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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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 NO.)
101 NORTH BROADWAY, PO BOX 231 55975-0231
SPRING VALLEY, MINNESOTA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (507) 346-1100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 15, 2000, the Registrant had issued and outstanding 4,640,477
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 15, 2000 was
$39.8 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the Registrant that such
person is an affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Annual Report for the year ended December 31, 1999,
are incorporated by reference in Parts I, II and IV of this Form 10-K. Parts of
the Registrant's Proxy Statement dated March 21, 2000, are incorporated by
reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business ................................................................................................. 3
General ......................................................................................... 3
Lending Activities .............................................................................. 4
Investment Activities ...........................................................................20
Sources of Funds ................................................................................24
Other Information
Service Corporations........................................................................28
Competition.................................................................................28
Other Corporations Owned by HMN.............................................................28
Employees...................................................................................29
Regulation ......................................................................................29
Taxation ........................................................................................38
Item 2. Properties ...............................................................................................40
Item 3. Legal Proceedings ........................................................................................41
Item 4. Submission of Matters to a Vote of Security Holders ......................................................41
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters .........................................................................................41
Item 6. Selected Financial Data ..................................................................................41
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...........................................................................41
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ...............................................41
Item 8. Financial Statements and Supplementary Data ..............................................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................................................41
PART III
Item 10. Directors and Executive Officers of the Registrant ......................................................42
Item 11. Executive Compensation ..................................................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management ..........................................42
Item 13. Certain Relationships and Related Transactions ..........................................................42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................................43
Signatures .......................................................................................................46
Index to Exhibits ................................................................................................47
2
PART I
ITEM 1. BUSINESS
GENERAL
HMN Financial, Inc. ("HMN" or the "Corporation"), was incorporated under
the laws of the State of Delaware in March 1994 for the purpose of becoming
the savings and loan holding company of Home Federal Savings Bank ("Home
Federal" or the "Bank") in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock
savings bank. 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. On
April 30, 1999 MSL was liquidated and its assets and liabilities were
transferred to the Bank. 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 a mortgage banking and mortgage brokerage facility located in
Brooklyn Park, Minnesota.
The Company's financial statements identify the Bank and MSI as
reportable operating segments. In addition, MSI has been segmented further
into mortgage servicing rights and mortgage banking activities. The
information on pages 51 - 52 of the Company's annual report is incorporated
herein by reference.
On December 5, 1997 HMN, through its wholly owned subsidiary, the Bank,
completed its merger with Marshalltown Financial Corporation (MFC) pursuant
to a merger agreement dated July 1, 1997. Refer to Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report for information on
assets acquired in the merger.
As a community-oriented financial institution, HMN seeks to serve the
financial needs of communities in its market area. HMN's business involves
attracting deposits from the general public and using such deposits to
originate or purchase one-to-four family residential, commercial real estate,
and multi-family mortgage loans in addition to consumer, construction, and
commercial business loans. HMN also invests in mortgage-backed and related
securities, investment securities (consisting primarily of U.S. government
and government agency obligations) and other permissible investments. The
executive offices of HMN are located at 101 N. Broadway, PO Box 231, Spring
Valley, Minnesota 55975-0231. It's telephone number at that address is (507)
346-1100.
MARKET AREA
HMN serves the Minnesota counties of Fillmore, Freeborn, Houston, Mower,
Olmsted and Winona and portions of Steele, Dodge, Goodhue and Wabasha through
its main office located in Spring Valley, Minnesota and its six branch
offices located in Albert Lea, Austin, LaCrescent, Rochester and Winona,
Minnesota. The portion of HMN's market area consisting of Rochester and the
contiguous communities is composed of primarily urban and suburban
communities, while the balance of HMN's market area consists primarily of
rural areas and small towns. Primary industries in HMN's market area include
manufacturing, agriculture, health care, wholesale and retail trade, service
industries and education. Major employers include IBM, the Mayo Clinic,
Hormel, a food processing company, and various small industrial and other
companies. HMN's market area is also the home of Winona State University,
Rochester Community and Technical College, University of Minnesota -
Rochester Center, Winona State University - Rochester Center and Austin's
Riverland Community College.
3
HMN serves the Iowa counties of Marshall and Tama through its branch
offices located in Marshalltown and Toledo. Major industries in the area are
Swift & Company - pork processors, Fisher Controls Int. - valve and regulator
manufacturing, Lennox Industries - furnace and air conditioner manufacturing,
Iowa Veterans Home - hospital care, Marshall Community School District
- -education, Marshall Medical & Surgical Center - hospital care and Meskwaki
Casino - gaming operations.
Based upon information obtained from the Minnesota State Demographic
Center for 1997, the population of the six primary counties in the Bank's
Minnesota market area was as follows: Fillmore - 20,900; Freeborn - 32,500;
Houston -19,300; Mower - 37,600; Olmsted - 116,500; and Winona - 49,500.
Total income per capita for 1997 in these six counties ranged from
approximately $19,300 to $27,200.
Based upon information obtained from the State Library of Iowa for 1997,
the population of Marshall County was 38,800 and the population of Tama
County was 17,700. Total income per capita of the above mentioned Iowa
counties ranged from approximately $20,600 to $22,800.
MSI is a mortgage banking and mortgage brokerage office located in
Brooklyn Park, Minnesota. The office primarily originates single family
residential loans for sale in the secondary market or purchases loans from
third party originators located primarily in the seven county metropolitan
area of Minneapolis and St. Paul and sells the loans and generally the
related servicing rights to those loans in the secondary market. In the past
MSI has also purchased mortgage servicing rights from third parties for the
purpose of generating loan servicing income.
LENDING ACTIVITIES
GENERAL. Historically, HMN originated 30-year, fixed-rate mortgage loans
secured by one-to-four family residences. Since 1979, in order to reduce its
vulnerability to changes in interest rates, HMN has emphasized the
origination or purchase of loans for the loan portfolio which have shorter
terms to maturity such as 15 year, fixed rate residential loans and Graduated
Equity Mortgages ("GEMs") which fully amortize in 15 to 20 years. HMN has
also emphasized the origination or purchase of Adjustable Rate Mortgage loans
("ARMs") for portfolio which have interest rates which are fixed for an
initial period of one, three or five years and then generally adjust
annually, thereafter, based upon a treasury interest rate index plus a
certain margin, subject to annual and lifetime rate adjustment limits.
Throughout 1999 HMN sold the majority of the fixed rate one-to-four family
mortgage loan originations in order to reduce its interest rate risk. In 1998
HMN hired experienced commercial loan officers who have actively pursued
commercial real estate and other commercial business loans to small and
medium sized businesses. HMN also offers a competitive array of consumer loan
products which include both open lines and closed ended home equity loans as
well as other consumer loans. The home equity line of credit has an
adjustable interest rate based upon the Wall Street Journal prime rate plus a
margin.
4
LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of HMN's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of December 31:
1999 1998 1997
------------------- ------------------- --------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- --------
REAL ESTATE LOANS:
One-to-four family.................. $344,674 70.95% $365,496 79.31% $395,668 87.58%
Multi-family........................ 8,489 1.75 4,719 1.02 2,717 0.60
Commercial.......................... 43,894 9.04 28,990 6.29 10,572 2.34
Construction or development......... 16,046 3.30 15,155 3.29 5,725 1.27
-------- ------ -------- ------ -------- ------
Total real estate loans.......... 413,103 85.04 414,360 89.91 414,682 91.79
-------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer loans:
Savings account.................... 733 0.15 994 0.22 1,362 0.30
Education.......................... 85 0.02 118 0.03 123 0.03
Automobile......................... 4,532 0.93 2,897 0.63 2,438 0.54
Home equity line................... 22,437 4.62 19,476 4.22 19,490 4.31
Home equity........................ 17,349 3.57 9,566 2.08 7,176 1.59
Home improvement................... 321 0.07 436 0.09 652 0.14
Other.............................. 2,779 0.57 1,313 0.28 624 0.14
-------- ------ -------- ------ -------- ------
Total consumer loans............. 48,236 9.93 34,800 7.55 31,865 7.05
Commercial business loans........... 24,435 5.03 11,695 2.54 5,226 1.16
-------- ------ -------- ------ -------- ------
Total other loans................ 72,671 14.96 46,495 10.09 37,091 8.21
-------- ------ -------- ------ -------- ------
Total loans................... 485,774 100.00% 460,855 100.00% 451,773 100.00%
------ ------ ------
------ ------ ------
LESS:
Loans in process.................... 2,771 7,997 4,562
Unamortized discounts............... 297 414 547
Net deferred loan fees.............. 1,537 1,948 1,847
Allowance for losses on loans....... 3,273 3,041 2,748
-------- -------- --------
Total loans receivable, net... $477,896 $447,455 $442,069
-------- -------- --------
-------- -------- --------
1996 1995
------------------- --------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
REAL ESTATE LOANS:
One-to-four family....................... $321,340 90.19% $292,497 90.62%
Multi-family............................. 280 0.08 361 0.11
Commercial............................... 7,918 2.22 8,744 2.71
Construction or development.............. 3,474 0.98 5,082 1.58
-------- ------ -------- ------
Total real estate loans............... 333,012 93.47 306,684 95.02
-------- ------ -------- ------
OTHER LOANS:
Consumer loans:
Savings account......................... 938 0.26 1,210 0.37
Education............................... 467 0.13 342 0.11
Automobile.............................. 566 0.16 671 0.21
Home equity line........................ 11,881 3.33 3,509 1.09
Home equity............................. 5,927 1.67 7,997 2.47
Home improvement........................ 585 0.16 785 0.24
Other................................... 568 0.16 545 0.17
-------- ------ -------- ------
Total consumer loans.................. 20,932 5.87 15,059 4.66
Commercial business loans................ 2,344 0.66 1,018 0.32
-------- ------ -------- ------
Total other loans..................... 23,276 6.53 16,077 4.98
-------- ------ -------- ------
Total loans........................ 356,288 100.00% 322,761 100.00%
------ ------
------ ------
LESS:
Loans in process......................... 2,814 3,531
Unamortized discounts.................... 417 289
Net deferred loan fees................... 1,695 1,899
Allowance for losses on loans............ 2,340 2,191
-------- --------
Total loans receivable, net........ $349,022 $314,851
-------- --------
-------- --------
5
The following table shows the composition of HMN's loan portfolio by
fixed- and adjustable-rate loans as of December 31:
1999 1998 1997
------------------ -------------------- --------------------
(DOLLARS IN THOUSANDS) Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
FIXED-RATE LOANS
Real estate:
One-to-four family
GEM......................................... $ 51,309 10.56% $ 56,211 12.20% $ 53,258 11.79%
Other....................................... 187,796 38.66 227,790 49.43 256,263 56.72
-------- ------- -------- ------- -------- -------
Total one-to-four family................... 239,105 49.22 284,001 61.63 309,521 68.51
Multi-family................................. 7,549 1.56 3,509 0.76 2,490 0.55
Commercial................................... 27,801 5.72 17,768 3.86 1,914 0.42
Construction or development.................. 5,011 1.03 9,366 2.03 3,180 0.71
-------- ------- -------- ------- -------- -------
Total fixed-rate real estate loans......... 279,466 57.53 314,644 68.27 317,105 70.19
-------- ------- -------- ------- -------- -------
Consumer loans:
Savings...................................... 733 0.15 994 0.22 1,362 0.30
Education.................................... 85 0.02 0 0.00 0 0.00
Automobile................................... 4,532 0.93 2,897 0.63 2,437 0.54
Home equity.................................. 16,962 3.49 9,384 2.04 6,701 1.48
Home improvement............................. 321 0.07 436 0.09 652 0.14
Other........................................ 2,696 0.55 1,175 0.25 612 0.14
-------- ------- -------- ------- -------- -------
Total consumer loans....................... 25,329 5.21 14,886 3.23 11,764 2.60
-------- ------- -------- ------- -------- -------
Commercial business loans..................... 18,936 3.90 10,157 2.20 5,226 1.16
-------- ------- -------- ------- -------- -------
Total other loans.......................... 44,265 9.11 25,043 5.43 16,990 3.76
-------- ------- -------- ------- -------- -------
Total fixed-rate loans..................... 323,731 66.64 339,687 73.71 334,095 73.95
-------- ------- -------- ------- -------- -------
ADJUSTABLE-RATE LOANS
Real estate:
One-to-four family........................... 105,569 21.73 81,495 17.68 86,147 19.07
Multi-family................................. 724 0.15 1,210 0.26 227 0.05
Commercial................................... 16,309 3.36 11,222 2.44 8,658 1.92
Construction or development.................. 11,035 2.27 5,789 1.26 2,545 0.56
-------- ------- -------- ------- -------- -------
Total adjustable-rate real estate loans.... 133,637 27.51 99,716 21.64 97,577 21.60
Consumer (home equity and other).............. 22,907 4.72 19,914 4.32 20,101 4.45
Commercial business loans..................... 5,499 1.13 1,538 0.33 0 0.00
-------- ------- -------- ------- -------- -------
Total adjustable-rate loans................ 162,043 33.36 121,168 26.29 117,678 26.05
-------- ------- -------- ------- -------- -------
Total loans................................ 485,774 100.00% 460,855 100.00% 451,773 100.00%
-------- ------- -------- ------- -------- -------
------- ------- -------
LESS
Loans in process.............................. 2,771 7,997 4,562
Unamortized discounts......................... 297 414 547
Net deferred loan fees........................ 1,537 1,948 1,847
Allowance for losses on loans................. 3,273 3,041 2,748
-------- -------- --------
Total loans receivable, net................ $477,896 $447,455 $442,069
-------- -------- --------
-------- -------- --------
1996 1995
------------------- --------------------
(DOLLARS IN THOUSANDS) Amount Percent Amount Percent
-------- ------- -------- -------
FIXED-RATE LOANS
Real estate:
One-to-four family
GEM........................................... $ 48,831 13.71% $ 30,175 9.35%
Other......................................... 187,519 52.63 181,401 56.20
-------- ------- -------- -------
Total one-to-four family..................... 236,350 66.34 211,576 65.55
Multi-family................................... 223 0.06 302 0.10
Commercial..................................... 1,276 0.36 1,518 0.47
Construction or development.................... 2,970 0.83 4,848 1.50
-------- ------- -------- -------
Total fixed-rate real estate loans........... 240,819 67.59 218,244 67.62
-------- ------- -------- -------
Consumer loans:
Savings........................................ 938 0.26 1,210 0.37
Education...................................... 434 0.12 299 0.09
Automobile..................................... 566 0.16 671 0.21
Home equity.................................... 5,338 1.50 7,254 2.25
Home improvement............................... 585 0.16 785 0.24
Other.......................................... 568 0.16 545 0.17
-------- ------- -------- -------
Total consumer loans......................... 8,429 2.36 10,764 3.33
-------- ------- -------- -------
Commercial business loans....................... 1,344 0.38 1,018 0.32
-------- ------- -------- -------
Total other loans............................ 9,773 2.74 11,782 3.65
-------- ------- -------- -------
Total fixed-rate loans....................... 250,592 70.33 230,026 71.27
-------- ------- -------- -------
ADJUSTABLE-RATE LOANS
Real estate:
One-to-four family............................. 84,990 23.85 80,921 25.07
Multi-family................................... 57 0.02 59 0.02
Commercial..................................... 6,642 1.87 7,226 2.24
Construction or development.................... 504 0.14 234 0.07
-------- ------- -------- -------
Total adjustable-rate real estate loans...... 92,193 25.88 88,440 27.40
Consumer (home equity and other)................ 12,503 3.51 4,295 1.33
Commercial business loans....................... 1,000 0.28 0 0.00
-------- ------- -------- -------
Total adjustable-rate loans.................. 105,696 29.67 92,735 28.73
-------- ------- -------- -------
Total loans.................................. 356,288 100.00% 322,761 100.00%
-------- ------- -------- -------
------- -------
LESS
Loans in process................................ 2,814 3,531
Unamortized discounts........................... 417 289
Net deferred loan fees.......................... 1,695 1,899
Allowance for losses on loans................... 2,340 2,191
-------- --------
Total loans receivable, net.................. $349,022 $314,851
-------- --------
-------- --------
6
The following schedule illustrates the interest rate sensitivity of
HMN's loan portfolio at December 31, 1999. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due. Scheduled repayments of principal are reflected in the
year in which they are scheduled to be paid.
Real Estate
----------------------------------------------------------------------
Multi-family and
One-to-four Family Commercial Construction
---------------------- ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
------- ----- ------- ------ ------- ------
Due During
Years Ending
December 31,
2000(1)................ $ 22,853 7.41% $ 5,498 8.97% $ 9,329 8.18%
2001................... 19,678 7.29 3,644 8.49 2,700 8.50
2002................... 19,568 7.24 4,000 8.22 260 8.58
2003 through 2004...... 40,196 7.21 10,997 8.36 83 7.56
2005 through 2009...... 94,329 7.16 19,472 8.21 273 7.58
2010 through 2024...... 130,735 7.12 8,772 8.18 1,955 7.60
2025 and following..... 17,315 7.06 0 0.00 1,446 7.58
---------- --------- --------
$ 344,674 $ 52,383 $ 16,046
---------- --------- --------
---------- --------- --------
Commercial
Consumer Business Total
--------------------- ---------------------- --------------------
Weighted Weighted Weighted
Average Average Average
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
------- ------ ------ ------ ------- -----
Due During
Years Ending
December 31,
2000(1)................ $ 1,936 10.40% $ 3,787 8.78% $ 43,403 8.02%
2001................... 746 9.82 1,567 8.33 28,335 7.68
2002................... 2,167 9.18 3,238 8.33 29,233 7.65
2003 through 2004...... 7,495 8.24 11,417 8.26 70,188 7.67
2005 through 2009...... 5,254 8.67 1,815 8.71 121,143 7.42
2010 through 2024...... 30,638 9.40 2,611 7.91 174,711 7.59
2025 and following..... 0 0.00 0 0.00 18,761 7.10
---------- --------- ----------
$ 48,236 $ 24,435 $485,774
---------- --------- ----------
---------- --------- ----------
(1) Includes demand loans, loans having no stated maturity, overdraft
loans and education loans.
The total amount of loans due after December 31, 2000 which have
predetermined interest rates is $292.0 million, while the total amount of
loans due after such dates which have floating or adjustable interest rates
is $144.1 million.
At December 31, 1999 construction or development loans for one-to-four
family dwellings totaled $6.3 million, multi-family totaled $4.0 million, and
non-residential totaled $5.7 million.
7
Under the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a
"readily ascertainable" value or 30% for certain residential development
loans). At December 31, 1999, based upon the 15% limitation, the Bank's
regulatory limit for loans-to-one borrower was approximately $7.2 million.
However, at December 31, 1999, the largest dollar amount outstanding to one
borrower or group of related borrowers was $6.27 million. This loan, which is
secured by a shopping mall located in Winona, Minnesota, was performing in
accordance with its terms at December 31, 1999.
The Bank's Mortgage and Consumer Loan Committee is responsible for
review and approval of all loans over the FHLMC/FNMA conforming loan dollar
limits (the Limit) originated by the Bank. For the majority of 1999 the Limit
was $240,000, compared to $227,150 for the majority of 1998. Approval of one
member of the Loan Committee is required on all loans ranging from the Limit
to $500,000. Loans greater than $500,000 must be approved by the Board of
Directors of the Bank or its Executive Committee after review and preliminary
approval by the Loan Committee. All loans closed each month are reviewed by
the Board of Directors at its regularly scheduled meetings.
The Bank's commercial loan officers have the authority to approve
loans which meet the guidelines established by the commercial loan policy for
loans up to $250,000. The Bank's Commercial Loan Committee is responsible for
reviewing and approving commercial loans which range from $250,001 to $4.0
million. Loans exceeding the $4.0 million must be approved by the Board of
Directors.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications
are made on the basis of detailed applications and property valuations
(consistent with the Bank's appraisal policy) by the Bank's staff appraiser
or an independent appraiser. The loan applications are designed primarily to
determine the borrower's ability to repay. The more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or confirmations. The Bank also offers the Home Credit Plus
Program which relies on the credit score of the loan applicant instead of
income, asset and employment verification procedures. The Bank also offers
low or alternative documentation underwriting procedures which conform to
FNMA underwriting guidelines.
Generally, the Bank requires title insurance on its mortgage loans
as well as fire and extended coverage casualty insurance in amounts at least
equal to the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. The Bank also requires flood
insurance to protect the property securing its interest when the property is
located in a flood plain.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. At December 31,
1999 HMN's one-to-four family real estate loans totaled $344.7 million, a
decline of $20.8 million, compared to $365.5 million at December 31, 1998
which declined by $30.2 million compared to $395.7 million at December 31,
1997. In order to reduce its interest rate risk the Bank sold 62% of all
one-to-four family mortgage loans originated or refinanced during 1999. The
Bank converted $6.9 million of one-to-four family loans during 1999 into
mortgage-backed securities (securitization) and transferred the securities
into securities available for sale. It also sold another $10.2 million of
one-to-four family loans from the loan portfolio. The impact of the loan
securitization and sales when coupled with the principal repayments caused
the one-to-four family loan portfolio to decline by $20.8 million during
1999. During 1998, the Bank securitized and sold $27.9 million of one-to-four
family residential loans out of its loan portfolio. It also sold
approximately 44% of the Bank's one-to-four family residential loans that
were originated or refinanced in 1998. The loan securitizations and the loan
sales, when coupled with the accelerated prepayments experienced in the loan
portfolio during 1998, caused the one-to-four family real estate loan
portfolio to decline $30.2 million from December 31, 1997 to December 31,
1998.
8
On December 5, 1997 the Bank merged with Marshalltown Financial
Corporation ("MFC"). The Loan Portfolio Composition table includes for
December 31, 1997, $62.9 million of one-to-four family residential loans,
$2.3 million of multi-family residential, $2.1 million of commercial real
estate and $2.6 million of consumer loans which were acquired in the MFC
merger.
The GEM loans require payments which increase after the first year.
Under the GEM loans, the monthly payments required for the first year are
established based on a 30-year amortization schedule. Depending upon the
program selected, the payments may increase in the succeeding years by
amounts ranging from 0% to 5%. Most of the GEM loans originated by HMN
provide for at least three annual payment increases over the first five years
of the loan. The increased payments required under GEM loans are applied to
principal and have the effect of shortening the term to maturity; the GEM
loans do not permit negative amortization. HMN has primarily offered two GEM
programs, one with a contractual maturity of approximately 17 years and one
with a contractual maturity of approximately 22 years. The GEMs are generally
priced based upon loans with similar contractual maturities. The GEMs have
been popular with consumers who anticipate future increases in income and who
desire an amortization schedule of less than 30 years. During 1999 the GEM
program was discontinued by HMN. At December 31, 1999, HMN had $51.3 million
of GEM loans, a decrease of $3.9 million from $56.2 million at December 31,
1998, compared to $53.3 million at December 31, 1997, $48.8 million at
December 31, 1996 and $30.2 million at December 31, 1995.
In addition to the GEM loan program, HMN offers other conventional
fixed-rate one-to-four family loans with maximum terms of up to 30 years. HMN
generally sells the majority of new loan originations or refinances with
fixed rates and terms to maturity ranging from 15 years to 30 years that are
eligible for sale in the secondary market. The interest rates charged on the
fixed-rate loan products are generally set based on the FNMA or FHLMC
delivery rates, as well as other competitive factors. At December 31, 1999,
HMN had $187.8 million of fixed-rate one-to-four family mortgage loans, a
decrease of $40.0 million compared to $227.8 million at December 31, 1998,
$256.3 million at December 31, 1997, $187.5 million at December 31, 1996 and
$181.4 at December 31, 1995.
HMN also offers one-year ARMs at a margin (generally 275 basis
points) over the yield on the Average Monthly One Year U.S. Treasury Constant
Maturity Index for terms of up to 30 years. The ARM loans currently offered
by HMN allow the borrower to select (subject to pricing) an initial period of
one year, three years, or five years between the loan origination and the
date the first interest rate change occurs. Generally, the ARMs provide for
up to a 200 basis point annual interest rate change cap and a lifetime cap
600 basis points over or under the initial rate. Initial interest rates
offered on the ARM loans during 1999 ranged from 198 basis points below the
fully indexed loan rate to 275 basis points over the fully indexed loan rate.
All borrowers are now qualified for the loan at the fully indexed rate. HMN's
originated ARMs do not permit negative amortization of principal, do not
contain prepayment penalties and generally are not convertible into
fixed-rate loans. See "-Delinquencies and Non-Performing Assets." In the
past, the Bank offered one-year ARMs with a margin of 200 to 235 basis points
over a specified index and an average annual cap of 145 basis points. At
December 31, 1999, the one-to-four family ARMs totaled $105.6 million, an
increase of $24.1 million compared to $81.5 million at December 31, 1998,
$86.1 million at December 31, 1997, $85.0 million at December 31, 1996 and
$80.9 million at December 31, 1995.
HMN has also originated a limited number of fixed-rate loans with
terms up to 30 years which are insured by the Federal Housing Authority
("FHA"), Veterans Administration ("VA") and Minnesota Home Finance
Administration ("MHFA").
In underwriting one-to-four family residential real estate loans,
HMN evaluates the borrower's credit history, ability to make principal,
interest and escrow payments, and the value of the property that will secure
the loan and debt to income ratios. Properties securing one-to-four family
residential real estate loans made by
9
HMN are appraised by independent fee appraisers or by HMN's staff appraiser.
HMN originates residential mortgage loans with loan-to-value ratios of up to
95% for owner-occupied homes and up to 70% for non-owner occupied homes;
however, private mortgage insurance is generally required to reduce HMN's
exposure to 80% or less. HMN generally seeks to underwrite its loans in
accordance with secondary market standards.
HMN's residential mortgage loans customarily include due-on-sale
clauses giving it the right to declare the loan immediately due and payable
in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. HMN originates
permanent commercial real estate and multi-family loans secured by properties
located in its market area. It also purchases commercial real estate and
multi-family loans outside of its market area originated by other third
parties. Commercial real estate loans totaled $43.9 million at December 31,
1999, an increase of $14.9 million from $29.0 million at December 31, 1998,
compared to $10.6 million at December 31, 1997, $7.9 million at December 31,
1996 and $8.7 million at December 31, 1995. Multi-family loans totaled $8.5
million at December 31, 1999, an increase of $3.8 million from $4.7 million
at December 31, 1998, compared to $2.7 million at December 31, 1997.
The commercial real estate and multi-family loan portfolio includes
loans secured by motels, hotels, apartment buildings, churches, small office
buildings, small business facilities, shopping malls, nursing homes and other
non-residential building properties primarily located in the upper Midwestern
United States.
Permanent commercial real estate and multi-family loans are
generally originated for a maximum term of 15 years and may have longer
amortization periods with balloon maturity features. The interest rates may
be fixed for the term of the loan or have adjustable features which are tied
to prime or a treasury index. Commercial real estate and multi-family loans
are generally written in amounts of up to 75% of the lesser of the appraised
value of the property or the purchase price and generally have a debt service
coverage ratio of at least 120%. The debt service coverage is the ratio of
net cash from operations before payment of debt to debt service. HMN may
originate construction loans secured by commercial or multi-family real
estate, or may purchase participation interests in third party originated
construction loans secured by commercial or multi-family real estate.
Appraisals on commercial real estate and multi-family real estate
properties are performed by independent appraisers prior to the time the loan
is made. All appraisals on commercial and multi-family real estate are
reviewed and approved by a commercial loan officer. The Bank's underwriting
procedures require verification of the borrower's credit history, income and
financial statements, banking relationships, references and income
projections for the property. All commercial real estate and multi-family
loans over $250,000 must be approved by a majority of the commercial loan
committee prior to closing. The commercial loan policy generally requires
personal guarantees from the proposed borrowers. Once the loan is closed, HMN
performs an annual on-site inspection on collateral properties for loans with
balances in excess of $250,000 and also includes an annual review of the
financial performance of the property to determine that it is performing as
anticipated.
At December 31, 1999, HMN's two largest commercial real estate loans
totaled $6.3 million and $5.0 million. The first loan is secured by a
shopping mall in Winona, Minnesota and the second loan is secured by a hotel
and other commercial real estate in St. Cloud, Minnesota. Both of these loans
were performing at December 31, 1999.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one-to-four family residences.
This greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effects of general
economic
10
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically
dependent upon the successful operation of the related real estate project.
If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be
impaired. At December 31, 1999, HMN did not have any commercial real estate
loans or multi-family loans which were 90 days or more delinquent.
CONSTRUCTION LENDING. HMN makes construction loans to individuals
for the construction of their residences and to builders for the construction
of one-to-four family residences. It also makes a very limited number of
loans to builders for houses built on speculation. Construction loans also
include commercial real estate loans. HMN had $16.0 million of construction
loans outstanding at December 31, 1999, an increase of $891,000 from $15.2
million at December 31, 1998, compared to $5.7 million at December 31, 1997,
$3.5 million at December 31, 1996 and $5.1 million at December 31, 1995.
Almost all loans to individuals for the construction of their
residences are structured as permanent loans. Such loans are made on the same
terms as residential loans, except that during the construction phase, which
typically lasts up to seven months, the borrower pays interest only.
Generally, the borrower also pays a construction fee up to $800 at the time
of origination. Residential construction loans are underwritten pursuant to
the same guidelines used for originating residential loans on existing
properties.
Construction loans to builders or developers of one-to-four family
residences generally carry terms of 1 to 15 years with a construction phase
of up to seven months. Such loans generally do not permit the payment of
interest from loan proceeds.
Construction loans to owner occupants are generally made in amounts
of up to 95% of the lesser of cost or appraised value, but no more than 85%
of the loan proceeds can be disbursed until the building is completed. The
loan-to-value ratios on loans to builders are limited to 70%. Prior to making
a commitment to fund a construction loan, HMN requires an appraisal of the
property and financial data and verification of income on the borrower. HMN
obtains personal guarantees for substantially all of its construction loans
to builders. Personal financial statements of guarantors are also obtained as
part of the loan underwriting process. Generally construction loans have been
located in HMN's market area.
Construction loans are obtained principally through continued
business from builders and developers who have previously borrowed from the
Bank, as well as referrals from existing customers and walk-in customers. The
application process includes a submission to the Bank of accurate plans,
specifications and costs of the project to be constructed. These items are
used as a basis to determine the appraised value of the as built subject
property.
At December 31, 1999 construction real estate loans totaled $16.0
million of which one-to-four family residential loans totaled $6.4 million,
multi-family residential totaled $4.0 million and construction on commercial
real estate totaled $5.6 million.
The nature of construction loans is such that they are more
difficult to evaluate and monitor. The risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value upon completion of the project and the estimated cost (including
interest) of the project. If the estimate of value proves to be inaccurate,
HMN may be confronted, at or prior to the maturity of the loan, with a
project having a value which is insufficient to assure full repayment and/or
the possibility of having to make substantial investments to complete and
sell the project. Because defaults in repayment may not occur during the
construction period it may be difficult to identify problem loans at an early
stage. In such cases, HMN may be required to modify the terms of the loan.
11
CONSUMER LENDING. HMN originates a variety of different types of
consumer loans, including home equity loans (open-ended and closed-ended),
education, automobile, home improvement, deposit account and other loans for
household and personal purposes. At December 31, 1999, consumer loans totaled
$48.2 million, an increase of $13.4 million from $34.8 million at December
31, 1998, compared to $31.9 million at December 31, 1997, $20.9 million at
December 31, 1996 and $15.1 million at December 31, 1995.
Consumer loan terms vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower. HMN's
consumer loans are made at fixed and adjustable interest rates, with terms of
up to 20 years for secured loans and up to three years for unsecured loans.
HMN's home equity loans are written so that the total commitment
amount, when combined with the balance of any other outstanding mortgage
liens, may not exceed 95% of the appraised value of the property. The
closed-end home equity loans are written with fixed- or adjustable-rates with
terms of up to 15 years. The open-end home equity lines are written with an
adjustable rate with terms of up to 20 years, a 10 year draw period which
requires "interest only" payments and a 10 year repayment period which fully
amortizes the outstanding balance. The consumer may access the open-end home
equity line either by making a withdrawal at the Bank or writing a check on
the home equity line of credit account. HMN's closed ended home equity loans
totaled $17.3 million at December 31, 1999, an increase of $7.7 million from
$9.6 million at December 31, 1998, compared to $7.2 million at December 31,
1997, $5.9 million at December 31, 1996 and $8.0 million at December 31,
1995. HMN's open-ended home equity lines totaled $22.4 million at December
31, 1999, an increase of $2.9 million from $19.5 million at December 31,
1998, compared to $19.5 million at December 31, 1997, $11.9 million at
December 31, 1996 and $3.5 million at December 31, 1995.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, in relation to the proposed loan amount. Consumer loans may entail
greater credit risk than do residential mortgage loans, particularly in the
case of consumer loans which are unsecured or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered
on such loans. At December 31, 1999, $177,000 of the consumer loan portfolio
was non-performing. There can be no assurance that delinquencies will not
increase in the future.
COMMERCIAL BUSINESS LENDING. In order to satisfy the demand for
financial services available to individuals and businesses in its market
area, historically HMN has maintained a portfolio of commercial business
loans primarily to small retail operations, small manufacturing concerns and
professional firms. More recently HMN has expanded it commercial business
loans to loans collateralized by inventory and or receivables and leasehold
interests on equipment HMN's commercial business loans generally have terms
ranging from six months to five years and may have either fixed or variable
interest rates. HMN's commercial business loans generally include personal
guarantees and are usually, but not always, secured by business assets such
as inventory, equipment, leasehold interests in equipment fixtures, real
estate and accounts receivables. The underwriting process for commercial
business loans includes consideration of the borrower's financial statements,
tax returns, projections of future business operations and inspection of the
subject collateral, if any. HMN has also purchased participation interests in
commercial business loans from third party originators. The underlying
collateral for the loans are generally inventory or equipment and generally
have repayment periods of less than ten years. Commercial business loans
totaled $24.4 million at
12
December 31, 1999, an increase of $12.7 million from $11.7 million at
December 31, 1998, compared to $5.2 million at December 31, 1997, $2.3
million at December 31, 1996 and $1.0 million at December 31, 1995.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her income, and
which are secured by real property whose value tends to be more easily
ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may
fluctuate in value based on the success of the business. At December 31,
1999, there were no delinquent commercial business loans.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED AND RELATED
SECURITIES
Real estate loans are generally originated by HMN's staff of
salaried and commissioned loan officers. Loan applications are taken in all
branch offices.
While HMN originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the interest rate environment.
During the last several years, the dollar volume of originated conventional
fixed-rate, one-to-four family loans has exceeded the dollar volume of GEMs
and ARMs.
In order to supplement loan demand in HMN's market area and
geographically diversify its loan portfolio, HMN purchases real estate loans
from selected sellers, with yields based upon current market rates. HMN
carefully reviews and underwrites all loans to be purchased to ensure that
they meet HMN's under-writing standards. The seller generally continues to
service these purchased loans. HMN originated $142.2 million of loans during
1999, a decrease of $6.5 million from $148.7 million for the year ended
December 31, 1998, compared to $68.1 million for the year ended December 31,
1997. HMN purchased $70.0 million of loans during 1999 compared to $71.0
million for the year ended December 31, 1998 and $71.8 million for the year
ended December 31, 1997. The majority of the purchased one-to-four family
loans have interest rates that are fixed for a one, three or five year period
and then adjust annually thereafter or were 15 year fixed-rate loans. The
commercial real estate and commercial business loans purchased have terms and
interest rates which are similar in nature to HMN's originated commercial and
business portfolio. All purchased loans are reviewed to determine that each
loan meets certain underwriting requirements. Refer to Note 6 of the Notes to
Consolidated Financial Statements in the Annual Report for more information
on purchased loans.
HMN has substantial holdings of mortgage-backed and related
securities which are held, depending on the investment intent, in the
"available for sale" portfolio. HMN purchased $20.4 million of
mortgage-backed securities during 1999, a decrease of $93.4 million from
purchases of $113.8 million for 1998 and $27.5 million in purchases for 1997.
HMN sold $29.3 million of mortgage-backed securities during the year ended
December 31, 1999, a decrease of $67.2 million, compared to sales of $96.5
million for the year ended December 31, 1998 and sales of $67.9 million for
the year ended December 31, 1997. During 1999 cash flow from the
mortgage-backed security portfolio generally was needed to fund loans. See
- --"Investment Activities."
13
The following table shows the loan and mortgage-backed and related
securities origination, purchase, acquisition, sale and repayment activities
of HMN for the periods indicated.
(DOLLARS IN THOUSANDS)
LOANS Year Ended December 31,
ORIGINATIONS BY TYPE: 1999 1998 1997
---------------------------------------------
Adjustable-rate:
Real estate - one-to-four family ................. $ 5,965 2,328 1,987
- multi-family ....................... 818 0 0
- commercial ......................... 12,336 5,388 1,000
- construction or development ........ 10,171 787 375
Non-real estate - consumer ......................... 17,481 15,689 16,871
- commercial business .............. 16,671 176 0
--------- --------- ---------
Total adjustable-rate ........................ 63,442 24,368 20,233
--------- --------- ---------
Fixed-rate:
Real estate - one-to-four family ................. 8,240 44,413 32,024
- multi-family ....................... 2,597 1,694 263
- commercial ......................... 15,791 16,882 50
- construction or development ........ 9,544 10,626 6,539
Non-real estate - consumer ......................... 23,267 13,100 7,579
- commercial business .............. 19,305 37,672 1,409
--------- --------- ---------
Total fixed-rate ............................. 78,744 124,387 47,864
--------- --------- ---------
Total loans originated ....................... 142,186 148,755 68,097
--------- --------- ---------
PURCHASES:
Real estate - one-to-four family ................. 47,975 58,512 67,213
- multi-family ....................... 0 8,571 0
- commercial ......................... 10,673 1,172 0
- construction or development ........ 6,793 0 2,425
Non-real estate - commercial business .............. 4,123 2,731 2,174
--------- --------- ---------
Total loans purchased ........................ 69,564 70,986 71,812
--------- --------- ---------
ACQUISITION:
Real estate - one-to-four family ................. 0 0 63,328
- multi-family ....................... 0 0 2,308
- commercial ......................... 0 0 2,099
Non-real estate - consumer ......................... 0 0 2,599
--------- --------- ---------
Total loans acquired .......................... 0 0 70,334
--------- --------- ---------
Transfers from loans held for sale ................... 0 0 96
SALES AND REPAYMENTS:
Real estate - one-to-four family ................. 0 5,878 8,969
- commercial ......................... 685 650 0
Non-real estate - consumer ......................... 246 238 339
--------- --------- ---------
Total sales .................................. 931 6,766 9,308
--------- --------- ---------
Loans securitized and transferred to securities .... 6,925 27,953 16,526
Transfers to loans held for sale ................... 10,187 52,295 4,347
Principal repayments ............................... 163,691 106,824 84,244
--------- --------- ---------
Total reductions ............................. 181,734 193,838 114,425
--------- --------- ---------
Decrease in other items, net ....................... (5,097) (20,517) (2,867)
--------- --------- ---------
Net increase ................................. $ 24,919 5,386 93,047
--------- --------- ---------
--------- --------- ---------
14
MORTGAGE-BACKED AND RELATED SECURITIES
Loans securitized and transferred to securities .... $ 6,925 27,953 16,526
PURCHASES:
Mortgage-backed securities:(1)
Adjustable-rate ..................................... 0 0 0
Fixed-rate .......................................... 0 1,766 3,426
CMOs and REMICs:
Adjustable-rate ..................................... 0 76,174 3,417
Fixed-rate .......................................... 20,385 35,839 20,617
-------- -------- --------
Total purchases ................................. 20,385 113,779 27,460
-------- -------- --------
ACQUISITION:
Adjustable-rate mortgage-backed securities ........... 0 0 12,522
Fixed-rate mortgage-backed securities ................ 0 0 25,738
-------- -------- --------
Total acquisitions .............................. 0 0 38,260
-------- -------- --------
SALES:
Mortgage-backed securities:(1)
Adjustable-rate ..................................... 6,913 24,955 9,535
Fixed-rate .......................................... 1,143 46,432 344
CMOs and REMICs:
Adjustable-rate ..................................... 17,466 13,765 26,486
Fixed-rate .......................................... 3,815 11,366 31,529
-------- -------- --------
Total sales ..................................... 29,337 96,518 67,894
-------- -------- --------
PRINCIPAL REPAYMENTS:
Decrease in other items, net .......................... (40,342) (38,003) (13,578)
-------- -------- --------
Net increase (decrease) ............................ $(42,369) 7,211 774
-------- -------- --------
-------- -------- --------
- --------------------------------
(1) Consists of pass-through securities.
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, HMN attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all loans over 16 days delinquent.
Additional written and verbal contacts may be made with the borrower between
30 and 60 days after the due date. If the loan is contractually delinquent 90
days, HMN usually sends a 30-day demand letter to the borrower and, after the
loan is contractually delinquent 120 days, institutes appropriate action to
foreclose on the property. If foreclosed, the property is sold at a sheriff's
sale and may be purchased by HMN. Delinquent consumer loans are generally
handled in a similar manner. HMN's procedures for repossession and sale of
consumer collateral are subject to various requirements under state consumer
protection laws.
Real estate acquired by HMN as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate in judgement for six months
to one year and thereafter as real estate owned until it is sold. When
property is acquired or expected to be acquired by foreclosure or deed in
lieu of foreclosure, it is recorded at the lower of cost or estimated fair
value, less the estimated cost of disposition. After acquisition, all costs
incurred in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to the
extent of fair value less disposition cost.
15
The following table sets forth HMN's loan delinquencies by type, by
amount and by percentage of type at December 31, 1999.
Loans Delinquent For:
------------------------------------------------------------------- Total Delinquent
60-89 Days 90 Days and Over Loans
-------------------------------- -------------------------------- ------------------------------
Percent Percent Percent
of Loan of Loan of Loan
(DOLLARS IN THOUSANDS) Number Amount Category Number Amount Category Number Amount Category
----- ------ -------- ------ ------ -------- ------ ------ --------
One-to-four family
real estate ........ 10 $ 447 0.13% 8 $ 640 0.19% 18 $1,087 0.32%
Multi-family ......... 0 0 0.00 0 0 0.00 0 0 0.00
Commercial ........... 0 0 0.00 0 0 0.00 0 0 0.00
Construction or
development ......... 0 0 0.00 0 0 0.00 0 0 0.00
Consumer ............. 17 101 0.21 25 178 0.37 42 279 0.58
Commercial
business ............ 0 0 0.00 0 0 0.00 0 0 0.00
--- --- ----- ------ ------ ------
Total ............ 27 $ 548 0.11% 33 $ 818 0.17% 60 $1,366 0.28%
--- --- ----- ------ ------ ------
--- --- ----- ------ ------ ------
CLASSIFICATION OF ASSETS. Federal regulations require that each
savings institution classify its own assets on a regular basis. In addition,
in connection with examinations of savings institutions, the Office of Thrift
Supervision (OTS) and FDIC examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized
by the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing
facts, conditions and values questionable, and there is a high possibility of
loss. An asset classified as Loss is considered uncollectible and of such
little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan
losses. If an asset or portion thereof is classified as Loss, the institution
must either establish specific allowances for loan losses in the amount of
100% of the portion of the asset classified as Loss, or charge off such
amount. If an institution does not agree with an examiner's classification of
an asset, it may appeal this determination to the District Director of the
OTS. On the basis of management's review of its assets, at December 31, 1999,
the Bank had classified a total of $912,000 of its loans and other assets as
follows:
Real Estate
-------------------------------------------------
Construction Commercial
(DOLLARS IN THOUSANDS) One-to-Four or and Commercial
Family Development Multi-family Consumer Business Total
----------- ------------ ------------ -------- ---------- ------
Substandard ...... $727 0 0 127 0 854
Doubtful ......... 0 0 0 0 0 0
Loss ............. 0 0 0 58 0 58
---- ---- ---- ---- ---- ----
Total ........ $727 0 0 185 0 912
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
The Bank's classified assets consist of the non-performing loans and
loans and other assets of concern discussed herein. As of the date hereof,
these asset classifications are materially consistent with those of the OTS
and FDIC.
NON-PERFORMING ASSETS. Loans are reviewed quarterly and any loan
whose collectibility is doubtful is placed on non-accrual status. Loans are
placed on nonaccrual status when either principal or interest is 90 days or
more past due, unless, in the judgment of management, the loan is well
collateralized and in the process of collection. Interest accrued and unpaid
at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or
16
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. Restructured loans include the Bank's troubled
debt restructurings (which involved forgiving a portion of interest or
principal on any loans or making loans at a rate materially less than the
market rate). Foreclosed assets include assets acquired in settlement of
loans. The following table sets forth the amounts and categories of
non-performing assets in the Bank's portfolio.
December 31,
------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
------ ------ ------ ----- -----
Non-accruing loans:
Real estate:
One-to-four family............................. $ 165 317 177 235 196
Commercial real estate......................... 0 73 79 83 85
Consumer....................................... 177 86 7 7 32
Commercial business............................ 0 0 0 13 128
---- ---- ---- ---- ----
Total........................................ 342 476 263 338 441
---- ---- ---- ---- ----
Accruing loans delinquent 90 days or more:
One-to-four family.............................. 476 312 365 0 0
Consumer....................................... 0 0 37 0 0
---- ---- ---- ---- ----
Total........................................ 476 312 402 0 0
---- ---- ---- ---- ----
Restructured loans:
Multi-family.................................... 0 0 0 0 94
Foreclosed assets:
Real estate:
One-to-four family............................. 0 18 142 23 315
---- ---- ---- ---- ----
Total........................................ 0 18 142 23 315
---- ---- ---- ---- ----
Total non-performing assets....................... $ 818 806 807 361 850
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total as a percentage of total assets............. 0.12% 0.12% 0.12% 0.07% 0.16%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total non-performing loans........................ $ 818 $788 $665 $338 $535
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total as a percentage of total
loans receivable, net............................ 0.17% 0.18% 0.15% 0.10% 0.17%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
For the year ended December 31, 1999, gross interest income which
would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $34,943. The amounts that
were included in interest income on such loans during 1999 were $26,424.
Total non-performing assets were $818,000 at December 31, 1999, an
increase of $12,000, compared to $806,000 at December 31, 1998, $807,000 at
December 31, 1997 and $361,000 at December 31, 1996. Non-performing assets
had the following activity during 1999: sales of $18,000, transfers in of
$423,000 and transfers out due to performance of $393,000. Non-performing
assets had the following activity during 1998: sales of $142,000, transfers
in of $389,000 and transfers out due to performance of $248,000.
Non-performing assets had the following activity during 1997: sales of
$42,000, charge-offs of $35,000, payments of $80,000 and net transfers to
non-performing assets of $603,000. The increase in non-performing assets from
1996 to 1997 is primarily the result of three one-to-four family purchased
loans totaling $365,000 that were behind on their payments by more than 90
days and the foreclosure of two one-to-four family mortgages totaling
$142,000.
Total non-performing assets were $361,000 at December 31, 1996, a
decrease of $489,000, compared to $850,000 at December 31, 1995. The decrease
in non-performing assets is the result of the sale of foreclosed assets of
$315,000, the charge-off of $72,000 of commercial loans, and the normal
inflow and outflow of delinquent loans caused by borrowers getting behind on
their payments and then bringing the loans current again.
17
OTHER LOANS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of December 31, 1999 there were $95,000 of loans
with known information about the possible credit problems of the borrowers or
the cash flows of the secured properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms which may result in the future inclusion of such items in the
non-performing asset categories.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
ALLOWANCE FOR LOSSES ON LOANS. The following table sets forth an
analysis of the Bank's allowance for loan losses for the year ended:
(DOLLARS IN THOUSANDS) 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Balance at beginning of year ................... $3,041 2,748 2,341 2,191 1,893
MFC allowance for losses acquired .............. 0 0 122 0 0
Provision for losses ........................... 240 310 300 300 300
CHARGE-OFFS
Real estate:
One-to-four family .......................... (1) (2) (4) 0 0
Multi-family ................................ 0 0 0 (88) 0
Consumer ...................................... (9) (17) (7) (1) (2)
Commercial business ........................... 0 0 (12) (61) 0
------- ------- ------- ------- ------
Total charge-offs ......................... (10) (19) (23) (150) (2)
------- ------- ------- ------- ------
RECOVERIES
Consumer ..................................... 2 0 0 0 0
Commercial business .......................... 0 2 8 0 0
------- ------- ------- ------- ------
Total recoveries .......................... 2 2 8 0 0
------- ------- ------- ------- ------
Net charge-offs ................................ (8) (17) (15) (150) (2)
------- ------- ------- ------- ------
Balance at end of year ......................... $3,273 3,041 2,748 2,341 2,191
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Ratio of net charge-offs during the year to
average loans outstanding during the year ..... 0.00% 0.00% 0.01% 0.05% 0.00%
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Ratio of allowance for losses on loans to
total non-performing loans, at end of year .... 400.29% 385.79% 413.17% 691.84% 409.13%
------- ------- ------- ------- ------
------- ------- ------- ------- ------
18
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
DECEMBER 31,
---------------------------------------------------
1999 1998
-------------------- ----------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
(DOLLARS IN THOUSANDS) Amount Loans Amount Loans
------ ------- ------ -------
Real Estate:
One-to-four family ............. $ 527 70.95% $ 544 79.31%
Multi-family ................... 133 1.75 142 1.02
Commercial ..................... 533 9.04 797 6.29
Construction or development .... 231 3.30 455 3.29
Consumer .......................... 674 9.93 546 7.55
Commercial business ............... 291 5.03 328 2.54
Unallocated ....................... 884 0.00 229 0.00
------ ------ ------ ------
Total ........................ $3,273 100.00% $3,041 100.00%
------ ------ ------ ------
------ ------ ------ ------
DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
(DOLLARS IN THOUSANDS) Amount Loans Amount Loans Amount Loans
------ ------- ------ ------- -------- ---------
Real Estate:
One-to-four family ............. $ 560 87.58% $ 496 90.19% $ 452 90.62%
Multi-family ................... 80 0.60 8 0.08 21 0.11
Commercial ..................... 198 2.34 113 2.22 125 2.71
Construction or development .... 172 1.27 104 0.98 153 1.58
Consumer .......................... 527 7.05 473 5.87 286 4.66
Commercial business ............... 46 1.16 29 0.66 37 0.32
Unallocated ....................... 1,165 0.00 1,118 0.00 1,117 0.00
------ ------ ------ ------ ------ ------
Total $ ...................... $2,748 100.00% $2,341 100.00% $2,191 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
19
The allowance for losses on loans is established through a provision
for losses on loans charged to earnings based on management's evaluation of
the risk inherent in its entire loan portfolio and changes in the nature and
volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers
specific occurrences, general and local economic conditions, loan portfolio
composition, historical and local experience and other factors that warrant
recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of the various types of loans,
the general level of non-performing assets and the anticipated net realizable
values, the current loan portfolio and current economic conditions are
considered. The Bank also requires additional reserves for all classified
loans.
While management believes that it uses the best information
available to determine the allowance for losses on loans, unforeseen market
conditions could result in adjustments to the allowance for losses on loans,
and net earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making the final determination.
Refer to Management's Discussion and Analysis on Allowances for Loan and Real
Estate Losses and Non-performing Assets in the Annual Report.
INVESTMENT ACTIVITIES
HMN and the Bank utilize the available for sale securities portfolio
in virtually all aspects of asset/liability management strategy. In making
investment decisions, the Investment-Asset/Liability Committee considers,
among other things, the yield and interest rate objectives, the credit risk
position and the projected cash flow requirements.
The Bank must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is
maintained. At December 31, 1999, the Bank's liquidity ratio (liquid assets
as a percentage of net withdrawable savings deposits and current borrowings)
was 16.7%. The Bank's level of liquidity is a result of management's
asset/liability strategy. See "Regulation - Liquidity."
SECURITIES. Federally chartered savings institutions have the
authority to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally chartered savings institutions may also
invest their assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly.
The investment strategy of HMN and the Bank has been directed toward
a mix of high-quality assets (primarily government and agency obligations)
with short and intermediate terms to maturity. At December 31, 1999, HMN did
not own any investment securities of a single issuer which exceeded 10% of
HMN's stockholder's equity other than U.S. government or federal agency
obligations.
The Bank invests a portion of its liquid assets in interest-earning
overnight deposits of the Federal Home Loan Bank of Des Moines ("FHLB") and
various money market mutual funds. Other investments include high grade
medium-term (up to three years) corporate debt securities, medium-term
federal agency notes, and a variety of other types of mutual funds which
invest in adjustable-rate, mortgage-backed securities, asset-backed
securities, repurchase agreements and U.S. Treasury and agency obligations.
HMN invests in the same type of investment securities as the Bank and also
invests in taxable and tax exempt municipal obligations and corporate
equities such as preferred and common stock. See Note 4 of the Notes to
Consolidated Financial Statements in the Annual Report for additional
information regarding HMN's securities portfolio.
20
The following table sets forth the composition of HMN's securities
portfolio, excluding mortgage-backed and related securities, at the dates
indicated.
DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------- -----------------------------------------
Amortized Adjusted Market % of Amortized Adjusted Market % of
(DOLLARS IN THOUSANDS) Cost To Value Total Cost To Value Total
---------- -------- ------- ------- --------- -------- -------- --------
Securities available for sale:
U.S. government and agency obligations. $39,298 (1,691) 37,607 40.34% $17,379 12 17,391 25.11%
U.S. Treasury obligations .............. 3,984 (42) 3,942 4.23
Municipal obligations ................. 1,532 (4) 1,528 1.64 2,901 (5) 2,896 4.18
Corporate debt ........................ 19,695 (276) 19,419 20.83 4,232 (3) 4,229 6.10
Corporate equity(1) ................... 8,587 (1,440) 7,147 7.67 8,271 (296) 7,975 11.51
Stock of federal agencies(1) .......... 3,768 (711) 3,057 3.28 5,874 114 5,988 8.64
-------- ------- ------ -------- ------- -------
Subtotal ............................ 76,864 72,700 77.99 38,657 38,479 55.54
FHLB stock .............................. 11,470 11,470 12.30 9,838 9,838 14.20
-------- ------- ------ -------- ------- -------
Total investment securities
and FHLB stock ..................... 88,334 84,170 90.29 48,495 48,317 69.74
-------- ------- ------ -------- ------- -------
Average remaining life of
investment securities
excluding FHLB stock..................... 4.6 years 4.5 years
Other Interest-earning Assets:
Cash equivalents ...................... 9,051 9,051 9.71 20,961 20,961 30.26
-------- ------- ------ -------- ------- -------
Total ............................... $97,385 93,221 100.00% $69,456 69,278 100.00%
-------- ------- ------ -------- ------- -------
-------- ------- ------ -------- ------- -------
Average remaining life or term
to repricing of investment securities
and other interest-earning assets,
excluding FHLB stock.................... 4.2 years 3.2 years
DECEMBER 31,
------------------------------------------
1997
------------------------------------------
Amortized Adjusted Market % of
(DOLLARS IN THOUSANDS) Cost To Value Total
-------- -------- ------- --------
Securities available for sale:
U.S. government and agency obligations ... $43,403 (60) 43,343 49.98%
U.S. Treasury obligations ................
Municipal obligations .................... 0 0 0 0.00
Corporate debt ........................... 2,903 0 2,903 3.35
Corporate equity(1) ...................... 8,017 1,021 9,038 10.42
Stock of federal agencies(1) ............. 14,034 605 14,639 16.88
------- ------- -------
Subtotal ............................... 68,357 69,923 80.63
FHLB stock ................................. 7,432 7,432 8.57
------- ------- -------
Total investment securities
and FHLB stock ........................ 75,789 77,355 89.20
------- ------- -------
Average remaining life of
investment securities
excluding FHLB stock........................ 2.5 years
Other Interest-earning Assets:
Cash equivalents ......................... 9,365 9,365 10.80
------- ------- -------
Total .................................. $85,154 86,720 100.00%
------- ------- -------
------- ------- -------
Average remaining life or term
to repricing of investment securities
and other interest-earning assets,
excluding FHLB stock....................... 2.3 years
(1) Average life assigned to corporate equity holdings and stock of federal
agencies is five years.
21
The composition and maturities of the securities portfolio,
excluding FHLB stock, mortgage-backed and other related securities, are
indicated in the following table.
December 31, 1999
---------------------------------------
After 1 After 5
1 Year through 5 through 10
or Less Years Years
------------ ------------ ----------
Amortized Amortized Amortized
(DOLLARS IN THOUSANDS) Cost Cost Cost
------------ ----------- ----------
Securities available for sale:
U.S. government securities ......... $ 500 21,997 0
U.S. Treasuries..................... 0 3,984
Municipal obligations............... 0 0 0
Corporate debt...................... 5,057 14,638 0
Corporate equity.................... 0 0 0
Stock of federal agencies........... 0 0 0
------ -------- -------
Total stock........................... $5,557 40,619 0
------ -------- -------
------ -------- -------
Weighted average yield................ 6.73% 6.22% 0.00%
December 31, 1999
--------------------------------------------------------------
Over No Stated Total
10 Years Maturity Securities
------------ ----------- --------------------------------
Amortized Amortized Amortized Adjusted Market
(DOLLARS IN THOUSANDS) Cost Cost Cost to Value
------------ ---------- ---------- --------- ------
Securities available for sale:
U.S. government securities ......... 16,801 0 39,298 (1,691) 37,607
U.S. Treasuries..................... 0 0 3,984 (42) 3,942
Municipal obligations............... 1,532 0 1,532 (4) 1,528
Corporate debt...................... 0 0 19,695 (276) 19,419
Corporate equity.................... 0 8,587 8,587 (1,440) 7,147
Stock of federal agencies........... 0 3,768 3,768 (711) 3,057
-------- ------ ------ ------
Total stock........................... 18,333 12,355 76,864 72,700
-------- ------ ------ ------
-------- ------ ------ ------
Weighted average yield................. 6.54 % 4.73 % 6.09 %
22
MORTGAGE-BACKED AND RELATED SECURITIES. In order to supplement loan
production (particularly those of interest rate sensitive loans) and achieve
its asset/liability management goals, HMN invests in mortgage-backed and
related securities. All of the mortgage-backed and related securities owned
by HMN are issued, insured or guaranteed either directly or indirectly by a
federal agency or are rated "AA" or higher. HMN had $100.8 million of
mortgage-backed and related securities all classified as available for sale
at December 31, 1999, a decrease of $42.3 million from $143.1 million at
December 31, 1998, compared to $135.9 million at December 31, 1997 and $135.2
million at December 31, 1996, of which $133.4 million were classified as
available for sale.
The contractual maturities of the mortgage-backed and related
securities portfolio without any prepayment assumptions at December 31, 1999
is as follows:
December 31,
1999
5 Years 5 to 10 10 to 20 Over 20 Balance
(DOLLARS IN THOUSANDS) or Less Years Years Years Outstanding
----------- ---------- ------------ ----------- --------------
Securities available for sale:
Federal Home Loan Mortgage Corporation............ $ 108 794 458 0 1,360
Federal National Mortgage Association............. 0 0 0 268 268
Government National Mortgage Association.......... 5 5 87 0 97
Other mortgage-backed securities.................. 0 0 0 21 21
Collateralized Mortgage Obligations............... 595 499 2,438 95,499 99,031
----------- ---------- ------------ ----------- --------------
Total.......................................... $ 708 1,298 2,983 95,788 100,777
----------- ---------- ------------ ----------- --------------
----------- ---------- ------------ ----------- --------------
Weighted average yield............................ 8.27% 7.45% 6.68% 7.36% 7.34%
At December 31, 1999, HMN did not have any non-agency
mortgage-backed or related securities in excess of 10% of its stockholders'
equity, except for a $14.5 million collateralized mortgage obligation issued
by Residential Accredit Loans, Inc. with an AAA rating by Finch.
CMOs are securities derived by reallocating the cash flows from
mortgage-backed securities or pools of mortgage loans in order to create
multiple classes, or tranches, of securities with coupon rates and average
lives that differ from the underlying collateral as a whole. The terms to
maturity of any particular tranche is dependent upon the prepayment speed of
the underlying collateral as well as the structure of the particular CMO.
Although a significant proportion of HMN's CMOs are in tranches which have
been structured (through the use of cash flow priority and "support"
tranches) to give somewhat more predictable cash flows, the cash flow and
hence the value of CMOs is subject to change.
At December 31, 1999, HMN had $68.0 million invested in CMOs which
have floating interest rates that change either monthly or quarterly,
compared to $94.5 million at December 31, 1998, $23.3 million at December 31,
1997 and $43.5 million at December 31, 1996.
At December 31, 1999 the projected duration (period of time until
half the interest and half the principal is collected) of the $31.0 million
fixed-rate CMO portfolio is approximately 3.4 years using median prepayment
speeds projected by the Bloomberg security system.
Refer to Management's Discussion and Analysis - Market Risk in the
Annual Report for information on changes in market value of the
mortgage-backed or related securities under different rate shock environments.
Mortgage-backed and related securities can serve as collateral for
borrowings and, through sales and repayments, as a source of liquidity. In
addition, mortgage-backed and related securities available for sale can be
sold to respond to changes in economic conditions.
23
SOURCES OF FUNDS
GENERAL. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and other funds provided
from operations.
DEPOSITS. The Bank offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of
passbook, NOW, money market, non-interest bearing checking and certificate
accounts (including individual retirement accounts). The Bank relies
primarily on competitive pricing policies and customer service to attract and
retain these deposits.
The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. As customers have become more interest rate
conscious, the Bank has become more susceptible to short-term fluctuations in
deposit flows. The Bank manages the pricing of its deposits in keeping with
its asset/liability management, profitability and growth objectives. Based on
its experience, the Bank believes that its passbook and NOW accounts are
relatively stable sources of deposits. However, the ability of the Bank to
attract and maintain certificate deposits, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions.
The following table sets forth the savings flows at the Bank during
the periods indicated.
Year Ended December 31,
---------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
--------- --------- ---------
Opening balance................... $ 433,869 467,348 362,477
MFC deposits acquired............. 0 0 103,612
Deposits.......................... 667,957 536,135 370,761
Withdrawals....................... (716,263) (588,662) (385,002)
Interest credited................. 14,819 19,048 15,500
--------- -------- --------
Ending balance.................. 400,382 433,869 467,348
--------- -------- --------
Net increase (decrease)........... $(33,487) (33,479) 104,871
--------- -------- --------
--------- -------- --------
Percent increase (decrease)....... (7.72)% (7.16)% 28.93%
--------- -------- --------
--------- -------- --------
24
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Bank as of December
31:
1999 1998 1997
------------------------ ------------------------ --------------------------
Percent Percent Percent
(DOLLARS IN THOUSANDS) Amount of Total Amount of Total Amount of Total
------ -------- -------- -------- -------- --------
TRANSACTIONS AND SAVINGS DEPOSITS(1):
Non-interest checking................... $ 7,706 1.92 % $ 13,187 3.04 % $ 3,833 0.82 %
NOW Accounts - 1.00%(2)................. 25,896 6.47 25,459 5.87 23,144 4.95
Passbook Accounts - 2.00%(3)............ 34,470 8.61 35,766 8.24 36,199 7.75
Money Market Accounts - 3.41%(4)........ 31,821 8.00 29,419 6.78 24,807 5.31
------------ ------------ ------------ --------- ----------- -------------
Total Non-Certificates................ $ 99,893 25.00 % $ 103,831 23.93% $ 87,983 18.83 %
------------ ------------ ------------ --------- ----------- -------------
------------ ------------ ------------ --------- ----------- -------------
CERTIFICATES:
2.00 - 2.99% ......................... $ 201 0.05 % $ 0 0.00 % $ 727 0.15 %
3.00 - 3.99% ......................... 16,408 4.10 1,943 0.45 24,155 5.17
4.00 - 4.99% ......................... 88,176 22.02 87,582 20.19 162,916 34.86
5.00 - 5.99% ......................... 151,827 37.92 160,630 37.02 178,847 38.27
6.00 - 6.99% ......................... 43,875 10.96 78,273 18.04 11,627 2.49
7.00 - 7.99% ......................... 2 0.00 1,342 0.31 1,091 0.23
8.00 - 8.99% ......................... 0 0.00 264 0.06 2 0.00
9.00% and over ........................ 0 0.00 4 0.00 0 0.00
------------ ------------ ------------ --------- ----------- ----------
Total Certificates ................... 300,489 75.05 330,038 76.07 379,365 81.17
------------ ------------ ------------ --------- ----------- -------------
Total Deposits .................... $ 400,382 100.00 % $ 433,869 100.00 % $ 467,348 100.00 %
------------ ------------ ------------ --------- ----------- -------------
------------ ------------ ------------ --------- ----------- -------------
- -----------------------
(1) Reflects rates paid on transaction and savings deposits at December 31,
1999.
(2) The rate on NOW Accounts for 1998 was 1.00% and 1997 was 1.50%.
(3) The rate on Passbook Accounts for 1998 was 2.00% and 1997 was 2.62%.
(4) The rate on Money Market Accounts for 1998 was 3.19% and 1997 was 3.34%.
25
The following table shows rate and maturity information for the
Bank's certificates of deposit as of December 31, 1999.
(DOLLARS IN THOUSANDS)
Certificate accounts maturing 2.00- 3.00- 4.00- 5.00-
in quarter ending: 2.99% 3.99% 4.99% 5.99%
----- ----- ----- -----
March 31, 2000 .............. 0 3,249 30,970 21,451
June 30, 2000 ............... 100 3,961 14,970 43,424
September 30, 2000 .......... 101 4,417 8,321 13,142
December 31, 2000 ........... 0 4,554 10,077 12,507
March 31, 2001 .............. 0 83 3,958 11,389
June 30, 2001 ............... 0 85 4,564 11,654
September 30, 2001 .......... 0 23 5,258 7,655
December 31, 2001 ........... 0 17 3,831 1,278
March 31, 2002 .............. 0 4 1,648 2,454
June 30, 2002 ............... 0 7 1,157 1,326
September 30, 2002 .......... 0 3 1,238 620
December 31, 2002 ........... 0 1 505 427
Thereafter .................. 0 4 1,679 24,500
-------- ------- ------- -------
Total .................... $201 16,408 88,176 151,827
======= ====== ====== =======
Percent of total ......... 0.07% 5.46% 29.34% 50.53%
===== ===== ===== ======
(DOLLARS IN THOUSANDS)
Certificate accounts maturing 6.00- 7.00- 8.00- 9.00- Percent
in quarter ending: 6.99% 7.99% 8.99% 9.99% Total of Total
----- ----- ----- ----- ------- --------
March 31, 2000 .............. 4,274 0 0 0 59,944 19.95
June 30, 2000 ............... 1,793 0 0 0 64,248 21.38
September 30, 2000 .......... 14,978 0 0 0 40,959 13.63
December 31, 2000 ........... 7,612 0 0 0 34,750 11.56
March 31, 2001 .............. 3,376 0 0 0 18,806 6.26
June 30, 2001 ............... 1,961 0 0 0 18,264 6.08
September 30, 2001 .......... 2,531 0 0 0 15,467 5.15
December 31, 2001 ........... 2,817 2 0 0 7,945 2.64
March 31, 2002 .............. 744 0 0 0 4,850 1.61
June 30, 2002 ............... 386 0 0 0 2,876 0.96
September 30, 2002 .......... 1,031 0 0 0 2,892 0.96
December 31, 2002 ........... 585 0 0 0 1,518 0.51
Thereafter .................. 1,787 0 0 0 27,970 9.31
------ ------- ----- ------ ------- -------
Total .................... 43,875 2 0 0 300,489 100.00%
====== ======= ===== ====== ======= ======
Percent of total ......... 14.60% 0.00% 0.00% 0.00% 100.00%
====== ===== ==== ==== ======
26
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.
Maturity
--------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -------
(DOLLARS IN THOUSANDS)
Certificates of deposit less
than $100,000 ............................... $51,961 56,949 65,741 91,869 266,520
Certificates of deposit of $100,000 or more .. 3,895 5,744 6,869 8,218 24,726
Public funds(1) .............................. 4,088 1,555 3,100 500 9,243
------- ------- ------- -------- -------
Total certificates of
deposit ................................. $59,944 64,248 75,710 100,587 300,489
======= ======= ======= ======= =======
Passbook of $100,000 or more ................ $ 1,433 0 0 0 1,433
- ---------------
(1) Deposits from governmental and other public entities all in excess
of $100,000.
For additional information regarding the composition of the Bank's deposits,
see Note 13 of the Notes to Consolidated Financial Statements in the Annual
Report. For additional information on certificate maturities and the impact
on HMN's liquidity see Liquidity starting on page 23 of the Annual Report.
BORROWINGS. The Bank's other available sources of funds include
advances from the FHLB and other borrowings. As a member of the FHLB, the
Bank is required to own capital stock in the FHLB and is authorized to apply
for advances from the FHLB. Each FHLB credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB may
prescribe the acceptable uses for these advances, as well as limitations on
the size of the advances and repayment provisions. Consistent with its
asset/liability management strategy, the Bank has utilized FHLB advances from
time to time to extend the term to maturity of its liabilities. Also, the
Bank has used FHLB borrowings to fund loan demand and other investment
opportunities and to offset deposit outflows. At December 31, 1999, the Bank
had $229.4 million of FHLB advances outstanding. On such date, the Bank had a
collateral pledge arrangement with the FHLB of Des Moines pursuant to which
the Bank may borrow up to an additional $27.6 million for liquidity purposes.
See Note 14 of the Notes to Consolidated Financial Statements in the Annual
Report.
At December 31, 1999, HMN had an undrawn $2.5 million revolving line of
credit with Norwest Bank Minnesota, N.A. The credit line matures September 30,
2000 and floats at the Federal Funds rate plus 250 basis points. See Note 15 of
the Notes to Consolidated Financial Statements in the Annual Report.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and the revolving line of credit ("Other
Borrowings") for the periods indicated.
Year Ended December 31,
----------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
-------- -------- ------
Maximum Balance:
- ---------------
FHLB advances and Other Borrowings .................... $230,900 194,579 128,007
FHLB short-term borrowings and Other Borrowings ....... 60,500 46,893 60,429
Average Balance:
- ---------------
FHLB advances and Other Borrowings .................... 197,930 172,407 112,500
FHLB short-term borrowings and Other Borrowings ....... 28,683 32,320 45,598
27
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
December 31,
-------------------------------
1999 1998 1997
---- ---- ------
(DOLLARS IN THOUSANDS)
FHLB short-term borrowings and Other Borrowings................ $60,500 17,500 43,250
Weighted average interest rate of
FHLB short-term borrowings and Other Borrowings............... 5.67 % 5.38 % 5.85 %
SERVICE CORPORATIONS OF THE BANK
As a federally chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities in which a federal
savings bank may engage directly.
Osterud Insurance Agency, Inc. ("OIAI"), a Minnesota corporation, was
organized in 1983. OIAI operated as an insurance agency until 1986 when its
assets were sold. OIAI remained inactive until 1993 when it began offering
credit life insurance, annuity products and mutual fund products to the Bank's
customers and others. OIAI recorded net income of $31,700 for the year ended
December 31, 1999.
MSL Financial Corporation ("MSL") was acquired in the MFC merger. MSL
offered annuity products to MFC customers and also has an investment in FHLMC
preferred stock. On April 30, 1999, MSL was liquidated and $151,000 of assets
and $3,100 of liabilities were transferred into the Bank.
COMPETITION
The Bank faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from mortgage bankers, commercial banks, credit unions and other savings
institutions, which also make loans secured by real estate located in the Bank's
market area and through internet banking operations which are throughout the
continental United States. The Bank competes for loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
Competition for deposits is principally from money market and mutual
funds, securities firms, commercial banks and other savings institutions located
in the same communities and through internet banking operations which are
throughout the continental United States. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours and a customer oriented staff.
OTHER CORPORATIONS OWNED BY HMN
HMN has two other wholly owned subsidiaries, HMN Mortgage Services,
Inc. ("MSI") and Security Finance Corporation ("SFC"). MSI operates a mortgage
banking and mortgage brokerage facility located in Brooklyn Park, Minnesota.
Brooklyn Park is located in the Minneapolis/St. Paul Metropolitan area. MSI's
primary function is to originate and/or purchase single family residential loans
for resale on the secondary market to FNMA, FHLMC or other third parties. It
also, from time to time, purchases mortgage servicing
28
rights from other lenders. SFC invests in commercial loans and commercial real
estate loans located throughout the United States which were originated by third
parties.
EMPLOYEES
At December 31, 1999, HMN had a total of 148 full-time equivalent
employees. None of the employees of HMN or its subsidiaries are represented by
any collective bargaining unit. Management considers its employee relations to
be good.
REGULATION
GENERAL
The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all its operations. The Bank is a member of the FHLB
of Des Moines and is subject to certain limited regulation by the Federal
Reserve Board. The Bank is a member of the Savings Association Insurance Fund
("SAIF") and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank. As the
savings and loan holding company of the Bank, HMN also is subject to federal
regulation and oversight. The purpose of the regulation of HMN and other holding
companies is to protect subsidiary savings associations.
Certain of these regulatory requirements and restrictions are discussed
below.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS safety and soundness examination of the Bank was
dated November of 1999. The Bank has not been scheduled for a safety and
soundness examination in year 2000. When these examinations are conducted by the
OTS and the FDIC, the examiners may require the Bank to provide for higher
general or specific loan loss reserves. From time to time, financial
institutions in various regions of the United States have been called upon by
examiners to write down assets and to establish increased levels of reserves,
primarily as a result of perceived weaknesses in real estate values and a more
restrictive regulatory climate.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. The general assessment,
to be paid on a semi-annual basis, is computed upon the savings association's
total assets as reported in the association's latest quarterly thrift financial
report, the savings association's condition as reflected by its composite
rating, and the complexity of the savings association's business determined by
the amount of trust assets administered, assets subject to recourse or similar
obligations and the principal amount of loans serviced by the savings
association. Savings associations (unlike the Bank) with a composite rating of 3
receive a condition component equal to 25% of their size component and savings
associations with a composite rating of 4 or 5 receive a condition component
equal to 50% of their size component. The Bank's OTS assessment for the year
ended December 31, 1999 was approximately $183,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and HMN. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action,
29
including misleading or untimely reports filed with the OTS. Except under
certain circumstances, public disclosure of final enforcement actions by the OTS
is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, unless approved by the OTS, the permissible level
of investment by federal associations in loans secured by non-residential real
property may not exceed 400% of regulatory capital. Federal savings associations
are also generally authorized to branch nationwide. The Bank is in compliance
with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000, or 15%, of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1999, the Bank's lending limit under this restriction was $7.2
million. The Bank is in compliance with the loans-to-one borrower limitation.
In December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. FDICIA provides for, among other
things, the recapitalization of the Bank Insurance Fund; adoption of safety and
soundness standards; enhanced federal supervision of depository institutions,
including greater authority for the appointment of a conservator or receiver for
undercapitalized institutions; the establishment of risk-based deposit insurance
premiums; liberalization of the qualified thrift lender test; greater
restrictions on transactions with affiliates; and mandated consumer protection
disclosures with respect to deposit accounts. See "- Insurance of Accounts and
Regulation by the FDIC," "- Regulatory Capital Requirements" and "- Qualified
Thrift Lender Test."
The OTS, as well as the other federal banking agencies, have issued
safety and soundness standards on matters such as credit underwriting and loan
documentation, internal controls and audit systems, interest rate risk exposure,
asset growth and quality, compensation and other employee benefits and year 2000
issues. The proposal also establishes the maximum ratio of classified assets to
total capital (which for this purpose includes loss allowances exceeding the
amount includable for regulatory capital purposes) at 100% and the minimum level
of earnings sufficient to absorb losses without impairing capital. Earnings will
be sufficient if the net income over the last four quarters is assumed to
continue over the next four quarters and the institution would otherwise remain
in capital compliance. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
The Bank is subject to a wide array of other laws and regulations, both
federal and state, including, but not limited to, usury laws, the Community
Reinvestment Act and regulations thereunder, the Equal Credit Opportunity Act
and Regulation B, Regulation E - Electronic Funds Transfer requirements, the
Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act
and Regulation X. The Bank is also subject to laws and regulations that may
impose liability on lenders and owners for clean-up costs and other costs
stemming from hazardous waste located on property securing real estate loans
made by lenders or on real estate that is owned by lenders following a
foreclosure or otherwise.
FINANCIAL MODERNIZATION ACT
On November 12, 1999, the President signed into law the
Gramm-Leach-Bliley Act, or GLB Act, which significantly changed the regulatory
structure and oversight of the financial services industry. The GLB Act revises
the Bank Holding Company Act of 1956 (BHC Act) and the Home Owners Loan Act
(HOLA) and repeals the affiliation provisions of the Glass-Steagall Act of 1933,
permitting a qualifying
30
holding company, called a financial holding company, to engage in a full range
of financial activities, including banking, insurance, and securities
activities, as well as merchant banking and additional activities that are
"financial in nature" or "incidental" to such financial activities. Savings and
loan holding companies are similarly authorized to engage in activities that are
financial in nature. The GLB Act thus provides expanded financial affiliation
opportunities for existing holding companies and permits various non-bank
financial services providers to acquire banks and thrifts by allowing holding
companies to engage in activities such as securities underwriting, and
underwriting and brokering of insurance products. The GLB Act also expands
passive investments by financial holding companies in any type of company,
financial or nonfinancial, through merchant banking and insurance company
investments. In order for a bank holding company to qualify as a financial
holding company, its subsidiary depository institutions must be
"well-capitalized" and "well-managed" and have at least a "satisfactory"
Community Reinvestment Act rating.
The GLB Act reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to primary
supervision by the Federal Reserve Board and savings and loan holding companies
are subject to supervision by the OTS. Current federal and state regulators of
financial holding company regulated subsidiaries such as insurers,
broker-dealers, investment companies and banks generally retain their
jurisdiction and authority. In order to implement its underlying purposes, the
GLB Act preempts state laws restricting the establishment of financial
affiliations authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance regulators. With regard to securities laws, the
GLB Act removes the current blanket exemption for banks from the broker-dealer
registration requirements under the Securities Exchange Act of 1934, amends the
Investment Company Act of 1940 with respect to bank common trust fund and mutual
fund activities, and amends the Investment Advisers Act of 1940 to require
registration of banks that act as investment advisers for mutual funds. The GLB
Act also includes provisions concerning subsidiaries of banks, permitting a
national bank to engage in most financial activities through a financial
subsidiary, provided that the bank and its depository institution affiliates
meet certain qualification requirements relating to capital, management, total
assets, subordinated debt, capital, risk management, and affiliate transactions.
With respect to subsidiaries of state banks, new activities as "principal" would
be limited to those permissible for a national bank financial subsidiary. The
GLB Act requires a state bank with a financial subsidiary permitted under the
GLB Act to be "well capitalized," and also subjects the bank to the same
capital, risk management and affiliate transaction rules as applicable to
national banks. The provisions of the GLB Act relating to financial holding
companies become effective 120 days after its enactment, or about March 15,
2000, excluding the federal preemption provisions, which became effective on the
date of enactment.
The GLB Act adopts a number of provisions related to the
capitalization, membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank System. The GLB Act also restricts the
powers of new unitary savings and loan association holding companies. Unitary
savings and loan holding companies that are "grandfathered," i.e., unitary
savings and loan holding companies in existence or with applications filed with
the OTS on or before May 4, 1999, such as HMN, retain their authority under the
prior law. All other unitary savings and loan holding companies are limited to
financially related activities. The GLB Act prohibits non-financial companies
from acquiring grandfathered unitary savings and loan holding companies. HMN is
unable to predict the impact of the GLB Act on its operations at this time.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Savings deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to
31
the SAIF. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Under the system, all insured depository institutions were
placed into one of nine categories and assessed insurance premiums, ranging from
.04% to .31% of deposits, based upon their level of capital and supervisory
evaluation. Institutions classified as well capitalized (I.E., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy would pay the lowest premium while
institutions that are less than adequately capitalized (I.E., core and Tier 1
risk-based capital ratios of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern would pay the highest
premium. Risk classification of all insured institutions will be made by the
FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition, under FDICIA, the FDIC may impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
DIFA also addressed the funding for the Financing Corp. (FICO) bonds.
Thrifts were required to pay 6.4 basis points per $100 of deposits from January
1, 1997 to December 31, 1999. From January 1, 2000 until the FICO bonds are
retired in 2019, the estimated assessment to retire the FICO bonds is expected
to be 2.5 basis points per $100 of deposits.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained earnings, and certain
noncumulative perpetual preferred stock. In addition, all intangible assets,
other than a limited amount of purchased mortgage servicing rights, must be
deducted from tangible capital. At December 31, 1999, the Bank had goodwill and
other intangibles of $5.1 million and $222,000 of mortgage servicing rights
which were required to be deducted from stockholders' equity to arrive at
tangible capital and Tier I capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks or
engaged in certain other activities solely as agent for its customers, or
meeting other criteria, are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the association's level of ownership,
including the assets of includable subsidiaries in which the association has a
minority interest that is not consolidated for GAAP purposes. For excludable
32
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The subsidiary of the Bank is an includable subsidiary.
At December 31, 1999, the Bank had tangible capital of $44.9 million,
or 6.6% of adjusted total assets, which is $34.7 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital or Tier I capital to
equal at least 3% of adjusted total assets (as defined by regulation). Core
capital generally consists of tangible capital plus certain intangible assets.
As a result of the prompt corrective action provisions of FDICIA discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
The OTS regulations only allow those savings associations rated a
composite one (the highest rating) under the safety and soundness rating system
for savings associations to be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations are required to
maintain a Tier I capital to adjusted total assets of 4% to 5%. The OTS assesses
each individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. The Bank is also
required to have a Tier I capital ratio to risk-weighted assets of 4%. In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one-to-four
family first lien mortgage loans not more than 90 days delinquent and having a
loan to value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or the FHLMC.
At December 31, 1999, the Bank had Tier I capital equal to $44.9
million, or 6.6%, of adjusted total assets, which is $17.7 million above the
minimum Tier I ratio requirement of 4% based upon the Bank's composite rating.
At December 31, 1999, the Bank had a Tier I capital to risk-weighted assets
ratio of 11.8%, which is $29.6 million above the minimum requirement of $15.3
million.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
December 31, 1999, the Bank had $3.2 million of general loss reserves, which
were included in capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. At December 31, 1999 the
Bank had $11,000 of exclusions from capital.
On December 31, 1999, the Bank had total "risk-based" capital of $48.1
million and risk-weighted assets of $381.4 million, or total capital of 12.6% of
risk-weighted assets. This amount was $17.6 million above the 8% requirement in
effect on that date.
Under FDICIA, all the federal banking agencies, including the OTS, were
required to revise their risk-based capital requirements to ensure that such
requirements account for interest rate risk, concentration of credit risk and
the risks of non-traditional activities, and that they reflect the actual
performance of and
33
expected loss on multi-family loans. Such standards were adopted with the
enactment of FDICIA.
The OTS had adopted a rule that required every savings association with
more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an interest rate risk
component ("IRR component") equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. The IRR component is a measure of
the potential decline in the net portfolio value ("NPV") of a savings
association, greater than 2% of the present value of its assets, based upon a
hypothetical 200 basis point increase or decrease in interest rates (whichever
results in a greater decline). NPV is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts. The rule provided for
a two quarter lag between calculating interest rate risk and recognizing any
deduction from capital. The OTS has decided not to require the IRR component to
be deducted from the capital calculations of all institutions. It has reserved
the right to take the IRR component into account in assessing the capital
requirements for an individual institution. On December 1, 1998 the OTS issued
Thrift Bulletin 13a ("TB 13a"), Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities, which among other things established
guidelines for measuring an institution's sensitivity to market risk. TB 13a has
a table which examiners use as a starting point in their analysis of an
institution's level of interest rate risk, assuming there were no deficiencies
in the institution's risk management practices. Based upon an internal IRR
exposure report prepared by management at December 31, 1999, the Bank was deemed
to have "significant risk" per the OTS table. Management is in the process of
determining the actions necessary to reduce the interest rate exposure of the
Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have adopted regulations authorizing the agencies to require a depository
institution to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities.
The OTS and the FDIC are authorized and, under certain circumstances,
required to take certain actions against associations that fail to meet capital
requirements. Effective December 19, 1992, the federal banking agencies,
including the OTS, were given additional enforcement authority over
undercapitalized depository institutions. The OTS is generally required to take
action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% Tier 1 to adjusted total
assets ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital
ratio). Any such association must submit a capital restoration plan and until
such plan is approved by the OTS may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The OTS is authorized to impose the
additional restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (I.E., Tier 1 risk-based or Tier I to
adjusted total assets of less than 3% or a risk-based capital ratio of less than
6%) must be made subject to one or more additional specified actions and
operating restrictions mandated by FDICIA. These actions and restrictions
include requiring the issuance of additional voting securities; limitations on
asset growth; mandated asset reduction; changes in senior management;
divestiture, merger or acquisition of the association; restrictions on executive
compensation; and any other action the OTS deems appropriate. An association
that becomes "critically undercapitalized" (I.E., a tangible equity to total
asset ratio of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a savings association, with certain limited
exceptions,
34
within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to other possible
enforcement actions by the OTS or the FDIC. Such actions could include a capital
directive, a cease-and-desist order, civil money penalties, the establishment of
restrictions on all aspects of the association's operations, the appointment of
a receiver or conservator or a forced merger into another institution.
If the OTS determines that an association is in an unsafe or unsound
condition, or is engaged in an unsafe or unsound practice, it is authorized to
reclassify a well-capitalized association as an adequately capitalized
association, and if the association is adequately capitalized, to impose the
restrictions applicable to an undercapitalized association. If the association
is undercapitalized, the OTS is authorized to impose the restrictions applicable
to a significantly undercapitalized association.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of HMN's stock. HMN shareholders do not have
preemptive rights, and therefore, if HMN is directed by the OTS or the FDIC to
issue additional shares of common stock, such issuance may result in the
dilution in the percentage of ownership of existing stockholders of HMN.
At December 31, 1999 the Bank would be considered to be "well
capitalized" under the prompt corrective actions provisions mentioned above. See
Note 20 "Federal Home Loan Bank Investment, Regulatory Liquidity and Regulatory
Capital Requirements" in the Notes to Consolidated Financial Statements in the
Annual Report for more information on the Bank's capital.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.
Under OTS regulations, a savings association that is a subsidiary of a
holding company, like the Bank, must file either a notice or an application 30
days before declaring a dividend or seeking board approval of a capital
distribution. A notice is required unless a savings association (that is a
holding company subsidiary) is not eligible for expedited treatment under OTS
regulation or would not be adequately capitalized after the distribution, or the
distribution would cause the association's distributions for the calendar year
to exceed its net income for the year to date plus retained net income for the
prior two years, or the distribution is otherwise contrary to statute,
regulation or regulatory agreement or condition. If any of these conditions
exist, then an application must be filed with the OTS. The OTS may object to a
capital distribution if it would constitute the distribution to be an unsafe or
unsound practice.
In March of 2000, the Bank received notification from the OTS that
subject to certain restrictions (which could only be calculated at the time of
distribution) a dividend from the Bank to HMN of $3.0 million could be paid
during 2000 without violating the dividend limitations mentioned above.
LIQUIDITY
All savings associations, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid
35
assets, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity" in the Annual Report. This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4% or an amount that would be
required to operate the Bank in a safe and sound manner.
ACCOUNTING
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (I.E., whether held to maturity, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP, to require that transactions be reported
in a manner that best reflects their underlying economic substance and inherent
risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (which consists of total assets less intangibles, properties
used to conduct the savings association's business and liquid assets not
exceeding 20% of total assets) in qualified thrift investments on a monthly
average for nine out of every 12 months on a rolling basis. For HMN such assets
primarily consist of residential housing related loans and investments. At
December 31, 1999, the Bank met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the Bank Insurance Fund. If an association that fails the test has not yet
requalified and has not converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the association is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it may have to repay promptly any outstanding FHLB borrowings, which
could result in prepayment penalties or purchase additional FHLB stock to meet
the stockholder requirements of non-QTL members. If any association that fails
the QTL test is controlled by a holding company, then within one year after the
failure, the holding company must register as a bank holding company and become
subject to all restrictions on bank holding companies. See "- Holding Company
Regulation."
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions are restricted to a percentage of the association's capital.
Affiliates of the Bank include HMN and any company which is under common control
with the Bank. In addition, a savings association may not lend
36
to any affiliate engaged in activities not permissible for a bank holding
company, acquire the securities of most affiliates or purchase low quality
assets from affiliates. The Bank's subsidiaries are not deemed affiliates,
however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans generally must be made on terms substantially the same as for loans to
unaffiliated individuals.
HOLDING COMPANY REGULATION
HMN is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, HMN is registered and required to file reports
with and subject to regulation and examination by the OTS. In addition, the OTS
has enforcement authority over HMN and its non-savings association subsidiaries
which also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, HMN generally is not
subject to activity restrictions. If HMN acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of HMN and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association) would become
subject to holding company activity restrictions unless such other associations
qualify as QTLs and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, HMN must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure HMN must register as, and will become subject to, the
restrictions applicable to bank holding companies. The activities authorized for
a bank holding company are more limited than are the activities authorized for a
unitary or multiple savings and loan holding company. See "-Qualified Thrift
Lender Test."
HMN must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
FEDERAL SECURITIES LAW
The stock of HMN is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). HMN is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
HMN stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of HMN may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
HMN meets specified current public information requirements, each affiliate of
HMN is able to sell in the public market, without registration, a limited number
of shares in any three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW
37
checking accounts). At December 31, 1999, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB, which is one of 12 regional Federal
Home Loan Banks ("FHB"), that administers the home financing credit function of
savings associations. Each FHB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHB System. It makes loans to
members (I.E., advances) in accordance with policies and procedures established
by the board of directors of the FHB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At December 31, 1999, the Bank had $11.5 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received dividends on its FHLB stock. Over the past five calendar years such
dividends have averaged 6.72% and were 6.30% for calendar year 1999. For the
year ended December 31, 1999, dividends paid by the FHLB of Des Moines to the
Bank totaled $641,000.
Under federal law the FHBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. HMN and its subsidiaries file consolidated federal
income tax returns on a calendar year basis using the accrual method of
accounting. Prior to 1996, savings institutions were subject to special bad debt
reserve rules and certain other rules. During this period of time, a savings
institution that held 60% or more of its assets in "qualifying assets" (as
defined in the Internal Revenue Code) was permitted to maintain reserves for bad
debts and to make annual additions to such reserves that qualified as deductions
from taxable income. HMN was in compliance with this requirement.
A qualifying thrift institution could elect annually to compute its
allowable additions to bad debt reserves under either the percentage of taxable
income method or the experience method. The percentage of taxable income method
of calculating bad debt reserves limited the applicable percentage deduction to
8% of taxable income and could not cause the reserves to exceed 6% of qualifying
loans at the end of the taxable year. HMN used the experience method to
calculate additions to tax bad debt reserves through tax year 1995.
Beginning in 1996, the favorable bad debt method described above was
repealed putting savings institutions on the same tax bad debt method as
commercial banks. This legislation required recapture of the amount of the tax
bad debt reserves to the extent that they exceed the adjusted base year reserve
("the applicable excess reserves"). The applicable excess reserves are
recaptured over a six-year period. This
38
recapture period can be deferred for a period of up to two years to the extent
that a certain residential lending test is met. HMN has previously provided
taxes for the applicable excess reserves.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes before 1988 exceed the allowable amount of such reserves computed
under the experience method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not, without adverse
tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1999, the Bank's Excess for tax purposes totaled
approximately $8.8 million.
HMN was incorporated in 1994 and filed its first consolidated Federal
income tax return with its subsidiaries for the year ended December 31, 1994.
The return required to be filed for 1999 has been extended and will be filed by
September 2000. The Bank and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through December
31, 1983. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the opinion of management, any examination of still
open returns (including returns of subsidiaries and predecessors of, or entities
merged into, the Bank) would not result in a deficiency which could have a
material adverse effect on the consolidated financial condition of HMN.
MINNESOTA TAXATION. HMN and its subsidiaries that operate in Minnesota
are subject to Minnesota state taxation. A Minnesota corporation's income or
loss is allocated based on a three-factor apportionment of the corporation's
Minnesota gross receipts, payroll and property over the total gross receipts,
payroll and property of all corporations in the unitary group. The corporate tax
rate in Minnesota is 9.8%. The Minnesota Alternative Minimum Tax rate is 5.8%.
The Bank and it subsidiaries have not been audited by the Minnesota
taxation authorities.
IOWA TAXATION. On December 5, 1997 the Bank acquired MFC and its
subsidiaries which were located in the state of Iowa. The Bank is now subject to
Iowa Franchise tax on an apportionment basis weighted based upon deposits
located within Iowa to total deposits of the Bank. Income apportioned to Iowa is
subject to a 5% tax rate.
The Bank and its subsidiaries have not been audited by Iowa taxation
authorities.
DELAWARE TAXATION. As a Delaware holding company, HMN is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. HMN is also subject to an annual
franchise tax imposed by the State of Delaware.
39
ITEM 2. PROPERTIES
The following table sets forth information concerning the main office
and each branch office of HMN at December 31, 1999. The Bank uses all properties
listed below except for the mortgage banking/brokerage office. At December 31,
1999, HMN's premises had an aggregate net book value of approximately $6.1
million.
Year Owned or
Location Acquired Leased
- ----------------------------------------- -------- --------
CORPORATE OFFICE:
101 North Broadway 1975 Owned
Spring Valley, Minnesota
FULL SERVICE BRANCHES:
715 North Broadway 1998 Owned
Spring Valley, Minnesota
201 Oakland Avenue West 1960 Owned
Austin, Minnesota
Crossroads Shopping Center 1962 Owned
Rochester, Minnesota
4th & Center (1) 1973 Owned
Winona, Minnesota
175 Center Street 1998 Owned
Winona, Minnesota
208 South Walnut 1975 Owned
LaCrescent, Minnesota
1110 6th St., NW 1982 Owned
Rochester, Minnesota
143 West Clark Street 1993 Owned
Albert Lea, Minnesota
303 W. Main St. 1997 Owned
Marshalltown, Iowa
119 W. High St. 1997 Leased
Toledo, Iowa
29 S. Center St. 1997 Owned
Marshalltown, Iowa
MORTGAGE BANKING/BROKERAGE OFFICE:
7101 Northland Circle, Suite 105 1997 Leased
Brooklyn Park, Minnesota
- ------------------
(1) The property previously was used by the Bank and is currently being held for
sale.
40
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank and HMN are involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on HMN's consolidated financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The information on pages 22, 56 and the back cover page of the Annual Report
to Security Holders for the year ended December 31, 1999 is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information on page 11 of the Annual Report to Security Holders for the
year ended December 31, 1999 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information on pages 12 through 28 of the Annual Report to Security
Holders for the year ended December 31, 1999 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information on pages 24 through 26 of the Annual Report to Security
Holders for the year ended December 31, 1999 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 29 through 56 of the Annual Report to Security
Holders for the year ended December 31, 1999 is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors on pages 4 through 6 of the Registrant's
definitive Proxy Statement dated March 21, 2000 is incorporated herein by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS
Officers are elected annually by the Board of Directors of HMN and the Bank.
The business experience of each executive officer of HMN and the Bank who is not
also a director of HMN is set forth below.
DWAIN C. JORGENSEN. Mr. Jorgensen, age 51, is Senior Vice President
Operations of HMN and the Bank. Mr. Jorgensen has held such positions with the
Bank since 1998. Prior to such time, he served as Vice President, Controller and
Chief Accounting Officer of HMN and the Bank from 1989 to 1998. From 1983 to
1989, Mr. Jorgensen was an Assistant Vice President and Operations Officer with
the Bank.
TIMOTHY P. JOHNSON. Mr. Johnson, age 47, is Vice President and Treasurer of
HMN and the Bank, a position he has held since 1997. He has also been Principal
Accounting Officer since 1998. Prior to such time, he served as Treasurer from
1992 to 1997. From 1983 to 1992, Mr. Johnson was Chief Financial Officer of St.
Louis Bank for Savings, Duluth, Minnesota.
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 9 through 12 of the Registrant's definitive Proxy
Statement dated March 21, 2000 is incorporated herein by reference, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on pages 2, 3, and 4 of the Registrant's definitive Proxy
Statement dated March 21, 2000 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 15 of the Registrant's definitive Proxy Statement
dated March 21, 2000 is incorporated herein by reference.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. Financial Statements
The following information appearing in the Registrant's Annual
Report to Security Holders for the year ended December 31, 1999, is incorporated
by reference in this Form 10-K Annual Report as Exhibit 13.
Pages in
1999 Annual
Annual Report Section Report
--------------------- -----------
Five Year Consolidated Financial Highlights 11
Consolidated Balance Sheets --
December 31, 1999 and 1998 29
Consolidated Statements of Income --
Each of the Years in the Three-Year
Period Ended December 31, 1999 30
Consolidated Statements of Comprehensive Income --
Each of the Years in the Three-Year
Period Ended December 31, 1999 30
Consolidated Statement of Stockholders'
Equity -- Each of the Years in the
Three-Year Period Ended December 31, 1999 31
Consolidated Statements of Cash Flows --
Each of the Years in the Three-Year
Period Ended December 31, 1999 32
Notes to Consolidated Financial Statements 33 - 52
Independent Auditors' Report 53
Selected Quarterly Financial Data 54 - 55
Other Financial Data 56
Common Stock Price Information 56
2. Financial Statement Schedules
All financial statement schedules have been omitted as information is
not required under the related instructions, is not applicable or has been
included in the Notes to Consolidated Financial Statements.
43
3. Exhibits
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-K Report
-------------- -------------------------------- --------------- ----------------
2 Agreement and Plan of Merger 1* Not applicable
dated July 1, 1997
3 Amended and Restated Certificate of Incorporation 2* Not applicable
Amended and Restated By-laws 3* Not applicable
4 Form of Common Stock Certificate 4* Not applicable
10.1 + Employment Agreement for Mr. Weise 5* Not applicable
dated June 29, 1994
Extension of Employment Contract 6* Not applicable
Second Extension of Employment Contract 7* Not applicable
Third Extension of Employment Contract 8* Not applicable
10.2 + Employment Agreement for Mr. Gardner 5* Not applicable
dated June 29, 1994
Extension of Employment Contract 6* Not applicable
Second Extension of Employment Contract 7* Not applicable
Third Extension of Employment Contract 8* Not applicable
10.3 + Change in Control Severance Agreement 9* Not applicable
for Mr. McNeil dated April 1, 1998
10.4 + Directors Deferred Compensation Plan 5* Not applicable
10.5 + Amended and Restated HMN Financial, Inc. 10* Not applicable
Recognition and Retention Plan dated
July 29, 1998
10.6 + Amended and Restated HMN Financial, Inc. 10* Not applicable
Stock Option and Incentive Plan dated
July 29, 1998
11 Statement re: Computation of per share 11 Filed electronically
earnings
13 Annual Report to Security Holders 13 Filed electronically
21 Subsidiaries of Registrant 21 Filed electronically
23 Consent of KPMG LLP 23 Filed electronically
dated March 28, 2000
27 Financial Data Schedule 27 Filed electronically
Year ended 1999
+ Management contract of compensatory arrangement.
44
-----------------
1* Incorporated by reference to the same numbered exhibit to the Company's
Current Report on Form 8-K dated July 1, 1997, filed on July 10, 1997.
2* 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).
3* 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
No. 0-24100).
4* 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).
5* Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for the period ended December 31, 1994 (File No.
0-24100).
6* Incorporated by reference to the same numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No.
0-24100).
7* Incorporated by reference to the same numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1998 (File No.
0-24100).
8* Incorporated by reference to the same numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No.
0-24100).
9* Incorporated by reference to the same numbered exhibit to the Company's
Annual Report on Form 10-K for the period ended December 31, 1998 (File No.
0-24100).
10* Incorporated by reference to the same numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File
No. 0-24100).
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HMN FINANCIAL, INC.
Date: March 28, 2000 By: /s/ Roger P. Weise
-------------------------------- -------------------------------------
Roger P. Weise
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Roger P. Weise By: /s/ James B. Gardner
-------------------------------- -------------------------------------
Roger P. Weise, Chairman of the James B. Gardner,
Board, President and Chief Executive Vice President and Director
Executive Officer (Principal (Principal Financial Officer)
Executive and Operating Officer)
Date: March 28, 2000 Date: March 28, 2000
-------------------------------- ----------------------------------
By: /s/ Allan R. Deboer By: /s/ Duane D. Benson
-------------------------------- ----------------------------------
Allan R. DeBoer, Director Duane D. Benson, Director
Date: March 28, 2000 Date: March 28, 2000
-------------------------------- ----------------------------------
By: /s/ Timothy R. Geisler By: /s/ Michael Mcneil
-------------------------------- ----------------------------------
Timothy R. Geisler, Director Michael McNeil,
Senior Vice President and Director
Date: March 28, 2000 Date: March 28, 2000
-------------------------------- ---------------------------------
By: /s/ Irma R. Rathbun By: /s/ M.F. Schumann
------------------------------- ----------------------------------
Irma R. Rathbun, Director M.F. Schumann, Director
Date: March 28, 2000 Date: March 28, 2000
------------------------------- ----------------------------------
By: /s/ Richard J. Ziebell By: /s/ Timothy P. Johnson
-------------------------------- ----------------------------------
Richard J. Ziebell, Director Timothy P. Johnson,
Vice President and Treasurer
(Principal Accounting Officer)
Date: March 28, 2000 Date: March 28, 2000
-------------------------------- ----------------------------------
46
INDEX TO EXHIBITS
Sequential
Page Numbering
Where Attached
Exhibits Are
Regulation S-K Located in This
Exhibit Number Document Form 10-K Report
-------------- --------------------------------------- -----------------
11 Statement re: Computation of per share earnings Filed electronically
13 Annual Report to Security Holders Filed electronically
21 Subsidiaries of Registrant Filed electronically
23 Consent of KPMG LLP Filed electronically
dated March 28, 2000
27 Financial Data Schedule Filed electronically
Year ended 1999
47