-----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, DQo8emwUz21Xv6AC6XClCUxMsOMZG5L4IWv499xVIjdF1FlICiMqO+e3EedWiYw9 LXNkYC1AJ1GszJ5HRiZR7w== 0000921183-01-500015.txt : 20010815 0000921183-01-500015.hdr.sgml : 20010815 ACCESSION NUMBER: 0000921183-01-500015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HMN FINANCIAL INC CENTRAL INDEX KEY: 0000921183 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411777397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24100 FILM NUMBER: 1707868 BUSINESS ADDRESS: STREET 1: 101 N BROADWAY CITY: SPRING VALLEY STATE: MN ZIP: 55975-1223 BUSINESS PHONE: 5073461100 10-Q 1 q201i.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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 June 30, 2001 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 August 3, 2001 Common stock, $0.01 par value 4,444,139 HMN FINANCIAL, INC. CONTENTS PART I - FINANCIAL INFORMATION Page Item 1: Financial Statements (unaudited) Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 3 Consolidated Statements of Income for the Three Months Ended and Six Months Ended June 30, 2001 and 2000 4 Consolidated Statements of Comprehensive Income for the Three Months Ended and Six Months Ended June 30, 2001 and 2000 5 Consolidated Statement of Stockholders' Equity for the Six Month Period Ended June 30, 2001 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 7 Notes to Consolidated Financial Statements 8-16 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 17-26 Item 3: Quantitative and Qualitative Disclosures about Market Risk Discussion included in Item 2 under Market Risk 20 PART II - OTHER INFORMATION Item 1: Legal Proceedings 27 Item 2: Changes in Securities 27 Item 3: Defaults Upon Senior Securities 27 Item 4: Submission of Matters to a Vote of Security Holders 27 Item 5: Other Information 28 Item 6: Exhibits and Reports on Form 8-K 28 Signatures 29 2 PART I - FINANCIAL STATEMENTS
HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) Assets June 30, 2001 December 31, 2000 --------------------- --------------------- Cash and cash equivalents 32,049,034 14,416,861 Securities available for sale: Mortgage-backed and related securities (amortized cost $71,401,478 and $76,199,237) 72,452,708 75,379,719 Other marketable securities (amortized cost $41,734,877 and $66,392,057) 40,856,124 63,826,770 ------------- ------------ 113,308,832 139,206,789 ------------- ------------ Loans held for sale 46,608,484 7,861,029 Loans receivable, net 503,475,798 518,765,209 Accrued interest receivable 3,465,729 4,311,747 Federal Home Loan Bank stock, at cost 12,245,000 12,245,000 Mortgage servicing rights, net 1,479,568 1,188,928 Premises and equipment, net 9,838,874 9,459,710 Investment in limited partnerships 2,209,825 2,838,364 Goodwill 3,890,956 3,980,974 Core deposit intangible 731,614 794,363 Prepaid expenses and other assets 2,040,922 947,201 ------------- ------------ Total assets $ 731,344,636 716,015,875 ============= ============ Liabilities and Stockholders' Equity Deposits $ 412,439,299 421,690,548 Federal Home Loan Bank advances 239,800,000 221,900,000 Accrued interest payable 1,109,257 1,575,521 Advance payments by borrowers for taxes and insurance 887,813 650,348 Accrued expenses and other liabilities 4,153,711 3,355,110 Deferred tax liabilities 1,585,200 218,700 ------------- ------------ Total liabilities 659,975,280 649,390,227 ------------- ------------ Commitments and contingencies Minority interest 227,192 0 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 59,362,984 59,584,176 Retained earnings, subject to certain restrictions 75,427,844 73,380,588 Accumulated other comprehensive income (loss) 52,844 (2,037,005) Unearned employee stock ownership plan shares (5,221,353) (5,318,067) Unearned compensation restricted stock awards (7,350) (9,800) Treasury stock, at cost 4,695,951 and 4,737,521 shares (58,564,092) (59,065,531) --------------- ------------ Total stockholders' equity 71,142,164 66,625,648 --------------- ------------ Total liabilities and stockholders' equity $ 731,344,636 716,015,875 =============== ============
See accompanying notes to consolidated financial statements. 3 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 --------------------- --------------------- Interest Income: Loans receivable $ 11,321,443 9,953,689 22,547,937 19,396,314 Securities available for sale: Mortgage-backed and related 1,029,327 1,652,504 2,277,956 3,458,176 Other marketable 632,461 1,163,766 1,490,404 2,346,282 Cash equivalents 28,308 65,786 71,536 103,241 Other 130,842 203,173 296,728 395,935 ----------- ----------- ------------ ----------- Total interest income 13,142,381 13,038,918 26,684,561 25,699,948 ----------- ----------- ------------ ----------- Interest expense: Deposits 4,909,776 4,521,544 9,971,378 8,858,165 Federal Home Loan Bank advances 3,018,502 3,473,362 6,348,866 6,842,022 ----------- ----------- ------------ ----------- Total interest expense 7,928,278 7,994,906 16,320,244 15,700,187 ----------- ----------- ------------ ----------- Net interest income 5,214,103 5,044,012 10,364,317 9,999,761 Provision for loan losses 300,000 45,000 450,000 90,000 ----------- ----------- ------------ ----------- Net interest income after provision for loan losses 4,914,103 4,999,012 9,914,317 9,909,761 ----------- ----------- ------------ ----------- Non-interest income: Fees and service charges 362,760 348,071 714,551 604,943 Mortgage servicing fees 107,457 76,664 214,231 155,907 Securities gains (losses), net (610,000) 34,960 (332,296) (33,801) Gain on sales of loans 1,410,864 293,848 2,263,200 476,577 Earnings (losses) in limited partnerships (325,258) 81,858 (628,539) 118,847 Hedging valuation gain (loss) 43,066 0 (55,274) 0 Other 199,827 181,254 329,951 301,872 ----------- ----------- ------------ ----------- Total non-interest income 1,188,716 1,016,655 2,505,824 1,624,345 ----------- ----------- ------------ ----------- Non-interest expense: Compensation and benefits 2,042,047 1,488,218 3,955,058 3,184,318 Occupancy 514,572 464,721 1,079,791 890,317 Federal deposit insurance premiums 19,969 20,783 40,772 42,234 Advertising 113,988 88,677 200,143 132,385 Data processing 240,928 191,208 471,754 376,629 Amortization of mortgage servicing rights, net of valuation adjustments and servicing costs 195,395 76,263 336,038 145,280 Other 811,500 618,658 1,555,778 1,203,290 ---------- ----------- ------------ ----------- Total non-interest expense 3,938,399 2,948,528 7,639,334 5,974,453 ---------- ----------- ------------ ----------- Income before income tax expense 2,164,420 3,067,139 4,780,807 5,559,653 Income tax expense 787,300 1,187,000 1,784,900 2,149,800 ---------- ----------- ------------ ----------- Income before minority interest 1,377,120 1,880,139 2,995,907 3,409,853 ---------- ----------- ------------ ----------- Minority interest 105,001 0 132,880 0 ---------- ----------- ------------ ----------- Net income $ 1,272,119 1,880,139 2,863,027 3,409,853 ========== =========== ============ =========== Basic earnings per share $ 0.34 0.48 0.77 0.87 ========== =========== ============ =========== Diluted earnings per share$ 0.32 0.47 0.72 0.84 ========== =========== ============ ===========
See accompanying notes to consolidated financial statements. 4 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended June 30, 2001 2000 -------------------------- ------------------------ Net income $ 1,272,119 1,880,139 Other comprehensive income, net of tax: Unrealized losses on hedging valuation: (81,621) 0 Less: minority interest in hedging valuation (30,688) 0 --------- ------- Net unrealized losses on hedging valuation (50,933) 0 Unrealized gains on securities: Unrealized holding gains arising during period 585,459 50,682 Less: reclassifica- tion adjustment for gains (losses) included in net income (368,300) 21,061 -------- -------- Net unrealized gains on securities 953,759 29,621 -------- ------- Other comprehensive income 902,826 29,621 --------- --------- Comprehensive income $ 2,174,945 1,909,760 ========= ========= Six Months Ended June 30, 2001 2000 -------------------------- ------------------------ Net income $ 2,863,027 3,409,853 Other comprehensive income, net of tax: Unrealized losses on hedging valuation: (81,621) 0 Less: minority interest in hedging valuation (30,688) 0 --------- ------- Net unrealized losses on hedging valuation (50,933) 0 Unrealized gains on securities: Unrealized holding gains arising during period 1,943,193 (680,053) Less: reclassifica- tion adjustment for gains (losses) included in net income (197,589) (20,401) -------- -------- Net unrealized gains on securities 2,140,782 (659,652) --------- -------- Other comprehensive income 2,089,849 (659,652) --------- --------- Comprehensive income $ 4,952,876 2,750,201 ========= =========
See accompanying notes to consolidated financial statements. 5 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Six Month Period Ended June 30, 2001 (unaudited)
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) --------------------------------------------------------- Balance, December 31, 2000 $ 91,287 59,584,176 73,380,588 (2,037,005) Net income 2,863,027 Other comprehensive income 2,089,849 Treasury stock purchases Employee stock options exercised (385,085) Tax benefits of exercised stock options 118,822 Tax expenses of restricted stock awards (2,479) Amortization of restricted stock awards Dividends paid (815,771) Earned employee stock ownership plan shares 47,550 --------- ---------- ---------- ---------- Balance, June 30, 2001 $ 91,287 59,362,984 75,427,844 52,844 ========= ========== ========== ========== Unearned Employee Stock Unearned Ownership Compensation Total Plan Restricted Stockholders' Shares Stock Awards Treasury Stock Equity --------------------------------------------------------- Balance, December 31, 2000 $ (5,318,067) (9,800) (59,065,531) 66,625,648 Net income 2,863,027 Other comprehensive income 2,089,849 Treasury stock purchases (74,152) (74,152) Employee stock options exercised 575,591 190,506 Tax benefits of exercised stock options 118,822 Tax expenses of restricted stock awards (2,479) Amortization of restricted stock awards 2,450 2,450 Dividends paid (815,771) Earned employee stock ownership plan shares 96,714 144,264 --------- ---------- ----------- ---------- Balance, June 30, 2001 $ (5,221,353) (7,350) (58,564,092) 71,142,164 ========= ========== =========== ==========
See accompanying notes to consolidated financial statements. 6 HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 2001 2000 - --------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,863,027 3,409,853 Adjustments to reconcile net income to cash provided (used) by operating activities: Provision for loan losses 450,000 90,000 Depreciation 496,208 436,284 Amortization of premiums, net 46,564 1,686 Amortization of deferred loan fees (260,738) (101,535) Amortization of goodwill 90,018 90,012 Amortization of core deposit intangible 62,749 116,220 Amortization of other purchase accounting adjustments 6,220 (45,989) Amortization of mortgage servicing rights and net valuation adjustments 329,604 128,301 Capitalized mortgage servicing rights (620,244) (163,946) Deferred income taxes 132,375 125,500 Securities (gains) losses, net 332,296 33,801 Gains on sales of real estate (16,921) 0 Gain on sales of loans (2,263,200) (476,577) Proceeds from sale of loans held for sale 383,937,788 50,899,525 Disbursements on loans held for sale (420,124,178) (51,498,211) Decrease in hedging valuation 55,274 0 Principal collected on loans held for sale 40,905 10,759 Amortization of restricted stock awards 2,450 83,033 Amortization of unearned ESOP shares 96,714 96,912 Earned employee stock ownership shares priced above original cost 47,550 23,211 Decrease (increase) in accrued interest receivable 846,018 (263,582) Increase (decrease) in accrued interest payable (466,264) 145,539 Equity (earnings) losses of limited partnerships 628,539 (118,847) Equity earnings of minority interest 132,880 0 Increase in other assets (1,260,404) (145,864) Increase in other liabilities 1,028,834 432,649 Other, net 11,152 3,503 ----------- ---------- Net cash provided (used) by operating activities (33,374,784) 3,312,237 ----------- ---------- Cash flows from investing activities: Proceeds from sales of securities available for sale 15,000,567 21,512,948 Principal collected on securities available for sale 5,351,723 4,024,688 Proceeds collected on maturity of securities available for sale 8,695,000 2,500,000 Purchases of securities available for sale 0 (4,442,111) Proceeds from sales of loans receivable 12,156 196,851 Purchase of Federal Home Loan Bank stock 0 (775,000) Net decrease (increase) in loans receivable 14,227,463 (36,496,177) Proceeds from sale of real estate 311,544 0 Purchases of premises and equipment (875,372) (992,333) ---------- ----------- Net cash provided (used) by investing activities 42,723,081 (7,844,660) ---------- ----------- Cash flows from financing activities: Increase (decrease) in deposits (9,279,172) 1,303,721 Purchase of treasury stock (74,152) (2,705,970) Stock options exercised 190,506 150,888 Dividends to stockholders (815,771) (786,479) Proceeds from Federal Home Loan Bank advances 194,200,000 118,000,000 Repayment of Federal Home Loan Bank advances (176,300,000) (102,500,000) Minority interest in mortgage services 125,000 0 Increase in advance payments by borrowers for taxes and insurance 237,465 84,515 ----------- ------------ Net cash provided by financing activities 8,283,876 13,546,675 ----------- ------------ Increase in cash and cash equivalents 17,632,173 2,387,778 Cash and cash equivalents, beginning of period 14,416,861 9,051,380 ----------- ------------ Cash and cash equivalents, end of period $ 32,049,034 11,439,158 =========== ============ Supplemental cash flow disclosures: Cash paid for interest $ 16,786,508 15,554,648 Cash paid for income taxes 2,163,000 1,313,800 Supplemental noncash flow disclosures: Loans securitized and transferred to securities available for sale 0 8,106,230 Loans transferred to loans held for sale 801,947 912,171 Transfer of loans to real estate 81,242 49,653 Transfer of real estate to loans 0 50,140
See accompanying notes to consolidated financial statements. 7 HMN FINANCIAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) June 30, 2001 and 2000 (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 one wholly owned subsidiary, Osterud Insurance Agency, Inc. (OAI), doing business as Home Federal Investment Services, which offers financial planning products and services. HMN has another wholly owned subsidiary, Security Finance Corporation (SFC). Prior to 2000, SFC invested in commercial loans and commercial real-estate loans located throughout the United States which were originated by third parties. During 2000 SFC sold many of its assets to the Bank and discontinued investing in commercial loans. The Bank has another subsidiary, Home Federal Mortgage Services, LLC (HFMS), which is a mortgage banking and mortgage brokerage business located in Brooklyn Park, Minnesota. Prior to 2001 the business was operated as a wholly owned subsidiary of HMN and was known as HMN Mortgage Services, Inc. (MSI). In January 2001, HMN sold 100% of the MSI stock to the Bank. The Bank formed HFMS and merged MSI into HFMS. Effective February 1, 2001 the business sold a 49% membership interest in HFMS to two individuals. The consolidated financial statements included herein are for HMN, SFC, MSI, through January 31, 2001, the Bank and the Bank's subsidiaries, OAI and HFMS. 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 comprehensive 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 and six month periods ended June 30, 2001 are not necessarily indicative of the results which may be expected for the entire year. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current period presentation. (3) NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for 8 impairment in accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. HMN is required to adopt the provisions of SFAS No. 141 immediately and it will adopt SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require upon adoption of SFAS No. 142, that HMN evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, HMN will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, HMN will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require HMN to perform an assessment of whether there is an indication that goodwill [and equity-method goodwill] is impaired as of the date of adoption. To accomplish this HMN must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. HMN will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and HMN must perform the second step of the transitional impairment test. In the second step, HMN must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in HMN's income statement. And finally, any unamortized negative goodwill [and negative equity-method goodwill] existing at the date SFAS No. 142 is adopted must be written off as the cumulative effect of a change in accounting principle. On January 1, 2002 the adoption date, HMN expects to have unamortized goodwill in the amount of $3,800,938, unamortized identifiable intangible assets in the amount of $685,509 and no unamortized negative goodwill , all of which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $180,024 and $90,018 for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting SFAS No. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on HMN's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. (4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES HMN adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, in the first quarter of 2001. HMN is using an interest rate swap, whereby it pays interest based upon three month London Inter-Bank Offer Rate (LIBOR) and receives interest payments based upon a fixed rate of 7.5% on a notional value of $10 million in a fair value hedge with no ineffectiveness. The hedge is offsetting a callable certificate of deposit for $10 9 million which was issued by HMN. A transition adjustment of $75,637 was recorded on January 1, 2001 as a debit to other assets and also as a credit to the related certificate of deposit. On June 30, 2001 the interest rate swap was marked to a market value of $27,923 which is included in other assets and the corresponding certificate of deposit was adjusted to the same value and is reflected in deposits in the consolidated balance sheet of HMN. The interest rate swap was deemed to be totally effective and therefore no gain or loss was recorded in the income statement. HMN originates and purchases single family residential loans for sale into the secondary market and enters into commitments to sell or securitize those loans in order to mitigate the interest rate risk associated with holding the loans until they are sold. At the beginning of the second quarter, commitments to sell Loans Held for Sale were designated as a cash flow hedge of a forecasted transaction and were accounted for in accordance with SFAS No. 133. On June 30, 2001, the carrying value of the derivatives were marked to market by a $131,621 credit to Loans Held for Sale, a deferred tax asset was established for $50,000 and other comprehensive loss was debited for $81,621. The derivative adjustment in the balance sheet is a consolidated number that is partially owned by a minority interest. The adjustment to other comprehensive loss was $30,688 related to the minority interest and therefore the net adjustment to other comprehensive loss for HMN was $50,933. As the Loans Held for Sale are ultimately sold, the losses currently in accumulated other comprehensive income will be reclassified in the gains and losses on sale of loans in the income statement. It is estimated that all of the Loans Held for Sale at June 30, 2001 will be sold in the next three months. HMN has commitments outstanding to extend credit to future borrowers or to purchase loans that had not closed prior to the end of the quarter which it refers to as its mortgage pipeline. As commitments to originate or purchase loans enter into the mortgage pipeline, HMN simultaneously enters into commitments to sell the mortgage pipeline into the secondary market. As a result of marking the mortgage pipeline and the related commitments to sell the mortgage pipeline to market during the second quarter of 2001 HMN recorded a credit to Loans Held for Sale of $423,193, a debit to Other Liabilities of $381,398 and a loss due to economic hedging valuations of $41,795. As a result of marking the mortgage pipeline and the related commitments to sell the mortgage pipeline to market during the six month period ended June 30, 2001, HMN had recorded a credit to Loans Held for Sale of $301,539, a debit to Other Liabilities of $246,265 and a loss in hedging valuations of $55,274. (5) COMPREHENSIVE INCOME 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 of unrealized gains and losses on securities available for sale and unrealized gains and losses on hedging activity for loans held for sale and certificates of deposit with matching interest rate swaps. The gross unrealized losses in hedging valuation for the second quarter of 2001 was $132,000, the income tax benefit would have been $50,000 and therefore, the net loss was $82,000. The gross minority interest in hedging valuation for the second quarter of 2001 was $49,000, the income tax benefit would have been $18,000 and therefore, the net loss was $31,000. There was no hedging valuation in the second quarter of 2000. The gross unrealized holding gains on securities for the second quarter of 2001 was $975,000, the income tax expense would have been $390,000 and therefore, the net gain was $585,000. The gross reclassification adjustment for the second quarter of 2001 was $610,000, the income tax benefit would have been $242,000 and therefore the net loss was $368,000. The gross unrealized holding gains on securities for the second quarter of 2000 was $76,000, the income tax expense would have been $25,000 and therefore, the net gain was $51,000. The gross reclassification adjustment in the second quarter of 2000 was $35,000, the income tax expense would have been $14,000 and therefore, the net reclassification adjustment was $21,000. The gross unrealized losses in hedging valuation for the six month period ended June 30, 2001 was $132,000, the 10 income tax benefit would have been $50,000 and therefore, the net loss was $82,000. The gross minority interest in hedging valuation for the six month period ended June 30, 2001 was $49,000, the income tax benefit would have been $18,000 and therefore, the net loss was $31,000. There was no hedging valuation in the six month period ended June 30, 2000. The gross unrealized holding gains on securities for the six month period ended June 30, 2001 was $3,225,000, the income tax expense would have been $1,282,000 and therefore, the net gain was $1,943,000. The gross reclassification adjustment in the six month period ended June 30, 2001 was $332,000, the income tax benefit would have been $134,000 and therefore, the net reclassification adjustment was $198,000. The gross unrealized holding losses on securities for the six month period ended June 30, 2000 was $1,108,000, the income benefit would have been $428,000 and therefore, the net loss was $680,000. The gross reclassification adjustment in the six month period ended June 30, 2000 was $34,000, the income tax benefit would have been $14,000 and therefore, the net reclassification adjustment was $20,000. (6) CASH DIVIDEND On July 24, 2001 HMN's Board of Directors announced a cash dividend of $0.14 per share, payable on September 11, 2001 to stockholders of record on August 28, 2001. (7) INVESTMENT IN MORTGAGE SERVICING RIGHTS A summary of mortgage servicing activity is as follows: - -------------------------------------------------------------------------------
Six Months Twelve Months Six Months ended ended ended June 30, 2001 Dec 31, 2000 June 30, 2000 -------------- --------------- --------------- Mortgage servicing rights Balance, beginning of period $ 1,188,928 1,148,774 1,148,774 Originations 620,244 367,531 163,946 Amortization (329,604) (327,377) (149,201) ---------- ---------- ---------- Balance, end of period 1,479,568 1,188,928 1,163,519 ---------- ---------- ---------- Valuation reserve Balance, beginning of period 0 (25,100) (25,100) Reductions 0 25,100 20,900 ---------- ---------- ---------- Balance, end of period 0 0 (4,200) ---------- ---------- ---------- Mortgage servicing rights, net $ 1,479,568 1,188,928 1,159,319 ========== ========== ========== Fair value of mortgage servicing rights $ 1,632,000 1,476,000 1,418,000 ========== ========== ========== - ------------------------------------------------------------------------------
Mortgage servicing costs, which include professional services for valuing mortgage servicing rights, were $6,434 at June 30, 2001, and $16,980 and $31,415 for the six and twelve months ended in June and December 2000, respectively. All of the loans being serviced were single family loans serviced for FNMA under the mortgage-backed security program or the individual loan sale program. The following is a summary of the risk characteristics of the loans being serviced at June 30, 2001. 11
- ------------------------------------------------------------------------------ Weighted Weighted Loan Principal Average Average Number of Balance Interest Rate Remaining Term Loans ------------- --------------- --------------- --------- Original term 30 year fixed rate $ 84,967,000 7.46 % 334 1,053 Original term 15 year fixed rate 89,478,000 6.76 % 159 1,437 Seven year balloon 292,000 6.97 % 321 4 Adjustable rate 3,893,000 8.50 % 314 30 - ------------------------------------------------------------------------------
(8) INVESTMENT IN LIMITED PARTNERSHIPS Investments in limited partnerships were as follows:
- -------------------------------------------------------------------------- June 30, December 31, Primary partnership activity 2001 2000 - ------------------------------- ------------ ------------- Mortgage servicing rights $ 1,649,042 2,257,941 Common stock of financial institutions 278,884 285,524 Low to moderate income housing 281,899 294,899 ------------ ---------- $ 2,209,825 2,838,364 ============ ========== - --------------------------------------------------------------------------
During the second quarter of 2001 HMN's proportionate loss from a mortgage servicing partnership (which included additional impairment reserves of $67,000) was $333,400, its proportionate share of gains from the common stock investments in financial institutions was $14,600 and it recognized $6,500 of losses on the low income housing partnerships. During 2001 HMN anticipates receiving low income housing credits totaling $84,000, of which $21,000 were credited to current income tax benefits in the second quarter of 2001. During the second quarter of 2000 HMN's proportionate revenue from a mortgage servicing partnership (which included the reduction of previously established impairment reserves of $108,400) was $123,500, its proportionate share of losses from common stock investments in financial institutions was $35,100 and it recognized $6,500 of losses on low income housing partnerships. During 2000 HMN received low income housing credits totaling $80,000, of which $20,000 were credited to current income tax benefits in the second quarter. During the six month period ended June 30, 2001 HMN's proportionate loss from a mortgage servicing partnership (which included additional impairment reserves of $164,300) was $608,900, its proportionate share of losses from the common stock investments in financial institutions was $6,600 and it recognized $13,000 of losses on the low income housing partnerships. During 2001 HMN anticipates receiving low income housing credits totaling $84,000, of which $42,000 were credited to current income tax benefits in the six month period ended June 30, 2001. During the six month period ended June 30, 2000 HMN's proportionate revenue from a mortgage servicing partnership (which included the reduction of previously established impairment reserves of $118,000) was $171,800, its proportionate share of losses from the common stock investments in financial institutions was $39,200 and it recognized $13,800 of losses on the low income housing partnerships. During 2000 HMN received low-income housing credits totaling $80,000, of which $40,000 were credited to current income tax benefits in the six month period ended June 30, 2000. 12 (9) 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 Six Months ended June 30, June 30, -------------------- ------------------- 2001 2000 2001 2000 -------------------- ------------------- Weighted average number of common shares outstanding used in basic earnings per common share calculation 3,745,151 3,881,190 3,733,951 3,939,614 Net dilutive effect of: Options 219,121 114,259 217,913 114,612 Restricted stock awards 585 1,881 660 2,584 ---------- ---------- ------------ ------------ Weighted average number of shares outstanding adjusted for effect of dilutive securities 3,964,857 3,997,330 3,952,524 4,056,810 ========== ========== ============ ============ Income available to common shareholders $ 1,272,119 1,880,139 2,863,027 3,409,853 Basic earnings per common share $ 0.34 0.48 0.77 0.87 Diluted earnings per common share $ 0.32 0.47 0.72 0.84
(10) 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 Tier I or Core capital and Risk-based capital (as defined in the regulations) to total assets (as defined). Management believes, as of June 30, 2001, that the Bank meets all capital adequacy requirements to which it is subject. Management believes that based upon the Bank's capital calculations at June 30, 2001 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized. On June 30, 2001 the Bank's tangible assets and adjusted total assets were $719.8 million and its risk-weighted assets were $460.5 million. The following table presents the Bank's capital amounts and ratios at June 30, 2001 for actual capital, required capital and excess capital including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations. 13
Required to be Adequately Actual Capitalized ---------------------- ------------------------- Percent of Percent of Amount Assets Amount Assets (in thousands) --------- ------------ ------------ ------------ Bank stockholder's equity $ 57,589 Plus: Net unrealized loss on certain securities available for sale and cash flow hedges 560 Minority interest in consolidated subsidiaries 227 Less: Goodwill and other intangibles 4,623 Excess mortgage servicing rights 165 ------ Tier I or core capital 53,588 ------ Tier I capital to adjusted total assets 7.44% $ 28,793 4.00% Tier I capital to risk- weighted assets 11.64% $ 18,422 4.00% Plus: Allowable allowance for Loan losses 3,216 ------ Risk-based capital $ 56,804 $ 36,843 ====== Risk-based capital to risk- Weighted assets 12.33% 8.00% To Be Well Capitalized Under Prompt Corrective Excess Capital Actions Provisions ---------------------- ------------------------- Percent of Percent of Amount Assets Amount Assets (in thousands) --------- ------------ ------------ ------------ Bank stockholder's equity $ Plus: Net unrealized loss on certain securities available for sale and cash flow hedges Minority interest in consolidated subsidiaries Less: Goodwill and other intangibles Excess mortgage servicing rights Tier I or core capital Tier I capital to adjusted total assets 24,795 3.44% $ 35,991 5.00% Tier I capital to risk- weighted assets 35,166 7.64% $ 27,632 6.00% Plus: Allowable allowance for Loan losses Risk-based capital $ 19,961 $ 46,054 Risk-based capital to risk- Weighted assets 4.33% 10.00% Based upon the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio.
The tangible capital of the Bank was in excess of the minimum 2% required at June 30, 2001 but is not reflected in the table above. (11) BUSINESS SEGMENTS HMN's wholly owned subsidiaries, Home Federal Savings Bank and MSI (through January 31, 2001), have been identified as reportable operating segments in accordance with the provisions of SFAS 131. MSI and its successor through merger, Home Federal Mortgage Services, LLC, were deemed to be a segment because its operations were conducted independently from the Bank. MSI and HFMS, jointly called Mortgage Services, have been segmented further into Mortgage Servicing Rights and Mortgage Banking activities. The mortgage servicing segment owns servicing rights on loans which have either been sold to FNMA or securitized into mortgage backed instruments which were issued by FNMA. MSI receives a servicing fee which is based upon the outstanding balance of the loan being serviced and pays a subservicer a monthly fee to service the loan. MSI's mortgage banking activity includes an origination function and it also purchases loans from other loan originators. All loans acquired either by origination or by purchase are intended to be resold in the secondary loan market. Security Finance Corporation and HMN, the holding company, did not meet the quantitative thresholds for determining reportable segments and therefore are included in the "Other" category. HMN evaluates performance and allocates resources based on the segment's net income or loss, return on average assets and return on average equity. Each corporation is managed separately with its own president, who reports directly to HMN's chief operating decision maker, and board of directors. The following table sets forth certain information about the reconciliations of reported profit or loss and assets for each of HMN's reportable segments. 14
HMN Mortgage Services, Inc. ----------------------------- Home Federal Mortgage Mortgage (Dollars in thousands) Savings Bank Servicing Rights Banking - ------------------------------------------------------------------------ At or for the three months ended June 30, 2001: Interest income - external customers $ 12,126 0 911 Non-interest income - external customers 610 12 800 Earnings (loss) on limited partnerships (339) 0 0 Intersegment interest income 834 0 0 Intersegment non- interest income 230 0 0 Interest expense 7,975 0 869 Amortization of mortgage servicing rights and net valuation adjustments 166 23 0 Other non-interest expense 2,910 5 611 Income tax expense (benefit) 771 0 0 Minority interest 105 0 0 Net income (loss) 1,234 (16) 231 Total assets 723,447 134 46,511 Net interest margin 2.92 % NM NM Return on average assets 0.68 % (44.97) 1.72 % Return on average realized common equity 8.62 % (1,991.20) 77.20 % At or for the three months ended June 30, 2000: Interest income - external customers $ 12,817 0 68 Non-interest income - external customers 762 7 163 Earnings (loss) on limited partnerships 117 0 0 Intersegment interest income 0 0 0 Intersegment non- interest income 100 0 0 Interest expense 7,995 0 52 Amortization of mortgage servicing rights and net valuation adjustments 61 6 0 Other non-interest expense 2,593 9 236 Income tax expense (benefit) 1,217 (3) (23) Net income (loss) 1,885 (5) (34) Total assets 702,155 210 6,229 Net interest margin 2.88 % NM NM Return on average assets 1.09 % (9.59) % (3.81) % Return on average realized common equity 14.38 % (30.17) % (11.61) % NM - Not meaningful Total Reportable Consolidated Segments Other Eliminations Total - ------------------------------------------------------------------------------- At or for the three months ended June 30, 2001: Interest income - external customers 13,037 105 0 13,142 Non-interest income - external customers 1,422 92 0 1,514 Earnings (loss) on limited partnerships (339) 14 0 (325) Intersegment interest income 834 85 (919) 0 Intersegment non- interest income 230 1,364 (1,594) 0 Interest expense 8,844 3 (919) 0 Amortization of mortgage servicing rights and net valuation adjustments 189 0 0 189 Other non-interest expense 3,526 369 (146) 3,749 Income tax expense (benefit) 771 16 0 787 Minority interest 105 0 0 105 Net income (loss) 1,449 1,272 (1,449) 1,272 Total assets 769,696 71,156 (109,507) 731,345 Net interest margin NM NM NM 2.98 Return on average assets NM NM NM 0.70 Return on average realized common equity NM NM NM 7.11 At or for the three months ended June 30, 2000: Interest income - external customers 12,885 154 0 13,039 Non-interest income - external customers 932 2 0 934 Earnings (loss) on limited partnerships 117 (35) 0 82 Intersegment interest income 0 64 (64) 0 Intersegment non- interest income 100 1,854 (1,954) 0 Interest expense 8,047 12 (64) 7,995 Amortization of mortgage servicing rights and net valuation adjustments 67 0 0 67 Other non-interest expense 2,838 143 (100) 2,881 Income tax expense (benefit) 1,191 (4) 0 1,187 Net income (loss) 1,846 1,888 (1,854) 1,880 Total assets 708,594 65,903 (58,288) 716,209 Net interest margin NM NM NM 2.95% Return on average assets NM NM NM 1.06% Return on average realized common equity NM NM NM 11.07% NM - Not meaningful
15
HMN Mortgage Services, Inc. ----------------------------- Home Federal Mortgage Mortgage (Dollars in thousands) Savings Bank Servicing Rights Banking - ------------------------------------------------------------------------ At or for the six months ended June 30, 2001: Interest income - external customers $ 25,095 0 1,373 Non-interest income - external customers 1,519 28 1,246 Earnings (loss) on limited partnerships (622) 0 0 Intersegment interest income 1,252 0 0 Intersegment non- interest income 381 0 0 Interest expense 16,385 0 1,345 Amortization of mortgage servicing rights and net valuation adjustments 284 46 0 Other non-interest expense 6,028 6 1,048 Income tax expense 1,699 0 (28) Minority interest 133 0 0 Net income (loss) 2,646 (24) 254 Total assets 723,447 134 46,115 Net interest margin 2.93 % NM NM Return on average assets 0.74 % (29.69) 1.24 % Return on average realized common equity 9.55 % (567.43) 44.14 % At or for the six months ended June 30, 2000: Interest income - external customers $ 25,238 0 116 Non-interest income - external customers 1,209 29 263 Earnings (loss) on limited partnerships 158 0 0 Intersegment interest income 0 0 0 Intersegment non- interest income 191 0 0 Interest expense 15,700 0 85 Amortization of mortgage servicing rights and net valuation adjustments 116 12 0 Other non-interest expense 5,284 17 483 Income tax expense (benefit) 2,198 0 (76) Net income (loss) 3,408 0 (113) Total assets 702,155 210 6,229 Net interest margin 2.86 % NM NM Return on average assets 0.99 % (0.04) % (10.68) % Return on average realized common equity 13.10 % (1.20) % (26.02) % NM - Not meaningful Total Reportable Consolidated Segments Other Eliminations Total - ------------------------------------------------------------------------------- At or for the six months ended June 30, 2001: Interest income - external customers 26,468 216 0 26,684 Non-interest income - external customers 2,793 342 0 3,135 Earnings (loss) on limited partnerships (622) (7) 0 (629) Intersegment interest income 1,252 173 (1,425) 0 Intersegment non- interest income 381 2,765 (3,146) 0 Interest expense 17,730 15 (1,425) 16,320 Amortization of mortgage servicing rights and net valuation adjustments 330 0 0 330 Other non-interest expense 7,082 497 (270) 7,309 Income tax expense 1,671 14 0 1,785 Minority interest 133 0 0 133 Net income (loss) 2,876 2,863 (2,876) 2,863 Total assets 769,696 71,156 (109,507) 731,345 Net interest margin NM NM NM 2.97 Return on average assets NM NM NM 0.79 Return on average realized common equity NM NM NM 8.13 At or for the six months ended June 30, 2000: Interest income - external customers 25,354 346 0 25,700 Non-interest income - external customers 1,501 4 0 1,505 Earnings (loss) on limited partnerships 158 (39) 0 119 Intersegment interest income 0 127 (127) 0 Intersegment non- interest income 191 3,315 (3,506) 0 Interest expense 15,785 2 (127) 15,700 Amortization of mortgage servicing rights and net valuation adjustments 128 0 0 128 Other non-interest expense 5,784 253 (191) 5,846 Income tax expense (benefit) 2,122 28 0 2,150 Net income (loss) 3,295 3,430 (3,315) 3,410 Total assets 708,594 65,903 (58,288) 716,209 Net interest margin NM NM NM 2.94% Return on average assets NM NM NM 0.97% Return on average realized common equity NM NM NM 10.04% NM - Not meaningful
16 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, provisions made for loan losses and impairment reserve adjustments required on mortgage servicing assets. The operations of financial institutions, including the Bank, are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of personal income and savings in the market area of the Bank. NET INCOME HMN's net income for the second quarter of 2001 was $1.3 million, a decrease of $608,000, or 32%, compared to net income of $1.9 million for the second quarter of 2000. Basic earnings per share were $0.34 for the quarter ended June 30, 2001, a decrease of $0.14 per share or 29.2%, from $0.48 basic earnings per share for the same quarter of 2000. Diluted earnings per share for the second quarter of 2001 were $0.32, a decrease of $0.15 or 31.9%, from $0.47 for the second quarter of 2000. During the second quarter of 2001, HMN recognized $610,000 of impairment losses on corporate debt securities because the underlying debtor corporation filed for bankruptcy. It also recognized $333,000 in losses on a limited partnership investment in mortgage servicing assets that declined in value during the quarter. Diluted earnings per share for the second quarter of 2001 decreased by a total of $0.15 due to the impairment losses and the limited partnership losses recognized during the quarter. HMN's net income for the six months ended June 30, 2001 was $2.9 million, a decrease of $547,000, or 16.0%, compared to net income of $3.4 million for the six month period ended June 30, 2000. Basic earnings per share were $0.77 for the six months ended June 30, 2001, a decrease of $0.10 or 11.5%, from $0.87 for the same six month period in 2000. Diluted earnings per share for the six-month period in 2001 were $0.72, a decrease of $0.12 or 14.3%, from $0.84 for the same six-month period in 2000. During the first six months of 2001, HMN recognized $610,000 of impairment losses on corporate debt securities because the underlying debtor corporation filed for bankruptcy. It also recognized $609,000 losses on a limited partnership investment in mortgage servicing assets that declined in value during the period. Diluted earnings per share for the first six months of 2001 decreased by a total of $0.19 due to the impairment losses and the limited partnership losses recognized during the period. 17 NET INTEREST INCOME Net interest income for the second quarter of 2001 was $5.2 million, an increase of $170,000 or 3.4%, compared to $5.0 million for the second quarter of 2000. Interest income for the second quarter of 2001 was $13.1 million, an increase of $103,000 or 0.8%, compared to $13.0 for the second quarter of 2000. Interest income increased by $411,000 due to a $15.2 million net increase in average interest-earning assets from the second quarter of 2000 to the second quarter of 2001. The increase in average interest-earning assets is the result of HMN's emphasis on originating and/or purchasing commercial real estate loans, commercial business loans and consumer loans which generally have higher interest rates and shorter terms to maturity than single family fixed-rate residential loans. Interest income decreased by $308,000 due to a decrease in interest rates from the second quarter of 2000 to the second quarter of 2001. The yield on interest-earning assets decreased from 7.63% at June 30, 2000 to 7.50% at June 30, 2001. During the first six months of 2001 the Federal Reserve Board substantially cut short-term interest rates which in turn caused the yield on the floating rate loan portfolio and the yield on new loans originated to be less than the yields that were earned in the loan portfolio during a comparable period in 2000. Interest expense was $7.93 million for the second quarter of 2001, a decrease of $67,000 or 0.8%, compared to $7.99 million for the same quarter in 2000. Interest expense on deposit accounts was $4.9 million, an increase of $388,000 or 8.6%, from $4.5 million for the second quarter of 2000. Interest expense on deposits increased because HMN was required to pay higher rates in order to retain the deposits. Interest expense on Federal Home Loan Bank (FHLB) advances was $3.0 million for the second quarter of 2001, a decrease of $455,000 or 13.1%, from $3.5 million for the second quarter of 2000. Interest expense on FHLB advances decreased by $178,000 due to a decline in the average outstanding advances between the two quarters. Interest expense also declined by $277,000 due to a decline in the interest rates paid on FHLB advances between the two quarters. HMN has many advances which are tied to a London Inter-Bank Offer Rates (LIBOR) index and the interest rate on those advances adjusts monthly to changes in the index. During the first six months of 2001 as the Federal Reserve Board reduced short-term interest rates the LIBOR index also decreased. Net interest margin (net interest income divided by average interest earning assets) for the second quarter of 2001 was 2.98%, a 3 basis point increase, compared to 2.95% for the second quarter of 2000. Net interest income for the six month period ended June 30, 2001 was $10.4 million, an increase of $365,000 or 3.6%, compared to $10.0 million for the same period of 2000. Interest income for the six month period of 2001 was $26.7 million, an increase of $985,000 or 3.8%, compared to $25.7 million for the same period of 2000. Interest income increased by $663,000 due to an $18.8 million net increase in average interest-earning assets from the six month period of 2000 to the same period of 2001. The increase in average interest-earning assets is the result of HMN's emphasis on originating and/or purchasing commercial real estate loans, commercial business loans and consumer loans which generally have higher interest rates and shorter terms to maturity than single family fixed-rate residential loans. Interest income increased by $317,000 due to higher interest rates being earned on the types of assets being added to the loan and loans held for sale portfolios which replaced lower yielding assets in the securities portfolio. The change in asset mix improved the yield on interest earning assets from 7.55% at June 30, 2000 to 7.65% at June 30, 2001 despite the fact that interest rates declined from the first six months of 2000 to the same period in 2001. Interest expense was $16.3 million for the six months ended June 30, 2001, an increase of $620,000 or 3.9%, compared to $15.7 million for the same six month period of 2000. Interest expense on deposits was $10.0 million for the six month period ended June 30, 2001, an increase of $1.1 million or 12.6%, compared to $8.9 million for the same period of 2000. Interest expense on deposits increased because HMN was required to pay higher rates in order to retain the deposits. Interest expense on FHLB advances was $6.3 million for the six month period of 2001, a decrease of $493,000 or 7.2%, from $6.8 million for the same period of 2000. Interest expense decreased by $224,000 due to a $7.5 million decrease in the average outstanding advances from the FHLB. Interest expense decreased by $269,000 due to a decrease in the cost of borrowing from the FHLB. HMN has many advances which are tied to a London Inter-Bank Offer Rates (LIBOR) index and the interest rate on those advances adjusts monthly to changes in the index. During 2001 as the Federal Reserve Board reduced short-term interest rates the LIBOR index also decreased. The average interest rate paid on average 18 interest-bearing liabilities was 5.11% during the six months ended June 30, 2001, compared to 4.99% for the same period of 2000. Net interest margin (net interest income divided by average interest earning assets) for the six months ended June 30, 2001, was 2.97%, an increase of 3 basis points, compared to 2.94% for the same period of 2000. PROVISION FOR LOAN LOSSES *The provision for loan losses for the second quarter ended June 30, 2001 was $300,000, an increase of $255,000, or 567.0%, compared to $45,000 for the second quarter of 2000. The provision for loan losses for the six months ended June 30, 2001 was $450,000, an increase of $360,000, or 400.0% compared to $90,000 for the same six month period ended in 2000. The provision is the result of management's evaluation of the composition of the loan portfolio, the historical level of non-performing loans, increases in loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located such as national and regional unemployment data, local single family construction permits and local economic growth rates. Management's evaluation of probable losses inherent in the loan portfolio revealed conditions that resulted in increasing the 2001 loan loss provision compared to the provision for 2000. This increase was due primarily to the growth that was experienced in the commercial and consumer loan portfolios. HMN will continue to monitor its allowance for losses as these conditions dictate. 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:
2001 2000 ------------- --------------- Balance at January 1, $3,143,746 $ 3,273,311 Provision 450,000 90,000 Charge-offs (68,830) (2,993) Recoveries 326 425 ----------- ------------ Balance at June 30, $ 3,525,242 $ 3,360,743 =========== ============
NON-INTEREST INCOME Non-interest income was $1.2 million for the second quarter of 2001, an increase of $172,000, or 16.9%, from $1.0 million for the second quarter of 2000. Non-interest income increased by $1.2 million primarily due to increased gains recognized on the sale of single family residential loans and increased fees collected. Interest rates on fixed rate single family residential loans were very favorable during the second quarter of 2001, which caused the loan volume of new home purchases and existing home refinances in HMN's markets to exceed our expectations. Since HMN sells the majority of its fixed rate single family loan activity, gain on the sale of loans improved from the second quarter of 2000 to the second quarter of 2001. The increase in non-interest income was offset by a $645,000 decline in gain on the sale of securities and a $407,000 decrease in earnings from limited partnerships. Gain on the sale of securities declined primarily due to a $610,000 impairment loss recognized in the securities portfolio. The low interest rates on single family home loans have caused many homeowners to refinance their mortgages. The increased refinance volume has caused the value of HMN's investment in a limited partnership that invests in mortgage servicing rights to decline. Non-interest income was $2.5 million for the six months ended June 30, 2001, an increase of $881,000, or 54.3%, from $1.6 million for the same six month period of 2000. Non-interest income increased by $2.0 million primarily due to increased gains recognized on the sale of single family residential loans and increased fees collected. Interest rates on fixed rate single family residential loans were very favorable during 2001, which caused the loan volume of new home purchases and home refinances in HMN's markets to exceed our expectations. Since HMN sells the majority of its fixed rate single family loan activity, gain on the sale of loans improved from 2000 to 2001. The increase in non-interest income was offset by a $298,000 decline in gain on the sale of securities and a $747,000 decrease in earnings from limited partnerships. Gain on the sale of securities declined primarily due to a $610,000 impairment loss recognized in the securities portfolio during the second quarter of 2001. The low interest rates on single family home loans have caused many homeowners to refinance their mortgages. The increased refinance volume has caused the value of HMN's investment in a limited partnership that invests in mortgage servicing rights to decline. * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion. 19 NON-INTEREST EXPENSE Non-interest expense was $3.9 million for the second quarter of 2001, an increase of $1.0 million or 33.6%, from $2.9 million for the second quarter of 2000. Compensation and benefits expense increased by $554,000, or 37.2%, due primarily to increased commissions being paid on more loan production, increased claims experience for the self funded health benefit plan, annual pay increases and increases in the number of employees in the work force. Occupancy costs increased by $49,000 primarily due to additional depreciation on remodeled facilities and other costs related to equipment. Amortization of mortgage servicing rights, net of valuation adjustments and servicing costs increased by $119,000 due to a change in the estimated time over which the servicing fees will be collected. Advertising expenses and other expense increased a total of $218,000 between the two quarters. The increase in other expenses is partially due to the increased loan origination and brokerage activity. Non-interest expense was $7.64 million for the six months ended June 30, 2001, an increase of $1.67 million or 27.9%, from $5.97 million for the same six month period of 2000. Compensation and benefits expense increased by $770,000, or 24.2%, due primarily to increased commissions being paid on increased loan production, annual pay increases, increases in the number of employees in the work force and an increase in claims on the self funded health benefit plan. Occupancy costs increased by $189,000 primarily due to additional depreciation on remodeled facilities and other costs related to equipment. Amortization of mortgage servicing rights, net of valuation adjustments and servicing costs increased by $191,000 due to a change in the estimated time over which the servicing fees will be collected. Advertising expenses and other expenses increased a total of $420,000 between the two six month periods. The increase in other expenses is partially due to the increased loan origination and brokerage activity. INCOME TAX EXPENSE Income tax expense was $787,000 for the second quarter of 2001, a decrease of $400,000 compared to $1.2 million for the second quarter of 2000. Income tax expense was $1.8 million for the six months ended June 30, 2001, a decrease of $365,000 compared to $2.2 million for the same six month period of 2000. The decreases in income taxes are primarily due to decreases in taxable income. 20 NON-PERFORMING ASSETS The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at June 30, 2001 and December 31, 2000.
June 30, December 31, (Dollars in Thousands) 2001 2000 ----------- ------------ Non-Accruing Loans One-to-four family real estate $ 498 775 Nonresidential real estate 68 0 Consumer 91 142 Commercial business 563 95 ------ ------- Total 1,220 1,012 ------ ------- Accruing loans delinquent 90 days or more 6 405 Other assets 1,390 0 Foreclosed Assets Real estate: One-to-four family 0 195 ------ ------- Total non-performing assets $ 2,616 $ 1,612 ====== ======= Total as a percentage of total assets 0.36% 0.23% ====== ======= Total non-performing loans $ 1,220 $ 1,417 ====== ======= Total as a percentage of total loans receivable, net 0.24% 0.27% ====== =======
Total non-performing assets at June 30, 2001 were $2,616,000, an increase of $1,004,000, from $1,612,000 at December 31, 2000. The net increase of $1,004,000 was the result of a $208,000 increase in non-accruing loans, a $1,390,000 increase in non-accruing investments due to bankruptcy filed by the underlying debtors, which were offset by a $399,000 decrease in accruing loans delinquent 90 days or more and a decrease of $195,000 in real estate owned. DIVIDENDS On July 24, 2001 HMN declared a cash dividend of $.14 per share, payable on September 11, 2001 to shareholders of record on August 28, 2001. During 2001, HMN has declared and paid dividends as follows: Record date Payable date Dividend per share Dividend Payout Ratio - ---------------- ------------- ------------------- --------------------- February 22, 2001 March 8, 2001 $0.12 29.27% April 24, 2001 June 11, 2001 $0.12 30.0 % The annualized dividend payout ratio for the past four quarters, ending with the September 11, 2001 payment will be 31.85%. The declaration of dividends are subject to, among other things, HMN's financial condition and results of operations, the Bank's compliance with its regulatory capital requirements, including the fully phased-in capital requirements, tax considerations, industry standards, economic conditions, regulatory restrictions, general business practices and other factors. 21 LIQUIDITY For the six months ended June 30, 2001, the net cash used by operating activities was $33.4 million. HMN collected $15.0 million from the sale of securities, $14.0 million from principal repayments and the maturity of securities and $312,000 in proceeds from the sale of real estate. It purchased premises and equipment of $875,000 and net loans receivable decreased by $14.2 million due to loan prepayments and payoffs. HMN had a net decrease in deposit balances of $9.3 million for the six month period. It received net proceeds of $17.9 million from FHLB advances and $237,000 from increased advance payments from borrowers for taxes and insurance. HMN received $125,000 from the sale of a minority interest in HFMS and it also received $190,506 related to the exercise of HMN stock options. HMN purchased $74,000 of its own stock and paid $816,000 in dividends to its shareholders. *HMN has certificates of deposits with outstanding balances of $237.2 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 that 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. *HMN has $25.0 million of FHLB advances which mature after 2003 but have call features that can be exercised by the FHLB during the next 12 months. If the call features are exercised HMN has the option of requesting any advance otherwise available to it pursuant to the Credit Policy of the FHLB. HMN also has $18.5 million of FHLB advances which will mature during the next 12 months. Since HMN has the ability to request another advance to replace the advance that is being called or is maturing, management does not anticipate that it will have a liquidity problem due to advances being called by the FHLB during the next 12 month period. 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 the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located below 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 June 30, 2001. 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 June 30, 2001. * This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion. 22
- ---------------------------------------------------------------------------- Other than trading portfolio Market Value -------------------------------------------------- (Dollars in thousands) Basis point change in interest rates -200 -100 0 +100 +200 - ----------------------------------------------------------------------------- Cash equivalents $32,029 32,019 32,009 31,998 31,988 Securities available for sale: Fixed-rate CMOs 10,734 10,776 10,639 10,316 9,970 Variable-rate CMOs 55,660 56,060 57,480 57,874 57,807 Fixed-rate available for sale mortgage-backed and related securities 2,885 2,837 2,747 2,659 2,563 Variable-rate available for sale mortgage- backed and related securities 1,600 1,593 1,587 1,578 1,570 Fixed-rate available for sale other marketable securities 43,018 41,881 40,741 39,447 38,318 Variable-rate available for sale other marketable securities 112 110 115 111 111 Federal Home Loan Bank stock 12,221 12,211 12,245 12,190 12,180 Fixed-rate loans held for sale 49,072 48,278 46,608 44,934 44,144 Loans receivable, net: Fixed-rate real estate loans 245,937 242,198 235,653 227,945 220,319 Variable-rate real estate loans 148,479 145,755 143,169 140,654 138,291 Fixed-rate other loans 76,173 75,485 77,815 76,055 74,492 Variable-rate other loans 66,203 65,049 63,917 63,355 62,981 Mortgage servicing rights, net 598 1,032 1,632 1,959 1,900 Investment in limited partnerships 1,286 1,564 2,209 2,549 2,673 ------- ------- ------ ------ ------ Total market risk sensitive assets 746,007 736,848 728,566 713,624 699,307 ------- ------- ------- ------- ------- NOW deposits 46,400 46,400 46,400 46,400 46,400 Passbook deposits 32,605 32,605 32,605 32,605 32,605 Money market deposits 37,501 37,501 37,501 37,501 37,501 Certificate deposits 295,932 295,932 295,932 295,932 295,932 Fixed-rate Federal Home Loan Bank advances 179,590 171,018 163,993 162,340 160,363 Variable-rate Federal Home Loan Bank advances 77,585 77,555 77,524 77,492 77,461 ------- -------- ------- ------ ------ Total market risk sensitive liabilities 669,613 661,011 653,955 652,270 650,262 ------- -------- ------- ------- ------- Off-balance sheet financial instruments: Commitments to extend credit 3,799 2,505 0 (3,260) (4,536) Commitments to sell or deliver loans (5,704) (3,749) 0 4,743 6,676 ------- -------- ------- ------- ------ Net market risk $ 78,299 77,081 74,611 59,871 46,905 ======= ======== ======= ======= ======= Percentage change from current market value 4.94% 3.31% 0.00% (19.76)% (37.13)% ======= ======== ======= ======= ======= - ----------------------------------------------------------------------------
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 23 between 7% to 37%, depending on the note rate and the period to maturity. Adjustable rate mortgages ("ARMs") were assumed to prepay at annual rates of between 11% and 28%, depending on the note rate and the period to maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 7% and 37% depending on the note rate 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 and the related cash flow priority of the CMO tranche owned. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at an annual rate of 9%. FHLB advances were projected to be called at the first call date where the projected interest rate on similar remaining term advances exceeded the interest rate on HMN's callable advance. *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 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 June 30, 2001 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 24,443 1.68 % +100 24,673 2.64 % 0 24,039 0.00 % -100 22,043 -8.30 % -200 19,904 -17.20 % 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. *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. *This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion. 24 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 which conform to the secondary market guidelines. HMN has focused its portfolio lending on the origination of commercial loan products and consumer loans which generally have shorter weighted average terms to maturity and/or interest rates which adjust at least every three 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. FORWARD-LOOKING INFORMATION The following paragraphs 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. PROVISION FOR LOAN LOSSES The provision for loan losses for the second quarter ended June 30, 2001 was $300,000, an increase of $255,000, or 567.0%, compared to $45,000 for the second quarter of 2000. The provision for loan losses for the six months ended June 30, 2001 was $450,000, an increase of $360,000, or 400.0% compared to $90,000 for the same six month period ended in 2000. The provision is the result of management's evaluation of the composition of the loan portfolio, the historical level of non-performing loans, increases in loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located such as national and regional unemployment data, local single family construction permits and local economic growth rates. Management's evaluation of probable losses inherent in the loan portfolio revealed conditions that resulted in increasing the 2001 loan loss provision compared to the provision for 2000. This increase was due primarily to the growth that was experienced in the commercial and consumer loan portfolios. HMN will continue to monitor its allowance for losses as these conditions dictate. 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. LIQUIDITY HMN has certificates of deposits with outstanding balances of $237.2 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 that 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. HMN has $25.0 million of FHLB advances which mature after 2003 but have call features that can be exercised by the FHLB during the next 12 months. If the call features are exercised HMN has the option of requesting any advance otherwise available to it pursuant to the Credit Policy of the FHLB. HMN also has $18.5 million of FHLB advances which will mature during the next 12 months. Since HMN has the ability to request another advance to replace the advance that is being called or is maturing, management does not anticipate that it will have a liquidity problem due to advances being called by the FHLB during the next 12 month period. 25 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 the 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 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 June 30, 2001. 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 June 30, 2001. 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 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 table in the market risk section. 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 June 30, 2001 to determine if its current level of interest rate risk is acceptable. The table in the asset/liability section projects the estimated annual impact on net interest income of immediate interest rate changes called rate shocks. 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. 26 HMN FINANCIAL, INC. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. None. ITEM 2. Changes in Securities and Use of Proceeds. Not applicable. ITEM 3. Defaults Upon Senior Securities. Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of the Company was held on April 24, 2001 at 10:00 a.m. The following is a record of the votes cast in the election of directors of the Company: For Withhold Term expiring in 2004: Susan K. Kolling 2,978,492 297,764 Roger P. Weise 3,112,116 164,140 Richard J. Ziebell * 3,173,129 103,127 Terms for Directors continuing in office are as follows: Term Michael McNeil 2003 Timothy P. Johnson 2002 Duane D. Benson 2003 Timothy R. Geisler 2002 Allan R. DeBoer 2002 Mahlon C. Schneider 2003 Accordingly the individuals named above were declared to be duly elected directors of the Company for terms to expire as stated above. The following is a record of the votes cast in the approval of the HMN Financial, Inc. 2001 Omnibus Stock Plan (the "Plan") and reservation of 400,000 shares under the Plan. NUMBER PERCENTAGE OF OF VOTES VOTES ACTUALLY CAST FOR 1,883,575 57.49% AGAINST 398,708 12.17% ABSTAIN 354,332 10.82% BROKER NON-VOTE 639,641 19.52% * Mr. Ziebell has resigned from his position on the Board of Directors effective June 30, 2001. 27 The following is a record of the votes cast in respect of the proposal to ratify the appointment of KPMG LLP as the Company's auditors for the fiscal year ending December 31, 2001. NUMBER PERCENTAGE OF OF VOTES VOTES ACTUALLY CAST FOR 3,245,488 99.06% AGAINST 19,613 0.60% ABSTAIN 11,155 0.34% BROKER NON-VOTE 0 0.00% Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Company. ITEM 5. Other Information. None. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. See Index to Exhibits on page 27 of this report. (b) Reports on Form 8-K - None. 28 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: August 13, 2001 /s/ Michael McNeil Michael McNeil, President (Principal Executive Officer) Date: August 13, 2001 /s/ Timothy P. Johnson Timothy P. Johnson, Chief Financial Officer (Principal Financial Officer) 29 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 3.1 Amended and Restated Articles of Incorporation *1 N/A 3.2 Amended and Restated By-laws *2 N/A 4 Form of Common Stock *3 N/A Including indentures 11 Computation of Earnings Per Common Share 11 Filed electronically *1 Incorporated by reference to the same numbered exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 0-24100). *2 Incorporated by reference to the same numbered exhibit to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997 (File 0-24100). *3 Incorporated by reference to the same numbered exhibit to the Company's Registration Statement on Form S-1 dated April 1, 1994 (File No. 33-77212). 30 EX-11 3 ex11e.txt EXHIBIT 11 Exhibit 11 - Computation of Earnings per Share
Three months ended Six Months ended June 30, June 30, -------------------- ------------------- 2001 2000 2001 2000 -------------------- ------------------- Weighted average number of common shares outstanding used in basic earnings per common share calculation 3,745,151 3,881,190 3,733,951 3,939,614 Net dilutive effect of: Options 219,121 114,259 217,913 114,612 Restricted stock awards 585 1,881 660 2,584 ---------- ---------- ------------ ------------ Weighted average number of shares outstanding adjusted for effect of dilutive securities 3,964,857 3,997,330 3,952,524 4,056,810 ========== ========== ============ ============ Income available to common shareholders $ 1,272,119 1,880,139 2,863,027 3,409,853 Basic earnings per common share $ 0.34 0.48 0.77 0.87 Diluted earnings per common share $ 0.32 0.47 0.72 0.84
-----END PRIVACY-ENHANCED MESSAGE-----