-----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, NkdLu0B9rGjmMwj4MBOfEZz7zEqUE/j7WIY8eVy8e6Ldd1cQEPXhNEv+E+TY2QLe OYLhIVZ4NPXCntqYgOVoaQ== 0000921183-98-000007.txt : 19980515 0000921183-98-000007.hdr.sgml : 19980515 ACCESSION NUMBER: 0000921183-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: 98621414 BUSINESS ADDRESS: STREET 1: 101 N BROADWAY CITY: SPRING VALLEY STATE: MN ZIP: 55975-1223 BUSINESS PHONE: 5073461100 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 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 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) 346-1100 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / Indicate the number of shares outstanding of each of the issuer's common stock as of the latest practicable date. Class Outstanding at May 8, 1998 - -------------------------------------- ---------------------------- Common stock, $0.01 par value 5,909,052* *Gives effect to a 50% stock dividend to be distributed on May 22, 1998 to holders of record on May 8, 1998. HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements (unaudited) Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 3 Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997 4 Consolidated Statement of Comprehensive Income for the Three Months Ended March 31, 1998 and 1997 5 Consolidated Statement of Stockholders' Equity for the Three Month Period Ended March 31, 1998 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 6-7 Notes to Consolidated Financial Statements 8-13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 14-22 Item 3: Quantitative and Qualitative Disclosures about Market Risk Discussion included in Item 2 under Market Risk 17 PART II - OTHER INFORMATION Item 1: Legal Proceedings 23 Item 2: Changes in Securities 23 Item 3: Defaults Upon Senior Securities 23 Item 4: Submission of Matters to a Vote of Security Holders 23 Item 5: Other Information 23 Item 6: Exhibits and Reports on Form 8-K 23 Signatures 24 2 PART I - FINANCIAL STATEMENTS HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
March 31, December 31, ASSETS 1998 1997 ----------- ----------- Cash and cash equivalents. . . . . . . .$ 21,267,061 9,364,635 Securities available for sale: Mortgage-backed and related securities (amortized cost $137,263,165 and $135,598,404). . . . . . . . . 137,473,527 135,935,482 Other marketable securities (amortized cost $80,170,535 and $68,356,926) . . . . . . . . . . . 81,648,096 69,923,477 ----------- ----------- 219,121,623 205,858,959 ----------- ----------- Loans held for sale. . . . . . . . . . . 8,317,565 2,287,265 Loans receivable, net. . . . . . . . . . 450,209,710 442,068,600 Federal Home Loan Bank stock, at cost. . 8,488,000 7,432,200 Real estate, net . . . . . . . . . . . . 75,177 133,939 Premises and equipment, net. . . . . . . 6,515,713 5,880,710 Accrued interest receivable. . . . . . . 3,870,744 4,038,131 Investment in limited partnerships . . . 6,222,467 5,989,399 Goodwill . . . . . . . . . . . . . . . . 4,476,510 4,500,873 Core deposit intangible. . . . . . . . . 1,474,516 1,546,273 Mortgage servicing rights. . . . . . . . 1,096,724 781,005 Prepaid expenses and other assets. . . . 982,545 1,349,521 ----------- ----------- Total assets . . . . . . . . . . .$ 732,118,355 691,231,510 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY . Deposits . . . . . . . . . . . . . . . .$ 466,998,386 467,347,688 Federal Home Loan Bank advances. . . . . 167,292,879 127,650,021 Accrued interest payable . . . . . . . . 2,104,569 1,365,064 Advance payments by borrowers for taxes and insurance . . . . . . . . . 862,984 786,619 Accrued expenses and other liabilities . 5,967,389 6,056,356 Due to stockholders of Marshalltown Financial Corporation. . . . . . . . . 192,890 3,555,352 Due to brokers . . . . . . . . . . . . . 3,745,250 0 ----------- ----------- Total liabilities. . . . . . . . . 647,164,347 606,761,100 ----------- ----------- Commitments and contingencies Stockholders' equity: Serial preferred stock: authorized 500,000 shares; issued and outstanding none. . . . . . . . . . 0 0 Common stock ($.01 par value): authorized 11,000,000 shares; issued 9,128,662 shares . . . . . . 91,287 91,287 Additional paid-in capital. . . . . . 59,800,424 59,698,661 Retained earnings, subject to certain restrictions. . . . . . . . . . . . 61,887,608 60,224,253 Accumulated other comprehensive income. . . . . . . . . . . . . . . 1,031,926 1,129,818 Unearned employee stock ownership plan shares . . . . . . . . . . . . (5,799,632) (4,554,280) Unearned compensation restricted stock awards. . . . . . . . . . . . . . . (538,944) (600,668) Treasury stock, at cost 2,912,110 shares. . . . . . . . . . . . . . . (31,518,661) (31,518,661) ----------- ----------- Total stockholders' equity . . . . 84,954,008 84,470,410 ----------- ----------- Total liabilities and stockholders' equity . . . . . . . . . . . . . .$ 732,118,355 691,231,510 =========== ===========
See accompanying notes to consolidated financial statements. 3 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Three Months Ended March 31, 1998 1997 ------------------------------- Interest Income: Loans receivable. . . . . . . . . . . . . $ 8,642,372 6,908,242 Securities available for sale:. . . . . . Mortgage-backed and related . . . . . . 2,218,698 2,189,210 Other marketable. . . . . . . . . . . . 956,472 585,242 Securities held to maturity:. . . . . . . Mortgage-backed and related . . . . . . 0 33,400 Other marketable. . . . . . . . . . . . 0 10,032 Cash equivalents. . . . . . . . . . . . . 161,324 82,160 Other . . . . . . . . . . . . . . . . . . 122,334 94,961 ----------- ----------- Total interest income. . . . . . . . . 12,101,200 9,903,247 ----------- ----------- Interest expense:. . . . . . . . . . . . . . Deposits. . . . . . . . . . . . . . . . . 5,703,524 4,572,798 Federal Home Loan Bank advances . . . . . 2,084,466 1,451,400 ----------- ----------- Total interest expense . . . . . . . . 7,787,990 6,024,198 ----------- ----------- Net interest income . . . . . . . 4,313,210 3,879,049 Provision for loan losses. . . . . . . . . . 75,000 75,000 ----------- ----------- Net interest income after provision for loan losses. . . . 4,238,210 3,804,049 ----------- ----------- Non-interest income: . . . . . . . . . . . . Fees and service charges. . . . . . . . . 201,756 96,412 Securities gains, net . . . . . . . . . . 896,447 270,917 Gain on sales of loans. . . . . . . . . . 366,244 153,450 Other . . . . . . . . . . . . . . . . . . 197,722 177,515 ----------- ----------- Total non-interest income. . . . . . . 1,662,169 698,294 ----------- ----------- Non-interest expense:. . . . . . . . . . . . Compensation and benefits . . . . . . . . 1,852,480 1,315,987 Occupancy . . . . . . . . . . . . . . . . 364,721 241,147 Federal deposit insurance premiums. . . . 73,831 58,977 Advertising . . . . . . . . . . . . . . . 92,981 78,137 Data processing . . . . . . . . . . . . . 174,055 124,529 Provision for real estate losses. . . . . 0 2,000 Other . . . . . . . . . . . . . . . . . . 695,956 293,665 ----------- ----------- Total non-interest expense . . . . . . 3,254,024 2,114,442 ----------- ----------- Income before income tax expense . . . 2,646,355 2,387,901 Income tax expense . . . . . . . . . . . . . 983,000 913,421 ----------- ----------- Net income . . . . . . . . . . . . . . $ 1,663,355 1,474,480 =========== =========== Basic earnings per share . . . . . . . . . . $ 0.31 0.27 =========== =========== Diluted earnings per share . . . . . . . . . $ 0.28 0.25 =========== ===========
See accompanying notes to consolidated financial statements. 4 HMN FINANCIAL, INC. Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended March 31, 1998 1997 ------------------------ --------------------- Net income $ 1,663,355 1,474,480 Other comprehensive income, net of tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 452,347 (747,358) Less: reclassification adjustment for gains included in net income (550,239) (161,282) -------- -------- Other comprehensive income (97,892) (908,640) --------- ------- Comprehensive income $ 1,565,463 565,840 ========= =======
See accompanying notes to consolidated financial statements. HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Three Months Ended March 31, 1998 (unaudited)
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income --------------------------------------------------------- Balance, December 31, 1997 $ 91,287 59,698,661 60,224,253 1,129,818 Net income 1,663,355 Other comprehensive income (97,892) Amortization of restricted stock awards Shares purchased for employee stock ownership plan Earned employee stock ownership plan shares 101,763 ----------- ----------- ----------- ----------- Balance, March 31, 1998 $ 91,287 59,800,424 61,887,608 1,031,926 =========== =========== =========== =========== Unearned Employee Stock Unearned Ownership Compensation Total Plan Restricted Treasury Stockholders' Shares Stock Awards Stock Equity -------------------------------------------------------- Balance, December 31, 1997 $(4,554,280) (600,668) (31,518,661) 84,470,410 Net income 1,663,355 Other comprehensive income (97,892) Amortization of restricted stock awards 61,724 61,724 Shares purchased for employee stock ownership plan (1,361,595) (1,361,595) Earned employee stock ownership plan shares 116,243 218,006 ----------- --------- ----------- ------------ Balance, March 31, 1998 $ (5,799,632) (538,944) (31,518,661) 84,954,008 =========== ============ =========== ============
See accompanying notes to consolidated financial statements. 5 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 1998 1997 ---------------------- Cash flows from operating activities: Net income $ 1,663,355 1,474,480 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 75,000 75,000 Depreciation 144,845 102,879 Amortization of (discounts) premiums, net (20,916) (46,804) Amortization of deferred loan fees (148,028) (87,139) Amortization of goodwill 45,159 0 Amortization of core deposit intangible 71,757 0 Amortization of loans and deposits mark to market on MFC 184,119 0 Amortization of mortgage servicing rights 137,110 0 Provision for deferred income taxes 90,000 128,200 Securities gains, net (896,447) (270,917) Gain on sales of real estate (2,768) 0 Gain on sales of loans (366,244) (153,450) Proceeds from sale of loans held for sale 34,212,150 867,032 Disbursements on loans held for sale (28,386,755) (276,008) Amortization of restricted stock awards 61,724 57,174 Amortization of unearned ESOP shares 116,243 96,060 Earned employee stock ownership shares priced above original cost 101,763 59,237 Decrease in accrued interest receivable 167,387 497,246 Increase (decrease) in accrued interest payable 739,505 (66,175) Equity earnings of limited partnership (51,943) (73,824) Decrease (increase) in other assets 481,381 (705,413) Increase in other liabilities (61,153) 552,087 Other, net (105,926) 33,052 ---------- ---------- Net cash provided by operating activities 8,251,318 2,390,917 ---------- ---------- Cash flows from investing activities: Proceeds from sales of securities available for sale 61,083,048 15,902,046 Principal collected on securities available for sale 6,290,945 2,949,425 Proceeds collected on maturity of securities available for sale 6,100,000 14,650,000 Purchases of securities available for sale (82,365,386) (33,086,600) Proceeds from sales of securities held to maturity 0 348,871 Principal collected on securities held to maturity 0 240,441 Proceeds collected on maturity of securities held to maturity 0 1,000,000 Proceeds from sales of loans receivable 1,965,018 19,210,058 Purchases of mortgage servicing rights (356,744) 0 Purchase of interest in limited partnerships (181,125) (1,216,875) Purchase of Federal Home Loan Bank stock (1,055,800) (193,100) Net increase in loans receivable (21,711,768) (16,873,204) Proceeds from sale of real estate 50,574 0 Purchases of premises and equipment (779,848) (482,836) Decrease in due to shareholders of Marshalltown Financial Corporation (3,362,462) 0 ---------- ---------- Net cash provided by investing activities (34,323,548) 2,448,226 ---------- ---------- Cash flows from financing activities: Increase (decrease) in deposits (268,567) 1,645,716 Purchase of treasury stock 0 (4,109,637) Increase in unearned ESOP shares (1,361,595) 0 Payments to ESOP trustee to purchase additional HMN shares (114,405) 0 Proceeds from Federal Home Loan Bank advances 62,500,000 36,000,000 Repayment of Federal Home Loan Bank advances (22,857,142) (36,357,142) Increase in advance payments by borrowers for taxes and insurance 76,365 280,461 ---------- ---------- Net cash provided (used) by financing activities 37,974,656 (2,540,602) ---------- ---------- Increase in cash and cash equivalents 11,902,426 2,170,341 Cash and cash equivalents, beginning of period 9,364,635 10,583,717 ---------- ---------- Cash and cash equivalents, end of period $ 21,267,061 12,754,058 ========== ========== 6 Supplemental cash flow disclosures: Cash paid for interest $ 7,048,485 6,090,373 Cash paid for income taxes 175,000 148,500 Supplemental noncash flow disclosures: Loans securitized and transferred to securities available for sale $ 0 4,781,034 Securities held to maturity transferred to securities available for sale 0 1,295,147 Loans transferred to loans held for sale 11,495,290 897,559 Transfer of loans to real estate 0 94,164 Securities purchased with liability due to broker 3,745,250 0 Due to stockholders of Marshalltown Financial, Inc. 192,890 0
See accompanying notes to consolidated financial statements. 7 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) March 31, 1998 and 1997 (1) HMN FINANCIAL, INC. HMN Financial, Inc.(HMN) is a stock savings bank holding company which owns 100 percent of Home Federal Savings Bank (the Bank or Home Federal). Home Federal has a community banking philosophy and operates retail banking facilities in Minnesota and Iowa. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OAI) and MSL Financial Corporation (MSL), which offer financial planning products and services. HMN has two other wholly owned subsidiaries, Security Finance Corporation (SFC) and HMN Mortgage Services, Inc. (MSI). SFC invests in commercial loans and commercial real-estate loans located throughout the United States which were originated by third parties. MSI operates mortgage banking and mortgage brokerage facilities located in Eden Prairie and Brooklyn Park, Minnesota. The consolidated financial statements included herein are for HMN, SFC, MSI, the Bank and the Bank's wholly owned subsidiaries, OAI and MSL. 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 statement of income for the three month period ended March 31, 1998 is 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 Effective January 1, 1998 HMN adopted Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. The statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be disclosed in the financial statements. Comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income, which for HMN is comprised entirely of unrealized gains and losses on securities available for sale. The gross unrealized holding gains for the first quarter of 1998 were $681,000, the income tax expense would have been $228,000 and therefore, the net gain was $452,000. The gross reclassification adjustment for the first quarter of 1998 was $896,000, the income tax expense would have been $346,000 and therefore, the net reclassification adjustment was $550,000. The gross unrealized holding losses for the first quarter of 1997 were $1,321,000, the income tax benefit would have been $574,000 and therefore, the net loss was $747,000. The gross reclassification adjustment for the first quarter of 1997 was $271,000, the income tax expense would have been $110,000 and therefore, the net reclassification adjustment was $161,000. 8 In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS which revises employers' disclosures about pension and other Postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other Postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligation and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when FASB Statements No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS, No. 88, EMPLOYERS' ACCOUNTING FOR SETTLEMENT AND CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS, and No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, were issued. SFAS No. 132 suggests combined formats for presentation of pension and other postretirement benefit disclosures. It is effective for fiscal years beginning after December 15, 1997. Restatement of disclosures for earlier periods provided for comparative purposes is required unless the information is not readily available. Adopting the disclosure requirements of SFAS No. 132 will not have a material impact on HMN's financial condition or the results of its operations. (4) STOCK SPLIT In February of 1998 HMN authorized a three-for-two stock split in the form of a fifty percent stock dividend subject to stockholder approval to increase HMN's authorized common stock from 7.0 million shares to 11.0 million shares. At the annual meeting on April 28, 1998 the stockholders approved the increase in authorized common stock. The Board of Directors then declared that the stock dividend will be distributed on May 22, 1998 to stockholders of record on May 8, 1998. The stock split increased HMN's outstanding common shares from 6,085,775 to 9,128,662 shares. Stockholders' equity has been restated to give retroactive effect to the stock split for all periods presented by reclassifying from additional paid-in capital to common stock the par value of the additional shares arising from the stock split. In addition all references in the Consolidated Financial Statements and Notes thereto to number of shares, per- share amounts, stock option data and market prices of HMN's common stock have been restated giving retroactive recognition to the stock split. The Board also announced a cash dividend of $0.06 per share, payable on June 12, 1998 to stockholders of record on May 27, 1998. (5) MERGERS AND ACQUISITIONS On December 5, 1997 HMN, through its wholly owned subsidiary, Home Federal, completed its merger (the Merger) with Marshalltown Financial Corporation (MFC) pursuant to a merger agreement dated July 1, 1997. The aggregate consideration per the merger agreement 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 with a historical cost of $1.0 million which were cancelled upon the completion of the merger. The following Unaudited Pro Forma Condensed Combined Consolidated Statements of Income for the three months ended March 31, 1997 combine HMN's income statement with MFC's income statement. The statement is presented as if the Merger had been effective at the beginning of the period presented, after giving effect to certain pro forma adjustments described in the accompanying notes. The Unaudited Pro Forma Condensed Combined Financial Information and notes thereto (the Information) 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 subsidiaries 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 Information is not necessarily indicative of the 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 period indicated. 9 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME Three months ended March 31, 1997
Pro Forma --------------------------- HMN MFC Adjustments Combined --------- ---------- ---------- ----------- Total interest income $ 9,903,247 2,200,332 (501,075)(1)(2) 11,602,504 Total interest expense 6,024,198 1,364,688 96,893 (3)(4) 7,485,779 ---------- ---------- ---------- ---------- Net interest income 3,879,049 835,644 (597,968) 4,116,725 Provision for loan losses 75,000 2,500 77,500 Non-interest income 698,294 36,874 735,168 Non-interest expense 2,114,442 593,036 123,561 (5)(6) 2,831,039 ---------- ---------- ---------- ---------- Income before income tax expense 2,387,901 276,982 (721,529) 1,943,354 Income tax expense 913,421 33,904 (247,718) 699,607 ---------- ---------- ---------- ---------- Net income $1,474,480 243,078 (473,811) 1,243,747 ========== ========== ========== ========== Basic earnings per share $ 0.27 0.17 0.22 Diluted earnings per share $ 0.25 0.17 0.21 Weighted average shares outstanding: Basic 5,550,215 1,411,475 5,550,215 Diluted 5,888,815 1,469,290 5,888,815
Pursuant to the Merger and consistent with GAAP, certain adjustments were recorded, primarily to accrue for specific, identified costs related to the merger of MFC. The amounts of the Merger related costs 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 Condensed Combined Consolidated Statement of Income for the three months ended March 31, 1997 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. 10 (6) EARNINGS PER SHARE The following table reconciles the weighted average shares outstanding and the income available to common shareholders used for basic and diluted EPS:
Three months ended March 31, 1998 1997 ----------------------------- Weighted average number of common shares outstanding used in basic earnings per common share calculation . . . . . . . . 5,447,501 5,550,215 Net dilutive effect of: Options . . . . . . . . . . . . . . . . . 403,037 255,093 Restricted stock awards . . . . . . . . . 61,395 83,507 --------- --------- Weighted average number of shares outstanding adjusted for effect of dilutive securities . . . . . . . . . . . 5,911,933 5,888,815 ========= ========= Income available to common shareholders. . $1,663,355 1,474,480 Basic earnings per common share. . . . . . $0.31 0.27 Diluted earnings per common share. . . . . $0.28 0.25
The earnings per share calculations reflected above are presented as if the split had been completed at the beginning of each period presented for the weighted average number of shares outstanding for each period. (7) EMPLOYEE BENEFITS During 1994 HMN adopted an Employee Stock Ownership Plan (the ESOP) which met the requirements of Section 4975(e)(7) of the Internal Revenue Code and Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and, as such the ESOP was empowered to borrow in order to finance purchases of the common stock of HMN. The ESOP borrowed $6,085,770 from HMN to purchase 912,865 post stock split shares of common stock of HMN on the date of the conversion. The ESOP debt requires quarterly payments of principal plus interest at 7.52%. HMN has committed to make quarterly contributions to the ESOP necessary to repay the loan including interest. As the debt is repaid, ESOP shares which were initially pledged as collateral for its debt, are committed to be released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. HMN accounts for its ESOP in accordance with Statement of Position 93-6, EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in stockholders' equity. As shares are determined to be ratably released from collateral, HMN reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. During the first quarter of 1998 HMN loaned $1,476,000 to the ESOP to purchase additional shares of HMN stock. The stock purchased by the ESOP will be used to provide a benefit to the employees that were added as the result of the MFC Merger. In June of 1995, HMN as part of a Recognition and Retention Plan (RRP) awarded 126,729 post stock split shares of restricted common stock to its officers and directors. The shares vest over a five year period and were issued from treasury stock. In April 1997, 3,000 post stock split shares of restricted common stock were awarded to a director. Those shares vest over a five year period beginning in 1998. At March 31, 1998 there are 73,062 post stock split shares that vest over the next four years. In June 1995, HMN adopted its only stock option plan, the 1995 Stock Option and Incentive Plan (the SOP). During 1995, options exercisable for 821,569 post stock split shares of HMN common stock were granted to certain officers and directors at an exercise price of $9.21 per share. The options vest over a five year period and may be exercised within 10 years of the grant date. In December 1996, options exercisable for 1,500 post stock split shares of common stock were granted to officers at an exercise price of $12.08. In April 11 1997, options for 18,000 post stock split shares of common stock were granted to a director at an exercise price of $13.00. A summary of stock option activity under the SOP on a post stock split basis is detailed as follows: - --------------------------------------------------------------------------- Weighted Options average available for Options exercise grant outstanding price ---------- ----------- ------- December 31, 1997 90,054 802,200 $9.30 Exercised 0 ---------- ----------- ------- March 31, 1998 90,054 802,200 $9.30 ========== =========== =======
The following table summarizes information about stock options on a post split basis outstanding at March 31, 1998: - -----------------------------------------------------------------------------
Options Outstanding Options Exercisable --------------------------------------------------- ---------------------- Weighted average Exercise Number remaining contractual price outstanding life in years Number Price ------------- ----------- --------------------- --------- --------- $9.21 782,700 7.1 303,458 $9.21 12.08 1,500 8.6 300 12.08 13.00 18,000 9.0 3,600 13.00 -------- -------- 802,200 307,358 ======== ======== - -----------------------------------------------------------------------------
(8) 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. Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tangible, Tier I (Core), and Risk-based capital (as defined in the regulations) to adjusted total assets and risk-weighted assets (as defined). Management believes, as of March 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. Management believes that based upon the Bank's capital calculations at March 31, 1998 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized. On March 31, 1998 the Bank's tangible assets and adjusted total assets were $691,231,000 and its risk-weighted assets were $321,833,000. The following table presents the Bank's capital amounts and ratios at Mach 31, 1998 for actual capital, required capital and excess capital including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations. 12
Required to be Adequately Actual Capitalized --------------------- ---------------------- (in thousands) Amount Percent Amount Percent ---------- ---------- ---------- ---------- Bank stockholder's equity $ 52,193 Plus: Net unrealized loss (gain) on certain securities available for sale (466) Less: Goodwill and other intangibles 5,951 Excess mortgage servicing rights 539 --------- Tier I or core capital 45,237 $27,649 --------- Tier I capital to adjusted total assets 6.54% 4.00% Tier I capital to risk- weighted assets 14.06% Less: Equity investments and other assets required to be deducted (263) Plus: Allowable allowance for loan losses 2,819 ---------- Risk-based capital $47,793 $25,747 ========== Risk-based capital to risk- weighted assets 14.85% 8.00% To Be Well Capitalized Under Prompt Corrective Excess Capital Actions Provisions (in thousands) Amount Percent Amount Percent ---------- ---------- ---------- ---------- Bank stockholder's equity $ Plus: Net unrealized loss (gain) on certain securities available for sale Less: Goodwill and other intangibles Excess mortgage servicing rights Tier I or core capital $17,588 Tier I capital to adjusted total assets 2.54% 5.00% Tier I capital to risk- weighted assets 6.00% Less: Equity investments and other assets required to be deducted Plus: Allowable allowance for loan losses Risk-based capital $22,046 Risk-based capital to risk- weighted assets 6.85% 10.00%
The tangible capital of the Bank was in excess of the minimum 2% required at March 31, 1998 but is not reflected in the table above. 13 HMN FINANCIAL, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL HMN's net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and the interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between the yield earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. HMN's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net interest margin is calculated by dividing net interest income by the average interest-earning assets and is normally expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. HMN's net income is also affected by the generation of non-interest income, which primarily consists of gains from the sale of securities, gains from sale of loans, service charges, fees and other income. In addition, net income is affected by the level of operating expenses and establishment of a provision for loan losses. The operations of financial institutions, including the Bank, are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of personal income and savings in the market area of the Bank. NET INCOME HMN's net income for the first quarter of 1998 was $1.7 million, an increase of $189,000, or 12.8%, compared to $1.5 million for the first quarter of 1997. Net income increased by $434,000 due to an increase in net interest income and by $964,000 due to increased non-interest income. The increased income was partially off-set by a $1.1 million increase in non-interest expense. Basic earnings per share was $0.31 for the quarter ended March 31, 1998, an increase of $0.04 per share, or 14.8%, from $0.27 basic earnings per share for the same quarter of 1997. Diluted earnings per share was $0.28 per share for the first quarter of 1998, an increase of $0.03, or 12.0% from $0.25 diluted earnings per share for the first quarter of 1997. In February of 1998 HMN announced that its Board of Directors had authorized a three-for-two stock split in the form of a fifty percent stock dividend subject to stockholder approval at the annual meeting of stockholders held on April 28, 1998 to increase HMN's authorized common stock from 7.0 million shares to 11.0 million shares. At the annual meeting the stockholders approved the increase in authorized common stock. The Board of Directors then declared that the split will be distributed on May 22, 1998 to shareholders of record on May 8, 1998. The financial statements included in this Form 10- Q have been presented assuming that the stock split had taken place on March 31, 1998 as required by generally accepted accounting principles. Earnings per share calculations were based upon post split weighted average outstanding share information. NET INTEREST INCOME Net interest income for the first quarter of 1998 was $4.3 million an increase of $434,000, or 11.2%, compared to $3.9 million for the first quarter of 1997. Interest income for the first quarter of 1998 was $12.1 million, an increase of $2.2 million, or 22.2%, compared to $9.9 million for the first quarter of 1997. Interest income increased primarily due to the interest-bearing assets that were acquired from the Marshalltown Financial Corporation (MFC) merger which occurred on December 5, 1997 and the additional 14 interest-bearing assets which were purchased with the $39.6 million of net additional Federal Home Loan Bank of Des Moines (FHLB) advances which were taken out during the first quarter of 1998. The average outstanding balances for interest-bearing assets increased by $98.7 million for loans receivable, $30.1 million for the securities portfolio, and $8.3 million for other interest bearing assets. The increase in average outstanding interest earning assets caused interest income to increase by $2.45 million and was partially off-set by a decline in interest income of $253,000 caused by declining yields on interest bearing assets. Interest expense was $7.8 million for the first quarter of 1998 an increase of $1.8 million, or 29.3%, compared to $6.0 million for the same quarter of 1997. The increase in interest expense is primarily due to the additional deposits as a result of the MFC merger and the additional net advances taken out from the FHLB. The average outstanding deposits for the first quarter of 1998 was $99.4 million larger than the average outstanding deposits for the same quarter in 1997 and therefore caused interest expense to increase by $1.1 million. The average outstanding FHLB advances for the first quarter of 1998 was $44.2 million larger than the average outstanding FHLB advances for the same quarter in 1997 and therefore caused interest expense to increase by $633,000. PROVISION FOR LOAN LOSSES The provision for loan losses for the first quarter of 1998 and 1997 was $75,000. The provision is the result of management's evaluation of the loan portfolio, a historically low level of non-performing loans, minimal loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located. Management's evaluation did not reveal conditions that would cause it to increase the provision for loan losses during 1998 compared to 1997. Future economic conditions and other unknown factors will impact the need for future provisions for loan losses. As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods. A reconciliation of HMN's allowance for loan losses is summarized as follows: 1998 1997 --------- ---------- Balance at January 1, $ 2,748,219 2,340,585 Provision 75,000 75,000 Recoveries 1,576 7,000 --------- ---------- Balance at March 31, $ 2,824,795 2,422,585 ========= ========== NON-INTEREST INCOME Non-interest income was $1.7 million for the first quarter of 1998, an increase of $964,000, or 138.0% compared to $698,000 for the first quarter of 1997. The increase in non-interest income is primarily due to $105,000 increase in fees earned related to mortgage banking activities and additional fees on deposits as the result of the MFC merger, $626,000 increase in gain on the sale of securities and a $213,000 increase in gain on the sale of loans. The Bank and HMN Mortgage Services, Inc. (MSI) have increased their mortgage banking activities during the first quarter of 1998 compared to the first quarter of 1997 and therefore fee income related to mortgage banking activities and gain on the sale of loans has increased substantially. A favorable interest rate environment allowed HMN to sell many securities that were in portfolio at a gain. NON-INTEREST EXPENSE Non-interest expense was $3.3 million for the first quarter of 1998, an increase of $1.2 million, or 57.1%, compared to $2.1 million for the same quarter of 1997. Compensation and benefit expense increased by $536,000 primarily due to an increase in HMN's work force as a result of the MFC merger, increased staff added to the mortgage banking operations of MSI and the Bank and normal annual compensation increases to Bank employees. Occupancy costs increased by $124,000 due to three buildings added by the MFC merger, the addition of a mortgage banking office in Brooklyn Park, Minnesota and increased occupancy costs related to opening a new retail facility in Spring Valley. Other non-interest expense increased by $402,000 due to 15 additional operating costs incurred related to the MFC merger, the mortgage banking expansion in Brooklyn Park and amortization of goodwill and core deposit intangibles of $117,000 related to the MFC merger. INCOME TAX EXPENSE Income tax expense was $983,000 for the first quarter of 1998 an increase of $70,000 compared to $913,000 for the first quarter of 1997. The increase is primarily due to an increase in taxable income between the two periods. NON-PERFORMING ASSETS The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at March 31, 1998 and December 31, 1997.
March 31, December 31, (Dollars in Thousands) 1998 1997 ---------- ----------- Non-Accruing Loans One-to-four family real estate $ 297 177 Nonresidential real estate 78 79 Commercial business 14 0 Consumer 8 7 ---- ---- Total 397 263 ---- ---- Accruing loans delinquent 90 days or more 383 402 Foreclosed Assets Real estate: One-to-four family 83 142 ---- ---- Total non-performing assets $863 $807 ==== ==== Total as a percentage of total assets 0.12% 0.12% ==== ==== Total non-performing loans $780 $665 ==== ==== Total as a percentage of total loans receivable, net 0.17% 0.15% ==== ====
Total non-performing assets at March 31, 1998 were $863,000, an increase of $56,000, from $807,000 at December 31, 1997. The net increase of $56,000 was the result of an increase of non-accruing loans and the sale of foreclosed residential homes. DIVIDENDS In February of 1998, the Board of Directors of HMN authorized a stock split in the form of a 50% stock dividend subject to HMN stockholder approval of an increase in the number of authorized shares of common stock from 7.0 million to 11.0 million at the annual meeting of stockholders on April 28, 1998. HMN also declared a cash dividend of $.06 per share, payable on June 12, 1998 to shareholders of record on May 27, 1998. The dividend will be approximately $352,000. LIQUIDITY For the quarter ended March 31, 1998, the net cash provided by operating activities was $8.3 million. HMN collected $61.1 million from the sale of securities, it collected $12.4 million in principal repayments or on the maturity of securities during the quarter. HMN also collected $2.0 million on the sale of loans receivable during the quarter. It purchased $82.4 million of securities, funded a net increase in loans receivable of $21.7 million, purchased $1.1 million of FHLB stock and paid $3.6 million to the MFC stockholders related to the MFC merger. HMN had additional net borrowing from the FHLB of $39.4 million and loaned $1.48 million to its employee stock ownership plan to repurchase HMN stock for the purpose of providing a benefit to the employees added as a result of the MFC merger. 16 *HMN has certificates of deposits with outstanding balances of $263.9 million that come due over the next 12 months. Based upon past experience management anticipates that the majority of the deposits will renew for another term. HMN believes that deposits which do not renew will be replaced with deposits from other customers, or funded with advances from the FHLB, or will be funded through the sale of securities. Management does not anticipate that it will have a liquidity problem due to maturing deposits. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. HMN's market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure. HMN's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact HMN's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. HMN monitors how its assets will mature or reprice in comparison to how its liabilities will mature or reprice. The Maturity or Repricing Table located in the Asset/Liability Management section of this report is used as part of the monitoring process. HMN also monitors the projected changes in net interest income that would occur if interest rates were to suddenly change up or down. The Rate Shock Table located in the Asset/Liability Management section of this report discloses HMN's projected changes in net interest income based upon immediate interest rate changes called rate shocks. *HMN utilizes a model which uses the discounted cash flows from its interest- earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities due to different interest rate changes. HMN believes that over the next twelve months interest rates could conceivably fluctuate in a range of 200 basis points up or down from where the rates were at March 31, 1998. HMN does not have a trading portfolio. The following table discloses the projected changes in market value to HMN's interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on March 31, 1998. * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 21 of this discussion. 17
- ------------------------------------------------------------------------- Other than trading portfolio Market Value ------------------------------------------------ (Dollars in thousands) Basis point change in interest rates -200 -100 0 +100 +200 - ------------------------------------------------------------------------- Cash equivalents $20,293 20,276 20,258 20,242 20,226 Fixed-rate CMOs 62,434 62,107 61,507 59,965 57,957 Variable-rate CMOs 59,773 60,535 61,984 60,651 58,315 Fixed-rate available for sale mortgage-backed and related securities 12,288 12,159 12,011 11,851 11,620 Variable-rate available for sale mortgage- backed and related securities 2,023 1,997 1,982 1,969 1,951 Fixed-rate available for sale other marketable securities 89,459 86,200 83,018 79,970 77,064 Variable-rate available for sale other marketable securities 6,971 6,953 6,936 6,919 6,902 Fixed-rate loans held for sale 8,331 8,324 8,317 8,310 8,303 Fixed-rate real estate loans 337,024 334,400 325,524 314,007 302,020 Variable-rate real estate loans 85,614 84,314 82,616 81,023 79,262 Fixed-rate other loans 18,059 17,890 17,695 17,504 17,316 Variable-rate other loans 38,079 38,084 38,140 38,209 38,241 ------- ------- ------- ------- ------- Total market risk sensitive assets 740,348 733,239 719,988 700,620 679,177 ------- ------- ------- ------- ------- NOW deposits 22,961 22,942 22,923 22,904 22,885 Passbook deposits 36,076 34,511 33,077 31,757 30,538 Money market deposits 35,798 34,505 33,327 32,245 31,250 Certificate deposits 383,083 379,270 375,529 371,870 368,285 Fixed-rate Federal Home Loan Bank advances 130,496 126,578 122,828 119,236 115,793 Variable-rate Federal Home Loan Bank advances 44,148 44,062 43,976 43,890 43,805 ------- ------- ------- ------- ------- Total market risk sensitive liabilities 652,562 641,868 631,660 621,902 612,556 ------- ------- ------- ------- ------- Off-balance sheet financial instruments: Commitments to extend credit 42 42 41 40 38 ------- ------- ------ ------ ------ Net market risk $ 87,828 91,413 88,369 78,758 66,659 ======= ======= ======= ====== ====== Percentage change from current market value (0.61)% 3.44% 0.00% (10.88)% (24.57)% ======= ======= ======= ======= ====== - --------------------------------------------------------------------------
The preceding table was prepared utilizing the following assumptions (the "Model 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 7% to 31%, depending on the coupon and period to maturity. Adjustable rate mortgages ("ARMs") were assumed to prepay at annual rates of between 12% and 23%, depending on coupon and the period to maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 17% and 38% 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. 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. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the "Interest Spread") will remain 18 constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets which are approaching their lifetime interest rate caps could be different from the values disclosed in the table. In the event of a change in interest rates, prepayment and early withdrawal levels may 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. 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 March 31, 1998 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated annual impact on net interest income of immediate interest rate changes called rate shocks. Rate Shock Net Interest Percentage in Basis Points Income Change ---------------- ------------ ---------- +200 15,947 -1.24% +100 16,122 -0.16% 0 16,148 0.00% -100 15,956 -1.19% -200 15,223 -5.73% The preceding table was prepared utilizing the Model Assumptions regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. 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 a substantial increase in interest rates and could impact net interest income. In an attempt to manage its exposure to changes in interest rates, management closely monitors interest rate risk. The Bank has an Asset/Liability Committee consisting of executive officers which meets at least quarterly to review the interest rate risk position and projected profitability. The committee makes recommendations for adjustments to the asset liability position of the Bank to the Board of Directors of the Bank. This committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In addition, the Board reviews on a quarterly basis the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios. In managing its asset/liability mix, the Bank, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates. To the extent consistent with its interest rate spread objectives, the Bank attempts to reduce its interest rate risk and has taken a number of steps to restructure its assets and liabilities. The Bank has primarily focused its fixed rate one-to-four family residential lending program on loans with contractual terms of 20 years or less. The Bank generally follows the practice of selling all of its fixed rate single family loans with *This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 22 of this discussion. 19 contractual maturities of thirty years. At times, depending on its interest rate sensitivity, the Bank may sell fixed rate single family loans with shorter contractual maturities than thirty years in order to reduce interest rate risk and record a gain on the sale of loans. The following table sets forth the interest rate sensitivity of HMN's assets and liabilities at March 31, 1998, using certain assumptions that are described in more detail below:
- ----------------------------------------------------------------------------- Maturing or Repricing --------------------------------------------------- Over 6 6 Months Months to Over 1-3 (Dollars in thousands) or Less One Year Years - ----------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities $ 74,478 9,302 31,239 Other marketable securities 12,837 329 8,767 Securities held to maturity: Mortgage-backed and related securities 0 0 0 Other marketable securities 0 0 0 Loans held for sale, net 8,318 0 0 Loans receivable, net Fixed rate one-to-four family 27,201 25,030 83,332 Adjustable rate one-to-four family 29,083 20,077 17,590 Multi family 364 366 1,128 Fixed rate commercial real estate 2,703 396 662 Adjustable rate commercial real estate 5,512 2,095 720 Commercial business 2,109 715 1,636 Consumer loans 26,539 1,515 3,471 Federal Home Loan Bank stock 0 0 0 Cash equivalents 20,267 0 0 Total interest-earning assets 209,411 59,825 148,545 Non-interest checking 7,558 0 0 NOW accounts 22,973 0 0 Passbooks 3,600 3,600 10,366 Money market accounts 2,694 2,694 7,762 Certificates 138,154 125,776 87,273 Federal Home Loan Bank advances 61,714 5,179 24,000 Total interest-bearing liabilities 236,693 137,249 129,401 Interest-earning assets less interest-bearing liabilities $ (27,282) (77,424) 19,144 Cumulative interest-rate sensitivity gap $ (27,282) (104,706) (85,562) Cumulative interest-rate gap as a percentage of total assets at March 31, 1998 (3.95)% (15.15)% (12.38)% Cumulative interest-rate gap as a percentage of interest-earning assets at December 31, 1997 (6.36) (15.38) Schedule prepared based upon the earlier of contractual maturity or repricing date, if applicable, adjusted for scheduled repayments of principal and projected prepayments of principal based upon experience. Loans receivable are presented net of loans in process and deferred loan fees. Construction and development loans are all one-to-four family loans and therefore have been included in the fixed rate one-to-four family and adjustable rate one-to-four family lines. Over 3-5 Over 5 No Stated (Dollars in thousands) Years Years Maturity Total - ----------------------------------------------------------------------------- Securities available for sale: Mortgage-backed and related securities$ 13,600 8,644 0 137,263 Other marketable securities 30,410 15,577 12,251 80,171 Securities held to maturity: Mortgage-backed and related securities 0 0 0 0 Other marketable securities 0 0 0 0 Loans held for sale, net 0 0 0 8,318 Loans receivable, net Fixed rate one-to-four family 59,697 115,189 0 310,449 Adjustable rate one-to-four family 18,972 3,378 0 89,100 Multi family 506 522 0 2,886 Fixed rate commercial real estate 195 42 0 3,998 Adjustable rate commercial real estate 0 0 0 8,327 Commercial business 696 85 0 5,241 Consumer loans 1,534 (26) 0 33,033 Federal Home Loan Bank stock 0 0 8,488 8,488 Cash equivalents 0 0 0 20,267 Total interest-earning assets 125,610 143,411 20,739 707,541 Non-interest checking 0 0 0 7,558 NOW accounts 0 0 0 22,973 Passbooks 6,635 11,795 0 35,996 Money market accounts 4,968 8,832 0 26,950 Certificates 19,884 2,434 0 373,521 Federal Home Loan Bank advances 66,000 10,400 0 167,293 Total interest-bearing liabilities 97,487 33,461 0 634,291 Interest-earning assets less interest-bearing liabilities $ 28,123 109,950 20,739 73,250 Cumulative interest-rate sensitivity gap $ (57,439) 52,511 73,250 73,250 Cumulative interest-rate gap as a percentage of total assets at March 31, 1998 (8.31)% 7.60 % 10.60 % 10.60% Cumulative interest-rate gap as a percentage of interest- earning assets at December 31, 1997 Schedule prepared based upon the earlier of contractual maturity or repricing date, if applicable, adjusted for scheduled repayments of principal and projected prepayments of principal based upon experience. Loans receivable are presented net of loans in process and deferred loan fees. Construction and development loans are all one-to-four family loans and therefore have been included in the fixed rate one-to-four family and adjustable rate one-to-four family lines.
20 The preceding table was prepared utilizing the Model 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 7% to 31%, depending on the coupon and period to maturity. ARMs were assumed to prepay at annual rates of between 12% and 23%, depending on coupon and the period to maturity. GEM loans were assumed to prepay at annual rates of between 17% and 38% depending on the coupon and the period to maturity. Mortgage-backed securities and CMOs were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at an annual rate of 20%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. Although certain assets and liabilities may have similar maturities and periods of repricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable- rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase. Refer to Regulatory Capital Requirements above for a discussion of the Bank's interest rate risk component. 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. HMN assumes no obligations 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 $263.9 million that come due during 1998. Based upon past experience management anticipates that the majority of the deposits will renew for another term. Any deposits which do not renew will be replaced with deposits from other customers, or funded with advances from the FHLB, or will be funded through the sale of securities. Management does not anticipate that it will have a liquidity problem due to 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 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 maturing certificates to become a liquidity problem MARKET RISK HMN believes that over the next twelve months interest rates could conceivably fluctuate in a range of 200 basis points up or down from where the rates were at March 31, 1998. HMN's actual market value changes for interest earnings assets and interest bearing liabilities may differ from the projected market values disclosed in the table in the Market Risk Section. Actual interest rates could fluctuate by more than 200 basis points up or down from rates in effect on March 31, 1998 due to unanticipated occurrences such as the start of another war in the gulf. Many Asian countries are experiencing economic difficulties which may have a larger impact on the economy of the United States than is currently anticipated and thereby cause general interest rates to fluctuate by more than 200 basis points. 21 Certain shortcomings are inherent in the method of analysis in the table presented in the Market Risk section above. 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. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest rate index with a similar term to maturity (the Interest Spread) will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets which are approaching their life time interest rate caps could be different from the values disclosed in the table. In the event of a change in interest rates, prepayment and early withdrawal levels may 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. 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 March 31, 1998 to determine if its current level of interest rate risk is acceptable. HMN's actual net interest income caused by interest rate changes may differ from the amounts reflected in the table which projects the estimated impact on net interest income of immediate interest rate changes called rate shocks. HMN's actual maturing and repricing results of its interest-earning assets and interest-bearing liabilities may differ from the amounts reflected in the gap table. Certain shortcomings are inherent in the method of analysis presented in each of the tables. 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 a substantial increase in interest rates and could impact net interest income. 22 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 April 28, 1998 the Board of Directors passed a resolution amending the Certificate of Incorporation of HMN Financial, Inc.. The Amended Certificate of Incorporation is included as Exhibit 3(I). Since the Certificate of Incorporation has not been previously filed in electronic format the complete Amended Articles of Incorporation are included in this item. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits on page 25 of this report. (b) Reports on Form 8-K - None. 23 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: May 14, 1998 /s/ Roger P. Weise ------------------- ------------------------ Roger P. Weise, Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: May 14, 1998 /s/ James B. Gardner ------------------- ------------------------ James B. Gardner, Executive Vice President (Principal Financial Officer) 24 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 Certificate of Incorporation as amended. 3(i) Filed electronically 3(b) By-laws *3 N/A Resolution to Amend By-laws of HMN Financial, Inc. By-laws of HMN Financial, Inc. as amended 4 Instruments defining the rights of security holders, Including indentures *1 N/A 5(a) Amendment to the Home Federal Savings *2 N/A Bank Employees' Savings & Profit Sharing Plan dated January 28, 1997. 5(b) Amendment to the Adoption Agreement for *2 N/A Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust effective June 17, 1997. 11 Computation of Earnings Per Common Share 11 Filed electronically 27 Financial Data Schedule 27 Filed electronically *1 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. *2 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. *3 Filed as an exhibit to Registrant's Form 10-Q for September 30, 1997 (file no. 0-24100). All previously filed documents are hereby incorporated by reference in accordance with Item 601 of Regulation S-K. 25 EX-3 2 CERTIFICATE OF INCORPORATION OF HMN FINANCIAL, INC. As amended April 28, 1998 FIRST:The name of the Corporation is HMN Financial, Inc. (hereinafter sometimes referred to as the "Corporation"). SECOND:The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent at that address is The Corporation Trust Company. THIRD:The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: A.The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 11.5 million consisting of: 1. Five hundred thousand shares of Preferred Stock, $.01 par value per share (the "Preferred Stock"); and 2. Eleven million shares of Common Stock, $.01 par value per share (the "Common Stock"). B.The Board of Directors is authorized, subject to any limitations presented by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of the Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation. C.1.Notwithstanding any other provision of this Certificate of Incorporation, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit. 2.The following definitions shall apply to this Section C of this Article FOURTH: (a)An "affiliate" of a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. (b)"Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on the date this Certificate of Incorporation is filed with the Secretary of State of the State of Delaware ("Filing Date"); PROVIDED, HOWEVER, that a person shall, in any event, also be deemed the "beneficial owner" of any Common Stock: (1)which such person or any of its affiliates beneficially owns, directly or indirectly; or (2)which such person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more of the clauses of Section A of Article EIGHTH) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement understanding, relationship or otherwise (but shalt not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or (3)which is beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation; and provided further, however, that (i) no director or officer 2 of this Corporation (or any affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such director or officer (or any affiliate thereof) and (ii) neither any employee stock ownership or similar plan of this Corporation or any subsidiary of this Corporation nor any trustee with respect thereto (or any affiliate of such trustee) shall, solely by reason of such capacity of such trustee, be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage of Common Stock beneficially owned by a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. (c)A "person" shall mean any individual, firm, corporation, or other entity (d)The Board of Directors shall have the power to construe and apply the provisions of this section and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (1) the number of shares of Common Stock beneficially owned by any person, (2) whether a person is an affiliate of another, (3) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (4) the application of any other definition or operative provision of this Section to the given facts, or (5) any other matter relating to the applicability or effect of this Section. 3.The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own Common Stock in excess of the Limit (or holds of record Common Stock beneficially owned by any person in excess of the Limit (a "Holder in Excess") supply the Corporation with complete information as to (a) the record owner(s) of all shares beneficially owned by such Holder in Excess and (b) any other factual matter relating to the applicability or effect of this section as may reasonably be requested of such Holder in Excess. The Board of Directors shall further have the right to receive from any Holder in Excess reimbursement for all expenses incurred by the Board in connection with its investigation of any matters relating to the applicability or effect of this section on such Holder in Excess, to the extent such investigation is deemed appropriate by the Board of Directors as a result of the Holder in Excess refusing to supply the Corporation with the information described in the previous sentence. 3 4. Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast one third of the votes (after giving effect, if required, to the provisions of this Section) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. Every reference in this Certificate of Incorporation to a majority or other proportion of outstanding capital stock (or the holders thereof) or voting power for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such percentage or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock after giving effect to the provisions of this Section whether or not the holders of capital stock are present in person or by proxy. 5.Any constructions, applications, or determinations made by the Board of Directors, pursuant to this Section in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its stockholders. 6.In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken here from or otherwise rendered inapplicable, it being the intent of this Corporation and its stockholders that each such remaining provision (or portion thereof) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (A)The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by Statute or by this Certificate of Incorporation or the By-laws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. (B)The directors of the Corporation need not be elected by written ballot unless the By-laws so provide. (C)Any action required or permitted to be taken by the stockholders of the Corporation, subject to the rights of holders of any class or series of Preferred Stock of the Corporation, must be effected at a duly called annual or special meeting of stockholders of the 4 Corporation and may not be effected by any consent in writing by such stockholders. (D)Special meetings of stockholders of the Corporation, subject to the rights of holders of any class or series of Preferred Stock 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 (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) (the "Whole Board"). SIXTH: A.The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board. 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 conclusion of the first annual meeting of stockholders, the term of office of the second class to expire at the conclusion of the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the conclusion of the annual meeting of stockholders two years thereafter. 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 conclusion of 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. B.Subject to the rights of the holders of any 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 of Directors shall shorten the term of any incumbent director. C.Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-laws of the Corporation. D.Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH of this Certificate of Incorporation), voting together as a single class. 5 SEVENTH:The Board of Directors is expressly empowered to adopt, amend or repeal the By-laws of the Corporation. Any adoption, amendment or repeal of the By- laws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the By-laws of the Corporation. In addition to any vote of the holders of any class or series of stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH hereof), voting together as a single class, shall be required to adopt, amend or repeal any provisions of the By-laws of the Corporation. EIGHTH: A.In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in this Section: 1.any merger or consolidation of the Corporation or any Subsidiary (as hereinafter deemed) with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or 2.any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereafter defined) equaling or exceeding 25% or more of the combined assets of the Corporation and its Subsidiaries; or 3.the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value equaling or exceeding 25% of the combined assets of the Corporation and its Subsidiaries except pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or 4.the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or 5.any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or 6 convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then-outstanding shares of stock of the Corporation entitled to vote in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or quotation system or otherwise. The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article EIGHTH. B.The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote, or such vote as is required by law or by this Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, either the condition specified in the following paragraph 1 is met or all of the conditions specified in the following; paragraph 2 are met: 1.The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2.All of the following conditions shall have been met: (a)The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following: (1)(if applicable) the Highest Per Share Price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher. (2)the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article EIGHTH as the "Determination Date"), whichever is higher. 7 (b)The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (1)(if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date, or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (2)(if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (3)the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c)The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with subparagraph B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (d)After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination; (1) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (2) there shall have been (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by 8 a majority of the Disinterested Directors, (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Disinterested Directors; and (3) neither such Interested Stockholder nor any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (e)After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f)A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). C.For the purposes of this Article EIGHTH: 1.A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. 2."Interested Stockholder" shall mean any Person (other than the Corporation or any holding company or Subsidiary thereof) who or which: (a)is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or (b)is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then- outstanding Voting Stock; or (c)is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such 9 assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. 3.A Person shall be a beneficial owner of any Voting Stock: (a)which such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on the Filing Date; or (b)which such Person or any of its Affiliates or Associates has (1) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (2) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such Person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (c)which are beneficially owned, directly or indirectly within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as in effect on the Filing Date, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in Subparagraph (b) of this Paragraph 3) or in disposing of any shares of Voting Stock; provided, however, that, in the case of any employee stock ownership or similar plan of the Corporation or of any Subsidiary in which the beneficiaries thereof possess the right to vote any shares of Voting Stock held by such plan, no such plan nor any trustee with respect thereto (nor any Affiliate of such trustee), solely by reason of such capacity of such trustee, shall be deemed, for any purposes hereof, to beneficially own any shares of Voting Stock held under any such plan. 4.For the purpose of determining whether a Person is an Interested Stockholder pursuant to Paragraph 2 of this Section C, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Paragraph 3 of this Section C but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 5."Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the 10 Securities Exchange Act of 1934, as amended, as in effect on the Filing Date. 6."Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 2 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 7."Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder, and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the Board of Directors. 8."Fair Market Value" means: (a) with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or in any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock, the highest closing sale price of the stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotations ("NASDAQ") System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, Fair Market Value shall be the highest sale price reported during the 30-day period preceding the date in question, or, if no such prices are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith; and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. 9.Reference to "Highest Per Share Price" means with respect to any class of stock, the highest price per share, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 10.In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. D.A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry, (1) whether a person is an Interested Stockholder; (2) the 11 number of shares of Voting Stock beneficially owned by any person; (3) whether a person is an Affiliate or Associate of another; and (4) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has an aggregate Fair Market Value equaling or exceeding 25% of the combined assets of the Corporation and its Subsidiaries. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article EIGHTH. E.Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F.Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article EIGHTH. NINTH:The Board of Directors of the Corporation, when evaluating any offer of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer on the Corporation's present and future customers and employees and those of its Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which the Corporation and its Subsidiaries operate or are located; on the ability of the Corporation to fulfill its corporate objectives as a financial institution holding company and on the ability of its subsidiary financial institution to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations. TENTH: A.Except as set forth in Section B of this Article TENTH, in addition to any affirmative vote of stockholders required by law or this Certificate of Incorporation, any direct or indirect purchase or other acquisition by the Corporation of any Equity Security (as hereinafter defined) of any class from any Interested Person (as hereinafter defined) shall require the affirmative vote of the holders of at least 80% of the Voting Stock of the Corporation that is not beneficially owned (for purposes of this Article TENTH beneficial ownership shall be determined in accordance with Section C.2(b) of Article FOURTH hereof) by such Interested Person, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or quotation system, or otherwise. Certain defined 12 terms used in this Article TENTH are as set forth in Section C below. B.The provisions of Section A of this Article TENTH shall not be applicable with respect to: (1)any purchase or other acquisition of securities made as part of a tender or exchange offer by the Corporation or a Subsidiary (which term, as used in this Article TENTH, is as defined in the first clause of Section C.6 of Article EIGHTH hereof) of the Corporation to purchase securities of the same class made on the same terms to all holders of such securities and complying with the applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provision replacing such Act, rules or regulations); (2)any purchase or acquisition made pursuant to an open market purchase program approved by a majority of the Board of Directors, including a majority of the Disinterested Directors (which term, as used in this Article TENTH, is as defined in Article EIGHTH hereof); or (3)any purchase or acquisition which is approved by a majority of the Board of Directors, including a majority of the Disinterested Directors, and which is made at no more than the Market Price (as hereinafter defined), on the date that the understanding between the Corporation and the Interested Person is reached with respect to such purchase (whether or not such purchase is made or a written agreement relating to such purchase is executed on such date), of shares of the class of Equity Security to be purchased. C.For the purposes of this Article TENTH: (i)The term Interested Person shall mean any Person (other than the Corporation, Subsidiaries of the Corporation, pension, profit sharing, employee stock ownership or other employee benefit plans of the Corporation and its Subsidiaries, entities organized or established by the Corporation or any of its Subsidiaries pursuant to the terms of such plans and trustees and fiduciaries with respect to any such plan acting in such capacity) that is the direct or indirect beneficial owner of 5% or more of the Voting Stock of the Corporation, and any Affiliate or Associate of any such person. (ii)The Market Price of shares of a class of Equity Security on any day shall mean the highest sale price of shares of such class of Equity Security on such day, or, if that day is not a trading day, on the trading day immediately preceding such day, on the national securities exchange or the NASDAQ System or any other system then in use on which such class of Equity Security is traded. (iii)The term Equity Security shall mean any security described in Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect on December 31, 1991, which is traded on a national securities exchange or the NASDAQ System or any other system then in use. 13 (iv)For purposes of this Article TENTH, all references to the term Interested Stockholder in the definition of Disinterested Director shall be deemed to refer to the term Interested Person. ELEVENTH: A.Each director or officer (or former director or former officer) of the Corporation who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; PROVIDED, HOWEVER, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B.The right to indemnification conferred in Section A of this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); PROVIDED, HOWEVER, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a ''final adjudication"), that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C.If a claim under Section A or B of this Article is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except 14 in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. D.The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-laws, agreement, vote of stockholders or Disinterested Directors or otherwise. E.The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F.The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation to any employee or agent or former employee or agent of the Corporation or any person who is or was serving at the request of the Corporation as an employee or agent of any other corporation, partnership, joint venture, trust or other enterprise, including an employee benefit plan. TWELFTH:A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its 15 stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to further eliminate or limit, or to authorize corporate action further limiting or eliminating, the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. THIRTEENTH: No amendment, addition, alteration, change or repeal of any provision of this Certificate of Incorporation shall be made, unless such is first proposed by the Board of Directors of the Corporation, upon the affirmative vote of at least two-thirds of the directors then in office at a duly constituted meeting of the Board of Directors called expressly for such purpose, and thereafter approved by the stockholders by a majority of the total votes eligible to be cast at a duly constituted meeting of stockholders called expressly for such purpose; PROVIDED, HOWEVER that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to amend or repeal this Article THIRTEENTH, clause C.1. of Article FOURTH, clauses (C) or (D) of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH, Article NINTH, Article TENTH, Article ELEVENTH or Article TWELFTH. FOURTEENTH:The name and mailing address of the sole incorporator are as follows: NAME MAILING ADDRESS Roger P. Weise 101 N. Broadway Spring Valley, Minnesota 55975 16 I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereto set my hand this 23RD day of MARCH, l994. And as amended April 28, 1998. /s/ Roger P. Weise - -------------------------------- Roger P. Weise, Incorporator 17 EX-11 3 Exhibit 11 HMN Financial, Inc. Computation of Earnings Per Common Share Three Months Ended March 31, ----------------------------- Computation of Earnings Per Common Share: 1998 1997 ----------------------------- Weighted average number of common shares outstanding used in basic earnings per common share calculation . . . . . . . . . . . . 5,447,501 5,550,215 Net dilutive effect of: Options . . . . . . . . . . . . . . 403,037 255,093 Restricted stock awards . . . . . . 61,395 83,507 ----------- --------- Weighted average number of shares outstanding adjusted for effect of dilutive securities . . . . . . . . 5,911,933 5,888,815 =========== ========= Income available to common shareholders$1,663,355 1,474,480 Basic earnings per common share. . . $0.37 0.27 Diluted earnings per common share. . $0.28 0.25 EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 AND DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 21,267 0 0 0 219,122 0 0 458,527 (2,825) 732,118 467,998 37,893 12,873 129,400 0 0 91 84,863 732,118 8,642 3,175 284 12,101 5,703 7,788 4,313 75 896 3,254 2,646 0 0 0 1,663 0.31 0.28 7.27 397 383 0 95 2,748 0 2 2,825 962 0 1,863 AS THE RESULT OF A STOCK SPLIT STOCKHOLDERS EQUITY AND EARNINGS PER SHARE DATA HAVE BEEN RESTATED TO RETROACTIVELY RESTATE THE IMPACT OF THE SPLIT. AMOUNT REPORTED UNDER "EPS PRIMARY" IS ACTUALLY "EPS BASIC".
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