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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, 1996
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) 346-7345
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. [X]
As of March 14, 1997, the Registrant had issued and outstanding 4,209,826
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 14, 1997 was
$76.3 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, 1996,
are incorporated by reference in Parts II and IV of this Form 10-K.
Parts of the Registrant's Proxy Statement dated March 13, 1997, are incorporated
by reference in Part III of this Form 10-K.
Exhibit Index is located on page 47.
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business ....................................................... 3
General ................................................... 3
Lending Activities ........................................ 4
Investment Activities ..................................... 19
Sources of Funds .......................................... 23
Other Information
Service Corporations ................................. 27
Competition .......................................... 27
Employees ............................................ 27
Executive Officers ................................... 28
Regulation ................................................ 28
Taxation .................................................. 37
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 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, pursuant to its
plan of conversion. HMN commenced on May 23, 1994, a Subscription and Community
Offering (the "Offering") of its shares in connection with the conversion of the
Bank. The Offering ended on June 22, 1994, and final approval for the
conversion was received from the Office of Thrift Supervision ("OTS") on June
29, 1994. HMN issued 6,085,775 shares of common stock at a price of $10 per
share. Total proceeds from the conversion were $59,178,342 net of costs
relating to the conversion of $1,679,408, and have been recorded as common stock
and additional paid in capital.
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 mortgage loans and, to a much lesser
extent, consumer, construction, commercial real estate, commercial business and
multi-family 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) 346-7345.
MARKET AREA
HMN serves the Minnesota counties of Fillmore, Freeborn, Houston, Mower,
Olmsted and Winona and portions of Steele, Dodge, Goodhue and Wabasha Counties,
Minnesota, 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 and
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 College, Austin Community College and several
vocational/technical schools.
Based upon 1990 census information, the population of the six primary
counties in the Bank's market area was as follows: Fillmore - 20,800; Freeborn
- - 33,000; Houston - 18,500; Mower - 37,300; Olmsted - 101,000; and Winona -
47,900. Based upon 1990 U.S. Department of Commerce information, per capita
income in these six counties ranged from approximately $15,000 to $21,000.
During the fourth quarter of 1996, HMN opened a mortgage banking office in
Edina, Minnesota. The office will primarily purchase loans from third party
originators located in the seven county metropolitan area of Minneapolis and St.
Paul and sell the loans in the secondary market or place the loans in HMN's loan
portfolio. The new office will also purchase mortgage servicing rights from
third parties for the purpose of generating loan servicing income.
3
LENDING ACTIVITIES
GENERAL. Historically, the Bank 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, the Bank has emphasized the
origination or purchase of mortgage loans having shorter terms to maturity or
repricing, such as 15-year, fixed-rate residential loans, Adjustable Rate
Mortgage loans ("ARMs") and Graduated Equity Mortgage loans ("GEMs"). Starting
in 1995 and throughout 1996 HMN offered a competitive home equity line of
credit. HMN also offers consumer loans and, to a much lesser extent,
construction, commercial real estate, multi-family and commercial business
loans. See "- Originations, Purchases and Sales of Loans and Mortgage-Backed
and Related Securities."
4
LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of the 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 the dates indicated.
December 31,
-------------------------------------------------------
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 ................... 17,808 5.00 11,506 3.56
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
---------- ----------
---------- ----------
December 31,
---------------------------------------------------------------------------------
1994 1993 1992
----------------------- --------------------- ----------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
REAL ESTATE LOANS:
- -----------------
One-to-four family .............. $ 252,943 91.14% $ 233,009 92.18% $ 223,914 89.86%
Multi-family .................... 311 0.11 349 0.14 709 0.28
Commercial ...................... 8,316 3.00 4,559 1.80 6,512 2.61
Construction or development ..... 2,799 1.01 3,309 1.31 6,879 2.76
---------- ---------- ---------- ---------- ---------- ----------
Total real estate loans ....... 264,369 95.26 241,226 95.43 238,014 95.51
---------- ---------- ---------- ---------- ---------- ----------
OTHER LOANS:
- -----------
Consumer loans:
Savings account ................ 648 0.23 872 0.34 1,153 0.46
Education ...................... 2,007 0.72 1,819 0.72 1,584 0.64
Automobile ..................... 520 0.19 681 0.27 927 0.37
Home equity .................... 7,716 2.78 5,604 2.22 4,623 1.86
Home improvement ............... 870 0.31 912 0.36 1,044 0.42
Other .......................... 502 0.19 586 0.23 684 0.27
---------- ---------- ---------- ---------- ---------- ----------
Total consumer loans .......... 12,263 4.42 10,474 4.14 10,015 4.02
Commercial business loans ...... 897 0.32 1,089 0.43 1,160 0.47
---------- ---------- ---------- ---------- ---------- ----------
Total other loans ............. 13,160 4.74 11,563 4.57 11,175 4.49
---------- ---------- ---------- ---------- ---------- ----------
Total loans .................. 277,529 100.00% 252,789 100.00% 249,189 100.00%
---------- ---------- ----------
---------- ---------- ----------
LESS:
- ----
Loans in process ................ 2,327 2,333 4,576
Unamortized discounts ........... 162 14 32
Net deferred loan fees .......... 2,147 2,507 2,236
Allowance for losses on loans ... 1,893 1,489 831
---------- ---------- ----------
Total loans receivable, net .. $ 271,000 $ 246,446 $ 241,514
---------- ---------- ----------
---------- ---------- ----------
5
The following table shows the composition of the HMN's loan portfolio by
fixed and adjustable rate at the dates indicated.
December 31,
--------------------------------------------------
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................................... 12,503 3.51 4,295 1.33
Commercial business loans.................. 1,000 0.28 --- ---
--------- --------- --------- ---------
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
--------- ---------
--------- ---------
December 31,
---------------------------------------------------------------------------
1994 1993 1992
------------------- ------------------- --------------------
(DOLLARS IN THOUSANDS) Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
FIXED-RATE LOANS
- ----------------
Real estate:
One-to-four family
GEM ....................................... $ 24,769 8.93% $ 22,304 8.83% $ 34,987 14.04
Other ..................................... 168,272 60.63 171,503 67.84 152,513 61.20
--------- --------- --------- --------- --------- ---------
Total one-to-four family ................. 193,041 69.56 193,807 76.67 187,500 75.24
Multi-family .............................. 311 0.11 349 0.13 709 0.28
Commercial ................................ 1,612 0.58 626 0.25 2,418 0.97
Construction or development ............... 1,008 0.37 2,800 1.11 5,558 2.23
--------- --------- --------- --------- --------- ---------
Total fixed-rate real estate loans ....... 195,972 70.62 197,582 78.16 196,185 78.72
--------- --------- --------- --------- --------- ---------
Consumer loans:
Savings .................................. 648 0.23 872 0.34 1,153 0.46
Education ................................ 1,278 0.46 1,819 0.72 1,584 0.64
Automobile ............................... 520 0.19 681 0.27 927 0.37
Home equity .............................. 7,258 2.62 5,604 2.22 4,623 1.86
Home improvement ......................... 870 0.31 912 0.36 1,044 0.42
Other .................................... 502 0.18 586 0.23 684 0.27
--------- --------- --------- --------- --------- ---------
Total consumer loans .................... 11,076 3.99 10,474 4.14 10,015 4.02
--------- --------- --------- --------- --------- ---------
Commercial business loans ................ 897 0.32 1,089 0.43 1,160 0.47
--------- --------- --------- --------- --------- ---------
Total other loans ....................... 11,973 4.31 11,563 4.57 11,175 4.49
--------- --------- --------- --------- --------- ---------
Total fixed-rate loans .................. 207,945 74.93 209,145 82.73 207,360 83.21
--------- --------- --------- --------- --------- ---------
ADJUSTABLE-RATE LOANS
- ---------------------
Real estate:
One-to-four family ........................ 59,901 21.58 39,202 15.51 36,414 14.62
Multi-family .............................. --- --- --- --- --- ---
Commercial ................................ 6,704 2.42 3,933 1.56 4,094 1.64
Construction or development ............... 1,792 0.64 509 0.20 1,321 0.53
--------- --------- --------- --------- --------- ---------
Total adjustable-rate real estate loans... 68,397 24.64 43,644 17.27 41,829 16.79
Consumer................................... 1,187 0.43 --- --- --- ---
Commercial business loans.................. --- --- --- --- --- ---
--------- --------- --------- --------- --------- ---------
Total adjustable-rate loans............... 69,584 25.07 43,644 17.27 41,829 16.79
--------- --------- --------- --------- --------- ---------
Total loans............................... 277,529 100.00% 252,789 100.00% 249,189 100.00%
--------- --------- --------- --------- --------- ---------
--------- --------- ---------
LESS
- ----
Loans in process............................ 2,327 2,333 4,576
Unamortized discounts....................... 162 14 32
Net deferred loan fees...................... 2,147 2,507 2,236
Allowance for losses on loans............... 1,893 1,489 831
--------- --------- ---------
Total loans receivable, net................. $ 271,000 $ 246,446 $ 241,514
--------- --------- ---------
--------- --------- ---------
6
The following schedule illustrates the interest rate sensitivity of
HMN's loan portfolio at December 31, 1996. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule reflects the effects of estimated prepayments on
the loan portfolio.
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,
----------------
1997(1) .................... $ 48,641 7.60% $ 1,551 8.21% $ 539 8.04%
1998 ....................... 48,580 7.58 1,136 8.11 428 8.04
1999 ....................... 30,222 7.58 1,137 8.11 427 8.04
2000 and 2001 .............. 58,102 7.57 1,503 8.08 619 8.04
2002 to 2006 ............... 83,497 7.54 1,975 8.41 897 8.04
2007 to 2021 ............... 49,867 7.48 896 8.04 535 8.04
2022 and following ......... 2,431 7.30 --- --- 29 8.15
------- ----- -----
$ 321,340 $ 8,198 $ 3,474
------- ----- -----
------- ----- -----
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,
----------------
1997(1) .................... $ 4,135 8.91% $ 875 9.65% $ 55,741 7.75%
1998 ....................... 2,466 9.20 476 9.49 53,086 7.71
1999 ....................... 2,466 9.20 476 9.49 34,728 7.71
2000 and 2001 .............. 3,286 9.23 324 9.74 63,834 7.69
2002 to 2006 ............... 4,852 8.90 193 10.09 91,414 7.64
2007 to 2021 ............... 3,727 8.75 --- --- 55,025 7.58
2022 and following ......... --- --- --- --- 2,460 7.31
------ ----- -------
$ 20,932 $ 2,344 $ 356,288
------ ----- -------
------ ----- -------
- -------------
(1) Includes demand loans, loans having no stated maturity, overdraft loans and
education loans.
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $207 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $93.5
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, 1996, based
upon the 15% limitation, the Bank's regulatory loans-to-one borrower limit was
approximately $9.1 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. At December 31, 1996, the
largest dollar amount outstanding to one borrower or group of related borrowers
was $940,000. This loan, which is secured by a motel located in the Bank's
market area, was performing in accordance with its terms at December 31, 1996.
The Bank's Loan Committee is responsible for review and approval of all
loans over $149,999 originated by the Bank. Approval of one member of the Loan
Committee is required on all loans ranging from $150,000 to $249,999 and the
approval of at least two committee members is required on loans over $250,000 to
$400,000. Loans greater than $400,000 must be approved by the Board of
Directors of the Bank after review and preliminary approval by the Loan
Committee. All loans closed each month are reviewed by the Board of Directors
at the monthly meeting.
Under the Bank's loan policy, the loan officer processing an application is
responsible for ensuring that all documentation is obtained prior to the
submission of the application to the Loan Committee. In addition, the loan
officer verifies that the application meets the Bank's underwriting guidelines
described below. Also, each application is assigned to a reviewing officer who
reviews the file to assure its accuracy and completeness. The Branch Manager
has the authority to approve all loans up to $149,999.
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 and the more significant items on the application
are verified through use of credit reports, financial statements, tax returns
and/or confirmations.
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. The cornerstone of
HMN's lending program is the origination of loans secured by mortgages on owner-
occupied one-to-four family residences. At December 31, 1996, $321.3 million,
or 90.19% of HMN's loan portfolio consisted of mortgage loans on one-to-four
family residences. At December 31, 1996, $233.2 million of the one-to-four
family residential loan portfolio was secured by properties located in HMN's
market area. HMN had $88.1 million of purchased one-to-four family loans in its
portfolio which were secured by properties located outside of its market area
(primarily located in the Midwestern United States, or the Southeastern United
States). Generally mortgage loans originated by the Bank are retained and
serviced by it. If a loan has a fixed rate with an original term to maturity of
30 years the loan is generally sold.
Prior to 1979, the Bank originated for retention in its own portfolio 30-
year, fixed-rate loans secured by one-to-four family residential real estate.
Beginning in 1979, the Bank began to emphasize the origination of fixed-rate
loans with terms of 15 years or less for retention in its portfolio. In
addition, in 1982, the Bank began to originate ARMs, subject to market
conditions and consumer preference. Subsequently, the Bank also began to
emphasize GEM originations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Annual Report attached as Exhibit 13 hereto (the "Annual Report").
HMN currently offers conventional fixed-rate loans with maximum terms of up
to 30 years although HMN generally limits originations of loans with terms
longer than 20 years. The interest rate on such loans is generally
8
set based on the FHLMC delivery rates, as well as, competitive factors. At
December 31, 1996, HMN had $187.5 million of fixed-rate loans (excluding GEM
loans) or 52.63% of HMN's total loan portfolio with a weighted average
contractual term to maturity of 12.9 years.
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 when the first interest
rate change occurs. Generally the ARMs provide for an up to 200 basis point
annual interest rate change cap and a lifetime cap generally 600 basis points
over the initial rate. HMN's one year ARM loan portfolio typically contains
interest rate floors which are generally equal to the initial rate of the loan.
Initial interest rates offered on the ARM loans during 1996 ranged from 0 to 192
basis points below the fully indexed loan rate. All borrowers are now qualified
for the loan at the fully indexed rate. 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, 1996, one-to-four family ARMs totaled $85.0 million, or
23.8% of HMN's total loan portfolio.
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. HMN has $12.7 million of ARM loans purchased from a third party
which are convertible at borrowers option into fixed-rate loans. It has an
agreement with the third party to repurchase the ARM loans which convert to
fixed rates at a stipulated price.
The GEM loans carry required 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 currently offers two GEM programs, one with a
contractual maturity of approximately 15 years and one with a contractual
maturity of approximately 19 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. HMN believes that GEMs may
increase in popularity in the future if interest rates rise and consumers are
less easily able to afford the higher monthly payments required by 15-year,
fixed-rate loans.
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").
Commencing in 1994, HMN began to sell all 30-year, fixed-rate FHA-insured loans
originated with servicing released. See "- Originations, Purchases and Sales of
Loans and Mortgage-Backed Securities and Related Securities."
In underwriting one-to-four family residential real estate loans, HMN
evaluates both the borrower's ability to make principal, interest and escrow
payments, 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 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 50% for non-owner occupied
homes; however, private mortgage insurance is 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 the 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 and the loan is not repaid.
9
CONSTRUCTION LENDING. HMN makes construction loans to individuals for the
construction of their residences, and to a much lesser extent, 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. The loan policy
limits the total amount of construction loans outstanding at one time to 2.0% of
assets. At December 31, 1996, HMN had $3.5 million of construction loans
outstanding representing 1.0% of HMN's total loan portfolio.
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. 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 up 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. At December 31, 1996, HMN had $134,000 of construction
loans to builders or developers. While it anticipates that it will continue to
engage in this type of lending from time to time in the future, HMN currently
expects that its total volume at any one time will be limited.
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. It
generally 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. All 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 subject property.
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.
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 loans outside of its
market area that are guaranteed by the Small Business Administration ("SBA") or
originated by other third parties. At December 31, 1996, HMN had $7.9 million
in commercial real estate loans, representing 2.2% of HMN's total loan
portfolio, and $280,000 in multi-family loans, or 0.1% of its total loan
portfolio.
The commercial real estate and multi-family loan portfolio includes loans
secured by motels, apartment buildings, churches, small office buildings, small
business facilities, nursing homes and other non-residential building
properties, substantially all of which are located within HMN's market area.
Permanent commercial real estate and multi-family loans are generally
originated for a maximum term of
10
20 years and generally have adjustable interest rates. Prior to 1995 commercial
real estate and multi-family loans could have either a fixed interest rate or an
adjustable interest rate. Commercial real estate and multi-family loans are
written in amounts of up to 70% of the lesser of the appraised value of the
property or the purchase price and must have a debt service coverage ratio of at
least 125%. The debt service coverage is the ratio of net cash from operations
before payment of debt to debt service. HMN does not originate construction
loans secured by commercial or multi-family real estate.
Appraisals on properties serving commercial real estate and multi-family
loans originated by HMN are performed by independent appraisers prior to the
time the loan is made. Generally all appraisals on commercial and multi-family
real estate are reviewed by a member of the Bank's Loan Committee. 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. It also requires personal guarantees from the
borrowers. In addition, HMN performs an annual on-site inspection on collateral
properties for loans with balances in excess of $250,000.
At December 31, 1996, HMN's two largest commercial real estate loans
totaled $940,000 and $910,000. The first loan was secured by a motel located in
Rochester, Minnesota near the Mayo Clinic. The second commercial real estate
loan was also secured by a motel located in HMN's market area. Both of these
loans were performing at December 31, 1996.
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
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, 1996, HMN had one commercial real estate loan totaling $83,000 and no multi-
family loans which were 90 days or more delinquent.
CONSUMER LENDING. HMN originates a variety of different types of consumer
loans, including home equity loans (open-end and closed-end), education,
automobile, home improvement, deposit account and other loans for household and
personal purposes. At December 31, 1996, consumer loans totaled $20.9 million,
or 5.9% of total loans outstanding.
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 90% 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 loans 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 loan either by making a
withdrawal at the Bank or writing a check on the home equity line of credit
account. At December 31, 1996, HMN's equity loans totaled $17.8 million, or
5.0% of the total loan portfolio.
11
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, 1996, $7,300 or .03% 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, HMN has
maintained a portfolio of commercial business loans primarily to small retail
operations, small manufacturing concerns and professional firms. Most of HMN's
commercial business loans have terms ranging from six months to five years and
carry fixed 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, 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. At December 31,
1996, HMN had $2.3 million of commercial business loans outstanding, or 0.7% of
the total loan portfolio. In addition, on that date, HMN had $20,000 of letters
of credit outstanding.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
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, 1996, there was one delinquent commercial business loan
totaling $13,000 that was over 90 days delinquent.
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 and processed 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 conventional fixed-rate, one-to-four family
loans has exceeded the dollar volume of GEMs and ARMs. Currently, substantially
all residential mortgage loans originated are retained in the loan portfolio
except 30 year fixed rate loans.
From time to time, 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 underwriting standards. The seller continues to service these
purchased loans. During 1996, HMN originated $56.7 million of real estate and
consumer loans and it purchased $55.8 million of single family residential loans
originated outside of its market area. The majority of the purchased loans have
interest rates that are fixed for a one, three or five year period and then
adjust annually thereafter or were seasoned fixed rate loans. 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.
12
HMN has substantial holdings of mortgage-backed and related securities
which are held, depending on the investment intent, in the "available for sale"
or "held to maturity" portfolios. During 1996, the Bank purchased $7.3 million
of mortgaged-backed securities and $50.3 million of mortgage-related securities,
primarily CMOs. See "- Investment Activities." During the same period, HMN
sold $81.1 million of mortgage-backed and related securities.
13
The following table shows the loan and mortgage-backed and related
securities origination, purchase, sale and repayment activities of HMN for the
periods indicated.
(DOLLARS IN THOUSANDS) Year Ended December 31,
LOANS 1996 1995 1994
--------------------------------------
ORIGINATIONS BY TYPE:
- --------------------
Adjustable-rate:
Real estate - one-to-four family...................... $ 5,441 2,117 8,891
- multi-family.................................... --- 58 ---
- construction or development..................... 916 691 2,822
Non-real estate - consumer............................ 12,012 4,575 962
-------- -------- --------
Total adjustable-rate............................. 18,369 7,441 12,675
-------- -------- --------
Fixed-rate:
Real estate - one-to-four family..................... 27,036 23,565 23,032
- multi-family.................................... 145 --- ---
- commercial...................................... 30 150 ---
- construction or development..................... 6,181 4,847 3,305
Non-real estate - consumer........................... 4,583 7,267 7,418
- commercial business........................... 430 610 685
-------- -------- --------
Total fixed-rate.................................... 38,405 36,439 34,440
-------- -------- --------
Total loans originated.............................. 56,774 43,880 47,115
-------- -------- --------
PURCHASES:
- ---------
Real estate - one-to-four family...................... 55,839 47,136 17,213
Commercial real estate guaranteed by SBA.............. --- 946 4,073
Non-real estate - commercial business................. 1,500 --- ---
-------- -------- --------
Total purchased................................... 57,339 48,082 21,286
SALES AND REPAYMENTS:
- --------------------
Real estate - one-to-four family...................... 2,310 2,414 ---
Non-real estate - consumer............................ 176 1,791 ---
-------- -------- --------
Total sales....................................... 2,486 4,205 ---
Loans securitized and transferred to securities....... 15,441 --- ---
-------- -------- --------
Transfers to loans held for sale...................... 1,407 --- ---
-------- -------- --------
Principal repayments.................................. 58,262 39,215 39,419
-------- -------- --------
Total reductions.................................. 77,596 43,420 39,419
-------- -------- --------
Decrease in other items, net.......................... (2,990) (3,310) (4,242)
-------- -------- --------
Net increase...................................... $ 33,527 45,232 24,740
-------- -------- --------
-------- -------- --------
MORTGAGE-BACKED AND RELATED SECURITIES
Loans securitized and transferred to securities...... $15,441 --- ---
PURCHASES:
- ---------
Mortgage-backed securities:(1)
Adjustable-rate...................................... --- --- 20,297
Fixed-rate........................................... 7,266 10,139 17,562
CMOs and REMICs:
Adjustable-rate...................................... 6,527 55,321 5,483
Fixed-rate........................................... 43,831 11,881 42,725
-------- -------- --------
Total Purchases................................... 57,624 77,341 86,067
-------- -------- --------
SALES:
- -----
Mortgage-backed securities:(1)
Adjustable-rate...................................... --- 23,073 ---
Fixed-rate........................................... 24,786 11,953 8,373
CMOs and REMICs:
Adjustable-rate...................................... 23,876 9,008 ---
Fixed-rate........................................... 32,487 13,681 7,847
-------- -------- --------
Total Sales....................................... 81,149 57,715 16,220
-------- -------- --------
PRINCIPAL REPAYMENTS:
- --------------------
Decrease in other items, net.......................... 28,915 4,440 45,355
-------- -------- --------
Net increase (decrease).............................. $(36,999) 15,186 24,492
-------- -------- --------
-------- -------- --------
(1) Consists of pass-through securities.
14
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 Minnesota 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.
The following table sets forth HMN's loan delinquencies by type, by amount
and by percentage of type at December 31, 1996.
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............ 8 $ 257 0.08% 6 $ 235 0.07% 14 $ 492 0.15%
Multi-family........... --- --- --- --- --- --- --- --- ---
Commercial............. --- --- --- 1 83 1.05 1 83 1.05
Construction or
development........... --- --- --- --- --- --- --- --- ---
Consumer............... 2 16 0.08 5 7 0.03 7 23 0.11
Commercial
business.............. 1 43 1.83 1 13 0.55 2 56 2.39
----- ----- ----- ------ ----- ------
Total.............. 11 $ 316 0.09% 13 $ 338 0.09% 24 $ 654 0.18%
----- ----- ----- ------ ----- ------
----- ----- ----- ------ ----- ------
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, 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, 1996, the Bank had
classified a total of $493,000 of its loans and other assets as follows:
15
Commercial Real
One-to-Four Construction or Estate and Commercial
(DOLLARS IN THOUSANDS) Family Development Multi-Family Consumer Business
---------- --------------- -------------- -------- ----------
Substandard ............. $ 312 --- 83 26 71
Doubtful ................ --- --- --- --- ---
Loss .................... --- --- --- 1 ---
--- --- --- --- ---
Total .............. $ 312 --- 83 27 71
--- --- --- --- ---
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 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) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Non-accruing loans:
Real estate:
One-to-four family................. $ 235 196 178 80 524
Multi-family....................... --- --- --- --- ---
Commercial real estate............. 83 85 --- --- ---
Consumer........................... 7 32 57 58 81
Commercial business................ 13 128 --- --- ---
--- --- --- --- ---
Total............................ 338 441 235 138 605
--- --- --- --- ---
Accruing loans delinquent 90
days or more:
One-to-four family.................. --- --- --- 23 ---
Restructured loans:
Multi-family........................ --- 94 199 --- 280
Foreclosed assets:
Real estate:
One-to-four family................. 23 315 64 316 ---
Commercial real estate............. --- --- --- 95 99
Construction or development........ --- --- --- --- 88
Consumer........................... --- --- --- 10 ---
------ ------ ------ ------ ------
Total............................ 23 315 64 421 187
------ ------ ------ ------ ------
Total non-performing assets........... $ 361 850 498 582 1,072
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total as a percentage of total
assets............................... 0.07% 0.16% 0.10% 0.14% 0.26%
Total non-performing loans............ $ 338 $ 535 $ 434 $ 161 $ 885
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total as a percentage of total
loans receivable, net................ 0.10% 0.17% 0.16% 0.07% 0.37%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $34,638. The amounts that were included in
interest income on such loans in 1996 were $21,139.
Total non-performing assets were $361,000 at December 31, 1996, a decrease
of $489,000, compared to
16
$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.
Total non-performing assets were $850,000 at December 31, 1995, an increase
of $352,000, compared to $498,000 at December 31, 1994. The increase was
principally the result of foreclosing on $315,000 of one-to-four family real
estate, troubled commercial business loans of $128,000, and $85,000 of troubled
commercial real estate.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above, as of December 31, 1996 there were $132,000 loans with
respect to which 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 and 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) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Balance at beginning of year .............. $ 2,191 1,893 1,489 831 883
CHARGE-OFFS
Real estate:
One-to-four family ...................... --- (1) (6) (1) (25)
Multi-family ............................ (88) --- --- --- (185)
Commercial real estate .................. --- --- --- --- (7)
Construction or development ............. --- --- --- --- (70)
Consumer ................................ (1) --- --- (1) (1)
Commercial business ..................... (61) (1) --- --- ---
-------- -------- ------- -------- --------
(150) (2) (6) (2) (288)
-------- -------- ------- -------- --------
RECOVERIES
Real estate:
One-to-four family ...................... --- --- --- --- 2
Commercial real estate .................. --- --- --- --- ---
Consumer ................................ --- --- --- --- 1
-------- -------- ------- -------- --------
--- --- --- --- 3
-------- -------- ------- -------- --------
Net charge-offs ........................... (150) (2) (6) (2) (285)
Additions charged to operations ........... 300 300 410 660 233
-------- -------- ------- -------- --------
Balance at end of year .................... $2,341 2,191 1,893 1,489 831
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
Ratio of net charge-offs during the year to
average loans outstanding during the
year ..................................... 0.05% --- --- --- 0.12%
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
Ratio of allowance for losses on loans to
total non-performing loans, at end of
year ..................................... 692.60% 409.13% 436.52% 924.84% 93.90%
-------- -------- ------- -------- --------
-------- -------- ------- -------- --------
17
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
December 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
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 .......... $ 496 90.19% $ 452 90.62% $ 475 92.18%
Multi-family ................ 8 0.08 21 0.11 21 0.14
Commercial real estate....... 113 2.22 125 2.71 128 1.80
Construction or development . 104 0.98 153 1.58 84 1.31
Consumer .................... 473 5.87 286 4.66 280 4.14
Commercial business ......... 29 0.66 37 0.32 27 0.43
Unallocated ................. 1,118 --- 1,117 --- 878 ---
------ ------ ------ ------ ------ ------
Total .................... $ 2,341 100.00% $ 2,191 100.00% $ 1,893 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
December 31,
------------------------------------------------
1993 1992
------------ ------------
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 .......... $ 374 92.18% $ 208 89.86%
Multi-family ................ 10 0.14 18 0.28
Commercial real estate....... 140 1.80 198 2.61
Construction or development . 1 1.31 2 2.76
Consumer .................... 234 4.14 173 4.02
Commercial business ......... 30 0.43 32 0.47
Unallocated ................. 700 --- 200 ---
------ ------ ------ ------
Total .................... $ 1,489 100.00% $ 831 100.00%
------ ------ ------ ------
------ ------ ------ ------
18
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.
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, 1996, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 12.48%. 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, 1996, 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 ("FHLB") of Des Moines 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 Notes 4 and 5 of the Notes to Consolidated Financial Statements in the
Annual Report for additional information regarding HMN's securities portfolio.
On January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. See Note 2 of the Notes to Consolidated Financial Statements in the
Annual Report for the impact of adopting the accounting standard.
19
The following table sets forth the composition of HMN's securities
portfolio, excluding mortgage-backed and related securities, at the dates
indicated.
December 31,
---------------------------------------------------
1996
------------------------------------
Amortized Adjusted Market % of
(DOLLARS IN THOUSANDS) Cost To Value Total
----- ----- ------ -----
Securities available for sale:
U.S. government and agency
obligations .......................... $ 29,600 (322) 29,278 49.93%
Municipal obligations .............. --- --- --- ---
Corporate debt ..................... 1,091 1 1,092 1.86
Corporate equity(1) ................ 7,796 386 8,182 13.96
Stock of federal agencies(1)........ 3,874 49 3,923 6.69
Securities held to maturity:
U.S. agency obligations ............ --- --- ---
Municipal obligations .............. --- --- ---
Corporate debt ..................... 1,000 1,001 1.71
---------- --------- -------
Subtotal ......................... 43,361 43,476 74.15
FHLB stock ........................... 5,434 5,434 9.27
---------- --------- -------
Total investment securities
and FHLB stock .................. 48,795 48,910 83.42
---------- --------- -------
Average remaining life of investment
securities excluding FHLB stock ...... 3.4 years
Other Interest-Earning Assets:
Cash equivalents ................... 9,718 9,718 16.58
Total ............................ $ 58,513 58,628 100.00%
---------- --------- -------
---------- --------- -------
Average remaining life or term
to repricing of investment securities
and other interest-earning assets,
excluding FHLB stock ................ 2.8 years
December 31,
---------------------------------------------------
1995
---------------------------------
Amortized Adjusted Market % of
(DOLLARS IN THOUSANDS) Cost To Value Total
----- ----- ------ -----
Securities available for sale:
U.S. government and agency
obligations .......................... $ 21,896 (566) 21,330 50.58%
Municipal obligations .............. 1,600 1 1,601 3.80
Corporate debt ..................... 851 9 860 2.04
Corporate equity(1) ................ 6,898 174 7,072 16.77
Stock of federal agencies(1)........ 1,004 37 1,041 2.47
Securities held to maturity:
U.S. agency obligations ............ --- --- ---
Municipal obligations .............. 228 229 0.54
Corporate debt ..................... 2,999 2,995 7.10
---------- --------- -------
Subtotal ......................... 35,476 35,128 83.30
FHLB stock ........................... 3,802 3,802 9.02
Total investment securities
and FHLB stock .................. 39,278 38,930 92.32
---------- --------- -------
Average remaining life of investment
securities excluding FHLB stock ...... 3.0 years
Other Interest-Earning Assets:
Cash equivalents ................... 3,238 3,238 7.68
Total ........................... $42,516 42,168 100.00%
---------- --------- -------
---------- --------- -------
Average remaining life or term
to repricing of investment securities
and other interest-earning assets,
excluding FHLB stock ................ 2.7 years
December 31,
---------------------------------------------------
1994
---------------------------------
(DOLLARS IN THOUSANDS) Amortized Adjusted Market % of
Cost To Value Total
----- ----- ----- -----
Securities available for sale:
U.S. government and agency
obligations .......................... $ 23,823 (2,266) $ 21,557 43.20%
Municipal obligations .............. 3,001 (36) 2,965 5.94
Corporate debt ..................... 701 (10) 691 1.38
Corporate equity(1) ................ 5,610 (600) 5,010 10.04
Stock of federal agencies(1)........ 1,004 (20) 984 1.97
Securities held to maturity:
U.S. agency obligations ............ 2,000 1,945 3.90
Municipal obligations .............. --- --- ---
Corporate debt ..................... 6,008 5,875 11.77
---------- --------- -------
Subtotal ......................... 42,147 39,027 78.20
FHLB stock ........................... 3,039 3,039 6.09
---------- --------- -------
and FHLB stock .................. 45,186 42,066 84.29
---------- --------- -------
Average remaining life of investment
securities excluding FHLB stock ...... 2.4 years
Other Interest-Earning Assets:
Cash equivalents ................... 7,842 7,842 15.71%
Total ........................... $ 53,028 49,908 100.00%
---------- --------- -------
---------- --------- -------
Average remaining life or term
to repricing of investment securities
and other interest-earning assets,
excluding FHLB stock ................ 2.0 years
(1)Average life assigned to corporate equity holdings and stock of federal
agencies is five years.
20
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, 1996
--------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 No Stated Total
1 Year Years Years Maturity Securities
---------- ---------- ---------- ---------- ---------------------------------
Amortized Amortized Amortized Amortized Amortized Adjusted Market
(DOLLARS IN THOUSANDS) Cost Cost Cost Cost Cost To Value
--------- ---------- ---------- ----------- --------- --------- --------
Securities available for sale:
U.S. government securities... $ 2,150 27,450 --- --- 29,600 (322) 29,278
Corporate debt............... 200 476 415 --- 1,091 1 1,092
Corporate equity............. --- --- --- 7,796 7,796 386 8,182
Stock of federal agencies.... --- --- --- 3,874 3,874 49 3,923
Securities held to maturity:
Corporate debt............... 1,000 --- --- --- 1,000 1 1,001
----- ----- ---- ----- ------ ------
Total stock.................... $ 3,350 27,926 415 11,670 43,361 43,476
----- ------ ----- ------ ------ ------
----- ------ ----- ------ ------ ------
Weighted average yield......... 5.93% 6.00% 9.02% 5.92% 6.00%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
21
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. At December 31, 1996, HMN had $135.2 million of
mortgage-backed and related securities (including $133.4 million securities
available for sale).
At December 31, 1996 HMN had $43.5 million invested in CMOs which have
floating interest rates that change either monthly or quarterly compared to
$69.8 million at December 31, 1995. HMN decreased its investment in floating
rate CMOs in order to invest in mortgage loans and fund the purchase of HMN
common stock.
The projected weighted average life of the $102.4 million fixed rate CMO
and mortgage-backed security portfolio is approximately 4.0 years using median
prepayment speeds projected by the Bloomberg security system. The contractual
maturities of the mortgage-backed and related securities portfolio without any
prepayment assumptions at December 31, 1996 is as follows:
December 31,
1996
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.. $ --- 315 1,081 412 1,808
Federal National Mortgage Association... --- --- 462 522 984
Collateralized Mortgage Obligations..... 2,625 3,483 26,380 98,075 130,563
Securities held to maturity:
Federal Home Loan Mortgage Corporation.. 467 194 690 53 1,404
Federal National Mortgage Association... 60 98 --- --- 158
Other mortgage-backed securities........ --- --- --- 244 244
------- ------ ------- ------- -------
Total................................ $ 3,152 4,090 28,613 99,306 135,161
------- ------ ------- ------- -------
------- ------ ------- ------- -------
Weighted average yield.................. 6.72% 7.98% 7.11% 6.93% 6.99%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
At December 31, 1996, HMN did not have any non-agency mortgage-backed or
related securities in excess of 10% of its stockholders' equity, except for an
$11.9 million collateralized mortgage obligation issued by Bear Stearns with an
AAA rating by Moody's.
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.
To assess price volatility, the Federal Financial Institutions Examination
Council ("FFIEC") adopted a policy in 1992 which requires an annual "stress"
test of mortgage derivative securities. This policy, which has been adopted by
the OTS, requires the Bank to annually test its CMOs and other mortgage-related
securities to determine whether they are "high-risk" or "nonhigh-risk
securities". At December 31, 1996, the Bank had $17.4 million of CMO's which
were classified as high-risk securities under the OTS guidelines.
22
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. For information regarding the
carrying and market values of HMN's mortgage-backed and related securities
portfolio, see Notes 4 and 5 of the Notes to Consolidated Financial Statements
in the Annual Report.
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) 1996 1995 1994
------- -------- --------
Opening balance................ $ 373,539 350,575 353,581
Deposits....................... 351,330 339,781 384,406
Withdrawals.................... 378,009 331,481 400,090
Interest credited.............. 15,617 14,664 12,678
------- ------- -------
Ending balance............... 362,477 373,539 350,575
------- ------- -------
Net increase (decrease)........ $ (11,062) 22,964 (3,006)
-------- ------- -------
-------- ------- -------
Percent increase (decrease).... (2.96)% 6.55% (0.85)%
-------- ------- -------
-------- ------- -------
23
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:
1996 1995 1994
-------------------- -------------------- --------------------
Percent Percent Percent
(DOLLARS IN THOUSANDS) Amount of Total Amount of Total Amount of Total
TRANSACTIONS AND SAVINGS DEPOSITS(1): -------- -------- -------- -------- -------- --------
Non-interest checking . . . . . . . . . $ 2,389 0.66% $ 2,505 0.67% $ 1,767 0.50%
NOW Accounts - 2.01%(2) . . . . . . . . 17,589 4.85 15,997 4.28 14,456 4.12
Passbook Accounts - 2.50% . . . . . . . 30,070 8.29 29,384 7.86 32,094 9.15
Money Market Accounts - 2.83% . . . . . 16,533 4.56 18,472 4.95 21,984 6.28
--------- --------- --------- --------- --------- --------
Total Non-Certificates . . . . . . . $ 66,581 18.36% $ 66,358 17.76% $ 70,301 20.05%
--------- --------- --------- --------- --------- --------
CERTIFICATES:
3.00 - 3.99% . . . . . . . . . . . . $ 425 0.12% $ 0 0.00% $ 19,431 5.54%
4.00 - 4.99% . . . . . . . . . . . . 22,553 6.22 22,440 6.01 72,449 20.67
5.00 - 5.99% . . . . . . . . . . . . 168,040 46.36 152,971 40.95 111,940 31.93
6.00 - 6.99% . . . . . . . . . . . . 76,704 21.16 89,754 24.03 40,597 11.58
7.00 - 7.99% . . . . . . . . . . . . 28,077 7.75 40,721 10.90 21,700 6.19
8.00 - 8.99% . . . . . . . . . . . . 96 0.03 1,294 0.35 12,061 3.44
9.00 - 9.99% . . . . . . . . . . . . 1 --- 1 0.00 462 0.13
10.00% and over . . . . . . . . . . . --- --- 0 0.00 1,634 0.47
--------- --------- --------- --------- --------- --------
Total Certificates . . . . . . . . . 295,896 81.64 307,181 82.24 280,274 79.95
--------- --------- --------- --------- --------- --------
Total Deposits . . . . . . . . . . $ 362,477 100.00% $ 373,539 100.00% $ 350,575 100.00
--------- --------- --------- --------- --------- --------%
--------- --------- --------- --------- --------- --------
- -----------------------
(1)Reflects rates paid on transaction and savings deposits at December 31, 1996.
(2)The rate on NOW Accounts for 1995 and 1994 was 2.22%.
24
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
3.00- 4.00- 5.00- 6.00-
(DOLLARS IN THOUSANDS) 3.99% 4.99% 5.99% 6.99%
Certificate accounts maturing in quarter ----- ----- ----- -----
ending:
March 31, 1996 . . . . . . . . . . . . $ 413 12,324 30,530 7,446
June 30, 1996 . . . . . . . . . . . . . 12 6,593 28,824 6,653
September 30, 1996 . . . . . . . . . . --- 1,406 23,632 7,633
December 31, 1996 . . . . . . . . . . . --- 1,635 14,098 4,257
March 31, 1997 . . . . . . . . . . . . --- 403 13,262 7,952
June 30, 1997 . . . . . . . . . . . . . --- 78 11,894 11,956
September 30, 1997 . . . . . . . . . . --- 32 10,187 9,227
December 31, 1997 . . . . . . . . . . . --- 55 10,568 1,044
March 31, 1998 . . . . . . . . . . . . --- --- 8,426 2,382
June 30, 1998 . . . . . . . . . . . . . --- 27 4,758 2,351
September 30, 1998 . . . . . . . . . . --- --- 3,220 2,221
December 31, 1998 . . . . . . . . . . . --- --- 813 514
Thereafter . . . . . . . . . . . . . . --- --- 7,828 13,068
------- ------- ------- -------
Total . . . . . . . . . . . . . . . $ 425 22,553 168,040 76,704
------- ------- ------- -------
------- ------- ------- -------
Percent of total . . . . . . . . . . 0.14% 7.62% 56.80% 25.92%
------ ------ ------ ------
------ ------ ------ ------
7.00- 8.00- 9.00- Percent
(DOLLARS IN THOUSANDS) 7.99% 8.99% 9.99% Total of Total
Certificate accounts maturing in quarter ----- ----- ----- ----- --------
ending:
March 31, 1996 . . . . . . . . . . . . 455 --- --- 51,168 17.28
June 30, 1996 . . . . . . . . . . . . . 277 --- --- 42,359 14.32
September 30, 1996 . . . . . . . . . . 5,386 15 --- 38,072 12.87
December 31, 1996 . . . . . . . . . . . 12,474 --- --- 32,464 10.97
March 31, 1997 . . . . . . . . . . . . 4,734 1 --- 26,352 8.91
June 30, 1997 . . . . . . . . . . . . . 1,801 5 --- 25,734 8.70
September 30, 1997 . . . . . . . . . . 1,322 16 --- 20,784 7.02
December 31, 1997 . . . . . . . . . . . 1,357 20 --- 13,044 4.41
March 31, 1998 . . . . . . . . . . . . 150 27 --- 10,985 3.71
June 30, 1998 . . . . . . . . . . . . . 93 12 1 7,242 2.45
September 30, 1998 . . . . . . . . . . 28 --- --- 5,469 1.85
December 31, 1998 . . . . . . . . . . . --- --- --- 1,327 0.45
Thereafter . . . . . . . . . . . . . . ---
--- --- 20,896 7.06
------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . . 28,077 96 1 295,896 100.00%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Percent of total . . . . . . . . . . 9.49% 0.03% 0.00% 100.00%
------ ----- ------ ------
------ ----- ------ ------
25
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,
1996.
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 . . . . . . . . . . $ 39,365 36,325 62,112 122,832 260,634
Certificates of deposit of
$100,000 or more . . . . . . . . . 2,571 1,953 6,241 7,498 18,263
Public funds(1) . . . . . . . . . . 9,232 4,082 2,185 1,500 16,999
------ ------ ------ ------- -------
Total certificates of
deposit . . . . . . . . . . . . $ 51,168 42,360 70,538 131,830 295,896
------ ------ ------ ------- -------
------ ------ ------ ------- -------
- ---------------
(1)Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's deposits, see
Note 11 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 Management on page 21 of the Annual Report.
BORROWINGS. The Bank's other available sources of funds include advances
from the Federal Home Loan Bank ("FHLB") of Des Moines and other borrowings. As
a member of the FHLB of Des Moines, the Bank is required to own capital stock in
the FHLB of Des Moines and is authorized to apply for advances from the FHLB of
Des Moines. Each FHLB credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLB of Des Moines 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, 1996, the Bank had $106.1
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 $11.5 million for liquidity purposes. See "Financial
Review - Federal Home Loan Bank Advances" and Note 12 of the Notes to
Consolidated Financial Statements in the Annual Report.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings for the periods indicated.
Year Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
MAXIMUM BALANCE:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . .$ 106,436 74,534 52,343
FHLB short-term borrowings and open line of credit . . . . . 64,429 42,429 7,329
AVERAGE BALANCE:
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . 89,656 65,069 40,121
FHLB short-term borrowings . . . . . . . . . . . . . . . . . 47,949 20,812 2,719
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
26
December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
FHLB short-term borrowings and open line of credit . . . . . . . . $ 46,429 33,429 6,429
Weighted average interest rate of
FHLB short-term borrowings and open line of credit . . . . . . . . 5.52% 6.05% 5.75%
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 which a federal savings
bank may engage in 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. At December 31, 1996, the Bank's liability related to
OIAI was $32,700. OIAI recorded a net loss of $6,560 for the year ended
December 31, 1996.
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. 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 those deposits is principally from money market and mutual
funds, securities firms, commercial banks and other savings institutions located
in the same communities. 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. Based upon deposits at June 30, 1994, the latest
date such information was available, Home Federal's share of deposits held by
thrifts, commercial banks and credit unions in Fillmore, Freeborn, Houston,
Mower, Olmsted and Winona Counties, Minnesota was 21.9%, 17.1%, 9.3%, 17.4%,
6.3% and 3.8%, respectively.
EMPLOYEES
At December 31, 1996, HMN had a total of 109 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.
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 unless otherwise
27
indicated. Such individuals have held their current positions for at least five
years.
DWAIN C. JORGENSEN. Mr. Jorgensen, age 48, is Vice President, Controller
and Chief Accounting Officer of HMN and the Bank. Mr. Jorgensen has held such
positions with the Bank since 1989. From 1983 to 1989, Mr. Jorgensen was an
Assistant Vice President and Operations Officer with the Bank.
SUSAN K. KOLLING. Mrs. Kolling, age 45, is Senior Vice President of HMN
and is Senior Vice President of Marketing of the Bank, a position she has held
since 1995. Prior to such time, she served as Vice President from 1992 through
1994 and as a Loan Officer from 1981 through 1991. Mrs. Kolling began her
career with the Bank in 1969.
TIMOTHY P. JOHNSON. Mr. Johnson, age 44, is Treasurer of HMN and the Bank,
a position he has held since 1992. From 1983 to 1992, Mr. Johnson was Chief
Financial Officer of St. Louis Bank for Savings, Duluth, Minnesota.
ROXANNE M. HELLICKSON. Mrs. Hellickson, age 36, is Vice President/Loan
Administrator and Corporate Secretary of HMN and the Bank. She served as
Assistant Secretary of the Bank from 1992 to 1994 and was secretary to the
Bank's President and a loan officer from 1989 to 1992. Mrs. Hellickson began
her career with the Bank in 1979.
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 examination of the Bank was dated April 1996. The
Bank has not been scheduled for an examination in 1997. 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. 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. Savings associations (unlike the Bank) that are classified as
"troubled" (I.E., having a supervisory rating of "4" or "5" or subject to a
conservatorship) are required to pay a 50% premium over the standard assessment.
The Bank's OTS assessment for the year ended December 31, 1996 was approximately
$118,000.
28
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, 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, 1996, the Bank's lending limit under this restriction was $9.1
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
proposed safety and soundness standards on matters such as loan underwriting and
documentation, internal controls and audit systems, interest rate risk exposure,
compensation and other employee benefits. 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 proposal also requires savings
and loan holding companies to ensure that transactions and relationships with
their subsidiary savings associations do not have a detrimental effect on the
safe and sound operation of the association. No assurance can be given as to
the final form of the proposed regulations.
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 the FDIC. 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
29
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
FDICIA also requires the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC adopted a
transitional risk-based assessment system, effective January 1, 1993, under
which all insured depository institutions are placed into one of nine categories
and assessed insurance premiums, ranging from .23% to .31% of deposits, based
upon their level of capital and supervisory evaluation. The permanent system,
adopted in June 1993 and effective January 1, 1994, continued the risk
classification system established under the transitional rule. Under the
system, 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.
The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 30,
1996. DIFA addressed the inadequate funding of the (SAIF). In order to
recapitalize the SAIF, DIFA imposed a one-time assessment on all thrift
institutions. The Bank's assessment was a pretax charge of $2,351,563 and was
recognized in the third quarter of 1996.
DIFA also addressed the funding for the Financing Corp. (FICO) bonds.
Thrifts will 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.
DIFA proposed that the Bank Insurance Fund (BIF) and SAIF be merged on
January 1, 1999, provided no insurance depository institution is a savings
association on that date. DIFA also directed the Secretary of the Treasury to
present recommendations to Congress for establishment of a common depository
institution charter by March 31, 1997. At this time, HMN does not know what
effect, if any, the proposed legislation or charter revisions will have on
future operations.
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, 1996, the Bank had $289,000 of
mortgage servicing rights which were required to be deducted from tangible
capital.
30
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 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 subsidiaries the debt and
equity investments in such subsidiaries are deducted from assets and capital,
with a five-year transition period beginning on July 1, 1990, for investments
made before April 12, 1989. The subsidiary of the Bank is an includable
subsidiary.
At December 31, 1996, the Bank had tangible capital of $61.9 million, or
11.5% of adjusted total assets, which is $53.9 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) a limited
amount of purchased credit card relationships. 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.
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the safety and soundness rating
system for savings associations will be permitted to operate at or near the
regulatory minimum leverage ratio of 3%. All other savings associations will be
required to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess
each individual savings association through the supervisory process on a case-
by-case basis to determine the applicable requirement. No assurance can be
given as to the final form of any such regulation, the date of its effectiveness
or the requirement applicable to the Bank.
At December 31, 1996, the Bank had core capital equal to $61.9 million, or
11.5%, of adjusted total assets, which is $45.8 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
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, 1996, the Bank had $2.3 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. The Bank had no such exclusions
from capital and assets at December 31, 1996.
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.
31
On December 31, 1996, the Bank had total "risk-based" capital of $64.3
million (including $61.9 million in core capital and $2.3 million in qualifying
supplementary capital) and risk-weighted assets of $234.5 million, or total
capital of 27.4% of risk-weighted assets. This amount was $45.6 million above
the 8% requirement in effect on that date.
Under FDICIA, all the federal banking agencies, including the OTS, must
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
expected loss on multi-family loans. Such standards must be adopted within 18
months of 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. Based upon an IRR component
analysis at December 31, 1996, the Bank was deemed to have more than "normal"
interest rate risk and may, at some time in the future, be required to deduct an
amount from capital. 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% core ratio, a 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 core capital ratios
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 capital 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, within 90 days after it
becomes critically undercapitalized.
32
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, 1996 the Bank would be considered to be "well capitalized"
under the prompt corrective actions provisions mentioned above. See Note 16
"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.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of HMN, the Bank will also be required to
give the OTS 30 days' notice prior to declaring any dividend on its stock. The
OTS may object to the distribution during that 30-day period based on
33
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMELS 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined in the OTS prompt corrective action regulations) following the proposed
distribution. Savings associations that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
A savings association will be considered in troubled condition if it has a
CAMELS rating of 4 or 5, is subject to an enforcement action relating to its
safety and soundness or financial viability or has been informed in writing by
the OTS that it is in troubled condition. As under the current rule, the OTS
may object to a capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
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 assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity Management" 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 5%.
In addition, short-term liquid assets (E.G., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 7.4% and a short-term liquid
asset ratio of 1.9%.
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
34
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. Such assets primarily consist of residential housing
related loans and investments. At December 31, 1996, 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 immediately ineligible to receive any
new FHLB borrowings and 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 must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. 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 to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most 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 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 such restrictions unless such other associations which qualify as a
QTL 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
35
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 checking accounts). At December
31, 1996, 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 of Des Moines, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB 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 FHLB System. It makes loans to
members (I.E., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. 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 FHLB. 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, 1996, the Bank had $5.4 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 7.95% and were 7.01% for calendar
year 1996. For the year ended December 31, 1996, dividends paid by the FHLB of
Des Moines to the Bank totaled $327,000, which constitute a $74,000 increase
from the amount of dividends received in 1995.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings
36
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. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. For the year ended December 31, 1996 the amount of the bad
debt reserve deduction for "qualifying real property loans" (generally loans
secured by improved real estate) may be computed only under the experience
method. Prior to January 1, 1996 the bad debt reserve was allowed to be
calculated on either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that is used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower current federal income
tax rate than that applicable to corporations (generally approximately 32%
assuming the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four-year period. No representation
can be made as to whether the Bank will meet the 60% test for subsequent taxable
years.
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. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
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 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, 1996, the Bank's Excess for tax
37
purposes totaled approximately $6.6 million.
HMN and its subsidiaries file consolidated federal income tax returns on a
fiscal year basis using the accrual method of accounting. Savings associations,
such as the Bank, that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
HMN was incorporated in 1994 and filed its first consolidated Federal
income tax return with its subsidiaries for the year ended December 31, 1994
during 1995. The return required to be filed for 1996 has been extended and
will be filed by August 1997. 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%.
In 1990, Minnesota changed its alternative minimum tax system. The tax is
now based upon Minnesota Alternative Minimum Taxable Income as opposed to the
Minnesota Apportionment Factors method which was in effect from 1987 through
1989. The Minnesota Alternative Minimum Tax rate is 5.8%.
The Bank and it subsidiaries have not been audited by the Minnesota
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.
38
ITEM 2. PROPERTIES
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1996. At December 31, 1996, the
Bank's premises had an aggregate net book value of approximately $2.8 million.
YEAR OWNED OR NET BOOK VALUE AT
LOCATION ACQUIRED LEASED DECEMBER 31, 1996(1)
- -------------------------- -------- -------- --------------------
(In Thousands)
MAIN OFFICE:
101 North Broadway 1975 Owned 371
Spring Valley, Minnesota
FULL SERVICE BRANCHES:
201 Oakland Avenue 1960 Owned 195
Austin, Minnesota
Crossroads Shopping Center 1962 Owned 490
Rochester, Minnesota
4th & Center 1973 Owned 135
Winona, Minnesota
208 South Walnut 1975 Owned 94
LaCrescent, Minnesota
1110 6th St., NW 1982 Owned 882
Rochester, Minnesota
143 West Clark Street 1993 Owned 598
Albert Lea, Minnesota
MORTGAGE BROKERAGE OFFICE:
9973 Valley View Road 1996 Leased ---
Eden Prairie, Minnesota
- ------------------------
(1) Does not include $727,248 of net furniture and equipment distributed
between all the above offices or its subsidiary.
During 1997 the Bank plans to build two retail banking facilities, one in
Spring Valley and the other in Winona, at an estimated cost of $2.5 million.
The facilities will replace the existing retail facilities in both locations.
HMN and the Bank believe that their remaining facilities are adequate to meet
their present needs.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at December 31, 1996 was
approximately $405,000.
39
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 3, 24 and 48 of the Annual Report to Security
Holders for the year ended December 31, 1996 is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information on page 12 of the Annual Report to Security Holders for the
year ended December 31, 1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information on pages 13 through 24 of the Annual Report to Security
Holders for the year ended December 31, 1996 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 25 through 47 of the Annual Report to Security
Holders for the year ended December 31, 1996 is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on pages 4 through 7 of the Registrant's definitive Proxy
Statement dated March 13, 1997 is incorporated herein by reference. See
"Business - Executive Officers" in Part I of the Form 10-K for information
regarding executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The information on pages 8 through 14 of the Registrant's definitive Proxy
Statement dated March 13, 1997 is incorporated herein be reference, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information on pages 2 through 4 of the Registrant's definitive Proxy
Statement dated March 13, 1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
41
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, 1996, is
incorporated by reference in this Form 10-K Annual Report as Exhibit
13.
Pages in
1996 Annual
Annual Report Section Report
--------------------- -----------
Five Year Consolidated Financial Highlights 12
Consolidated Balance Sheets --
December 31, 1996 and 1995 25
Consolidated Statements of Income --
Each of the Years in the Three-Year
Period Ended December 31, 1996 26
Consolidated Statement of Stockholders'
Equity -- Each of the Years in the
Three-Year Period Ended December 31, 1996 27
Consolidated Statements of Cash Flows --
Each of the Years in the Three-Year
Period Ended December 31, 1996 28
Notes to Consolidated Financial Statements 29 - 43
Independent Auditors' Report 44
Other Financial Data 45
Selected Quarterly Financial Data 46 - 47
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.
42
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 Plan of acquisition, reorganization, Not applicable Not applicable
arrangement, liquidation or
succession
3 (i) Articles of Incorporation * Not applicable
(ii) By-laws * Not applicable
4 Instruments defining the rights of security * Not applicable
holders, including indentures
9 Voting trust agreement Not applicable Not applicable
10.1 Employment agreement for Mr. Weise ** Not applicable
dated June 29, 1994
10.2 Employment agreement for Mr. Gardner ** Not applicable
dated June 29, 1994
10.3 Directors Deferred Compensation Plan ** Not applicable
10.4 1995 Recognition and Retention Plan *** Not applicable
10.5 1995 Stock Option and Incentive Plan *** Not applicable
11 Statement re: Computation of per share 11 Filed electronically
earnings
12 Statement re: Computation of ratios Not applicable Not applicable
13 Annual Report to Security Holders 13 Filed electronically
16 Letter re: Change in certifying accountant Not applicable Not applicable
18 Letter re: Change in accounting principles Not applicable Not applicable
21 Subsidiaries of Registrant 21 Filed electronically
43
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
- -------------- -------------------------------------------- --------------- ----------------
22 Published report regarding matters Not applicable Not applicable
submitted to vote of security holders
23 Consent of KPMG Peat Marwick LLP 23 Filed electronically
dated March 25, 1997
24 Power of Attorney Not applicable Not applicable
27 Financial Data Schedule 27 Filed electronically
28 Information from reports furnished to None Not applicable
state insurance regulatory authorities
99 Additional exhibits None Not applicable
----------------
* Filed April 1, 1994, as exhibits to the Registrant's Form S-1 registration
statement (Registration No. 33-77212) pursuant to the Securities Act of 1933.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
** Filed as an exhibit to the Registrant's Form 10-K for 1994 (file no. 0-
24100). All previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
*** Filed as an exhibit to the Registrant's Form 10-K for 1995 (file no. 0-
24100). All previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
44
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, 1997 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/ Keith A. Hagen
---------------------------- --------------------------
Roger P. Weise, Chairman of the Board, Keith A. Hagen, Director
President and Chief Executive Officer
(Principal Executive and Operating
Officer)
Date: March 28, 1997 Date: March 28, 1997
---------------------------- -------------------------
By: /s/ Irma R. Rathbun By: /s/ Timothy R. Geisler
---------------------------- --------------------------
Irma R. Rathbun, Director Timothy R. Geisler, Director
Date: March 28, 1997 Date: March 28, 1997
---------------------------- -------------------------
By: /s/ M. F. Schumann By: /s/ James B. Gardner
---------------------------- --------------------------
M.F. Schumann, Director James B. Gardner,
Executive Vice President and
Director
(Principal Financial Officer)
Date: March 28, 1997 Date: March 28, 1997
---------------------------- -------------------------
By: /s/ Dwain C. Jorgensen
Dwain C. Jorgensen,
Vice President and Controller
(Principal Accounting Officer)
Date: March 28, 1997
----------------------------
45
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 Peat Marwick LLP Filed electronically
dated March 25, 1997
27 Financial Data Schedule Filed electronically
46