclosure requirements. SFAS No. 129 is effective for periods ending after December 15, 1997. As the requirements of SFAS No. 129 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 requires that all items that are components of comprehensive income 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, including all changes in equity during a period except those resulting from investments by owners and distributions to owners," be reported in a financial statement that is displayed with the same prominence as other financial statements. Companies will be required to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires reclassification of prior periods presented. As the requirements of SFAS No. 130 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information (SFAS No. 131). SFAS No. 131 requires that enterprises report certain financial and descriptive information about operating segments in complete sets of financial statements of the Company and in condensed financial statements of interim periods issued to shareholders. It also requires that a Company report certain information about their products and services, geographic areas in which they operate and their major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. As the requirements of SFAS No. 131 are disclosure related, its implementation will have no impact on the Company's financial condition or results of operations. 22 EX-99 4 EX-99.2 COMBINED FINANCIALS HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET at September 30, 1997
Pro Forma ---------------------------- ASSETS HMN MFC Adjustments Combined ----------- --------- -------------- ----------- Cash and cash equivalents $ 9,635,956 4,681,416 14,317,372 Securities available for sale: Mortgage-backed and related securities 111,117,282 0 25,343,907(1)(2) 136,461,189 Other marketable securities 72,815,033 1,224,396 9,075,182(1)(2) 83,114,611 ----------- ---------- ---------- ----------- 183,932,315 1,224,396 34,419,089 219,575,800 ----------- ---------- ---------- ----------- Securities held to maturity: Mortgage-backed and related securities 0 40,105,545 (40,105,545)(2) 0 Other marketable securities 0 10,087,377 (10,087,377)(2) 0 ----------- ---------- ---------- ----------- 0 50,192,922 (50,192,922) 0 ----------- ---------- ---------- ----------- Loans held for sale 2,089,733 0 2,089,733 Loans receivable, net 352,925,376 66,183,349 1,636,000 (2) 420,744,725 Federal Home Loan Bank stock, at cost 6,236,700 1,195,500 7,432,200 Real estate, net 89,334 397,466 486,800 Premises and equipment, net 4,230,723 385,072 370,392 (2) 4,986,187 Investment in limited partnerships 5,580,797 443,973 6,024,770 Goodwill 4,723,042 (3) 4,723,042 Core deposit intangible 1,567,000 (4) 1,567,000 Accrued interest receivable 3,180,525 713,098 3,893,623 Prepaid expenses and other assets 945,436 74,223 1,019,659 ----------- ----------- ---------- ----------- Total assets $568,846,895 125,491,415 (7,477,399) 686,860,911 =========== =========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $366,682,349 103,709,881 440,000 (2) 470,832,230 Federal Home Loan Bank advances 112,007,163 0 10,000,000 (1) 122,007,163 Accrued interest payable 1,147,269 1,031,293 2,178,562 Advance payments by borrowers for taxes and insurance 758,067 12,342 770,409 Accrued expenses and other liabilities 3,632,564 457,170 2,363,330 (5) 6,453,064 ----------- ----------- ---------- ----------- Total liabilities 484,227,412 105,210,686 12,803,330 602,241,428 ----------- ----------- ---------- ----------- Commitments and contingencies Stockholders' equity: HMN serial preferred stock ($.01 par value): authorized 500,000 shares; issued and outstanding none 0 0 0 HMN common stock ($.01 par value): authorized shares 7,000,000; issued shares 6,085,775 60,858 14,115 (14,115) (1) 60,858 Additional paid-in capital 59,702,833 10,599,090 (10,599,090) (1) 59,702,833 Retained earnings, subject to certain restrictions 58,976,197 9,749,169 (9,749,169) (1) 58,976,197 Net unrealized gain on securities available for sale 967,170 32,077 (32,077) (1) 967,170 Unearned employee stock ownership plan shares (4,650,340) 0 (4,650,340) Unearned compensation restricted stock awards (658,817) (113,722) 113,722 (1) (658,817) HMN treasury stock, at cost, 1,873,939 shares (29,778,418) 0 (29,778,418) ---------- ----------- ----------- ----------- Total stockholders' equity 84,619,483 20,280,729 (20,280,729) 84,619,483 ---------- ----------- ----------- ----------- Total liabilities and stockholders' equity $568,846,895 125,491,415 (7,477,399) 686,860,911 =========== =========== =========== ===========
HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET Pursuant to the Merger and consistent with generally accepted accounting principles ("GAAP"), certain purchase method accounting adjustments relating to MFC will be recorded. The purchase method accounting adjustments are preliminary estimates and are subject to revision as economic conditions change or as more information becomes available. The purchase price was $24.8 million, consisting of $23.7 million for 1.35 million outstanding shares of MFC stock, or $17.51 per share, and $1.1 million for the outstanding MFC options. HMN owned 60,000 shares at a cost of $1.0 million of MFC stock which were cancelled upon the completion of the Merger. The following notes further explain the adjustments. (1) Represents the planned sale of $14.8 million of securities available for sale, the planned borrowing of $10.0 million of advances from the Federal Home Loan Bank of Des Moines and the elimination of HMN's $1.0 million investment in MFC common stock and the elimination of MFC's stockholders' equity under the purchase method of accounting. (2) Represents the mark-to-market adjustments to reflect the fair market value of the MFC assets acquired and liabilities assumed under the purchase method of accounting. It also transfers the held to maturity security portfolio to the available for sale portfolio. The following summarizes the net mark-to-market premium or (discounts) established for the following asset categories: Bank premises and equipment $ 370,392 Securities 73,719 Loans 1,636,000 Deposits (440,000) ---------- Total $1,640,111 ========== (3) Represents the excess of the purchase price paid for MFC over the fair market value of the tangible and identifiable assets acquired and the fair value of the liabilities (goodwill) assumed under the purchase method of accounting. Goodwill is assumed to amortize on a straight-line basis over 25 years. The merger consideration of $24.8 million plus the cancellation of 60,000 shares of MFC common stock owned by HMN with a historical cost of $1.0 million was allocated as follows: Net assets at fair value (note 1 & 2) $21,920,840 Core deposit intangible (note 4) 1,567,000 Data processing conversion costs (note 5) (160,000) Severance and other change of control costs (note 5) (692,000) Professional fees (note 5) (380,000) Other accrued liabilities (note 5) (128,000) Goodwill 4,723,042 Net deferred tax liabilities (note 5) (1,003,330) ---------- Purchase price $25,847,552 ========== (4) Represents core deposit intangible relating to MFC's deposits. The core deposit intangible will be amortized using an accelerated method. (5) Represents accruals for other Merger related costs such as data processing conversion costs ($160,000), severance and other change of control costs ($692,000), professional fees including investment banker, accountants and attorneys fees ($380,000), accruals for other liabilities ($128,000) and net deferred tax liabilities of ($1,003,330). HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 1997
HMN MFC Pro Forma Nine Months Nine Months---------------------------- 9-30-97 9-30-97 Adjustments Combined ----------- --------- -------------- ----------- Interest Income: Loans receivable $20,730,094 3,701,845 (759,742) (1) 23,672,197 Securities available for sale: Mortgage-backed and related 6,458,996 0 6,458,996 Other marketable 2,621,762 53,924 2,675,686 Securities held to maturity: Mortgage-backed and related 33,400 2,142,943 (769,104)(2) 1,407,239 Other marketable 10,032 493,454 2,439 (2) 505,925 Cash equivalents 225,237 190,056 415,293 Other 304,158 62,591 366,749 ---------- ---------- ---------- ---------- Total interest income 30,383,679 6,644,813 (1,526,407) 35,502,085 ---------- ---------- ---------- ---------- Interest expense: Deposits 13,993,332 4,115,712 (176,779)(3) 17,932,265 Federal Home Loan Bank advances 4,792,552 0 450,000 (4) 5,242,552 ---------- ---------- ---------- ---------- Total interest expense 18,785,884 4,115,712 273,221 23,174,817 ---------- ---------- ---------- ---------- Net interest income 11,597,795 2,529,101 (1,799,628) 12,327,268 Provision for loan losses 225,000 7,500 232,500 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 11,372,795 2,521,601 (1,799,628) 12,094,768 ---------- ---------- ---------- ---------- Non-interest income: Fees and service charges 318,346 42,885 361,231 Securities gains, net 872,159 2,237 874,396 Gain on sales of loans 334,367 0 334,367 Other 457,786 52,793 510,579 ---------- ---------- ---------- ---------- Total non-interest income 1,982,658 97,915 2,080,573 ---------- ---------- ---------- ---------- Non-interest expense: Compensation and benefits 4,106,699 1,007,848 5,114,547 Occupancy 718,801 144,348 19,935 (6) 883,084 Federal deposit insurance premiums 175,379 50,698 226,077 Advertising 214,557 40,887 255,444 Data processing 372,432 77,415 449,847 Provision for real estate losses 3,000 0 3,000 Other 879,375 424,530 350,744 (5) 1,654,649 ---------- ---------- ---------- ---------- Total non-interest expense 6,470,243 1,745,726 370,679 8,586,648 ---------- ---------- ---------- ---------- Income before income tax expense 6,885,210 873,790 (2,170,307) 5,588,693 Income tax (benefit) expense 2,554,400 246,526 (677,226) 2,123,700 ---------- ---------- ---------- ---------- Net income $ 4,330,810 627,264 (1,493,081) 3,464,993 ========== ========== ========== ========== Primary earnings per common share and common share equivalents $ 1.10 0.43 0.88 ===== ===== ===== Fully diluted earnings per common share and common share equivalents $ 1.09 0.42 0.87 ===== ===== ===== Weighted average shares outstanding: Primary 3,938,454 1,470,989 3,938,454 Fully diluted 3,977,962 1,477,287 3,977,962
HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 1996
HMN MFC Pro Forma Nine Months Nine Months------------------------- 9-30-96 9-30-96 Adjustments Combined ----------- --------- ------------- ---------- Interest Income: Loans receivable $ 19,009,335 3,328,393 (759,742)(1) 21,577,986 Securities available for sale: Mortgage-backed and related 7,730,690 0 7,730,690 Other marketable 1,655,705 50,984 1,706,689 Securities held to maturity: Mortgage-backed and related 719,827 2,494,344 (769,104)(2) 2,445,067 Other marketable 90,103 402,683 2,439 (2) 495,225 Cash equivalents 315,623 207,835 523,458 Other 232,453 64,014 296,467 ---------- --------- ---------- ---------- Total interest income 29,753,736 6,548,253 (1,526,407) 34,775,582 ---------- --------- ---------- ---------- Interest expense: Deposits 14,281,156 4,174,507 (176,779) (3)18,278,884 Federal Home Loan Bank advances 3,739,015 0 450,000 (3) 4,189,015 ---------- --------- ---------- ---------- Total interest expense 18,020,171 4,174,507 273,221 22,467,899 ---------- --------- ---------- ---------- Net interest income 11,733,565 2,373,746 (1,799,628) 12,307,683 Provision for loan losses 225,000 7,500 232,500 ---------- --------- ---------- ---------- Net interest income after provision for loan losses 11,508,565 2,366,246 (1,799,628) 12,075,183 ---------- --------- ---------- ---------- Non-interest income: Fees and service charges 254,188 47,740 301,928 Securities gains, net 961,798 0 961,798 Gain on sales of loans 16,980 0 16,980 Other 365,879 76,754 442,633 ---------- --------- ---------- ---------- Total non-interest income 1,598,845 124,494 1,723,339 ---------- --------- ---------- ---------- Non-interest expense: Compensation and benefits 3,380,843 976,553 4,357,396 Occupancy 595,216 151,283 19,935 (6) 766,434 Federal deposit insurance premiums 636,676 180,222 816,898 SAIF special assessment 2,351,563 681,920 3,033,483 Advertising 229,735 40,851 270,586 Data processing 368,145 78,078 446,223 Other 799,710 373,518 350,744 (5) 1,523,972 ---------- --------- ---------- ----------- Total non-interest expense 8,361,888 2,482,425 370,679 11,214,992 ---------- --------- ---------- ----------- Income (loss) before income taxes 4,745,522 8,315 (2,170,307) 2,583,530 Income tax (benefit) expense 1,770,274 (12,253) (749,221) 1,008,800 ---------- --------- ---------- ----------- Net income (loss) $ 2,975,248 20,568 (1,421,086) 1,574,730 ========== ========= ========== =========== Primary earnings per common share and common share equivalents $ 0.66 0.01 0.35 ========== ========= =========== Fully diluted earnings per common share and common share equivalents 0.66 0.01 0.35 ========== ========= =========== Weighted average shares outstanding: Primary 4,509,942 1,472,722 4,509,942 Fully diluted 4,516,499 1,473,784 4,516,499
HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME For the year ended December 31, 1996
HMN MFC Pro Forma Nine Months Nine Months---------------------------- 12-31-96 9-30-96 Adjustments Combined ----------- --------- -------------- ----------- Interest Income: Loans receivable $25,721,042 4,386,435 (983,477)(1) 29,347,735 Securities available for sale: Mortgage-backed and related 10,027,438 0 10,027,438 Other marketable 2,424,628 62,312 2,486,940 Securities held to maturity: Mortgage-backed and related 765,120 3,383,557 (1,023,803)(2) 3,379,573 Other marketable 104,448 551,307 2,981 (2) 658,194 Cash equivalents 494,129 279,284 773,413 Other 327,520 93,316 420,836 ---------- ---------- --------- ---------- Total interest income 39,864,325 8,756,211 (2,004,299) 47,094,129 ---------- ---------- --------- ---------- Interest expense: Deposits 18,949,937 5,579,496 (212,430)(3) 24,352,654 Federal Home Loan Bank advances 5,243,853 0 600,000 (4) 5,693,853 ---------- ---------- --------- ---------- Total interest expense 24,193,790 5,579,496 387,570 30,046,507 ---------- ---------- --------- ---------- Net interest income 15,670,535 3,176,715 (2,391,869) 17,047,622 Provision for loan losses 300,000 10,000 310,000 ---------- ---------- --------- ---------- Net interest income after provision for loan losses 15,370,535 3,166,715 (2,391,869) 16,737,622 ---------- ---------- --------- ---------- Non-interest income: Fees and service charges 359,249 62,661 421,910 Securities gains, net 1,029,638 0 1,029,638 Gain on sales of loans 39,306 0 39,306 Other 494,507 89,982 584,489 ---------- ---------- --------- ---------- Total non-interest income 1,922,700 152,643 2,075,343 ---------- ---------- --------- ---------- Non-interest expense: Compensation and benefits 4,591,367 1,314,115 5,905,482 Occupancy 825,609 200,758 26,580(6) 1,046,302 Federal deposit insurance premiums 799,890 239,406 1,039,296 SAIF special assessment 2,351,563 681,920 3,033,483 Advertising 308,464 53,995 362,459 Data processing 489,045 103,898 592,943 Other 1,142,948 593,324 467,662(5) 2,087,016 ---------- ---------- ---------- ---------- Total non-interest expense 10,508,886 3,187,416 494,242 14,066,981 ---------- ---------- ---------- ---------- Income before income tax expense 6,784,349 131,942 (2,886,111) 4,745,984 Income tax expense 2,510,000 57,212 (1,009,212) 1,558,000 ---------- ---------- ---------- ---------- Net income $4,274,349 74,730 (1,876,899) 2,472,180 ========== ========== ========== ========== Primary earnings per common share and common share equivalents $ 0.96 0.05 0.56 ========== ========== ========== Fully diluted earnings per common share and common share equivalents $ 0.95 0.05 0.55 ========== ========== ========== Weighted average shares outstanding: Primary 4,436,833 1,472,185 4,436,833 Fully diluted 4,509,566 1,473,784 4,509,566
HMN FINANCIAL, INC. AND SUBSIDIARIES MARSHALLTOWN FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME Pursuant to the Merger and consistent with GAAP, certain adjustments will be recorded, primarily to accrue for specific, identified costs related to the merger of MFC. The amounts of the Merger related costs are preliminary estimates and are subject to revisions as economic conditions change or as more information becomes available. HMN expects to achieve operating cost savings primarily through reductions in staff and the consolidation of certain functions such as data processing, investments and other back office operations at MFC. The operating cost savings are expected to be achieved in various amounts at various times during the years subsequent to the acquisition of MFC and not ratably over, or at the beginning or end of, such periods. No adjustment has been reflected in the Unaudited Pro Forma Combined Consolidated Statement of Income for the year ended December 31, 1996 or for the nine months ended September 30, 1997 and 1996 for the anticipated cost savings. (1) Represents amortization of MFC mark-to-market adjustments under the purchase method of accounting for loans. (2) Represents amortization of MFC mark-to-market adjustments under the purchase method of accounting for securities, and the forgone interest income resulting from the planned sale of $15.8 million of securities. (3) Represents amortization of MFC mark-to-market adjustments under the purchase method of accounting for deposits. (4) Represents the net interest cost of borrowing $10.0 million to fund the MFC acquisition. (5) Represents amortization of goodwill and core deposit intangible. (6) Represents the additional depreciation on premises and equipment related to the MFC mark-to-market adjustments. Provided the accounting estimates related to the acquisition of MFC are not revised, the estimated impact of amortizing goodwill and other purchase accounting adjustments will reduce pretax income by the following amounts in each of the following years: $1,256,000 for 1998, $593,000 for 1999, $564,000 for 2000, $426,694 for 2001 and $346,674 for 2002. -----END PRIVACY-ENHANCED MESSAGE-----