UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[x] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2015 |
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
1016 Civic Center Drive Northwest |
55901 |
Rochester, Minnesota |
(Zip Code) |
(Address of principal executive offices) |
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(507) 535-1200 |
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Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered |
Common Stock, par value $.01 per share |
NASDAQ Global Market |
Securities registered pursuant to section 12(g) of the Act:
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None |
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|
(Title of class) |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [ ] NO [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES [ ] NO [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 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 ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
[ ] |
Accelerated filer |
[ ] |
Non-accelerated filer |
[ ] |
Smaller reporting company |
[ X ] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [ X ]
As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $36.0 million based on the closing stock price of $11.79 on such date as reported on the NASDAQ Global Market.
As of February 22, 2016, the number of outstanding shares of common stock of the registrant was 4,486,299.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s annual report to stockholders for the year ended December 31, 2015 (Annual Report), are incorporated by reference in Parts I and II of this Form 10-K. Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the registrant’s fiscal year ended December 31, 2015 are incorporated by reference in Part III of this Form 10- K.
TABLE OF CONTENTS
PART I |
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Page | ||
Item 1. |
Business |
5 |
Item 1A. |
Risk Factors |
31 |
Item 1B. |
Unresolved Staff Comments |
41 |
Item 2. |
Properties |
41 |
Item 3. |
Legal Proceedings |
42 |
Item 4. |
Mine Safety Disclosures |
42 |
PART II |
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Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
42 |
Item 6. |
Selected Financial Data |
42 |
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
42 |
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
42 |
Item 8. |
Financial Statements and Supplementary Data |
42 |
Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
42 |
Item 9A. |
Controls and Procedures |
43 |
Item 9B. |
Other Information |
43 |
PART III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
44 |
Item 11. |
Executive Compensation |
44 |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
44 |
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
44 |
Item 14. |
Principal Accounting Fees and Services |
44 |
PART IV |
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Item 15. |
Exhibits, Financial Statement Schedules |
45 |
Signatures |
46 | |
Index to Exhibits |
47 |
Forward-Looking Statements
The information presented or incorporated by reference in this Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to increasing our core deposit relationships, improving credit quality, reducing non-performing assets, growing earning assets, generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for improvement thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; our ability to complete the acquisition of certain assets from Deerwood Bank and integrate its operations; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and mix of interest-earning assets; the amount and mix of interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of dividends paid by the Federal Home Loan Bank (FHLB) on its stock; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer trust preferred securities held by the Bank; the ability of the Bank to pay dividends to HMN; the ability of HMN to pay the principal and interest payments on its third party note payable; the ability to remain well capitalized; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.
A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including additional changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with alternate funding sources, including changes in collateral advance rates and policies of the FHLB; technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company; the availability of internal and, as required, external sources of funding; acquisition integration costs; our ability to attract and retain employees; or other significant uncertainties. For additional discussion of these and certain other risks and uncertainties applicable to the Company, see the “Risk Factors” sections of this Form 10-K. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements.
Any forward-looking statement speaks only as of the date hereof and we undertake no duty to update any of the forward-looking statements after the date of this Form 10-K.
PART I
ITEM 1. |
BUSINESS |
General
HMN Financial, Inc. (HMN and, together with its subsidiaries, the Company) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank). The Bank has a community banking philosophy and operates retail banking and loan production facilities in Minnesota, Iowa, and Wisconsin. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA), which offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which was inactive in 2015, but has acted as an intermediary for the Bank in holding and operating certain foreclosed properties. HMN was incorporated in Delaware in 1994.
As a community-oriented financial institution, the Company seeks to serve the financial needs of communities in its market area. The Company’s business involves attracting deposits from the general public and businesses and using such deposits to originate or purchase one-to-four family residential, commercial real estate, and multi-family mortgage loans as well as consumer, construction, and commercial business loans. The Company also invests in mortgage-backed and related securities, U.S. government agency obligations and other permissible investments. The executive offices of the Company are located at 1016 Civic Center Drive Northwest, Rochester, Minnesota 55901. Its telephone number at that address is (507) 535-1200. The Company’s website is www.hmnf.com. Information contained on the Company’s website is expressly not incorporated by reference into this Form 10-K.
Market Area
The Company serves the southern Minnesota counties of Dodge, Fillmore, Freeborn, Houston, Mower, Olmsted and Winona and portions of Steele, Goodhue and Wabasha through its corporate office located in Rochester, Minnesota and its eleven branch offices located in Albert Lea, Austin, Kasson (2), La Crescent, Rochester (4), Spring Valley and Winona, Minnesota. The portion of the Company’s southern Minnesota market area consisting of Rochester and the contiguous communities is composed of primarily urban and suburban communities, while the balance of the Company's southern Minnesota market area consists primarily of rural areas and small towns. Primary industries in the Company's southern Minnesota market area include manufacturing, agriculture, health care, wholesale and retail trade, service industries and education. Major employers include the Mayo Clinic, Hormel Foods (a food processing company), and IBM. The Company's market area is also the home of Winona State University, Rochester Community and Technical College, University of Minnesota - Rochester, Winona State University - Rochester Center and Austin’s Riverland Community College.
The Company serves Dakota County, in the southern portion of the Minneapolis and St. Paul metropolitan area, from its office located in Eagan, Minnesota. Major employers in this market area include Delta Airlines, CHS Cooperative, Flint Hills Resources LP (oil refinery), Unisys Corp (computer software), Blue Cross Blue Shield of Minnesota, and West Group, a Thomson Reuters business (legal research).
The Company serves the Iowa county of Marshall through its branch office located in Marshalltown, Iowa. Major employers in the area are Swift & Company (pork processors), Fisher Controls International (valve and regulator manufacturing), Lennox Industries (furnace and air conditioner manufacturing), Iowa Veterans Home (hospital care), Marshall Community School District (education), and Marshall Medical & Surgical Center (hospital care).
Based upon information obtained from the U.S. Census Bureau for 2014 (the last year for which information is available), the population of the seven primary counties in the Company’s southern Minnesota market area was estimated as follows: Dodge – 20,353; Fillmore – 20,776; Freeborn – 30,840; Houston – 18,738; Mower – 39,323; Olmsted – 150,287; and Winona – 51,097. For these same seven counties, the median household income from the U.S. Census Bureau for 2010-2014 ranged from $45,569 to $68,587. The population of Dakota County was 412,529 and the median household income was $74,995. With respect to Iowa, the population of Marshall County was 40,866 and the median household income was $52,354.
Lending Activities
General. Historically, the Company has originated 15 and 30 year fixed rate mortgage loans secured by one-to-four family residences for its loan portfolio. Over the past 15 years, the Company has focused on managing interest rate risk and increasing interest income by increasing its investment in shorter term and generally higher yielding commercial real estate, commercial business and construction loans, while reducing its investment in longer term one-to-four family real estate loans. The Company continues to originate 15 and 30 year fixed rate mortgage loans and some shorter term fixed rate loans. The shorter term fixed rate loans and adjustable rate loans are generally placed into portfolio, while the majority of the 15 and 30 year fixed rate mortgage loans are sold in the secondary mortgage market. Mortgage interest rates continued to be at relatively low levels in 2015 and very few 15 and 30 year loans were placed into portfolio as most were sold into the secondary market in order to manage the Company’s interest rate risk position. The Company also offers an array of consumer loan products that include both open and closed end home equity loans. Home equity lines of credit have adjustable interest rates based upon the prime rate, as published in the Wall Street Journal, plus a margin. Refer to “ Note 5 Loans Receivable, Net ” and “ Note 6 Allowance for Loan Losses and Credit Quality Information ” in the Notes to Consolidated Financial Statements in the Annual Report for more information on the loan portfolio (incorporated by reference in Item 8 of Part II of this Form 10-K).
The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate loans as of December 31:
2015 |
2014 |
2013 |
2012 |
2011 |
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(Dollars in thousands) |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
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Fixed rate Loans |
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Real estate: |
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One-to-four family |
$ | 55,226 | 11.68 |
% |
$ | 46,288 | 12.39 |
% |
$ | 47,377 | 11.96 |
% |
$ | 57,463 | 12.08 |
% |
$ | 69,426 | 11.96 |
% |
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Multi-family |
8,045 | 1.70 | 10,919 | 2.92 | 7,687 | 1.94 | 9,608 | 2.02 | 26,132 | 4.50 | ||||||||||||||||||||||||||||||
Commercial |
117,790 | 24.91 | 104,178 | 27.89 | 109,387 | 27.62 | 115,519 | 24.28 | 94,535 | 16.29 | ||||||||||||||||||||||||||||||
Construction |
27,381 | 5.79 | 7,361 | 1.97 | 2,645 | 0.67 | 8,430 | 1.77 | 5,145 | 0.89 | ||||||||||||||||||||||||||||||
Total real estate loans |
208,442 | 44.08 | 168,746 | 45.17 | 167,096 | 42.19 | 191,020 | 40.15 | 195,238 | 33.64 | ||||||||||||||||||||||||||||||
Consumer loans: |
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Automobile |
2,885 | 0.61 | 1,124 | 0.30 | 971 | 0.25 | 623 | 0.13 | 404 | 0.07 | ||||||||||||||||||||||||||||||
Home equity |
10,231 | 2.16 | 10,711 | 2.87 | 11,629 | 2.94 | 11,390 | 2.39 | 13,426 | 2.31 | ||||||||||||||||||||||||||||||
Recreational vehicle |
2,650 | 0.56 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||||||||||||||||||
Other |
4,635 | 0.99 | 4,091 | 1.09 | 4,174 | 1.05 | 4,827 | 1.02 | 6,156 | 1.06 | ||||||||||||||||||||||||||||||
Total consumer loans |
20,401 | 4.32 | 15,926 | 4.26 | 16,774 | 4.24 | 16,840 | 3.54 | 19,986 | 3.44 | ||||||||||||||||||||||||||||||
Commercial business loans |
39,197 | 8.29 | 32,147 | 8.61 | 40,122 | 10.13 | 32,769 | 6.89 | 54,604 | 9.41 | ||||||||||||||||||||||||||||||
Total non-real estate loans |
59,598 | 12.61 | 48,073 | 12.87 | 56,896 | 14.37 | 49,609 | 10.43 | 74,590 | 12.85 | ||||||||||||||||||||||||||||||
Total fixed rate loans |
268,040 | 56.69 | 216,819 | 58.04 | 223,992 | 56.56 | 240,629 | 50.58 | 269,828 | 46.49 | ||||||||||||||||||||||||||||||
Adjustable rate Loans |
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Real estate: |
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One-to-four family |
35,719 | 7.55 | 23,553 | 6.31 | 29,090 | 7.34 | 39,574 | 8.32 | 49,640 | 8.55 | ||||||||||||||||||||||||||||||
Multi-family |
4,279 | 0.90 | 4,781 | 1.28 | 426 | 0.11 | 2,148 | 0.45 | 9,385 | 1.62 | ||||||||||||||||||||||||||||||
Commercial |
79,136 | 16.74 | 59,187 | 15.84 | 69,099 | 17.45 | 105,202 | 22.11 | 148,940 | 25.66 | ||||||||||||||||||||||||||||||
Construction |
10,722 | 2.27 | 5,242 | 1.40 | 5,206 | 1.31 | 4,000 | 0.84 | 5,777 | 1.00 | ||||||||||||||||||||||||||||||
Total real estate loans |
129,856 | 27.46 | 92,763 | 24.83 | 103,821 | 26.21 | 150,924 | 31.72 | 213,742 | 36.83 | ||||||||||||||||||||||||||||||
Consumer: |
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Home equity line |
38,561 | 8.16 | 36,832 | 9.86 | 36,178 | 9.13 | 36,521 | 7.68 | 41,429 | 7.14 | ||||||||||||||||||||||||||||||
Home equity |
4,970 | 1.05 | 1,709 | 0.46 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||||||||||||||||||
Other |
483 | 0.10 | 458 | 0.12 | 471 | 0.12 | 614 | 0.12 | 746 | 0.13 | ||||||||||||||||||||||||||||||
Total consumer loans |
44,014 | 9.31 | 38,999 | 10.44 | 36,649 | 9.25 | 37,135 | 7.80 | 42,175 | 7.27 | ||||||||||||||||||||||||||||||
Commercial business loans |
30,909 | 6.54 | 24,975 | 6.69 | 31,587 | 7.98 | 47,085 | 9.90 | 54,655 | 9.41 | ||||||||||||||||||||||||||||||
Total non-real estate loans |
74,923 | 15.85 | 63,974 | 17.13 | 68,236 | 17.23 | 84,220 | 17.70 | 96,830 | 16.68 | ||||||||||||||||||||||||||||||
Total adjustable rate loans |
204,779 | 43.31 | 156,737 | 41.96 | 172,057 | 43.44 | 235,144 | 49.42 | 310,572 | 53.51 | ||||||||||||||||||||||||||||||
Total loans |
472,819 | 100.00 |
% |
373,556 | 100.00 |
% |
396,049 | 100.00 |
% |
475,773 | 100.00 |
% |
580,400 | 100.00 |
% |
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Less |
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Unamortized discounts |
16 | 14 | 33 | 33 | 93 | |||||||||||||||||||||||||||||||||||
Net deferred loan (costs) fees |
(91 | ) | 97 | 0 | 87 | 511 | ||||||||||||||||||||||||||||||||||
Allowance for losses on loans |
9,709 | 8,332 | 11,401 | 21,608 | 23,888 | |||||||||||||||||||||||||||||||||||
Total loans receivable, net |
$ | 463,185 | $ | 365,113 | $ | 384,615 | $ | 454,045 | $ | 555,908 |
The following table illustrates the interest rate maturities of the Company's loan portfolio at December 31, 2015. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Scheduled repayments of principal are reflected in the year in which they are scheduled to be paid. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate |
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(Dollars in thousands) |
One-to-four family |
Multi-family and Commercial |
Construction |
Consumer |
Commercial Business |
Total |
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Due During Years Ending December 31, |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
|||||||||||||||||||||||||||||||||||||
2016 (1) | $ | 38,608 | 3.84 |
% |
$ | 69,152 | 4.66 |
% |
$ | 19,718 | 3.77 |
% |
$ | 50,358 | 4.81 |
% |
$ | 47,193 | 4.36 |
% |
$ | 225,029 | 4.41 |
% |
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2017 |
14,592 | 4.20 | 41,090 | 4.45 | 7,868 | 4.67 | 5,900 | 5.64 | 13,232 | 4.98 | 82,682 | 4.60 | |||||||||||||||||||||||||||||||||||||
2018 |
10,468 | 4.16 | 42,707 | 4.37 | 5,232 | 4.33 | 3,455 | 5.53 | 3,722 | 4.63 | 65,584 | 4.41 | |||||||||||||||||||||||||||||||||||||
2019 through 2020 |
19,694 | 4.12 | 45,566 | 4.34 | 4,163 | 4.33 | 3,856 | 5.38 | 5,707 | 4.45 | 78,986 | 4.34 | |||||||||||||||||||||||||||||||||||||
2021 through 2025 |
6,859 | 3.96 | 9,382 | 3.88 | 1,122 | 4.44 | 767 | 5.55 | 252 | 5.00 | 18,382 | 4.03 | |||||||||||||||||||||||||||||||||||||
2026 through 2040 |
723 | 4.75 | 1,352 | 3.23 | 0 | 0.00 | 79 | 5.72 | 0 | 0.00 | 2,154 | 3.83 | |||||||||||||||||||||||||||||||||||||
2041 and thereafter |
1 | 4.53 | 1 | 4.50 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 2 | 4.51 | |||||||||||||||||||||||||||||||||||||
$ | 90,945 | $ | 209,250 | $ | 38,103 | $ | 64,415 | $ | 70,106 | $ | 472,819 |
|
(1) |
Includes demand loans, loans having no stated maturity and overdraft loans. |
The total amount of loans due after December 31, 2016 which have predetermined interest rates is $178.0 million, while the total amount of amount of loans due after such date which have floating or adjustable interest rates is $69.8 million. At December 31, 2015, construction loans were $15.1 million for one-to-four family dwellings, $18.9 million for multi-family and $4.1 million for nonresidential.
The aggregate amount of loans and extensions of credit that the Bank is permitted to make to any one borrower is generally limited to 15% of unimpaired capital and surplus. In addition to the 15% limit, the Bank is permitted to lend an additional amount equal to 10% of unimpaired capital and surplus if the additional amount is fully secured by “readily marketable collateral” having a current market value of at least 100% of the loan or extension of credit. Similarly, the Bank is permitted to lend additional amounts equal to the lesser of 30% of unimpaired capital and surplus, or $30 million, for certain residential development loans. Applicable law establishes a number of rules for combining loans to separate borrowers. Loans or extensions of credit to one person may be attributed to other persons if: (i) the proceeds of a loan or extension of credit are used for the direct benefit of the other person; or (ii) a common enterprise is deemed to exist between persons. At December 31, 2015, based upon the 15% limitation, the Bank's regulatory limit for loans to one borrower was approximately $12.2 million and no loans to any one borrower exceeded this amount. At December 31, 2015, the Bank’s largest aggregate amount of loans to one borrower totaled $10.1 million. All of the loans for the largest borrower were performing in accordance with their terms and the borrower had no affiliation with the Bank other than its relationship as a borrower.
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 determined by an independent appraiser. The loan applications are designed primarily to determine the borrower's ability to repay. The more significant items on the application are verified through the use of credit reports, financial statements, tax returns, or confirmations.
One-to-four family loans that are equal to or less than the conforming/saleable loan dollar limits as established by the Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage Association (FNMA) may be approved by a designated underwriter. This limit was $417,000 for both 2015 and 2014. Loans up to $500,000 may be approved by one of the Bank’s retail lending underwriters, the Rochester Market President, the Rochester Market Vice President, or the Bank’s Director of Business Banking. The approval limit for these individuals varies depending on their authority level and includes the total aggregate amount of all retail loan obligations owed or guaranteed to the Bank, plus the new obligation. Loans up to $1.0 million may be approved by the Bank’s Director of Retail Lending and Loan Servicing or the Vice President of Credit Administration. The Bank’s Chief Credit Officer and Chief Operating Officer may approve loans up to $1.75 million and $2.0 million, respectively. The approval limit for these individuals includes the total aggregate amount of all loan obligations owed or guaranteed to the Bank, plus the new obligation. Loans greater than $2.0 million require the approval of a majority of the Executive Loan Committee.
The Bank's individual commercial loan officers have the authority to approve loans that meet the guidelines established by the Bank’s commercial loan policy for loans up to their individual delegated aggregate relationship authority. Individual delegated aggregate relationship authority varies by loan officer, with the highest individual authorities being $400,000. The aggregate relationship amount is determined by the total customer credit commitments outstanding, plus the new loan request amount. The Director of Business Banking can approve loans up to a $500,000 aggregate relationship. The Vice President of Credit Administration, Chief Credit Officer and the Chief Operating Officer have approval authorities up to $1.0 million aggregate, $1.75 million aggregate and $2.0 million aggregate, respectively. Existing loan relationship requests that, in aggregate, are greater than $2.0 million to $7.5 million, or a new relationship loan request of greater than $2.0 million up to $4.5 million, are approved by the Senior Loan Committee. Any loan request greater than these limits must be approved by the Bank’s Executive Loan Committee.
The Bank generally 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. The Bank also requires flood insurance to protect the property securing its interest when the property is located in a flood plain.
One-to-Four Family Residential Real Estate Lending. At December 31, 2015, the Company's one-to-four family real estate loans, consisting of both fixed rate and adjustable rate loans, totaled $90.9 million, an increase of $21.1 million, from $69.8 million at December 31, 2014. The increase in the one-to-four family loans in 2015 is the result of additional mortgage lending staff and an increased emphasis on originating shorter term fixed rate and adjustable rate mortgage loans that were placed into the portfolio during 2015. The majority of the longer term loans that were originated during the year continued to be sold into the secondary market in order to manage the Company’s interest rate risk position.
The Company offers conventional fixed rate one-to-four family loans that have maximum terms of 30 years. In order to manage interest rate risk, the Company typically sells the majority of fixed rate loan originations with terms to maturity of 15 years or greater that are eligible for sale in the secondary market. The interest rates charged on the fixed rate loan products are based on the secondary market delivery rates, as well as other competitive factors. The Company also originates fixed rate loans with terms up to 30 years that are insured by the Federal Housing Authority (FHA), Veteran’s Administration (VA), Minnesota Housing Finance Agency, Iowa Finance Authority, or United States Department of Agriculture-Guaranteed Housing.
The Company also offers one-year adjustable rate mortgages (ARMs) at a margin (generally 350 to 450 basis points) over the yield on the Average Weekly One Year U.S. Treasury Constant Maturity Index for terms of up to 30 years. The ARM loans offered by the Company allow the borrower to select (subject to pricing) an initial period of one year, three years, or five years between the loan origination and the date the first interest rate change occurs. The ARMs generally have a 200 basis point annual interest rate change cap and a lifetime cap of 600 basis points over or under the initial rate. The Company’s originated ARMs do not permit negative amortization of principal, generally do not contain prepayment penalties and are not convertible into fixed rate loans. Because of the low interest rate environment that has existed over the last few years, a limited number of ARM loans have been originated as consumers have generally opted for the longer term fixed rate loans.
In underwriting one-to-four family residential real estate loans, the Company evaluates the borrower's credit history, 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 the Company are appraised by independent appraisers. The Company originates residential mortgage loans with loan-to-value ratios up to 100% for owner-occupied homes and up to 85% for non-owner-occupied homes; however, private mortgage insurance is generally required to reduce the Company's exposure to 80% or less of the value on most loans. The Company generally seeks to underwrite its loans in accordance with secondary market, FHA or VA standards. However, the Company does originate shorter term fixed rate and adjustable rate one-to-four family loans for its portfolio that do not meet certain secondary market guidelines.
The Company's residential mortgage loans customarily include due-on-sale clauses giving it the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage.
Fixed rate loans in the Company's portfolio represent conventional fixed rate loans. At December 31, 2015, $1.7 million of the one-to-four family residential loan portfolio was non-performing compared to $1.6 million at December 31, 2014.
Commercial Real Estate and Multi-Family Lending. The Company originates permanent commercial real estate and multi-family loans secured by properties located primarily in its market area. It also purchases a limited amount of participations in commercial real estate and multi-family loans originated by third parties. The commercial real estate and multi-family loan portfolio includes loans secured by motels, hotels, apartment buildings, churches, ethanol plants, manufacturing plants, land developments, office buildings, business facilities, shopping malls, nursing homes, golf courses, restaurants, warehouses, convenience stores, and other non-residential building properties primarily located in the upper Midwestern portion of the United States. At December 31, 2015, the Company’s commercial and multi-family real estate loans totaled $209.3 million, an increase of $30.2 million, from $179.1 million at December 31, 2014.
Permanent commercial real estate and multi-family loans are generally originated for a maximum term of 10 years and may have longer amortization periods with balloon maturity features. The interest rates may be fixed for the term of the loan or have adjustable features that are tied to the prime rate or another published index. Commercial real estate and multi-family loans are generally written in amounts up to 80% of the lesser of the appraised value of the property or the purchase price and generally have a debt service coverage ratio of at least 120%. The debt service coverage ratio is the ratio of net cash from operations to debt service payments. The Company may originate construction loans secured by commercial or multi-family real estate, or may purchase participation interests in third party originated construction loans secured by commercial or multi-family real estate.
Appraisals on commercial real estate and multi-family real estate properties are performed by independent appraisers prior to the time the loan is made. For transactions less than $250,000, the Company may use an internal valuation. All appraisals on commercial and multi-family real estate are reviewed and approved by a qualified third party or credit department employee. The Bank's underwriting procedures require verification of the borrower's credit history, income and financial statements, banking relationships, and income projections for the property. The commercial loan policy generally requires personal guarantees from the proposed borrowers. An initial on-site inspection is generally required for all collateral properties for loans with balances in excess of $250,000. Independent annual reviews are performed for aggregate commercial lending relationships that exceed $500,000. The reviews cover financial performance, documentation completeness, and accuracy of loan risk ratings.
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, 2015, $0.3 million of loans in the commercial real estate portfolio were non-performing, compared to $7.2 million at December 31, 2014. The largest non-performing lending relationship in this category as of December 31, 2015 is a $0.2 million loan secured by farm land located in the Bank’s primary market area.
Construction Lending. The Company makes construction loans to individuals for the construction of their residences and to builders for the construction of one-to-four family residences. It also makes a limited number of loans to builders for houses built on speculation. Construction loans also include commercial real estate loans.
Almost all loans to individuals for the construction of their residences are structured as permanent loans. These loans are made on the same terms as residential loans, except that during the construction phase, which typically lasts up to twelve months, the borrower pays interest only. Generally, the borrower also pays a construction fee at the time of origination plus other costs associated with processing the loan. 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 one year or less.
Construction loans to owner occupants are generally made in amounts up to 95% of the lesser of cost or appraised value, but no more than 90% of the loan proceeds can be disbursed until the building is completed. The Company generally limits the loan-to-value ratios on loans to builders to 80%. Prior to making a commitment to fund a construction loan, the Company requires a valuation of the property, financial data, and verification of the borrower's income. The Company 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. Construction loans are generally located in the Company'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 one factor utilized in the determination of the appraised value of the subject property to be built.
At December 31, 2015, construction loans totaled $38.1 million, an increase of $25.5 million from $12.6 million at December 31, 2014. Total construction loans included $15.1 million and $6.4 million of one-to-four family residential, $18.9 million and $1.1 million of multi-family residential, and $4.1 million and $5.1 million of commercial real estate loans at December 31, 2015 and December 31, 2014, respectively. The nature of construction loans makes them more difficult to evaluate and monitor than loans on existing buildings. 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, experience of the builder, and the estimated cost (including interest) of the project. If the estimate of value proves to be inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project having a value that is insufficient to assure full repayment 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 these cases, the Company may be required to modify the terms of the loan. At December 31, 2015, $1.4 million of construction loans in the commercial real estate portfolio were non-performing compared to $1.5 million at December 31, 2014. The non-performing construction loans are loans to parties related through common ownership to construct model homes that when sold, or have a purchase agreement, are converted to performing loans and the interest is recognized.
Consumer Lending. The Company originates a variety of consumer loans, including home equity loans (open-end and closed-end), automobile, recreational vehicles, mobile home, lot loans, loans secured by deposit accounts and other loans for household and personal purposes. At December 31, 2015, the Company’s consumer loans totaled $64.4 million, an increase of $9.5 million from $54.9 million at December 31, 2014.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The Company's consumer loans are made at fixed or adjustable interest rates, with terms up to 20 years for secured loans and up to five years for unsecured loans.
The Company's home equity loans are written so that the total commitment amount, when combined with the balance of any other outstanding mortgage liens, generally do not exceed 90% of the appraised value of the property or an internally established market value. Internal market values are established using current market data, including recent sales data, and are typically lower than third party appraised values. The closed-end home equity loans are written with fixed or adjustable rates with terms up to 15 years. The open-end home equity lines are written with an adjustable rate and a 2-or 10-year draw period that requires interest only payments followed by a 10-year repayment period that fully amortizes the outstanding balance. The consumer may access the open-end home equity line by making a withdrawal at the Bank, transferring funds through our online or mobile banking products, or writing a check on the home equity line of credit account. Open and closed-end equity loans, which are generally secured by second mortgages on the borrower’s principal residence, represented 83.5% of the Company’s consumer loan portfolio at December 31, 2015.
The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and their 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 that are unsecured or are secured by rapidly depreciable assets, such as automobiles, recreational vehicles, or mobile homes. In these 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 that can be recovered on such loans. At December 31, 2015, $0.8 million of the consumer loan portfolio was non-performing, compared to $0.5 million at December 31, 2014.
Commercial Business Lending. The Company maintains a portfolio of commercial business loans to borrowers associated with the real estate industry as well as to retail, manufacturing operations, and professional firms. The Company's commercial business loans generally have terms ranging from six months to five years and may have either fixed or variable interest rates. The Company's commercial business loans generally include personal guarantees and are usually, but not always, secured by business assets such as inventory, equipment, leasehold interests in equipment, fixtures, real estate and accounts receivable. 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. The Company also purchases participation interests in commercial business loans originated outside of the Company’s market area from third party originators. These loans generally have underlying collateral of inventory or equipment and repayment periods of less than ten years. At December 31, 2015, the Company’s commercial business loans totaled $70.1 million, an increase of $13.0 million, from $57.1 million at December 31, 2014.
Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her income, and which are secured by real property with more easily ascertainable value, 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. Furthermore, 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, 2015 and December 31, 2014, there were $0.1 million of loans in the commercial business loan portfolio that were non-performing.
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related Securities
Real estate loans are generally originated by the Company's salaried loan officers. Mortgage and consumer loan officers may also receive a commission in addition to their base salary for meeting production and other branch goals. Loan applications are taken in all branch and loan production offices.
The Company originates both fixed and adjustable rate loans, however, its ability to originate loans is dependent upon the relative customer demand for loans in its markets. Demand for adjustable rate loans is affected by the interest rate environment. The number of adjustable rate loans remained low in 2015 due to the low long term fixed mortgage rates that existed during the year. The Company originated for its portfolio $12.1 million of one-to-four family adjustable rate loans during 2015, an increase of $10.1 million, from $2.0 million in 2014. The Company also originated for its portfolio $27.6 million of fixed rate one-to-four family loans during 2015, an increase of $16.0 million, from $11.6 million for 2014. The increase in the fixed and adjustable rate one-to-four family loans that were placed into the loan portfolio in 2015 is the result of the Bank offering more adjustable and short term fixed rate loan options to borrowers that did not meet certain secondary market criteria but did meet internal underwriting guidelines. This increased the amount of loans that were originated and placed into the Bank’s portfolio.
During the past several years, the Company has focused its portfolio loan origination efforts on commercial real estate, commercial business and consumer loans because these loans have terms to maturity and adjustable interest rate characteristics that are generally more beneficial to the Company in managing interest rate risk than traditional one-to-four family fixed rate conventional loans. The Company originated $141.1 million of multi-family and commercial real estate, commercial business and consumer loans (which excludes commercial real estate loans for construction or development) during 2015, an increase of $40.6 million, from originations of $100.5 million for 2014. The increase in originations primarily reflects the $17.6 million and $17.3 million increase in commercial business and commercial real estate loans, respectively, in 2015 compared to 2014. Consumer loan origination also increased $11.6 million between the periods, while multi-family loan origination decreased $5.9 million.
In order to supplement loan demand in the Company's market area and geographically diversify its loan portfolio, the Company, from time to time, purchases participations in real estate loans from selected sellers, with yields based upon then-current market rates. The Company reviews and underwrites all loans purchased to ensure that they meet the Company's underwriting standards and the seller generally continues to service the loans. The Company has generally not experienced higher losses or credit quality issues with purchased participations than other loans originated by the Company. The Company purchased $18.4 million of loans during 2015, an increase of $7.2 million, from $11.2 million during 2014. The commercial real estate and commercial business loans that were purchased have terms and interest rates that are similar in nature to the Company's originated commercial and business portfolio. See “Note 5 Loans Receivable, Net” and “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements in the Annual Report for more information on purchased loans (incorporated by reference in Item 8 of Part II of this Form 10-K).
The Company also acquired loans totaling $24.1 million in the acquisition of Kasson State Bank that was completed in the third quarter of 2015.
The Company has some mortgage-backed and related securities that are held, based on investment intent, in the "available for sale" portfolio. The Company acquired $5.5 million of mortgage-backed and related securities in 2015 in connection with the Kasson State Bank acquisition and did not acquire any mortgage-backed securities in 2014. No mortgage-backed securities were purchased in 2015, other than those acquired in the Kasson State Bank acquisition, because debt instruments issued by federal agencies, such as FNMA and FHLMC, continued to be more appealing to purchase due to their shorter duration given the low interest rate environment that continued to exist in 2015. In 2015, the Company sold $4.2 million of mortgage-backed securities that were acquired in the Kasson State Bank acquisition, due primarily to the small lot size of the individual securities. The Company did not sell any mortgage-backed securities in 2014. See – “Investment Activities” below.
The following table shows the loan and mortgage-backed and related securities origination, purchase, acquisition, sale and repayment activities of the Company for the periods indicated.
LOANS HELD FOR INVESTMENT
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Originations by type: |
||||||||||||
Adjustable rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
$ | 12,111 | 2,009 | 2,808 | ||||||||
- multi-family |
0 | 4,400 | 0 | |||||||||
- commercial |
21,489 | 28,181 | 831 | |||||||||
- construction or development |
19,920 | 9,812 | 10,971 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
18,852 | 10,487 | 15,348 | |||||||||
- commercial business |
19,538 | 8,123 | 18,319 | |||||||||
Total adjustable rate |
91,910 | 63,012 | 48,277 | |||||||||
Fixed rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
27,612 | 11,550 | 8,345 | |||||||||
- multi-family |
4,042 | 5,576 | 850 | |||||||||
- commercial |
47,306 | 23,316 | 24,555 | |||||||||
- construction or development |
38,299 | 39,274 | 6,368 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
11,610 | 8,331 | 8,731 | |||||||||
- commercial business |
18,281 | 12,130 | 21,541 | |||||||||
Total fixed rate |
147,150 | 100,177 | 70,390 | |||||||||
Total loans originated |
239,060 | 163,189 | 118,667 | |||||||||
Purchases: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
2,800 | 0 | 0 | |||||||||
- commercial |
7,501 | 6,003 | 1,550 | |||||||||
- construction or development |
5,500 | 0 | 150 | |||||||||
Non-real estate - |
||||||||||||
- commercial business |
2,600 | 5,196 | 1,437 | |||||||||
Total loans purchased |
18,401 | 11,199 | 3,137 | |||||||||
Acquisition: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
4,985 | 0 | 0 | |||||||||
- multi-family |
100 | 0 | 0 | |||||||||
- commercial |
7,712 | 0 | 0 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
5,226 | 0 | 0 | |||||||||
- commercial business |
6,037 | 0 | 0 | |||||||||
Total loans acquired |
24,060 | 0 | 0 | |||||||||
Sales, participations and repayments: |
||||||||||||
Real estate - |
||||||||||||
- commercial |
4,504 | 22,098 | 2,887 | |||||||||
- construction or development |
14,602 | 19,796 | 0 | |||||||||
Non-real estate - |
||||||||||||
- consumer |
516 | 982 | 910 | |||||||||
- commercial business |
154 | 2,201 | 17,937 | |||||||||
Total sales |
19,776 | 45,077 | 21,734 | |||||||||
Transfers to loans held for sale |
8,125 | 13,243 | 12,183 | |||||||||
Principal repayments |
154,054 | 137,205 | 161,002 | |||||||||
Total reductions |
181,955 | 195,525 | 194,919 | |||||||||
Decrease in other items, net |
(303 | ) | (1,356 | ) | (6,609 | ) | ||||||
Net increase (decrease) |
$ | 99,263 | (22,493 | ) | (79,724 | ) |
LOANS HELD FOR SALE
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Originations by type: |
||||||||||||
Adjustable rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
$ | 0 | 0 | 0 | ||||||||
Total adjustable rate |
0 | 0 | 0 | |||||||||
Fixed rate: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
69,941 | 41,557 | 69,347 | |||||||||
Total fixed rate |
69,941 | 41,557 | 69,347 | |||||||||
Total loans originated |
69,941 | 41,557 | 69,347 | |||||||||
Sales and repayments: |
||||||||||||
Real estate - |
||||||||||||
- one-to-four family |
71,992 | 41,533 | 71,261 | |||||||||
Total sales |
71,992 | 41,533 | 71,261 | |||||||||
Transfers from loans held for investment |
(3,778 | ) | (557 | ) | (832 | ) | ||||||
Principal repayments |
24 | 7 | 0 | |||||||||
Total reductions |
68,238 | 40,983 | 70,429 | |||||||||
Net increase (decrease) |
$ | 1,703 | 574 | (1,082 | ) |
MORTGAGE-BACKED AND RELATED SECURITIES
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Purchases: |
||||||||||||
Fixed rate mortgage-backed securities |
2,343 | 0 | 0 | |||||||||
CMOs and REMICs (1) |
3,116 | 0 | 0 | |||||||||
Total purchases |
5,459 | 0 | 0 | |||||||||
Sales: |
||||||||||||
Fixed rate mortgage-backed securities |
2,174 | 0 | 0 | |||||||||
CMOs and REMICs |
2,021 | |||||||||||
Total sales |
4,195 | 0 | 0 | |||||||||
Principal repayments |
(1,890 | ) | (2,304 | ) | (5,208 | ) | ||||||
Net decrease |
$ | (626 | ) | (2,304 | ) | (5,208 | ) |
(1) Collateralized mortgage obligations and real estate mortgage investment conduits
Classified Assets and Delinquencies
Classification of Assets. Federal regulations require that each savings institution evaluate and classify its assets on a regular basis. In addition, in connection with examinations of savings institutions, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) examiners may identify problem assets and, if appropriate, require them to be classified with an adverse rating. There are three adverse classifications: substandard, doubtful, and loss. Assets classified as substandard 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. Assets classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection 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 specific allowances for loan losses. If an asset, or portion thereof, is classified as a loss, the institution charges off such amount. If an institution does not agree with an OCC or FDIC examiner's classification of an asset, it may appeal the determination to the OCC District Director or the appropriate FDIC personnel. On the basis of management's review of its assets, at December 31, 2015, the Bank classified a total of $21.8 million of its loans and real estate as follows:
(Dollars in thousands) |
One-to-Four Family |
Real Estate Construction or Development |
Commercial and Multi-family |
Consumer |
Commercial Business |
Real Estate |
Total |
|||||||||||||||||||||
Substandard |
$ | 2,889 | 1,436 | 12,864 | 639 | 1,533 | 2,045 | 21,406 | ||||||||||||||||||||
Doubtful |
55 | 0 | 0 | 52 | 0 | 0 | 107 | |||||||||||||||||||||
Loss |
0 | 0 | 0 | 286 | 0 | 0 | 286 | |||||||||||||||||||||
Total |
$ | 2,944 | 1,436 | 12,864 | 977 | 1,533 | 2,045 | 21,799 |
The Bank's classified assets consist of non-performing loans and loans and other assets of concern discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (incorporated by reference in Item 7 of Part II of this Form 10-K). See “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements in the Annual Report (incorporated by reference in Item 8 of Part II of this Form 10-K) for more information on classified assets. At December 31, 2015, these asset classifications were materially consistent with those of the OCC and FDIC.
Delinquency Procedures. Generally, the following procedures apply to delinquent one-to-four family real estate loans. When a borrower fails to make a required payment on a loan, the Company 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 are made with the borrower between 30 and 60 days after the due date. If the loan is contractually delinquent 90 days, the Company 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 the Company. Delinquent commercial real estate and commercial business loans are generally handled in a similar manner. The Company's procedures for repossession and sale of consumer collateral are subject to various requirements under state consumer protection laws.
Real estate acquired by the Company as a result of foreclosure is typically classified as real estate in judgment for six to twelve months and thereafter as real estate owned until it is sold. When property is acquired by foreclosure or deed in lieu of foreclosure, it is recorded as real estate owned at the 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 the Company's loan delinquencies by loan type, amount and percentage of type at December 31, 2015 for loans past due 60 days or more.
Loans Delinquent For: |
Total Delinquent |
|||||||||||||||||||||||||||||||||||
60-89 Days |
90 Days and Over | Loans | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Number |
Amount |
Percent of Loan Category |
Number |
Amount |
Percent of Loan Category |
Number |
Amount |
Percent of Loan Category |
|||||||||||||||||||||||||||
One-to-four family real estate |
2 | $ | 130 | 0.14 | % | 5 | $ | 799 | 0.88 | % | 7 | 929 | 1.02 | % | ||||||||||||||||||||||
Non-residential real estate |
2 | 289 | 0.15 | 0 | 0 | 0.00 | 2 | 289 | 0.15 | |||||||||||||||||||||||||||
Consumer |
9 | 262 | 0.41 | 8 | 119 | 0.18 | 17 | 381 | 0.59 | |||||||||||||||||||||||||||
Total |
13 | $ | 681 | 0.14 | % | 13 | $ | 918 | 0.19 | % | 26 | $ | 1,599 | 0.34 | % |
Loans delinquent for 90 days and over are generally non-accruing and are included in the Company’s non-performing asset total at December 31, 2015.
Investment Activities
The Company utilizes the available for sale securities portfolio in virtually all aspects of asset/liability management. 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 Bank's liquidity and projected cash flow requirements.
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, the holding company of a federally chartered savings institution may also invest its 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 the Company has been directed toward a mix of high-quality assets (primarily government agency obligations) with short and intermediate terms to maturity. At December 31, 2015, the Company did not own any investment securities of a single issuer that exceeded 10% of the Company's stockholders’ equity other than U.S. government agency obligations.
The Bank invests a portion of its liquid assets in interest-earning overnight deposits of the Federal Home Loan Bank of Des Moines (FHLB) and the Federal Reserve Bank of Minneapolis. Other investments include high grade municipal bonds, corporate preferred stock, corporate equity securities, and medium-term (up to five years) federal agency notes. HMN invests in the same type of investment securities as the Bank. See “Note 4 Securities Available For Sale” in the Notes to Consolidated Financial Statements in the Annual Report for additional information regarding the Company's securities portfolio (incorporated by reference in Item 8 of Part II of this Form 10-K).
The following table sets forth the composition of the Company's securities portfolio, excluding mortgage-backed and related securities, at the dates indicated.
December 31, 2015 |
December 31, 2014 |
December 31, 2013 |
||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
Amort Cost |
Adjusted To |
Fair Value |
% of Total |
||||||||||||||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agency obligations |
$ | 105,003 | (61 | ) | 104,942 | 71.4 |
% |
$ | 135,014 | (570 | ) | 134,444 | 75.1 |
% |
$ | 103,030 | (636 | ) | 102,394 | 46.4 |
% |
|||||||||||||||||||||||||||
Municipal obligations |
3,991 | 11 | 4,002 | 2.8 | ||||||||||||||||||||||||||||||||||||||||||||
Corporate obligations |
340 | (6 | ) | 334 | 0.2 | |||||||||||||||||||||||||||||||||||||||||||
Corporate preferred stock |
700 | (350 | ) | 350 | 0.2 | 700 | (280 | ) | 420 | 0.2 | 700 | (420 | ) | 280 | 0.1 | |||||||||||||||||||||||||||||||||
Corporate equity (1) |
58 | 5 | 63 | 0.0 | 58 | 3 | 61 | 0.0 | 58 | 11 | 69 | 0.0 | ||||||||||||||||||||||||||||||||||||
Subtotal |
110,092 | 109,691 | 74.6 | 135,772 | 134,925 | 75.3 | 103,788 | 102,743 | 46.5 | |||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock (1) |
691 | 691 | 0.5 | 777 | 777 | 0.4 | 784 | 784 | 0.4 | |||||||||||||||||||||||||||||||||||||||
Total investment securities and Federal Home Loan Bank stock |
110,783 | 110,382 | 75.1 | 136,549 | 135,702 | 75.7 | 104,572 | 103,527 | 46.9 | |||||||||||||||||||||||||||||||||||||||
Average remaining life of investment securities excluding Federal Home Loan Bank stock (years) |
1.48 | 1.77 | 1.20 | |||||||||||||||||||||||||||||||||||||||||||||
Other interest earning assets: |
||||||||||||||||||||||||||||||||||||||||||||||||
Cash equivalents |
36,570 | 36,570 | 24.9 | 43,455 | 43,455 | 24.3 | 117,304 | 117,304 | 53.1 | |||||||||||||||||||||||||||||||||||||||
Total |
$ | 147,353 | 146,952 | 100.0 |
% |
$ | 180,004 | 179,157 | 100.0 |
% |
$ | 221,876 | 220,831 | 100.0 |
% |
|||||||||||||||||||||||||||||||||
Average remaining life or term to repricing of investment securities and other interest earning assets, excluding Federal Home Loan Bank stock (years) |
1.11 | 1.34 | 0.56 |
(1)Average life assigned to corporate equity holdings is five years.
The composition and maturities of the investment securities portfolio, excluding FHLB stock, mortgage-backed and related securities, are indicated in the following table.
December 31, 2015 | ||||||||||||||||||||||||||||||||
1 Year or Less |
After 1 through 5 Years |
After 5 through 10 Years |
Over 10 Years |
No stated maturity |
Total Securities | |||||||||||||||||||||||||||
(Dollars in thousands) |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Amortized Cost |
Adjusted To |
Fair Value |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||
U.S. government agency securities (1) |
$ | 39,995 | 65,008 | 0 | 0 | 0 | 105,003 | (61 | ) | 104,942 | ||||||||||||||||||||||
Municipal obligations |
1,023 | 2,232 | 736 | 0 | 0 | 3,991 | 11 | 4,002 | ||||||||||||||||||||||||
Corporate obligations |
0 | 0 | 340 | 0 | 0 | 340 | (6 | ) | 334 | |||||||||||||||||||||||
Corporate preferred stock |
0 | 0 | 0 | 700 | 0 | 700 | (350 | ) | 350 | |||||||||||||||||||||||
Corporate equity |
0 | 0 | 0 | 0 | 58 | 58 | 5 | 63 | ||||||||||||||||||||||||
Total |
$ | 41,018 | 67,240 | 1,076 | 700 | 58 | 110,092 | (401 | ) | 109,691 | ||||||||||||||||||||||
Weighted average yield (2) |
1.52 |
% |
1.41 |
% |
3.11 |
% |
4.73 |
% |
1.80 |
% |
1.49 |
% |
(1) |
Callable U.S. government agency securities maturity date based on first available call date that the security is anticipated to be called. |
(2) |
Yields are computed on a tax equivalent basis. . |
Mortgage-Backed and Related Securities. In order to supplement loan production and achieve its asset/liability management goals, the Company invests in mortgage-backed and related securities. All of the mortgage-backed and related securities owned by the Company are issued, insured or guaranteed either directly or indirectly by a U.S. Government Agency and are considered to be investment grade securities. The Company had $2.3 million of mortgage-backed and related securities classified as available for sale at December 31, 2015, compared to $2.9 million at December 31, 2014 and $5.2 million at December 31, 2013. The decrease in mortgage-backed securities in 2015 and 2014 is the result of fewer purchases by the Company and normal repayments. No mortgage-backed securities were purchased in 2015, other than those acquired in the Kasson State Bank acquisition, and none were purchased in 2014. Few mortgage-backed securities were purchased because debt instruments issued by federal agencies, such as FNMA and FHLMC, continued to be more appealing to purchase due to their shorter duration given the low interest rate environment that existed in 2015 and 2014.
The contractual maturities of the mortgage-backed and related securities portfolio without any prepayment assumptions at December 31, 2015 are as follows:
(Dollars in thousands) |
5 Years or Less |
5 to 10 Years |
10 to 20 Years |
Over 20 Years |
Dec. 31, 2015 Balance Outstanding |
|||||||||||||||
Securities available for sale: |
||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
$ | 759 | 0 | 0 | 0 | 759 | ||||||||||||||
Federal National Mortgage Association |
747 | 0 | 0 | 0 | 747 | |||||||||||||||
Collateralized Mortgage Obligations |
0 | 13 | 0 | 764 | 777 | |||||||||||||||
Total |
$ | 1,506 | 13 | 0 | 764 | 2,283 | ||||||||||||||
Weighted average yield |
4.40 |
% |
4.50 |
% |
0.00 |
% |
3.13 |
% |
3.96 |
% |
At December 31, 2015, the Company did not have any non-agency mortgage-backed or related securities in excess of 10% of its stockholders' equity.
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.
Sources of Funds
General. The Bank's primary sources of funds are retail, internet and brokered deposits, payments of loan principal, interest earned on loans and securities, repayments and maturities of securities, borrowings, and other funds provided from operations.
Deposits. The Bank offers a variety of deposit accounts to retail and commercial customers having a wide range of interest rates and terms. The Bank's deposits consist of savings, negotiable order of withdrawal (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 savings and NOW accounts are relatively stable sources of deposits. However, the ability of the Bank to attract and maintain certificates of deposit and money market accounts, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. The increase in deposits in 2015 relates primarily to the $47.3 million in deposits that were acquired in an acquisition in the third quarter of 2015. The changes in deposits in 2014 and 2013 are primarily the result of changes in the commercial deposits from customers in the ethanol industry. Brokered deposits decreased $7.6 million and $8.3 million in 2014 and 2013, respectively, as the proceeds from loan payoffs were used to pay off the outstanding brokered deposits that matured during those years.
The following table sets forth the savings flows at the Bank during the periods indicated.
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Opening balance |
$ | 496,750 | 553,930 | 514,951 | ||||||||
Deposits |
4,084,845 | 4,825,616 | 4,879,691 | |||||||||
Deposits acquired in branch purchase |
47,280 | 0 | 0 | |||||||||
Withdrawals |
(4,070,087 | ) | (4,883,860 | ) | (4,842,618 | ) | ||||||
Interest credited |
599 | 1,064 | 1,906 | |||||||||
Ending balance |
559,387 | 496,750 | 553,930 | |||||||||
Net increase (decrease) |
$ | 62,637 | (57,180 | ) | 38,979 | |||||||
Percent increase (decrease) |
12.61 |
% |
(10.32 |
)% |
7.57 |
% |
The following table sets forth the dollar amount of deposits in the various types of deposit products offered by the Bank as of December 31:
|
(1) |
Reflects weighted average rates paid on transaction and savings deposits at December 31, 2015. |
|
(2) |
The weighted average rate on NOW Accounts for 2014 was 0.02% and 2013 was 0.03%. |
|
(3) |
The weighted average rate on Savings Accounts for 2014 and 2013 was 0.07%. |
|
(4) |
The weighted average rate on Money Market Accounts for 2014 was 0.25% and 2013 was 0.28%. |
The following table shows rate and maturity information for the Bank’s certificates of deposit as of December 31, 2015.
(Dollars in thousands) |
0.00- 0.99% |
1.00- 1.99% |
2.00- 2.99% |
3.00- 3.99% |
Total |
Percent of Total |
||||||||||||||||||
Certificate accounts maturing in quarter ending: | ||||||||||||||||||||||||
March 31, 2016 |
$ | 19,596 | 136 | 366 | 0 | 20,098 | 20.34 | |||||||||||||||||
June 30, 2016 |
15,038 | 537 | 367 | 0 | 15,942 | 16.13 | ||||||||||||||||||
September 30, 2016 |
13,717 | 645 | 0 | 0 | 14,362 | 14.53 | ||||||||||||||||||
December 31, 2016 |
11,128 | 529 | 0 | 0 | 11,657 | 11.79 | ||||||||||||||||||
March 31, 2017 |
5,656 | 973 | 0 | 0 | 6,629 | 6.71 | ||||||||||||||||||
June 30, 2017 |
2,544 | 323 | 0 | 0 | 2,867 | 2.90 | ||||||||||||||||||
September 30, 2017 |
2,283 | 652 | 0 | 0 | 2,935 | 2.97 | ||||||||||||||||||
December 31, 2017 |
3,909 | 292 | 0 | 0 | 4,201 | 4.25 | ||||||||||||||||||
March 31, 2018 |
2,579 | 335 | 0 | 0 | 2,914 | 2.95 | ||||||||||||||||||
June 30, 2018 |
2,702 | 640 | 0 | 0 | 3,342 | 3.38 | ||||||||||||||||||
September 30, 2018 |
2,291 | 814 | 0 | 0 | 3,105 | 3.14 | ||||||||||||||||||
December 31, 2018 |
1,846 | 757 | 0 | 110 | 2,713 | 2.74 | ||||||||||||||||||
Thereafter |
2,102 | 5,978 | 0 | 0 | 8,080 | 8.17 | ||||||||||||||||||
Total |
$ | 85,391 | 12,611 | 733 | 110 | 98,845 | 100.00 |
% |
||||||||||||||||
Percent of total |
86.39 | % | 12.76 | % | 0.74 | % | 0.11 | % | 100.0 | % |
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, 2015.
Maturity | ||||||||||||||||||||
(Dollars in thousands) |
3 Months or Less |
Over 3 to 6 Months |
Over 6 to 12 Months |
Over 12 Months |
Total |
|||||||||||||||
Certificates of deposit less than $250,000 |
$ | 18,296 | 14,043 | 24,708 | 36,005 | 93,052 | ||||||||||||||
Certificates of deposit of $250,000 or more |
522 | 752 | 1,290 | 716 | 3,280 | |||||||||||||||
Public funds less than $250,000 (1) |
29 | 147 | 21 | 65 | 262 | |||||||||||||||
Public funds of $250,000 or more (1) |
1,251 | 1,000 | 0 | 0 | 2,251 | |||||||||||||||
Total certificates of deposit |
$ | 20,098 | 15,942 | 26,019 | 36,786 | 98,845 | ||||||||||||||
Checking and savings accounts of $250,000 or more |
$ | 177,485 | 0 | 0 | 0 | 177,485 | ||||||||||||||
Accounts of $250,000 or more |
$ | 179,258 | 1,752 | 1,290 | 716 | 183,016 |
_______________
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's deposits, see “Note 11 Deposits” in the Notes to Consolidated Financial Statements in the Annual Report (incorporated by reference in Item 8 of Part II of this Form 10-K). For additional information on certificate maturities and the impact on the Company's liquidity see “Management Discussion and Analysis - Liquidity and Capital Resources” of the Annual Report (incorporated by reference in Item 7 of Part II of this Form 10-K).
Borrowings. The Bank's other available sources of funds include advances from the FHLB and borrowings from the Federal Reserve Bank of Minneapolis. As a member of the FHLB of Des Moines, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses for these advances, as well as limitations on the size of the advances and repayment provisions. Consistent with its asset/liability management strategy, the Bank has utilized FHLB advances from time to time to fund loan demand and extend the term to maturity of its liabilities. The Bank may also use short-term FHLB and Federal Reserve Bank borrowings to offset short term cash needs due to deposit outflows or loan fundings. At December 31, 2015, the Bank had no FHLB advances and no Federal Reserve Bank borrowings outstanding. On such date, the Bank had a collateral pledge arrangement with the FHLB pursuant to which the Bank may borrow up to $95.3 million for liquidity purposes, subject to approval from the FHLB. The Bank also had the ability to borrow $73.5 million from the Federal Reserve Bank based upon the loans that were pledged as collateral at December 31, 2015. On December 15, 2014, the Company entered into a Loan Agreement with an unrelated third party, providing for a term loan of up to $10 million that was evidenced by a promissory note with an interest rate of 6.5% per annum. On February 17, 2015 the Company took a one time advance on the note of $10.0 million and used the proceeds to retire the final $10 million of Preferred Stock. The outstanding loan balance on the third party note payable was $9.0 million at December 31, 2015.
Refer to the information on pages 22 and 23 under the caption “Management Discussion and Analysis - Liquidity and Capital Resources” in the Annual Report and “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to Consolidated Financial Statements in the Annual Report for more information on FHLB advances and other borrowings (incorporated by reference in Items 7 and 8 of Part II of this Form 10-K).
Service Corporations of the Bank
As a federally chartered savings bank, the Bank is permitted by OCC 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 these additional funds are used for inner-city or community development purposes. In addition to investments in service corporations, federal institutions are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities in which a federal savings bank may engage directly.
OIA is one of two subsidiaries of the Bank. OIA is a Minnesota corporation that was organized in 1983 and operated as an insurance agency until 1986 when its assets were sold. OIA remained inactive until 1993 when it began offering credit life insurance, annuity and mutual fund products to the Bank's customers and others. OIA currently offers a variety of financial planning products and services. HPH is the Bank’s other subsidiary and was organized as a limited liability company in Minnesota in 2013. It was inactive in 2015 but has operated as an intermediary for the Bank in holding and operating certain foreclosed properties.
Competition
The Bank faces strong competition both in originating real estate, commercial and consumer loans and in attracting deposits. Competition in originating loans comes primarily from mortgage bankers, commercial banks, credit unions and other savings institutions which have offices in the Bank's market area and those that operate through Internet banking operations throughout the United States. The Bank competes for loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides to borrowers.
Competition for deposits is principally from mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those that operate through Internet banking operations throughout the United States. The ability of the Bank to attract and retain deposits depends on its ability to provide an investment opportunity that satisfies the requirements of investors as to rate of return, liquidity, risk, convenience and other factors. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and a customer oriented staff.
Other Corporations Owned by the Company
The Bank was HMN’s sole direct subsidiary at December 31, 2015.
Employees
At December 31, 2015, the Company had a total of 194 employees, which equated to 185 full-time equivalent employees. None of the employees of the Company are represented by any collective bargaining unit. Management considers its employee relations to be good.
Regulation and Supervision
The banking industry is highly regulated. As a savings and loan holding company (SLHC), HMN is subject to regulation, supervision and examination by the FRB. The Bank, a federally-chartered savings association, is also subject to extensive regulation, supervision and examination by the OCC, which is the Bank’s primary federal regulator. The FDIC also has authority to regulate the Bank. Subsidiaries of HMN and the Bank may also be subject to state regulation and/or licensing in connection with certain insurance and investment activities. The Company is subject to numerous laws and regulations. These laws and regulations impose restrictions on activities, set minimum capital requirements, impose lending and deposit restrictions and establish other restrictions. References in this section to applicable statutes and regulations are brief and incomplete summaries only. You should consult the statutes, regulations and related policies and interpretive guidance for a full understanding of the details of their operation. Changes in statutes, regulation or regulatory policies applicable to the Company, including interpretation or implementation thereof, could have a material effect on the Company’s business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) significantly changed, and will continue to change, the regulatory structure for financial institutions and their holding companies, including with respect to lending, deposit, investment, trading and operating activities. Federal banking regulators and other agencies including, among others, the FRB, the OCC and the Consumer Financial Protection Bureau (CFPB), have been, and will continue to be, engaged in extensive rule-making efforts under the Dodd-Frank Act.
Holding Company Regulation
In accordance with the Dodd-Frank Act, the OTS was integrated into the OCC in 2011 and the primary banking regulator for HMN became the FRB. The FRB supervises and regulates all SLHCs, including HMN, that were formerly regulated by the OTS. The Dodd-Frank Act also codified the FRB’s so-called “source of strength” doctrine. While the OTS had suggested that SLHCs were to serve as a “source of support”, the OTS did not have a formal policy. The source of strength doctrine requires financial institution holding companies, such as HMN, to provide financial assistance to their subsidiary financial institutions in the event of financial distress. The Dodd-Frank Act and applicable FRB regulations now subject all SLHCs to the source-of-strength doctrine. The regulations do not explicitly authorize the FRB to compel a SLHC to recapitalize a subsidiary savings association, but the FRB does have broad enforcement authority over SLHCs. The practical impact of this for HMN is still unclear. It may mean that HMN should be able to demonstrate its ability to access the capital markets for additional funds. The Dodd-Frank Act does not directly alter HMN’s ability to engage in non-financial activities. However, the FRB now has the authority to require a grandfathered unitary SLHC, like HMN, to form an intermediate holding company to serve as the direct parent of a thrift, and it is possible that the FRB would impose other restrictions if HMN sought to engage in non-financial activities.
Acquisitions by Savings and Loan Holding Companies. Acquisition of a savings association or a savings and loan holding company is generally subject to FRB approval and the public must have an opportunity to comment on the proposed acquisition. Without prior approval from the FRB, HMN may not acquire, directly or indirectly, control of another savings association.
Examination and Reporting. Under Home Owners' Loan Act (HOLA) and FRB regulations, HMN, as a SLHC, must file periodic reports with the FRB. In addition, HMN must comply with FRB record keeping requirements and is subject to holding company supervision and examination by the FRB. The FRB may take enforcement action if the activities of a SLHC constitute a risk to the financial safety, soundness or stability of a subsidiary savings association.
Affiliate Transactions. The Bank, as a holding company subsidiary that is a depository institution, is subject to both qualitative and quantitative limitations on transactions with the Company. See “Bank Regulation - Transactions with Affiliates and Insiders” below.
Capital Adequacy. The Bank is subject to various capital requirements, which, effective January 1, 2015, have been modified under rules promulgated by the FRB and the OCC implementing the Dodd-Frank Act and the Basel III reforms of the Basel Committee on Banking Supervision of the Bank for International Settlements (Basel III Rules).
Under the Basel III Rules, certain SLHCs for the first time in 2015 found themselves to be subject to formal regulatory capital requirements. In the second quarter of 2015, the FRB amended its Small Bank Holding Company Policy Statement (Policy Statement), which exempted small bank holding companies from the above capital requirements, by raising the asset size threshold for determining applicability from $500 million to $1 billion. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company met the qualitative exemption requirements, and therefore, is exempt from the Basel III holding company capital requirements.
See “Bank Regulation – Capital Requirements and Prompt Corrective Action Requirements; Basel III Rules” below.
Dividends. Federal law also limits the ability of a savings and loan holding company, such as HMN, to pay dividends or make other capital distributions. FRB guidance applicable to holding companies sets out factors that should be taken into account when considering dividends or distributions, including, among other things, current and prospective earnings and liquidity, and the holding company’s ability to serve as an ongoing source of financial and managerial strength to insured depository institution subsidiaries such as the Bank.
Bank Regulation
As a federally-chartered savings association, the Bank is subject to regulation and supervision by the OCC. Federal law authorizes the Bank, as a federal savings association, to conduct, subject to various conditions and limitations, business activities that include: accepting deposits and paying interest on them; making and buying loans secured by residential and other real estate; making a limited amount of consumer loans; making a limited amount of commercial loans; investing in corporate obligations, government debt securities, and other securities; and offering various banking, trust, securities and insurance agency services to its customers.
Savings associations are expected to conduct lending activities in a prudent, safe and sound manner. The OCC regulates the safety and soundness of the Bank by enforcing statutory limits on the Bank’s lending and investment powers. OCC regulations set aggregate limits on certain types of loans including commercial business, commercial real estate, and consumer loans. OCC regulations also establish limits on loans to a single borrower. As of December 31, 2015, the Bank’s lending limit to one borrower was approximately $12.2 million.
A federal savings association generally may not invest in noninvestment-grade debt securities. A federal savings association may establish subsidiaries to conduct any activity the association is authorized to conduct and may establish service corporation subsidiaries for limited preapproved activities.
Qualified Thrift Lender Test. Savings associations, including the Bank, must be qualified thrift lenders (QTLs). A savings association generally satisfies the QTL requirement if at least 65% of a specified asset base consists of assets such as loans to small businesses and loans to purchase or improve domestic residential real estate. Savings associations may qualify as QTLs in other ways. Savings associations that do not qualify as QTLs are subject to significant restrictions on their operations. If the Bank fails to meet QTL requirements, the Company would face certain limitations, including potential enforcement action by the OCC and, as a result of the Dodd-Frank Act, a statutory bar to the payment by the Bank of dividends except under prescribed conditions including approval by the OCC. As of December 31, 2015, the Bank met the QTL test.
OCC Assessments. The OCC is authorized by statute to charge assessments to cover the costs of examining the financial institutions it regulates and to fund its operations. The Bank’s OCC assessments for the year ended December 31, 2015 were approximately $155,000. While all SLHCs, including HMN, were subject to examination fees imposed by the OTS, the FRB has not assessed fees for its examination function.
Transactions with Affiliates and Insiders. Savings associations, like banks, are subject to affiliate and insider transaction restrictions. The restrictions prohibit or limit a savings association from extending credit to, or entering into certain covered transactions with affiliates, principal stockholders, directors and executive officers of the savings association and its affiliates. The term “affiliate” generally includes a holding company, such as HMN, and any company under common control with the savings association. Federal law limits covered transactions between the Bank and any one affiliate to 10% of the Bank’s capital and surplus and with all affiliates in the aggregate to 20%. In addition, the federal law governing unitary savings and loan holding companies prohibits the Bank from making any loan to any affiliate whose activity is not permitted for a subsidiary of a bank holding company. This law also prohibits the Bank from making any equity investment in any affiliate that is not its subsidiary. The Bank is currently in compliance with these requirements. The Dodd-Frank Act expanded the limitations on transactions with affiliates to cover transactions that create credit risk. Covered transactions now include derivatives and the borrowing and lending of securities. Repurchase agreements with affiliates are now subject to collateralization requirements.
Dividend Restrictions. Federal law limits the ability of a depository institution, such as the Bank, to pay dividends or make other capital distributions. The Bank, as a subsidiary of a savings and loan holding company, must file a notice with the FRB before payment of a dividend or approval of a proposed capital distribution by its board of directors and must obtain prior approval from the FRB if it fails to meet certain regulatory conditions.
During 2015, the Bank paid dividends to HMN of $3.0 million to pay the principal and interest on the third party note payable and fund the ongoing operating expenses of the Company. HMN did not declare or distribute any dividends to its common shareholders in 2015.
Deposit Insurance. The FDIC insures the deposits of the Bank through the Deposit Insurance Fund (DIF). The DIF is funded by assessments of FDIC members such as the Bank. The FDIC applies a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, an institution’s insurance assessments vary according to the level of capital the institution holds and the degree to which it is the subject of supervisory concern.
The Dodd-Frank Act instituted significant changes that modified the way that the DIF is managed by the FDIC and is capitalized. The Dodd-Frank Act altered the assessment base for deposit insurance assessments from a deposit to an asset base. It also increased the DIF reserve ratio from 1.15% to 1.35%. The Dodd Frank Act also requires that FDIC assessments be set in a manner that offsets the cost of the assessment increases for institutions with consolidated assets of less than $10 billion (meaning that assessments on larger institutions will be responsible for the 20 basis point increase). During 2015, the Bank was assessed approximately $342,000 for the DIF. The Dodd-Frank Act also permanently increased deposit insurance coverage from $100,000 per account ownership type to $250,000.
In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Financing Corporation (FICO) to service the FICO debt incurred in the 1980’s. The FICO assessment rate is adjusted quarterly. In 2015, the Bank paid a FICO assessment of approximately $31,000.
Capital Requirements and Prompt Corrective Action Requirements; Basel III Rules. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Quantitative measures established by regulations to ensure capital adequacy required the Bank to maintain minimum amounts and ratios of Common Tier 1 Risk-based capital, Total Tier 1 capital (Tier 1 leverage ratio), Tier 1 capital to Risk-based assets, and Risk-based capital to total assets (in each case as defined in the regulations). The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established five capital categories: 1) well-capitalized; 2) adequately capitalized; 3) undercapitalized; 4) significantly undercapitalized; and 5) critically undercapitalized. The activities in which a depository institution may engage and regulatory responsibilities of federal bank regulatory agencies vary depending upon whether an institution is well-capitalized, adequately capitalized or undercapitalized. Undercapitalized institutions are subject to various restrictions such as limitations on dividends and growth. A depository institution’s prompt corrective action capital category depends upon where its capital levels are in relation to relevant capital measures, which include risk-based capital measures and certain other factors.
At December 31, 2015, the Bank’s capital amounts and ratios are presented for (a) actual capital and (b) required capital and ratios under the Prompt Corrective Actions regulations to which the Bank is currently subject:
Prompt Corrective Action Regulations |
||||||||||||||||||||||||
Actual |
Required to be Adequately Capitalized |
Required to be Well Capitalized |
||||||||||||||||||||||
(Dollars in thousands) |
Amount |
Percent of Assets (1) |
Amount |
Percent of Assets (1) |
Amount |
Percent of Assets (1) |
||||||||||||||||||
December 31, 2015 |
||||||||||||||||||||||||
Common equity tier 1 capital ratio |
$ | 71,520 | 14.08 |
% |
$ | 22,854 | 4.50 |
% |
$ | 33,012 | 6.50 |
% |
||||||||||||
Tier 1 leverage ratio |
71,520 | 11.46 | 24,971 | 4.00 | 31,213 | 5.00 | ||||||||||||||||||
Tier 1 risk-based capital ratio |
71,520 | 14.08 | 30,473 | 6.00 | 40,630 | 8.00 | ||||||||||||||||||
Total risk-based capital ratio |
77,934 | 15.35 | 40,630 | 8.00 | 50,788 | 10.00 |
(1) |
Based upon the Bank’s adjusted total assets for the purpose of the Tier 1 or core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratios. |
Management believes that, as of December 31, 2015, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the prompt corrective action regulations described above and was “well capitalized” within the meaning of those prompt corrective action regulations. However, there can be no assurance that the Bank will continue to maintain such status in the future. In addition, the OCC has extensive discretion in its supervisory and enforcement activities, including the ability to downgrade the Bank’s prompt corrective action capital category by one level under certain conditions.
Under applicable banking regulations, the failure to comply with capital rules or other applicable requirements as they arise, could subject HMN, the Bank and their directors and officers to such restrictions, legal actions or sanctions as the FRB or the OCC considers appropriate. Possible sanctions include among others (i) the imposition of one or more cease and desist orders requiring corrective action, which are enforceable directives that may address any aspect of the Company management, operations or capital, including requirements to change management, raise equity capital, dispose of assets or effect a change of control; (ii) civil money penalties; and (iii) downgrades in the capital adequacy status of the Bank. These regulatory actions may significantly restrict the ability of the Company to take operating and strategic actions that may be in the best interests of stockholders or compel the Company to take operating and strategic actions that are not potentially in the best interests of stockholders.
Other Regulations and Examination Authority. The FDIC has adopted regulations to protect the DIF and depositors, including regulations governing the deposit insurance of various forms of accounts. Federal regulation of depository institutions is intended for the protection of depositors, and not for the protection of stockholders or other creditors. In addition, federal law requires that in any liquidation or other resolution of any FDIC-insured depository institution, claims for administrative expenses of the receiver and for deposits in U.S. branches (including claims of the FDIC as subrogee of the insured institution) shall have priority over the claims of general unsecured creditors.
The OCC may sanction any OCC-regulated bank that does not operate in accordance with OCC regulations, policies and directives. The FDIC has additional authority to terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is operating in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, or order of or condition imposed by the FDIC.
Federal Home Loan Bank (FHLB) System. The Bank is a member of the FHLB of Des Moines, which is one of the 11 regional Federal Home Loan Banks (FHBs). The primary purpose of the FHBs is to provide funding to their saving association members in support of the home financing credit function of the members. Each FHB serves as a reserve or central bank for its members within its assigned region. FHBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. FHBs make loans or advances to members in accordance with policies and procedures established by the board of directors of the FHB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Financing Board. All advances from a FHB are required to be fully secured by sufficient collateral as determined by the FHB. Long-term advances are required to be used for residential home financing and small business and agricultural loans.
As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. As of December 31, 2015, the Bank had $0.7 million in FHLB stock, which was in compliance with this requirement. The Bank receives dividends on its FHLB stock. The FHLB’s dividend philosophy is to differentiate dividend rates between membership and activity-based capital stock. Based on the FHLB’s most recent quarterly filing on Form 10-Q for the nine months ended September 30, 2015, the effective combined annualized dividend rate paid on both subclasses of its capital stock during the nine months ended September 30, 2015 and 2014 was 2.92% and 2.80%, respectively.
Other Regulation. Under FRB regulations, the Bank is required to maintain reserves against transaction accounts (primarily interest-bearing and noninterest-bearing checking accounts). Historically, reserves generally have been maintained in cash or in noninterest-bearing accounts, thereby effectively increasing an institution’s cost of funds. These regulations generally require that the Bank maintain reserves against net transaction accounts. The reserve levels are subject to adjustment by the FRB and prior to October 6, 2008, the policy was to not pay interest on reserves. The FRB now pays interest and utilizes the rate of interest paid on reserves to conduct monetary policy. A savings association, like other depository institutions maintaining reservable accounts, may, under certain conditions, borrow from the Federal Reserve Bank discount window.
Numerous other regulations promulgated by the FRB, the OCC, the CFPB and other agencies and other governmental authorities affect the business operations of the Bank. These include but are not limited to regulations relating to privacy, equal credit access, mortgage lending and foreclosure practices, electronic fund transfers, collection of checks, lending and savings disclosures, and availability of funds. The CFPB has broad authority to develop new rules and interpretations with respect to consumer financial products and services, even though its examination and enforcement authority currently do not extend to the Bank.
The CFPB’s rule-making activities include, among other things, the issuance in January 2013 of final rules implementing the Dodd-Frank Act mortgage lending requirements, including the “ability-to-repay” requirement for mortgage lending together with certain safe harbors and rebuttable presumptions of compliance associated with “qualified mortgages.”
Community Reinvestment Act. The Community Reinvestment Act (CRA) requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their delineated communities, including low to moderate income neighborhoods within those communities, while maintaining safe and sound banking practices. The regulatory agency assigns one of four possible ratings to an institution’s CRA performance and is required to make public an institution’s rating and written evaluation. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs improvement and substantial noncompliance. Under regulations that apply to all current CRA performance evaluations, many factors play a role in assessing a financial institution’s CRA performance. The institution’s regulator must consider its financial capacity and size, legal impediments, local economic conditions and demographics, including the competitive environment in which it operates. The evaluation does not rely on absolute standards, and the institutions are not required to perform specific activities or to provide specific amounts or types of credit. The Bank maintains a CRA statement for public viewing, as well as an annual CRA highlights document. These documents describe the Bank’s credit programs and services, community outreach activities, public comments and other efforts to meet community credit needs. The Bank’s last CRA exam was July 29, 2013 and the Bank received a “satisfactory” rating under the Intermediate Small Savings Association criteria.
Bank Secrecy Act. The Bank Secrecy Act (BSA) requires financial institutions to verify the identity of customers, keep records and file reports that are determined to have a high degree of usefulness in criminal, tax and regulatory matters, and to implement anti-money laundering programs and compliance procedures. The impact on Bank operations from the BSA depends on the types of customers served by the Bank.
Troubled Asset Relief Program – Capital Purchase Program
On October 3, 2008, the federal government enacted the Emergency Economic Stabilization Act of 2008 (EESA). EESA was enacted to provide liquidity to the U.S. financial system and lessen the impact of accelerating economic problems. The EESA included broad authority. The centerpiece of the EESA was the Troubled Asset Relief Program (TARP). The EESA’s broad authority was interpreted to allow the Treasury to purchase equity interests in both healthy and troubled financial institutions. The equity purchase program is commonly referred to as the Capital Purchase Program (CPP). The Company elected to participate in the CPP and sold shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock) to the Treasury in December 2008, along with a warrant to purchase 833,333 shares of HMN common stock at $4.68 per share (the Warrants). As a participant in the CPP, the Company was subject to the regulatory requirements of the EESA, as amended, and the interim final rule published on June 15, 2009, 31 C.F.R. Part 30, TARP Standards for Compensation and Corporate Governance, which imposed, among other things, certain restrictions on executive compensation and corporate governance practices. Further, holders of the Preferred Stock were entitled to a 5% annual cumulative compounding dividend for each of the first five years of the investment, which increased to 9% on February 15, 2014, until the Company redeemed the shares.
On February 8, 2013, the Treasury sold the Preferred Stock to unaffiliated third party investors in a private transaction for $18.8 million. The Company received no proceeds from the sale and it had no effect on the terms of the outstanding Preferred Stock, including the Company’s obligation to satisfy accrued and unpaid compounded dividends prior to the payment of any dividend or other distribution to holders of junior stock, including the Company’s common stock, and the increase in the dividend rate from 5% to 9%, commencing with the dividend payment date of February 15, 2014. Further, the sale of the Preferred Stock had no effect on the Company’s capital, financial condition or results of operations. As of February 17, 2015, all of the Preferred Stock had been redeemed by the Company.
On May 21, 2015, the Treasury sold the Warrants at an exercise price of $4.68 per share to three unaffiliated third party investors for an aggregate purchase price of $5.7 million. Two of the investors received a Warrant to purchase 277,777.67 shares and one investor received a Warrant to purchase 277,777.66 shares. All of the Warrants may be exercised at any time prior to their expiration date of December 23, 2018. The Company received no proceeds from this transaction and it had no effect on the Company’s capital, financial condition or results of operations.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are chosen by and serve at the discretion of the Board of Directors of HMN and the Bank. There are no family relationships among any of the directors or officers of HMN and the Bank. The business experience of each executive officer of both HMN and the Bank is set forth below.
Bradley C. Krehbiel, age 57. Mr. Krehbiel has been a director of HMN and President of the Bank since 2009, President of HMN since 2010, and Chief Executive Officer of HMN and the Bank since 2012. Prior to that, he had been the Executive Vice President of the Bank since 2004. Mr. Krehbiel joined the Bank as Vice President of Business Banking in 1998. Prior to his employment at the Bank, Mr. Krehbiel held several positions in the financial services industry.
Jon J. Eberle, age 50. Mr. Eberle is Chief Financial Officer, Senior Vice President and Treasurer of HMN and the Chief Financial Officer, Executive Vice President and Treasurer of the Bank. Mr. Eberle has held the Chief Financial Officer and Treasurer positions since 2003 and the Executive Vice President position since 2012. Prior to that he served as a Vice President since 2000 and as the Controller since 1998. From 1994 to 1998, he served as the Director of Internal Audit for HMN and the Bank. Prior to his employment at the Bank, Mr. Eberle worked for six years as a certified public accountant with a national accounting firm.
Lawrence D. McGraw, age 52. Mr. McGraw has served as the Chief Operating Officer and Executive Vice President of the Bank since 2012. Prior to that he served as Chief Credit Officer and Senior Vice President since 2010. Prior to his employment at the Bank, Mr. McGraw served as Regional President and Chief Banking Officer of a Minnesota community bank from 2005 until 2010. From 2001 to 2005 he served as the President and Chief Executive Officer of a branch location of the same community bank. Prior to his tenure at the Minnesota community bank, Mr. McGraw held various positions at two other community banks and the FDIC.
Susan K. Kolling, age 64. Ms. Kolling has served as Senior Vice President of the Bank and HMN since 1995. From 2001 to 2013, when she reached established board term limits, she also served as a Director of HMN and the Bank. Ms. Kolling served as a Vice President of the Bank from 1992 to 1994.
Available Information
The Company’s website is www.hmnf.com. The Company makes available, free of charge, through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files these materials with, or furnishes them to, the Securities and Exchange Commission (the SEC). Information contained on the Company’s website is expressly not incorporated by reference into this Form 10-K.
ITEM 1A. |
RISK FACTORS |
Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact the Company’s business and future results of operations.
Risks Related to our Business
Our capital may not be adequate to meet all our needs and requirements in the future and we may need to take steps to meet our capital needs. These actions may reduce our base of earning assets and core deposits and may dilute our shareholders or result in a change of control of the Company or the Bank. There can be no assurance that we will satisfactorily meet our required future capital needs.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations and protect depositors of the Bank. Depending upon the operating performance of the Bank and our other liquidity and capital needs, we may find it prudent, subject to prevailing market conditions and other factors, to raise additional capital through the issuance of additional shares of our common stock or other equity securities. Additional capital would potentially permit the Company to repay the existing third party note payable and allow the Bank to grow its assets more aggressively. Depending on circumstances, if we were to raise capital, we may deploy it to the Bank for general banking purposes, or may retain some or all of such capital for use by the Company.
If the Company were to raise capital through the issuance of additional shares of common stock or other equity securities, it could dilute the ownership interests of existing stockholders, dilute the Company’s earnings per share, and, if issued at a price less than the Company’s book value, dilute the per share book value of our common stock, and could result in a change in control of the Company and the Bank. New investors may also have rights, preferences and privileges senior to our current stockholders which may adversely impact our current stockholders. Our ability to raise additional capital through the issuance of equity securities, if deemed prudent, would depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. A significant investment by a person or group may also necessitate an amendment to our Certificate of Incorporation, which would require stockholder approval. Accordingly, we may not be able to raise additional capital, if needed, at all, on favorable economic terms, or other terms acceptable to us.
The Bank may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and its cost of funds for banking operations may significantly increase as a result of general economic conditions, interest rates and competitive pressures. HMN, on an unconsolidated basis, has limited capital resources and liquidity to assist the Bank with its liquidity and capital requirements.
Liquidity is the ability to meet cash flow needs on a timely basis and at a reasonable cost. The liquidity of the Bank is used to pay expenses, make loans and to repay deposit and borrowing liabilities as they become due or are demanded by customers and creditors. Many factors affect the Bank’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and standing in the marketplace and general economic conditions.
The Bank’s primary source of funding is retail deposits, gathered through its network of thirteen banking offices. Wholesale funding sources principally consist of borrowing lines from the FHLB of Des Moines and the Federal Reserve Bank of Minneapolis and brokered and internet certificates of deposit obtained from the national market. Borrowings from the FHLB are subject to the FHLB’s credit policies and procedures relating to the valuation of the loans securing advances as well as the amount of funds the FHLB will loan to the Bank. The current collateral pledged to secure advances may become unacceptable, the formulas for determining the excess pledged collateral may change or the Bank’s credit rating with the FHLB could decrease. In these cases, the Bank may not have sufficient collateral to pledge or have the borrowing capacity to meet its funding needs and may be required to rely upon alternate funding sources, such as the Federal Reserve Bank, which bear higher borrowing costs. The Bank’s securities and loan portfolios also provide a source of contingent liquidity that could be accessed in a reasonable time period through sales.
Significant changes in general economic conditions, market interest rates, competitive pressures or otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it would have to rely more heavily on brokered deposits or borrowings in the future, which are typically more expensive than retail deposits.
The Bank actively manages its liquidity position and monitors it using cash flow forecasts. Changes in economic conditions, including consumer savings habits and availability or access to borrowed funds and the brokered and internet deposit markets could potentially have a significant impact on the Company’s liquidity position, which in turn could materially impact its financial condition, results of operations and cash flows.
The HMN’s primary source of cash is dividends from the Bank, and the Bank is restricted from paying dividends to HMN unless certain conditions are met under bank regulatory requirements. At December 31, 2015, HMN had $2.6 million in cash and other assets that could readily be turned into cash. Primarily, HMN requires cash for the payment of holding company level expenses, including interest and principal payments on its third party note payable, director and management fees, legal expenses and regulatory costs. HMN does not anticipate that it will have on a stand-alone basis adequate liquid resources to make all of the required cash payments for these items in the future. To meet these payment requirements or other potential HMN liquidity or capital needs would require dividends from the Bank or external capital. Failure to meet regulatory requirements for any future dividends from the Bank to HMN, or to receive dividends in amounts deemed satisfactory by HMN, could cause HMN to require other sources of liquidity for its needs in 2016 and beyond. Further information about HMN’s liquidity position is available on page 22 in the “Management Discussion and Analysis – Liquidity and Capital Resources” section of the Annual Report incorporated by reference in Part II, Item 7 of this Form 10-K.
Our allowance for loan losses may prove to be insufficient to absorb losses or appropriately reflect, at any given time, the inherent risk of loss in our loan portfolio.
Our non-performing assets were at $6.2 million, or 0.97% of total assets at December 31, 2015. Classified loans at December 31, 2015 were $27.7 million, or 5.9% of total loans. Classified loans represent special mention, performing substandard and nonperforming loans. The level of our non-performing and classified loans was primarily due to the weak economic recovery and the continued difficulties in the real estate markets we primarily serve. If the economic recovery does not continue and/or the real estate markets do not continue to improve, these assets may not perform according to their terms and the value of the collateral may be insufficient to pay any remaining loan balance. If this occurs, we may experience losses or an increased risk of loss in our loan portfolio, which could have a negative effect on our results of operations. Like all financial institutions, we maintain an allowance for loan losses to provide for loans in our portfolio that may not be repaid in their entirety. Our allowance for loan losses may not be sufficient to cover actual loan losses or the inherent risk of loss in our loan portfolio, and future provision for loan losses could materially adversely affect our operating results.
In evaluating the appropriateness of our allowance for loan losses, we consider numerous factors, including but not limited to, specific occurrences of loan impairment, our historical charge-off experience, actual and anticipated changes in the size of the portfolios, national and regional economic conditions such as unemployment data, loan delinquencies, local economic conditions, demand for single-family homes, demand for commercial real estate and building lots, loan portfolio composition and historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses and estimates of risk of loss inherent in our loan portfolio have varied and are likely to continue to vary from our current estimates. Such variances may materially and adversely affect our financial condition and results of operations.
Federal regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.
The Company has concentrations in commercial business and commercial real estate loans, increasing the risk in its loan portfolio.
In order to enhance the yield and shorten the term-to-maturity of its loan portfolio, the Company has expanded its commercial business and commercial real estate lending and these categories of loans represented over 50% of the total loans receivable in each of the past five years. Some of the Company’s commercial real estate portfolio is in land development loans, while many of the Company’s commercial business loans were made to borrowers associated with the real estate industry. Commercial business and commercial real estate loans generally, and land development loans in particular, 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 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 or properties intended for resale are not developed and sold), the borrower’s ability to repay the loan and the underlying collateral may be impaired. Commercial business loans to businesses that are dependent on the cash flow generated by the sale or leasing of real estate are similarly impacted. The Company’s commercial business and commercial real estate loan portfolios have experienced difficulties in recent years, which has adversely affected the Company’s results of operations and financial condition. At December 31, 2015, the Company classified $4.2 million of loans as non-performing, of which $1.7 million related to commercial business and commercial real estate loans. At December 31, 2015, total classified loans included $23.6 million of commercial business and commercial real estate loans. The Company may experience actual losses in respect of these classified loans and further increases in the level of classified loans in our loan portfolio that may require further increases in our provision for loan losses.
Regional economic changes in the Company’s markets have adversely impacted, and may continue to adversely impact, results from operations.
Like all financial institutions, the Company is subject to the effects of any economic downturn, and in particular a significant decline in home values and reduced commercial development in the Company’s markets has had a negative effect on results of operations. The Company’s success depends primarily on the general economic conditions in the counties in which the Company conducts business, and in the southern Minnesota and northern Iowa areas in general. Unlike larger financial institutions that are more geographically diversified, the Company provides banking and financial services to customers primarily in the southern Minnesota counties of Dodge, Fillmore, Freeborn, Houston, Mower, Olmsted and Winona and portions of Steele, Goodhue and Wabasha counties, as well as Marshall county in Iowa. The local economic conditions in these market areas have a significant impact on the Company’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond the Company’s control can affect and has affected these local economic conditions and can adversely affect and has adversely affected the Company’s financial condition and results of operations. The Company has a significant amount of commercial business and commercial real estate loans and decreases in tenant occupancy and development home sales have had a negative effect on the ability of many of the Company’s borrowers to make timely repayments of their loans, and has had a negative effect on the value of the collateral held as security for these loans, which has adversely impacted the Company’s earnings.
Because of the asset size of the Company, adverse performance affecting a few large loans or lending relationships can cause significant volatility in earnings.
Due to the Company’s asset size, the provision for loan losses or charge offs associated with individual loans can be large relative to the Company’s earnings for a particular period. If one or a few relatively large loans become non-performing in a period and the Company is required to increase its loss reserves, or to write off principal or interest relative to such loans, the operating results for that period could be significantly adversely affected. The effect on results of operations for any given period from a change in the performance of a small number of loans may be disproportionately larger than the impact of such loans on the quality of the Company’s overall loan portfolio. In 2009, our internal loan limits were lowered to $4.5 million per borrower, however, existing borrowers with relationships over that limit were “grandfathered” in. In 2014, the lending limit was increased to $7.5 million. The Bank’s largest borrowing relationship had outstanding loans totaling $10.1 million and was performing at December 31, 2015.
The Company operates in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, including recent changes under federal law.
The Company is and will continue to be subject to extensive examination, supervision and comprehensive regulation by federal bank regulatory agencies. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system and the financial system as a whole, and not holders of our common stock. These regulations affect our lending practices, capital structure, investment practices, dividend policy, and growth, among other things. See Item 1 “Business – Regulation and Supervision” of this Form 10-K for information regarding regulation affecting the Company.
The Dodd-Frank Act and Basel III continue to change the bank regulatory structure and to affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Company. The Dodd-Frank Act requires various federal agencies, including the FRB, the OCC and the CFPB, to adopt a broad range of new implementing rules and regulations. The federal agencies were given significant discretion in drafting the implementing rules and regulations, and many of the requirements called for in the Dodd-Frank Act are being implemented over the course of several years. The full impact of changes resulting from the Dodd-Frank Act and Basel III on our operations is ongoing. These changes and other changes in the regulatory landscape may significantly impact the profitability of business activities, require material changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.
U.S. banking regulators have adopted a strengthened set of capital requirements that have been applicable to the Bank since January 1, 2015. Among other things, the new capital requirements include requirements relating to common equity as a component of core capital and as a “capital conservation buffer” against risk, and a higher minimum core capital requirement, and revise the rules for calculating risk-weighted assets and capital for purposes of such requirements. The application of more stringent capital requirements to the Bank, could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if the Bank is unable to comply with such requirements or if the Bank foresees that it may be unable to comply in the future. The Basel III Rules’ changes to methods of calculating assets and capital, including changes to risk weightings and the elements of (and deductions from) regulatory capital, could result in management modifying its business strategy and could further limit the Company’s ability to make distributions, including paying dividends or repurchasing shares of stock.
The FRB assesses the condition, performance and activities of savings and loan holding companies in a manner that is consistent with its established risk-based approach regarding bank holding company supervision to ensure that savings and loan holding companies are effectively supervised and can serve as a source of strength for, and do not threaten the soundness of, subsidiary depository institutions such as the Bank.
The CFPB, has broad authority to develop new rules and interpretations with respect to consumer financial products and services even though its examination and enforcement authority do not currently extend to the Bank.
Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, restrict mergers and acquisitions, investments, access to capital, the location of banking offices, or increase the ability of non-banks to offer competing financial services and products, among other things. Failure, or alleged failure, to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil or criminal penalties or money damages in connection with actions or proceedings on behalf of regulators or consumers, and/or reputational damage, any of which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations and to reduce the likelihood of such actions or proceedings, there can be no assurance that such violations will not occur or that such actions or proceedings will not be brought.
Changes to laws and regulations, including changes in interpretation or implementation, may also limit the Bank’s flexibility on financial products and fees which could result in additional operational costs and a reduction in our non-interest income.
Further, our regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Examples include limits on payment of dividends by banks and regulations governing compensation. Regulation of dividends may limit the liquidity of the Company and restrictions on compensation may adversely affect our ability to attract and retain employees.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA and fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The Bank has implemented policies and procedures designed to ensure compliance with such laws and regulations, but any noncompliance could lead to regulatory actions that could result in material penalties or sanctions.
The USA Patriot Act and Bank Secrecy Act may subject us to large fines for non-compliance.
The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If these activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. Although the Bank has developed policies and procedures designed to ensure compliance, regulators may take enforcement action against the Bank in the event of noncompliance.
Changes in interest rates could negatively impact the Company’s results of operations.
The earnings of the Company are primarily dependent on net interest income, which is the difference between interest earned on loans and investments and interest paid on interest-bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors, including government monetary and fiscal policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. If the Company’s interest-earning assets mature, reprice or prepay more quickly than interest-bearing liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in the case of deposits, are withdrawn by the accountholder, more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income. Given the Company’s mix of assets and liabilities as of December 31, 2015, a falling interest rate environment would negatively impact the Company’s results of operations. The effect on our deposits of decreases in interest rates generally lags the effect on our assets. The lagging effect of deposit rate changes is primarily due to the Bank’s deposits that are in the form of certificates of deposit, which do not re-price immediately when the federal funds rate changes.
Fixed rate loans increase the Company’s exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing. Adjustable rate loans decrease the risks to a lender associated with changes in interest rates but involve other risks. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, and the increased payment increases the potential for default. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as the borrowers refinance their loans at lower interest rates. Under these circumstances, the Company’s results of operations could be negatively impacted.
Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive assets including mortgage servicing rights, and the Company’s ability to realize gains on the sale or resolution of assets. This type of income can vary significantly from quarter-to-quarter and year-to-year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse effect on the Company’s results of operations.
Changes in interest rates or prepayment speeds could negatively impact the value of capitalized mortgage servicing rights.
The capitalization, amortization and impairment of mortgage servicing rights are subject to significant estimates. These estimates are based upon loan types, note rates and prepayment speed assumptions. Changes in interest rates or prepayment speeds may have a material effect on the net carrying value of mortgage servicing rights. In a declining interest rate environment, prepayment speed assumptions will increase and result in an acceleration in the amortization of the mortgage servicing rights as the assumed underlying portfolio declines and also may result in impairment as the value of the mortgage servicing rights declines.
The extended disruption or compromise of vital infrastructure, including the Company’s technology systems, could negatively impact the Company’s results of operations and financial condition.
The Company’s business depends on its ability to process, record and monitor a large number of transactions. The Company’s technological and physical infrastructures, which include its financial, accounting and other data processing systems, are vital to its operation. Extended disruption or compromise of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of the Company’s control, could cause the Company to suffer regulatory consequences, reputational damage and financial losses, any of which, could have a material adverse effect either on the financial services industry as a whole, or on the Company’s business, financial condition and results of operations.
The Company faces cybersecurity and other external data security risks that could adversely affect the reputation of the Company and that could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s business is dependent upon the transmission and storage of confidential information in digital technologies, computer and email systems, software, and networks. The Company has security systems in place and regularly monitors its computer systems and network infrastructure. The Company does not believe that it has experienced a material cybersecurity breach, but it has experienced immaterial threats to its data and systems, including computer virus and malware attacks and other attempted unauthorized access to our systems. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all future attacks. Other financial institutions have been, and continue to be, the target of various evolving and adaptive cyberattacks, including malware and denial of service, as part of an effort to disrupt the operations of financial institutions, potentially test their cybersecurity capabilities, or obtain confidential, proprietary, or other information. As cybersecurity threats continue to evolve, the Company may incur increasing costs in an effort to minimize these risks. In addition, the Company could be held liable for, and could suffer reputational damage as a result of, any security breach or loss, which could have a material adverse effect on the Company’s financial condition and results of operations.
Third parties with which the Company does business or that facilitate its business activities, including vendors and retailers, could also be sources of operational and information security risk to the Company. There have been increasingly sophisticated and large-scale efforts on the part of third parties to breach data security with respect to financial transactions, including intercepting account information at locations where customers make purchases, as well as the use of social engineering schemes such as “phishing.” For example, large retailers have reported data breaches resulting in the loss of customer information. In the event that third parties are able to misappropriate financial information of the Bank’s customers, even if such breaches take place due to weaknesses in other parties' internal data security procedures, the Company could suffer reputational or financial losses which could have a material adverse effect on its financial condition and results of operations.
Strong competition within the Company’s market area may limit profitability or generate losses.
The Company faces significant competition both in attracting deposits and in the origination of loans. Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the Bank’s market area have historically provided most of the Company’s competition for deposits and loans; however, the Company also competes with financial institutions that operate through Internet banking operations throughout the United States. In addition, and particularly in times of high interest rates, the Company faces additional and significant competition for funds from money market and mutual funds, and securities firms located in the same communities and those that operate through Internet banking operations throughout the United States. Many competitors have substantially greater financial and other resources than the Company. Finally, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than savings banks and as a result, they may enjoy a competitive advantage over the Company. 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. This competitive strategy places significant competitive pressure on the prices of loans and deposits.
Loss of large checking and money market deposit customers could increase cost of funds and have a negative effect on results of operations.
The Company has a number of large deposit customers that maintain balances in checking and money market accounts at the Bank. At December 31, 2015, there were $60 million in checking and money market accounts of customers in the ethanol and other industries that have relationship balances greater than $5 million. The ability to attract and retain these types of deposits has a positive effect on the Company’s net interest margin as they provide a relatively low cost of funds to the Company compared to certificates of deposits or advances. If these depositors were to withdraw these funds and the Bank was not able to replace them with similar types of deposits, the Banks cost of funds would increase and the Company’s results of operation would be negatively impacted.
We may decide to continue to grow our business through acquisitions, which may disrupt or harm our business and dilute stockholder value.
The Company completed an acquisition in the third quarter of 2015 and has announced another acquisition that is scheduled to be completed in the second quarter of 2016. The Company continues to regularly monitor acquisition opportunities and conducts due diligence activities related to possible transactions with banks and other financial institutions. Negotiations may take place and future acquisitions may occur at any time. Our ability to grow through acquisitions will depend, in part, on the availability of suitable acquisition targets at acceptable prices, terms, and conditions; our ability to compete effectively for these acquisition candidates; and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a relatively short period of time.
The benefits of an acquisition may take more time than expected to develop or integrate into our operations and we cannot guarantee that any acquisition will ultimately produce any benefits. Acquiring other banks, businesses, or branches involves various risks, such as potential disruption of the Company’s business, including diversion of management’s attention; difficulty in valuing the target company; potential exposure to undisclosed, contingent, or other liabilities or problems, unanticipated costs associated with an acquisition, and an inability to recover or manage such liabilities and costs; exposure to potential asset quality issues of the target company; volatility in reported income as goodwill and other impairment losses could occur irregularly and in varying amounts; difficulty and expense of integrating the operations and personnel of the target company or in realizing projected efficiencies, revenue increases, costs savings, increased market presence, or other projected benefits; potential loss of key employees or customers of the Company or the target company; dilution to existing stockholders if securities are issued as part of transaction consideration or to fund transaction consideration; and potential changes in banking or tax laws or regulations that may affect the target company. Any of the foregoing factors could have a material adverse effect on the Company’s financial condition and results of operations.
Risks related to our Common Stock
The price of our common stock has been volatile and could continue to fluctuate in the future.
During the year ended December 31, 2015, the closing price of our common stock on The NASDAQ Global Market ranged from $10.18 to $12.92 per share, and over the period from January 1, 2012 to December 31, 2015 it has ranged from $1.61 to $13.95. Our closing sale price on December 31, 2015 was $11.55 per share and on February 22, 2016 was $11.14 per share. Our stock generally trades in low volumes and its price may fluctuate in response to a number of events and factors, including, but not limited to, variations in operating results, litigation or governmental and regulatory proceedings, market perceptions of our financial reporting, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
We may issue additional stock, or reissue shares of treasury stock, without shareholder consent.
We have authorized 16,000,000 shares of common stock. As of December 31, 2015, 9,128,662 shares were issued and outstanding (including 4,645,769 shares that were held as treasury stock), and 6,871,338 shares were unissued. Of the unissued shares of common stock 833,333 were reserved for issuance pursuant to outstanding warrants, 15,000 shares were reserved for issuance pursuant to outstanding options and 96,341 shares were reserved for issuance pursuant to our equity incentive plans. The board of directors has authority, without action or vote of the stockholders, to issue all or part of the authorized but unissued shares and to reissue all of the treasury shares. Additional shares may be issued, or treasury shares reissued, in connection with future financing, acquisitions, employee stock plans, or otherwise. Any such issuance, or reissuance, will dilute the percentage ownership of existing stockholders. We are also currently authorized to issue up to 500,000 shares of preferred stock and as of December 31, 2015, there were no preferred stock shares issued and outstanding. Under our certificate of incorporation, our board of directors can issue additional preferred stock in one or more series and fix the terms of such stock without shareholder approval. Preferred stock may include the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. The issuance of preferred stock could adversely affect the rights of the holders of common stock and reduce the value of the common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party.
Future sale of shares of our common stock in the public market upon exercise of the outstanding warrants could depress our stock price.
Shares issuable upon exercise of the outstanding warrants represented beneficial ownership of approximately 16% of our common stock as of December 31, 2015. The warrants, or shares issuable upon exercise of the warrants may be eligible for sale publicly under Rule 144 under the Securities Act of 1933 in certain circumstances. Sales of substantial amounts of our common stock, whether upon exercise of the warrants or otherwise, or the perception that those sales could occur may adversely affect the market price of our common stock.
Our ability to pay dividends on or repurchase our common stock is significantly restricted. We have not paid a dividend on our common stock during the last seven years and our current financial condition and results of operations and ongoing expenses, including the interest and principal payments due on our third party note payable, make payment of any such dividend unlikely in the foreseeable future.
We are a stock savings bank holding company and our operations are conducted primarily by the Bank. Since we receive substantially all of our revenue from dividends from the Bank, our ability to pay dividends on our common stock depends on our receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations. The ability of the Bank to pay dividends to us is also subject to its profitability, financial condition, capital needs and other cash flow requirements. There is no assurance that the Bank will be able to pay dividends to us in the future or that we will generate adequate cash flow to pay dividends in the future. The inability to receive dividends from the Bank could have an adverse affect on our business and financial condition.
At December 31, 2015, the Company had an outstanding balance of $9.0 million on a note to an unrelated third party with an interest rate of 6.5% per annum. The principal balance of the loan is payable in consecutive equal annual installments of $1 million on each anniversary of the date of the Loan Agreement, commencing on December 15, 2015, with the balance due on December 15, 2021. The Company may prepay the note in whole or in part without penalty.
The required payments on the note make the payment of any common stock dividend or distribution unlikely in the foreseeable future.
Provisions of our certificate of incorporation and bylaws, as well as Delaware and federal law, may discourage, delay or prevent an acquisition of control of us, even in situations that may be viewed as desirable by our stockholders.
Provisions included in our certificate of incorporation and bylaws, as well as provisions of the Delaware General Corporation Law and federal law (including banking regulations), may discourage, delay or prevent potential acquisitions of control of us, particularly when attempted in a transaction that is not negotiated directly with and approved by our board of directors, despite perceived short-term benefits to our stockholders (such as an increase in the trading price of our common stock).
Specifically, our certificate of incorporation and bylaws include provisions that:
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limit the voting power of shares held by a stockholder beneficially owning in excess of 10% of the outstanding shares of our common stock; |
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require that, with limited exceptions, business combinations between us and a stockholder beneficially owning in excess of 10% of the voting power of the outstanding shares of our stock entitled to vote in the election of directors, be approved by at least 80% of the total number of our outstanding voting shares; |
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require that prior to acquiring shares from a stockholder that owns 5% or more of our publicly traded voting stock, with limited exception, holders of 80% or more of our voting stock outstanding, other than shares held by the selling stockholder, must approve the transaction; |
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divide our board of directors, other than directors who may be elected by a class or series of preferred stock, into three classes serving staggered three-year terms and provide that a director may only be removed prior to the expiration of a term for cause by the affirmative vote of the holders of at least 80% of the voting power of all of the outstanding shares of capital stock entitled to vote in an election of directors; |
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require that a special meeting of stockholders be called pursuant to a resolution adopted by a majority of our board of directors; |
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require advance notice of nominations of directors to be made, or business to be brought, by stockholders at our annual meetings; |
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authorize the issuance of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors; and |
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require that amendments to (i) our certificate of incorporation be approved by a two-thirds vote of our board of directors and by a majority of the outstanding shares of our voting stock or, with respect to the amendment of certain provisions (regarding, among other things, provisions relating to number, classification, election and removal of directors, amendment of the bylaws, call of special stockholder meetings, acquisitions of control, director liability, and certain business combinations), by 80% of the outstanding shares of our voting stock, and (ii) our bylaws be approved by a majority vote of our board of directors or the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation’s voting stock. For purposes of Section 203, “voting stock” means stock of any class or series entitled to vote generally in the election of directors. Furthermore, federal law requires FRB or OCC approval prior to any direct or indirect acquisition of control (as defined in regulations) of HMN or the Bank, respectively, including, with respect to the Bank, any indirect acquisition of control through an acquisition of control of HMN.
An “ownership change” for purposes of Section 382 of the Internal Revenue Code may materially impair our ability to use our net operating loss carryforwards.
Our ability to use our net operating loss carryforwards to offset future taxable income will be limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code (the Code). In general, an ownership change will occur if there is a cumulative increase in our ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change net operating losses equal to the equity value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate.
In the event an “ownership change” was to occur, we could realize a permanent loss of a portion of our U.S. federal net operating loss carryforwards and lose certain built-in losses that have not been recognized for tax purposes. The amount of the permanent loss would depend on the size of the annual limitation (which is a function of our market capitalization at the time of an “ownership change” and the then prevailing long-term tax exempt rate) and the remaining carry forward period (U.S. federal net operating losses generally may be carried forward for a period of 20 years).
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. |
PROPERTIES |
The Company leases its corporate office in Rochester, Minnesota and owns the buildings and land for 10 of its 13 full service branches. The remaining three full service branches and three loan origination office are leased. These leased branches are located at 1016 Civic Center Drive NW, Rochester, Minnesota; 100 1st Ave Bldg., Suite 200, Rochester, Minnesota; and 2805 Dodd Road, Suite 160, Eagan, Minnesota. The leased loan origination offices are located at 50 14th Avenue East, Suite 100, Sartell, Minnesota; 1850 Austin Road, Owatonna, Minnesota; and 3960 Hillside Drive, Delafield, Wisconsin. The Bank uses all properties and they are all located in Minnesota, except for one full service branch located in Iowa and one loan origination office located in Wisconsin.
ITEM 3. |
LEGAL PROCEEDINGS |
From time to time, the Company is party to legal proceedings arising out of its lending and deposit operations. The Company is, and expects to become, engaged in a number of foreclosure proceedings and other collection actions as part of its collection activities. Based on our current understanding of these pending legal proceedings, management does not believe that judgments or settlements arising from pending or threatened litigation matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, operating results or cash flows of the Company. Litigation is often unpredictable and the actual results of litigation cannot be determined with any certainty.
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
PART II
ITEM 5. |
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The information on page 24 under the caption “Dividends”, “Note 16 Stockholders’ Equity” of the Notes to Consolidated Financial Statements, on page 55, page 65 under the caption “Common Stock Information” and the inside back cover page of the Annual Report is incorporated herein by reference.
ITEM 6. |
SELECTED FINANCIAL DATA |
The information on page 5 under the caption “Five Year Consolidated Financial Highlights” of the Annual Report is incorporated herein by reference.
ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The table on page 7 and the tables regarding investment maturities on page 18 of Part 1 Item 1 of this Form 10-K, as well as the information on pages 6 through 26 under the caption “Management Discussion and Analysis” (other than the section captioned “Market Risk”) of the Annual Report is incorporated herein by reference.
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements (including the Notes to Consolidated Financial Statements) on pages 27 through 62 of the Annual Report, are incorporated herein by reference.
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. |
CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures. An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Bank’s President (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial Officer) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Management's Annual Report on Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons by collusion of two or more people, or by management override of the control. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
Under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under this framework, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015. The Company has not included an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our independent registered public accounting firm is not required to attest to management's report pursuant to Item 308(b) of Regulation S-K because the Company is not an accelerated filer or large accelerated filer.
Changes in internal controls. No change in the Company’s internal control over financial reporting was identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this report and that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. |
OTHER INFORMATION |
None.
PART III
ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated by reference from the information under the caption “Executive Officers of the Registrant” in Part I of this report and under the captions “Proposal 1 – Election of Directors - Board of Directors,” “Corporate Governance - Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the Company’s fiscal year ended December 31, 2015 (the 2016 Proxy Statement).
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial and accounting officer, controller and other persons performing similar functions. The Company has posted the Code of Ethics on its website located at www.hmnf.com. The Company intends to post on its website any amendment to, or a waiver from, a provision of the Code of Ethics that applies to its principal executive officer, principal financial and accounting officer, controller or other persons performing similar functions within four business days following the date of such amendment or waiver.
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference from the information under the caption “2015 Executive Compensation” and “2015 Director Compensation” in the 2016 Proxy Statement.
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference from the information under the captions “Security Ownership of Management and Certain Beneficial Owners” and “Other Equity Compensation Plan Information” in the 2016 Proxy Statement.
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference from the information under the captions “Corporate Governance – Committees of the Board of Directors; - Director Independence; - Related Person Transaction Approval Policy; and - Certain Transactions” in the 2016 Proxy Statement.
ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated by reference from the information under the captions “Corporate Governance - Independent Registered Public Accounting Firm Fees” and “-Approval of Independent Registered Public Accounting Firm Services and Fees” in the 2016 Proxy Statement.
PART IV
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ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
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1. |
Financial Statements |
The following financial statements appearing in the Company's Annual Report, are incorporated herein by reference.
Annual Report Section |
Pages in 2015 Annual Report |
Consolidated Balance Sheets -- December 31, 2015 and 2014 |
27 |
Consolidated Statements of Comprehensive Income -- Each of the Years in the Three-Year Period Ended December 31, 2015 |
28 |
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Consolidated Statements of Stockholders’ Equity -- Each of the Years in the Three-Year Period Ended December 31, 2015 |
29 |
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Consolidated Statements of Cash Flows -- Each of the Years in the Three-Year Period Ended December 31, 2015 |
30 |
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Notes to Consolidated Financial Statements |
31 |
Report of Independent Registered Public Accounting Firm |
63 |
2. |
Financial Statement Schedules |
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All financial statement schedules have been omitted as this information is not required under the related instructions, is not applicable or has been included in the Notes to Consolidated Financial Statements. |
3. |
Exhibits |
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The exhibits filed with this report are set forth on the Index of Exhibits filed as part of this report immediately following the signatures. |
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.
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HMN FINANCIAL, INC. |
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Date: March 11, 2016 |
By: |
/s/ Bradley C. Krehbiel |
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Bradley C. Krehbiel, President and CEO |
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Each of the undersigned hereby appoints Hugh C. Smith and Jon J. Eberle, and each of them (with full power to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act of 1934, as amended, any and all amendments and exhibits to this Form 10-K and any and all applications, instruments, and other documents to be filed with the Securities and Exchange Commission pertaining to this Form 10-K or any amendments thereto, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary or desirable. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 11, 2016.
Name |
Title |
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/s/ Bradley C. Krehbiel |
President and CEO |
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Bradley C. Krehbiel |
(Principal Executive Officer) |
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/s/ Jon J. Eberle |
Senior Vice President, Chief Financial Officer and Treasurer |
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Jon J. Eberle |
(Principal Financial and Accounting Officer) |
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/s/ Hugh C. Smith |
Chairman of the Board |
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Hugh C. Smith |
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/s/ Allen R. Berning |
Director |
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Allen R. Berning |
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/s/ Michael J. Fogarty |
Director |
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Michael J. Fogarty |
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/s/ Malcolm W. McDonald |
Director |
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Malcolm W. McDonald |
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/s/ Bernard R. Nigon |
Director |
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Bernard R. Nigon |
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/s/ Wendy S. Shannon |
Director |
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Wendy S. Shannon |
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/s/ Patricia S. Simmons |
Director |
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Patricia S. Simmons |
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/s/ Mark E. Utz |
Director |
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Marl E. Utz |
INDEX TO EXHIBITS
Exhibit Number |
Exhibit |
Filing Status |
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3.1 |
Certificate of Incorporation (Amended and Restated through July 28, 2015) |
Incorporated by Reference (1) |
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3.2 |
Amended and Restated By-laws |
Incorporated by Reference (2) |
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4.1 |
Form of Common Stock Certificate |
Incorporated by Reference (3) |
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4.2 |
Form of Warrant to Purchase Common Stock |
Filed Electronically |
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10.1† |
Form of Change in Control Agreement with executive officers |
Incorporated by Reference (4) |
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10.2† |
Directors Deferred Compensation Plan |
Incorporated by Reference (5) |
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10.3† |
Non-Employee Director Stock Purchase Plan |
Incorporated by Reference (6) |
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10.4† |
Description of annual awards to non-employee directors under the 2009 Equity Incentive Plan and form of Restricted Stock Agreement (approved April 28, 2015) |
Incorporated by Reference (7) |
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10.5† |
HMN Financial, Inc. Employee Stock Ownership Plan (Amended and Restated January 1, 2016) |
Filed Electronically |
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10.6† |
HMN Financial, Inc. 2009 Equity Incentive Plan |
Incorporated by Reference (8) |
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10.7† |
Form of Restricted Stock Agreement under HMN Financial, Inc. 2009 Equity Incentive Plan |
Incorporated by Reference (9) |
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10.8† |
Form of Restricted Stock Agreement under HMN Financial, Inc. 2009 Equity Incentive Plan (Approved April 28, 2015) |
Filed Electronically |
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10.9† |
Form of Incentive Stock Option Agreement under HMN Financial, Inc. 2009 Equity Incentive Plan (Approved January 26, 2016) |
Filed Electronically |
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10.10† |
Form of Non-Statutory Stock Option Agreement under HMN Financial, Inc. 2009 Equity Incentive Plan |
Incorporated by Reference (10) |
||
10.11† |
Executive Management Incentive Plan (Amended and Restated January 26, 2016) |
Filed Electronically |
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10.12† |
Amendment to the January 2014 Restricted Stock Award Agreements (Amended January 26, 2016) |
Filed Electronically |
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13 |
Portions of Annual Report to Security Holders incorporated by reference |
Filed Electronically |
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21 |
Subsidiaries of Registrant |
Filed Electronically |
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23.1 |
Consent of CliftonLarsonAllen LLP |
Filed Electronically |
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23.2 |
Consent of KPMG LLP |
Filed Electronically |
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24 |
Powers of Attorney |
Included with Signatures |
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31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
Filed Electronically |
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31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
Filed Electronically |
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32 |
Section 1350 Certifications |
Filed Electronically |
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101 |
Financial Statements of the Company from the Annual Report on Form 10-K for the year ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statement of Comprehensive Income (Loss), (iii) the Consolidated Statement of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. |
Filed Electronically |
† Management contract or compensatory arrangement.
1 |
Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015 (File No. 000-24100). |
2 |
Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated March 5, 2012 (File No. 000-24100). |
3 |
Incorporated by reference to the same numbered exhibit to the Company’s Registration Statement on Form S-1 dated April 1, 1994 (File No. 33-77212). |
4 |
Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 27, 2014, filed on June 2, 2014 (File No. 000-24100). |
5 |
Incorporated by reference to the same numbered exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 1994 (File No. 000-24100). |
6 |
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015 (File No. 000-24100). |
7 |
Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015 (File No. 000-24100). |
8 |
Incorporated by reference to Exhibit A to the Company’s Proxy Statement for its Annual Meeting of Stockholders held on April 28, 2009 (File No. 000-24100). |
9 |
Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 6, 2009, filed on May 12, 2009 (File No. 000-24100). |
10 |
Incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K dated May 6, 2009, filed on May 12, 2009 (File No. 000-24100). |
48
Exhibit 4.2
Warrant No. W-
WARRANT
to purchase
______________
Shares of Common Stock
of HMN FINANCIAL, INC.
1. Definitions . Unless the context otherwise requires, when used herein the following terms shall have the meanings indicated.
“ Affiliate ” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with, such other Person. For purposes of this definition, “ control ” (including, with correlative meanings, the terms “ controlled by ” and “ under common control with ”) when used with respect to any Person, means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of such Person, whether through the ownership of voting securities by contract or otherwise.
“ Board of Directors ” means the board of directors of the Company, including any duly authorized committee thereof.
“ Business Combination ” means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Company’s stockholders.
“ business day ” means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.
“ Capital Stock ” means (A) with respect to any Person that is a corporation or company, any and all shares, interests, participations or other equivalents (however designated) of capital or capital stock of such Person and (B) with respect to any Person that is not a corporation or company, any and all partnership or other equity interests of such Person.
“ Charter ” means, with respect to any Person, its certificate or articles of incorporation, articles of association, or similar organizational document.
“ Common Stock ” means the common stock, par value $0.01 per share, of the Company.
“ Company ” means the Person whose name, corporate or other organizational form and jurisdiction of organization is set forth in Item 1 of Schedule A hereto.
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.
“ Exercise Price ” means the amount set forth in Item 2 of Schedule A hereto.
“ Expiration Date ” means the date set forth in Item 3 of Schedule A hereto.
“ Expiration Time ” means 5:00 p.m., New York City time on the Expiration Date.
“ Fair Market Value ” means, with respect to any security or other property, the fair market value of such security or other property as determined by the Board of Directors, acting in good faith.
“ Governmental Entities ” means, collectively, all United States and other governmental, regulatory or judicial authorities.
“ Market Price ” means, with respect to a particular security, on any given day, the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the last closing bid and ask prices regular way, in either case on the principal national securities exchange on which the applicable securities are listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the closing bid and ask prices as furnished by two members of the Financial Industry Regulatory Authority, Inc. selected from time to time by the Company for that purpose. “Market Price” shall be determined without reference to after hours or extended hours trading. If such security is not listed and traded in a manner that the quotations referred to above are available for the period required hereunder, the Market Price per share of Common Stock shall be deemed to be the fair market value per share of such security as determined in good faith by the Board of Directors in reliance on an opinion of a nationally recognized independent investment banking corporation retained by the Company for this purpose and certified in a resolution to the Warrantholder. For the purposes of determining the Market Price of the Common Stock on the “trading day” preceding, on or following the occurrence of an event, (i) that trading day shall be deemed to commence immediately after the regular scheduled closing time of trading on the principal stock exchange on which the Common Stock is then listed or traded (or, if not so listed or traded, the New York Stock Exchange) or, if trading is closed at an earlier time, such earlier time and (ii) that trading day shall end at the next regular scheduled closing time, or if trading is closed at an earlier time, such earlier time (for the avoidance of doubt, and as an example, if the Market Price is to be determined as of the last trading day preceding a specified event and the closing time of trading on a particular day is 4:00 p.m. and the specified event occurs at 5:00 p.m. on that day, the Market Price would be determined by reference to such 4:00 p.m. closing price).
“ Ordinary Cash Dividends ” means a regular quarterly cash dividend on shares of Common Stock out of surplus or net profits legally available therefor (determined in accordance with U.S. GAAP in effect from time to time), provided that Ordinary Cash Dividends shall not include any cash dividends to the extent the aggregate per share dividends paid on the outstanding Common Stock in any quarter exceed the Quarterly Dividend Threshold, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.
“ Person ” has the meaning given to it in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.
“ Per Share Fair Market Value ” has the meaning set forth in Section 13(C).
“ Pro Rata Repurchases ” means any purchase of shares of Common Stock by the Company or any Affiliate thereof pursuant to (A) any tender offer or exchange offer subject to Section 13(e) or 14(e) of the Exchange Act or Regulation 14E promulgated thereunder or (B) any other offer available to substantially all holders of Common Stock, in the case of both (A) or (B), whether for cash, shares of Capital Stock of the Company, other securities of the Company, evidences of indebtedness of the Company or any other Person or any other property (including, without limitation, shares of Capital Stock, other securities or evidences of indebtedness of a subsidiary), or any combination thereof, effected while this Warrant is outstanding. The “ Effective Date ” of a Pro Rata Repurchase shall mean the date of acceptance of shares for purchase or exchange by the Company under any tender or exchange offer which is a Pro Rata Repurchase or the date of purchase with respect to any Pro Rata Repurchase that is not a tender or exchange offer.
“ Quarterly Dividend Threshold ” means the amount set forth in Item 4 of Schedule A hereto.
“ Regulatory Approvals ” with respect to the Warrantholder, means, to the extent applicable and required to permit the Warrantholder to exercise this Warrant for shares of Common Stock and to own such Common Stock without the Warrantholder being in violation of applicable law, rule or regulation, the receipt of any necessary approvals and authorizations of, filings and registrations with, notifications to, or expiration or termination of any applicable waiting period under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.
“ SEC ” means the U.S. Securities and Exchange Commission.
“ Securities Act ” means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.
“ Shares ” has the meaning set forth in Section 2.
“trading day” means (A) if the shares of Common Stock are not traded on any national or regional securities exchange or association or over-the-counter market, a business day or (B) if the shares of Common Stock are traded on any national or regional securities exchange or association or over-the-counter market, a business day on which such relevant exchange or quotation system is scheduled to be open for business and on which the shares of Common Stock (i) are not suspended from trading on any national or regional securities exchange or association or over-the-counter market for any period or periods aggregating one half hour or longer; and (ii) have traded at least once on the national or regional securities exchange or association or over-the-counter market that is the primary market for the trading of the shares of Common Stock. The term “trading day” with respect to any security other than the Common Stock shall have a correlative meaning based on the primary exchange or quotation system on which such security is listed or traded.
“ U.S. GAAP ” means United States generally accepted accounting principles.
“ Warrantholder ” has the meaning set forth in Section 2.
“ Warrant ” means this Warrant.
“ Warrant Shares ” means the number of Shares set forth in Item 6 of Schedule A hereto, as may be adjusted pursuant to the terms hereof from time to time.
2. Number of Shares; Exercise Price . This certifies that, for value received, the person in whose name this Warrant is registered as set forth in Item 9 of Schedule A or such person’s permitted assigns (the “ Warrantholder ”) is entitled, upon the terms and subject to the conditions hereinafter set forth, to acquire from the Company, in whole or in part, after the receipt of all applicable Regulatory Approvals, if any, up to an aggregate of the number of fully paid and nonassessable shares of Common Stock set forth in Item 6 of Schedule A hereto, at a purchase price per share of Common Stock equal to the Exercise Price. The number of shares of Common Stock (the “ Shares ”) and the Exercise Price are subject to adjustment as provided herein, and all references to “Common Stock,” “Shares” and “Exercise Price” herein shall be deemed to include any such adjustment or series of adjustments.
3. Exercise of Warrant; Term . Subject to Section 2, to the extent permitted by applicable laws and regulations, the right to purchase the Shares represented by this Warrant is exercisable, in whole or in part by the Warrantholder, at any time or from time to time after the execution and delivery of this Warrant by the Company on the date hereof, but in no event later than the Expiration Time, by (A) the surrender of this Warrant and Notice of Exercise annexed hereto, duly completed and executed on behalf of the Warrantholder, at the principal executive office of the Company located at the address set forth in Item 7 of Schedule A hereto (or such other office or agency of the Company in the United States as it may designate by notice in writing to the Warrantholder at the address of the Warrantholder appearing on the books of the Company), and (B) payment of the Exercise Price for the Shares thereby purchased by having the Company withhold, from the shares of Common Stock that would otherwise be delivered to the Warrantholder upon such exercise, shares of Common Stock issuable upon exercise of the Warrant equal in value to the aggregate Exercise Price as to which this Warrant is so exercised based on the Market Price of the Common Stock on the trading day on which this Warrant is exercised and the Notice of Exercise is delivered to the Company pursuant to this Section 3.
If the Warrantholder does not exercise this Warrant in its entirety, the Warrantholder will be entitled to receive from the Company within a reasonable time, and in any event not exceeding three business days, a new warrant in substantially identical form for the purchase of that number of Shares equal to the difference between the number of Shares subject to this Warrant and the number of Shares as to which this Warrant is so exercised. Notwithstanding anything in this Warrant to the contrary, the Warrantholder hereby acknowledges and agrees that its exercise of this Warrant for Shares is subject to the condition that the Warrantholder will have first received any applicable Regulatory Approvals.
4. Issuance of Shares; Authorization; Listing . Certificates for Shares issued upon exercise of this Warrant will be issued in such name or names as the Warrantholder may designate (or, if requested by the Warrantholder and agreed by the Company, Shares will be issued via book-entry transfer crediting the specified account of such named Person or Persons) and will be delivered to such named Person or Persons within a reasonable time, not to exceed three business days after the date on which this Warrant has been duly exercised in accordance with the terms of this Warrant. The Company hereby represents and warrants that any Shares issued upon the exercise of this Warrant in accordance with the provisions of Section 3 will be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges (other than liens or charges created by the Warrantholder, income and franchise taxes incurred in connection with the exercise of the Warrant or taxes in respect of any transfer occurring contemporaneously therewith). The Company agrees that the Shares so issued will be deemed to have been issued to the Warrantholder as of the close of business on the date on which this Warrant and payment of the Exercise Price are delivered to the Company in accordance with the terms of this Warrant, notwithstanding that the stock transfer books of the Company may then be closed or certificates representing such Shares may not be actually delivered on such date. The Company will at all times until the Expiration Time (or, if such date shall not be a business day, then on the next succeeding business day) reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of providing for the exercise of this Warrant, the aggregate number of shares of Common Stock then issuable upon exercise of this Warrant at any time. The Company will (A) procure, at its sole expense, the listing of the Shares issuable upon exercise of this Warrant at any time, subject to issuance or notice of issuance, on all principal stock exchanges on which the Common Stock is then listed or traded and (B) maintain such listings of such Shares at all times after issuance. The Company will use reasonable best efforts to ensure that the Shares may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange on which the Shares are listed or traded.
5. No Fractional Shares or Scrip . No fractional Shares or scrip representing fractional Shares shall be issued upon any exercise of this Warrant. In lieu of any fractional Share to which the Warrantholder would otherwise be entitled, the Warrantholder shall be entitled to receive a cash payment equal to the Market Price of the Common Stock on the last trading day preceding the date of exercise less the pro-rated Exercise Price for such fractional share.
6. No Rights as Stockholders; Transfer Books . This Warrant does not entitle the Warrantholder to any voting rights or other rights as a stockholder of the Company prior to the date of exercise hereof. The Company will at no time close its transfer books against transfer of this Warrant in any manner which interferes with the timely exercise of this Warrant.
7. Charges, Taxes and Expenses . Issuance of Shares to the Warrantholder upon the exercise of this Warrant shall be made without charge to the Warrantholder for any issue or transfer tax or other incidental expense in respect of the issuance of such Shares (other than liens or charges created by the Warrantholder, income and franchise taxes incurred in connection with the exercise of the Warrant or taxes in respect of any transfer occurring contemporaneously therewith), all of which taxes and expenses shall be paid by the Company.
8. Transfer/Assignment .
(A) Subject to compliance with clause (B) of this Section 8, this Warrant and all rights hereunder are transferable, in whole or in part, upon the books of the Company by the registered holder hereof in person or by duly authorized attorney, and a new warrant shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of one or more transferees, upon surrender of this Warrant, duly endorsed, to the office or agency of the Company described in Section 3. All expenses (other than stock transfer taxes) and other charges payable in connection with the preparation, execution and delivery of the new warrants pursuant to this Section 8 shall be paid by the Company.
(B) Subject to compliance with applicable securities laws, the Warrantholder may transfer, sell, assign or otherwise dispose (“ Transfer ”) all or a portion of the Warrant or the Shares issuable upon exercise of the Warrant at any time, and the Company shall take all steps as may be reasonably requested by the Warrantholder to facilitate such Transfer.
9. Exchange and Registry of Warrant . This Warrant is exchangeable, upon the surrender hereof by the Warrantholder to the Company, for a new warrant or warrants of like tenor and representing the right to purchase the same aggregate number of Shares. The Company shall maintain a registry showing the name and address of the Warrantholder as the registered holder of this Warrant. This Warrant may be surrendered for exchange or exercise in accordance with its terms, at the office of the Company, and the Company shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry.
10. Loss, Theft, Destruction or Mutilation of Warrant . Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in the case of any such loss, theft or destruction, upon receipt of a bond, indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company shall make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of Shares as provided for in such lost, stolen, destroyed or mutilated Warrant.
11. Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a business day, then such action may be taken or such right may be exercised on the next succeeding day that is a business day.
12. [Reserved]
13. Adjustments and Other Rights . The Exercise Price and the number of Shares issuable upon exercise of this Warrant shall be subject to adjustment from time to time as follows; provided , that if more than one subsection of this Section 13 is applicable to a single event, the subsection shall be applied that produces the largest adjustment and no single event shall cause an adjustment under more than one subsection of this Section 13 so as to result in duplication:
(A) Stock Splits, Subdivisions, Reclassifications or Combinations . If the Company shall (i) declare and pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide or reclassify the outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares, the number of Shares issuable upon exercise of this Warrant at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Warrantholder after such date shall be entitled to purchase the number of shares of Common Stock which such holder would have owned or been entitled to receive in respect of the shares of Common Stock subject to this Warrant after such date had this Warrant been exercised immediately prior to such date. In such event, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment and (2) the Exercise Price in effect immediately prior to the record or effective date, as the case may be, for the dividend, distribution, subdivision, combination or reclassification giving rise to this adjustment by (y) the new number of Shares issuable upon exercise of the Warrant determined pursuant to the immediately preceding sentence.
(B) [Reserved]
(C) Other Distributions . In case the Company shall fix a record date for the making of a distribution to all holders of shares of its Common Stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding Ordinary Cash Dividends, dividends of its Common Stock and other dividends or distributions referred to in Section 13(A)), in each such case, the Exercise Price in effect prior to such record date shall be reduced immediately thereafter to the price determined by multiplying the Exercise Price in effect immediately prior to the reduction by the quotient of (x) the Market Price of the Common Stock on the last trading day preceding the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the Fair Market Value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of Common Stock (such amount and/or Fair Market Value, the “ Per Share Fair Market Value ”) divided by (y) such Market Price on such date specified in clause (x); such adjustment shall be made successively whenever such a record date is fixed. In such event, the number of Shares issuable upon the exercise of this Warrant shall be increased to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment, and (2) the Exercise Price in effect immediately prior to the distribution giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the Per Share Fair Market Value would be reduced by the per share amount of the portion of the cash dividend that would constitute an Ordinary Cash Dividend. In the event that such distribution is not so made, the Exercise Price and the number of Shares issuable upon exercise of this Warrant then in effect shall be readjusted, effective as of the date when the Board of Directors determines not to distribute such shares, evidences of indebtedness, assets, rights, cash or warrants, as the case may be, to the Exercise Price that would then be in effect and the number of Shares that would then be issuable upon exercise of this Warrant if such record date had not been fixed.
(D) Certain Repurchases of Common Stock . In case the Company effects a Pro Rata Repurchase of Common Stock, then the Exercise Price shall be reduced to the price determined by multiplying the Exercise Price in effect immediately prior to the Effective Date of such Pro Rata Repurchase by a fraction of which the numerator shall be (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Pro Rata Repurchase and (y) the Market Price of a share of Common Stock on the trading day immediately preceding the first public announcement by the Company or any of its Affiliates of the intent to effect such Pro Rata Repurchase, minus (ii) the aggregate purchase price of the Pro Rata Repurchase, and of which the denominator shall be the product of (i) the number of shares of Common Stock outstanding immediately prior to such Pro Rata Repurchase minus the number of shares of Common Stock so repurchased and (ii) the Market Price per share of Common Stock on the trading day immediately preceding the first public announcement by the Company or any of its Affiliates of the intent to effect such Pro Rata Repurchase. In such event, the number of shares of Common Stock issuable upon the exercise of this Warrant shall be increased to the number obtained by dividing (x) the product of (1) the number of Shares issuable upon the exercise of this Warrant before such adjustment, and (2) the Exercise Price in effect immediately prior to the Pro Rata Repurchase giving rise to this adjustment by (y) the new Exercise Price determined in accordance with the immediately preceding sentence. For the avoidance of doubt, no increase to the Exercise Price or decrease in the number of Shares issuable upon exercise of this Warrant shall be made pursuant to this Section 13(D).
(E) Business Combinations . In case of any Business Combination or reclassification of Common Stock (other than a reclassification of Common Stock referred to in Section 13(A)), the Warrantholder’s right to receive Shares upon exercise of this Warrant shall be converted into the right to exercise this Warrant to acquire the number of shares of stock or other securities or property (including cash) which the Common Stock issuable (at the time of such Business Combination or reclassification) upon exercise of this Warrant immediately prior to such Business Combination or reclassification would have been entitled to receive upon consummation of such Business Combination or reclassification; and in any such case, if necessary, the provisions set forth herein with respect to the rights and interests thereafter of the Warrantholder shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to the Warrantholder’s right to exercise this Warrant in exchange for any shares of stock or other securities or property pursuant to this paragraph. In determining the kind and amount of stock, securities or the property receivable upon exercise of this Warrant following the consummation of such Business Combination, if the holders of Common Stock have the right to elect the kind or amount of consideration receivable upon consummation of such Business Combination, then the consideration that the Warrantholder shall be entitled to receive upon exercise shall be deemed to be the types and amounts of consideration received by the majority of all holders of the shares of common stock that affirmatively make an election (or of all such holders if none make an election).
(F) Rounding of Calculations; Minimum Adjustments . All calculations under this Section 13 shall be made to the nearest one-tenth (1/10th) of a cent or to the nearest one-hundredth (1/100th) of a share, as the case may be. Any provision of this Section 13 to the contrary notwithstanding, no adjustment in the Exercise Price or the number of Shares into which this Warrant is exercisable shall be made if the amount of such adjustment would be less than $0.01 or one-tenth (1/10th) of a share of Common Stock, but any such amount shall be carried forward and an adjustment with respect thereto shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate $0.01 or 1/10th of a share of Common Stock, or more.
(G) Timing of Issuance of Additional Common Stock Upon Certain Adjustments . In any case in which the provisions of this Section 13 shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Warrantholder of this Warrant exercised after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such exercise by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such exercise before giving effect to such adjustment and (ii) paying to such Warrantholder any amount of cash in lieu of a fractional share of Common Stock; provided , however , that the Company upon request shall deliver to such Warrantholder a due bill or other appropriate instrument evidencing such Warrantholder’s right to receive such additional shares, and such cash, upon the occurrence of the event requiring such adjustment.
(H) [Reserved]
(I) Other Events . The Exercise Price or the number of Shares into which this Warrant is exercisable shall not be adjusted in the event of a change in the par value of the Common Stock or a change in the jurisdiction of incorporation of the Company.
(J) Statement Regarding Adjustments . Whenever the Exercise Price or the number of Shares into which this Warrant is exercisable shall be adjusted as provided in Section 13, the Company shall forthwith file at the principal office of the Company a statement showing in reasonable detail the facts requiring such adjustment and the Exercise Price that shall be in effect and the number of Shares into which this Warrant shall be exercisable after such adjustment, and the Company shall also cause a copy of such statement to be sent by mail, first class postage prepaid, to each Warrantholder at the address appearing in the Company’s records.
(K) Notice of Adjustment Event . In the event that the Company shall propose to take any action of the type described in this Section 13 (but only if the action of the type described in this Section 13 would result in an adjustment in the Exercise Price or the number of Shares into which this Warrant is exercisable or a change in the type of securities or property to be delivered upon exercise of this Warrant), the Company shall give notice to the Warrantholder, in the manner set forth in Section 13(J), which notice shall specify the record date, if any, with respect to any such action and the approximate date on which such action is to take place. Such notice shall also set forth the facts with respect thereto as shall be reasonably necessary to indicate the effect on the Exercise Price and the number, kind or class of shares or other securities or property which shall be deliverable upon exercise of this Warrant. In the case of any action which would require the fixing of a record date, such notice shall be given at least 10 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 15 days prior to the taking of such proposed action. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any such action.
(L) Proceedings Prior to Any Action Requiring Adjustment . As a condition precedent to the taking of any action which would require an adjustment pursuant to this Section 13, the Company shall take any action which may be necessary, including obtaining regulatory, New York Stock Exchange, NASDAQ Stock Market or other applicable national securities exchange or stockholder approvals or exemptions, in order that the Company may thereafter validly and legally issue as fully paid and nonassessable all shares of Common Stock that the Warrantholder is entitled to receive upon exercise of this Warrant pursuant to this Section 13.
(M) Adjustment Rules . Any adjustments pursuant to this Section 13 shall be made successively whenever an event referred to herein shall occur. If an adjustment in Exercise Price made hereunder would reduce the Exercise Price to an amount below par value of the Common Stock, then such adjustment in Exercise Price made hereunder shall reduce the Exercise Price to the par value of the Common Stock.
14. [Reserved]
15. No Impairment . The Company will not, by amendment of its Charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder.
16. Governing Law . This Warrant will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. To the extent permitted by applicable law, each of the Company and the Warrantholder hereby unconditionally waives trial by jury in any civil legal action or proceeding relating to the Warrant or the transactions contemplated hereby or thereby.
17. Binding Effect . This Warrant shall be binding upon any successors or assigns of the Company.
18. Amendments . This Warrant may be amended and the observance of any term of this Warrant may be waived only with the written consent of the Company and the Warrantholder.
19. Prohibited Actions . The Company agrees that it will not take any action which would entitle the Warrantholder to an adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of this Warrant, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon the exercise of all outstanding options, warrants, conversion and other rights, would exceed the total number of shares of Common Stock then authorized by its Charter.
20. Notices . Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices hereunder shall be delivered as set forth in Item 8 of Schedule A hereto, or pursuant to such other instructions as may be designated in writing by the party to receive such notice.
21. Entire Agreement . This Warrant, the forms attached hereto and Schedule A hereto (the terms of which are incorporated by reference herein) contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or undertakings with respect thereto.
[Remainder of page intentionally left blank]
[Form of Notice of Exercise]
Date: _________
TO: |
HMN Financial, Inc. |
RE: |
Election to Purchase Common Stock |
The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby agrees to subscribe for and purchase the number of shares of the Common Stock set forth below covered by such Warrant. The undersigned, in accordance with Section 3 of the Warrant, hereby agrees to pay the aggregate Exercise Price for such shares of Common Stock via the cashless exercise provision of Section 3 of the Warrant. A new warrant evidencing the remaining shares of Common Stock covered by such Warrant, but not yet subscribed for and purchased, if any, should be issued in the name set forth below.
Number of Shares of Common Stock __________________
Aggregate Exercise Price: __________________
Holder: __________________
By: __________________
Name: __________________
Title: __________________
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by a duly authorized officer.
Dated:___________, 2015
|
HMN FINANCIAL, INC.
By: Name: Brad Krehbiel Title: Chief Executive Officer
Attest:
By: Name: Jon Eberle Title: Chief Financial Officer |
[Signature Page to Warrant]
Schedule A
Item 1
Name: HMN Financial, Inc.
Corporate or other organizational form: Corporation
Jurisdiction of organization: Delaware
Item 2
Exercise Price: $4.68 per share
Item 3
Expiration Date: December 23, 2018
Item 4
Quarterly Dividend Threshold: $0.25 per share
Item 5
[reserved]
Item 6
Number of shares of Common Stock underlying the Warrant (the “ Warrant Shares ”):
Item 7
Company’s address: 1016 Civic Center Drive N.W., Rochester, MN 55901
Item 8
Notice information: HMN Financial, Inc.
Attn: Chief Financial Officer
1016 Civic Center Drive N.W.
Rochester, MN 55901
Item 9
Name of Registered Warrantholder:
13
Exhibit 10.5
HMN FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(As Amended and Restated January 1, 2016)
HMN FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Page
PREAMBLE |
1 | |
ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION |
2 | |
1.1 Definitions |
2 |
|
(a) |
“Act” |
2 |
(b) |
“Administrator” |
2 |
(c) |
“Affiliate” |
2 |
(d) |
“Annual Additions” |
2 |
(e) |
“Authorized Leave of Absence” |
3 |
(f) |
“Beneficiary” |
3 |
(g) |
“Board of Directors” |
3 |
(h) |
“Break” |
3 |
(i) |
“Code” |
3 |
(j) |
“Compensation” |
4 |
(k) |
“Date of Hire” |
4 |
(l) |
“Disability” |
4 |
(m) |
“Disability Retirement Date” |
4 |
(n) |
“Early Retirement Date” |
4 |
(o) |
“Effective Date” |
4 |
(p) |
“Eligibility Period” |
4 |
(q) |
“Employee” |
5 |
(r) |
“Employer” |
5 |
(s) |
“Employer Securities” |
5 |
(t) |
“Entry Date” |
5 |
(u) |
“Exempt Loan” |
5 |
(v) |
“Former Participant” |
5 |
(w) |
“Fund” |
5 |
(x) |
“Hour of Service” |
5 |
(y) |
“Investment Adjustments” |
6 |
(z) |
“Leased Employee” |
6 |
(aa) |
“Limitation Year” |
6 |
(bb) |
“Normal Retirement Date” |
6 |
(cc) |
“Participant” |
6 |
(dd) |
“Plan” |
6 |
(ee) |
“Plan Year” |
6 |
(ff) |
“Qualified Domestic Relations Order” |
7 |
(gg) |
“Retirement” |
7 |
(hh) |
“Service” |
7 |
(ii) |
“Sponsor” |
7 |
(jj) |
“Trust Agreement” |
7 |
(kk) |
“Trustee” |
7 |
(ll) |
“Valuation Date” |
7 |
(mm) |
“Year of Service” |
7 |
1.2 |
Plurals and Gender |
8 |
1.3 |
Incorporation of Trust Agreement |
8 |
1.4 |
Headings |
8 |
1.5 |
Severability |
8 |
1.6 |
References to Governmental Regulations |
8 |
1.7 |
Benefits Determined Under Provisions in Effect at Termination of Employment |
8 |
1.8 |
Effective Date of Restatement |
8 |
ARTICLE II PARTICIPATION |
9 | |
2.1 |
Commencement of Participation |
9 |
2.2 |
Termination of Participation |
9 |
2.3 |
Resumption of Participation |
9 |
2.4 |
Determination of Eligibility |
10 |
ARTICLE III CREDITED SERVICE |
11 | |
3.1 |
Service Counted for Eligibility Purposes |
11 |
3.2 |
Service Counted for Vesting Purposes |
11 |
3.3 |
Credit for Pre-Break Service |
11 |
3.4 |
Service Credit During Authorized Leaves |
12 |
3.5 |
Service Credit During Maternity or Paternity Leave |
12 |
3.6 |
Ineligible Employees |
12 |
3.7 |
Periods of Military Service |
12 |
ARTICLE IV CONTRIBUTIONS |
13 | |
4.1 |
Employee Stock Ownership Contributions |
13 |
4.2 |
Time and Manner of Employee Stock Ownership Contributions |
13 |
4.3 |
Records of Contributions |
14 |
4.4 |
Erroneous Contributions |
14 |
ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS |
15 | |
5.1 |
Establishment of Separate Participant Accounts |
15 |
5.2 |
Establishment of Contribution Holding and Suspense Accounts |
15 |
5.3 |
Allocation of Earnings, Losses and Expenses |
16 |
5.4 |
Allocation of Forfeitures |
16 |
5.5 |
Allocation of Annual Employee Stock Ownership Contributions |
16 |
5.6 |
Limitation on Annual Additions |
17 |
5.7 |
Erroneous Allocations |
20 |
5.8 |
Value of Participant’s Interest in Fund |
20 |
5.9 |
Investment of Account Balances |
20 |
ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY |
21 | |
6.1 |
Normal Retirement |
21 |
6.2 |
Early Retirement |
21 |
6.3 |
Disability Retirement |
21 |
6.4 |
Death Benefits |
21 |
6.5 |
Designation of Death Beneficiary and Manner of Payment |
21 |
ARTICLE VII VESTING AND FORFEITURES |
23 | |
7.1 |
Vesting on Death, Disability and Normal Retirement |
23 |
7.2 |
Vesting on Termination of Participation |
23 |
7.3 |
Disposition of Forfeitures |
23 |
ARTICLE VIII EMPLOYEE STOCK OWNERSHIP PROVISIONS |
25 | |
8.1 |
Right to Demand Employer Securities |
25 |
8.2 |
Voting Rights |
25 |
8.3 |
Nondiscrimination in Employee Stock Ownership Contributions |
25 |
8.4 |
Dividends |
26 |
8.5 |
Exempt Loans |
26 |
8.6 |
Exempt Loan Payments |
27 |
8.7 |
Put Option |
28 |
8.8 |
Diversification Requirements |
29 |
8.9 |
Independent Appraiser |
29 |
8.10 |
Disqualified Person Transactions |
29 |
ARTICLE IX PAYMENTS AND DISTRIBUTIONS |
30 | |
9.1 |
Payments on Termination of Service — In General |
30 |
9.2 |
Commencement of Payments |
30 |
9.3 |
Mandatory Commencement of Benefits |
30 |
9.4 |
Required Beginning Dates |
33 |
9.5 |
Form of Payment |
33 |
9.6 |
Medium of Distribution |
33 |
9.7 |
Payments Upon Termination of Plan |
33 |
9.8 |
Distributions Pursuant to Qualified Domestic Relations Orders |
33 |
9.9 |
Cash-Out Distributions |
34 |
9.10 |
ESOP Distribution Rules |
34 |
9.11 |
Withholding |
34 |
9.12 |
Waiver of 30-day Notice |
35 |
9.13 |
Direct Transfer Option |
36 |
ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS |
37 | |
10.1 |
Top-Heavy Rules to Control |
37 |
10.2 |
Top-Heavy Plan Definitions |
37 |
10.3 |
Calculation of Accrued Benefits |
38 |
10.4 |
Determination of Top-Heavy Status |
40 |
10.5 |
Determination of Super Top-Heavy Status |
40 |
10.6 |
Minimum Contribution |
40 |
10.7 |
Vesting |
41 |
ARTICLE XI ADMINISTRATION |
42 | |
11.1 |
Appointment of Administrator |
42 |
11.2 |
Resignation or Removal of Administrator |
42 |
11.3 |
Appointment of Successors: Terms of Office, Etc |
42 |
11.4 |
Powers and Duties of Administrator |
42 |
11.5 |
Action by Administrator |
43 |
11.6 |
Participation by Administrators |
44 |
11.7 |
Agents |
44 |
11.8 |
Allocation of Duties |
44 |
11.9 |
Delegation of Duties |
44 |
11.10 |
Administrator’s Action Conclusive |
44 |
11.11 |
Compensation and Expenses of Administrator |
44 |
11.12 |
Records and Reports |
45 |
11.13 |
Reports of Fund Open to Participants |
45 |
11.14 |
Named Fiduciary |
45 |
11.15 |
Information from Employer |
45 |
11.16 |
Reservation of Rights by Employer |
45 |
11.17 |
Liability and Indemnification |
45 |
11.18 |
Service as Trustee and Administrator |
46 |
ARTICLE XII CLAIMS PROCEDURE |
47 | |
12.1 |
Notice of Denial |
47 |
12.2 |
Right to Reconsideration |
47 |
12.3 |
Review of Documents |
47 |
12.4 |
Decision by Administrator |
47 |
12.5 |
Notice by Administrator |
47 |
12.6 |
Limitations on Actions |
47 |
ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER |
48 | |
13.1 |
Amendments |
48 |
13.2 |
Consolidation, Merger or Other Transactions of Employer |
48 |
13.3 |
Consolidation or Merger of Trust |
49 |
13.4 |
Bankruptcy or Insolvency of Employer |
49 |
13.5 |
Voluntary Termination |
49 |
13.6 |
Partial Termination of Plan or Permanent Discontinuance of Contributions |
50 |
ARTICLE XIV MISCELLANEOUS |
51 | |
14.1 |
No Diversion of Funds |
51 |
14.2 |
Liability Limited |
51 |
14.3 |
Incapacity |
51 |
14.4 |
Spendthrift Clause |
51 |
14.5 |
Benefits Limited to Fund |
51 |
14.6 |
Cooperation of Parties |
52 |
14.7 |
Payments Due Missing Persons |
52 |
14.8 |
Governing Law |
52 |
14.9 |
Nonguarantee of Employment |
52 |
14.10 |
Counsel |
52 |
HMN FINANCIAL, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
PREAMBLE
Effective as of January 1, 1994, HMN Financial, Inc., a Delaware corporation, (the “Sponsor”), has adopted the HMN Financial, Inc. Employee Stock Ownership Plan in order to enable Participants to share in the growth and prosperity of the Sponsor and its wholly owned subsidiary, Home Federal Savings Bank, and to provide Participants with an opportunity to accumulate capital for their future economic security by accumulating funds to provide retirement, death and disability benefits. The Plan is a stock bonus plan designed to meet the requirements of an employee stock ownership plan as described at Code § 4975(e)(7) and ERISA § 407(d)(6). The primary purpose of the employee stock ownership plan is to invest in employer securities. The Sponsor intends that the Plan will qualify under Code §§ 401(a) and 501(a) and will comply with the provisions of ERISA.
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION
1.1 |
Definitions . |
Unless a different meaning is plainly implied by the context, the following terms as used in this Plan shall have the following meanings:
(a) “Act” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute.
(b) “Administrator” shall mean the administrative committee provided for in Article XI.
(c) “Affiliate” shall mean any trade or business entity under common control with the Employer, or under common control with a predecessor employer (if so required by regulations prescribed by the Secretary of the Treasury) while it is such. For this purpose, a trade or business entity (whether a corporation, partnership, sole proprietorship or otherwise) is under “common control” with another trade or business entity (i) if both entities are corporations which are members of a controlled group of corporations as defined in Code § 414(b), or (ii) if both entities are trades or businesses (whether or not incorporated) which are under common control as defined in Code § 414(c), or (iii) if both entities are members of an affiliated service group as defined in Code § 414(m), or (iv) if both entities are required to be aggregated pursuant to regulations under Code § 414(o). Service for all entities under common control shall be treated as service for a single employer to the extent required by the Code; provided, however, that an individual shall not be a Participant in the Plan by reason of this section. In applying the first sentence of this section for purposes of Section 5.6 of the Plan, the provisions of subsections (b) and (c) of Code § 414 are deemed to be modified as provided in Code § 415(h).
(d) “ Annual Additions ” shall mean the sum of the following amounts allocated to a Participant for a Limitation Year under this Plan and all other defined contribution plans maintained by the Employer in which he or she participates:
(1) Annual Additions include:
(A) Employer contributions.
(B) Forfeitures, if any.
(C) Voluntary non-deductible (Employee) contributions, if any.
(D) Amounts attributable to medical benefits as described in Code §§ 415(l) and 419A(d)(1).
(2) Notwithstanding the foregoing, Annual Additions do not include:
(A) The direct transfer of a benefit or employee contributions from a qualified plan to the Plan.
(B) Reinvested dividends on Employer Securities.
(C) Restorative payments made to restore losses to the Plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under Title I of ERISA or under other applicable federal or state law.
(D) Rollover contributions (as described in Code §§ 401(a)(31), 402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3) or 457(e)(16), or any other Code section that permits rollovers).
(E) Employer contributions that are used by the Trust to pay interest on an Exempt Loan or any forfeitures of Employer Securities purchased with the proceeds of an Exempt Loan, provided that not more than one-third of the Employer contributions are allocated to Participants who are among the group of Employees determined to be “highly compensated employees” within the meaning of Code § 414(q).
An Annual Addition with respect to a Participant’s Accounts shall be deemed credited thereto with respect to a Limitation Year if it is allocated to the Participant’s accounts under the terms of the plan as of any date within such Limitation Year.
(e) “Authorized Leave of Absence” shall mean an absence from Service with respect to which the Employee may or may not be entitled to Compensation and which meets any one of the following requirements:
(1) Service in any of the armed forces of the United States for up to 36 months, provided that the Employee resumes Service within 90 days after discharge, or such longer period of time during which such Employee’s employment rights are protected by law; or
(2) Any other absence or leave expressly approved and granted by the Employer which does not exceed 24 months, provided that the Employee resumes Service at or before the end of such approved leave period. In approving such leaves of absence, the Employer shall treat all Employees on a uniform and nondiscriminatory basis.
(f) “Beneficiary” shall mean such persons as may be designated by the Participant to receive benefits after the death of the Participant, or such persons designated by the Administrator to receive benefits after the death of the Participant, all as provided in Section 6.5.
(g) “Board of Directors” shall mean the Board of Directors of the Sponsor.
(h) “Break” shall mean a Plan Year during which an Employee fails to complete more than 500 Hours of Service.
(i) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute.
(j) “Compensation” shall mean the amount of remuneration paid to an Employee by the Employer during a Plan Year, on or after the date on which the Employee becomes a Participant, for services rendered to the Employer during such Plan Year, including base salary, bonuses, overtime and any amount of compensation contributed pursuant to a salary reduction election to any plan which meets the requirements of Code §§ 125, 132(f)(4) or 401(k), but excluding amounts paid by the Employer or accrued with respect to this Plan or any other qualified or non-qualified unfunded plan of deferred compensation or other employee welfare plan to which the Employer contributes, payments for group insurance, medical benefits, reimbursement for expenses, and other forms of extraordinary pay, and excluding amounts accrued for a prior year. Compensation includes military differential wage payments (as defined in Code § 3401(h)) to the extent required under Code § 414(u).
Effective for Plan Years commencing during or after 2016, the Compensation of a Participant for a Plan Year shall not exceed $265,000, adjusted for each Plan Year to take into account any increase provided for that year in accordance with the Code § 401(a)(17) or regulations prescribed by the Secretary of the Treasury. The dollar increase in effect on January 1 of any calendar year shall apply to Plan Years beginning in that calendar year. If a Plan Year is shorter than 12 months, the limit under this subsection for that year shall be multiplied by a fraction, the numerator of which is the number of months in the short Plan Year and the denominator of which is 12.
(k) “Date of Hire” shall mean the date on which a person shall perform his first Hour of Service. Notwithstanding the foregoing, in the event a person incurs one or more consecutive Breaks after his initial Date of Hire which results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his “Date of Hire” shall thereafter be the date on which he completes his first Hour of Service after such Break or Breaks.
(l) “Disability” shall mean a physical or mental impairment which prohibits a Participant from engaging in any occupation for wages or profit and which has caused the Social Security Administration to classify the individual as “disabled” for purposes of Social Security.
(m) “Disability Retirement Date” shall mean the first day of the month after which a Participant incurs a Disability.
(n) “Early Retirement Date” shall mean the first day of the month coincident with or next following the date on which a Participant attains age 55 and completes 5 Years of Service.
(o) “Effective Date” shall mean the orginal effective date of the Plan, which was January 1, 1994.
(p) “Eligibility Period” shall mean the period of 12 consecutive months commencing on an Employee’s Date of Hire. Succeeding eligibility computation periods after the initial eligibility computation period shall be based on Plan Years which include the first anniversary of an Employee’s Date of Hire.
(q) “Employee” shall mean any person employed by the Employer, including officers, but excluding Leased Employees and directors in their capacity as such; provided further, however, that the term “Employee” shall not include any employee included in a unit of employees covered by a collective bargaining agreement with the Employer that does not expressly provide for participation of such employees in this Plan, where there has been good-faith bargaining between the Employer and the employees’ representatives on the subject of retirement benefits. Notwithstanding anything herein to the contrary, an individual is not an Employee during any period during which the individual is classified by the Employer as an independent contractor or as any other status in which the person is not treated as a common law employee of the Employer for purposes of withholding of taxes, regardless of the correct legal status of the individual. The previous sentence applies to all periods of such service of an individual who is subsequently reclassified as an employee, whether the reclassification is retroactive or prospective.
(r) “Employer” shall mean HMN Financial, Inc., a Delaware corporation, and its wholly owned subsidiary, Home Federal Savings Bank, or any successors to the aforesaid corporations by merger, consolidation or otherwise, which may agree to continue this Plan, or any affiliated or subsidiary corporation or business organization of any Employer which, with the consent of the Sponsor, shall agree to become a party to this Plan.
(s) “Employer Securities” shall mean the common stock issued by HMN Financial, Inc.
(t) “Entry Date” shall mean each January 1 and July 1, so long as this Plan shall remain in effect.
(u) “Exempt Loan” shall mean a loan described at Code § 4975(d)(1) to the Trustee to purchase Employer Securities for the Plan, made or guaranteed by a disqualified person, as defined at Code § 4975(e)(2), including, but not limited to, a direct loan of cash, a purchase money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee or the use of assets of such disqualified person as collateral for such a loan.
(v) “Former Participant” shall mean any previous Participant whose participation has terminated but who has a vested interest in the Plan which has not been distributed in full.
(w) “Fund” shall mean the Fund maintained by the Trustee pursuant to the Trust Agreement in order to provide for the payment of the benefits specified in the Plan.
(x) “Hour of Service” shall mean each hour for which an Employee is directly or indirectly paid or entitled to payment by an Employer for the performance of duties or for reasons other than the performance of duties (such as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and similar periods of paid non-working time). To the extent not otherwise included, Hours of Service shall also include each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. Hours of working time shall be credited on the basis of actual hours worked, even though compensated at a premium rate for overtime or other reasons. In computing and crediting Hours of Service for an Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall apply, said Sections being herein incorporated by reference. Hours of Service shall be credited to the Plan Year or other relevant period during which the services were performed or the nonworking time occurred, regardless of the time when Compensation therefor may be paid. Any Employee for whom no hourly employment records are kept by the Employer shall be credited with 190 Hours of Service for each calendar month in which he would have been credited with a least one Hour or Service under the foregoing provisions, if hourly records were available. Effective January 1, 1985, for absences commencing on or after that date, solely for purposes of determining whether a Break for participation and vesting purposes has occurred in an Eligibility Period or Plan Year, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this Section 1.1(x), an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this provision shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break in that period, or (2) in all other cases, in the following computation period.
(y) “Investment Adjustments” shall mean the increases and/or decreases in the value of a Participant’s accounts attributable to earnings, gains, losses and expenses of the Fund, as set forth in Section 5.3.
(z) “Leased Employee” shall mean any person defined as such by Code § 414(n). In general, a Leased Employee is any person who is not otherwise an employee of the Employer or an Affiliate (referred to collectively as the “recipient”) and who pursuant to an agreement between the recipient and any other person (“leasing organization”) has performed services for the recipient (or for the recipient and related persons determined in accordance with Code § 414(n)(6)) on a substantially full-time basis for a period of at least one year and such services are performed under primary direction or control by the recipient. For purposes of the requirements listed in Code § 414(n)(3), any Leased Employee shall be treated as an employee of the recipient, and contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. However, if Leased Employees constitute less than 20% of the recipient’s non-highly compensated work force within the meaning of Code § 414(n)(5)(C)(ii), those Leased Employees covered by a plan described in Code § 414(n)(5) shall be disregarded. Notwithstanding the foregoing, no Leased Employee shall be an Employee or a Participant in this Plan.
(aa) “Limitation Year” shall mean the Plan Year.
(bb) “Normal Retirement Date” shall mean the first day of the month coincident with or during which a Participant attains age 65 and completes the fifth anniversary of his participation in the Plan.
(cc) “Participant” shall mean an Employee who has met all of the eligibility requirements of the Plan and who is ‘currently included in the Plan as provided in Article II hereof.
(dd) “Plan” shall mean the HMN Financial, Inc. Employee Stock Ownership Plan, as described herein or as hereafter amended from time to time.
(ee) “Plan Year” shall mean any 12 consecutive month period commencing on January 1 and ending on December 31.
(ff) “Qualified Domestic Relations Order” shall mean any judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony, marital property rights to a spouse, former spouse, child or other dependent of the Participant (all such persons hereinafter termed “alternate payee”) and is made pursuant to a State domestic relations law (including community property law) and, further, that creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to receive all or a portion of the benefits payable with respect to a Participant and that clearly specifies the following:
(1) the name and last known mailing address (if available) of the Participant and the name and mailing address of each alternate payee to which the order relates;
(2) the amount or percentage of the Participant’s benefits to be paid to an alternate payee or the manner in which the amount is to be determined; and
(3) the number of payments or period for which payments are required.
A domestic relations order is not a Qualified Domestic Relations Order if it:
(1) requires the Plan to provide any type or form of benefit or any option not otherwise provided under the Plan; or,
(2) requires the Plan to provide increased benefits; or
(3) requires payment of benefits to an alternate payee that is required to be paid to another alternate payee under a previously existing Qualified Domestic Relations Order.
(gg) “Retirement” shall mean termination of employment which qualifies as early, normal or Disability retirement as described in Article VI.
(hh) “Service” shall mean employment with the Employer.
(ii) “Sponsor” shall mean HMN Financial, Inc., a Delaware corporation.
(jj) “Trust Agreement” shall mean the agreement, dated June 2, 1994 by and between HMN Financial, Inc., a Delaware corporation, and First Bankers Trust Co, N.A.
(kk) “Trustee” shall mean the Trustee or Trustees by whom the assets of the Plan are held, as provided in the Trust Agreement, or his or their successors.
(ll) “Valuation Date” shall mean the last day of each Plan Year. The Trustee may make additional valuations, at the instruction of the Administrator, but in no event may the Administrator request additional valuations by the Trustee more frequently than quarterly. Whenever such date falls on a Saturday, Sunday or holiday, the preceding business day shall be the Valuation Date.
(mm) “Year of Service” shall mean any Plan Year during which an Employee has completed at least 1,000 Hours of Service, except as otherwise specified in Article III. In the determination of Years of Service for eligibility and vesting purposes under this Plan, the term “Year of Service” shall also mean any Plan Year during which an Employee has completed at least 1,000 Hours of Service with an Affiliate.
1.2 |
Plurals and Gender . |
Where appearing in the Plan and the Trust Agreement, the masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates a different meaning.
1.3 |
Incorporation of Trust Agreement . |
The Trust Agreement, as the same may be amended from time to time, is intended to be and hereby is incorporated by reference into this Plan and for all purposes shall be deemed a part of the Plan.
1.4 |
Headings . |
The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof.
1.5 |
Severability . |
In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein.
1.6 |
References to Governmental Regulations . |
References in this Plan to regulations issued by the Internal Revenue Service, the Department of Labor, or other governmental agencies shall include all regulations, rulings, procedures, releases and other position statements issued by any such agency.
1.7 |
Benefits Determined Under Provisions in Effect at Termination of Employment . |
Except as may be specifically provided herein to the contrary, benefits under the Plan attributable to service prior to a Participant’s employment termination shall be determined and paid in accordance with the provisions of the Plan as in effect as of the date the employment termination occurred unless he or she resumes Service after that date and such resumption of Service causes a contrary result under the provisions hereof. However, the provisions of this document shall apply to any such Participant to the extent necessary to maintain the qualified status of the Plan under Code § 401(a) or to comply with the requirements of ERISA.
1.8 |
Effective Date of Restatement . |
Unless a different date is specified for some purpose in this document, the provisions of this amended and restated Plan document are generally effective as of January 1, 2016. However, any provision necessary to comply with a requirement of federal legislation or a Treasury regulation which has an effective date earlier than January 1, 2016, shall be effective as of the date required by the applicable law or regulation, unless a different effective date is specifically stated in this document.
ARTICLE II
PARTICIPATION
2.1 |
Commencement of Participation . |
(a) Any Employee who completes at least 1,000 Hours of Service during his Eligibility Period or during any Plan Year beginning after his Date of Hire shall initially become a Participant on the Entry Date coincident with or next following the later of the following dates, provided he is employed by the Employer on that Entry Date:
(1) The date which is 12 months after his Date of Hire; and
(2) The date on which he attains age 18.
(b) Any Employee who had satisfied the requirements set forth in Section 2.1(a) during the 12-month period prior to the Effective Date became a Participant on the Effective Date, provided he was still employed by the Employer on the Effective Date.
2.2 |
Termination of Participation . |
After commencement or resumption of his participation, an Employee shall remain a Participant during each consecutive Plan Year thereafter until the earliest of the following dates:
(a) His actual Retirement date;
(b) His date of death; or
(c) The last day of a Plan Year during which he incurs a Break.
2.3 |
Resumption of Participation . |
(a) Any Participant whose employment terminates and who resumes Service before he incurs a Break shall resume participation immediately on the date he is reemployed.
(b) Except as otherwise provided in Section 2.3(c), any Participant who incurs one or more Breaks and resumes Service shall resume participation retroactively as of the first day of the first Plan Year in which he completes a Year of Service after such Break(s).
(c) Any Participant who incurs one or more Breaks and resumes Service, but whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3, shall be treated as a new Employee and shall again be required to satisfy the eligibility requirements contained in Section 2.1 before resuming participation on the appropriate Entry Date, as specified in Section 2.1.
2.4 |
Determination of Eligibility . |
The Administrator shall determine the eligibility of Employees in accordance with the provisions of this Article. For each Plan Year, the Employer shall furnish the Administrator a list of all Employees, indicating the original date of their reemployment with the Employer and any Breaks they may have incurred.
ARTICLE III
CREDITED SERVICE
3.1 |
Service Counted for Eligibility Purposes . |
Except as provided in Section 3.3, all Years of Service completed by an Employee shall be counted in determining his eligibility to become a Participant on and after the Effective Date, whether such Service was completed before or after the Effective Date. Further, Years of Service completed prior to January 1, 1998, with the former Marshalltown Finance Corporation and its subsidiary, Marshalltown Savings Plan FSB, shall be treated as Years of Service with an Employer in determining his eligibility to become a Participant on and after January 1, 1998.
3.2 |
Service Counted for Vesting Purposes . |
All Years of Service completed by an Employee (including Years of Service completed prior to the Effective Date) shall be counted in determining his vested interest in this Plan, except the following:
(a) Service which is disregarded under the provisions of Section 3.3;
(b) Service prior to the Effective Date of this Plan if such Service would have been disregarded under the “break in service” rules (within the meaning of IRS Treas. Reg. § 1.41l(a)-5(b)(6)).
Further, Years of Service completed prior to January 1, 1998, with the former Marshalltown Finance Corporation and its subsidiary, Marshalltown Savings Bank FSB, shall be treated as Years of Service with an Employer in determining his vested interest in the Plan.
3.3 |
Credit for Pre-Break Service . |
Upon his resumption of participation following one or a series of consecutive Breaks, an Employee’s pre-Break Service shall be reinstated to his credit for all purposes of this Plan only if either:
(a) He was vested in any portion of his accrued benefit at the time the Break(s) began; or
(b) The number of his consecutive Breaks does not equal or exceed the greater of 5 or the number of his Years of Service credited to him before the Breaks began.
Except as provided in the foregoing, none of an Employee’s Service prior to one or a series of consecutive Breaks shall be counted for any purpose in connection with his participation in this Plan thereafter.
3.4 |
Service Credit During Authorized Leaves . |
An Employee shall receive no Service credit under Section 3.1 or 3.2 during any Authorized Leave of Absence. However, solely for the purpose of determining whether he has incurred a Break during any Plan Year in which he is absent from Service for one or more Authorized Leaves of Absence, he shall be credited with 40 Hours of Service for each week during any such leave period. Notwithstanding the foregoing, if an Employee fails to return to Service on or before the end of a leave period, he shall be deemed to have terminated Service as of the first day of such leave period and his credit for Hours of Service, determined under this Section 3.4, shall be revoked. Notwithstanding anything contained herein to the contrary, an Employee who is absent by reason of military service as set forth in Section 1.1(d)(1) shall be given Service credit under this Plan for such military leave period to the extent, and for all purposes, required by law.
3.5 |
Service Credit During Maternity or Paternity Leave . |
Effective for absences beginning on or after January 1, 1985, for purposes of determining whether a Break has occurred for participation and vesting purposes, an individual who is on maternity or paternity leave as described in Section 1.1(x), shall be deemed to have completed Hours of Service during such period of absence, all in accordance with Section 1.1(x). Notwithstanding the foregoing, no credit shall be given for such Hours of Service unless the individual furnishes to the Administrator such timely information as the Administrator may reasonably require to determine:
(a) that the absence from Service was attributable’ to one of the maternity or paternity reasons enumerated in Section 1.1(x); and
(b) the number of days for which such absence lasted.
In no event, however, shall any credit be given for such leave other than for determining whether a Break has occurred.
3.6 |
Ineligible Employees . |
Notwithstanding any provisions of this Plan to the contrary, any person who is employed by the Employer, but who is ineligible to participate in this Plan, either because of his failure
(a) To meet the eligibility requirements contained in Article II; or
(b) To be an Employee, as defined in Section 1.1(q), shall, nevertheless, earn Years of Service for eligibility and vesting purposes pursuant to the rules contained in this Article III. However, such a person shall not be entitled to receive any contributions hereunder unless and until he becomes a Participant in this Plan, and then, only during his period of participation.
3.7 |
Periods of Military Service . |
The Plan will comply with the requirements of Code § 414(u) with respect to each Participant who is absent from service because of “qualified military service” (as defined in Code § 414(u)(5)) as prescribed under Code § 414(u) (or other federal law cited therein).
ARTICLE IV
CONTRIBUTIONS
4.1 |
Employee Stock Ownership Contributions . |
(a) Subject to all of the provisions of this Article IV, for each Plan Year commencing on or after the Effective Date, the Employer shall make an Employee Stock Ownership contribution to the Fund, in such amount as may be determined by the Board of Directors in its discretion. Such contribution shall be in the form of cash or Employer Securities. In determining the value of Employer Securities transferred to the Fund as an Employee Stock Ownership contribution, the Administrator may determine the average of closing prices of such securities for a period of up to 90 consecutive days immediately preceding the date on which the securities are contributed to the Fund. In the event that the Employer Securities are not readily tradable on an established securities market, the value of the Employer Securities transferred to the Fund shall be determined by an independent appraiser in accordance with Section 8.9.
(b) In no event shall such contribution by the Employer exceed for any Plan Year the maximum amount that may be deducted by the Employer under Code § 404, nor shall such contribution cause the Employer to violate its regulatory capital requirements. Each Employee Stock Ownership contribution by the Employer shall be deemed to be made on the express condition that the Plan, as then in effect, shall be qualified under Code §§ 401 and 501 and that the amount of such contribution shall be deductible from the Employer’s income under Code § 404.
4.2 |
Time and Manner of Employee Stock Ownership Contributions . |
(a) The Employee Stock Ownership contribution (if any) for each Plan Year shall be paid to the Trustee in one lump sum or installments at any time on or before the expiration of the time prescribed by law (including any extensions) for filing of the Employer’s federal income tax return for its fiscal year ending concurrent with or during such Plan Year. Any portion of the Employee Stock Ownership contribution for each Plan Year that may be made prior to the last day of the Plan Year shall be maintained by the Trustee in the Contribution Holding Account described in Section 5.2 until the last day of such Plan Year.
(b) If an Employee Stock Ownership contribution for a Plan Year is paid after the close of the Employer’s fiscal year which ends concurrent with or during such Plan Year but on or prior to the due date (including any extensions) for filing of the Employer’s federal income tax return for such fiscal year, it shall be considered, for allocation purposes, as an Employee Stock Ownership contribution to the Fund for the Plan Year for which it was computed and accrued, unless such contribution is accompanied by a statement to the Trustee, signed by a representative of the Employer, which specifies that the Employee Stock Ownership contribution is made with respect to the Plan Year in which it is received by the Trustee. Any Employee Stock Ownership contribution paid by the Employer during any Plan Year but after the due date (including any extensions) for filing of its federal income tax return for the fiscal year of the Employer ending on or before the last day of the preceding Plan Year shall be treated, for allocation purposes, as an Employee Stock Ownership contribution to the Fund for the Plan Year in which the contribution is paid to the Trustee.
(c) Notwithstanding anything contained herein to the contrary, no Employee Stock Ownership contribution shall be made for any year during which a “limitations account” created pursuant to Section 5.6(c)(2) is in existence until the balance of such limitations account has been reallocated in accordance with Section 5.6(c)(2).
4.3 |
Records of Contributions . |
The Employer shall deliver at least annually to the Trustee, with respect to the contributions contemplated in Section 4.1, a certificate of the Administrator, in such form as the Trustee shall approve, setting forth:
(a) The aggregate amount of contributions, if any, to the Fund for such Plan Year;
(b) The names, Internal Revenue Service identifying numbers and current residential addresses of all Participants in the Plan;
(c) The amount and category of contributions to be allocated to each such Participant; and
(d) Any other information reasonably required for the proper operation of the Plan.
4.4 |
Erroneous Contributions . |
(a) Notwithstanding anything herein to the contrary, upon the Employer’s request, a contribution which was made by a mistake of fact, or conditioned upon the qualification of the Plan or any amendment thereof, under Code § 401, or upon the deductibility of the contribution under Code § 404, shall be returned to the Employer by the Trustee within one year after the payment of the contribution, the denial of the qualification or the disallowance of the deduction (to the extent disallowed), whichever is applicable; provided, however, that in the case of disqualification of the Plan based upon any amendment hereto, the Employer shall not be entitled to the return of its Employee Stock Ownership contribution unless an Application for Determination with respect to the Plan amendment had been filed with the Internal Revenue Service within one year after the adoption of such amendment by the Employer. Any portion of a contribution returned pursuant to this Section 4.4 shall be adjusted to reflect its proportionate share of the losses of the fund, but shall not be adjusted to reflect any earnings or gains. Notwithstanding any provisions of this Plan to the contrary, the right or claim of any Participant or Beneficiary to any asset of the Fund or any benefit under this Plan shall be subject to and limited by this Section 4.4.
(b) In no event shall voluntary Employee contributions be accepted. Any such voluntary Employee contributions (and any earnings attributable thereto) mistakenly received by the Trustee shall promptly be returned to the Participant.
ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS
5.1 |
Establishment of Separate Participant Accounts . |
The Administrator shall establish and maintain separate individual accounts for Participants in the Plan and for each Former Participant in accordance with the provisions of this Article V. Such separate accounts shall be for accounting purposes only and shall not require a segregation of the Fund, and no Participant, Former Participant or Beneficiary shall acquire any right to or interest in any specific assets of the Fund as a result of the allocations provided for under this Plan, except where segregation is expressly provided for in this Plan.
(a) Employee Stock Ownership Accounts .
The Administrator shall establish a separate Employee Stock Ownership Account in the Fund for each Participant. The account shall be credited as of the last day of each Plan Year with the amounts allocated to the Participant under Sections 5.4 and 5.5. The Administrator may establish subaccounts hereunder, an Employer Stock Account reflecting a Participant’s interest in Employer Securities held by the Trust and an Other Investments Account reflecting the Participant’s interest in his Employee Stock Ownership Account other than Employer Securities.
(b) Distribution Accounts .
In any case where distribution of a terminated Participant’s vested interest in the Plan is to be deferred, the Administrator shall establish a separate, nonforfeitable account in the Fund to which the balance in his Employee Stock Ownership Account in the Plan shall be transferred after such Participant incurs a Break. Unless the Former Participant’s distribution accounts are segregated for investment purposes pursuant to section 9.4, they shall share in Investment Adjustments.
(c) Other Accounts .
The Administrator shall establish such other separate accounts for each Participant as may be necessary or desirable for the convenient administration of the Fund.
5.2 Establishment of Contribution Holding and Suspense Accounts .
The Administrator shall establish separate accounts as follows:
(a) Contribution Holding Account .
The Administrator shall establish a Contribution Holding Account. There shall be credited to such Contribution Holding Account any Employee Stock Ownership contributions that may be made prior to the last day of the Plan Year, as provided in Section 4.2. The Contribution Holding Account shall share proportionately as to time and amount in any Investment Adjustments. As of the last day of each Plan Year, the balance of the Contribution Holding Account shall be added to any other Employee Stock Ownership contributions that may have been made for that Plan Year and allocated to the Employee Stock Ownership Accounts of Participants as provided in Section 5.5.
(b) Exempt Loan Suspense Account .
For each Exempt Loan taken by the Plan, the Administrator shall establish a separate Exempt Loan Suspense Account. Exempt Loan payments shall be attributed to the appropriate Exempt Loan Suspense Account in accordance with Sections 8.5 and 8.6. All Employer Securities released for a given Plan Year from all the ESOP Exempt Loan Suspense Accounts pursuant to Sections 8.5 and 8.6 shall be pooled and allocated as of the last day of such Plan Year to the Employee Stock Ownership Accounts of Participants as provided in Section 5.5.
5.3 |
Allocation of Earnings, Losses and Expenses . |
As of each Valuation Date, any increase or decrease in the net worth of the aggregate Employee Stock Ownership Accounts held in the Fund attributable to earnings, losses, expenses and unrealized appreciation or depreciation in each such aggregate Account, as determined by the Trustee pursuant to the Trust Agreement, shall be credited to or deducted from the appropriate suspense accounts and all Participants’ Employee Stock Ownership Accounts (except segregated distribution accounts described in Section 5.1(b) and the “limitations account” described in Section 5.6(c)(4)) in the proportion that the value of each such Account (determined immediately prior to such allocation and before crediting any Employee Stock Ownership contributions and forfeitures for the current Plan year but after adjustment for any transfer to or from such Accounts and for the time such funds were in such Accounts) bears to the value of all Employee Stock Ownership Accounts.
5.4 |
Allocation of Forfeitures . |
As of the last day of each Plan Year, all forfeitures attributable to the Employee Stock Ownership Accounts which are then available for reallocation shall be, as appropriate, added to the Employee Stock Ownership contribution (if any) for any such year and allocated among the Participants’ Employee Stock Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and 5.6.
5.5 |
Allocation of Annual Employee Stock Ownership Contributions . |
As of the last day of each Plan Year for which the Employer shall make an Employee Stock Ownership contribution, the Administrator shall allocate the Employee Stock Ownership contribution (including reallocable forfeitures) for such Plan year to the Employee Stock Ownership account of each Participant who completed at least 1,000 Hours of Service during that Plan Year, provided that he is still employed by the Employer on the last day of the Plan Year. Such allocation shall be made in the same proportion that each such Participant’s Compensation for such Plan Year bears to the total Compensation of all such Participants for such Plan Year, subject to Section 5.6. Notwithstanding the foregoing, if a Participant attains his Normal Retirement Date and terminates Service prior to the last day of the Plan Year but after completing 1,000 Hours of Service, he shall be entitled to an allocation based on his Compensation earned prior to his termination and during the Plan Year. Notwithstanding the foregoing, if a Participant attains age 62 and has completed 10 years of service with the Company and terminates service prior to the last day of the Plan Year, but after completing 1,000 Hours of Service, he shall be entitled to an allocation based on his Compensation earned prior to his termination and during the Plan Year. Notwithstanding the foregoing, if a Participant attains age 60 and has completed 15 Years of Service with the Company and terminates service prior to the last day of the Plan Year, but after completing 1,000 Hours of Service, he shall be entitled to an allocation based on his Compensation earned prior to his termination and during the Plan Year. Furthermore, if a Participant completes 1,000 Hours of Service and is on a Leave of Absence on the last day of the Plan Year because of pregnancy or other medical reason, such a Participant shall be entitled to an allocation based on his Compensation earned during such Plan Year.
5.6 |
Limitation on Annual Additions . |
(a) Notwithstanding any provisions of this Plan to the contrary, the total Annual Additions credited to a Participant’s accounts under this Plan (and under any other defined contribution plan to which the Employer or an Affiliate contributes) for any Limitation Year shall not exceed the lesser of:
(1) $53,000 for the Plan Year commencing in 2016, and adjusted for each Plan Year to reflect cost of living adjustments for that Plan Year provided under Code § 415(d) or published by the Secretary of the Treasury.
(2) 100% of the Compensation of such Participant. This paragraph (2) shall not apply to any contribution for medical benefits after separation from service within the meaning of Code §§ 401(h) or 419A(f)(2) which is otherwise treated as an Annual Addition.
(b) Solely for the purpose of this Section 5.6, the term “Compensation” is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includable in gross income (or to the extent the amount would have been received and includible in gross income but for an election under Code §§ 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b).
(1) “Compensation” specifically includes, but is not limited to:
(A) Commissions paid to salespeople, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements or other expense allowances under a nonaccountable plan (as described in IRS Treas. Reg. § 1.62-2(c));
(B) Amounts described in Code §§ 104(a)(3), 105(a), or 105(h), but only to the amount that these amounts are includible in gross income;
(C) Amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are not deductible by the Employee under Code § 217;
(D) The value of a nonqualified stock option granted to an Employee, but only to the extent that the value of the option is includible in gross income of the Employee for the taxable year of the stock option grant;
(E) The amount includible in the gross income of the Employee upon making the election described in Code § 83(b);
(F) Amounts that are includible in the gross income of an Employee under the rules of Code §§ 409A or 457(f)(1)(A) or because the amounts are constructively received by the Employee; and
(G) Amounts paid after the Employee’s severance from employment, but only including regular pay for services during the Employee’s regular working hours, or pay for services outside the Employee’s regular working hours, (such as overtime or shift differential), commissions, bonuses, or other similar payments, and only if such pay would have been paid to the Employee prior to severance from employment if the Employee had continued in employment with the Employer. Such pay is Compensation only if paid by the later of (i) 2½ months after the Employee’s severance from employment with the Employer or (ii) the end of the Limitation Year that includes the date of the Employee’s severance from employment.
Notwithstanding anything in this section to the contrary, “Compensation” will not exceed the amount permitted to be taken into account for any Limitation Year under Code § 401(a)(17).
(2) “Compensation” specifically excludes:
(A) Employer contributions (other than elective contributions described in Code §§ 402(e)(3), 408(k)(6), 408(p)(2)(A)(i), or 457(b)) to a plan of deferred compensation (including a simplified employee pension described in Code § 408(k) or a simple retirement account described in Code § 408(p)), to the extent not includible in the Employee’s gross income for the taxable year in which contributed, and any distributions from a plan of deferred compensation regardless of whether the distribution amounts are includible in the gross income of the Employee when distributed;
(B) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture;
(C) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option;
(D) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee and are not salary reduction amounts described in Code § 125);
(E) Amounts received after an Employee’s severance from employment for unused accrued bona fide sick, vacation or other leave; and
(F) Other items of remuneration similar to items described in (b)(2)(a)-(d) above.
(c) In the event that the limitations on Annual Additions described in this Section 5.6(a) above are exceeded for any reason allowed under any applicable guidance with respect to any Participant in any Limitation Year, then the contributions allocable to the Participant for such year shall be reduced to the minimum extent required by such limitations in the following order of priority:
(1) If any further reductions in Annual Additions are necessary, then the Employee Stock Ownership contributions and forfeitures allocated during such Limitation Year to the Participant’s Employee Stock Ownership Account shall be reduced. The amount of any such reductions in the Employee Stock Ownership contributions and forfeitures shall be reallocated to all other Participants in the same manner as set forth under Sections 5.4 and 5.5.
(2) Any amounts which cannot be reallocated to other Participants in a current Limitation Year in accordance with Section 5.6(c)(1) above because of the limitations contained in Section 5.6(a) shall be credited to an account designated as the “limitations account” and carried forward to the next and subsequent Limitation Years until it can be reallocated to all Participants as set forth in Sections 5.4, and 5.5, as appropriate. No Investment Adjustments shall be allocated to this limitations account. In the next and subsequent Limitation Years, all amounts in the limitations account must be allocated in the manner described in Sections 5.4 and 5.5, as appropriate, before any Employee Stock Ownership contributions may be made to this Plan for that Limitation Year.
(3) The Administrator shall determine to what extent the Annual Additions to any Participant’s Employee Stock Ownership Account must be reduced in each Limitation Year. The Administrator shall reduce the Annual Additions to all other qualified, tax-exempt retirement plans maintained by the Employer in accordance with the terms contained therein for required reductions or reallocations mandated by Code § 415 before reducing any Annual Additions in this Plan.
(4) In the event this Plan is voluntarily terminated by the Employer under Section 13.5, any amounts credited to the limitations account described in Section 5.6(c)(2) above which have not be reallocated as set forth herein shall be distributed to the Participants who are still employed by the Employer on the date of termination, in the proportion that each Participant’s Compensation bears to the Compensation of all Participants.
(5) Corrections for excess Annual Additions, if any, will be made as provided above (to the extent not inconsistent with applicable Treasury Regulations or other guidance) and under the appropriate program described in IRS Revenue Procedure 2013-12 (or subsequent guidance).
(d) In the event that the Employer is a member of (1) a controlled group of corporations or a group of trades or businesses under common control (as described in Code §§ 414(b) or (c), as modified by Code § 415(h) thereof), or (2) an affiliated service group (as described in Code § 414(m)), the Annual Additions credited to any Participant’s accounts in any such Limitation Year shall be further limited by reason of the existence of all other qualified retirement plans maintained by such affiliated corporations, other entities under common control or other members of the affiliated service group, to the extent such reduction is required by Code § 415 and the regulations promulgated thereunder. The Administrator shall determine if any such reduction in the Annual Additions to a Participant’s accounts is required for this reason, and if so, the same provisions as stated in 5.6(c) above shall apply.
5.7 |
Erroneous Allocations . |
No Participant shall be entitled to any Annual Additions or other allocations to his accounts in excess of those permitted under Sections 5.3, 5.4, 5.5, and 5.6. If it is determined at anytime that the Administrator and/or Trustees have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating Investment Adjustments, or in excluding or including any person as a Participant, then the Administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The accounts of any or all Participants may be revised, if necessary, in order to correct such error.
5.8 |
Value of Participant’s Interest in Fund . |
At any time, the value of a Participant’s interest in the Fund shall consist of the aggregate value of his Employee Stock Ownership Account and his distribution account, if any, determined as of the next-preceding Valuation Date. The Administrator shall maintain adequate records of the cost basis of Employer Securities allocated to each Participant’s Employer Stock Ownership Account.
5.9 |
Investment of Account Balances . |
The Employee Stock Ownership Accounts shall be invested primarily in Employer Securities. Employer Securities shall constitute at least 51% of the assets of all Employee Stock Ownership Accounts. All sales of Employer Securities by the Trustee attributable to the Employee Stock Ownership Accounts of all Participants shall be charged pro rata to the Employee Stock Ownership Accounts of all Participants.
ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
6.1 |
Normal Retirement . |
A Participant who reaches his Normal Retirement Date and who shall retire at that time shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1. A Participant who remains in Service after his Normal Retirement Date shall not be entitled to any retirement benefits until his actual termination of Service thereafter (except as provided in Section 9.3(g)) and he shall meanwhile continue to participate in this Plan.
6.2 |
Early Retirement . |
A Participant who reaches his Early Retirement .Date may retire at such time (or, at his election, as of the first day of any month thereafter prior to his Normal Retirement Date) and shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1.
6.3 |
Disability Retirement . |
In the event a Participant incurs a Disability, he may retire on his Disability Retirement Date and shall thereupon be entitled to retirement benefits based on the value of his interest in the Fund, payable pursuant to the provisions of Section 9.1.
6.4 |
Death Benefits . |
(a) Upon the death of a Participant before his Retirement or other termination of Service, the value of his interest in the Fund shall be payable pursuant to the provisions of Section 9.1. The Administrator shall direct the Trustee to distribute his interest in the Fund to any surviving Beneficiary designated by the Participant or, if none, to such persons designated by the Administrator pursuant to Section 6.5.
(b) Upon the death of a Former Participant, the Administrator shall direct the Trustee to distribute any undistributed balance of his interest in the Fund to any surviving Beneficiary designated by him or, if none, to such persons designated by the Administrator pursuant to Section 6.5.
(c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive the interest in the Fund of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator’s determination of death and of the right of any person to receive payment shall be conclusive.
6.5 |
Designation of Death Beneficiary and Manner of Payment . |
(a) Each Participant shall have the right to designate a Beneficiary or Beneficiaries to receive the sum or sums to which he may be entitled upon his death. The Participant may also designate the manner in which any death benefits under this Plan shall be payable to his Beneficiary, provided that such designation is in accordance with Section 9.4. Such designation of Beneficiary and manner of payment shall be in writing and delivered to the Administrator, and shall be effective when received by the Administrator. The Participant shall have the right to change such designation by notice in writing to the Administrator. Such change of Beneficiary or the manner of payment shall become effective upon its receipt by the Administrator. Any such change shall be deemed to revoke all prior designations.
(b) If a Participant shall fail to designate validly a Beneficiary or if no designated Beneficiary survives the Participant, his interest in the Fund shall be paid to the person or persons in the first of the following classes of successive preference Beneficiaries surviving at the death of the Participant: the Participant’s (1) widow or widower, (2) children, (3) parents, and (4) estate. The Administrator shall decide what Beneficiaries, if any, shall have been validly designated, and its decision shall be binding and conclusive on all persons.
(c) Notwithstanding the foregoing, if a Participant has been married throughout the 12 month period preceding the date of his death, the sum or sums to which he may be entitled under this Plan upon his death shall be paid to his spouse, unless the Participant’s spouse shall have consented to the election of another Beneficiary. Such a spousal consent shall be in writing and shall be witnessed either by a representative of the Plan or a notary public. If it is established to the satisfaction of the Administrator that such spousal consent cannot be obtained because there is no spouse, because the spouse cannot be located, or other reasons prescribed by governmental regulations, the consent of the spouse may be waived, and the Participant may designate a Beneficiary or Beneficiaries other than his spouse.
ARTICLE VII
VESTING AND FORFEITURES
7.1 |
Vesting on Death, Disability and Normal Retirement . |
Unless his participation in this Plan shall have terminated prior thereto, upon a Participant’s death, Disability or upon his attainment of Normal Retirement Date (whether or not he actually retires at that time) while he is still employed by the Employer, the Participant’s entire interest in the Fund shall be fully vested and nonforfeitable.
7.2 |
Vesting on Termination of Participation. |
Upon termination of his participation in this Plan for any reason other than death, Disability, or Normal Retirement, a Participant shall be vested in a percentage of his Employee Stock Ownership Account based on the Years of Service (including Years of Service prior to the Effective Date) credited to him for vesting purposes at the time of his termination of participation.
(a) For any Participant who completes at least one Hour of Service on or after January 1, 2015 (or, if earlier, the date on which any Exempt Loan that was outstanding on January 1, 2007 is repaid), the following vesting schedule applies:
Years of Service Completed |
Percentage Vested |
|
Less than 3 |
0% |
|
3 or more |
100% |
(b) For any Participant who does not meet the requirement in subsection (a), the following vesting schedule applies:
Years of Service Completed |
Percentage Vested |
|
Less than 5 |
0% |
|
5 or more |
100% |
Any portion of the Participant’s Employee Stock Ownership Account which is not vested at the time he incurs a Break shall thereupon be forfeited and disposed of pursuant to Section 7.3. Distribution of the vested portion of a terminated Participant’s interest in the Plan may be authorized by the Administrator in any manner permitted under Section 9.1.
7.3 |
Disposition of Forfeitures . |
(a) In the event a Participant incurs a Break and subsequently resumes both his Service and his participation in the Plan prior to incurring at least 5 Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be reinstated to the credit of the Participant as of the date he resumes participation.
(b) In the event a Participant terminates Service and subsequently incurs a Break and receives a distribution, or in the event a Participant does not terminate Service, but incurs at least 5 Breaks, or in the event that a Participant terminates Service and incurs at least 5 Breaks but has not received a distribution, then the forfeitable portion of his Employer Account, including Investment Adjustments, shall be reallocated to other Participants, pursuant to Section 5.4 as of the date the Participant incurs such Break or Breaks, as the case may be.
(c) In the event a former Participant who had received a distribution from the Plan is rehired, he shall repay the amount of his distribution before the earlier of 5 years after the date of his rehire by the Employer, or the close of the first period of 5 consecutive Breaks commencing after the withdrawal in order for any forfeited amounts to be restored to him.
ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS
8.1 |
Right to Demand Employer Securities . |
A Participant entitled to a distribution from his Employee Stock Ownership Account shall be entitled to demand that his interest in the Account be distributed to him in the form of Employer Securities, all subject to Section 9.10. In the event that the Employer Securities are not readily tradable on an established market, the Participant shall be entitled to require that the Employer repurchase the Employer Securities under a fair valuation formula, as provided by governmental regulations. The Participant or Beneficiary shall be entitled to exercise the put option described in the preceding sentence for a period of not more than 60 days following the date of distribution of Employer Securities to him. If the put option is not exercised within such 60-day period, the Participant or Beneficiary may exercise the put option during an additional period of not more than 60 days after the beginning of the first day of the first Plan Year following the Plan Year in which the first put option period occurred, all as provided in regulations promulgated by the Secretary of the Treasury.
8.2 |
Voting Rights . |
Each Participant with an Employee Stock Ownership Account shall be entitled to direct the Trustee as to the manner in which the Employer Securities in such Account are to be voted. Employer Securities held in the Employee Stock Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by the Trustee on each issue with respect to which shareholders are entitled to vote, in the proportion that the Participants had voted the shares allocated to their Accounts with respect to such issue. Prior to the initial allocation of shares, the Trustee shall be entitled to vote the shares in the Suspense Account without prior direction from the Participants or the Administrator.
8.3 |
Nondiscrimination in Employee Stock Ownership Contributions . |
In the event that the amount of the Employee Stock Ownership contributions that would be required in any Plan Year to make the scheduled payments on an Exempt Loan would exceed the amount that would otherwise be deductible by the Employer for such Plan Year under Code § 404, then no more than one-third of the Employee Stock Ownership contributions for the Plan Year, which is also the Employer’s taxable year, shall be allocated to the group consisting of those Employees who, during the Plan Year or the preceding Plan Year, meet any one of the following requirements:
(a) The employee at any time during the current or prior Plan Year was a more than 5-percent owner as defined in Code § 414(q)(2), or was the spouse, child, parent or grandparent of such an owner to whom the owner’s stock is attributed pursuant to Code § 318 (regardless of the Compensation of the owner or family member).
(b) The employee received Compensation from the employer in excess of $120,000 for the prior Plan Year. The employee must also have been in the top 20 percent of employees of the employer who performed services for the employer in such prior Plan Year, when ranked on the basis of Compensation paid during the Plan Year. For purposes of determining the top 20 percent of employees under Code § 414(q)(3), the Plan will disregard any non-resident aliens who receive no earned income from the employer which constitutes income from sources within the United States.
(c) The individual is a former employee who had a separation year prior to the current Plan Year and such individual performed services for the employer and was a highly compensated employee within the meaning of Code § 414(q) for either (i) such separation year, or (ii) any Plan Year ending on or after the individual’s 55th birthday. A “separation year” is the Plan Year in which the individual separates from service with the employer. With respect to an individual who separated from service before January 1, 1987, the individual will be included as a highly compensated employee only if the individual was a more than 5-percent owner or received Compensation in excess of $50,000 during (i) the employee’s separation year (or the year preceding such separation year), or (ii) any year ending on or after such individual’s 55th birthday (or the last year ending before such individual’s 55th birthday).
(d) The dollar amount specified in subsection (b) shall be indexed for cost of living increases for each calendar year after 2016 as provided in the applicable Treasury regulations. For any Plan Year, the applicable dollar amount shall be the dollar amount in effect for the calendar year in which the Plan Year commences.
(e) For purposes of this section, “employer” includes the Employer and all Affiliates, and “employee” includes Leased Employees.
(f) For purposes of this section, “Compensation” means the amount defined as such under Section 5.6.
8.4 |
Dividends . |
Dividends paid with respect to Employer Securities credited to a Participant’s Employee Stock Ownership account as of the record date for the dividend payment may be paid in cash to the Participants, pursuant to the directions of the Board of Directors of the Sponsor. If the Board of Directors shall direct that the aforesaid dividends shall be paid directly to Participants, the quarterly dividends paid with respect to such Employer Securities shall be paid to the Plan, from which dividend distributions in cash shall be made to the Participants with respect to the Employer Securities in their Employee Stock Ownership Accounts within 90 days of the close of the Plan Year in which the dividends were paid. Dividends on Employer Securities obtained pursuant to an Exempt Loan and still held in the Suspense Account may be used to make payments on an Exempt Loan, as described in Section 8.5.
8.5 |
Exempt Loans . |
(a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt Loan may take the form of (i) a loan from a bank or other commercial lender to purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii) an installment sale of Employer Securities to the Plan. The proceeds of any such Exempt Loan shall be used, within a reasonable time after the Exempt Loan is obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such Exempt Loan shall provide for no more than a reasonable rate of interest and shall be without recourse against the Plan. The number of years to maturity under the Exempt Loan must be definitely ascertainable at all times. The only assets of the Plan that may be given as collateral for an Exempt Loan are Employer Securities acquired with the proceeds of the Exempt Loan and Employer Securities that were used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan. Such Employer Securities so pledged shall be placed in an Exempt Loan Suspense Account. No person or institution entitled to payment under an Exempt Loan shall have recourse against Trust assets other than the aforesaid collateral, Employer Stock Ownership contributions (other than contributions of Employer Securities) that are available under the Plan to meet obligations under the Exempt Loan and earnings attributable to such collateral and the investment of such contributions. All Employee Stock Ownership contributions paid during the Plan Year in which an Exempt Loan is made (whether before or after the date the proceeds of the Exempt Loan are received), all Employee Stock Ownership contributions paid thereafter until the Exempt Loan has been repaid in full, and all earnings from investment of such Employee Stock Ownership contributions, without regard to whether any such Employee Stock Ownership contributions and earnings have been allocated to Participants’ Employee Stock Ownership Accounts, shall be available to meet obligations under the Exempt Loan as such obligations accrue, or prior to the time such obligations accrue, unless otherwise provided by the Employer at the time any such contribution is made. Any pledge of Employer Securities shall provide for the release of shares so pledged upon the payment of any portion of the Exempt Loan.
(b) For each Plan Year during the duration of the Exempt Loan, the number of shares of Employer Securities released from such pledge shall equal the number of encumbered shares held immediately before release for the current Plan Year multiplied by a fraction. The numerator of the fraction is the sum of principal and interest paid in such Plan Year. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years. Such years will be determined without taking into account any possible extension or renewal periods. If interest on any Exempt Loan is variable, the interest to be paid in future years under the Exempt Loan shall be computed by using the interest rate applicable as of the end of the Plan Year.
(c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan pursuant to the terms of which the number of Employer Securities to be released from encumbrance shall be determined solely with reference to principal payments. In the event that such an Exempt Loan is obtained, annual payments of principal and interest shall be at a cumulative rate that is not less rapid at any time than level payments of such amounts for not more than 10 years. The amount of interest in any such annual loan repayment shall be disregarded only to the extent that it would be determined to be interest under standard loan amortization tables. The requirement set forth in the preceding sentence shall not be applicable from the time that, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan exceeds 10 years.
8.6 |
Exempt Loan Payments . |
(a) Payments of principal and interest on any Exempt Loan during a Plan Year shall be made by the Trustee (as directed by the Administrator) only from (1) Employee Stock Ownership contributions to the Trust made to meet the Plan’s obligation under an Exempt Loan (other than contributions of Employer Securities) and from any earnings attributable to Employer Securities held as collateral for an Exempt Loan and investments of such contributions (both received during or prior to the Plan Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale of any Employer Securities held as collateral for an Exempt Loan. Such contribution and earnings shall be accounted for separately by the Plan until the Exempt Loan is repaid.
(b) Employer Securities released by reason of the payment of principal or interest on an Exempt Loan from amounts allocated to Participants’ Employee Stock Ownership Accounts shall immediately upon payment be allocated as set forth in Section 5.5.
(c) The Employer shall contribute to the Trust sufficient amounts to enable the Trust to pay principal and interest on any such Exempt Loans as they are due, provided however that no such contribution shall exceed the limitations in Section 5.6. In the event that such contributions by reason of the limitations in Section 5.6 are insufficient to enable the Trust to pay principal and interest on such Exempt Loan as it is due, then upon the Trustee’s request the Employer shall:
(1) Make an Exempt Loan to the Trust in sufficient amounts to meet such principal and interest payments. Such new Exempt Loan shall be subordinated to the prior Exempt Loan. Securities released from the pledge of the prior Exempt Loan shall be pledged as collateral to secure the new Exempt Loan. Such Employer Securities will be released from this new pledge and allocated to the Employee Stock Ownership Accounts of the Participants in accordance with applicable provisions of the Plan;
(2) Purchase any Employer Securities pledged as collateral in an amount necessary to provide the Trustee with sufficient funds to meet the principal and interest repayments. Any such sale by the Plan shall meet the requirements of ERISA § 408(e); or
(3) Any combination of the foregoing. However, the Employer shall not, pursuant to the provisions of this subsection, do, fail to do or cause to be done any act or thing which would result in a disqualification of the Plan as an Employee Stock Ownership Plan under the Code.
(d) Except as provided in Section 8.1 above and notwithstanding any amendment to or termination of the Plan which causes it to cease to qualify as an Employee Stock Ownership plan within the meaning of Code § 4975(e)(7), or any repayment of an Exempt Loan, no shares of Employer Securities acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase Employer Securities may be subject to a put, call or other option, or buy-sell or similar arrangement while such shares are held by the Plan or when such Shares are distributed from the Plan. The protections and rights provided under this subsection (d) shall be non-terminable as provided in IRS Treas. Reg. § 54.4975-11(a)(3)(ii).
8.7 |
Put Option . |
If a Participant exercises a put option (as set forth in Section 8.1) with respect to Employer Securities that were distributed as part of a total distribution pursuant to which a Participant’s Employee Stock Ownership Account is distributed to him in a single taxable year, the Employer or the Plan may elect to pay the purchase price of the Employer Securities over a period not to exceed 5 years. Such payments shall be made in substantially equal installments not less frequently than annually over a period beginning not later than 30 days after the exercise of the put option. Reasonable interest shall be paid to the Participant with respect to the unpaid balance of the purchase price and adequate security shall be provided with respect thereto. In the event that a Participant exercises a put option with respect to Employer Securities that are distributed as part of an installment distribution, the amount to be paid for such securities shall be paid not later than 30 days after the exercise of the put option.
8.8 |
Diversification Requirements . |
Each Participant who has completed at least 10 years of participation in the Plan and has attained age 55 may elect within 90 days after the close of each Plan Year during his “qualified election period” to direct the Plan as to the investment of at least 25 percent of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). For purposes of this Section 8.8, the term “qualified election period” shall mean the 5-Plan-Year period beginning with the Plan Year after the Plan Year in which the Participant attains age 55 (or, if later, beginning with the Plan Year after the first Plan Year in which the Employee first completes at least 10 years of participation in the Plan). In the case of the Employee who has attained age 60 and completed 10 years of participation in the prior Plan Year and in the case of the election year in which any other Participant who has met the minimum age and service requirements for diversification can make his last election hereunder, he shall be entitled to direct the Plan as to the investment of at least 50 percent of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). The Plan shall make available at least 3 investment options (not inconsistent with regulations prescribed by the Department of Treasury) to each Participant making an election hereunder. The Plan shall be deemed to have met the requirements of this Section if the portion of the Participant’s Employee Stock Ownership Account covered by the election hereunder is distributed to the Participant or his designated Beneficiary within 90 days after the period during which the election may be made. In the absence of such a distribution, the Trustee shall implement the Participant’s election within 90 days following the expiration of the qualified election period.
8.9 |
Independent Appraiser . |
An independent appraiser meeting the requirements of Code § 170(a)(1) shall value the Employer Securities in those Plan Years when such securities are not readily tradable on an established securities market.
8.10 |
Disqualified Person Transactions . |
In the case of any transaction between the Plan and a disqualified person, as defined at Code § 4975(e)(2), the value of Employer Securities shall be determined as of the date of the transaction.
ARTICLE IX
PAYMENTS AND DISTRIBUTIONS
9.1 |
Payments on Termination of Service — In General . |
All benefits provided under this Plan shall be funded by the value of a Participant’s vested interest in the Fund. As soon as practicable after a Participant’s Retirement, death or termination of Service, the Administrator shall ascertain the value of his vested interest in the Fund, as provided in Article V, and the Administrator shall hold or dispose of the same in accordance with the following provisions of this Article IX.
9.2 |
Commencement of Payments . |
(a) Distributions upon Retirement or Death . Upon a Participant’s Retirement or Death, payment of benefits under this Plan shall, unless the Participant otherwise elects (in accordance with Section 9.3), commence no later than 6 months after the close of the Plan Year in which occurs the date of the Participant’s Retirement or death.
(b) Distribution following Termination of Service . Unless a Participant elects otherwise, if a Participant terminates Service prior to Retirement or death, he shall be accorded an opportunity to commence receipt of distributions from his Accounts within six (6) months after the Valuation Date next following the date of his termination of service. A Participant who terminates Service with a deferred vested benefit shall be entitled to receive from the Administrator a statement of his benefits. In the event that a Participant elects not to commence receipt of distributions from his Accounts in accordance with this Section 9.2(b), after the Participant incurs a Break, the Administrator shall transfer his deferred vested interest to a distribution account. If the value of a Participant’s vested Accounts (including any rollover accounts, if permitted under the Plan) do not exceed $1,000 on the Valuation Date next following the date of his termination of Service (or if the value is later determined to be $1,000 or less), the Plan Administrator may distribute the vested portion of his Accounts as soon as administratively feasible without the consent of the Participant or his spouse.
(c) Distribution of Accounts Greater Than $1,000 . If the value of a Participant’s vested Accounts exceeds $1,000, and the Account balance is immediately distributable, the Participant must consent to any distribution of such Account balance. The Plan Administrator shall notify the Participant of the right to defer any distribution until the Participant’s Account balance is no longer immediately distributable. The consent of the Participant shall not be required to the extent that a distribution is required to satisfy Code §§ 401(a)(9) or 415.
9.3 |
Mandatory Commencement of Benefits . |
(a) Unless a Participant elects otherwise, in writing, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which (i) the Participant attains age 65, (ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan Year, or (iii) the Participant terminates Service with the Employer.
(b) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, as of the first distribution calendar year, distributions, if not made in a lump sum, may be made only over one of the following periods (or a combination thereof):
(i) |
the life of the Participant, |
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(ii) |
the life of the Participant and the designated beneficiary, |
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(iii) |
a period certain not extending beyond the life expectancy of the Participant, or |
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(iv) |
a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated beneficiary. |
(c) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, if the participant’s interest is to be distributed in other than a lump sum, the following minimum distribution rules shall apply on or after the required beginning date:
(i) If a Participant’s benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant’s designated beneficiary or (2) a period not extending beyond the life expectancy of the designated beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the ‘first distribution calendar year, must at least equal the quotient obtained by dividing the Participant’s benefit by the applicable life expectancy.
(ii) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant’s benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant’s spouse is not the designated beneficiary, the applicable divisor determined from the table set forth in Proposed Regulations § 1.401(a)(9)-2 Q&A-4. Distributions after the death of the participant shall be distributed using the applicable life expectancy in subsection (iii) above as the relevant divisor without regard to Proposed Regulations § 1.401(a)(9)-2.
(iii) The minimum distribution required for the Participant’s first distribution calendar year must be made on or before the Participant’s required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the employee’s required beginning date occurs, must be made on or before December 31 of the distribution calendar year.
(d) If a Participant dies after a distribution has commenced in accordance with Section 8.3(b) but before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed to his Beneficiary at least as rapidly as under the method of distribution in effect as of the date of his death.
(e) If a Participant shall die before the distribution of his interest in the Plan has begun, the entire interest of the Participant shall be distributed by December 31 of the calendar year containing the fifth anniversary of the death of the Participant, except in the following events:
(i) If any portion of the Participant’s interest is payable to (or for the benefit of) a designated beneficiary over a period not extending beyond the life expectancy of such beneficiary and such distributions begin not later than December 31 of the calendar year immediately following the calendar year in which the Participant died.
(ii) If any portion of the Participant’s interest is payable to (or for the benefit of) the Participant’s spouse over a period not extending beyond the life expectancy of such spouse and such distributions begin no later than December 31 of the calendar year in which the Participant would have attained age 70½.
If the Participant has not made a distribution election by the time of his death, the Participant’s designated beneficiary shall elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Article or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated beneficiary, or if the designated beneficiary does not elect a method of distribution, distribution of the Participant’s entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
(f) For purposes of this Article, the life expectancy of a Participant and his spouse may be redetermined but not more frequently than annually. The life expectancy (or joint and last survivor expectancy) shall be calculated using the attained age of the Participant (or designated beneficiary) as of the Participant’s (or designated beneficiary’s) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated, such succeeding calendar year. Unless otherwise elected by the Participant (or his spouse, if applicable) by the time distributions are required to begin, life expectancies shall be recalculated annually. Any such election not to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated.
(g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child shall be treated as if it had been paid to a surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations).
(h) For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to this Article.
9.4 |
Required Beginning Dates . |
For purposes of this section, a Participant’s “required beginning date” is April 1 of the calendar year following the later of (i) the calendar year in which the Participant attained age 70½, or (ii) the calendar year in which the Participant terminates Service with the Employer. However, clause (ii) of the previous sentence does not apply to any Participant who is a more than 5-percent owner of the Employer (as defined in Code § 416) with respect to the Plan Year ending in the calendar year in which the Participant attains age 70½. Any Participant who had begun receiving minimum distributions for years prior to 1999, but who is not required to receive such distributions under the provisions of this subsection, may file a written election with the Company to stop those distributions until the required beginning date under this subsection.
9.5 |
Form of Payment . |
Each Participant’s vested interest shall be distributed in a lump sum payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the Administrator may not distribute a lump sum when the value of a Participant’s vested Accounts is in excess of $1,000 without the Participant’s consent. This form of payment shall be the normal form of distribution. Furthermore, however, in the event that the Administrator must commence distributions with respect to an Employee who has attained age 70½ and is still employed by the Employer, if the Employee does not elect a lump sum distribution, payments shall be made in installments in such amounts as shall satisfy the minimum distribution rules of Section 9.3.
9.6 |
Medium of Distribution . |
The distribution (including any direct rollover) will be made, pursuant to the Participant’s election, in either one or a combination of the following: (i) cash, or (ii) whole shares of Employer Securities (with any fractional share paid in cash). If the Participant does not elect a medium of distribution, the distribution will be made in cash.
9.7 |
Payments Upon Termination of Plan . |
Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or 13.6, the Administrator shall continue to perform its duties and the Trustee shall make all payments upon the following terms, conditions and provisions: All interests of Participants shall immediately become fully vested; the value of the interests of all Participants shall be determined within 60 days after such termination, and the Administrator shall have the same powers to direct the Trustee in making payments as contained in Sections 9.1 and 13.5.
9.8 |
Distributions Pursuant to Qualified Domestic Relations Orders . |
Upon receipt of a domestic relations order, the Administrator shall notify promptly the Participant and any alternate payee of receipt of the order and the Plan’s procedure for determining whether the order is a Qualified Domestic Relations Order. While the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined, if the benefits would otherwise be paid, the Administrator shall segregate in a separate account in the Plan the amounts that would be payable to the alternate payee during such period if the order were a Qualified Domestic Relations Order. If within 18 months the order is determined to be a Qualified Domestic Relations Order, the amounts so segregated, along with the interest or investment earnings attributable thereto shall be paid to the alternate payee. Alternatively, if within 18 months, it is determined that the order is not a Qualified Domestic Relations Order or if the issue is still unresolved, the amounts segregated under this Section 9.8, with the earnings attributable thereto, shall be paid to the Participant or Beneficiary who would have been entitled to such amounts if there had been no order. The determination as to whether the order is qualified shall be applied prospectively. Thus, if the Administrator determines that the order is a Qualified Domestic Relations Order after the 18-month period, the Plan shall not be liable for payments to the alternative payee for the period before the order is determined to be a Qualified Domestic Relations Order.
9.9 |
Cash-Out Distributions . |
If a Participant receives a distribution of the entire present value of his vested Account balances under this Plan because of the termination of his participation in the Plan, the Plan shall disregard a Participant’s Service with respect to which such cash-out distribution shall have been made, in computing his accrued benefit under the Plan in the event that a Former Participant shall again become an Employee and become eligible to participate in the Plan. Such a distribution shall be deemed to be made on termination of participation in the Plan if it is made not later than the close of the second Plan Year following the Plan Year in which such termination occurs. The forfeitable portion of a Participant’s accrued benefit shall be restored upon repayment to the Plan by such former Participant of the full amount of the cash-out distribution, provided that the former Participant again becomes an Employee. Such repayment must be made by the Employee not later than the end of the 5-year period beginning with the date of the distribution. Forfeitures required to be restored by virtue of such repayment shall be restored from the following sources in the following order of preference: (i) current forfeitures; (ii) additional employee stock ownership contributions, as appropriate and as subject to Section 5.6; and (iii) investment earnings of the Fund. In the event that a Participant’s interest in the Plan is totally forfeitable, a Participant shall be deemed to have received a distribution of zero upon his termination of Service. In the event of a return to Service within 5 years of the date of his deemed distribution, the Participant shall be deemed to have repaid his distribution in accordance with the rules of this Section 9.9
9.10 |
ESOP Distribution Rules . |
Notwithstanding any provision of this Article IX to the contrary, the distribution of a Participant’s Employee Stock Ownership Account (unless the Participant elects otherwise in writing), shall commence as soon as administratively feasible as of the first Valuation Date coincident with or next following his death, disability or termination of Service, but not later than 1 year after the close of the Plan Year in which the Participant separates from Service by reason of the attainment of his Normal Retirement Date, disability, death or separation from Service. In addition, the medium of all distributions hereunder shall be determined pursuant to Section 9.6.
9.11 |
Withholding . |
(a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article IX, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an “eligible rollover distribution” paid directly to an “eligible retirement plan” specified by the distributee in a “direct rollover.”
(b) An “eligible rollover distribution” is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life expectancy of the distributee or the joint life expectancies of the distributee and the distributee’s designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code § 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).
(1) Any withdrawal from the Participant’s accounts due to financial hardship prior to age 59½ is not an eligible rollover distribution.
(2) A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Code § 408(a) or (b), or to a qualified defined contribution plan described in Code §§ 401(a) or 403(a) that agrees to separately account for the amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.
(c) An “eligible retirement plan” is an individual retirement account described in Code § 408(a), an individual retirement annuity described in Code § 408(b), an annuity plan described in Code § 403(a), or a qualified trust described in Code § 401(a) with respect to a defined contribution plan, that accepts the distributee’s eligible rollover distribution. An eligible retirement plan also means an annuity contract described in Code § 403(b), or an eligible plan under Code § 457(b) which is maintained by a state, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to account separately for amounts transferred into such plan from this Plan.
(d) For purposes of this Section 9.11, a distributee includes a Participant or former Participant. In addition, the Participant’s or former Participant’s surviving spouse and the Participant’s or former Participant’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code § 414(p), are “distributees” with regard to the interest of the spouse or former spouse.
(e) For purposes of this Section 9.11, a “direct rollover” is a payment by the Plan to the “eligible retirement plan” specified by the distributee.
9.12 |
Waiver of 30-day Notice . |
If a distribution is one to which Code §§ 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under IRS Treas. Reg. § l.411(a)-11(c) is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution.
9.13 Direct Transfer Option .
A Beneficiary who is not a spouse of a deceased Participant, but who is a “designated beneficiary” under Code § 401(a)(9)(E) may elect, at the time and in the manner prescribed by the Administrator, to have all or any portion of the “transfer-eligible” amount payable from the Plan transferred directly to an individual retirement account described in Code § 408. For this purpose, the “transfer-eligible” amount is:
(a) During the calendar year containing the date of the Participant’s death, the Beneficiary’s full interest in the Plan.
(b) During the next calendar year, the Beneficiary’s full interest in the Plan, provided, however, that if the Beneficiary wants to apply the “life expectancy” rule of Code § 401(a)(9)(B)(iii) to the individual retirement account, the “transfer-eligible” amount is the balance of the Beneficiary’s, less the required minimum distribution due to the Beneficiary, as determined under Code § 401(a)(9).
(c) During the subsequent three calendar years, the full balance of the Beneficiary’s Account.
(d) During the calendar year containing the fifth anniversary of the Participant’s death, the “transfer-eligible” amount is zero, because the Beneficiary’s Account must be fully distributed from the Plan.
A Beneficiary electing a direct transfer under this Section 9.13 must provide the Administrator with the information necessary to accomplish the direct transfer in such manner and in accordance with such rules as may be prescribed for this purpose by the Administrator.
ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS
10.1 |
Top-Heavy Rules to Control . |
Anything contained in this Plan to the contrary notwithstanding, if for any Plan Year the Plan is a top-heavy plan, as determined pursuant to Code § 416 and the regulations thereunder in effect for the particular Plan Year, then the Plan must meet the requirements of this Article X for such Plan Year.
10.2 |
Top-Heavy Plan Definitions . |
Unless a different meaning is plainly implied by the context, the following terms as used in this Article X shall have the following meanings:
(a) “Accrued Benefit” shall mean the account balances or accrued benefits of an Employee, calculated pursuant to Section 10.3.
(b) “Determination Date” shall mean, with respect to any particular Plan Year of this Plan, the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year). In addition, the term “Determination Date” shall mean, with respect to any particular plan year of any plan (other than this Plan) in a Required Aggregation Group or a Permissive Aggregation Group, the last day of the plan year of such plan which falls within the same calendar year as the Determination Date for this Plan.
(c) “Employer” shall mean the Employer (as defined in Section 1.1(r)) and any entity which is (1) a member of a controlled group including such Employer, while it is a member of such controlled group (within the meaning of Code § 414(b)), (2) in a group of trades or businesses under common control with such Employer, while it is under common control (within the meaning of Code § 414(c)), and (3) a member of an affiliated service group including such Employer, while it is a member of such affiliated service group (within the meaning of Code § 414(m)).
(d) “Key Employee” shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who, at any time during the Plan Year or during the 4 immediately preceding Plan Years is one of the following:
(1) An officer of the Employer who has compensation greater than 150% of the amount in effect under Code § 415(c)(1)(A) for the Plan Year; provided, however, that no more than 50 Employees (or, if lesser, the greater of 3 or 10% of the Employees) shall be deemed officers;
(2) One of the 10 Employees having annual compensation (as defined in Code § 414(q)(7)) in excess of the limitation in effect under Code § 415(c)(1)(A), and owning (or considered as owning, within the meaning of Code § 318) the largest interests in the Employer;
(3) Any Employee owning (or considered as owning, within the meaning of Code § 318) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of ‘all stock of the Employer; or
(4) Any Employee having annual compensation (as defined in Code § 414(q)(7)) of more than $150,000 and who would be described in Section 10.2(d)(3) if “1%” were substituted for “5%” wherever the latter percentage appears.
For purposes of applying Code § 318 of the Code to the provisions of this Section 10.2(d), Code § 318(a)(2)(C) shall be applied by substituting “5%” for “50%” wherever the latter percentage appears. In addition, for purposes of this Section 10.2(d), the provisions of Code §§ 414(b), (c) and (m) shall not apply in determining ownership interests in the Employer. However, for purposes of determining whether an individual has compensation in excess of $150,000, or whether an individual is a Key Employee under Section 10.2(d)(1) and (2), compensation from each entity required to be aggregated under Code §§ 414(b), (c) and (m) shall be taken into account. Notwithstanding anything contained herein to the contrary, all determinations as to whether a person is or is not a Key Employee shall be resolved by reference to Code § 416 and any rules and regulations promulgated thereunder.
(e) “Non-Key Employee” shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who is not considered to be a Key Employee with respect to this Plan.
(f) “Permissive Aggregation Group” shall mean all plans in the Required Aggregation Group and any other plans maintained by the Employer which satisfy Code §§ 401(a)(4) and 410 when considered together with the Required Aggregation Group.
(g) “Required Aggregation Group” shall mean each plan (including any terminated plan) of the Employer in which a Key Employee is (or in the case of a terminated plan, had been) a Participant in the Plan Year containing the Determination Date or any of the 4 preceding Plan Years, and each other plan of the Employer which enables any plan of the Employer in which a Key Employee is a Participant to meet the requirement of Code §§ 401(a)(4) and 410.
10.3 |
Calculation of Accrued Benefits . |
(a) An Employee’s Accrued Benefit shall be equal to:
(1) With respect to this Plan or any other defined contribution plan (other than a defined contribution pension plan) in a Required Aggregation Group or a Permissive Aggregation Group, the Employee’s account balances under the respective plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions actually made after the valuation date but before the Determination Date (and, in the first plan year of a plan, also including any contributions made after the Determination Date which are allocated as of a date in the first plan year).
(2) With respect to any defined contribution pension plan in a Required Aggregation Group or a Permissive Aggregation Group, the Employee’s account balances under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions which have not actually been made, but which are due to be made as of the Determination Date.
(3) With respect to any defined benefit plan in a Required Aggregation Group or a Permissive Aggregation Group, the present value of the Employee’s accrued benefits under the plan, determined as of the most recent plan. valuation date within a 12-month period ending on the Determination Date, pursuant to the actuarial assumptions used by such plan, and calculated as if the Employee terminated Service under such plan as of the valuation date (except that, in the first plan year of a plan, a current Participant’s estimated Accrued Benefit Plan as of the Determination Date shall be taken into account).
(4) If an individual has not performed any services for the Employer at any time during the one-year period ending on the Determination Date with respect to a Plan Year, any account balance or accrued benefit for such individual shall not be taken into account for such Plan Year.
(b) The Accrued Benefit of any Employee shall be further adjusted as follows:
(1) The Accrued Benefit shall be calculated to include all amounts attributable to both Employer and Employee contributions, but shall exclude amounts attributable to voluntary deductible Employee contributions, if any.
(2) The Accrued Benefit shall be increased by the aggregate distributions made with respect to an Employee under the plan or plans, as the case may be, during the 5-year period ending on the Determination Date.
(3) Rollover and direct plan-to-plan transfers shall be taken into account as follows:
(A) If the transfer is initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another unrelated employer, the transferring plan shall continue to count the amount transferred; the receiving plan shall not count the amount transferred.
(B) If the transfer is not initiated by the Employee or is made between plans maintained by related employers, the transferring plan shall no longer count the amount transferred; the receiving plan shall count the amount transferred.
(4) Any distribution due to severance from employment, death or disability which was made prior to the one-year period ending on the Determination Date shall be disregarded for purposes of applying this subsection (b). Paragraphs (1) and (2) of this subsection shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with this Plan under Code § 416(a)(2)(A)(i).
(c) If any individual has not performed services for the Employer at any time during the 5-year period ending on the Determination Date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account.
10.4 |
Determination of Top-Heavy Status . |
This Plan shall be considered to be a top-heavy plan for any Plan Year if, as of the Determination Date, the value of the Accrued Benefits of Key Employees exceeds 60% of the value of the Accrued Benefits of all eligible Employees under the Plan. Notwithstanding the foregoing, if the Employer maintains any other qualified plan, the determination of whether this Plan is top-heavy shall be made after aggregating all other plans of the Employer in the Required Aggregation Group and, if desired by the Employer as a means of avoiding top-heavy status, after aggregating any other plan of the Employer in the Permissive Aggregation Group. If the required Aggregation Group is top-heavy, then each plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would not otherwise be deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not top-heavy, then no plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would otherwise be deemed to be top-heavy. In no event shall a plan included in a top-heavy Permissive Aggregation Group be deemed a top-heavy plan unless such plan is also included in a top-heavy Required Aggregation Group.
10.5 |
Determination of Super Top-Heavy Status . |
The Plan shall be considered to be a super top-heavy plan if, as of the Determination Date, the Plan would meet the test specified in Section 10.4 above for classification as a top-heavy plan, except that “90%” shall be substituted for “60%” whenever the latter percentage appears.
10.6 |
Minimum Contribution . |
(a) For any year in which the Plan is top-heavy, each Non-Key Employee who has met the age and service requirements, if any, contained in the Plan, shall be entitled to a minimum contribution (which may include forfeitures otherwise allocable) equal to a percentage of such Non-Key Employee’s compensation (as defined in Code § 415) as follows:
(1) If the Non-Key Employee is not covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 3% of such Non-Key Employee’s compensation.
(2) If the Non-Key Employee is covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 5% of such Non-Key Employee’s compensation.
(b) Notwithstanding the foregoing, the minimum contribution otherwise allocable to a Non-Key Employee under this Plan shall be reduced in the following circumstances:
(1) The percentage minimum contribution required under this Plan shall in no event exceed the percentage contribution made for the Key Employee for whom such percentage is the highest for the Plan Year after taking into account contributions under other defined contribution plans in this Plan’s Required Aggregation Group; provided, however, that this Section 10.7(b)(1) shall not apply if this Plan is included in a Required Aggregation Group and this Plan enables a defined benefit plan in such Required Aggregation Group to meet the requirements of Code §§ 401(a)(4) or 410.
(2) No minimum contribution shall be required (or the minimum contribution shall be reduced, as the case may be) for a Non-Key Employee under this Plan for any Plan Year if the Employer maintains another qualified plan under which a minimum benefit or contribution is being accrued or made on account of such Plan Year, in whole or in part, on behalf of the Non-Key Employee, in accordance with Code § 416(c).
(c) For purposes of this Section 10.6, there shall be disregarded (1) any Employer contributions attributable to a salary reduction or similar arrangement, or (2) any Employer contributions to or any benefits under Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other federal or state law. Notwithstanding the foregoing, elective contributions on behalf of Key Employees shall be taken into account in determining the minimum required contribution.
(d) For purposes of this Section 10.6, minimum contributions shall be required to be made on behalf of only those Non-Key Employees who have not terminated Service as of the last day of the Plan Year. If a Non-Key Employee is otherwise entitled to receive a minimum contribution pursuant to this Section 10.6(d), the fact that such Non-Key Employee failed to complete 1,000 Hours of Service or failed to make any mandatory or elective contributions under this Plan, if any are so required, shall not preclude him from receiving such minimum contribution.
10.7 |
Vesting . |
(a) For any Plan Year in which the Plan is a top-heavy plan, a Participant’s Employer account shall continue to vest according to the following schedule:
Years of Service Completed |
Percentage Vested |
|
Less than 3 |
0% |
|
3 or more |
100% |
(b) For purposes of Section 10.7(a), the term “year of service” shall have the same meaning as set forth in Section 1.1(mm), as modified by Section 3.2.
(c) If for any Plan Year the Plan becomes top-heavy and the vesting schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set forth in Section 10.7(a) shall remain applicable with respect to any Participant who has completed 3 Years of Service.
ARTICLE XI
ADMINISTRATION
11.1 |
Appointment of Administrator . |
This Plan shall be administered by a committee consisting of up to 5 persons, whether or not Employees or Participants, who shall be appointed from time to time by the Board of Directors to serve at its pleasure. The Sponsor may require that each person appointed as an Administrator shall signify his acceptance by filing an acceptance with the Sponsor. The term “Administrator” as used in this Plan shall refer to the members of the committee, either individually or collectively, as appropriate. In the event that the Sponsor shall elect not to appoint any individuals to constitute a committee to administer the Plan, the Sponsor shall serve as the Administrator hereunder.
11.2 |
Resignation or Removal of Administrator . |
An Administrator shall have the right to resign at any time by giving notice in writing, mailed or delivered to the Employer and to the Trustee. Any Administrator who was an employee of the Employer at the time of his appointment shall be deemed to have resigned as an Administrator upon his termination of Service. The Board of Directors may, in its discretion, remove any Administrator with or without cause, by giving notice in writing, mailed or delivered to the Administrator and to the Trustee.
11.3 |
Appointment of Successors: Terms of Office, Etc . |
Upon the death, resignation or removal of an Administrator, the Employer may appoint, by Board of Directors’ resolution, a successor or successors. Notice of termination of an Administrator and notice of appointment of a successor shall be made by the Employer in writing, with copies mailed or delivered to the Trustee, and the successor shall have all the rights and privileges and all of the duties and obligations of the predecessor.
11.4 |
Powers and Duties of Administrator . |
The Administrator shall have the following duties and responsibilities in connection with the administration of this Plan:
(a) To promulgate and enforce such rules, regulations and procedures as shall be proper for the efficient administration of the Plan, such rules, regulations and procedures to apply uniformly to all Employees, Participants and Beneficiaries;
(b) To determine all questions arising in the administration, interpretation and application of the Plan, including questions of eligibility and of the status and rights of Participants, Beneficiaries and any other persons hereunder;
(c) To decide any dispute arising hereunder strictly in accordance with the terms of the Plan; provided, however, that no Administrator shall participate in any matter involving any questions relating solely to his own participation or benefits under this Plan;
(d) To advise the Employer and the Trustee regarding the known future needs for funds to be available for distribution in order that the Trustee may establish investments accordingly;
(e) To correct defects, supply omissions and reconcile inconsistencies to the extent necessary to effectuate the Plan;
(f) To advise the Employer of the maximum deductible contribution to the Plan for each fiscal year;
(g) To direct the Trustee concerning all payments which shall be made out of the Fund pursuant to the provisions of this Plan;
(h) To advise the Trustee on all terminations of Service by Participants, unless the Employer has so notified the Trustee;
(i) To confer with the Trustee on the settling of any claims against the Fund;
(j) To make recommendations to the Board of Directors with respect to proposed amendments to the Plan and the Trust Agreement;
(k) To file all reports with government agencies, Employees and other parties as may be required by law, whether such reports are initially the obligation of the Employer, the Plan or the Trustee; and
(l) To have all such other powers as may be necessary to discharge its duties hereunder.
Except as expressly otherwise provided herein, the Administrator shall have full discretion to control and manage the operation and administration of the Plan and to make all decisions and determinations incident thereto. In carrying out its Plan responsibilities, the Administrator shall have full discretionary authority to construe the terms of the Plan and to make any factual determinations necessary to determine eligibility for benefits or the amount of any benefits. It is intended that the Administrator have discretion to the fullest extent permitted by law and that the Administrator’s exercise of its discretion be given deference to the greatest extent allowed under the law. This discretion includes, but is not limited to, the authority to make any rules, regulations or computations that the Administrator deems necessary to administer the Plan.
11.5 |
Action by Administrator . |
The Administrator may elect a Chairman and Secretary from among its members and may adopt rules for the conduct of its business. A majority of the members then serving shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Administrator shall be by vote of a majority of those present at such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent signed by at least a majority of the members. All documents, instruments, orders, requests, directions, instructions and other papers shall be executed on behalf of the Administrator by either the Chairman or the Secretary of the Administrator, if any, or by any member or agent of the Administrator duly authorized to act on the Administrator’s behalf.
11.6 |
Participation by Administrators . |
No Administrator shall be precluded from becoming a Participant in the Plan if he would be otherwise eligible, but he shall not be entitled to vote or act upon matters or to sign any documents relating specifically to his own participation under the Plan, except when such matters or documents relate to benefits generally. If this disqualification results in the lack of a quorum, then the Board of Directors shall appoint a sufficient number of temporary Administrators who shall serve for the sole purpose of determining such a question.
11.7 |
Agents . |
The Administrator may employ agents and provide for such clerical, legal, actuarial, accounting, medical, advisory or other services as it deems necessary to perform its duties under this Plan. The cost of such services and all other expenses incurred by the Administrator in connection with the administration of the Plan shall be paid from the Fund, unless paid by the Employer.
11.8 |
Allocation of Duties . |
The duties, powers and responsibilities reserved to the Administrator may be allocated among its members so long as such allocation is pursuant to written procedures adopted by the Administrator, in which case, except as may be required by the Act, no Administrator shall have any liability, with respect to any duties, powers or responsibilities not allocated to him, for the acts of omissions of any other Administrator.
11.9 |
Delegation of Duties . |
The Administrator may delegate any of its duties to other employees of the Employer, to the Trustee with its consent, or to any other person or firm, provided that the Administrator shall prudently choose such agents and rely in good faith on their actions.
11.10 |
Administrator’s Action Conclusive . |
Any action on matters within the authority of the Administrator shall be final and conclusive except as provided in Article XII.
11.11 |
Compensation and Expenses of Administrator . |
No Administrator who is receiving compensation from the Employer as a full-time employee, as a director or agent, shall be entitled to receive any compensation or fee for his services hereunder. Any other Administrator shall be entitled to receive such reasonable compensation for his services as an Administrator hereunder as may be mutually agreed upon between the Employer and such Administrator. Any such compensation shall be paid from the Fund, unless paid by the Employer. Each Administrator shall be entitled to reimbursement by the Employer for any reasonable and necessary expenditures incurred in the discharge of his duties.
11.12 |
Records and Reports . |
The Administrator shall maintain adequate records of its actions and proceedings in administering this Plan and shall file all reports and take all other actions as it deems appropriate in order to comply with the Act, the Code and governmental regulations issued thereunder.
11.13 |
Reports of Fund Open to Participants . |
The Administrator shall keep on file, in such form as it shall deem convenient and proper, all annual reports of the Fund received by the Administrator from the Trustee, and a statement of each Participant’s interest in the Fund as from time to time determined. The annual reports of the Fund and the statement of his own interest in the Fund, as well as a complete copy of the Plan and the Trust Agreement and copies of annual reports to the Internal Revenue Service, shall be made available by the Administrator to the Employer for examination by each Participant during reasonable hours at the office of the Employer, provided, however, that the statement of a Participant’s interest shall not be made available for examination by any other Participant.
11.14 |
Named Fiduciary . |
The Administrator is the named fiduciary for purposes of the Act and shall be the designated agent for receipt of service of process on behalf of the Plan. It shall use ordinary care and diligence in the performance of its duties under this Plan. Nothing in this Plan shall preclude the Employer from indemnifying the Administrator for all actions under this Plan, or from purchasing liability insurance to protect it with respect to its duties under this Plan.
11.15 |
Information from Employer . |
The Employer shall promptly furnish all necessary information to the Administrator to permit it to perform its duties under this Plan. The Administrator shall be entitled to rely upon the accuracy and completeness of all information furnished to it by the Employer, unless it knows or should have known that such information is erroneous.
11.16 |
Reservation of Rights by Employer . |
Where rights are reserved in this Plan to the Employer, such rights shall be exercised only by action of the Board of Directors, except where the Board of Directors, by written resolution, delegates any such rights to one or more officers of the Employer or to the Administrator. Subject to the rights reserved to the Board 6f Directors acting on behalf of the Employer as set forth in this Plan, no member of the Board of Directors shall have any duties or responsibilities under this Plan, except to the extent he shall be acting in the capacity of an Administrator or Trustee.
11.17 |
Liability and Indemnification . |
(a) The Administrator shall perform all duties required of it under this Plan in a prudent manner. To the extent not prohibited by the Act, the Administrator shall not be responsible in any way for any action or omission of the Employer, the Trustee or any other fiduciaries in the performance of their duties and obligations set forth in this Plan and in the Trust Agreement. To the extent not prohibited by the Act, the Administrator shall also not be responsible for any act or omission of any of its agents, or with respect to reliance upon advice of its counsel (whether or not such counsel is also counsel to the Employer or the Trustee), provided that such agents or counsel were prudently chosen by the Administrator and that the Administrator relied in good faith upon the action of such agent or the advice of such counsel.
(b) The Administrator shall not be relieved from responsibility or liability for any responsibility, obligation or duty imposed upon it under this Plan or under the Act. Except for its own gross negligence, willful misconduct or willful breach of the terms of this Plan, the Administrator shall be indemnified and held harmless by the Employer against liability or losses occurring by reason of any act or omission of the Administrator to the extent that such indemnification does not violate the Act or any other federal or state laws.
11.18 |
Service as Trustee and Administrator . |
Nothing in this Plan shall prevent one or more Trustees from serving as Administrator under this Plan.
ARTICLE XII
CLAIMS PROCEDURE
12.1 |
Notice of Denial . |
If a Participant or his Beneficiary is denied any benefits under this Plan, either in whole or in part, the Administrator shall advise the claimant in writing of the amount of his benefit, if any, and the specific reasons for the denial. The Administrator shall also furnish the claimant at that time with a written notice containing:
(a) A specific reference to pertinent Plan provisions;
(b) A description of any additional material or information necessary for the claimant to perfect his claim, if possible, and an explanation of why such material or information is needed; and
(c) An explanation of the Plan’s claim review procedure.
12.2 |
Right to Reconsideration . |
Within 60 days of receipt of the information described in 12.1 above, the claimant shall, if he desires further review, file a written request for reconsideration with the Administrator.
12.3 |
Review of Documents . |
So long as the claimant’s request for review is pending (including the 60-day period described in Section 12.2 above), the claimant or his duly authorized representative may review pertinent Plan documents and the Trust Agreement (and any pertinent related documents) and may submit issues and comments in writing to the Administrator.
12.4 |
Decision by Administrator . |
A final and binding decision shall be made by the Administrator within 60 days of the filing by the claimant of his request for reconsideration; provided, however, that if the Administrator feels that a hearing with the claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days.
12.5 |
Notice by Administrator . |
The Administrator’s decision shall be conveyed to the claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, with specific references to the pertinent Plan provisions on which the decision is based.
12.6 Limitations on Actions . A claimant must follow the claims procedure (and comply with all applicable deadlines established as part thereof) as a condition to the receipt of any benefits under the Plan, and as a condition to the availability of any other relief under or with respect to the Plan. The failure of a claimant to follow the claims procedure (including the failure to comply with the deadlines established as part thereof) will extinguish his right to file a subsequent claim or to file a lawsuit with respect to the claim. If a claimant follows the claims procedure, but his final appeal is denied, he will have one year to file a lawsuit with respect to that claim, and failure to meet the one-year deadline will extinguish his right to file a lawsuit with respect to that claim.
ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER
13.1 |
Amendments . |
The Employer reserves the right at any time and from time to time, and retroactively if deemed necessary or appropriate by it, to the extent permissible under law, to conform with governmental regulations or other policies, to amend in whole or in part any or all of the provisions of this Plan, provided that:
(a) No amendment shall make it possible for any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries under the Trust Agreement, except to the extent provided in Sections 4.4 and 5.6(c)(5);
(b) No amendment may, directly or indirectly, reduce the vested portion of any Participant’s interest as of the effective date of the amendment or change the vesting schedule with respect to the future accrual of Employer contributions for any Participants unless each Participant with 3 or more Years of Service with the Employer is permitted to elect to have the vesting schedule in effect before the amendment used to determine his vested benefit; and
(c) No amendment shall divest a Participant or Beneficiary of accounts accrued prior to the amendment, eliminate any optional form of benefit, decrease a Participant’s accrued benefit, or otherwise place greater restrictions or conditions on a Participant’s rights to Code § 411(d)(6) benefits except to the extent permitted by Code § 411(d)(6).
(d) No amendment may increase the duties of the Trustee without its consent.
(e) No amendment that shall change any of the following types of provisions shall be made more than once every 6 months, other than to comport with changes in the Code, the Act or the regulations thereunder: (i) any provision stating the amount and price of Employer Securities to be awarded to designated officers and directors or categories of officers and directors; (ii) any provisions specifying the timing of awards or allocations to officers and directors; (iii) any provision setting forth a formula that determines the amount, price and timing of allocations or awards, using objective criteria such as earnings of the issuer, value of the Employer Securities, Years of Service, job classification and Compensation levels.
Amendments may be made in the form of Board of Directors’ resolutions or separate written document. Copies of all amendments shall be delivered to the Trustee.
13.2 |
Consolidation, Merger or Other Transactions of Employer . |
Nothing in this Plan shall prevent the consolidation, merger, reorganization or liquidation of the Employer, or prevent the sale by Employer of any or all of its property. Any successor corporation or other entity formed and resulting from any such transaction shall have the right to become a party to this Plan by adopting the same by resolution and by appointing a new Trustee as though the Trustee had resigned in accordance with the Trust Agreement, and by executing a proper supplemental agreement with the Trustee. If, within 180 days from the effective date of such transaction, such new entity does not become a party to this Plan as above provided, this Plan shall automatically be terminated and the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.5.
13.3 |
Consolidation or Merger of Trust . |
In the event of any merger or consolidation of the Fund with, or transfer in whole or in part of the assets and liabilities of the Fund to, another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Fund applicable to such Participants shall be transferred to the other trust fund only if:
(a) Each Participant would receive a benefit under such successor trust fund immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (determined as if this Plan and such transferee trust fund had then terminated);
(b) Resolutions of the Board of Directors under this Plan, or of any new or successor employer of the affected Participants, shall authorize such transfer of assets, and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants’ inclusion in the new employer’s plan; and
(c) Such other plan and trust are qualified under Code §§ 401(a) and 501(a).
13.4 |
Bankruptcy or Insolvency of Employer . |
In the event of (a) the Employer’s legal dissolution or liquidation by any procedure other than a consolidation or merger, (b) the Employer’s receivership, insolvency, or cessation of its business as a going concern, or (c) the commencement of any proceeding by or against the Employer under the federal bankruptcy laws, and similar federal or state statute, or any federal or state statute or rule providing for the relief of debtors, compensation of creditors, arrangement, receivership, liquidation or any similar event which is not dismissed within 30 days, this Plan shall terminate automatically on such date (provided, however, that if a proceeding is brought against the Employer for reorganization under Chapter 11 of the United States Bankruptcy Code or any similar federal or state statute, then this Plan shall terminate automatically if and when said proceeding results in a liquidation of the Employer, or the approval of any Plan providing therefor, or the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or any similar conversion to a liquidation proceeding under federal or state law including, but not limited to, a receivership proceeding). In the event of any such termination as provided in the foregoing sentence, the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.5 hereof.
13.5 |
Voluntary Termination . |
The Board of Directors reserves the right to terminate this Plan at any time by giving to the Trustee and the Administrator notice in writing of such desire to terminate. The Plan shall terminate upon the date of receipt of such notice, the interests of all Participants shall become fully vested, and the Trustee shall make payments to each Participant or Beneficiary in accordance with Section 9.5. Alternatively, the Employer, in its discretion, may determine to continue the Trust Agreement and to continue the maintenance of the Fund, in which event distributions shall be made upon the contingencies and in all the circumstances which would have been entitled such distributions on a fully vested basis, had there been no termination of the Plan.
13.6 |
Partial Termination of Plan or Permanent Discontinuance of Contributions . |
In the event that a partial termination of the Plan shall be deemed to have occurred, or if the Employer shall discontinue completely its contributions hereunder, the right of each affected Participant to his interest in the Fund shall be fully vested. The Employer, in its discretion, shall decide whether to direct the Trustee to make immediate distribution of such portion of the Fund assets to the persons entitled thereto or to make distribution in the circumstances and contingencies which would have controlled such distributions if there had been no partial termination or discontinuance of contributions.
ARTICLE XIV
MISCELLANEOUS
14.1 |
No Diversion of Funds . |
It is the intention of the Employer that it shall be impossible for any part of the corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries, except to extent that a return of the Employer’s contribution is permitted under Sections 4.4 and 5.6(c)(5).
14.2 |
Liability Limited . |
Neither the Employer nor the Administrator, nor any agents, employees, officers, directors or shareholders of any of them, nor the Trustee, nor any other person shall have any liability or responsibility with respect to this Plan, except as expressly provided herein.
14.3 |
Incapacity . |
If the Administrator shall receive evidence satisfactory to it that a Participant or Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of such Participant or Beneficiary, and that no guardian, committee or other representative of the estate of such Participant or Beneficiary shall have been duly appointed, the Administrator may direct the Trustee to make payment of such benefit otherwise payable to such Participant or Beneficiary, to such other person or institution, including a custodian under a Uniform Gifts to Minor Act, or corresponding legislation (who shall be an adult, a guardian of the minor or a trust company), and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.
14.4 |
Spendthrift Clause . |
Except as permitted by the Act or the Code, no benefits or other amounts payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, charge or alienation. If the Administrator determines that any person entitled to any payments under the Plan has become insolvent or bankrupt or has attempted to anticipate, sell, transfer, assign, pledge, encumber, charge or otherwise in any manner alienate any benefit or other amount payable to him under the Plan or that there is any danger of any levy or attachment or other court process or encumbrance on the part of any creditor of such person entitled to payments under the Plan against any benefit or other accounts payable to such person, the Administrator may, at any time, in its discretion, direct the Trustee to withhold any or all payments to such person under the Plan and apply the same for the benefit of such person, in such manner and in such proportion as the Administrator may deem proper.
14.5 |
Benefits Limited to Fund . |
All contributions by the Employer to the Fund shall be voluntary, and the Employer shall be under no legal liability to make any such contributions. The benefits of this Plan shall be only as can be provided by the assets of the Fund, and no liability for the payment of benefits under the Plan or for any loss of assets due to any action or inaction of the Trustee shall be imposed upon the Employer.
14.6 |
Cooperation of Parties . |
All parties to this Plan and any party claiming interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary and desirable for carrying out this Plan or any of its provisions.
14.7 |
Payments Due Missing Persons . |
The Administrator shall direct the Trustee to make a reasonable effort to locate all persons entitled to benefits under the Plan; however, notwithstanding any provision in the Plan to the contrary, if, after a period of 5 years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Trustee shall send a certified letter to all such persons at their last known address advising them that their interest in benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Trustee for a period of 3 additional years (or a total of 8 years from the time the benefits first became payable), and thereafter such amounts shall be reallocated among current Participants in the same manner that a current contribution would be allocated. However, if a person subsequently makes a valid claim with respect to such reallocated amounts and any earnings thereon, the Plan earnings or the Employer’s contribution to be allocated for the year in which the claim shall be paid shall be reduced by the amount of such payment. Any such suspended amounts shall be handled in a manner not inconsistent with regulations issued by the Internal Revenue Service and Department of Labor.
14.8 |
Governing Law . |
This Plan has been executed in the State of Minnesota and all questions pertaining to its validity, construction and administration shall be determined in accordance with the laws of that State, except to the extent superseded by the Act.
14.9 |
Nonguarantee of Employment . |
Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause.
14.10 |
Counsel . |
The Trustee and the Administrator may consult with legal counsel, who may be counsel for the Employer and for the Administrator or the Trustee (as the case may be), with respect to the meaning or construction of this Plan and the Trust Agreement, their respective obligations or duties hereunder or with respect to any action or proceeding or any question of law, and they shall be fully protected with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel.
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by its duly authorized officers and its corporate seal to be affixed on this ___ day of ________, 2016.
HMN FINANCIAL, INC. |
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By:__________________________________
Its __________________________________
And: ________________________________
Its __________________________________
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53
Exhibit 10.8
HMN FINANCIAL, INC.
2009 EQUITY INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT *
(Executive Management Incentive Plan)
Full Name of Participant: |
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Number of Shares Covered: |
Grant Date: |
Vesting Schedule: |
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Number of Share(s) Which Become Vested
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This is a Restricted Stock Agreement (“ Agreement ”) between HMN Financial, Inc., a Delaware corporation (the “ Company ”), and the Participant identified in the table above.
RECITALS
WHEREAS, the Company maintains the HMN Financial, Inc. 2009 Equity Incentive Plan (the “ Plan ”);
WHEREAS, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”) to administer the Plan and determine the Awards to be granted under the Plan; and
WHEREAS, the Committee has determined that the Participant is eligible to receive an Award under the Plan in the form of Restricted Stock in partial payment of an incentive compensation award provided to the Participant pursuant to the Company’s Executive Management Incentive Plan (the “ Executive Plan ”);
NOW, THEREFORE, the Company and the Participant mutually agree as follows:
* Any capitalized term used in this Agreement will have the meaning set forth in this Agreement (including the table at the beginning of this Agreement) or, if not defined in this Agreement, set forth in the Plan as it currently exists or as it is amended in the future.
TERMS AND CONDITIONS
1. |
Issuance of Restricted Shares . |
(a) Subject to the terms and conditions of this Agreement, the Company has granted to the Participant a Restricted Stock Award involving the number of Shares specified at the beginning of this Agreement. Such Shares of Restricted Stock are subject to the restrictions provided for in this Agreement, and in the Plan, and are referred to collectively as the “ Restricted Shares ” and each as a “ Restricted Share .” The term “ Restricted Shares ” also refers to all securities received by the Participant in replacement of or in connection with the Restricted Shares acquired hereby pursuant to a recapitalization, reclassification, stock dividend, stock split, stock combination or other relevant event.
(b) Each Restricted Share will be evidenced by a book-entry in the name of the Participant with the Company’s transfer agent or by one or more Common Stock certificates issued in the name of the Participant. Any such Common Stock certificate will be deposited with the Company or its designee, together with an assignment separate from the certificate, in blank, signed by the Participant, and bear an appropriate legend referring to the restricted nature of the Restricted Stock evidenced thereby. Any book-entry will be subject to transfer restrictions and accompanied by a similar legend. Upon the vesting of Shares of Restricted Stock and the corresponding lapse of the restrictions and forfeiture conditions, the transfer restrictions and restrictive legend applicable to any book-entry evidencing such Shares will be removed, or a certificate for the Shares bearing no restrictive legend will be delivered to the Participant or a Successor or a Transferee.
2. |
Forfeiture and Transfer Restrictions . |
(a) |
Forfeiture . If (i) the Participant’s Service is terminated for any reason, whether by the Company with or without cause, voluntarily or involuntarily by the Participant or otherwise, or (ii) the Participant attempts to transfer or otherwise dispose of any of the Restricted Shares or the Restricted Shares become subject to attachment or any similar involuntary process, in violation of this Agreement, then any Restricted Shares that have not previously vested will be forfeited by the Participant to the Company, and the Participant will thereafter have no right, title or interest whatsoever in such Restricted Shares. The Company unilaterally may instruct the Company’s transfer agent to adjust the stock register of the Company to reflect the forfeiture of any Restricted Shares. If the Company does not have custody of any and all certificates representing Restricted Shares so forfeited, the Participant must immediately return to the Company any and all certificates representing Restricted Shares so forfeited. Additionally, the Participant must deliver to Company a stock power duly executed in blank relating to any and all certificates representing Restricted Shares forfeited to the Company in accordance with the previous sentence or, if such stock power has previously been tendered to the Company, the Company will be authorized to deem such previously tendered stock power delivered, and the Company will be authorized to cancel any and all certificates representing Restricted Shares so forfeited and issue and deliver to the Participant a new certificate for any Shares which vested prior to forfeiture. For purposes of this Agreement, neither the transfer of the Participant between any combination of the Company and its Affiliates, nor a leave of absence granted to the Participant by the Company, will be deemed a termination of employment. |
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(b) |
Limitation on Transfer. Until such time as the Restricted Shares have become vested under Section 3 of this Agreement, they may not be sold, transferred, assigned, pledged or otherwise encumbered or disposed of. Any attempt to assign, transfer, pledge, hypothecate, or otherwise dispose of the Restricted Shares contrary to the provisions hereof, and the levy of any attachment or similar process upon the Restricted Shares, will be void. |
3. |
Vesting . |
(a) |
Scheduled Vesting. So long as the Participant’s Service continues, the Restricted Shares will cease to be subject to forfeiture and the transferability restrictions under Section 2 hereof in the numbers and on the dates specified in the vesting schedule in the table at the beginning of this Agreement, or at such earlier time as may be specified in subsections (b) and (c) of this Section 3. Restricted Shares that have so ceased to be subject to forfeiture and transferability restrictions are sometimes referred to as “vested” or as “Vested Shares” in this Agreement. |
( b ) |
Death or Disability . If the Participant’s Service terminates because of death or Disability prior to the final scheduled vesting date of this Award, all Restricted Shares subject to this Award will vest and become Vested Shares as of the date of the Participant’s termination of Service. |
(c) |
Change in Control. If a Change in Control occurs prior to the final scheduled vesting date of this Award and while the Participant’s Service continues, all Restricted Shares subject to this Award will vest and become Vested Shares as of the date of the Change in Control. |
4. |
Stockholder Rights . Except as otherwise specifically provided in this Agreement or the Plan, the Participant will have all the rights of a stockholder of the Company with respect to the Restricted Shares as of the Grant Date specified at the beginning of this Agreement. Any dividends or distributions, other than regular cash dividends, declared and paid with respect to Restricted Shares will be subject to the same risk of forfeiture and other restrictions as the underlying Shares. |
5. |
Tax Withholding . The parties hereto recognize that the Company or one of its Affiliates may be obligated to withhold federal and state taxes or other taxes upon the vesting of the Restricted Shares, or, in the event that the Participant elects under Code Section 83(b) to report the receipt of the Restricted Shares as income in the year of receipt, upon the Participant’s receipt of the Restricted Shares. The Participant agrees that, at such time, if the Company or its Affiliate is required to withhold such taxes, the Participant will promptly pay, in cash upon demand to the Company or the Subsidiary having such obligation, such amounts as will be necessary to satisfy such obligation. In lieu of all or any part of a cash payment from a person receiving Restricted Shares under the Plan, the Committee may permit the individual to cover all or any part of the required withholdings (up to the Participant’s minimum required tax withholding rate or such other rate that will not trigger a negative accounting impact) through a reduction in the number of Restricted Shares delivered or a delivery or tender to the Company of Shares held by the Participant or other person, in each case valued in the same manner as used in computing the withholding taxes under applicable laws. |
The Participant further acknowledges that the Company has directed the Participant to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which the Participant may reside, and the tax consequences of the Participant’s death.
6. |
Restrictive Legends and Stop-Transfer Orders . |
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(a) |
Legends. Any certificate or certificates representing the Restricted Shares will bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws) noting the existence of the restrictions set forth in this Agreement: |
“THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A RESTRICTED STOCK AGREEMENT BETWEEN THE COMPANY AND THE PARTICIPANT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.”
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(b) |
Stop-Transfer Notices. The Participant agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. |
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(c) |
Refusal to Transfer. The Company will not be required (i) to transfer on its books any Restricted Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of the Restricted Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom the Restricted Shares will have been so transferred. |
7. |
No Right to Continued Service or Future Awards . This Agreement awards Restricted Stock to the Participant, but does not impose any obligation on the Company to make any future grants or issue any future awards to the Participant or otherwise continue the participation of the Participant under the Plan or the Executive Plan. This Agreement will not give the Participant a right to continued employment or Service with the Company or any Affiliate, and the Company or Affiliate employing the Participant may terminate his or her Service and otherwise deal with the Participant without regard to the effect it may have upon him or her under this Agreement |
By executing this Agreement, the Participant expressly acknowledges the above.
8. |
Interpretation of This Agreement . All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan or the Executive Plan will be binding and conclusive upon the Company and the Participant. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan will govern. |
9. |
Binding Effect . This Agreement will be binding in all respects on the heirs, representatives, Successors and assigns of the Participant, and any successor or assignee of the Company. |
10. |
Choice of Law . This Agreement is entered into under the laws of the State of Delaware and will be construed and interpreted thereunder (without regard to its conflict-of-law principles). |
11. |
Entire Agreement . This Agreement and the Plan set forth the entire agreement and understanding of the parties hereto with respect to the issuance and sale of the Restricted Shares and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the issuance and sale of these Restricted Shares and the administration of the Plan. |
12. |
Amendment and Waiver . Except as provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance. |
1 3 . |
Acknowledgment of Receipt of Copy . By execution hereof, the Participant acknowledges having received a copy of the Plan. |
1 4 . |
Participant’s Rights Limited . Participant acknowledges that the Company and its Affiliates are subject to the supervisory authority of the Office of the Comptroller of the Currency (the “OCC”) as well as additional or successor financial regulators. Accordingly, the Company and its Affiliates may be bound by, and are subject to compliance with, any applicable order, rule or regulation of, memorandum of understanding with, or directive or consent, approval or no objection requirement of, the OCC or other supervisory authority or financial regulator (the “Supervisory Restrictions”). |
By executing this Agreement, the Participant expressly acknowledges and confirms that:
(a) |
This Agreement will not give the Participant the right to continued employment or service with the Company or any Affiliate, and the Participant’s then employer may terminate the Participant’s employment or service at any time and otherwise deal with the Participant without regard to the effect it may have upon the Participant under this Agreement. Any termination of the Participant’s employment or service other than termination for Cause shall not prejudice the Participant’s vested right to compensation or other benefits under this Agreement. The Participant shall have no right to receive compensation or other benefits under this Agreement for any period after termination for Cause. |
(b) |
If the Participant is suspended and/or temporarily prohibited from participating in the conduct of the affairs of the Company’s Subsidiary, Home Federal Savings Bank (the “Bank”), by a notice served under Section 8(e)(3) or (g)(1) of Federal Deposit Insurance Act (12 U.S.C. §1818(e)(3) and (g)(1)), the Company’s obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company may in its discretion (i) pay the Participant all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. |
(c) |
If the Participant is removed and/or permanently prohibited from participating in the conduct of the affairs of the Bank by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. §1818(e)(4) or (g)(1)), all obligations of the Company under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties under this Agreement shall not be affected. |
(d) |
If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this paragraph 14(d) shall not affect any vested rights of the contracting parties under this Agreement. |
(e) |
All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary to the continued operation of the Bank: |
(1) |
By the Director of the OCC or his or her designee, at the time the Federal Deposit Insurance Corporation or Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in 13(c) of the Federal Deposit Insurance Act; or |
(2) |
By the Director of the OCC or his or her designee, at the time the Director or his or her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. |
Any rights of the parties to this Agreement that have already vested, however, shall not be affected by such action.
IN WITNESS WHEREOF, the Participant and the Company have executed this Agreement as of the date of issuance specified at the beginning of this Agreement.
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PARTICIPANT |
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HMN FINANCIAL, INC. |
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-7-
Exhibit 10.9
HMN FINANCIAL, INC.
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE 2009 EQUITY INCENTIVE PLAN
HMN Financial, Inc. (the “Company”), pursuant to its 2009 Equity Incentive Plan (the “Plan”), hereby grants an Option to purchase shares of the Company’s common stock to you, the Participant named below. The terms and conditions of the Option Award are set forth in this Agreement, consisting of this cover page and the Option Terms and Conditions on the following pages, and in the Plan document, a copy of which has been provided to you. Any capitalized term that is not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.
Full Name of Participant: |
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Number of Shares Covered: |
Grant Date: |
Exercise Price Per Share:
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Expiration Date: |
Vesting and Exercise Schedule:
Date(s)
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Number of Shares as to Which Option Becomes Vested and Exercisable
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By signing below or otherwise evidencing your acceptance of this Agreement in a manner approved by the Company, you agree to all of the terms and conditions contained in this Agreement and in the Plan document. You acknowledge that you have received and reviewed these documents and that they set forth the entire agreement between you and the Company regarding your right to purchase shares of the Company’s common stock pursuant to this Option.
PARTICIPANT: |
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HMN FINANCIAL, INC. |
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By: |
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Title: |
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HMN Financial, Inc.
2009 Equity Incentive Plan
Incentive Stock Option Agreement
OPTION TERMS AND CONDITIONS
1. Incentive Stock Option . This Option is intended to be an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code (the “Code”) and will be interpreted accordingly. To the extent that, for any reason, the Option does not qualify as an incentive stock option under Code Section 422, the Option will be treated as a non-statutory stock option, subject to the tax consequences applicable to such options and potentially tax withholding upon exercise in accordance with Section 15 of the Plan.
2. |
Vesting and Exercisability of Option . |
(a) Scheduled Vesting . This Option will vest and become exercisable as to the number of Shares and on the dates specified in the Vesting and Exercise Schedule on the cover page to this Agreement, so long as your Service to the Company does not end. The Vesting and Exercise Schedule is cumulative, meaning that to the extent the Option has not already been exercised and has not expired or been terminated or cancelled, you or the person otherwise entitled to exercise the Option as provided in this Agreement may at any time purchase all or any portion of the Shares subject to the vested portion of the Option.
(b) Accelerated Vesting . Notwithstanding Section 2(a), this Option Award shall immediately vest and become exercisable in full if:
(1) |
Your Service to the Company ends due to your death or Disability, in which case this Option will remain exercisable for twelve months following your termination of Service (but in no event later than its Expiration Date as specified on the cover page); or |
(2) |
A Change in Control or a Corporate Transaction of the type described in clauses (i) and (ii) of the definition thereof occurs. In such case, this Option will remain fully exercisable for twenty-four months after the Change in Control or Corporate Transaction (but in no event later than its Expiration Date as specified on the cover page), subject to the remainder of this subsection. Notwithstanding the foregoing, the Committee may elect to take action as described in Section 13(a)(1), 13(a)(2) or 13(a)(5) of the Plan under the circumstances described in this subsection 2(b)(2). If the Committee acts under Section 13(a)(1), any stock option substituted for this Option shall be fully vested and exercisable and remain exercisable for the same period as this Option. If the Committee acts under either Section 13(a)(2) or 13(a)(5), the accelerated vesting and exercisability, cancellation and any buyout of this Option Award shall occur as provided therein. |
3. |
Expiration . This Option will expire and will no longer be exercisable on the earliest of: |
(a) |
At 4:00 p.m. Central Time on the Expiration Date specified on the cover page of this Agreement; |
(b) |
At 4:00 p.m. Central Time on the expiration date of any applicable period specified in Section 6(d)(3) of the Plan or Section 2(b)(1) of this Agreement during which this Option may be exercised after your termination of Service; |
(c) |
Immediately upon your termination of Service for Cause; or |
(d) |
At 4:00 p.m. Central Time on the date (if any) fixed for termination or cancellation of this Option pursuant to Section 13(a)(2) or 13(a)(5) of the Plan. |
No one may exercise this Option after it has expired, notwithstanding any other provision of this Agreement.
4. |
Procedure to Exercise Option . |
(a) Notice of Exercise . This Option may be exercised by delivering written notice of exercise to the Company at its headquarters in the form attached to this Agreement or a similar form containing substantially the same information and addressed or delivered to the Chief Financial Officer of the Company, or to the Company’s outside Plan administrator if one has been appointed (the “ Notice of Exercise ”). The Notice of Exercise will state the election to exercise the Option, the number of Shares to be purchased, the method of payment of the aggregate exercise price and the directions for the delivery of the Shares to be acquired and will be signed by the person exercising this Option. If the person exercising this Option is your, he or she must also submit appropriate proof of his or her right to exercise this Option.
(b) Tender of Payment . Upon submitting a Notice of Exercise to the Company, you must provide for payment of the exercise price of the Shares being purchased through one or a combination of the following methods:
(1) cash (including check, bank draft, or money order payable to the Company);
(2) by delivery to the Company of Shares (by actual delivery or attestation of ownership in a form approved by the Company) already owned by you that are not subject to any security interest and that have an aggregate Fair Market Value on the date of exercise equal to the exercise price of the Shares being purchased;
(3) to the extent permitted by law, a broker-assisted cashless exercise in which you irrevocably instruct a broker to deliver to the Company proceeds of a sale of all or a portion of the Shares to be issued pursuant to the exercise (or a loan secured by such Shares) in payment of the exercise price of such Shares; or
(4) by authorizing the Company to retain, from the total number of Shares as to which the Option is exercised, that number of Shares having an aggregate Fair Market Value on the date of exercise equal to the exercise price of the Shares being purchased.
You should note that payment of the exercise price by either of the methods set forth in subparagraphs (3) and (4) above will result in the loss of incentive stock option tax treatment to the extent shares subject to the Option are sold or withheld. In addition, if the Committee determines, in any given circumstance, that payment of the exercise price with Shares as described in subparagraphs (2) and (4) above is undesirable for any reason, you may be precluded from paying any portion of the exercise price in either manner.
(c) Delivery of Shares . As soon as practicable after the Company receives a Notice of Exercise and payment of the exercise price as provided above, and has determined that all other conditions to exercise, including compliance with applicable laws as provided in Section 20(c) of the Plan, have been satisfied, the Company will deliver to the person exercising the Option, in the name of such person, the Shares being purchased (net of the number of Shares sold or withheld, if any, to pay the exercise price), as evidenced by issuance of a stock certificate or certificates, electronic delivery of such Shares to a brokerage account designated by such person, or book-entry registration of such Shares with the Company’s transfer agent. The Company will pay any original issue or transfer taxes with respect to the issue or transfer of the Shares and all fees and expenses incurred by it in connection therewith. All Shares so issued will be fully paid and nonassessable.
5. |
Service Requirement . Except as otherwise provided in Section 6(d)(3) of the Plan or Section 2(b) of this Agreement, this Option may be exercised only while you continue to provide Service to the Company or any Affiliate, and only if you have continuously provided such Service since the Grant Date of this Option. |
6. |
Limitation on Transfer . During your lifetime, only you (or your Successor or Transferee) may exercise this Option. The Option may not be assigned or transferred other than by will or the laws of descent and distribution or pursuant to a divorce decree or qualified domestic relations order as defined by the Code, or Title I of ERISA. Any attempt to assign, transfer, pledge, hypothecate, or otherwise dispose of this Option contrary to the provisions hereof, and the levy of any attachment or similar process upon this Option, will be void. |
7. |
No Stockholder Rights Before Exercise . Neither you nor any Successor or Transferee will have any rights as a stockholder of the Company with respect to any Shares subject to this Option unless and until the date you have become, or your Successor or Transferee has become, the holder of record of such Shares. |
8. |
Adjustment for Changes in Capitalization . If an “equity restructuring” (as defined in Section 17 of the Plan) occurs that causes the per share value of the Shares to change, the Committee will make such equitable adjustments to the Option as are contemplated by Section 17 of the Plan in order to avoid dilution or enlargement of your rights hereunder. The Committee may make such equitable adjustments to this Option as and to the extent provided in Section 17 of the Plan in connection with other changes in the Company’s capitalization contemplated by Section 17 of the Plan. |
9. |
Tax Consequences . You hereby acknowledge that if any Shares received pursuant to the exercise of any portion of this Option are sold within two years from the Grant Date or within one year from the effective date of exercise of this Option, or if certain other requirements of the Internal Revenue Code (the “Code”) are not satisfied, such Shares will be deemed under the Code not to have been acquired by you pursuant to an “incentive stock option” as defined in the Code, with potentially negative tax consequences for you. You agree to promptly notify the Company if you sell any Shares received upon the exercise of this Option within the time periods specified in the previous sentence. The Company shall not be liable to you if this Option for any reason is deemed not to be an “incentive stock option” within the meaning of the Code. |
10. |
Interpretation of This Agreement . All decisions and interpretations made by the Committee with regard to any question arising under this Agreement or the Plan will be binding and conclusive upon the Company and you (or your Successor or Transferee). If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan will govern. |
11. |
Discontinuance of Employment . Neither this Agreement, the Plan, nor the Option will confer on you any right with respect to continued Service with the Company or any of its Affiliates, nor interfere in any way with the right of the Company or any Affiliate to terminate your Service. Nothing in this Agreement will be construed as creating an employment contract for any specified term between you and the Company or any Affiliate. Neither any period of notice, if any, nor any payment in lieu thereof, upon termination of Service, wrongful or otherwise, will be considered as extending your period of Service for the purposes of the Plan or any Option granted thereunder. |
12. |
Obligation to Reserve Sufficient Shares . The Company will at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement. |
13. |
Binding Effect . This Agreement will be binding in all respects on your heirs, representatives, successors and assigns (and included for the sake of clarification, a Successor or Transferee of yours), and on the successors and assigns of the Company . |
14. |
Choice of Law . This Agreement is entered into under the laws of the State of Delaware and will be construed and interpreted thereunder (without regard to its conflict-of-law principles). |
15. |
Entire Agreement . This Agreement and the Plan set forth the entire agreement and understanding of the parties hereto with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the grant and exercise of this Option and the administration of the Plan. |
16. |
Amendment and Waiver . Except as otherwise provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance. |
17. |
Acknowledgment of Receipt of Copy . By execution hereof, you acknowledge having received a copy of the Plan. |
18. |
Regulatory Compliance . Notwithstanding any other provision of this Agreement: |
(a) |
Any payment or benefit to be made or provided to you pursuant to this Agreement shall be subject to and conditioned upon compliance with 12 CFR Part 359, “Golden Parachute and Indemnification Payments.” |
(b) |
Incorporated by reference herein are the terms required to be contained in employment contracts by 12 CFR Section 563.39. |
By signing the cover page of this Agreement, you agree to all the terms and conditions described above and in the Plan document.
Attachment 1
Notice of Exercise
__________________, ______
HMN Financial, Inc.
1016 Civic Center Drive N.W.
Rochester, Minnesota 55901-6057
Attention: Chief Financial Officer
Ladies and Gentlemen:
I hereby exercise the following option (the “ Option ”) granted to me with respect to the number of shares of Common Stock, par value $0.01 (“ Shares ”), of HMN Financial, Inc. (the “ Company ”), indicated below:
Participant’s Name: |
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Grant Date: |
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Exercise Price Per Share: |
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Number of Shares With Respect to Which the Option is Hereby Exercised: |
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Exercise Price: |
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☐ Enclosed with this Notice is a check, bank draft or money order in the amount of the Exercise Price.
☐ Enclosed with this Notice is a copy of my irrevocable instruction to my broker, __________________________________, to deliver to the Company proceeds of the sale of some or all of the Shares being acquired in an amount equal to the Exercise Price .
☐ Enclosed with this letter is a certificate evidencing unencumbered Shares (duly endorsed in blank) having an aggregate Fair Market Value equal to or in excess of the Exercise Price.
☐ I elect to pay the Exercise Price through a reduction in the number of Shares to be delivered to me upon this exercise of the Option.
Attachment 1
If I am enclosing Shares with this letter, I hereby represent and warrant that I am the owner of such Shares free and clear of all liens, security interests and other restrictions or encumbrances. I agree that I will pay any required withholding taxes in connection with this exercise.
Please issue the number of Shares with respect to which the Option is being exercised in the manner indicated below:
|
☐ |
Issue a certificate (the “Certificate”) for the Shares (net of any Shares withheld in payment of the Exercise price) in the name of the person(s) indicated below and deliver the Certificate to the address indicated: |
Name(s) in Which to Issue Certificate: |
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Address to Which Certificate Should be Delivered: |
||
Principal Mailing Address for Holder of the Certificate (if different from above): |
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☐ |
Electronic delivery of the Shares to my brokerage account as indicated below: |
Name of Brokerage Firm: |
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My Account Number: |
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Brokerage Firm DWAC Participant Number: |
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☐ |
Create a book-entry registration of the Shares (net of any Shares withheld in payment of the Exercise price) in the name of the person(s) indicated below: |
Name(s) in Which to Create Book-Entry Registration: |
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Mailing Address for Book-Entry Holders: |
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Very truly yours, | ||
Signature | ||
Name, please print | ||
Social Security Number |
Exhibit 10.11
HMN FINANCIAL, INC.
Executive Management Incentive Plan
This document sets forth the HMN Financial Executive Management Incentive Plan (the “Plan”), including the Plan objectives, design, participation/eligibility, performance metrics and administration. Compensation provided pursuant to the Plan may be provided directly by HMN Financial, Inc. or any of its subsidiaries, including its wholly-owned banking subsidiary, Home Federal Savings Bank (the “Bank”).
1. |
PLAN OBJECTIVES |
The Plan is intended to advance the interests of the Company (as defined in Section 9) and its stockholders by enabling the Company and its subsidiaries to attract and retain executives who have the skills, experience and work ethic required to effectively achieve the Company’s goals and objectives, and to align executives’ interests with the creation and maintenance of long-term stockholder value. The Plan is prospective in design, utilizing a defined payout formula that is based upon the achievement, over the course of each annual performance period, of a combination of pre-determined company, subsidiary, departmental and/or individual performance objectives.
2. |
PLAN DESIGN |
T he Plan design incorporates incentive award payout levels that are linked to the achievement of pre-defined performance objectives, and payment of earned amounts in a mixture of cash and equity awards. The payout levels (defined as a percentage of salary) for each Plan participant are designed to provide market competitive payouts for the achievement of performance objectives. An individual participant may earn less or more than the targeted incentive payout level based on performance during the applicable performance period. The Compensation Committee of the Board (the “Committee”) will review and approve for each performance period the Plan participants, award opportunity levels (as a percent of salary), and specific performance objectives and weightings. The specific objectives, weightings, and award opportunity levels will be provided in a scorecard to be delivered to each plan participant as soon as practicable after the Committee approves the specific terms and conditions to which Plan awards for a performance period will be subject.
3. |
PERFORMANCE PERIOD |
Each Plan performance period shall be one calendar year (January 1 st to December 31 st ).
4. |
PARTICIPATION/ELIGIBILITY |
For each performance period, the Committee will determine the employees (or employee groups) who will participate in the Plan for that performance period. Each Plan participant shall be notified of his or her selection for participation in the Plan and provided with an individual scorecard for the applicable performance period.
Eligibility to participate in the Plan or to receive a payout following completion of a performance period shall be subject to the following conditions:
(a) |
Any new employee must be employed by June 1 st in any calendar year performance period to be eligible to receive a Plan award for that performance period. |
(b) |
An employee who commences employment after a calendar year performance period has begun but on or before June 1 of that performance period will be eligible to receive a Plan award whose payout will be pro rated to reflect the portion of the performance period during which the individual was employed. |
(c) |
An employee who commences employment after June 1 st in any calendar year performance period will not be eligible to participate in the Plan during that performance period, but may be eligible to participate in the Plan during the next annual performance period. |
(d) |
A Plan participant must receive a minimum individual performance rating of “meets expectations” or better for a performance period in order to be eligible for any payout under a Plan award for that performance period. |
(e) |
Except as provided in paragraph 4(f) below, a Plan participant must be an active employee of the Company or one of its subsidiaries as of the award payout date in order to receive payment of a Plan award for a completed performance period. |
(f) |
A Plan participant who terminates employment during a performance period due to death or Disability (as the latter term is defined in Section 9) may, in the Committee’s discretion, receive a pro rata payout of a Plan award otherwise earned during the performance period based on the percentage of days the participant was actively employed during the performance period. A Plan participant who terminates employment for one of the foregoing reasons after a performance period has been completed but before the applicable award payout date will be entitled to be paid the full earned amount of his or her Plan award for that performance period. |
5. |
PERFORMANCE OBJECTIVES |
The payment of a Plan award will be contingent upon the degree of attainment over the applicable performance period of one or more performance objectives that are based on performance criteria approved by the Committee, such as net income, credit quality, return on equity, return on assets and performance against strategic initiatives. Any performance objective utilized may be expressed in absolute amounts, on a per share basis (basic or diluted), as a growth rate or change from preceding periods, as a comparison to the performance of specified companies or other external indices or measures, or as a comparison between or ratio of any approved performance criteria, and may relate to one or any combination of Company, subsidiary, department or individual performance. For any performance period, the Committee will select the applicable performance criteria, specify the relevant performance objectives based on those performance criteria, and specify in terms of a formula or standard the method for calculating the amount payable to a participant if and to the degree the performance objectives are satisfied, all prior to or as soon as possible following the commencement of the performance period.
6. |
AWARD CALCULATION AND PAYMENT |
(a) A participant’s target award opportunity under the Plan for any performance period will be set by the Committee as a percentage of the participant’s eligible salary, defined as the actual amount of salary earned by the participant during the applicable performance period. The Committee will correspondingly establish threshold and maximum award opportunities for each Plan participant similarly expressed as percentages of the participant’s eligible salary.
(b) Incentive awards under the Plan may be earned during each performance period depending on whether and the degree to which the applicable performance objectives for that performance period have been achieved. In determining whether and to what degree Plan awards have been earned during a performance period, the Committee will apply both “Level 1” and “Level 2” performance objectives, as follows:
(1) The Company must achieve a Level 1 minimum net income objective specified by the Committee for the performance period before any payout may be made to any Plan participant for that performance period.
(2) The Company must achieve a Level 1 minimum credit quality objective specified by the Committee for the performance period in addition to the Level 1 minimum net income objective referenced in paragraph 6(b)(1) above before any payout may be made to any Plan participant for that performance period with respect to any Company Level 2 performance objectives.
(3) If the Level 1 minimum net income goal of paragraph 6(b)(1), but not the Level 1 minimum credit quality goal of paragraph 6(b)(2), is achieved for the performance period, Plan participants will remain eligible to receive payouts based on the achievement of Level 2 subsidiary, departmental or individual performance objectives.
(4) Assuming satisfaction of the Level 1 minimum net income objective and potentially also the Level 1 minimum credit quality objective, actual Plan award payout amounts earned will be calculated using a ratable approach, where payout amounts are calculated based on the degree to which specified Level 2 threshold, target and maximum performance levels associated with separate payout amounts have been achieved.
(c) A total payout amount will be calculated for each Plan participant for a performance period, taking into account the achievement of Level 1 objectives, the degree of achievement of Level 2 objectives, the relative weighting of the Level 2 objectives, the participant’s eligible salary and any applicable pro rata adjustments. The payout amount will be paid in a combination of cash and an equity award granted pursuant to the Company’s 2009 Equity Incentive Plan (or such successor equity incentive plan as may be adopted by the Board and approved by the Company’s shareholders) (the “2009 Plan”), with the ratio between the cash and equity portions to be determined annually by the Committee, subject to section 6(d) below.
(1) The cash portion will be paid no later than March 15 of the year following the performance period, contingent only upon a participant’s continued employment with the Company or one of its subsidiaries through the date of payment.
(2) The equity award may be in the form of a restricted stock award, a stock option award or any other form of award authorized under the 2009 Plan, in the discretion of the Committee. The number of shares subject to any such equity award will be determined by dividing the dollar amount of the equity portion of a participant’s total payout amount by the grant date fair value of the award per share of HMN common stock subject to the award. Each such equity award will be subject to the terms and conditions summarized in section 7.
(d) In its discretion, the Committee may permit the Plan participants to elect to receive an equity award for any performance period that represents a greater percentage of the total payout amount for that performance period than had been determined by the Committee, with a corresponding reduction in the percentage of the total payout to be made in cash. The Committee may establish such limits on the percentage to be received in the form of an equity award as it sees fit. Any election by a Plan participant to receive a greater percentage of the total payout in the form of an equity award shall be made on such form as may be approved by the Committee and must be received by the Company no later than the deadline established by the Committee.
7. EQUITY AWARD TERMS AND CONDITIONS
Each equity award granted as part of a payout under the Plan will have a time-based vesting schedule of between one-to-five years, as determined by the Committee, assuming continued employment of the participant by the Company or one of its subsidiaries. If a participant terminates employment during such period, the participant will forfeit any unvested portion of any such equity award unless termination occurs due to death or Disability, in which case, the equity award will vest (and become exercisable or be settled, as applicable) in full immediately upon such termination. In addition, if a Change in Control (as defined in Section 9) occurs during the vesting period of an equity award granted as part of a total annual payout under the Plan, such equity award will vest (and become exercisable or be settled, as applicable) in full as of the occurrence of the Change in Control. Notwithstanding the foregoing, if such an equity award is in the form of a stock option or stock appreciation right, the Committee shall retain the discretion to take action as provided in Sections 13(a)(1), 13(a)(2) and 13(a)(5) of the 2009 Plan. A Plan participant will also receive any regular cash dividends declared and paid with respect to unvested restricted shares subject to any restricted stock award granted as part of a payout under the Plan. Equity awards granted as part of a total annual payout under the Plan will be subject to such additional terms and conditions as may be contained in a form of award agreement approved by the Committee and to the applicable terms of the Company’s 2009 Plan.
8. PLAN ADMINISTRATION
(a) The Committee shall administer this Plan and have the power, subject to the terms of this Plan, to determine when and to whom Plan awards will be granted, and the form, amount and other terms and conditions of each such award. The Committee shall have the authority to interpret this Plan and any award made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any award in the manner and to the extent it shall deem necessary or desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive on all parties.
(b) The Committee may delegate all or any portion of its authority under the Plan to any one or more of its members or, as to Plan awards to participants who are not executive officers of the Company, to the CEO of the Company. The Committee may also delegate non-discretionary administrative responsibilities in connection with the Plan to the human resources department of the Company or the Bank or to such other persons as it deems advisable.
(c) The Board or the Committee may at any time terminate, suspend or modify the Plan and the terms and conditions of any Plan award which has not been paid.
(d) The Committee shall have the authority to provide for the modification of a performance period and/or an adjustment to or waiver of the achievement of any performance objective as determined to be appropriate and equitable by the Committee to prevent dilution or enlargement of the rights of Plan participants with respect to outstanding Plan awards upon the occurrence of certain events, such as a Change of Control, a recapitalization, a change in accounting principles or practices, or other unusual, extraordinary or non-recurring events occurring during the performance period.
(e) The CEO of the Company will provide recommendations to the Committee as to the individuals to be included as participants in the Plan for each performance period, the incentive award opportunity levels for each participant and the Level 1 and Level 2 performance objectives for each performance period.
9. DEFINITIONS
When the following terms are used with capital letters in the Plan, they will have the meanings indicated:
(a) “Board” means the Board of Directors of the Company.
(b) “Cause” has the same meaning given to the term in the Company’s 2009 Equity Incentive Plan.
(c) “Change in Control” means a Change in Control as defined in the Company’s 2009 Plan or a transaction described in clause (i) or clause (ii) of the definition of “Corporate Transaction” in the Company’s 2009 Plan.
(d) “Company” means HMN or any successor thereto.
(e) “Disability” has the same meaning given to the term in the Company’s 2009 Equity Incentive Plan.
10. COMPENSATION RECOVERY
Each award and the compensation associated therewith shall be subject to potential forfeiture to or recovery by the Company in accordance with any compensation recovery policy currently in place or hereafter adopted by the Board.
11. OTHER PROVISIONS
(a) Nothing in the Plan shall confer upon any participant the right to continue in the employment of the Company or any of its subsidiaries or affect any right which the Company or any of its subsidiaries may have to terminate the employment of a participant with or without cause.
(b) The Company or any applicable subsidiary shall have the right to withhold from cash payments under the Plan to a participant or other person an amount sufficient to cover any required withholding taxes.
(c) The Plan shall be unfunded, and neither the Company nor any of its subsidiaries shall be required to segregate any assets that may at any time be represented by awards under the Plan. No participant shall, by virtue of this Plan, have any interest in any specific assets of the Company or any of its subsidiaries.
(d) The adoption of the Plan by the Committee shall not be construed as creating any limitation on the power of the Board or Committee to adopt such other incentive arrangements as it may deem appropriate.
(e) Payments received by a participant under an award made pursuant to the Plan shall not be deemed a part of a participant’s regular recurring compensation for purposes of the termination, indemnity or severance pay law of any state and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or any of its subsidiaries unless expressly so provided by such other plan, contract or arrangement, or unless the Committee expressly determines otherwise. For these purposes, an amount determined to be payable to a participant hereunder for a performance period, including the portion payable in the form of an equity award, shall be deemed an annual cash incentive bonus and a participant’s target award opportunity for a performance period hereunder shall be deemed that participant’s target annual cash incentive bonus.
(f) To the extent that federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Minnesota and construed accordingly.
(g) Participants and beneficiaries shall not have the right to assign, pledge or otherwise dispose of any part of an award under this Plan.
(h) Any payment or benefit to be made or provided to any participant pursuant to this Plan shall be subject to and conditioned upon compliance with 12 CFR Part 359, “Golden Parachute and Indemnification Payments.”
Page 6
Exhibit 10.12
Notice of Amendment to
Restricted Stock Agreement under the
HMN Financial, Inc. 2009 Equity Incentive Plan
Participant:___________________________
Number of Shares Subject to Award:______________
Grant Date:____________________
In accordance with Section 16(c) of the HMN Financial, Inc. 2009 Equity Incentive Plan (the “Plan”), the Compensation Committee of the Board of Directors of HMN Financial, Inc. (the “Company”) has amended the above referenced Restricted Stock Agreement between the Participant and the Company (the “Agreement”), effective ____________, 2016, as follows:
1. |
By inserting the words “or subsection (c)” after the words “subsection (b)” in subsection (a) of Section 3; and |
2. |
By adding the following subsection (c) to Section 3: |
“(c) All outstanding Restricted Shares shall immediately vest and become Vested Shares on the date a Change in Control occurs or a Corporate Transaction of the type described in clauses (i) and (ii) of the definition of “Corporate Transaction” occurs.”
In all other respects, the Agreement remains in full force and effect in accordance with its original terms.
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HMN FINANCIAL, INC.
By:___________________________________ Title:__________________________________ |
Exhibit 13
Five-year Consolidated Financial Highlights |
6 |
|
Management Discussion and Analysis |
7 |
|
Consolidated Financial Statements |
28 |
|
Notes to Consolidated Financial Statements |
32 |
|
Report of Independent Registered Public Accounting Firm |
66 |
|
Other Financial Data |
67 |
|
Common Stock Information |
68 |
|
Selected Quarterly Financial Data |
69 |
|
Corporate and Shareholder Information |
Inside Back Cover |
|
Directors and Officers |
Inside Back Cover |
HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. Home Federal Savings Bank operates twelve full service offices in Minnesota located in Albert Lea, Austin, Eagan, Kasson (2), La Crescent, Rochester (4), Spring Valley and Winona; one full service office in Marshalltown, Iowa; and three loan origination offices located in Sartell, Minnesota, Owatonna, Minnesota and Delafield, Wisconsin.
FIVE-YEAR CONSOLIDATED FINANCIAL HIGHLIGHTS
Selected Operations Data: |
Year Ended December 31, |
|||||||||||||||||||
(Dollars in thousands, except per share data) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
Total interest income |
$ | 21,453 | 20,613 | 22,983 | 30,816 | 39,541 | ||||||||||||||
Total interest expense |
1,507 | 1,211 | 3,289 | 7,139 | 11,135 | |||||||||||||||
Net interest income |
19,946 | 19,402 | 19,694 | 23,677 | 28,406 | |||||||||||||||
Provision for loan losses |
(164 |
) |
(6,998 |
) |
(7,881 |
) |
2,544 | 17,278 | ||||||||||||
Net interest income after provision for loan losses |
20,110 | 26,400 | 27,575 | 21,133 | 11,128 | |||||||||||||||
Fees and service charges |
3,316 | 3,458 | 3,513 | 3,325 | 3,739 | |||||||||||||||
Loan servicing fees |
1,046 | 1,058 | 1,029 | 964 | 987 | |||||||||||||||
Gain on sales of loans |
1,964 | 1,828 | 2,102 | 3,574 | 1,656 | |||||||||||||||
Gain on acquisition/sale of branch office |
289 | 0 | 0 | 552 | 0 | |||||||||||||||
Other non-interest income |
1,038 | 940 | 668 | 575 | 487 | |||||||||||||||
Total non-interest income |
7,653 | 7,284 | 7,312 | 8,990 | 6,869 | |||||||||||||||
Total non-interest expense |
23,196 | 21,403 | 22,623 | 24,670 | 29,552 | |||||||||||||||
Income (loss) before income tax expense (benefit) |
4,567 | 12,281 | 12,264 | 5,453 | (11,555 |
) |
||||||||||||||
Income tax expense (benefit) |
1,611 | 4,902 | (14,406 |
) (1) |
132 | 0 | ||||||||||||||
Net income (loss) |
2,956 | 7,379 | 26,670 | 5,321 | (11,555 |
) |
||||||||||||||
Preferred stock dividends and discount |
(108 |
) |
(1,710 |
) |
(2,068 |
) |
(1,861 |
) |
(1,821 |
) |
||||||||||
Net income (loss) available to common shareholders |
$ | 2,848 | 5,669 | 24,602 | 3,460 | (13,376 |
) |
|||||||||||||
Basic earnings (loss) per common share |
$ | 0.69 | 1.40 | 6.15 | 0.88 | (3.47 |
) |
|||||||||||||
Diluted earnings (loss) per common share |
0.61 | 1.23 | 5.71 | 0.86 | (3.47 |
) |
(1) Relates to the elimination of the deferred tax asset valuation reserve at December 31, 2013. |
Selected Financial Condition Data: |
December 31, |
|||||||||||||||||||
(Dollars in thousands, except per share data) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
Total assets |
$ | 643,161 | 577,426 | 648,622 | 653,327 | 790,155 | ||||||||||||||
Securities available for sale |
111,974 | 137,834 | 107,956 | 85,891 | 126,114 | |||||||||||||||
Loans held for sale |
3,779 | 2,076 | 1,502 | 2,584 | 3,709 | |||||||||||||||
Loans receivable, net |
463,185 | 365,113 | 384,615 | 454,045 | 555,908 | |||||||||||||||
Deposits |
559,387 | 496,750 | 553,930 | 514,951 | 656,176 | |||||||||||||||
FHLB advances and other borrowings |
9,000 | 0 | 0 | 70,000 | 70,000 | |||||||||||||||
Stockholders’ equity |
69,645 | 76,013 | 85,675 | 60,834 | 57,061 | |||||||||||||||
Book value per common share |
15.54 | 14.77 | 13.49 | 8.02 | 7.36 | |||||||||||||||
Number of full service offices |
13 | 11 | 11 | 12 | 13 | |||||||||||||||
Number of loan origination offices |
3 | 2 | 1 | 1 | 1 | |||||||||||||||
Key Ratios: (2) |
||||||||||||||||||||
Stockholders’ equity to total assets at year end |
10.83 |
% |
13.16 |
% |
13.21 |
% |
9.31 |
% |
7.22 |
% |
||||||||||
Average stockholders’ equity to average assets |
11.70 | 13.25 | 10.77 | 8.81 | 8.19 | |||||||||||||||
Return (loss) on stockholders’ equity (ratio of net income (loss) to average equity) |
4.27 | 9.12 | 42.22 | 8.94 | (16.94 |
) |
||||||||||||||
Return (loss) on assets (ratio of net income (loss) to average assets) |
0.50 | 1.21 | 4.55 | 0.79 | (1.39 |
) |
(2) Average balances were calculated based upon amortized cost without the market value impact of ASC 320. |
MANAGEMENT DISCUSSION AND ANALYSIS
This Annual Report, other reports filed by the Company with the Securities and Exchange Commission, and the Company’s proxy statement may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are often identified by such forward-looking terminology as “expect,” “intend,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,” “should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to, those relating to increasing our core deposit relationships, improving credit quality, reducing non-performing assets, growing earning assets, generating improved financial results (including profitability); the adequacy and amount of available liquidity and capital resources to the Bank; the Company’s liquidity and capital requirements; our expectations for core capital and our strategies and potential strategies for improvement thereof; improvements in loan production; changes in the size of the Bank’s loan portfolio; the amount of the Bank’s non-performing assets and the appropriateness of the allowance therefor; our ability to complete the acquisition of certain assets from Deerwood Bank and integrate its operations; anticipated future levels of the provision for loan losses; future losses on non-performing assets; the amount and mix of interest-earning assets; the amount and mix of interest-bearing liabilities; the availability of alternate funding sources; the payment of dividends by HMN; the future outlook for the Company; the amount of dividends paid by the Federal Home Loan Bank (FHLB) on its stock; the amount of deposits that will be withdrawn from checking and money market accounts and how the withdrawn deposits will be replaced; the projected changes in net interest income based on rate shocks; the range that interest rates may fluctuate over the next twelve months; the net market risk of interest rate shocks; the future outlook for the issuer trust preferred securities held by the Bank; the ability of the Bank to pay dividends to HMN; the ability of HMN to pay the principal and interest payments on its third party note payable; the ability to remain well capitalized; and compliance by the Bank with regulatory standards generally (including the Bank’s status as “well-capitalized”) and other supervisory directives or requirements to which the Company or the Bank are or may become expressly subject, specifically, and possible responses of the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), the Bank, and the Company to any failure to comply with any such regulatory standard, directive or requirement.
A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations. These include but are not limited to the adequacy and marketability of real estate and other collateral securing loans to borrowers; federal and state regulation and enforcement; possible legislative and regulatory changes, including additional changes to regulatory capital rules; the ability of the Bank to comply with other applicable regulatory capital requirements; enforcement activity of the OCC and FRB in the event of our non-compliance with any applicable regulatory standard or requirement; adverse economic, business and competitive developments such as shrinking interest margins, reduced collateral values, deposit outflows, changes in credit or other risks posed by the Company’s loan and investment portfolios; changes in costs associated with alternate funding sources, including changes in collateral advance rates and policies of the FHLB; technological, computer-related or operational difficulties; results of litigation; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government or tax laws; international economic developments; the Company’s access to and adverse changes in securities markets; the market for credit related assets; the future operating results, financial condition, cash flow requirements and capital spending priorities of the Company and the Bank; the availability of internal and, as required, external sources of funding; acquisition integration costs; our ability to attract and retain employees; or other significant uncertainties. Additional factors that may cause actual results to differ from the Company’s assumptions and expectations include those set forth in the Company’s most recent filings on Forms 10-K and 10-Q with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements. For additional discussion of the risks and uncertainties applicable to the Company, see the “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
All statements in this Annual Report, including forward-looking statements, speak only as of the date hereof, and we undertake no duty to update any of the forward-looking statements after the date of this Annual Report.
Overview
HMN Financial, Inc. (HMN or the Company) is the stock savings bank holding company for Home Federal Savings Bank (the Bank), which operates community banking and loan production offices in Minnesota, Iowa and Wisconsin. The earnings of the Company are primarily dependent on the Bank's net interest income, which is the difference between interest earned on loans and investments, and the interest paid on interest-bearing liabilities such as deposits and other borrowings. The difference between the average rate of interest earned on assets and the average rate paid on liabilities is the "interest rate spread". Net interest income is produced when interest-earning assets equal or exceed interest-bearing liabilities and there is a positive interest rate spread. Net interest income and net interest rate spread are affected by changes in interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net earnings are also affected by the generation of non-interest income, which consists primarily of gains from the sale of loans and real estate owned, fees for servicing loans, commissions on the sale of uninsured investment products, and service charges on deposit accounts. The Bank incurs expenses in addition to interest expense in the form of salaries and benefits, occupancy expenses, provisions for loan losses, deposit insurance, amortization expense on mortgage servicing assets, data processing costs and income taxes. The earnings of financial institutions, such as the Bank, are also significantly affected by prevailing economic and competitive conditions, particularly changes in interest rates, government monetary and fiscal policies, and regulations of various regulatory authorities. Lending activities are influenced by the demand for and supply of business credit, single-family and commercial properties, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of deposits are influenced by prevailing market rates of interest on competing investments, account maturities and the levels of personal income and savings.
MANAGEMENT DISCUSSION AND ANALYSIS
Critical Accounting Estimates
Critical accounting policies are those policies that the Company's management believes are the most important to understanding the Company’s financial condition and operating results. These critical accounting policies often involve estimates and assumptions that could have a material impact on the Company’s financial statements. The Company has identified the following critical accounting policies that management believes involve the most difficult, subjective, and/or complex judgments that are inherently uncertain. Therefore, actual financial results could differ significantly depending upon the estimates, assumptions and other factors used.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national and regional economic conditions such as unemployment data, loan delinquencies, local economic conditions, demand for single-family homes, demand for commercial real estate and building lots, loan portfolio composition and historical loss experience and observations made by the Company's ongoing internal audit and regulatory exam processes. Loans are charged off to the extent they are deemed to be uncollectible. The Company has established separate processes to determine the appropriateness of the loan loss allowance for its homogeneous single-family and consumer loan portfolios and its non-homogeneous loan portfolios. The determination of the allowance on the homogeneous single-family and consumer loan portfolios is calculated on a pooled basis with individual determination of the allowance for all non-performing loans. The determination of the allowance for the non-homogeneous commercial, commercial real estate and multi-family loan portfolios involves assigning standardized risk ratings and loss factors that are periodically reviewed. The loss factors are estimated based on the Company's own loss experience and are assigned to all loans without identified credit weaknesses. For each non-performing loan, the Company also performs an individual analysis of impairment that is based on the expected cash flows or the value of the assets collateralizing the loans and establishes any necessary reserves or charges off all loans, or portions thereof, that are deemed uncollectable.
The appropriateness of the allowance for loan losses is dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans are typically based on the appraised value of the property less estimated selling costs. The estimates are reviewed periodically and adjustments, if any, are recorded in the provision for loan losses in the periods in which the adjustments become known. Because of the size of some loans, changes in estimates can have a significant impact on the loan loss provision. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios and the actual loss experience. The Company increases its allowance for loan losses by charging the provision for loan losses against income and decreases its allowance by crediting the provision for loan losses and recoveries of previously charged off loans. The activity in the allowance in 2015 resulted in a credit to the loan loss provision. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified. Although management believes that based on current conditions the allowance for loan losses is maintained at an appropriate amount to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future conditions may differ substantially from those anticipated in determining the allowance for loan losses and adjustments may be required in the future.
MANAGEMENT DISCUSSION AND ANALYSIS
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.
The Company maintains significant net deferred tax assets for deductible temporary differences, the largest of which relates to the allowance for loan and real estate losses and net operating loss carryforwards. For income tax purposes, only net charge-offs are deductible, not the entire provision for loan losses. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon management’s judgment and evaluation of both positive and negative evidence, including the forecasts of future income, tax planning strategies, and assessments of the current and future economic and business conditions. The Company considers both positive and negative evidence regarding the ultimate realizability of deferred tax assets. Positive evidence includes the Company’s cumulative net income in the prior three year period, the ability to implement tax planning strategies to accelerate taxable income recognition, and the probability that taxable income will be generated in future periods. It is possible that future conditions may differ substantially from those anticipated in determining that no valuation allowance was required on deferred tax assets and adjustments may be required in the future.
Determining the ultimate settlement of any tax position requires significant estimates and judgments in arriving at the amount of tax benefits to be recognized in the financial statements. It is possible that the tax benefits realized upon the ultimate resolution of a tax position may result in tax benefits that are significantly different from those estimated.
Accounting for Loans Acquired in a Business Combination
Loans acquired in a business combination are initially recorded at their acquisition date fair values. The fair values of the purchased loans are based on the present value of the expected cash flows, including principal, interest and prepayments. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. Fair value estimates involve assumptions and judgments as to credit risk, interest rate risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate. Purchased loans are divided into loans with evidence of credit quality deterioration, which are accounted for under ASC topic 310-30 (purchased credit impaired (PCI)) and loans that do not meet this criteria, which are accounted for under ASC topic 310-20 (performing). PCI loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that the Bank will not be able to collect all principal and interest payments on the loan. In the assessment of credit quality, numerous assumptions, interpretations and judgments must be made, based on internal and third-party credit quality information and ultimately the determination as to the probability that all contractual cash flows will not be able to be collected. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.
Subsequent to the acquisition date, the Bank continues to estimate the amount and timing of cash flows expected to be collected on PCI loans. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for loan losses, resulting in an increase to the allowance for loan losses. Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. For acquired performing loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts or premiums to a loan's cost basis and are accreted or amortized into interest income over the loan's remaining life using the level yield method.
Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans. See “Note 2 Acquisitions” and “Note 6 Allowance for Loan Losses and Credit Quality Information” in the Notes to Consolidated Financial Statements for more information regarding acquired loan disclosures.
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Comparison of 2015 with 2014
Net income was $3.0 million for 2015, a decrease of $4.4 million, from $7.4 million for 2014. Net income available to common shareholders was $2.8 million for the year ended December 31, 2015, a decrease of $2.9 million, from net income available to common shareholders of $5.7 million for 2014. Diluted earnings per common share for the year ended December 31, 2015 was $0.61, a decrease of $0.62 compared to the diluted earnings per common share of $1.23 for the year ended December 31, 2014. The decrease in net income in 2015 is due primarily to a $6.8 million decrease in the credit provision for loan losses between the periods. The decrease in the credit provision was primarily because there was more commercial loan growth and fewer recoveries of previously charged off loans in 2015 when compared to 2014. Net income also decreased $1.4 million due to the change in the losses recognized on real estate owned between the periods. The increased losses in 2015 were primarily due to a large gain realized on the sale of a commercial property in 2014. These decreases in net income were partially offset by a $0.5 million increase in net interest income due to increases in outstanding loan balances and a $3.3 million decrease in income tax expense as a result of the decreased pre-tax net income between the periods.
Net Interest Income
Net interest income was $19.9 million for 2015, an increase of $0.5 million, or 2.8%, from $19.4 million for 2014. Interest income was $21.5 million for 2015, an increase of $0.9 million, or 4.1%, from $20.6 million for 2014. Interest income increased between the periods primarily because of a change in the mix of average interest-earning assets held, which resulted in an increase in the average yields earned between the periods. While the average interest-earning assets decreased $14.5 million between the periods, the average interest-earning assets held in higher yielding loans increased $25.5 million and the amount held in lower yielding cash and investment decreased $40.0 million between the periods. The increase in the average outstanding loans between the periods was primarily the result of an increase in the commercial loan portfolio, which occurred primarily because of an increase in loan originations and a reduction in loan payoffs between the periods. The Company also acquired $24.1 million of loans through an acquisition that occurred in the third quarter of 2015. The average yield earned on interest-earning assets was 3.83% for 2015, an increase of 24 basis points from 3.59% for 2014.
Interest expense was $1.5 million for the year ended December 31, 2015, an increase of $0.3 million, or 24.4%, from $1.2 million for 2014. Interest expense increased primarily because of the change in the mix of the average interest-bearing liabilities held, which resulted in an increase in the average rate paid between the periods. While the average interest-bearing liabilities decreased $2.8 million between the periods, the average amount held in higher rate advances and other borrowings increased $9.3 million, the average amount held in higher rate certificates of deposit decreased $14.5 million, and the average amount held in other lower rate checking and money market deposits increased $2.4 million between the periods. The increase in the average rates paid was primarily due to the $10.0 million holding company note payable that was funded in the first quarter of 2015 in connection with the redemption of all of the remaining Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Preferred Stock”). Interest expense increases related to borrowing costs were partially offset by the lower interest rates paid on deposit accounts between the periods as a result of the low interest rate environment that continued to exist in 2015. The average interest rate paid on interest-bearing liabilities was 0.29% for 2015, an increase of 6 basis points from the 0.23% average interest rate paid in 2014. Net interest margin (net interest income divided by average interest-earning assets) for 2015 was 3.56%, an increase of 18 basis points, compared to 3.38% for 2014.
The following table presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Non-accruing loans have been included in the average outstanding loan balance in the table as loans carrying a zero yield.
MANAGEMENT DISCUSSION AND ANALYSIS
Year Ended December 31, |
||||||||||||||||||||||||||||||||||||
2015 |
2014 |
2013 |
||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Average Outstanding Balance |
Interest Earned/ Paid |
Average Yield/ Rate |
Average Outstanding Balance |
Interest Earned/ Paid |
Average Yield/ Rate |
Average Outstanding Balance |
Interest Earned/ Paid |
Average Yield/ Rate |
|||||||||||||||||||||||||||
Interest-earning assets : |
||||||||||||||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||||||||
Mortgage-backed and related securities |
$ | 3,274 | 116 | 3.54 |
% |
$ | 3,726 | 164 | 4.40 |
% |
$ | 6,968 | 299 | 4.30 |
% |
|||||||||||||||||||||
Other marketable securities |
130,806 | 1,881 | 1.44 | 119,484 | 1,269 | 1.06 | 85,947 | 614 | 0.71 | |||||||||||||||||||||||||||
Loans held for sale |
2,507 | 87 | 3.47 | 1,557 | 58 | 3.73 | 1,964 | 72 | 3.67 | |||||||||||||||||||||||||||
Loans receivable, net (1) (2) |
394,086 | 19,302 | 4.90 | 369,571 | 18,929 | 5.12 | 408,383 | 21,816 | 5.34 | |||||||||||||||||||||||||||
FHLB stock |
734 | 4 | 0.54 | 778 | 4 | 0.51 | 2,191 | 53 | 2.42 | |||||||||||||||||||||||||||
Other, including cash equivalents |
28,544 | 63 | 0.22 | 79,373 | 189 | 0.24 | 55,909 | 129 | 0.23 | |||||||||||||||||||||||||||
Total interest-earning assets |
$ | 559,951 | 21,453 | 3.83 | $ | 574,489 | 20,613 | 3.59 | $ | 561,362 | 22,983 | 4.09 | ||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 76,136 | 17 | 0.02 |
% |
$ | 71,666 | 14 | 0.02 |
% |
$ | 69,675 | 15 | 0.02 |
% |
|||||||||||||||||||||
Passbooks |
55,273 | 42 | 0.08 | 47,200 | 32 | 0.07 | 44,113 | 34 | 0.08 | |||||||||||||||||||||||||||
Money market accounts |
153,441 | 347 | 0.23 | 162,207 | 414 | 0.26 | 120,782 | 372 | 0.31 | |||||||||||||||||||||||||||
Certificate accounts |
96,600 | 528 | 0.55 | 110,256 | 739 | 0.67 | 140,254 | 1,236 | 0.88 | |||||||||||||||||||||||||||
Brokered deposits |
0 | 0 | 0.00 | 830 | 12 | 1.45 | 10,647 | 147 | 1.38 | |||||||||||||||||||||||||||
FHLB advances and other borrowings |
9,225 | 573 | 6.21 | 0 | 0 | 0.00 | 30,427 | 1,485 | 4.88 | |||||||||||||||||||||||||||
Other interest-bearing liabilities |
985 | 0 | 0.00 | 924 | 0 | 0.00 | 963 | 0 | 0.00 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
$ | 391,660 | $ | 393,083 | $ | 416,861 | ||||||||||||||||||||||||||||||
Noninterest checking |
124,342 | 125,767 | 97,613 | |||||||||||||||||||||||||||||||||
Total interest-bearing liabilities and noninterest-bearing deposits |
$ | 516,002 | 1,507 | 0.29 |
% |
$ | 518,850 | 1,211 | 0.23 |
% |
$ | 514,474 | 3,289 | 0.64 |
% |
|||||||||||||||||||||
Net interest income |
19,946 | 19,402 | 19,694 | |||||||||||||||||||||||||||||||||
Net interest rate spread |
3.54 |
% |
3.35 |
% |
3.45 |
% |
||||||||||||||||||||||||||||||
Net earning assets |
$ | 43,949 | $ | 55,639 | $ | 46,888 | ||||||||||||||||||||||||||||||
Net interest margin |
3.56 |
% |
3.38 |
% |
3.51 |
% |
||||||||||||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities and noninterest-bearing deposits |
108.52 |
% |
110.72 |
% |
109.11 |
% |
(1) |
Tax exempt income was not significant; therefore, the yield was not presented on a tax equivalent basis for any of the years presented. The tax-exempt income was $0.1 million for 2015, $0.1 million for 2014, and $0.2 million for 2013. |
(2) |
Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. |
MANAGEMENT DISCUSSION AND ANALYSIS
Net interest margin increased to 3.56% in 2015 from 3.38% in 2014 primarily because of a change in the mix of average interest-earning assets held, which resulted in an increase in the average yields earned between the periods. The increases in the average yields earned due to having larger average balances of higher earning loans and smaller average balances of lower earning cash and investments was partially offset by an increase in the average rates paid on the average interest-bearing liabilities held between the periods. The increase in the average rates paid was primarily due to the $10.0 million holding company note payable that was funded in the first quarter of 2015 in connection with the redemption of all of the remaining Preferred Stock. Average net earning assets decreased $11.7 million to $43.9 million in 2015 compared to $55.6 million for 2014 primarily because the proceeds of the $10.0 million note payable that was funded in the first quarter of 2015 were used to redeem outstanding Preferred Stock.
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It quantifies the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
Year Ended December 31, |
||||||||||||||||||||||||
2015 vs. 2014 |
2014 vs. 2013 |
|||||||||||||||||||||||
Increase (Decrease) Due to |
Increase (Decrease) Due to |
|||||||||||||||||||||||
(Dollars in thousands) |
Volume (1) |
Rate (1) |
Total Increase (Decrease) |
Volume (1) |
Rate (1) |
Total Increase (Decrease) |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||
Mortgage-backed and related securities |
$ | (20 |
) |
(28 |
) |
(48 |
) |
(139 |
) |
4 | (135 |
) |
||||||||||||
Other marketable securities |
120 | 492 | 612 | 240 | 415 | 655 | ||||||||||||||||||
Loans held for sale |
36 | (7 |
) |
29 | (15 |
) |
1 | (14 |
) |
|||||||||||||||
Loans receivable, net |
1,175 | (802 |
) |
373 | (2,001 |
) |
(886 |
) |
(2,887 |
) |
||||||||||||||
Cash equivalents |
(121 |
) |
(5 |
) |
(126 |
) |
54 | 6 | 60 | |||||||||||||||
FHLB stock |
0 | 0 | 0 | (34 |
) |
(15 |
) |
(49 |
) |
|||||||||||||||
Total interest-earning assets |
$ | 1,190 | (350 |
) |
840 | (1,895 |
) |
(475 |
) |
(2,370 |
) |
|||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
NOW accounts |
$ | 1 | 1 | 2 | 0 | (1 |
) |
(1 |
) |
|||||||||||||||
Passbooks |
5 | 5 | 10 | 2 | (4 |
) |
(2 |
) |
||||||||||||||||
Money market accounts |
20 | (86 |
) |
(66 |
) |
89 | (48 |
) |
41 | |||||||||||||||
Certificates of deposit |
(104 |
) |
(107 |
) |
(211 |
) |
(300 |
) |
(197 |
) |
(497 |
) |
||||||||||||
Brokered deposits |
(12 |
) |
0 | (12 |
) |
(137 |
) |
2 | (135 |
) |
||||||||||||||
FHLB advances and other borrowings |
0 | 573 | 573 | (1,484 |
) |
0 | (1,484 |
) |
||||||||||||||||
Total interest-bearing liabilities |
(90 |
) |
386 | 296 | (1,830 |
) |
(248 |
) |
(2,078 |
) |
||||||||||||||
Increase (decrease) in net interest income |
$ | 1,280 | (736 |
) |
544 | (65 |
) |
(227 |
) |
(292 |
) |
(1) |
For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. |
MANAGEMENT DISCUSSION AND ANALYSIS
The following table sets forth the weighted average yields on the Company's interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates as of the date indicated. Non-accruing loans have been included in the average outstanding loan balances in the table as loans carrying a zero yield.
At December 31, 2015 |
||||||||||
Weighted average yield on: |
Weighted average rate on: |
|||||||||
Securities available for sale: |
||||||||||
Mortgage-backed and related securities |
3.75 |
% |
NOW accounts |
0.04 |
% |
|||||
Other marketable securities |
1.49 |
Passbooks |
0.09 | |||||||
Loans held for sale |
4.36 |
Money market accounts |
0.22 | |||||||
Loans receivable, net |
4.96 |
Certificates of deposit |
0.53 | |||||||
Federal Home Loan Bank stock |
0.50 |
Federal Home Loan Bank advances and other borrowings |
6.50 | |||||||
Other interest-earnings assets |
0.48 |
Combined weighted average rate on interest-bearing liabilities |
0.27 | |||||||
Combined weighted average yield on interest-earning assets |
4.06 |
Interest rate spread |
3.79 | |||||||
Provision for Loan Losses
The provision for loan losses was ($0.2 million) for the year ended December 31, 2015, an increase of $6.8 million, from ($7.0 million) for the year ended December 31, 2014. The credit provision for loan losses decreased primarily because there was more commercial loan growth, fewer credit rating upgrades, and fewer recoveries of previously charged off loans in 2015 when compared to 2014. The non-performing loan and foreclosed and repossessed asset activity for 2015 and 2014 was as follows:
Non-performing loans: |
December 31, |
|||||||
(Dollars in thousands) |
2015 |
2014 |
||||||
Balance at beginning of year |
$ | 10,920 | 17,496 | |||||
Classified as non-performing |
4,422 | 5,153 | ||||||
Charge offs |
(119 |
) |
(1,215 |
) |
||||
Principal payments received |
(5,011 |
) |
(7,211 |
) |
||||
Classified as performing |
(5,921 |
) |
(3,189 |
) |
||||
Transferred to real estate owned |
(110 |
) |
(114 |
) |
||||
Balance at end of year |
$ | 4,181 | 10,920 | |||||
Foreclosed and repossessed assets: |
December 31, |
|||||||
(Dollars in thousands) |
2015 |
2014 |
||||||
Balance at beginning of year |
$ | 3,103 | 6,898 | |||||
Transferred from non-performing loans |
110 | 114 | ||||||
Other foreclosures/repossessions |
239 | 28 | ||||||
Real estate sold |
(1,165 |
) |
(4,891 |
) |
||||
Net gain on sale of assets |
165 | 1,449 | ||||||
Write downs |
(407 |
) |
(495 |
) |
||||
Balance at end of year |
$ | 2,045 | 3,103 | |||||
The decrease in non-performing loans relates primarily to a commercial real estate development relationship that was upgraded to performing status during the year due to the improved financial performance of the project as a result of increased lot sales.
MANAGEMENT DISCUSSION AND ANALYSIS
A reconciliation of the allowance for loan losses for 2015 and 2014 is summarized as follows:
(Dollars in thousands) |
2015 |
2014 |
||||||
Balance at January 1 |
$ | 8,332 | 11,401 | |||||
Provision |
(164 |
) |
(6,998 |
) |
||||
Charge offs: |
||||||||
Commercial |
(69 |
) |
(55 |
) |
||||
Commercial real estate |
0 | (936 |
) |
|||||
Consumer |
(105 |
) |
(131 |
) |
||||
Single-family |
(19 |
) |
(92 |
) |
||||
Recoveries |
1,734 | 5,143 | ||||||
Balance at December 31 |
$ | 9,709 | 8,332 | |||||
Specific allowance |
$ | 1,009 | 1,074 | |||||
General allowance |
8,700 | 7,258 | ||||||
$ | 9,709 | 8,332 | ||||||
The allowance for loan losses increased in 2015 when compared to 2014 primarily because of the $99.3 million increase in the loan portfolio between the periods.
Non-Interest Income
Non-interest income was $7.7 million for the year ended December 31, 2015, an increase of $0.4 million, compared to $7.3 million for the year ended December 31, 2014.
The following table presents the components of non-interest income:
Year ended December 31, |
Percentage Increase (Decrease) |
|||||||||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
2015/2014 |
2014/2013 |
|||||||||||||||
Fees and service charges |
$ | 3,316 | 3,458 | 3,513 | (4.1 |
) % |
(1.6 |
)% |
||||||||||||
Loan servicing fees |
1,046 | 1,058 | 1,029 | (1.1 |
) |
2.8 | ||||||||||||||
Gain on sales of loans |
1,964 | 1,828 | 2,102 | 7.4 | (13.0 |
) |
||||||||||||||
Gain on acquisition |
289 | 0 | 0 | NM | NM | |||||||||||||||
Other non-interest income |
1,038 | 940 | 668 | 9.8 | 40.7 | |||||||||||||||
Total non-interest income |
$ | 7,653 | 7,284 | 7,312 | 5.1 | (0.4 |
) |
|||||||||||||
The increase is primarily related to a gain of $0.3 million that was recognized on an acquisition that occurred in the third quarter of 2015. Gain on sales of loans increased $0.1 million, or 7.4%, between the periods primarily because of an increase in single-family loan originations and sales. Other non-interest income increased $0.1 million primarily due to an increase in income related to the sale of non-insured investment products. These increases in non-interest income were partially offset by a $0.1 million decrease in fees and service charges primarily because of a decrease in retail and commercial overdraft fees between the periods.
MANAGEMENT DISCUSSION AND ANALYSIS
Non-Interest Expense
Non-interest expense was $23.2 million for the year ended December 31, 2015, an increase of $1.8 million, or 8.4%, from $21.4 million for the same period in 2014. The following table presents the components of non-interest expense:
Year ended December 31, |
Percentage Increase (Decrease) |
|||||||||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
2015/2014 |
2014/2013 |
|||||||||||||||
Compensation and benefits |
$ | 13,733 | 13,332 | 12,680 | 3.0 |
% |
5.1 |
% |
||||||||||||
Losses (gains) on real estate owned |
218 | (1,194 |
) |
(830 |
) |
118.3 | (43.9 |
) |
||||||||||||
Occupancy |
3,722 | 3,691 | 3,338 | 0.8 | 10.6 | |||||||||||||||
Deposit insurance |
375 | 435 | 868 | (13.8 |
) |
(49.9 |
) |
|||||||||||||
Data processing |
1,020 | 1,011 | 1,289 | 0.9 | (21.6 |
) |
||||||||||||||
Other |
4,128 | 4,128 | 5,278 | 0.0 | (21.8 |
) |
||||||||||||||
Total non-interest expense |
$ | 23,196 | 21,403 | 22,623 | 8.4 | (5.4 |
) |
|||||||||||||
Losses on real estate owned increased $1.4 million between the periods primarily because of a $1.0 million gain that was recognized on the sale of a single commercial property in 2014. Compensation expense increased $0.4 million between the periods primarily because of an increase in the expenses related to restricted stock awards and increased incentive accruals due to increased loan production. These increases in non-interest expense were partially offset by a decrease of $0.1 million in deposit insurance costs due primarily to a decrease in insurance rates between the periods.
Income Taxes
The Company considers the calculation of current and deferred income taxes to be a critical accounting policy that is subject to significant estimates. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities. Income tax expense was $1.6 million for the year ended December 31, 2015, a decrease of $3.3 million from $4.9 million for the same period in 2014. The decrease in income tax expense between the periods is primarily related to the decrease in pre-tax net income in 2015 when compared to 2014.
Net Income Available to Common Shareholders
Net income available to common shareholders was $2.8 million for 2015, a decrease of $2.9 million from the $5.7 million net income available to common shareholders in 2014. Basic earnings per common share for the year ended December 31, 2015 was $0.69, a decrease of $0.71 from the basic earnings per common share of $1.40 for the year ended December 31, 2014. Diluted earnings per common share for the year ended December 31, 2015 was $0.61, a decrease of $0.62 from diluted earnings per common share of $1.23 for the year ended December 31, 2014. The net income available to common shareholders and the basic and diluted earnings per common share decreased primarily because of the decrease in net income between the periods that was partially offset by a reduction in the dividends paid on the outstanding Preferred Stock. On February 17, 2015 the Company redeemed the final 10,000 shares of its outstanding Preferred Stock and, as a result, no dividends are required to be paid on the Preferred Stock after that date.
Comparison of 2014 with 2013
Net income was $7.4 million for 2014, a decrease of $19.3 million, from $26.7 million for 2013. Net income available to common shareholders was $5.7 million for the year ended December 31, 2014, a decrease of $18.9 million, from net income available to common shareholders of $24.6 million for 2013. Diluted earnings per common share for the year ended December 31, 2014 was $1.23, a decrease of $4.48 from $5.71 diluted earnings per common share for the year ended December 31, 2013. The decrease in net income in 2014 is due primarily to a $19.3 million increase in income tax expense between the periods as a result of eliminating the valuation reserve against the Company’s deferred tax asset in the fourth quarter of 2013 and recording regular income tax expense in 2014.
Net interest income was $19.4 million for 2014, a decrease of $0.3 million, or 1.5%, from $19.7 million for 2013. Interest income was $20.6 million for 2014, a decrease of $2.4 million, or 10.3%, from $23.0 million for 2013. Interest income decreased between the periods primarily because of a change in the mix of average interest-earning assets held and also because of a decrease in the average yields earned between the periods. While the average interest-earning assets increased $13.1 million between the periods, the average interest-earning assets held in lower yielding cash and investments increased $52.3 million and the amount of average interest-earning assets held in higher yielding loans decreased $39.2 million between the periods. The decrease in the average outstanding loans between the periods was primarily the result of a decrease in the commercial loan portfolio, which occurred primarily because of loan prepayments and non-renewals as a result of the Company’s continued focus on improving credit quality, decreasing loan concentration, and managing net interest margin. The average yield earned on interest-earning assets was 3.59% for the year ended December 31, 2014, a decrease of 50 basis points from 4.09% for the same period of 2013. The decrease in average yield is due to the change in the mix of assets held and the continued low interest rate environment that existed during 2014.
MANAGEMENT DISCUSSION AND ANALYSIS
Interest expense was $1.2 million for the year ended December 31, 2014, a decrease of $2.1 million, or 63.2%, from $3.3 million for 2013. Interest expense decreased primarily because of the change in the mix of the average interest-bearing liabilities held between the periods and also because of a decrease in the average interest rate. While the average interest-bearing liabilities increased $4.4 million between the periods, the amount held in higher rate certificates of deposit and Federal Home Loan Bank advances decreased $70.2 million and the amount of interest-bearing liabilities held in other lower rate deposit accounts increased $74.6 million between the periods. The decrease in certificates of deposit between the periods was the result of using the proceeds from loan principal payments to fund maturing certificates of deposit. The decreased average rates paid were the result of the change in the mix of liabilities held and the low interest rate environment that continued to exist during 2014. The average interest rate paid on interest-bearing liabilities was 0.23% for the year ended December 31, 2014, a decrease of 41 basis points from the 0.64% average interest rate paid in 2013.
Net interest margin decreased to 3.38% in 2014 from 3.51% in 2013 primarily because the yield on interest-earning assets decreased at a faster rate than the cost of interest-bearing liabilities. Net interest margin was also negatively impacted by a change in the asset mix as a higher percentage of interest-earning assets were in lower yielding cash and investments in 2014 when compared to 2013. Average net earning assets increased $8.7 million to $55.6 million in 2014 compared to $46.9 million for 2013 primarily because the net income realized in 2014 was reinvested in interest-earning assets.
The provision for loan losses was ($7.0 million) for the year ended December 31, 2014, a decrease in the credit provision of $0.9 million, from ($7.9 million) for the year ended December 31, 2013. The decrease in the size of the commercial loan portfolio, the continued improvement in the credit quality of the loan portfolio, and the recoveries received on previously charged off loans in 2014 and 2013 resulted in lower reserves being required in the allowance for loan losses. The reduction in the allowance for loan losses was the primary reason for the large credits in the provision for loan losses for 2014 and 2013. Future loan loss provisions are anticipated to return to more normalized levels due to the decrease in non-performing assets and the recoveries already received on previously charged off loans.
Total non-performing assets were $14.0 million at December 31, 2014, a decrease of $10.4 million, or 42.5%, from $24.4 million at December 31, 2013. Non-performing loans decreased $6.6 million and foreclosed and repossessed assets decreased $3.8 million during 2014. The decrease in non-performing loans during 2014 relates primarily to principal payments received. Of the $7.2 million in principal payments received during the period, $2.5 million was received on a residential development loan as settlement of the outstanding debt, $1.7 million related to the payoff of non-performing single family construction loans as a result of the houses being sold, $1.2 million related to the payoff of two non-performing one-to-four family loans that were refinanced with other financial institutions, $0.6 million related to additional principal payments received from various developers as a result of land or lot sales, and $0.7 million related to the payoff of non-performing commercial and commercial real estate loans.
The allowance for loan losses and charge offs decreased in 2014 when compared to 2013 because of two factors. The first factor was there were less required specific reserves because some non-performing loans were paid or charged off during 2014. The second factor was that the loan portfolio decreased $22 million between the periods which reduced the amount of the required allowance. These decreases in the allowance were partially offset by an increase in the required reserve percentages for certain risk rated loan categories as a result of the periodic internal analysis of recent loan charge-off history that was performed in 2014.
Non-interest income was $7.3 million for the year ended December 31, 2014, the same as for the year ended December 31, 2013. Gain on sales of loans decreased $0.3 million, or 13.0%, between 2014 and 2013 primarily because of a decrease in single family loan originations and sales. Fees and service charges decreased $0.1 million primarily because of a decrease in retail overdraft fees and other charges between 2014 and 2013. Other non-interest income increased $0.3 million between the periods due to increases in the sale of non-insured investment products and rental income. Loan servicing fees increased $29,000 as a result of servicing more commercial loans.
Non-interest expense was $21.4 million for the year ended December 31, 2014, a decrease of $1.2 million, or 5.4%, from $22.6 million for 2013. Other non-interest expenses decreased $1.2 million between 2014 and 2013 primarily because of a decrease in legal and other costs associated with loans and real estate owned. Deposit insurance expense decreased $0.4 million because of a decrease in assets and insurance rates between the periods. Gains on real estate owned increased $0.4 million between the periods primarily because of the significant gain realized on a commercial real estate property that was sold in 2014. Data processing expense decreased $0.3 million due to a decrease in hardware and software depreciation expense in 2014. These decreases in non-interest expense were partially offset by a $0.7 million increase in compensation expense in 2014 primarily because of an increase in salaries and pension benefit costs. Occupancy expense increased $0.4 million between 2014 and 2013 due to an increase in software amortization expense and the purchase of more non-capitalized items in 2014.
MANAGEMENT DISCUSSION AND ANALYSIS
The Company considers the calculation of current and deferred income taxes to be a critical accounting policy that is subject to significant estimates. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities. Income tax expense was $4.9 million for the year ended December 31, 2014, an increase of $19.3 million from the $14.4 million income tax benefit for the same period in 2013. In the second quarter of 2010, the Company recorded a deferred tax asset valuation reserve against its entire deferred tax asset balance and the Company continued to maintain a valuation reserve against the entire deferred tax asset balance until the fourth quarter of 2013. In the fourth quarter of 2013, the valuation reserve against the deferred tax asset was eliminated which resulted in a $14.4 million income tax benefit for 2013. Regular income tax expense was recorded in 2014.
Net income available to common shareholders was $5.7 million for the year ended December 31, 2014, a decrease of $18.9 million from $24.6 million in net income available to common shareholders for the year ended December 31, 2013. Basic earnings per common share for the year ended December 31, 2014 was $1.40, a decrease of $4.75 from the basic earnings per common share of $6.15 for the year ended December 31, 2013. Diluted earnings per common share for the year ended December 31, 2014 was $1.23, a decrease of $4.48 from diluted earnings per common share of $5.71 for the year ended December 31, 2013. The net income available to common shareholders and the basic and diluted earnings per common share decreased primarily because of the decrease in net income between the periods as a result of the elimination of the deferred tax asset valuation reserve in the fourth quarter of 2013. The difference between basic and diluted earnings per common share is related primarily to the dilutive effect of the outstanding warrant held by the U.S. Treasury to purchase 833,333 shares of the Company’s common stock at an exercise price of $4.68.
On December 23, 2008, the Company sold 26,000 shares of Preferred Stock and a related warrant to the United States Department of Treasury (“Treasury”) for $26.0 million as part of the Treasury’s Capital Purchase Program. On February 8, 2013, Treasury sold the Preferred Stock to unaffiliated third party investors in a private transaction for $18.8 million. The shares of Preferred Stock were entitled to a 5% annual cumulative dividend for each of the first five years of the investment, which increased to 9% on February 15, 2014. The Company paid the following dividends on, and effected the following redemptions of, its Preferred Stock during 2014:
Date |
Dividend |
Redemption |
May 15, 2014 |
$201.71 per share |
10,000 shares of Preferred Stock on a pro rata basis at $1,000 per share |
August 15, 2014 |
$22.50 per share |
None |
November 17, 2014 |
$22.50 per share |
6,000 shares of Preferred Stock on a pro rata basis at $1,000 per share |
Following the redemption on November 17, 2014, 10,000 shares of Preferred Stock remained outstanding. The Company did not pay any dividends on the Preferred Stock or redeem any shares of Preferred Stock in 2013.
On February 17, 2015, the Company redeemed the remaining 10,000 shares of outstanding Preferred Stock. After giving effect to a dividend of $22.50 per share on the Preferred Stock that was paid on the same date, the redemption price per share was $1,000. The Preferred Stock redemption was funded with a $10.0 million term loan to HMN from an unrelated third party that was evidenced by a promissory note. The principal balance of the note bears interest at a rate of 6.5% and is payable in consecutive annual installments of $1.0 million on each December 15, beginning December 15, 2015, with the balance due on December 15, 2021. The Preferred Stock dividend was funded by HMN through internally available funds.
MANAGEMENT DISCUSSION AND ANALYSIS
Financial Condition
Loans Receivable, Net
The following table sets forth the information on the Company's loan portfolio in dollar amounts and percentages before deductions for deferred fees and discounts and allowances for losses as of the dates indicated:
December 31, |
||||||||||||||||||||||||||||||||||||||||
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
||||||||||||||||||||||||||||||
Real Estate Loans: |
||||||||||||||||||||||||||||||||||||||||
One-to-four family |
$ | 90,945 | 19.24 |
% |
$ | 69,841 | 18.70 |
% |
$ | 76,467 | 19.31 |
% |
$ | 97,037 | 20.40 |
% |
$ | 119,066 | 20.52 |
% |
||||||||||||||||||||
Multi-family |
12,324 | 2.61 | 15,700 | 4.20 | 8,113 | 2.05 | 11,756 | 2.47 | 35,517 | 6.12 | ||||||||||||||||||||||||||||||
Commercial |
196,926 | 41.65 | 163,365 | 43.73 | 178,486 | 45.06 | 220,721 | 46.39 | 243,475 | 41.95 | ||||||||||||||||||||||||||||||
Construction or development |
38,103 | 8.05 | 12,603 | 3.37 | 7,851 | 1.98 | 12,430 | 2.61 | 10,922 | 1.88 | ||||||||||||||||||||||||||||||
Total real estate loans |
338,298 | 71.55 | 261,509 | 70.00 | 270,917 | 68.40 | 341,944 | 71.87 | 408,980 | 70.47 | ||||||||||||||||||||||||||||||
Other Loans: |
||||||||||||||||||||||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||||||||||||||||||
Automobile |
2,885 | 0.61 | 1,124 | 0.30 | 971 | 0.25 | 623 | 0.13 | 404 | 0.07 | ||||||||||||||||||||||||||||||
Home equity line |
38,980 | 8.24 | 36,832 | 9.86 | 36,178 | 9.13 | 36,521 | 7.68 | 41,429 | 7.14 | ||||||||||||||||||||||||||||||
Home equity |
14,782 | 3.13 | 12,420 | 3.33 | 11,629 | 2.94 | 11,390 | 2.39 | 13,426 | 2.31 | ||||||||||||||||||||||||||||||
Recreational vehicles |
2,650 | 0.56 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | 0 | 0.00 | ||||||||||||||||||||||||||||||
Other |
5,118 | 1.08 | 4,549 | 1.22 | 4,645 | 1.17 | 5,441 | 1.15 | 6,902 | 1.19 | ||||||||||||||||||||||||||||||
Total consumer loans |
64,415 | 13.62 | 54,925 | 14.71 | 53,423 | 13.49 | 53,975 | 11.35 | 62,161 | 10.71 | ||||||||||||||||||||||||||||||
Commercial business loans |
70,106 | 14.83 | 57,122 | 15.29 | 71,709 | 18.11 | 79,854 | 16.78 | 109,259 | 18.82 | ||||||||||||||||||||||||||||||
Total other loans |
134,521 | 28.45 | 112,047 | 30.00 | 125,132 | 31.60 | 133,829 | 28.13 | 171,420 | 29.53 | ||||||||||||||||||||||||||||||
Total loans |
472,819 | 100.00 |
% |
373,556 | 100.00 |
% |
396,049 | 100.00 |
% |
475,773 | 100.00 |
% |
580,400 | 100.00 |
% |
|||||||||||||||||||||||||
Less: |
||||||||||||||||||||||||||||||||||||||||
Unamortized discounts |
16 | 14 | 33 | 33 | 93 | |||||||||||||||||||||||||||||||||||
Net deferred loan (costs) fees |
(91 |
) |
97 | 0 | 87 | 511 | ||||||||||||||||||||||||||||||||||
Allowance for losses |
9,709 | 8,332 | 11,401 | 21,608 | 23,888 | |||||||||||||||||||||||||||||||||||
Total loans receivable, net |
$ | 463,185 | $ | 365,113 | $ | 384,615 | $ | 454,045 | $ | 555,908 | ||||||||||||||||||||||||||||||
In 2015, the Company’s loan portfolio increased because of an increase in the loan originations as a result of an increase in lending staff. The loan portfolio also increased $24.1 million as a result of the bank acquisition that occurred in the third quarter of 2015. Because of the enhanced lending staff and the previously announced branch acquisition that is scheduled to close in the second quarter of 2016, it is anticipated that the size of our overall loan portfolio will increase in 2016.
One-to-four family real estate loans were $90.9 million at December 31, 2015, an increase of $21.1 million, compared to $69.8 million at December 31, 2014. Mortgage loan originations increased in 2015 as a result of additional mortgage lending staff and an increased emphasis on originating shorter term and adjustable rate mortgage loans that were placed into the portfolio during 2015. The majority of the longer term mortgage loans that were originated during the year continued to be sold into the secondary market and were not placed in the loan portfolio in order to manage the Company’s interest rate risk position. The increased origination of loans placed into the loan portfolio was the primary reason for the increase in the one-to-four family loan portfolio during 2015.
Multi-family real estate loans were $12.3 million at December 31, 2015, a decrease of $3.4 million, compared to $15.7 million at December 31, 2014. The decrease in multi-family real estate loans in 2015 is primarily the result of a $3.9 million loan that was paid off during the year that was partially offset by new multi-family real estate originations.
Commercial real estate loans were $196.9 million at December 31, 2015, an increase of $33.5 million, compared to $163.4 million at December 31, 2014. Commercial business loans were $70.1 million at December 31, 2015, an increase of $13.0 million, compared to $57.1 million at December 31, 2014. Increased commercial loan demand and increased loan production resulted in an increase in the commercial business and commercial real estate loan portfolios in 2015.
Construction or development loans were $38.1 million at December 31, 2015, an increase of $25.4 million, compared to $12.7 million at December 31, 2014. The increase resulted primarily from $23.2 million in new construction loans, $13.0 million in advances on existing loans, $5.6 million in paid-off loans, and $5.2 million of projects that were completed and the related loans moved to a permanent classification.
Home equity lines of credit were $39.0 million at December 31, 2015, an increase of $2.2 million, compared to $36.8 million at December 31, 2014. The open-end home equity lines are generally written with an adjustable rate and a 10 year draw period which requires interest only payments followed by a 10 year repayment period which fully amortizes the outstanding balance. Closed-end home equity loans are written with fixed or adjustable rates with terms up to 15 years. Home equity loans were $14.8 million at December 31, 2015, an increase of $2.4 million, compared to $12.4 million at December 31, 2014. The increase in the open-end equity lines and closed-end equity loans is related primarily to an increase in originations between the periods.
MANAGEMENT DISCUSSION AND ANALYSIS
Allowance for Loan Losses
The determination of the allowance for loan losses and the related provision is a critical accounting policy of the Company that is subject to significant estimates, as previously discussed. The current level of the allowance for loan losses is a result of management’s assessment of the risks within the portfolio based on the information obtained through the credit evaluation process. The Company utilizes a risk-rating system on non-homogenous commercial real estate and commercial business loans that includes regular credit reviews to identify and quantify the risk in the commercial portfolio. Management conducts quarterly reviews of the entire loan portfolio and evaluates the need to adjust the allowance balance on the basis of these reviews.
Management actively monitors asset quality and, when appropriate, charges off loans against the allowance for loan losses. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used to determine the size of the allowance for loan losses.
The allowance for loan losses was $9.7 million, or 2.05% of gross loans at December 31, 2015, compared to $8.3 million, or 2.23% of gross loans at December 31, 2014. The allowance for loan losses increased primarily due to a $99.3 million increase in the loan portfolio between the periods. The increase in the allowance due to loan growth was partially offset by a decrease in the allowance due to lower reserve percentages being used for certain risk rated commercial loans between the periods as a result of an internal analysis of the most recent charge-off history that was performed during the year. The allowance also decreased due to a decrease in the allocated allowance for impaired loans. The decrease in the allowance as a percentage of outstanding loans, from 2.23% of gross loans at December 31, 2014 to 2.05% of gross loans at December 31, 2015, reflects the improved credit quality of the loan portfolio between the periods.
The following table reflects the activity in the allowance for loan losses and selected statistics:
December 31, |
||||||||||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
Balance at beginning of year |
$ | 8,332 | 11,401 | 21,608 | 23,888 | 42,828 | ||||||||||||||
Provision for losses |
(164 |
) |
(6,998 |
) |
(7,881 |
) |
2,544 | 17,278 | ||||||||||||
Charge-offs: |
||||||||||||||||||||
One-to-four family |
(19 |
) |
(92 |
) |
(200 |
) |
(63 |
) |
(508 |
) |
||||||||||
Consumer |
(105 |
) |
(131 |
) |
(484 |
) |
(1,071 |
) |
(270 |
) |
||||||||||
Commercial business |
(69 |
) |
(55 |
) |
(651 |
) |
(2,464 |
) |
(15,512 |
) |
||||||||||
Commercial real estate |
0 | (936 |
) |
(3,711 |
) |
(5,719 |
) |
(23,012 |
) |
|||||||||||
Recoveries |
1,734 | 5,143 | 2,720 | 4,493 | 3,084 | |||||||||||||||
Net recoveries (charge-offs) |
1,541 | 3,929 | (2,326 |
) |
(4,824 |
) |
(36,218 |
) |
||||||||||||
Balance at end of year |
$ | 9,709 | 8,332 | 11,401 | 21,608 | 23,888 | ||||||||||||||
Year-end allowance for loan losses as a percent of year end gross loan balance |
2.05 |
% |
2.23 |
% |
2.88 |
% |
4.54 |
% |
4.12 |
% |
||||||||||
Ratio of net loan (recoveries) charge-offs to average loans outstanding |
(0.36 |
) |
(1.02 |
) |
0.53 | 0.91 | 5.62 |
MANAGEMENT DISCUSSION AND ANALYSIS
The following table reflects the allocation of the allowance for loan losses:
December 31, |
||||||||||||||||||||||||||||||||||||||||
2015 |
2014 |
2013 |
2012 |
2011 |
||||||||||||||||||||||||||||||||||||
Allocated Allowance as a % of Loan Category |
Percent of Loans in Each Category to Total Loans |
Allocated Allowance as a % of Loan Category |
Percent of Loans in Each Category to Total Loans |
Allocated Allowance as a % of Loan Category |
Percent of Loans in Each Category to Total Loans |
Allocated Allowance as a % of Loan Category |
Percent of Loans in Each Category to Total Loans |
Allocated Allowance as a % of Loan Category |
Percent of Loans in Each Category to Total Loans |
|||||||||||||||||||||||||||||||
One-to-four family |
1.09 |
% |
19.24 |
% |
1.57 |
% |
18.70 |
% |
2.13 |
% |
19.31 |
% |
2.91 |
% |
20.40 |
% |
3.12 |
% |
20.52 |
% |
||||||||||||||||||||
Commercial real estate |
2.46 | 52.31 | 2.62 | 51.30 | 3.32 | 49.09 | 5.55 | 51.47 | 4.70 | 49.95 | ||||||||||||||||||||||||||||||
Consumer |
1.86 | 13.62 | 1.84 | 14.71 | 2.07 | 13.49 | 2.12 | 11.35 | 1.86 | 10.71 | ||||||||||||||||||||||||||||||
Commercial business |
2.05 | 14.83 | 2.11 | 15.29 | 3.08 | 18.11 | 5.08 | 16.78 | 4.93 | 18.82 | ||||||||||||||||||||||||||||||
Total |
2.05 | 100.00 |
% |
2.23 | 100.00 |
% |
2.88 | 100.00 |
% |
4.54 | 100.00 |
% |
4.12 | 100.00 |
% |
|||||||||||||||||||||||||
The allocated reserve percentages for one-to-four family, commercial real estate, and commercial business loan categories decreased in 2015 due to the general improvements in credit quality of the portfolio. The allocation of the allowance for loan losses for consumer loans increased slightly due to an increase in the outstanding balances and types of consumer loans held between the periods.
Allowance for Real Estate Losses
Real estate properties acquired or expected to be acquired through loan foreclosures are initially recorded at fair value less estimated selling costs. Management periodically performs valuations and an allowance for losses is established if the carrying value of a property exceeds its fair value less estimated selling costs. The balance in the allowance for real estate losses was $0.8 million at December 31, 2015 and $1.7 million at December 31, 2014.
Non-performing Assets
Loans are reviewed at least quarterly and if the collectability of any loan is doubtful, it is placed on non-accrual status. Loans are placed on non-accrual 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 collectability of the loan. Restructured loans include the Bank's troubled debt restructurings (TDRs) that involved forgiving a portion of interest or principal or making a loan at a rate materially less than the market rate to borrowers whose financial condition has deteriorated. Foreclosed and repossessed assets include assets acquired in settlement of loans. Total non-performing assets were $6.2 million at December 31, 2015, a decrease of $7.8 million, or 55.6%, from $14.0 million at December 31, 2014. Non-performing loans decreased $6.7 million and foreclosed and repossessed assets decreased $1.1 million during 2015. The decrease in non-performing loans relates primarily to a commercial real estate development relationship that was upgraded to performing status during the year due to the improved financial performance of the project as a result of increased lot sales. The following table sets forth the amounts and categories of non-performing assets (non-accrual loans and foreclosed and repossessed assets) in the Company’s portfolio:
MANAGEMENT DISCUSSION AND ANALYSIS
December 31, |
||||||||||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
Non-performing loans: |
||||||||||||||||||||
One-to-four family |
$ | 1,655 | 1,564 | 1,602 | 2,492 | 4,435 | ||||||||||||||
Commercial real estate |
1,694 | 8,750 | 14,549 | 25,543 | 22,658 | |||||||||||||||
Consumer |
786 | 486 | 737 | 300 | 699 | |||||||||||||||
Commercial business |
46 | 120 | 608 | 1,640 | 6,201 | |||||||||||||||
Total |
4,181 | 10,920 | 17,496 | 29,975 | 33,993 | |||||||||||||||
Foreclosed and repossessed assets: |
||||||||||||||||||||
One-to-four family |
48 | 50 | 0 | 1,595 | 352 | |||||||||||||||
Commercial real estate |
1,997 | 3,053 | 6,898 | 9,000 | 16,264 | |||||||||||||||
Total |
2,045 | 3,103 | 6,898 | 10,595 | 16,616 | |||||||||||||||
Total non-performing assets |
$ | 6,226 | $ | 14,023 | $ | 24,394 | $ | 40,570 | $ | 50,609 | ||||||||||
Total as a percentage of total assets |
0.97 |
% |
2.43 |
% |
3.76 |
% |
6.21 |
% |
6.40 |
% |
||||||||||
Total non-performing loans |
$ | 4,181 | $ | 10,920 | $ | 17,496 | $ | 29,975 | $ | 33,993 | ||||||||||
Total as a percentage of total loans receivable, net |
0.90 |
% |
2.99 |
% |
4.55 |
% |
6.60 |
% |
6.10 |
% |
||||||||||
Allowance for loan losses to non-performing loans |
232.22 |
% |
76.30 |
% |
65.17 |
% |
72.09 |
% |
70.27 |
% |
||||||||||
Gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $0.4 million for 2015, $0.9 million for 2014, and $1.8 million for 2013. The amounts that were included in interest income on a cash basis for these loans were $0.2 million, $0.2 million, and $0.1 million, respectively.
The following table summarizes the number and property type of commercial real estate loans that were non-performing (the largest category of non-performing loans) at December 31, 2015, 2014 and 2013.
(Dollars in thousands) |
Principal Amount of Loans at |
Principal Amount of Loans at |
Principal Amount of Loans at |
|||||||||||||||||||||
Property Type |
# of Relationships |
December 31, 2015 |
# of Relationships |
December 31, 2014 |
# of Relationships |
December 31, 2013 |
||||||||||||||||||
Developments/land |
3 | $ | 1,694 | 3 | $ | 8,750 | 9 | $ | 14,549 | |||||||||||||||
The Company had allocated reserves established against the above commercial real estate loans of $0.2 million, $0.3 million, and $2.2 million, respectively, at December 31, 2015, 2014, and 2013.
At December 31, 2015, 2014 and 2013, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $2.5 million, $9.4 million, and $17.4 million, respectively. Had the loans performed in accordance with their original terms throughout 2015, 2014, and 2013, the Company would have recorded gross interest income of $0.4 million, $0.9 million, and $1.8 million, respectively. During 2015, 2014 and 2013 the Company recorded gross interest income of $0.2 million, $0.3 million, and $0.5 million, respectively.
For the loans that were modified in 2015, $0.5 million were unclassified and performing, and $0.7 million were non-performing at December 31, 2015. The decrease in TDRs in 2015 relates primarily to a group of commercial development loans totaling $6.0 million that were upgraded to performing status and met the criteria to be removed from TDR classification during the year. Of the loans that were modified in 2015 and outstanding at December 31, 2015, $0.8 million related to loans secured by first or second mortgages on one-to-four family properties, and the remaining modifications related to other consumer or commercial loans.
For the loans that had been modified in 2014, $0.1 million were unclassified and performing and $0.1 million were non-performing at December 31, 2014. The decrease in TDRs in 2014 relates primarily to two related commercial development loans totaling $3.5 million that were charged down to $2.5 million and paid off during the year. TDRs also decreased during the year by $1.4 million due to the paydown of six loans in an unrelated commercial development, as well as $1.0 million due to the payoff of a loan for another unrelated commercial development. Of the loans that were modified in 2014 and outstanding at December 31, 2014, $0.2 million related to loans secured by first or second mortgages on one-to-four family properties, and the remaining modifications related to other consumer loans.
MANAGEMENT DISCUSSION AND ANALYSIS
For the loans that had been modified in 2013, $0.3 million were unclassified and performing and $0.8 million were non-performing at December 31, 2013. The decrease in TDRs in 2013 relates primarily to two commercial development loans for which $3.6 million in charge-offs were recorded during the year due to a decrease in the estimated value of the collateral supporting the loans. TDRs also decreased during the year by $4.0 million due to the paydown or payoff of four other unrelated commercial development loans, as well as $1.0 million due to the repossession and sale of collateral related to a consumer equity loan. The restructurings included reducing loan rates and restructuring repayment schedules to improve the borrower’s cash flow. Additional collateral was also obtained for some loans. Of the loans that were modified in 2013, $0.6 million related to loans secured by first or second mortgages on one-to-four family properties, and the remaining modifications related to other consumer, commercial real estate or commercial business loans.
The following table sets forth the amount of TDRs in the Company’s portfolio:
December 31, |
||||||||||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
2012 |
2011 |
|||||||||||||||
One-to-four family |
$ | 647 | 368 | 840 | 3,540 | 3,752 | ||||||||||||||
Commercial real estate |
725 | 7,956 | 14,781 | 24,702 | 19,524 | |||||||||||||||
Consumer |
732 | 571 | 697 | 1,814 | 578 | |||||||||||||||
Commercial business |
415 | 555 | 1,074 | 1,614 | 4,692 | |||||||||||||||
Total TDRs |
2,519 | 9,450 | 17,392 | 31,670 | 28,546 | |||||||||||||||
TDRs on accrual status |
1,618 | 7,414 | 3,780 | 7,125 | 10,802 | |||||||||||||||
TDRs on non-accrual status |
901 | 2,036 | 13,612 | 24,545 | 17,744 | |||||||||||||||
Total |
$ | 2,519 | 9,450 | 17,392 | 31,670 | 28,546 | ||||||||||||||
In addition to the TDRs and the non-performing loans set forth in the table above of all non-performing assets, as of December 31, 2015, there were four other potential problem loan relationships totaling $6.5 million. Potential problem loans are loans that are not in non-performing status, however, there are circumstances present to create doubt as to the ability of the borrower to comply with present repayment terms. The decision of management to include performing loans in potential problem loans does not necessarily mean that the Company expects losses to occur but that management recognized a higher degree of risk associated with these loans. The level of potential problem loans is another predominant factor in determining the relative level of the allowance for loan losses. The four loan relationships that are reported as potential problem loans at December 31, 2015 were $6.0 million in loans to two unrelated trucking companies and $0.5 million in loans secured by agricultural assets to two unrelated individuals. The three loan relationships reported as potential problem loans at December 31, 2014 were a $3.8 million loan to an educational institution, a $0.6 million loan to a small manufacturing business, and three loans totaling $0.3 million to a golf course. The five loan relationships reported as potential problem loans at December 31, 2013 were a $0.7 million loan secured by an auto salvage business, and four other loans to unrelated borrowers totaling $0.9 million that are secured by restaurant business assets.
MANAGEMENT DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
The Company attempts to manage its liquidity position so that the funding needs of borrowers and depositors are met timely and in a cost effective manner. Asset liquidity is the ability to convert assets to cash through the maturity or sale of the asset. Liability liquidity is the ability of the Bank to obtain retail, internet, or brokered deposits or to borrow funds from third parties such as the FHLB or the Federal Reserve Bank of Minneapolis.
The primary investing activities are the origination of loans and the purchase of securities. Principal and interest payments on loans and securities, along with the proceeds from the sale of loans held for sale, are the primary sources of cash for the Bank. Additional cash can be obtained by selling securities from the available for sale portfolio or by selling loans or mortgage servicing rights. Unpledged securities could also be pledged and used as collateral for additional borrowings with the FHLB or Federal Reserve Bank of Minneapolis to generate additional cash.
The primary financing activity is the attraction of retail and internet deposits. The Bank has the ability to borrow additional funds from the FHLB or Federal Reserve Bank of Minneapolis by pledging additional securities or loans, subject to applicable borrowing base and collateral requirements. See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to Consolidated Financial Statements for more information on additional advances that could be drawn based upon existing collateral levels with the FHLB and the Federal Reserve Bank of Minneapolis.
The Bank's most liquid assets are cash and cash equivalents, which consist of short-term highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash and interest-bearing deposits. The level of these assets is dependent on the operating, financing and investing activities during any given period.
Cash and cash equivalents at December 31, 2015 were $39.8 million, a decrease of $6.8 million, compared to $46.6 million at December 31, 2014. Net cash provided by operating activities during 2015 was $10.8 million. The Company conducted the following major investing activities during 2015: principal payments and maturity proceeds received on securities available for sale and FHLB stock were $190.0 million, purchases of securities available for sale and FHLB stock were $146.2 million, and the proceeds from the sale of premises and other real estate were $1.1 million. The Company also purchased premises and equipment of $0.8 million. Net loans receivable increased $80.5 million due primarily to increased loan originations. The Company recorded a gain on the acquisition of $0.3 million and received $4.8 million, net of cash, in connection with the transaction. Net cash used by investing activities during 2015 was $31.9 million. The Company conducted the following major financing activities during 2015: redemptions of preferred stock were $10.0 million, dividends paid to preferred stockholders totaled $0.2 million, deposits increased $15.4 million, received proceeds from borrowings of $65.0 million and repaid borrowings of $56.0 million. Net cash provided by financing activities was $14.2 million.
The Bank has certificates of deposits from customers with outstanding balances of $62.1 million that mature during 2016. Based upon past experience, management anticipates that the majority of the deposits will renew for another term. The Company believes that deposits that do not renew will be replaced with deposits from other customers or FHLB advances. Proceeds from the sale of securities could also be used to fund unanticipated outflows of deposits.
The Bank has deposits of $59.7 million in checking and money market accounts of four customers that have relationship balances greater than $5.0 million. These funds may be withdrawn at any time, however, management anticipates that the majority of these deposits will remain on deposit with the Bank over the next twelve months. If these deposits are withdrawn, it is anticipated that they would be funded with available cash or replaced with deposits from other customers or FHLB advances. Proceeds from the sale of securities could also be used to fund unanticipated outflows of deposits.
Dividends from the Bank have been the Company’s primary source of cash. The Bank is restricted under applicable federal banking law from paying dividends to the Company without prior notice to and non-objection of the applicable regulator. During 2015, the Bank paid dividends to the Company of $3.0 million and at December 31, 2015, the Company had $2.6 million in cash and other assets that could readily be turned into cash.
On February 17, 2015, the Company redeemed the final 10,000 shares of outstanding Preferred Stock after redeeming 16,000 shares in 2014. After giving effect to a dividend of $22.50 per share on the Preferred Stock that was paid on the same date, the redemption price per share was $1,000. The Preferred Stock redemption was funded through a $10.0 million term loan to HMN from an unrelated third party that was evidenced by a promissory note. The interest payments on the note are due quarterly. The principal balance of the note bears interest at a rate of 6.5% and is payable in consecutive annual installments of $1.0 million on each December 15, beginning December 15, 2015, with the balance due on December 15, 2021. The Preferred Stock dividend was funded by HMN through internally available funds.
MANAGEMENT DISCUSSION AND ANALYSIS
The Company’s primary use of cash is the payment of principal and interest on the third party note payable, and holding company level expenses, including the payment of director and management fees as well as legal expenses and other regulatory costs. The Company does not anticipate that it will have on a stand-alone basis adequate liquid resources to make future interest and principal payments on its third party note payable and fund the Company-level expenses. The Company plans to continue to fund its liquidity needs through dividends from the Bank or external capital. Provided that no default or event of default has occurred and is continuing, the Company may also, at its option, elect to defer payment of one installment of principal of the third party note payable otherwise due prior to the maturity date, in which event such installment will become due and payable on the maturity date.
Contractual Obligations and Commercial Commitments
The Company has certain obligations and commitments to make future payments under existing contracts. At December 31, 2015, the aggregate contractual obligations (excluding bank deposits) and commercial commitments were as follows:
Payments Due by Period |
||||||||||||||||||||
(Dollars in thousands) |
Total |
Less than 1 Year |
1-3 Years |
4-5 Years |
After 5 Years |
|||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Total borrowings |
$ | 9,000 | 1,000 | 2,000 | 2,000 | 4,000 | ||||||||||||||
Annual rental commitments under non-cancellable operating leases |
6,673 | 830 | 1,559 | 1,418 | 2,866 | |||||||||||||||
Total contractual obligations |
$ | 15,673 | 1,830 | 3,559 | 3,418 | 6,866 |
Amount of Commitments Expiring by Period |
||||||||||||||||||||
Other Commercial Commitments: |
||||||||||||||||||||
Commercial lines of credit |
$ | 45,513 | 26,752 | 5,408 | 8,343 | 5,010 | ||||||||||||||
Commitments to lend |
39,450 | 7,072 | 9,612 | 3,812 | 18,954 | |||||||||||||||
Standby letters of credit |
1,077 | 1,072 | 5 | 0 | 0 | |||||||||||||||
Total other commitments |
$ | 86,040 | 34,896 | 15,025 | 12,155 | 23,964 | ||||||||||||||
Regulatory Capital Requirements
Effective January 1, 2015 the capital requirements of the Company and the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The new requirements, among other things, (i) apply a strengthened set of capital requirements to the Bank (the Company is exempt, pursuant to the Small Bank Holding Company Policy Statement (Policy Statement), described below), including new requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum tier 1 capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The new rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and buffer requirements which will be phased in incrementally, with full implementation scheduled for January 1, 2019. Failure by the Bank to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believes that, as of December 31, 2015, the Bank’s capital ratios were in excess of those quantitative capital ratio standards set forth under the prompt corrective action regulations. However, there can be no assurance that the Bank will continue to maintain such status in the future. The OCC has extensive discretion in its supervisory and enforcement activities, and can further adjust the requirement to be “well-capitalized” in the future. See “Note 17 Regulatory Capital” of the Notes to Consolidated Financial Statements for a table which reflects the Bank’s capital compared to these capital requirements.
In the second quarter of 2015, the FRB amended its Policy Statement, which exempted small bank holding companies from the above capital requirements, by raising the asset size threshold for determining applicability from $500 million to $1 billion. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company met the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.
MANAGEMENT DISCUSSION AND ANALYSIS
The Company also serves as a source of capital, liquidity and financial support to the Bank. Depending upon the operating performance of the Bank and the Company’s other liquidity and capital needs, including potentially Company-level expenses and the payment of principal and interest payments on the third party note payable, the Company may find it prudent, subject to prevailing capital market conditions and other factors, to raise additional capital through issuance of its common stock or other equity securities. In addition, regulators have placed increasing emphasis on the amount of common equity as a component of core capital, and revised capital regulations incorporate specific levels of common equity capital. Additional capital would also potentially permit the Company to implement a strategy of growing Bank assets. Depending on the circumstances, if it were to raise capital, the Company may deploy it to the Bank for general banking purposes, or may retain some or all of it for use by the Company.
If the Company raises capital through the issuance of additional shares of common stock or other equity securities, it would dilute the ownership interests of existing stockholders and, if issued at less than the Company’s book value would dilute the per share book value of the Company’s common stock, dilute the Company’s earnings per share, and could result in a change of control of the Company and the Bank. New investors may also have rights, preferences and privileges senior to the Company’s current stockholders, which may adversely impact the Company’s current stockholders. The Company’s ability to raise additional capital through the issuance of equity securities, if deemed prudent, will depend on, among other factors, conditions in the capital markets at that time, which are outside of its control, and on the Company’s financial performance and plans. Accordingly, the Company may not be able to raise additional capital, if deemed prudent, on favorable economic terms, or other terms acceptable to it. If the Bank cannot satisfactorily address its capital needs as they arise, the Bank’s ability to maintain or expand its operations, maintain compliance with the regulatory capital requirements, to operate without additional regulatory or other restrictions, and its operating results, could be materially adversely affected.
Dividends
The declaration of dividends is subject to, among other things, the Company's financial condition and results of operations, the Bank's compliance with regulatory capital requirements and other regulatory restrictions, tax considerations, industry standards, economic conditions, general business practices and other factors. The Company has not made any dividend payments to common stockholders during the three year period ending December 31, 2015.
Under applicable federal banking laws and regulations, no dividends can be declared or paid by the Bank to the Company without notice to and non-objection from the applicable banking regulator. There is no assurance that the Bank and the Company would satisfy the applicable regulatory requirements necessary to effect any such dividends. The payment of dividends by the Company is dependent upon the Company having adequate cash or other assets that can be converted to cash to pay dividends to its stockholders. Further, any determination as to whether, when and in what amount to declare and pay any such dividends would be subject to the discretion of the boards of directors of the Bank and the Company and would depend on numerous factors including the results of operations, financial conditions, growth plans, and cash flow requirements of the Company and the Bank.
Impact of Inflation and Changing Prices
The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
New Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It requires, among other things, equity investments to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; the separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements. It also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The ASU is intended to reduce diversity in practice and is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The adoption of this ASU in the first quarter of 2018 is not anticipated to have a material impact on the Company’s consolidated financial statements.
MANAGEMENT DISCUSSION AND ANALYSIS
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure.
The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located in the following Asset/Liability Management section of this Management’s Discussion and Analysis discloses the Company's projected changes in net interest income based upon immediate interest rate changes called rate shocks.
The Company utilizes a model that uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities under different interest rate changes.
The following table discloses the projected changes in market value to the Company’s interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on December 31, 2015.
Market Value |
||||||||||||||||
(Dollars in thousands) Basis point change in interest rates |
-100 |
0 |
+100 |
+200 |
||||||||||||
Total market-risk sensitive assets |
$ | 631,484 | 620,803 | 605,106 | 591,510 | |||||||||||
Total market-risk sensitive liabilities |
558,598 | 524,172 | 502,724 | 472,877 | ||||||||||||
Off-balance sheet financial instruments |
(351 |
) |
0 | 79 | 198 | |||||||||||
Net market risk |
$ | 73,237 | 96,631 | 102,303 | 118,435 | |||||||||||
Percentage change from current market value |
(24.21 |
)% |
0.00 |
% |
5.87 |
% |
22.56 |
% |
||||||||
The preceding table was prepared utilizing the following assumptions (the Model Assumptions) regarding prepayment and decay ratios that were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 5% and 58%, depending on the note rate and the period to maturity. Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of between 18% and 138%, depending on the note rate and the period to maturity. Mortgage-backed securities were projected to have prepayments based upon the underlying collateral securing the instrument. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at annual rates of 6% and 8%, respectively. Non-interest checking and NOW accounts were both assumed to decay at an annual rate of 3%. Commercial non-interest checking and NOW accounts were assumed to decay at an annual rate of 7%. Commercial MMDA accounts were assumed to decay at annual rates of 12%.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the interest spread) will remain constant over the interest changes disclosed in the table. Changes in interest spread could impact projected market value changes. Certain assets, such as ARMs, have features that restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets that are approaching their lifetime interest rate caps or floors could be different from the values calculated in the table. Certain liabilities, such as certificates of deposit, have fixed rates that restrict interest rate changes until maturity. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may also decrease in the event of a substantial sustained increase in interest rates.
MANAGEMENT DISCUSSION AND ANALYSIS
Asset/Liability Management
The Company's management reviews the impact that changing interest rates will have on the net interest income projected for the twelve months following December 31, 2015 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated impact on net interest income during the 12 month period ending December 31, 2016 of immediate interest rate changes called rate shocks:
(Dollars in thousands) |
|||||||||
Rate Shock in Basis Points |
Net Interest Change |
Percent Change |
|||||||
+200 | $ | 2,710 | 11.82 |
% |
|||||
+100 | 1,330 | 5.80 | |||||||
0 | 0 | 0.00 | |||||||
-100 | (1,919 |
) |
(8.37 |
) |
|||||
The preceding table was prepared utilizing the Model Assumptions. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income. The increase in interest income in a rising rate environment is because there are more adjustable rate loans that would re-price to higher interest rates in the next twelve months than there are deposits that would re-price.
In an attempt to manage its exposure to changes in interest rates, management closely monitors interest rate risk. The Company has an Asset/Liability Committee that meets frequently to discuss changes in the interest rate risk position and projected profitability. The Committee makes adjustments to the asset-liability position of the Bank that are reviewed by the Board of Directors of the Bank. This Committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions as intended to assure attainment of the Bank's objectives in an effective manner. In addition, the Board reviews, on a quarterly basis, the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, the Bank may, at times, depending on the relationship between long and short-term interest rates, market conditions and consumer preference, place more emphasis on managing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, in certain situations, provide high enough returns to justify the increased exposure to sudden and unexpected changes in interest rates.
To the extent consistent with its interest rate spread objectives, the Bank attempts to manage its interest rate risk and has taken a number of steps to restructure its balance sheet in order to better match the maturities of its assets and liabilities. In the past, more long term fixed rate loans were placed into the single family loan portfolio. In recent years, the Bank has continued to focus its 30 year fixed rate single family residential lending program on loans that are saleable to third parties and generally places only adjustable rate or shorter term fixed rate loans that meet certain risk characteristics into its loan portfolio. A significant portion of the Bank’s commercial loan production continues to be in adjustable rate loans that re-price every one, two, or three years.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than commitments to originate and sell loans in the ordinary course of business. See “Note 18 Financial Instruments with Off-Balance Sheet Risk” in the Notes to Consolidated Financial Statements for additional information. Management believes that the Company has sufficient liquidity to satisfy its off-balance sheet obligations.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
Consolidated Statements of COMPREHENSIVE INCOME
Years ended December 31 (Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Interest income: |
||||||||||||
Loans receivable |
$ | 19,389 | 18,987 | 21,887 | ||||||||
Securities available for sale: |
||||||||||||
Mortgage-backed and related |
116 | 164 | 300 | |||||||||
Other marketable |
1,881 | 1,269 | 614 | |||||||||
Cash equivalents |
63 | 189 | 129 | |||||||||
Other |
4 | 4 | 53 | |||||||||
Total interest income |
21,453 | 20,613 | 22,983 | |||||||||
Interest expense: |
||||||||||||
Deposits |
934 | 1,211 | 1,804 | |||||||||
Federal Home Loan Bank advances and other borrowings |
573 | 0 | 1,485 | |||||||||
Total interest expense |
1,507 | 1,211 | 3,289 | |||||||||
Net interest income |
19,946 | 19,402 | 19,694 | |||||||||
Provision for loan losses |
(164 |
) |
(6,998 |
) |
(7,881 |
) |
||||||
Net interest income after provision for loan losses |
20,110 | 26,400 | 27,575 | |||||||||
Non-interest income: |
||||||||||||
Fees and service charges |
3,316 | 3,458 | 3,513 | |||||||||
Loan servicing fees |
1,046 | 1,058 | 1,029 | |||||||||
Gain on sales of loans |
1,964 | 1,828 | 2,102 | |||||||||
Gain on acquisition |
289 | 0 | 0 | |||||||||
Other |
1,038 | 940 | 668 | |||||||||
Total non-interest income |
7,653 | 7,284 | 7,312 | |||||||||
Non-interest expense: |
||||||||||||
Compensation and benefits |
13,733 | 13,332 | 12,680 | |||||||||
Losses (gains) on real estate owned |
218 | (1,194 |
) |
(830 |
) |
|||||||
Occupancy |
3,722 | 3,691 | 3,338 | |||||||||
Deposit insurance |
375 | 435 | 868 | |||||||||
Data processing |
1,020 | 1,011 | 1,289 | |||||||||
Other |
4,128 | 4,128 | 5,278 | |||||||||
Total non-interest expense |
23,196 | 21,403 | 22,623 | |||||||||
Income before income tax expense |
4,567 | 12,281 | 12,264 | |||||||||
Income tax expense (benefit) |
1,611 | 4,902 | (14,406 |
) |
||||||||
Net income |
2,956 | 7,379 | 26,670 | |||||||||
Preferred stock dividends |
(108 |
) |
(1,710 |
) |
(2,068 |
) |
||||||
Net income available to common shareholders |
$ | 2,848 | 5,669 | 24,602 | ||||||||
Other comprehensive income (loss), net of tax |
204 | 256 | (625 |
) |
||||||||
Comprehensive income available to common shareholders |
$ | 3,052 | 5,925 | 23,977 | ||||||||
Basic earnings per common share |
$ | 0.69 | 1.40 | 6.15 | ||||||||
Diluted earnings per common share |
$ | 0.61 | 1.23 | 5.71 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders’ Equity
Accumulated |
Unearned |
|||||||||||||||||||||||||||||||
Other |
Employee |
Total |
||||||||||||||||||||||||||||||
Additional |
Comprehensive |
Stock |
Stock- |
|||||||||||||||||||||||||||||
Preferred |
Common |
Paid-in |
Retained |
Income |
Ownership |
Treasury |
holders’ |
|||||||||||||||||||||||||
(Dollars in thousands) |
Stock |
Stock |
Capital |
Earnings |
(Loss) |
Plan |
Stock |
Equity |
||||||||||||||||||||||||
Balance, December 31, 2012 |
$ | 25,336 | 91 | 51,795 | 47,004 | (49 |
) |
(2,997 |
) |
(60,346 |
) |
60,834 | ||||||||||||||||||||
Net income |
26,670 | 26,670 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
(625 |
) |
(625 |
) |
||||||||||||||||||||||||||||
Preferred stock discount amortization |
664 | (664 |
) |
0 | ||||||||||||||||||||||||||||
Stock compensation expense |
4 | 4 | ||||||||||||||||||||||||||||||
Restricted stock awards |
(349 |
) |
349 | 0 | ||||||||||||||||||||||||||||
Restricted stock awards forfeited |
208 | (327 |
) |
(119 |
) |
|||||||||||||||||||||||||||
Amortization of restricted stock awards |
202 | 202 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(1,463 |
) |
(1,463 |
) |
||||||||||||||||||||||||||||
Earned employee stock ownership plan shares |
(21 |
) |
193 | 172 | ||||||||||||||||||||||||||||
Balance, December 31, 2013 |
$ | 26,000 | 91 | 51,175 | 72,211 | (674 |
) |
(2,804 |
) |
(60,324 |
) |
85,675 | ||||||||||||||||||||
Net income |
7,379 | 7,379 | ||||||||||||||||||||||||||||||
Other comprehensive income |
256 | 256 | ||||||||||||||||||||||||||||||
Redemption of preferred stock |
(16,000 |
) |
(16,000 |
) |
||||||||||||||||||||||||||||
Stock compensation tax benefits |
1 | 1 | ||||||||||||||||||||||||||||||
Restricted stock awards |
(1,262 |
) |
1,262 | 0 | ||||||||||||||||||||||||||||
Amortization of restricted stock awards |
240 | 240 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(1,785 |
) |
(1,785 |
) |
||||||||||||||||||||||||||||
Earned employee stock ownership plan shares |
53 | 194 | 247 | |||||||||||||||||||||||||||||
Balance, December 31, 2014 |
$ | 10,000 | 91 | 50,207 | 77,805 | (418 |
) |
(2,610 |
) |
(59,062 |
) |
76,013 | ||||||||||||||||||||
Net income |
2,956 | 2,956 | ||||||||||||||||||||||||||||||
Other comprehensive income |
204 | 204 | ||||||||||||||||||||||||||||||
Redemption of preferred stock |
(10,000 |
) |
(10,000 |
) |
||||||||||||||||||||||||||||
Restricted stock awards |
(332 |
) |
332 | 0 | ||||||||||||||||||||||||||||
Restricted stock awards forfeiture |
9 | (9 |
) |
0 | ||||||||||||||||||||||||||||
Amortization of restricted stock awards |
447 | 447 | ||||||||||||||||||||||||||||||
Preferred stock dividends |
(225 |
) |
(225 |
) |
||||||||||||||||||||||||||||
Earned employee stock ownership plan shares |
57 | 193 | 250 | |||||||||||||||||||||||||||||
Balance, December 31, 2015 |
$ | 0 | 91 | 50,388 | 80,536 | (214 |
) |
(2,417 |
) |
(58,739 |
) |
69,645 | ||||||||||||||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 2,956 | 7,379 | 26,670 | ||||||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||||
Provision for loan losses |
(164 |
) |
(6,998 |
) |
(7,881 |
) |
||||||
Depreciation |
706 | 576 | 880 | |||||||||
Amortization of premiums (discounts), net |
(3 |
) |
18 | 80 | ||||||||
Amortization of deferred loan fees |
(964 |
) |
(340 |
) |
(249 |
) |
||||||
Amortization of core deposit intangible |
28 | 0 | 0 | |||||||||
Amortization of purchased loan fair value adjustments |
(657 |
) |
0 | 0 | ||||||||
Amortization of mortgage servicing rights |
555 | 517 | 592 | |||||||||
Capitalized mortgage servicing rights |
(547 |
) |
(316 |
) |
(568 |
) |
||||||
Deferred income tax expense (benefit) |
1,722 | 4,566 | (14,464 |
) |
||||||||
Securities gains, net |
(6 |
) |
0 | 0 | ||||||||
(Gains) losses on sales of real estate and premises |
218 | (1,194 |
) |
(830 |
) |
|||||||
Gain on sales of loans |
(1,964 |
) |
(1,828 |
) |
(2,102 |
) |
||||||
Proceeds from sales of loans held for sale |
78,278 | 56,040 | 84,718 | |||||||||
Disbursements on loans held for sale |
(69,941 |
) |
(41,557 |
) |
(69,347 |
) |
||||||
Amortization of restricted stock awards |
447 | 240 | 202 | |||||||||
Amortization of unearned ESOP shares |
193 | 194 | 193 | |||||||||
Cancellation of vested restricted stock awards |
0 | 0 | (119 |
) |
||||||||
Earned ESOP shares priced above (below) original cost |
57 | 53 | (21 |
) |
||||||||
Stock option compensation expense |
0 | 1 | 4 | |||||||||
(Increase) decrease in accrued interest receivable |
(346 |
) |
240 | 65 | ||||||||
Increase (decrease) in accrued interest payable |
137 | (53 |
) |
(101 |
) |
|||||||
(Increase) decrease in other assets |
(239 |
) |
(444 |
) |
842 | |||||||
Increase (decrease) in other liabilities |
302 | (265 |
) |
364 | ||||||||
Other, net |
52 | 515 | 64 | |||||||||
Net cash provided by operating activities |
10,820 | 17,344 | 18,992 | |||||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sales of securities available for sale |
10,951 | 0 | 0 | |||||||||
Principal collected on securities available for sale |
1,694 | 2,148 | 4,933 | |||||||||
Proceeds collected on maturity of securities available for sale |
175,070 | 125,000 | 21,000 | |||||||||
Purchases of securities available for sale |
(144,069 |
) |
(157,004 |
) |
(49,090 |
) |
||||||
Purchase of Federal Home Loan Bank stock |
(2,152 |
) |
0 | (178 |
) |
|||||||
Redemption of Federal Home Loan Bank stock |
2,238 | 7 | 3,457 | |||||||||
Proceeds from sales of real estate and premises |
1,127 | 4,816 | 5,786 | |||||||||
Net (increase) decrease in loans receivable |
(80,447 |
) |
13,455 | 63,814 | ||||||||
Gain on acquisition |
(289 |
) |
0 | 0 | ||||||||
Acquisition payment (net of cash acquired) |
4,816 | 0 | 0 | |||||||||
Purchases of premises and equipment |
(803 |
) |
(847 |
) |
(425 |
) |
||||||
Net cash (used) provided by investing activities |
(31,864 |
) |
(12,425 |
) |
49,297 | |||||||
Cash flows from financing activities: |
||||||||||||
Increase (decrease) in deposits |
15,375 | (57,182 |
) |
38,953 | ||||||||
Redemption of preferred stock |
(10,000 |
) |
(16,000 |
) |
0 | |||||||
Dividends paid to preferred stockholders |
(225 |
) |
(5,964 |
) |
0 | |||||||
Proceeds from borrowings |
65,000 | 0 | 12,000 | |||||||||
Repayment of borrowings |
(56,000 |
) |
0 | (82,000 |
) |
|||||||
Increase (decrease) in customer escrows |
42 | 175 | (216 |
) |
||||||||
Net cash provided (used) by financing activities |
14,192 | (78,971 |
) |
(31,263 |
) |
|||||||
(Decrease) increase in cash and cash equivalents |
(6,852 |
) |
(74,052 |
) |
37,026 | |||||||
Cash and cash equivalents, beginning of year |
46,634 | 120,686 | 83,660 | |||||||||
Cash and cash equivalents, end of year |
$ | 39,782 | 46,634 | 120,686 | ||||||||
Supplemental cash flow disclosures: |
||||||||||||
Cash paid for interest |
$ | 1,358 | 1,264 | 3,390 | ||||||||
Cash paid for income taxes |
191 | 0 | 205 | |||||||||
Supplemental noncash flow disclosures: |
||||||||||||
Loans transferred to loans held for sale |
8,125 | 13,243 | 12,183 | |||||||||
Transfer of loans to real estate |
110 | 142 | 1,563 |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015, 2014 and 2013
NOTE 1 Description of the Business and Summary of Significant Accounting Policies
HMN Financial, Inc. (HMN or the Company) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank). The Bank has a community banking philosophy and operates retail banking and loan production facilities in Minnesota, Iowa, and Wisconsin. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OIA), which offers financial planning products and services, and HFSB Property Holdings, LLC (HPH), which was inactive in 2015, but has acted as an intermediary for the Bank in holding and operating certain foreclosed properties.
The consolidated financial statements included herein are for HMN, the Bank, OIA, and HPH. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company evaluated subsequent events through the filing date of our annual 10-K with the Securities and Exchange Commission on March 11, 2016.
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
An estimate that is particularly susceptible to change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is appropriate to cover probable losses inherent in the portfolio at the date of the balance sheet. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require changes to the allowance based on their judgment about information available to them at the time of their examination.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents.
Securities
Securities are accounted for according to their purpose and holding period. The Company classifies its debt and equity securities in one of three categories:
Trading Securities
Securities held principally for resale in the near term are classified as trading securities and are recorded at their fair values. Unrealized gains and losses on trading securities are included in other income.
Securities Held to Maturity
Securities that the Company has the positive intent and ability to hold to maturity are reported at cost and adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Unrealized losses on securities held to maturity reflecting a decline in value judged to be other than temporary are charged to income and a new cost basis is established.
Securities Available for Sale
Securities available for sale consist of securities not classified as trading securities or as securities held to maturity. They include securities that management intends to use as part of its asset/liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar factors. Unrealized gains and losses, net of income taxes, are reported as a separate component of stockholders’ equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method and recognized on the trade date. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Unrealized losses on securities available for sale reflecting a decline in value judged to be other than temporary are charged to income and a new cost basis is established.
Management monitors the investment security portfolio for impairment on an individual security basis and has a process in place to identify securities that could potentially have a credit impairment that is other than temporary. This process involves analyzing the length of time and extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and near-term prospects of the issuer, expected cash flows, and the Company's intent and ability to hold the investment for a period of time sufficient to recover the temporary loss, including determining whether it is more-likely-than-not that the Company will be required to sell the security prior to recovery. To the extent it is determined that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Held for Sale
Mortgage loans originated or purchased which are intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net fees and costs associated with acquiring or originating loans held for sale are deferred and included in the basis of the loan in determining the gain or loss on the sale of the loans. Gains on the sale of loans are recognized on the settlement date. Net unrealized losses are recognized through a valuation allowance by charges to income.
Loans Receivable, net
Loans receivable, net, are carried at amortized cost. Loan origination fees received, net of certain loan origination costs, are deferred as an adjustment to the carrying value of the related loans, and are amortized into income using the interest method over the estimated life of the loans.
Premiums and discounts on purchased participation loans are amortized into interest income using the interest method over the period to contractual maturity, adjusted for estimated prepayments.
The allowance for loan losses is based on a periodic analysis of the loan portfolio and is maintained at an amount considered to be appropriate by management to provide for probable losses inherent in the loan portfolio as of the balance sheet dates. In this analysis, management considers factors including, but not limited to, specific occurrences of loan impairment, actual and anticipated changes in the size of the portfolios, national and regional economic conditions (such as unemployment data, loan delinquencies, local economic conditions, demand for single-family homes, demand for commercial real estate and building lots, loan portfolio composition and historical loss experience) and observations made by the Company's ongoing internal audit and regulatory exam processes. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties or other collateral securing classified loans. Appraisals on collateral dependent commercial real estate and commercial business loans are obtained when it is determined that the borrower’s risk profile has deteriorated and the loan is classified as impaired. Subsequent new third party appraisals of properties securing impaired commercial real estate and commercial business loans are prepared at least every two years. For all land development loan types, a new third party appraisal is prepared on an annual basis where current activity is not consistent with the assumptions made in the most recent third party appraisal. Non-performing residential and consumer home equity loans and home equity lines may have a third party appraisal or an internal evaluation completed depending on the size of the loan and location of the property. These appraisals, or internal valuations, are generally completed when a residential or consumer home equity loan or home equity line of credit becomes 120 days past due and are typically updated after possession of the property is obtained. Valuations are reviewed on a quarterly basis and adjustments are made to the allowance for loan losses for temporary impairments and charge-offs are taken when the impairment is determined to be permanent. The fair market value of the properties for all loan types are adjusted for estimated selling costs in order to determine the net realizable value of the properties. The allowance for loan losses is established for known problem loans, as well as for loans which are not currently known to require an allowance. Loans are charged off to the extent they are deemed to be uncollectible. The appropriateness of the allowance for loan losses is dependent upon management’s estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to adjustments due to changing economic prospects of borrowers or properties. The fair market value of collateral dependent loans are typically based on the appraised value of the property less estimated selling costs. The estimates are reviewed periodically and adjustments, if any, are recorded in the provision for loan losses in the periods in which the adjustments become known. The allowance is allocated to individual loan categories based upon the relative risk characteristics of the loan portfolios and the actual loss experience. The Company increases its allowance for loan losses by charging the provision for loan losses against income and decreases its allowance by crediting the provision for loan losses. The methodology for establishing the allowance for loan losses takes into consideration probable losses that have been identified in connection with specific loans as well as losses in the loan portfolio that have not been specifically identified.
Interest income is recognized on an accrual basis except when collectability is in doubt. When loans are placed on a non-accrual basis, generally when the loan is 90 days past due, previously accrued but unpaid interest is reversed from income. If the ultimate collectability of a loan is in doubt and the loan is placed in nonaccrual status, the cost recovery method is used and cash collected is applied to first reduce the principal outstanding. Generally, the Company returns a loan to accrual status when all delinquent interest and principal becomes current under the terms of the loan agreement and collectability of remaining principal and interest is no longer doubtful. Previously collected interest payments that were applied to principal when the loan was classified as non-accrual are brought back into interest income using the effective yield method over the estimated life of the loan, including expected renewal terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All impaired loans are valued at the present value of expected future cash flows discounted at the loan's initial effective interest rate. The fair value of the collateral of an impaired collateral-dependent loan or an observable market price, if one exists, may be used as an alternative to discounting. If the value of the impaired loan is less than the recorded investment in the loan, the impaired amount is charged off. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all loans which are on non-accrual, delinquent as to principal and interest for 90 days or greater, or restructured in a troubled debt restructuring (TDR) involving a modification of terms. All non-accruing loans are reviewed for impairment on an individual basis.
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of the loan balances. The Company evaluates all loan modifications and if the Company, for legal or economic reasons related to the borrower's financial difficulties, grants a concession compared to the original terms and conditions of the loan that the Company would not otherwise consider, the modified loan is considered a TDR and is classified as an impaired loan. If the TDR loan was performing (accruing) prior to the modification, it typically will remain accruing after the modification as long as it continues to perform according to the modified terms. If the TDR loan was non-performing (non-accruing) prior to the modification, it will remain non-accruing after the modification for a minimum of six months. If the loan performs according to the modified terms for a minimum of six months, it typically will be returned to accruing status. In general, there are two conditions in which a TDR loan is no longer considered to be a TDR and potentially not classified as impaired. The first condition is whether the loan is refinanced with terms that reflect normal market terms for the type of credit involved. The second condition is whether the loan is repaid or charged off.
Purchased Loans Acquired Through Business Combinations
Purchased loans acquired in a business combination, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments, are initially recorded at fair value as determined by the present value of expected future cash flows with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan is an accretable yield adjustment and is recognized as interest income using the effective yield method over the life of the loan. Contractually required payments for principal and interest that exceed the undiscounted cash flows expected at acquisition is a nonaccretable difference and is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows after the loan is acquired are recognized as an impairment and charged to the provision for loan losses.
Transfers of Financial Assets and Participating Interests
Transfers of an entire financial asset or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.
Mortgage Servicing Rights
Mortgage servicing rights are capitalized at fair value and amortized in proportion to, and over the period of, estimated net servicing income. The Company evaluates its capitalized mortgage servicing rights for impairment each quarter. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. Any impairment is recognized through a valuation allowance.
Real Estate, net
Real estate acquired through loan foreclosure or deed in lieu of foreclosure, is initially recorded at the fair value less estimated selling costs. Third party appraisals are obtained as soon as practical after obtaining possession of property. Valuations are reviewed quarterly by management and an allowance for losses is established if the carrying value of a property exceeds its fair value less estimated selling costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premises and Equipment
Land is carried at cost. Office buildings, improvements, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over estimated useful lives of 5 to 40 years for office buildings and improvements and 3 to 10 years for furniture and equipment.
Core Deposit Intangible
The Company records the estimated fair value of the deposit base acquired in an acquisition as a core deposit intangible asset. The recorded amount is amortized on a straight line basis over the estimated life of the deposits acquired.
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Stock Based Compensation
The Company recognizes the grant-date fair value of stock option and restricted stock awards issued as compensation expense, amortized over the vesting period.
Employee Stock Ownership Plan (ESOP)
The Company has an ESOP that borrowed funds from the Company and purchased shares of HMN common stock. The Company makes quarterly principal and interest payments on the ESOP loan. As the debt is repaid, ESOP shares that were pledged as collateral for the debt are released from collateral based on the proportion of debt service paid in the year and then allocated to eligible employees. The Company accounts for its ESOP in accordance with ASC 718, Employers' Accounting for Employee Stock Ownership Plans . Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in stockholders' equity. As shares are determined to be ratably released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence regarding the ultimate realizability of deferred tax assets.
Preferred Stock Dividends and Discount
The proceeds received from the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (Preferred Stock) and related warrant to purchase 833,333 shares of the Company’s common stock issued to the United States Department of Treasury (Treasury) were allocated between the Preferred Stock and the warrant based on their relative fair values at the time of issuance in accordance with the requirements of ASC 470, Accounting for Convertible Debt Issued with Stock Purchase Warrants. Because of the increasing rate dividend feature of the shares of Preferred Stock, the discount on the warrant was amortized using the effective yield method over the five year period preceding the scheduled rate increase on the Preferred Stock in accordance with the requirements of ASC 505.
Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing the income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity.
Comprehensive Income
Comprehensive income is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income is the total of net income and other comprehensive income (loss), which for the Company is comprised of unrealized gains and losses on securities available for sale.
Segment Information
The amount of each segment item reported is the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing an enterprise’s general-purpose financial statements and allocations of revenues, expenses and gains or losses are included in determining reported segment profit or loss if they are included in the measure of the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets that are included in the measure of the segment’s assets that are used by the chief operating decision maker are reported for that segment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It requires, among other things, equity investments to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; the separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements. It also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The ASU is intended to reduce diversity in practice and is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The adoption of this ASU in the first quarter of 2018 is not anticipated to have a material impact on the Company’s consolidated financial statements.
Derivative Financial Instruments
The Company uses derivative financial instruments in order to manage the interest rate risk on residential loans held for sale and its commitments to extend credit for residential loans. The Company may also from time to time use interest rate swaps to manage interest rate risk. Derivative financial instruments include commitments to extend credit and forward mortgage loan sales commitments.
NOTE 2 Acquisitions
The Company records purchased assets and liabilities at their fair market value at the time of purchase in accordance with the requirements of ASU 805 - Business Combinations . On August 14, 2015, the Bank completed the acquisition of certain assets and assumption of certain liabilities of Kasson State Bank. The transaction increased the Bank’s total assets $52.8 million including increases in loans of $24.1 million, investments of $17.5 million, cash of $10.0 million, core deposit intangible of $0.4 million and other assets of $0.8 million. The Bank also assumed liabilities of $49.3 million, including $47.3 million of deposits and $2.0 million in other liabilities. Consideration paid was $3.2 million and a gain on the transaction of $0.3 million was recorded during the quarter. The Bank continues to operate both of the Kasson State Bank locations in Kasson, Minnesota acquired in the transaction as branches of Home Federal Savings Bank.
On November 18, 2015, the Bank entered into an agreement to acquire certain assets and assume certain liabilities of Deerwood Bank’s Albert Lea, Minnesota branch. The transaction is anticipated to close in the second quarter of 2016. Once completed, Home Federal Savings Bank plans to service the acquired assets and assumed liabilities out of our existing branch location in Albert Lea, Minnesota.
Determining the estimated fair value of the acquired assets and assumed liabilities required the Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the fair valuation of the loans acquired, which management considers to be a critical accounting estimate that involves significant estimates and assumptions. The fair value of the loans purchased was based on the present value of the expected cash flows. Periodic principal and interest cash flows were adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Kasson State Bank’s previously established allowance for loan losses. As a result, standard industry coverage ratios with regard to the allowance for credit losses are less meaningful after the acquisition. The purchased loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC topic 310-30 (purchased credit impaired (PCI)) and loans that do not meet this criteria, which are accounted for under ASC topic 310-20 (performing). PCI loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that the Bank will not be able to collect all contractually required principal and interest payments on the loan. Subsequent decreases in the expected cash flows require the Bank to evaluate the need for additions to the allowance for credit losses. Subsequent improvements in expected cash flows generally result in a reduction of previously established allowance for credit losses or the recognition of additional interest income over the remaining lives of the loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) and the related tax effects were as follows:
For the years ended December 31, |
||||||||||||||||||||||||||||||||||||
2015 |
2014 |
2013 |
||||||||||||||||||||||||||||||||||
(Dollars in thousands ) |
Before Tax |
Tax Effect |
Net of Tax |
Before Tax |
Tax Effect |
Net of Tax |
Before Tax |
Tax Effect |
Net of Tax |
|||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||
Gross unrealized gains (losses) arising during the period |
$ | 344 | 137 | 207 | 38 | (218 |
) |
256 | (1,272 |
) |
(647 |
) |
(625 |
) |
||||||||||||||||||||||
Less reclassification of net gains included in net income |
6 | 3 | 3 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Net unrealized gains (losses) arising during the period |
338 | 134 | 204 | 38 | (218 |
) |
256 | (1,272 |
) |
(647 |
) |
(625 |
) |
|||||||||||||||||||||||
Other comprehensive income (loss) |
$ | 338 | 134 | 204 | 38 | (218 |
) |
256 | (1,272 |
) |
(647 |
) |
(625 |
) |
The tax effect in 2014 includes the impact of the reversal of certain deferred tax asset valuation reserve components that reversed in 2014 as a result of the changes that occurred in the investment portfolio during the year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 Securities Available for Sale
A summary of securities available for sale at December 31, 2015 and 2014 is as follows:
(Dollars in thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
||||||||||||
December 31, 2015 |
||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Federal Home Loan Mortgage Corporation (F H LMC) |
$ | 728 | 31 | 0 | 759 | |||||||||||
Federal National Mortgage Association (FNMA) |
725 | 22 | 0 | 747 | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
FHLMC |
742 | 2 | (1 |
) |
743 | |||||||||||
Other |
42 | 0 | (8 |
) |
34 | |||||||||||
2,237 | 55 | (9 |
) |
2,283 | ||||||||||||
Other marketable securities: |
||||||||||||||||
U.S. Government agency obligations |
105,003 | 68 | (129 |
) |
104,942 | |||||||||||
Municipal obligations |
3,991 | 18 | (7 |
) |
4,002 | |||||||||||
Corporate obligations |
340 | 0 | (6 |
) |
334 | |||||||||||
Corporate preferred stock |
700 | 0 | (350 |
) |
350 | |||||||||||
Corporate equity |
58 | 5 | 0 | 63 | ||||||||||||
110,092 | 91 | (492 |
) |
109,691 | ||||||||||||
$ | 112,329 | 146 | (501 |
) |
111,974 | |||||||||||
December 31, 2014 |
||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||
FHLMC |
$ | 1,418 | 90 | 0 | 1,508 | |||||||||||
FNMA |
1,337 | 64 | 0 | 1,401 | ||||||||||||
2,755 | 154 | 0 | 2,909 | |||||||||||||
Other marketable securities: |
||||||||||||||||
U.S. Government agency obligations |
135,014 | 31 | (601 |
) |
134,444 | |||||||||||
Corporate preferred stock |
700 | 0 | (280 |
) |
420 | |||||||||||
Corporate equity |
58 | 3 | 0 | 61 | ||||||||||||
135,772 | 34 | (881 |
) |
134,925 | ||||||||||||
$ | 138,527 | 188 | (881 |
) |
137,834 |
In 2015, the Company sold $11.0 million of available for sale securities and recognized a gain of $6,000 on the sales. The Company did not sell any available for sale securities and did not recognize any gains or losses on investments in 2014 or 2013.
The following table presents the amortized cost and estimated fair value of securities available for sale at December 31, 2015, based upon contractual maturity adjusted for scheduled repayments of principal and projected prepayments of principal based upon current economic conditions and interest rates. Actual maturities may differ from the maturities in the following table because obligors may have the right to call or prepay obligations with or without call or prepayment penalties:
(Dollars in thousands) |
Amortized Cost |
Fair V alue |
||||||
Due one year or less |
$ | 6,989 | 7,012 | |||||
Due after one year through five years |
103,190 | 103,162 | ||||||
Due after five years through ten years |
1,333 | 1,329 | ||||||
Due after ten years |
759 | 408 | ||||||
No stated maturity |
58 | 63 | ||||||
Total |
$ | 112,329 | 111,974 | |||||
The allocation of mortgage-backed securities in the table above is based upon the anticipated future cash flow of the securities using estimated mortgage prepayment speeds.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the gross unrealized losses and fair values for the securities available for sale portfolio aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014:
Less Than Twelve Months |
Twelve Months or More |
Total |
||||||||||||||||||||||||||||||
(Dollars in thousands) |
# of Investments |
Fair Value |
Unrealized Losses |
# of Investments |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||||||
December 31, 2015 |
||||||||||||||||||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||||||||||
FNMA |
1 | $ | 346 | (1 |
) |
0 | $ | 0 | 0 | $ | 346 | (1 |
) |
|||||||||||||||||||
Other |
2 | 34 | (8 |
) |
0 | 0 | 0 | 34 | (8 |
) |
||||||||||||||||||||||
Other marketable securities: |
||||||||||||||||||||||||||||||||
U.S. Government agency obligations |
9 | 44,878 | (129 |
) |
0 | 0 | 0 | 44,878 | (129 |
) |
||||||||||||||||||||||
Municipal obligations |
12 | 2,010 | (7 |
) |
0 | 0 | 0 | 2,010 | (7 |
) |
||||||||||||||||||||||
Corporate obligations |
1 | 334 | (6 |
) |
0 | 0 | 0 | 334 | (6 |
) |
||||||||||||||||||||||
Corporate preferred stock |
0 | 0 | 0 | 1 | 350 | (350 |
) |
350 | (350 |
) |
||||||||||||||||||||||
Total temporarily impaired securities |
25 | $ | 47,602 | (151 |
) |
1 | $ | 350 | (350 |
) |
$ | 47,952 | (501 |
) |
||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||||||
Other marketable securities: |
||||||||||||||||||||||||||||||||
U.S. Government agency obligations |
22 | $ | 104,453 | (551 |
) |
1 | $ | 4,970 | (50 |
) |
$ | 109,423 | (601 |
) |
||||||||||||||||||
Corporate preferred stock |
0 | 0 | 0 | 1 | 420 | (280 |
) |
420 | (280 |
) |
||||||||||||||||||||||
Total temporarily impaired securities |
22 | $ | 104,453 | (551 |
) |
2 | $ | 5,390 | (330 |
) |
$ | 109,843 | (881 |
) |
||||||||||||||||||
We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the market liquidity for the investment, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and our intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. The unrealized losses on U.S. Government agency obligations are the result of changes in interest rates. The unrealized losses reported for the corporate preferred stock at December 31, 2015 relates to a single trust preferred security that was issued by the holding company of a small community bank. Typical of most trust preferred issuances, the issuer has the ability to defer interest payments for up to five years with interest payable on the deferred balance. In September 2014, the issuer paid all deferred interest that was due and all payments were current as of September 30, 2014. Since January 2015, the issuer has deferred its scheduled interest payments as allowed by the terms of the security agreement. The issuer’s subsidiary bank has incurred operating losses over the past several years due to increased provisions for loan losses but still met the regulatory requirements to be considered “well capitalized” based on its most recent regulatory filing. Based on a review of the issuer, it was determined that the trust preferred security was not other-than-temporarily impaired at December 31, 2015. The Company does not intend to sell the preferred stock and has the intent and ability to hold it for a period of time sufficient to recover the temporary loss. Management believes that the Company will receive all principal and interest payments contractually due on the security and that the decrease in the market value is primarily due to a lack of liquidity in the market for trust preferred securities. Management will continue to monitor the credit risk of the issuer and may be required to recognize other-than-temporary impairment charges on this security in future periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 Loans Receivable, Net
A summary of loans receivable at December 31, 2015 and 2014, is as follows:
(Dollars in thousands) |
2015 |
2014 |
||||||
Residential real estate loans: |
||||||||
1-4 family conventional |
$ | 90,587 | 69,372 | |||||
1-4 family FHA |
206 | 426 | ||||||
1-4 family VA |
152 | 43 | ||||||
90,945 | 69,841 | |||||||
Commercial real estate: |
||||||||
Lodging |
27,428 | 28,466 | ||||||
Retail/office |
45,097 | 40,279 | ||||||
Nursing home/health care |
9,183 | 7,032 | ||||||
Land developments |
21,272 | 17,766 | ||||||
Golf courses |
4,163 | 5,505 | ||||||
Restaurant/bar/café |
5,854 | 3,370 | ||||||
Alternative fuel plants |
2,205 | 5,377 | ||||||
Warehouse |
18,337 | 10,137 | ||||||
Construction: |
||||||||
1-4 family builder |
15,152 | 6,454 | ||||||
Multi-family |
18,865 | 1,062 | ||||||
Commercial real estate |
4,086 | 5,087 | ||||||
Manufacturing |
11,585 | 8,022 | ||||||
Churches/community service |
8,195 | 8,385 | ||||||
Multi-family |
12,324 | 15,700 | ||||||
Other |
43,607 | 29,026 | ||||||
247,353 | 191,668 | |||||||
Consumer: |
||||||||
Autos |
2,885 | 1,124 | ||||||
Home equity line |
38,980 | 36,832 | ||||||
Home equity |
14,782 | 12,420 | ||||||
Other – secured |
2,031 | 1,559 | ||||||
Recreational vehicles |
2,650 | 0 | ||||||
Land/lots |
1,144 | 1,670 | ||||||
Other – unsecured |
1,943 | 1,320 | ||||||
64,415 | 54,925 | |||||||
Commercial business |
70,106 | 57,122 | ||||||
Total loans |
472,819 | 373,556 | ||||||
Less: |
||||||||
Unamortized discounts |
16 | 14 | ||||||
Net deferred loan (costs) fees |
(91 |
) |
97 | |||||
Allowance for loan losses |
9,709 | 8,332 | ||||||
Total loans receivable, net |
$ | 463,185 | 365,113 | |||||
Commitments to originate or purchase loans |
$ | 27,184 | 29,635 | |||||
Commitments to deliver loans to secondary market |
$ | 8,071 | 3,279 | |||||
Weighted average contractual rate of loans in portfolio |
4.54 |
% |
4.52 |
% |
||||
Included in total commitments to originate or purchase loans are fixed rate loans aggregating $22.3 million and $21.2 million as of December 31, 2015 and 2014, respectively. The interest rates on these loan commitments ranged from 3.00% to 5.49% at December 31, 2015 and from 3.00% to 6.00% at December 31, 2014.
The aggregate amount of loans to executive officers and directors of the Company was $2.7 million, $2.8 million and $3.1 million at December 31, 2015, 2014 and 2013, respectively. During 2015, repayments on loans to executive officers and directors were $0.1 million, new loans to executive officers and directors totaled $0.2 million, and loans closed or paid off were $0.2 million. During 2014, repayments on loans to executive officers and directors were $0.1 million, new loans to executive officers and directors totaled $0.2 million, sales of executive officer and director loans were $0.2 million, and loans reclassified were $0.2 million. All loans were made in the ordinary course of business on normal credit terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties.
At December 31, 2015, 2014, and 2013, the Company was servicing loans for others with aggregate unpaid principal balances of approximately $391.9 million, $379.7 million and $411.8 million, respectively.
The Company originates residential, commercial real estate and other loans primarily in Minnesota, Iowa, and Wisconsin. At December 31, 2015 and 2014, the Company had in its portfolio single-family residential loans located in the following states:
2015 |
2014 |
|||||||||||||||
(Dollars in thousands) |
Amount |
Percent of Total |
Amount |
Percent of Total |
||||||||||||
Iowa |
$ | 5,387 | 5.9 |
% |
$ | 3,145 | 4.5 |
% |
||||||||
Minnesota |
75,417 | 82.9 | 62,219 | 89.1 | ||||||||||||
Wisconsin |
7,956 | 8.8 | 3,160 | 4.5 | ||||||||||||
Other states |
2,185 | 2.4 | 1,317 | 1.9 | ||||||||||||
Total |
$ | 90,945 | 100.0 |
% |
$ | 69,841 | 100.0 |
% |
Amounts under one million dollars in both years are included in “Other states”. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015 and 2014, the Company had in its portfolio commercial real estate loans located in the following states:
2015 |
2014 |
|||||||||||||||
(Dollars in thousands) |
Amount |
Percent of Total |
Amount |
Percent of Total |
||||||||||||
Alabama |
$ | 2,056 | 0.8 |
% |
$ | 2,202 | 1.2 |
% |
||||||||
Florida |
3,738 | 1.5 | 2,253 | 1.2 | ||||||||||||
Idaho |
3,678 | 1.5 | 3,810 | 2.0 | ||||||||||||
Indiana |
4,608 | 1.9 | 3,501 | 1.8 | ||||||||||||
Iowa |
1,106 | 0.4 | 0 | 0.0 | ||||||||||||
Michigan |
0 | 0.0 | 2,558 | 1.3 | ||||||||||||
Minnesota |
184,670 | 74.7 | 145,341 | 75.8 | ||||||||||||
North Carolina |
4,203 | 1.7 | 5,598 | 2.9 | ||||||||||||
North Dakota |
7,979 | 3.2 | 1,572 | 0.8 | ||||||||||||
Wisconsin |
31,918 | 12.9 | 22,354 | 11.7 | ||||||||||||
Other states |
3,397 | 1.4 | 2,479 | 1.3 | ||||||||||||
Total |
$ | 247,353 | 100.0 |
% |
$ | 191,668 | 100.0 |
% |
Amounts under one million dollars in both years are included in “Other states”. |
NOTE 6 Allowance for Loan Losses and Credit Quality Information
The allowance for loan losses is summarized as follows:
(Dollars in thousands) |
1-4 Family |
Commercia l Real Estate |
Consumer |
Commercial Business |
Total |
|||||||||||||||
Balance, December 31, 2012 |
$ | 2,821 | 13,588 | 1,146 | 4,053 | 21,608 | ||||||||||||||
Provision for losses |
$ | (1,206 |
) |
(5,190 |
) |
347 | (1,832 |
) |
(7,881 |
) |
||||||||||
Charge-offs |
(200 |
) |
(3,711 |
) |
(484 |
) |
(651 |
) |
(5,046 |
) |
||||||||||
Recoveries |
213 | 1,771 | 97 | 639 | 2,720 | |||||||||||||||
Balance, December 31, 2013 |
$ | 1,628 | 6,458 | 1,106 | 2,209 | 11,401 | ||||||||||||||
Provision for losses |
$ | (440 |
) |
(3,518 |
) |
(4 |
) |
(3,036 |
) |
(6,998 |
) |
|||||||||
Charge-offs |
(92 |
) |
(936 |
) |
(131 |
) |
(55 |
) |
(1,214 |
) |
||||||||||
Recoveries |
0 | 3,020 | 38 | 2,085 | 5,143 | |||||||||||||||
Balance, December 31, 2014 |
$ | 1,096 | 5,024 | 1,009 | 1,203 | 8,332 | ||||||||||||||
Provision for losses |
$ | (105 |
) |
(427 |
) |
254 | 114 | (164 |
) |
|||||||||||
Charge-offs |
(19 |
) |
0 | (105 |
) |
(69 |
) |
(193 |
) |
|||||||||||
Recoveries |
18 | 1,481 | 42 | 193 | 1,734 | |||||||||||||||
Balance, December 31, 2015 |
$ | 990 | 6,078 | 1,200 | 1,441 | 9,709 | ||||||||||||||
Allocated to: |
||||||||||||||||||||
Specific reserves |
$ | 270 | 370 | 307 | 127 | 1,074 | ||||||||||||||
General reserves |
826 | 4,654 | 702 | 1,076 | 7,258 | |||||||||||||||
Balance, December 31, 2014 |
$ | 1,096 | 5,024 | 1,009 | 1,203 | 8,332 | ||||||||||||||
Allocated to: |
||||||||||||||||||||
Specific reserves |
$ | 223 | 296 | 370 | 120 | 1,009 | ||||||||||||||
General reserves |
767 | 5,782 | 830 | 1,321 | 8,700 | |||||||||||||||
Balance, December 31, 2015 |
$ | 990 | 6,078 | 1,200 | 1,441 | 9,709 | ||||||||||||||
Loans receivable at December 31, 2014: |
||||||||||||||||||||
Individually reviewed for impairment |
$ | 1,867 | 9,728 | 806 | 555 | 12,956 | ||||||||||||||
Collectively reviewed for impairment |
67,974 | 181,940 | 54,119 | 56,567 | 360,600 | |||||||||||||||
Ending balance |
$ | 69,841 | 191,668 | 54,925 | 57,122 | 373,556 | ||||||||||||||
Loans receivable at December 31, 2015: |
||||||||||||||||||||
Individually reviewed for impairment |
$ | 2,203 | 2,204 | 977 | 415 | 5,799 | ||||||||||||||
Collectively reviewed for impairment |
88,742 | 245,149 | 63,438 | 69,691 | 467,020 | |||||||||||||||
Ending balance |
$ | 90,945 | 247,353 | 64,415 | 70,106 | 472,819 | ||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the amount of classified and unclassified loans at December 31, 2015 and 2014:
December 31, 2015 |
||||||||||||||||||||||||||||
Classified |
Unclassified |
|||||||||||||||||||||||||||
(Dollars in thousands) |
Special Mention |
Substandard |
Doubtful |
Loss |
Total |
Total |
Total Loans |
|||||||||||||||||||||
1-4 family |
$ | 189 | 2,889 | 55 | 0 | 3,133 | 87,812 | 90,945 | ||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Residential developments |
0 | 1,462 | 0 | 0 | 1,462 | 30,121 | 31,583 | |||||||||||||||||||||
Other |
2,827 | 12,838 | 0 | 0 | 15,665 | 200,105 | 215,770 | |||||||||||||||||||||
Consumer |
0 | 639 | 52 | 286 | 977 | 63,438 | 64,415 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Construction industry |
66 | 45 | 0 | 0 | 111 | 9,115 | 9,226 | |||||||||||||||||||||
Other |
4,857 | 1,488 | 0 | 0 | 6,345 | 54,535 | 60,880 | |||||||||||||||||||||
$ | 7,939 | 19,361 | 107 | 286 | 27,693 | 445,126 | 472,819 | |||||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||
Classified |
Unclassified |
|||||||||||||||||||||||||||
(Dollars in thousands) |
Special Mention |
Substandard |
Doubtful |
Loss |
Total |
Total |
Total Loans |
|||||||||||||||||||||
1-4 family |
$ | 0 | 2,493 | 207 | 0 | 2,700 | 67,141 | 69,841 | ||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Residential developments |
323 | 9,960 | 0 | 0 | 10,283 | 9,677 | 19,960 | |||||||||||||||||||||
Other |
7,376 | 8,792 | 0 | 0 | 16,168 | 155,540 | 171,708 | |||||||||||||||||||||
Consumer |
0 | 489 | 55 | 261 | 805 | 54,120 | 54,925 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Construction industry |
0 | 439 | 0 | 0 | 439 | 6,682 | 7,121 | |||||||||||||||||||||
Other |
4,255 | 1,156 | 0 | 0 | 5,411 | 44,590 | 50,001 | |||||||||||||||||||||
$ | 11,954 | 23,329 | 262 | 261 | 35,806 | 337,750 | 373,556 | |||||||||||||||||||||
Classified loans represent special mention, performing substandard, and non-performing loans categorized as substandard, doubtful and loss. Loans classified as special mention are loans that have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Loans classified as substandard are loans that are generally inadequately protected by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. A loan classified as loss is considered uncollectible and of such little value that continuance as an asset on the balance sheet is not warranted. Loans classified as substandard or doubtful require the Bank to perform an analysis of the individual loan and charge off any loans, or portion thereof, that are deemed uncollectible.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aging of past due loans at December 31, 2015 and 2014 is summarized as follows:
(Dollars in thousands) |
30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Current Loans |
Total Loans |
Loans 90 Days or More Past Due and Still Accruing |
|||||||||||||||||||||
2015 |
||||||||||||||||||||||||||||
1-4 family |
$ | 490 | 130 | 799 | 1,419 | 89,526 | 90,945 | 0 | ||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Residential developments |
0 | 0 | 0 | 0 | 31,583 | 31,583 | 0 | |||||||||||||||||||||
Other |
0 | 289 | 0 | 289 | 215,481 | 215,770 | 0 | |||||||||||||||||||||
Consumer |
330 | 262 | 119 | 711 | 63,704 | 64,415 | 0 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Construction industry |
0 | 0 | 0 | 0 | 9,226 | 9,226 | 0 | |||||||||||||||||||||
Other |
45 | 0 | 0 | 45 | 60,835 | 60,880 | 0 | |||||||||||||||||||||
$ | 865 | 681 | 918 | 2,464 | 470,355 | 472,819 | 0 | |||||||||||||||||||||
2014 |
||||||||||||||||||||||||||||
1-4 family |
$ | 413 | 673 | 841 | 1,927 | 67,914 | 69,841 | 0 | ||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Residential developments |
0 | 0 | 0 | 0 | 19,960 | 19,960 | 0 | |||||||||||||||||||||
Other |
0 | 0 | 0 | 0 | 171,708 | 171,708 | 0 | |||||||||||||||||||||
Consumer |
550 | 176 | 131 | 857 | 54,068 | 54,925 | 0 | |||||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||||||
Construction industry |
0 | 0 | 0 | 0 | 7,121 | 7,121 | 0 | |||||||||||||||||||||
Other |
136 | 0 | 0 | 136 | 49,865 | 50,001 | 0 | |||||||||||||||||||||
$ | 1,099 | 849 | 972 | 2,920 | 370,636 | 373,556 | 0 | |||||||||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans include loans that are non-performing (non-accruing) and loans that have been modified in a TDR. The following table summarizes impaired loans and related allowances for the years ended December 31, 2015 and 2014:
December 31, 2015 |
||||||||||||||||||||
(Dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
Loans with no related allowance recorded: |
||||||||||||||||||||
1-4 family |
$ | 1,251 | 1,251 | 0 | 943 | 60 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
25 | 1,706 | 0 | 5,189 | 96 | |||||||||||||||
Other |
44 | 184 | 0 | 319 | 7 | |||||||||||||||
Consumer |
475 | 476 | 0 | 387 | 10 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
0 | 79 | 0 | 28 | 0 | |||||||||||||||
Other |
0 | 0 | 0 | 8 | 0 | |||||||||||||||
Loans with an allowance recorded: |
||||||||||||||||||||
1-4 family |
952 | 952 | 223 | 1,045 | 14 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
1,947 | 1,947 | 270 | 1,621 | 0 | |||||||||||||||
Other |
188 | 188 | 26 | 302 | 32 | |||||||||||||||
Consumer |
502 | 519 | 370 | 448 | 20 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Other |
415 | 967 | 120 | 429 | 20 | |||||||||||||||
Total: |
||||||||||||||||||||
1-4 family |
2,203 | 2,203 | 223 | 1,988 | 74 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
1,972 | 3,653 | 270 | 6,810 | 96 | |||||||||||||||
Other |
232 | 372 | 26 | 621 | 39 | |||||||||||||||
Consumer |
977 | 995 | 370 | 835 | 30 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
0 | 79 | 0 | 28 | 0 | |||||||||||||||
Other |
415 | 967 | 120 | 437 | 20 | |||||||||||||||
$ | 5,799 | 8,269 | 1,009 | 10,719 | 259 | |||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 |
||||||||||||||||||||
(Dollars in thousands) |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||
Loans with no related allowance recorded: |
||||||||||||||||||||
1-4 family |
$ | 755 | 755 | 0 | 432 | 32 | ||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
7,416 | 10,040 | 0 | 7,633 | 219 | |||||||||||||||
Other |
48 | 216 | 0 | 50 | 6 | |||||||||||||||
Consumer |
463 | 464 | 0 | 467 | 15 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
80 | 198 | 0 | 87 | 0 | |||||||||||||||
Other |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Loans with an allowance recorded: |
||||||||||||||||||||
1-4 family |
1,112 | 1,112 | 270 | 1,543 | 14 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
1,522 | 1,522 | 240 | 3,121 | 0 | |||||||||||||||
Other |
742 | 743 | 130 | 847 | 32 | |||||||||||||||
Consumer |
343 | 360 | 307 | 451 | 9 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Other |
475 | 1,026 | 127 | 887 | 20 | |||||||||||||||
Total: |
||||||||||||||||||||
1-4 family |
1,867 | 1,867 | 270 | 1,975 | 46 | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Residential developments |
8,938 | 11,562 | 240 | 10,754 | 219 | |||||||||||||||
Other |
790 | 959 | 130 | 897 | 38 | |||||||||||||||
Consumer |
806 | 824 | 307 | 918 | 24 | |||||||||||||||
Commercial business: |
||||||||||||||||||||
Construction industry |
80 | 198 | 0 | 87 | 0 | |||||||||||||||
Other |
475 | 1,026 | 127 | 887 | 20 | |||||||||||||||
$ | 12,956 | 16,436 | 1,074 | 15,518 | 347 |
At December 31, 2015, 2014 and 2013, non-accruing loans totaled $4.2 million, $10.9 million, and $17.5 million, respectively, for which the related allowance for loan losses was $0.7 million, $0.8 million, and $3.4 million, respectively. Non-accruing loans for which no specific allowance has been recorded because management determined that the value of the collateral was sufficient to repay the loan totaled $1.4 million, $8.0 million, and $7.8 million, respectively. Had the loans performed in accordance with their original terms, the Company would have recorded gross interest income on the loans of $0.5 million, $0.9 million, and $1.8 million in 2015, 2014, and 2013, respectively. For the years ended December 31, 2015, 2014, and 2013, the Company recognized interest income on these loans of $0.3 million, $0.2 million, and $0.1 million, respectively. All of the interest income that was recognized for non-accruing loans was recognized using the cash basis method of income recognition. Non-accrual loans also include some of the loans that have had terms modified in a TDR.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes non-accrual loans at December 31, 2015 and 2014:
(Dollars in thousands) |
2015 |
2014 |
||||||
1-4 family |
$ | 1,655 | 1,564 | |||||
Commercial real estate: |
||||||||
Residential developments |
1,462 | 8,483 | ||||||
Other |
232 | 267 | ||||||
Consumer |
786 | 486 | ||||||
Commercial business: |
||||||||
Construction industry |
0 | 80 | ||||||
Other |
46 | 40 | ||||||
$ | 4,181 | 10,920 | ||||||
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan balances. If the Company, for legal or economic reasons related to the borrower’s financial difficulties, grants a concession compared to the original terms and conditions of the loan, the modified loan is considered a troubled debt restructuring (TDR).
At December 31, 2015, 2014 and 2013, there were loans included in loans receivable, net, with terms that had been modified in a TDR totaling $2.5 million, $9.4 million, and $17.4 million, respectively. Had these loans been performing in accordance with their original terms throughout 2015, 2014, and 2013, the Company would have recorded gross interest income of $0.4 million, $0.9 million, and $1.8 million, respectively. During 2015, 2014 and 2013, the Company recognized interest income of $0.2 million, $0.3 million, and $0.5 million, respectively, on these loans. For the loans that were modified in 2015, $0.5 million were classified and performing, and $0.7 million were non-performing at December 31, 2015.
The following table summarizes TDRs at December 31, 2015 and 2014:
(Dollars in thousands) |
2015 |
2014 |
||||||
1-4 family |
$ | 647 | 368 | |||||
Commercial real estate: |
||||||||
Residential developments |
26 | 7,432 | ||||||
Other |
699 | 524 | ||||||
Consumer |
732 | 571 | ||||||
Commercial business: |
||||||||
Construction industry |
0 | 80 | ||||||
Other |
415 | 475 | ||||||
$ | 2,519 | 9,450 | ||||||
As of December 31, 2015, the Bank had commitments to lend an additional $1.5 million to a borrower who has TDR and non-accrual loans. These additional funds are for the construction of one-to-four family homes with a maximum loan-to-value ratio of 75%. These loans are secured by the home under construction. There were no material commitments to lend additional funds to customers whose loans were restructured or classified at December 31, 2014.
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications are not reported as TDRs after 12 months if the loan was modified at a market rate of interest for comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement. All loans classified as TDRs are considered to be impaired.
When a loan is modified as a TDR, there may be a direct, material impact on the loans within the Consolidated Balance Sheets, as principal balances may be partially forgiven. The financial effects of TDRs are presented in the following table and represent the difference between the outstanding recorded balance pre-modification and post-modification, for the periods ending December 31, 2015 and 2014:
Year ended December 31, 2015 |
Year ended December 31, 2014 |
|||||||||||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Pre- modification Outstanding Recorded Investment |
Post- modification Outstanding R ecorded Investment |
Number of Contracts |
Pre- modification Outstanding Recorded Investment |
Post- modification Outstanding Recorded Investment |
||||||||||||||||||
Troubled debt restructurings: |
||||||||||||||||||||||||
1-4 family |
4 | $ | 476 | 478 | 2 | $ | 760 | 760 | ||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Other |
1 | 209 | 209 | 1 | 155 | 155 | ||||||||||||||||||
Consumer |
21 | 527 | 530 | 4 | 155 | 140 | ||||||||||||||||||
Commercial business: |
||||||||||||||||||||||||
Other |
1 | 44 | 44 | 1 | 31 | 25 | ||||||||||||||||||
Total |
27 | $ | 1,256 | 1,261 | 8 | $ | 1,101 | 1,080 | ||||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans that were restructured within the 12 months preceding December 31, 2015 and 2014 and defaulted during the year are presented in the table below:
Year ended December 31, 2015 |
Year ended December 31, 2014 |
|||||||||||||||
(Dollars in thousands) |
Number of Contracts |
Outstanding Recorded Investment |
Number of Contracts |
Outstanding Recorded Investment |
||||||||||||
Troubled debt restructurings that subsequently defaulted: |
||||||||||||||||
1-4 family |
0 | $ | 0 | 1 | $ | 640 | ||||||||||
Total |
0 | $ | 0 | 1 | $ | 640 | ||||||||||
The Company considers a loan to have defaulted when it becomes 90 or more days past due under the modified terms, when it is placed in non-accrual status, when it becomes other real estate owned, or when it becomes non-compliant with some other material requirement of the modification agreement.
Loans that were non-accrual prior to modification remain non-accrual for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accruing status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms.
TDRs are reviewed for impairment following the same methodology as other impaired loans. For loans that are collateral dependent, the value of the collateral is reviewed and additional reserves may be added as needed. Loans that are not collateral dependent may have additional reserves established if deemed necessary. The allocated allowance for TDRs was $0.5 million, or 5.2%, of the total $9.7 million in allowance for loan losses at December 31, 2015, and $0.4 million, or 5.1%, of the total $8.3 million in allowance for loan losses at December 31, 2014.
Loans acquired in a business combination are segregated into two types: purchased performing loans with a discount attributable at least in part to credit quality and PCI loans with evidence of significant credit deterioration. Purchased performing loans are accounted for in accordance with ASC 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination. PCI loans are accounted for in accordance with ASC 310-30 “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display significant credit deterioration since origination. In accordance with ASC 310-30, for PCI loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Furthermore, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loans when there is a reasonable expectation about the amount and timing of such cash flows. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through an adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as an impairment through the provision for loan losses.
The following is additional information with respect to loans acquired through the Kasson State Bank acquisition:
(Dollars in thousands) |
Contractual Principal Receivable |
Accretable Difference |
Carrying Amount |
|||||||||
Purchased Performing Loans: |
||||||||||||
Balance at August 14, 2015 |
$ | 24,215 | (793 |
) |
23,422 | |||||||
Change due to payments/refinances |
(5,676 |
) |
334 | (5,342 |
) |
|||||||
Transferred to foreclosed assets |
0 | 0 | 0 | |||||||||
Change due to loan charge-off |
0 | 0 | 0 | |||||||||
Balance at December 31, 2015 |
$ | 18,539 | (459 |
) |
18,080 | |||||||
(Dollars in thousands) |
Contractual Principal Receivable |
Non- Accretable Difference |
Carrying A mount |
|||||||||
Purchased Credit Impaired Loans: |
||||||||||||
Balance at August 14, 2015 |
$ | 1,134 | (497 |
) |
637 | |||||||
Change due to payments/refinances |
(260 |
) |
48 | (212 |
) |
|||||||
Transferred to foreclosed assets |
0 | 0 | 0 | |||||||||
Change due to loan charge-off |
(319 |
) |
287 | (32 |
) |
|||||||
Balance at December 31, 2015 |
$ | 555 | (162 |
) |
393 | |||||||
As a result of the Kasson State Bank acquisition, the Company has PCI loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount of those loans as of December 31, 2015 was $0.4 million.
No provision for loan losses was recognized during the period ended December 31, 2015 related to acquired loans as there was no significant change to the credit quality of those loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 Accrued Interest Receivable
Accrued interest receivable at December 31 is summarized as follows:
(Dollars in thousands) |
2015 |
2014 |
||||||
Securities available for sale |
$ | 422 | 348 | |||||
Loans receivable |
1,832 | 1,365 | ||||||
$ | 2,254 | 1,713 | ||||||
NOTE 8 Intangible Assets
The Company’s intangible assets consist of core deposit intangibles and mortgage servicing rights. A summary of mortgage servicing rights activity for 2015 and 2014 is as follows:
(Dollars in thousands) |
2015 |
2014 |
||||||
Mortgage servicing rights: |
||||||||
Balance, beginning of year |
$ | 1,507 | 1,708 | |||||
Originations |
547 | 316 | ||||||
Amortization |
(555 |
) |
(517 |
) |
||||
Balance, end of year |
1,499 | 1,507 | ||||||
Valuation reserve |
0 | 0 | ||||||
Mortgage servicing rights, net |
$ | 1,499 | 1,507 | |||||
Fair value of mortgage servicing rights |
$ | 2,590 | 2,562 | |||||
All of the single family loans sold where the Company continues to service the loans are serviced for Federal National Mortgage Association (FNMA) under the individual loan sale program. The following is a summary of the risk characteristics of the loans being serviced for FNMA at December 31, 2015:
(Dollars in thousands) |
Loan Principal Balance |
Weighted Average Interest Rate |
Weighted Average Remaining Term (months) |
Number of Loans |
||||||||||||
Original term: |
||||||||||||||||
30 year fixed rate |
$ | 218,688 | 4.21 |
% |
301 | 1,854 | ||||||||||
15 year fixed rate |
107,493 | 3.23 | 139 | 1,192 | ||||||||||||
Adjustable rate |
59 | 4.38 | 305 | 2 |
The gross carrying amount of intangible assets and the associated accumulated amortization at December 31, 2015 and 2014 are presented in the following table. Amortization expense for intangible assets was $0.6 million, $0.5 million, and $0.6 million for the years ended December 31, 2015, 2014 and 2013, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross |
Unamortized |
|||||||||||
Carrying |
Accumulated |
Intangible |
||||||||||
(Dollars in thousands) |
Amount |
Amortization |
Assets |
|||||||||
December 31, 2015 |
||||||||||||
Mortgage servicing rights |
$ | 3,739 | (2,240 |
) |
1,499 | |||||||
Core deposit intangible |
421 | (28 |
) |
393 | ||||||||
Total |
$ | 4,160 | (2,268 |
) |
1,892 | |||||||
December 31, 2014 |
||||||||||||
Mortgage servicing rights |
$ | 3,600 | (2,093 |
) |
1,507 | |||||||
The following table indicates the estimated future amortization expense for intangible assets:
(Dollars in thousands) |
Mortgage Servicing Rights |
Core Deposit Intangible |
Total Intangible Assets |
|||||||||
Year ended December 31, |
||||||||||||
2016 |
$ | 440 | 74 | 514 | ||||||||
2017 |
357 | 74 | 431 | |||||||||
2018 |
268 | 74 | 342 | |||||||||
2019 |
208 | 74 | 282 | |||||||||
2020 |
119 | 74 | 193 | |||||||||
Thereafter |
107 | 23 | 130 | |||||||||
$ | 1,499 | 393 | 1,892 | |||||||||
Projections of amortization are based on asset balances and the interest rate environment that existed at December 31, 2015. The Company’s actual experience may be significantly different depending upon changes in mortgage interest rates and other market conditions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 Real Estate
A summary of real estate at December 31, 2015 and 2014 is as follows:
2015 |
2014 |
|||||||||||||||||||||||
(Dollars in thousands) |
Residential |
Commercial & Other |
Total |
Residential |
Commercial & Other |
Total |
||||||||||||||||||
Real estate in judgment subject to redemption |
$ | 110 | 0 | 110 | 30 | 0 | 30 | |||||||||||||||||
Real estate acquired through foreclosure |
0 | 2,269 | 2,269 | 0 | 3,648 | 3,648 | ||||||||||||||||||
Real estate acquired through deed in lieu of foreclosure |
0 | 465 | 465 | 28 | 1,126 | 1,154 | ||||||||||||||||||
110 | 2,734 | 2,844 | 58 | 4,774 | 4,832 | |||||||||||||||||||
Allowance for losses |
(62 |
) |
(737 |
) |
(799 |
) |
(8 |
) |
(1,721 |
) |
(1,729 |
) |
||||||||||||
$ | 48 | 1,997 | 2,045 | 50 | 3,053 | 3,103 | ||||||||||||||||||
NOTE 10 Premises and Equipment
A summary of premises and equipment at December 31, 2015 and 2014 is as follows:
(Dollars in thousands) |
2015 |
2014 |
||||||
Land |
$ | 2,021 | 1,978 | |||||
Office buildings and improvements |
8,930 | 8,526 | ||||||
Furniture and equipment |
12,714 | 12,049 | ||||||
23,665 | 22,553 | |||||||
Accumulated depreciation |
(16,196 |
) |
(15,571 |
) |
||||
$ | 7,469 | 6,982 | ||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 Deposits
Deposits and their weighted average interest rates at December 31, 2015 and 2014 are summarized as follows:
2015 |
2014 |
|||||||||||||||||||||||
(Dollars in thousands) |
Weighted Average Rate |
Amount |
Percent of Total |
Weighted Average Rate |
Amount |
Percent of Total |
||||||||||||||||||
Noninterest checking |
0.00 |
% |
$ | 151,737 | 27.1 |
% |
0.00 |
% |
$ | 118,073 | 23.8 |
% |
||||||||||||
NOW accounts |
0.04 | 82,425 | 14.7 | 0.02 | 75,553 | 15.2 | ||||||||||||||||||
Savings accounts |
0.09 | 66,421 | 11.9 | 0.07 | 46,672 | 9.4 | ||||||||||||||||||
Money market accounts |
0.22 | 159,959 | 28.6 | 0.25 | 158,798 | 32.0 | ||||||||||||||||||
460,542 | 82.3 | 399,096 | 80.4 | |||||||||||||||||||||
Certificates by rate: |
||||||||||||||||||||||||
0-0.99% |
85,391 | 15.3 | 81,197 | 16.3 | ||||||||||||||||||||
1-1.99% |
12,611 | 2.3 | 13,629 | 2.7 | ||||||||||||||||||||
2-2.99% |
733 | 0.1 | 2,721 | 0.6 | ||||||||||||||||||||
3-3.99% |
110 | 0.0 | 107 | 0.0 | ||||||||||||||||||||
Total certificates |
0.53 | 98,845 | 17.7 | 0.61 | 97,654 | 19.6 | ||||||||||||||||||
Total deposits |
0.17 | $ | 559,387 | 100.0 |
% |
0.21 | $ | 496,750 | 100.0 |
% |
||||||||||||||
At December 31, 2015 and 2014, the Company had $183.0 million and $166.9 million, respectively, of deposit accounts with balances of $250,000 or more. At December 31, 2015 and 2014, the Company had no certificate accounts that had been acquired through a broker.
Certificates had the following maturities at December 31, 2015 and 2014:
2015 |
2014 |
|||||||||||||||
(Dollars in thousands) |
Amount |
Weighted Average Rate |
Amount |
Weighted Average Rate |
||||||||||||
Remaining term to maturity |
||||||||||||||||
1-6 months |
$ | 36,040 | 0.44 |
% |
$ | 32,925 | 0.52 |
% |
||||||||
7-12 months |
26,019 | 0.37 | 26,764 | 0.49 | ||||||||||||
13-36 months |
28,706 | 0.65 | 29,929 | 0.68 | ||||||||||||
Over 36 months |
8,080 | 1.05 | 8,036 | 1.03 | ||||||||||||
$ | 98,845 | 0.53 | $ | 97,654 | 0.61 | |||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015 and 2014, the Company had pledged mortgage loans and mortgage-backed and related securities with an amortized cost of approximately $28.0 million and $19.4 million, respectively, as collateral for certain deposits. An additional $1.0 million of letters of credit from the FHLB were pledged at December 31, 2015 and 2014 as collateral on certain Bank deposits.
Interest expense on deposits is summarized as follows for the years ended December 31, 2015, 2014 and 2013:
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
NOW accounts |
$ | 17 | 15 | 15 | ||||||||
Savings accounts |
42 | 31 | 34 | |||||||||
Money market accounts |
347 | 414 | 372 | |||||||||
Certificates |
528 | 751 | 1,383 | |||||||||
$ | 934 | 1,211 | 1,804 | |||||||||
NOTE 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings
The Bank had no outstanding advances from the FHLB or borrowings from the Federal Reserve Bank of Minneapolis as of December 31, 2015 or December 31, 2014. At December 31, 2015 it had collateral pledged to the FHLB consisting of FHLB stock, mortgage loans, and investments with unamortized principal balances of approximately $96.3 million. The Bank has the ability to draw additional borrowings of $95.3 million from the FHLB, based upon the mortgage loans and securities that are currently pledged, subject to a requirement to purchase FHLB stock. The Bank also had the ability to draw additional borrowings of $73.5 million from the Federal Reserve Bank of Minneapolis, based upon the loans that were pledged to them as of December 31, 2015, subject to approval from the Board of Governors of the Federal Reserve System (FRB).
On December 15, 2014, the Company entered into a Loan Agreement with an unrelated third party, providing for a term loan of up to $10.0 million that was evidenced by a promissory note (the Note) with an interest rate of 6.5% per annum. The principal balance of the loan is payable in consecutive equal annual installments of $1.0 million on each anniversary of the date of the Loan Agreement, commencing on December 15, 2015, with the balance due on December 15, 2021. Provided that no default or event of default has occurred and is continuing, the Company may, at its option, elect to defer payment of one installment of principal on the Note otherwise due prior to the maturity date, in which event such installment will become due and payable on the maturity date. The Company may voluntarily prepay the Note in whole or in part without penalty. The outstanding loan balance was $9.0 million at December 31, 2015.
NOTE 13 Income Taxes
Income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 is as follows:
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Current: |
||||||||||||
Federal |
$ | (87 |
) |
262 | 227 | |||||||
State |
(24 |
) |
74 | 64 | ||||||||
Total current |
(111 |
) |
336 | 291 | ||||||||
Deferred: |
||||||||||||
Federal |
1,393 | 3,753 | 3,554 | |||||||||
State |
329 | 813 | 1,351 | |||||||||
Total deferred |
1,722 | 4,566 | 4,905 | |||||||||
Change in valuation allowance |
0 | 0 | (19,602 |
) |
||||||||
Income tax expense (benefit) |
$ | 1,611 | 4,902 | (14,406 |
) |
|||||||
The reasons for the difference between expected income tax expense utilizing the federal corporate tax rate of 34% and the actual income tax expense (benefit) are as follows:
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Expected federal income tax expense |
$ | 1,553 | 4,176 | 4,170 | ||||||||
Items affecting federal income tax: |
||||||||||||
State income taxes, net of federal income tax expense |
259 | 698 | 706 | |||||||||
Tax exempt interest |
(44 |
) |
(45 |
) |
(69 |
) |
||||||
Decrease in valuation allowance |
0 | 0 | (19,602 |
) |
||||||||
Other, net |
(157 |
) |
73 | 389 | ||||||||
Income tax expense (benefit) |
$ | 1,611 | 4,902 | (14,406 |
) |
|||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at December 31:
(Dollars in thousands) |
2015 |
2014 |
||||||
Deferred tax assets: |
||||||||
Allowances for loan and real estate losses |
$ | 4,169 | 3,984 | |||||
Deferred compensation costs |
235 | 205 | ||||||
Deferred ESOP loan asset |
710 | 711 | ||||||
Nonaccruing loan interest |
361 | 627 | ||||||
Federal net operating loss carryforward |
1,026 | 1,730 | ||||||
State net operating loss carryforward |
2,255 | 2,448 | ||||||
Alternative minimum tax credit carryforward |
500 | 716 | ||||||
Capitalized other real estate owned expenses |
530 | 851 | ||||||
Net unrealized loss on securities available for sale |
142 | 276 | ||||||
Other |
155 | 237 | ||||||
Total gross deferred tax assets |
10,083 | 11,785 | ||||||
Deferred tax liabilities: |
||||||||
Deferred loan fees and costs |
247 | 250 | ||||||
Premises and equipment basis difference |
139 | 141 | ||||||
Originated mortgage servicing rights |
594 | 597 | ||||||
Core deposit intangible |
105 | 0 | ||||||
Other |
325 | 267 | ||||||
Total gross deferred tax liabilities |
1,410 | 1,255 | ||||||
Net deferred tax assets |
$ | 8,673 | 10,530 |
The Company has cumulative federal net operating loss carryforwards of $5.0 million at December 31, 2015 that expire beginning in 2029. The Company also has state net operating loss carryforwards of $23.2 million at December 31, 2015 that expire beginning in 2023.
Retained earnings at December 31, 2015 included approximately $8.8 million for which no provision for income taxes was made. This amount represents allocations of income to bad debt deductions for tax purposes. Reduction of amounts so allocated for purposes other than absorbing losses will create income for tax purposes, which will be subject to the then-current corporate income tax rate.
The Company considers the determination of the deferred tax asset amount and the need for any valuation reserve to be a critical accounting policy that requires significant judgment. The Company has, in its judgment, made reasonable assumptions and considered both positive and negative evidence relating to the ultimate realization of deferred tax assets. Positive evidence includes the cumulative net income generated over the prior three year period and the probability that taxable income will be generated in future periods. Negative evidence includes the general business and economic environment. Based upon this evaluation, the Company determined that no valuation allowance was required with respect to the net deferred tax assets at December 31, 2015 and 2014.
NOTE 14 Employee Benefits
All eligible full-time employees of the Bank that were hired prior to 2002 were included in a noncontributory retirement plan sponsored by the Financial Institutions Retirement Fund (FIRF). The Home Federal Savings Bank (Employer #8006) plan participates in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra DB Plan). The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multi-employer plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by the participating employer may be used to provide benefits to participants of other participating employers.
Effective September 1, 2002, the accrual of benefits for existing participants was frozen and no new enrollments were permitted into the plan. The actuarial present value of accumulated plan benefits and net assets available for benefits relating to the Bank's employees was not available at December 31, 2015 because such information is not accumulated for each participating institution. As of June 30, 2015, the Pentegra DB Plan valuation report reflected that the Bank was obligated to make a contribution totaling $0.2 million which was paid during 2015.
Funded status (market value of plan assets divided by funding target) as of July 1 for the 2015, 2014, and 2013 plan years were 96.01%, 97.98%, and 89.51%, respectively. Market value of plan assets reflects contributions received through June 30, 2015.
Total employer contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $190.8 million, $136.5 million, and $196.5 million for the plan years ended June 30, 2014, 2013 and 2012, respectively. The Bank’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB Plan. There is no funding improvement plan or rehabilitation plan as part of this multi-employer plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following contributions were paid by the Bank during the fiscal years ending December 31,
(Dollars in thousands) |
||||||||||||||
2015 |
2014 |
2013 |
||||||||||||
Date Paid |
Amount |
Date Paid |
Amount |
Date Paid |
Amount |
|||||||||
10/15/2015 |
$ | 42 |
10/15/2014 |
$ | 46 |
10/15/2013 |
$ | 42 | ||||||
12/30/2015 |
151 |
12/30/2014 |
164 |
12/30/2013 |
215 | |||||||||
Total |
$ | 193 | $ | 210 | $ | 257 | ||||||||
The Company has a qualified, tax-exempt savings plan with a deferred feature qualifying under Section 401(k) of the Internal Revenue Code (the 401(k) Plan). All employees who have attained 18 years of age are eligible to participate in the 401(k) Plan. Participants are permitted to make contributions to the 401(k) Plan equal to the lesser of 50% of the participant’s annual salary or the maximum allowed by law, which was $18,000 for 2015 and $17,500 for 2014 and 2013. The Company matches 25% of each participant’s contributions up to a maximum of 8% of the participant’s annual salary. Participant contributions and earnings are fully and immediately vested. The Company’s contributions are vested on a three year cliff basis, are expensed annually, and were $0.2 million, $0.1 million, and $0.2 million in 2015, 2014 and 2013, respectively.
The Company has adopted an Employee Stock Ownership Plan (the ESOP) that meets the requirements of Section 4975(e)(7) of the Internal Revenue Code and Section 407(d)(6) of ERISA and, as such, the ESOP is empowered to borrow in order to finance purchases of the common stock of HMN. The ESOP borrowed $6.1 million from the Company to purchase 912,866 shares of common stock in the initial public offering of HMN in 1994. As a result of a merger with Marshalltown Financial Corporation (MFC), the ESOP borrowed $1.5 million in 1998 to purchase an additional 76,933 shares of HMN common stock to account for the additional employees and avoid dilution of the benefit provided by the ESOP. The ESOP debt requires quarterly payments of principal plus interest at 7.52%. The Company has committed to make quarterly contributions to the ESOP necessary to repay the loans including interest. The Company contributed $0.5 million in 2015, 2014, and 2013.
As the debt is repaid, ESOP shares that were pledged as collateral for the debt are released from collateral based on the proportion of debt service paid in the year and then allocated to eligible employees. The Company accounts for its ESOP in accordance with ASU 718, Employers' Accounting for Employee Stock Ownership Plans . Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in stockholders' equity. As shares are determined to be ratably released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. ESOP compensation expense was $0.3 million, $0.3 million, and $0.2 million, respectively, for 2015, 2014 and 2013.
All employees of the Bank are eligible to participate in the ESOP after they attain age 18 and complete one year of service during which they worked at least 1,000 hours. A summary of the ESOP share allocation is as follows for the years ended:
2015 |
2014 |
2013 |
||||||||||
Shares held by participants beginning of the year |
336,024 | 347,887 | 350,539 | |||||||||
Shares allocated to participants |
24,317 | 24,317 | 24,317 | |||||||||
Shares purchased |
0 | 0 | 9 | |||||||||
Shares distributed to participants |
(26,064 |
) |
(36,180 |
) |
(26,978 |
) |
||||||
Shares held by participants end of year |
334,277 | 336,024 | 347,887 | |||||||||
Unreleased shares beginning of the year |
328,440 | 352,757 | 377,074 | |||||||||
Shares released during year |
(24,317 |
) |
(24,317 |
) |
(24,317 |
) |
||||||
Unreleased shares end of year |
304,123 | 328,440 | 352,757 | |||||||||
Total ESOP shares end of year |
638,400 | 664,464 | 700,644 | |||||||||
Fair value of unreleased shares at December 31 |
$ | 3,512,621 | 4,072,656 | 3,728,641 | ||||||||
In March 2001, the HMN Financial, Inc. 2001 Omnibus Stock Plan (2001 Plan) was adopted by the Company. In April 2009, this plan was superseded by the HMN Financial, Inc. 2009 Equity and Incentive Plan (2009 Plan) and options or restricted shares may no longer be awarded from the 2001 Plan. As of December 31, 2015, all outstanding options issued under the 2001 Plan have expired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purpose of the 2009 Plan is to provide key personnel and advisors with an opportunity to acquire a proprietary interest in the Company. The opportunity to acquire a proprietary interest in the Company is intended to aid in attracting, motivating and retaining key personnel and advisors, including non-employee directors, and to align their interests with those of the Company’s stockholders. 350,000 shares of HMN common stock were initially available for distribution under the 2009 Plan in either restricted stock or stock options, subject to adjustment for future stock splits, stock dividends and similar changes to the capitalization of the Company. Additionally, shares of restricted stock that are awarded are counted as 1.2 shares for purposes of determining the total shares available for issuance under the 2009 Plan. As of December 31, 2015, there were vested options to purchase 15,000 shares under the 2009 Plan that remain unexercised. These options expire 10 years from the date of grant and have an exercise price of $4.77.
A summary of activities under all plans for the past three years is as follows:
Unvested options |
||||||||||||||||||||||||||||
Shares Available For Grant |
Unvested Restricted Shares Outstanding |
Options Outstanding |
Award Value/ Weighted Average Exercise Price |
Number |
Weighted Average Grant Date Fair Value |
Vesting Period (in years) |
||||||||||||||||||||||
2001 Plan |
||||||||||||||||||||||||||||
December 31, 2012 |
0 | 0 | 45,540 | $ | 28.21 | 0 | ||||||||||||||||||||||
December 31, 2013 |
0 | 0 | 45,540 | 28.21 | 0 | |||||||||||||||||||||||
Forfeited/expired |
0 | 0 | (30,540 |
) |
27.33 | 0 | ||||||||||||||||||||||
December 31, 2014 |
0 | 0 | 15,000 | 30.00 | 0 | |||||||||||||||||||||||
Forfeited/expired |
0 | 0 | (15,000 |
) |
30.00 | 0 | ||||||||||||||||||||||
December 31, 2015 |
0 | 0 | 0 | 0.00 | 0 | |||||||||||||||||||||||
2009 Plan |
||||||||||||||||||||||||||||
December 31, 2012 |
121,965 | 148,333 | 15,000 | $ | 4.77 | 6,000 | $ | 4.41 | ||||||||||||||||||||
Granted October 4, 2013 |
(37,531 |
) |
31,276 | 0 | N/A | 0 | 3 | |||||||||||||||||||||
Forfeited |
5,400 | (4,500 |
) |
0 | 0 | |||||||||||||||||||||||
Cancelled |
31,219 | 0 | 0 | 0 | ||||||||||||||||||||||||
Vested |
0 | (73,303 |
) |
0 | (3,000 |
) |
4.41 | |||||||||||||||||||||
December 31, 2013 |
121,053 | 101,806 | 15,000 | 4.77 | 3,000 | 4.41 | ||||||||||||||||||||||
Granted January 7, 2014 |
(28,627 |
) |
23,856 | 0 | N/A | 0 | 3 | |||||||||||||||||||||
Granted May 27, 2014 |
(26,561 |
) |
22,134 | 0 | N/A | 0 | 3 | |||||||||||||||||||||
Forfeited/expired |
30,540 | 0 | 0 | 0 | ||||||||||||||||||||||||
Vested |
0 | (62,938 |
) |
0 | (3,000 |
) |
4.41 | |||||||||||||||||||||
December 31, 2014 |
96,405 | 84,858 | 15,000 | 4.77 | 0 | |||||||||||||||||||||||
Granted January 27, 2015 |
(11,903 |
) |
9,919 | 0 | N/A | 0 | 3 | |||||||||||||||||||||
Granted April 28, 2015 |
(3,158 |
) |
2,632 | 0 | N/A | 0 | 1 | |||||||||||||||||||||
Granted June 8, 2015 |
(398 |
) |
332 | 0 | N/A | 0 | 1 | |||||||||||||||||||||
Forfeited/expired |
395 | (329 |
) |
0 | 0 | |||||||||||||||||||||||
Forfeited/expired |
15,000 | 0 | 0 | 0 | ||||||||||||||||||||||||
Vested |
0 | (58,526 |
) |
0 | 0 | |||||||||||||||||||||||
December 31, 2015 |
96,341 | 38,886 | 15,000 | 4.77 | 0 | |||||||||||||||||||||||
Total all plans |
96,341 | 38,886 | 15,000 | $ | 4.77 | 0 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at December 31, 2015:
Exercise Price |
Number Outstanding |
Weighted Average Remaining Contractual Life in Years |
Number Exercisable |
Number Unexercisable |
Unrecognized Compensation Expense |
Weighted Average Years Over Which Unrecognized Compensation will be Recognized |
||||||||||||||||||||
$ | 4.77 | 15,000 | 3.4 | 15,000 | 0 | 0 | N/A | |||||||||||||||||||
The Company will issue shares from treasury stock upon the exercise of outstanding options.
In accordance with ASC 718, the Company recognized no compensation expense in 2015, as all outstanding options became fully vested in 2014. Compensation expense was recognized in 2014 and 2013 as stock options were vested. The amount of the expense was determined under the fair value method. The fair value for each option grant is estimated on the date of the grant using a Black Scholes option valuation model. There were no options granted in 2015, 2014 or 2013.
NOTE 15 Earnings per Common Share
The following table reconciles the weighted average shares outstanding and net income for basic and diluted earnings per common share:
Year ended December 31, |
||||||||||||
(Dollars in thousands, except per share data) |
2015 |
2014 |
2013 |
|||||||||
Weighted average number of common shares outstanding used in basic earnings per common share calculation |
4,127,453 | 4,060,404 | 4,001,288 | |||||||||
Net dilutive effect of : |
||||||||||||
Options and warrants |
513,505 | 507,856 | 266,391 | |||||||||
Restricted stock awards |
34,959 | 55,783 | 42,487 | |||||||||
Weighted average number of common shares outstanding adjusted for effect of dilutive securities |
4,675,917 | 4,624,043 | 4,310,166 | |||||||||
Net income |
$ | 2,956 | 7,379 | 26,670 | ||||||||
Dividends on preferred stock |
(108 |
) |
(1,710 |
) |
(2,068 |
) |
||||||
Net income available to common shareholders |
$ | 2,848 | 5,669 | 24,602 | ||||||||
Basic earnings per common share |
$ | 0.69 | 1.40 | 6.15 | ||||||||
Diluted earnings per common share |
$ | 0.61 | 1.23 | 5.71 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 Stockholders' Equity
The Company did not repurchase any shares of its common stock in the open market during 2015, 2014 or 2013. The Company has not made any dividend payments on its common stock during 2015, 2014 or 2013.
The Company's certificate of incorporation authorizes the issuance of up to 500,000 shares of preferred stock, and on December 23, 2008, the Company completed the sale of 26,000 shares of Preferred Stock to the Treasury. The Preferred Stock had a liquidation value of $1,000 per share and a related warrant was also issued to purchase 833,333 shares of HMN common stock at an exercise price of $4.68 per share (the Warrant). The transaction was part of the Treasury’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008. Under the terms of the sale, the shares of Preferred Stock were entitled to a quarterly cumulative compounding dividend at a stated rate of 5% per annum for each of the first five years of the investment, which increased to 9% on February 15, 2014, until HMN redeemed the shares.
On February 8, 2013, the Treasury sold the Preferred Stock to unaffiliated third party investors in a private transaction for $18.8 million. The Company received no proceeds from the sale and it had no effect on the terms of the outstanding Preferred Stock. Further, the sale of the Preferred Stock had no effect on the Company’s capital, financial condition or results of operations. In 2014, the Company redeemed 16,000 shares of Preferred Stock and on February 17, 2015, the Company redeemed the final 10,000 shares of outstanding Preferred Stock.
On May 21, 2015, the Treasury sold the Warrant at an exercise price of $4.68 to three unaffiliated third party investors for an aggregate purchase price of $5.7 million. Two of the investors received a warrant to purchase 277,777.67 shares and one investor received a warrant to purchase 277,777.66 shares. All of the warrants may be exercised at any time prior to their expiration date of December 23, 2018. The Company received no proceeds from this transaction and it had no effect on the Company’s capital, financial condition or results of operations.
In order to grant a priority to eligible accountholders in the event of future liquidation, the Bank, at the time of conversion to a stock savings bank, established a liquidation account equal to its regulatory capital as of September 30, 1993. In the event of future liquidation of the Bank, an eligible accountholder who continues to maintain their deposit account shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account will decrease as the balance of eligible accountholders is reduced subsequent to the conversion, based on an annual determination of such balance.
NOTE 17 Regulatory Capital
Effective January 1, 2015 the capital requirements of the Company and the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The new requirements, among other things, (i) apply a strengthened set of capital requirements to the Bank (the Company is exempt, pursuant to the Small Bank Holding Company Policy Statement (Policy Statement) described below), including new requirements relating to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and a higher minimum tier 1 capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The new rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and buffer requirements which will be phased in incrementally, with full implementation scheduled for January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In the second quarter of 2015, the FRB amended its Policy Statement, which exempted small bank holding companies from the above capital requirements, by raising the asset size threshold for determining applicability from $500 million to $1 billion. The Policy Statement was also expanded to include savings and loan holding companies that meet the Policy Statement’s qualitative requirements for exemption. The Company met the qualitative exemption requirements, and therefore, is exempt from the above capital requirements.
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier I (Core) capital, and Risk-based capital (as defined in the regulations) to total assets (as defined).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015 and 2014, the Bank's capital amounts and ratios are presented for actual capital, required capital and excess capital including amounts and ratios in order to qualify as being well capitalized under the prompt corrective action regulations:
Actual |
Required to be Adequately Capitalized |
Excess Capital |
To Be Well Capitalized Under Prompt Corrective Action Provisions (1) |
|||||||||||||||||||||||||||||
(Dollars in thousands) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
||||||||||||||||||||||||
December 31, 2015 |
||||||||||||||||||||||||||||||||
Common equity tier 1 capital |
$ | 71,520 | 14.08 |
% |
$ | 22,854 | 4.50 |
% |
$ | 48,666 | 9.58 |
% |
$ | 33,012 | 6.50 |
% |
||||||||||||||||
Tier I leverage |
71,520 | 11.46 | 24,971 | 4.00 | 46,549 | 7.46 | 31,213 | 5.00 | ||||||||||||||||||||||||
Tier 1 risk-based capital |
71,520 | 14.08 | 30,473 | 6.00 | 41,047 | 8.08 | 40,630 | 8.00 | ||||||||||||||||||||||||
Total risk-based capital |
77,934 | 15.35 | 40,630 | 8.00 | 37,304 | 7.35 | 50,788 | 10.00 | ||||||||||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||||||
Tier I or core capital |
$ | 66,976 | 11.76 |
% |
$ | 22,775 | 4.00 |
% |
$ | 44,201 | 7.76 |
% |
$ | 28,469 | 5.00 |
% |
||||||||||||||||
Tier I risk-based capital |
66,976 | 17.21 | 15,562 | 4.00 | 51,414 | 13.21 | 23,343 | 6.00 | ||||||||||||||||||||||||
Risk-based capital to risk-weighted assets |
71,882 | 18.48 | 31,125 | 8.00 | 40,757 | 10.48 | 38,906 | 10.00 |
(1) Under the recently issued final rules, revised requirements began to be phased in on January 1, 2015, as described above. (2) Based upon the Bank’s adjusted total assets for the purpose of the Tier I or core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. |
Management believes that, as of December 31, 2015, the Bank’s capital ratios were in excess of those quantitative capital ratio standards applicable on that date, set forth under the prompt corrective action regulations referenced above. However, there can be no assurance that the Bank will continue to maintain such status in the future. The OCC has extensive discretion in its supervisory and enforcement activities, and can further adjust the requirement to be “well-capitalized” in the future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of these instruments reflect the extent of involvement by the Company.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
December 31, Contract Amount |
||||||||
(Dollars in thousands) |
2015 |
2014 |
||||||
Financial instruments whose contract amount represents credit risk: |
||||||||
Commitments to originate, fund or purchase loans: |
||||||||
1-4 family mortgages |
$ | 4,292 | 1,204 | |||||
Commercial real estate mortgages |
18,834 | 24,956 | ||||||
Non-real estate commercial loans |
1,310 | 1,288 | ||||||
Undisbursed balance of loans closed |
44,082 | 25,875 | ||||||
Unused lines of credit |
96,354 | 86,714 | ||||||
Letters of credit |
1,077 | 1,541 | ||||||
Total commitments to extend credit |
$ | 165,949 | 141,578 | |||||
Forward commitments |
$ | 8,071 | 3,279 | |||||
Commitments to extend credit are agreements to lend to a customer, at the customer’s request, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on the loan type and on management's credit evaluation of the borrower. Collateral consists primarily of residential and commercial real estate and personal property.
Forward commitments represent commitments to sell loans to a third party following the closing of the loan and are entered into in the normal course of business by the Bank.
The Bank issued standby letters of credit which guarantee the performance of customers to third parties. The standby letters of credit outstanding expire over the next 15 months and totaled $1.0 million at December 31, 2015 and $1.5 million at December 31, 2014. The letters of credit are collateralized primarily with commercial real estate mortgages. Draws on standby letters of credit would be initiated by the secured party under the terms of the underlying obligation. Since the conditions under which the Bank is required to fund the standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments.
The Company has certain obligations and commitments to make future payments under existing contracts. At December 31, 2015, the aggregate contractual obligations (excluding bank deposits) and commercial commitments were as follows:
Payments Due by Period |
||||||||||||||||||||
(Dollars in thousands) |
Total |
Less than 1 Year |
1-3 Years |
4-5 Years |
After 5 Years |
|||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Total borrowings |
$ | 9,000 | 1,000 | 2,000 | 2,000 | 4,000 | ||||||||||||||
Annual rental commitments under non-cancellable operating leases |
6,673 | 830 | 1,559 | 1,418 | 2,866 | |||||||||||||||
$ | 15,673 | 1,830 | 3,559 | 3,418 | 6,866 |
Amount of Commitments Expiring by Period |
||||||||||||||||||||
Other Commercial Commitments: |
||||||||||||||||||||
Commercial lines of credit |
$ | 45,513 | 26,752 | 5,408 | 8,343 | 5,010 | ||||||||||||||
Commitments to lend |
39,450 | 7,072 | 9,612 | 3,812 | 18,954 | |||||||||||||||
Standby letters of credit |
1,077 | 1,072 | 5 | 0 | 0 | |||||||||||||||
$ | 86,040 | 34,896 | 15,025 | 12,155 | 23,964 | |||||||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 Derivative Instruments and Hedging Activities
The Company originates single-family residential loans for sale into the secondary market and enters into commitments to sell those loans in order to mitigate the interest rate risk associated with holding the loans until they are sold. The Company accounts for its commitments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities .
The Company had commitments outstanding to extend credit to future borrowers that had not closed prior to the end of the year, which is referred to as its mortgage pipeline. As commitments to originate loans enter the mortgage pipeline, the Company generally enters into commitments to sell the loans into the secondary market. The commitments to originate and sell loans are derivatives that are recorded at fair value. As a result of marking these derivatives to fair value for the period ended December 31, 2015, the Company recorded a decrease of other liabilities of $7,000, an increase of other assets of $20,000 and a net gain on the sale of loans of $27,000. As a result of marking these derivatives to fair value for the period ended December 31, 2014, the Company recorded an increase in other liabilities of $7,000, an increase in other assets of $15,000 and a net gain on the sale of loans of $8,000. As of December 31, 2015 and 2014, the current commitments to sell loans held for sale are derivatives that do not qualify for hedge accounting. The loans held for sale that are not hedged are recorded at the lower of cost or market. As a result of marking these loans for the period ended December 31, 2015, the Company recorded an increase in other liabilities of $3,000 and a net loss on the sale of loans of $3,000. As a result of marking these loans for the period ended December 31, 2014, the Company recorded an increase in other liabilities of $1,000, and a net loss on the sales of loans of $1,000.
NOTE 20 Fair Value Measurement
ASC 820, Fair Value Measurements , establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system consisting of three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The following table summarizes the assets of the Company for which fair values are determined on a recurring basis as of December 31, 2015 and 2014.
Carrying Value at December 31, 2015 |
||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Securities available for sale |
$ | 111,974 | 0 | 111,974 | 0 | |||||||||||
Mortgage loan commitments |
36 | 0 | 36 | 0 | ||||||||||||
Total |
$ | 112,010 | 0 | 112,010 | 0 | |||||||||||
Carrying Value at December 31, 2014 |
||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Securities available for sale |
$ | 137,834 | 0 | 137,834 | 0 | |||||||||||
Mortgage loan commitments |
16 | 0 | 16 | 0 | ||||||||||||
Total |
$ | 137,850 | 0 | 137,850 | 0 | |||||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company may also be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from the application of the lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in 2015 and 2014 that were still held at December 31, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets or portfolios at December 31, 2015 and 2014.
Carrying Value at December 31, 2015 |
||||||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
Year Ended December 31, 2015 Total gains (losses) |
|||||||||||||||
Loans held for sale |
$ | 3,779 | 0 | 3,779 | 0 | 3 | ||||||||||||||
Mortgage servicing rights |
1,499 | 0 | 1,499 | 0 | 0 | |||||||||||||||
Loans (1) |
4,790 | 0 | 4,790 | 0 | (373 |
) |
||||||||||||||
Real estate, net (2) |
2,045 | 0 | 2,045 | 0 | (262 |
) |
||||||||||||||
Total |
$ | 12,113 | 0 | 12,113 | 0 | (632 |
) |
Carrying Value at December 31, 2014 |
||||||||||||||||||||
(Dollars in thousands) |
Total |
Level 1 |
Level 2 |
Level 3 |
Year Ended December 31, 2014 Total gains (losses) |
|||||||||||||||
Loans held for sale |
$ | 2,076 | 0 | 2,076 | 0 | (1 |
) |
|||||||||||||
Mortgage servicing rights |
1,507 | 0 | 1,507 | 0 | 0 | |||||||||||||||
Loans (1) |
11,882 | 0 | 11,882 | 0 | 532 | |||||||||||||||
Real estate, net (2) |
3,103 | 0 | 3,103 | 0 | (134 |
) |
||||||||||||||
Total |
$ | 18,568 | 0 | 18,568 | 0 | 397 | ||||||||||||||
(1 ) Represents carrying value and related specific reserves on loans for which adjustments are based on the appraised value of the collateral. The carrying value of loans fully charged-off is zero. (2) Represents the fair value and related losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets. |
NOTE 21 Fair Value of Financial Instruments
ASC 825, Disclosures about Fair Values of Financial Instruments , requires disclosure of estimated fair values of the Company's financial instruments, including assets, liabilities and off-balance sheet items for which it is practicable to estimate fair value. The fair value estimates are made as of December 31, 2015 and 2014 based upon relevant market information, if available, and upon the characteristics of the financial instruments themselves. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based upon judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. The estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based only on existing financial instruments without attempting to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the Company's financial instruments are shown below. Following the table, there is an explanation of the methods and assumptions used to estimate the fair value of each class of financial instruments.
December 31, 2015 |
December 31, 2014 |
|||||||||||||||||||||||||||||||||||
Fair value hierarchy |
||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Carrying amount |
Estimated fair value |
Level 1 |
Level 2 |
Level 3 |
Contract amount |
Carrying amount |
Estimated fair value |
Contract amount |
|||||||||||||||||||||||||||
Financial assets: |
||||||||||||||||||||||||||||||||||||
Cash and cash equivalents |
$ | 39,782 | 39,782 | 39,782 | 46,634 | 46,634 | ||||||||||||||||||||||||||||||
Securities available for sale |
111,974 | 111,974 | 111,974 | 137,834 | 137,834 | |||||||||||||||||||||||||||||||
Loans held for sale |
3,779 | 3,779 | 3,779 | 2,076 | 2,076 | |||||||||||||||||||||||||||||||
Loans receivable, net |
463,185 | 458,539 | 458,539 | 365,113 | 364,509 | |||||||||||||||||||||||||||||||
FHLB stock |
691 | 691 | 691 | 777 | 777 | |||||||||||||||||||||||||||||||
Accrued interest receivable |
2,254 | 2,254 | 2,254 | 1,713 | 1,713 | |||||||||||||||||||||||||||||||
Financial liabilities: |
||||||||||||||||||||||||||||||||||||
Deposits |
559,387 | 558,731 | 558,731 | 496,750 | 496,494 | |||||||||||||||||||||||||||||||
FHLB advances and other borrowings |
9,000 | 9,000 | 9,000 | 0 | 0 | |||||||||||||||||||||||||||||||
Accrued interest payable |
242 | 242 | 242 | 93 | 93 | |||||||||||||||||||||||||||||||
Off-balance sheet financial instruments: |
||||||||||||||||||||||||||||||||||||
Commitments to extend credit |
36 | 36 | 165,949 | 16 | 16 | 141,578 | ||||||||||||||||||||||||||||||
Commitments to sell loans |
(26 |
) |
(26 |
) |
8,071 | (30 |
) |
(30 |
) |
3,279 |
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates their fair value.
Securities Available for Sale
The fair values of securities were based upon quoted market prices.
Loans Held for Sale
The fair values of loans held for sale were based upon quoted market prices for loans with similar interest rates and terms to maturity.
Loans Receivable
The fair values of loans receivable were estimated for groups of loans with similar characteristics. The fair value of the loan portfolio, with the exception of the adjustable rate portfolio, was calculated by discounting the scheduled cash flows through the estimated maturity using anticipated prepayment speeds and using discount rates that reflect the credit and interest rate risk inherent in each loan portfolio. The fair value of the adjustable loan portfolio was estimated by grouping the loans with similar characteristics and comparing the characteristics of each group to the prices quoted for similar types of loans in the secondary market.
FHLB Stock
The carrying amount of FHLB stock approximates its fair value.
Accrued Interest Receivable
The carrying amount of accrued interest receivable approximates its fair value since it is short-term in nature and does not present unanticipated credit concerns.
Deposits
The fair value of demand deposits, savings accounts and certain money market account deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
The fair value estimate for deposits does not include the benefit that results from the low cost funding provided by the Company's existing deposits and long-term customer relationships compared to the cost of obtaining different sources of funding. This benefit is commonly referred to as the core deposit intangible.
FHLB Advances and Other Borrowings
The fair values of advances and borrowings with fixed maturities are estimated based on discounted cash flow analysis using as discount rates the interest rates charged by the FHLB for borrowings of similar remaining maturities.
Accrued Interest Payable
The carrying amount of accrued interest payable approximates its fair value since it is short-term in nature.
Commitments to Extend Credit
The fair values of commitments to extend credit are estimated using the fees normally charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties.
Commitments to Sell Loans
The fair values of commitments to sell loans are estimated using the quoted market prices for loans with similar interest rates and terms to maturity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 HMN Financial, Inc. Financial Information (Parent Company Only)
The following are the condensed financial statements for the parent company only as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013.
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Condensed Balance Sheets |
||||||||||||
Assets: |
||||||||||||
Cash and cash equivalents |
$ | 2,564 | 557 | |||||||||
Investment in subsidiaries |
74,565 | 73,733 | ||||||||||
Loans receivable, net |
0 | 900 | ||||||||||
Prepaid expenses and other assets |
33 | 10 | ||||||||||
Deferred tax asset, net |
1,000 | 1,022 | ||||||||||
Total assets |
$ | 78,162 | 76,222 | |||||||||
Liabilities and Stockholders' Equity: |
||||||||||||
Other borrowed money |
9,000 | 0 | ||||||||||
Accrued expenses and other liabilities |
$ | (483 |
) |
209 | ||||||||
Total liabilities |
8,517 | 209 | ||||||||||
Serial preferred stock |
0 | 10,000 | ||||||||||
Common stock |
91 | 91 | ||||||||||
Additional paid-in capital |
50,388 | 50,207 | ||||||||||
Retained earnings |
80,536 | 77,805 | ||||||||||
Net unrealized losses on securities available for sale |
(214 |
) |
(418 |
) |
||||||||
Unearned employee stock ownership plan shares |
(2,417 |
) |
(2,610 |
) |
||||||||
Treasury stock, at cost, 4,645,769 and 4,658,323 shares |
(58,739 |
) |
(59,062 |
) |
||||||||
Total stockholders' equity |
69,645 | 76,013 | ||||||||||
Total liabilities and stockholders' equity |
$ | 78,162 | 76,222 | |||||||||
Condensed Statements of Income |
||||||||||||
Interest income |
$ | 1 | 1 | 1 | ||||||||
Interest expense |
(571 |
) |
0 | 0 | ||||||||
Equity income of subsidiaries |
3,629 | 7,644 | 26,792 | |||||||||
Compensation and benefits |
(269 |
) |
(233 |
) |
(235 |
) |
||||||
Occupancy |
(30 |
) |
(24 |
) |
(24 |
) |
||||||
Data processing |
(6 |
) |
(6 |
) |
(6 |
) |
||||||
Other |
(335 |
) |
(539 |
) |
(498 |
) |
||||||
Income before income tax benefit |
2,419 | 6,843 | 26,030 | |||||||||
Income tax benefit |
(537 |
) |
(536 |
) |
(640 |
) |
||||||
Net income |
$ | 2,956 | 7,379 | 26,670 | ||||||||
Condensed Statements of Cash Flows |
||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 2,956 | 7,379 | 26,670 | ||||||||
Adjustments to reconcile net income to cash used by operating activities: |
||||||||||||
Equity income of subsidiaries |
(3,629 |
) |
(7,644 |
) |
(26,792 |
) |
||||||
Deferred income tax benefit |
(22 |
) |
(92 |
) |
(931 |
) |
||||||
Earned employee stock ownership shares priced above (below) original cost |
57 | 53 | (21 |
) |
||||||||
Stock option compensation |
0 | 1 | 4 | |||||||||
Cancellation of restricted stock awards |
0 | 0 | (119 |
) |
||||||||
Amortization of restricted stock awards |
447 | 240 | 202 | |||||||||
Decrease in unearned ESOP shares |
193 | 194 | 193 | |||||||||
(Decrease) increase in accrued expenses and other liabilities |
(692 |
) |
(420 |
) |
47 | |||||||
Decrease (increase) in other assets |
23 | 69 | (65 |
) |
||||||||
Other, net |
(1 |
) |
0 | (1 |
) |
|||||||
Net cash used by operating activities |
(668 |
) |
(220 |
) |
(813 |
) |
||||||
Cash flows from investing activities: |
||||||||||||
Decrease (increase) in loans receivable, net |
900 | 100 | (200 |
) |
||||||||
Net cash provided (used) by investing activities |
900 | 100 | (200 |
) |
||||||||
Cash flows from financing activities: |
||||||||||||
Redemption of preferred stock |
(10,000 |
) |
(16,000 |
) |
0 | |||||||
Dividends to preferred stockholders |
(225 |
) |
(5,964 |
) |
0 | |||||||
Proceeds from borrowings |
10,000 | 0 | 0 | |||||||||
Repayments of borrowings |
(1,000 |
) |
0 | 0 | ||||||||
Dividends received from Bank |
3,000 | 22,500 | 1,000 | |||||||||
Net cash provided by financing activities |
1,775 | 536 | 1,000 | |||||||||
Increase (decrease) in cash and cash equivalents |
2,007 | 416 | (13 |
) |
||||||||
Cash and cash equivalents, beginning of year |
557 | 141 | 154 | |||||||||
Cash and cash equivalents, end of year |
$ | 2,564 | 557 | 141 | ||||||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 Business Segments
The Bank has been identified as a reportable operating segment in accordance with the provisions of ASC 280. HMN, the holding company, did not meet the quantitative thresholds for a reportable segment and therefore is included in the “Other” category. The Company evaluates performance and allocates resources based on the segment’s net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of directors.
The following table sets forth certain information about the reconciliations of reported net income and assets for each of the Company’s reportable segments.
(Dollars in thousands) |
Home Federal Savings Bank |
Other |
Eliminations |
Consolidated Total |
||||||||||||
At or for the year ended December 31, 2015: |
||||||||||||||||
Interest income – external customers |
$ | 21,453 | 0 | 0 | 21,453 | |||||||||||
Non-interest income – external customers |
7,653 | 0 | 0 | 7,653 | ||||||||||||
Intersegment interest income |
0 | 1 | (1 |
) |
0 | |||||||||||
Intersegment non-interest income |
204 | 3,629 | (3,833 |
) |
0 | |||||||||||
Interest expense |
937 | 571 | (1 |
) |
1,507 | |||||||||||
Non-interest expense |
22,760 | 640 | (204 |
) |
23,196 | |||||||||||
Income tax expense (benefit) |
2,148 | (537 |
) |
0 | 1,611 | |||||||||||
Net income |
3,629 | 2,956 | (3,629 |
) |
2,956 | |||||||||||
Total assets |
642,151 | 78,162 | (77,152 |
) |
643,161 | |||||||||||
At or for the year ended December 31, 2014: |
||||||||||||||||
Interest income – external customers |
$ | 20,613 | 0 | 0 | 20,613 | |||||||||||
Non-interest income – external customers |
7,284 | 0 | 0 | 7,284 | ||||||||||||
Intersegment interest income |
0 | 2 | (2 |
) |
0 | |||||||||||
Intersegment non-interest income |
180 | 7,644 | (7,824 |
) |
0 | |||||||||||
Interest expense |
1,213 | 0 | (2 |
) |
1,211 | |||||||||||
Non-interest expense |
20,781 | 802 | (180 |
) |
21,403 | |||||||||||
Income tax expense (benefit) |
5,438 | (536 |
) |
0 | 4,902 | |||||||||||
Net income |
7,644 | 7,379 | (7,644 |
) |
7,379 | |||||||||||
Total assets |
576,397 | 76,221 | (75,192 |
) |
577,426 | |||||||||||
At or for the year ended December 31, 2013: |
||||||||||||||||
Interest income – external customers |
$ | 22,983 | 0 | 0 | 22,983 | |||||||||||
Non-interest income – external customers |
7,312 | 0 | 0 | 7,312 | ||||||||||||
Intersegment interest income |
0 | 1 | (1 |
) |
0 | |||||||||||
Intersegment non-interest income |
182 | 26,792 | (26,974 |
) |
0 | |||||||||||
Interest expense |
3,290 | 0 | (1 |
) |
3,289 | |||||||||||
Non-interest expense |
22,039 | 766 | (182 |
) |
22,623 | |||||||||||
Income tax benefit |
(13,766 |
) |
(640 |
) |
0 | (14,406 |
) |
|||||||||
Net income |
26,795 | 26,667 | (26,792 |
) |
26,670 | |||||||||||
Total assets |
647,679 | 90,483 | (89,540 |
) |
648,622 | |||||||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
HMN Financial, Inc. and Subsidiaries
Rochester, Minnesota
We have audited the accompanying consolidated balance sheets of HMN Financial, Inc. and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these consolidated financial statements based on our audits. The consolidated statements of comprehensive income, stockholders’ equity, and cash flows of HMN Financial, Inc. and subsidiaries for the year ended December 31, 2013 were audited by other auditors whose report dated March 11, 2014, was unqualified.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HMN Financial, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
March 11, 2016
OTHER FINANCIAL DATA
The following tables set forth certain information as to the Bank’s Federal Home Loan Bank (FHLB) advances.
Year Ended December 31, |
||||||||||||
(Dollars in thousands) |
2015 |
2014 |
2013 |
|||||||||
Maximum Balance: |
||||||||||||
FHLB advances |
$ | 16,000 | 0 | 70,000 | ||||||||
FHLB short-term advances |
16,000 | 0 | 70,000 | |||||||||
Average Balance: |
||||||||||||
FHLB advances |
551 | 0 | 30,329 | |||||||||
FHLB short-term advances |
551 | 0 | 30,329 | |||||||||
See “Note 12 Federal Home Loan Bank (FHLB) Advances and Other Borrowings” in the Notes to Consolidated Financial Statements for more information on the Bank’s FHLB advances and other borrowings.
COMMON STOCK INFORMATION
The common stock of the Company is listed on the Nasdaq Stock Market under the symbol HMNF. As of December 31, 2015, the Company had 9,128,662 shares of common stock issued and 4,645,769 shares in treasury stock. As of December 31, 2015, there were 598 stockholders of record and 1,048 estimated beneficial stockholders. The following table presents the stock price information for the Company as furnished by Nasdaq for each quarter for the last two fiscal years. On February 12, 2016, the last reported sale price of shares of our common stock on the Nasdaq Stock Market was $11.00 per share. The Company has not paid a dividend on its common stock during the three year period ending December 31, 2015 and no common stock dividends are anticipated to be paid in 2016. See “ Liquidity and Capital Resources – Dividends” in the “Management Discussion and Analysis” section of this annual report for a description of restrictions on the ability of the Company and the Bank to pay dividends.
December 31, 2015 |
September 30, 2015 |
June 30, 2015 |
March 31, 2015 |
December 31, 2014 |
September 30, 2014 |
June 30, 2014 |
March 31, 2014 |
|||||||||||||||||||||||||
HIGH |
$ | 12.06 | 12.06 | 12.61 | 12.92 | 13.95 | 13.20 | 11.98 | 13.44 | |||||||||||||||||||||||
LOW |
11.06 | 10.88 | 10.18 | 11.46 | 10.06 | 10.95 | 8.94 | 9.82 | ||||||||||||||||||||||||
CLOSE |
11.55 | 11.51 | 11.79 | 12.10 | 12.40 | 13.20 | 11.00 | 9.85 |
The following graph and table compares the total cumulative stockholders’ return on the Company’s common stock to the NASDAQ U.S. Stock Index (“NASDAQ Composite”), which includes all NASDAQ traded stocks of U.S. companies, and the SNL Bank NASDAQ Index. The graph and table assume that $100 was invested on December 31, 2010 and that all dividends were reinvested.
Period Ending |
||||||||||||||||||||||||
Index |
12/31/10 |
12/31/11 |
12/31/12 |
12/31/13 |
12/31/14 |
12/31/15 |
||||||||||||||||||
HMN Financial, Inc. |
100.00 | 68.90 | 123.53 | 376.16 | 441.28 | 411.03 | ||||||||||||||||||
NASDAQ Composite |
100.00 | 99.21 | 116.82 | 163.75 | 188.03 | 201.40 | ||||||||||||||||||
SNL Bank NASDAQ Index |
100.00 | 88.73 | 105.75 | 152.00 | 157.42 | 169.94 |
SELECTED QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share data) |
December 31, 2015 |
September 30, 2015 |
June 30, 2015 |
|||||||||
Selected Operations Data (3 months ended): | ||||||||||||
Interest income |
$ | 6,109 | 5,390 | 5,070 | ||||||||
Interest expense |
393 | 397 | 391 | |||||||||
Net interest income |
5,716 | 4,993 | 4,679 | |||||||||
Provision for loan losses |
75 | (56 |
) |
(183 |
) |
|||||||
Net interest income after provision for loan losses |
5,641 | 5,049 | 4,862 | |||||||||
Non-interest income: |
||||||||||||
Fees and service charges |
827 | 863 | 844 | |||||||||
Loan servicing fees |
268 | 262 | 257 | |||||||||
Gain on sales of loans |
536 | 613 | 530 | |||||||||
Gain on aquisition |
0 | 289 | 0 | |||||||||
Other |
330 | 204 | 236 | |||||||||
Total non-interest income |
1,961 | 2,231 | 1,867 | |||||||||
Non-interest expense: |
||||||||||||
Compensation and benefits |
3,448 | 3,299 | 3,540 | |||||||||
(Gains) losses on real estate owned |
97 | 168 | 65 | |||||||||
Occupancy |
981 | 936 | 926 | |||||||||
Deposit insurance |
106 | 125 | 74 | |||||||||
Data processing |
267 | 254 | 268 | |||||||||
Other |
1,097 | 1,187 | 927 | |||||||||
Total non-interest expense |
5,996 | 5,969 | 5,800 | |||||||||
Income before income tax expense |
1,606 | 1,311 | 929 | |||||||||
Income tax expense |
516 | 491 | 344 | |||||||||
Net income |
1,090 | 820 | 585 | |||||||||
Preferred stock dividends |
0 | 0 | 0 | |||||||||
Net income available to common stockholders |
$ | 1,090 | 820 | 585 | ||||||||
Basic earnings per common share |
$ | 0.26 | 0.20 | 0.14 | ||||||||
Diluted earnings per common share |
$ | 0.23 | 0.18 | 0.13 | ||||||||
Financial Ratios: |
||||||||||||
Return on average assets (1) |
0.69 |
% |
0.53 |
% |
0.42 |
% |
||||||
Return on average common equity (1) |
6.19 | 4.77 | 3.50 | |||||||||
Average equity to average assets |
11.70 | 11.91 | 12.30 | |||||||||
Net interest margin (1)(2) |
3.80 | 3.44 | 3.56 | |||||||||
(Dollars in thousands) |
||||||||||||
Selected Financial Condition Data: |
||||||||||||
Total assets |
$ | 643,161 | 618,917 | 564,001 | ||||||||
Securities available for sale: |
||||||||||||
Mortgage-backed and related securities |
2,283 | 7,080 | 2,115 | |||||||||
Other marketable securities |
109,691 | 138,258 | 123,326 | |||||||||
Loans held for sale |
3,779 | 5,153 | 5,968 | |||||||||
Loans receivable, net |
463,185 | 432,174 | 368,110 | |||||||||
Deposits |
559,387 | 531,586 | 481,476 | |||||||||
Stockholders’ equity |
69,645 | 68,710 | 67,494 |
(1) Annualized
(2) Net interest income divided by average interest-earning assets
March 31, 2015 |
December 31, 2014 |
September 30, 2014 |
June 30, 2014 |
March 31, 2014 |
|||||||||||||
4,884 | 5,035 | 5,131 | 5,020 | 5,427 | |||||||||||||
326 | 274 | 297 | 306 | 334 | |||||||||||||
4,558 | 4,761 | 4,834 | 4,714 | 5,093 | |||||||||||||
0 | (2,221 |
) |
(989 |
) |
(2,178 |
) |
(1,610 |
) |
|||||||||
4,558 | 6,982 | 5,823 | 6,892 | 6,703 | |||||||||||||
782 | 831 | 903 | 901 | 823 | |||||||||||||
261 | 271 | 263 | 263 | 261 | |||||||||||||
285 | 348 | 804 | 330 | 346 | |||||||||||||
0 | 0 | 0 | 0 | 0 | |||||||||||||
268 | 230 | 224 | 228 | 258 | |||||||||||||
1,596 | 1,680 | 2,194 | 1,722 | 1,688 | |||||||||||||
3,448 | 3,388 | 3,193 | 3,273 | 3,478 | |||||||||||||
(112 |
) |
(64 |
) |
(78 |
) |
(1,120 |
) |
68 | |||||||||
879 | 1,037 | 896 | 876 | 882 | |||||||||||||
70 | 107 | 74 | 97 | 157 | |||||||||||||
231 | 276 | 240 | 249 | 246 | |||||||||||||
917 | 1,073 | 1,100 | 1,089 | 866 | |||||||||||||
5,433 | 5,817 | 5,425 | 4,464 | 5,697 | |||||||||||||
721 | 2,845 | 2,592 | 4,150 | 2,694 | |||||||||||||
260 | 1,167 | 1,054 | 1,620 | 1,062 | |||||||||||||
461 | 1,678 | 1,538 | 2,530 | 1,632 | |||||||||||||
(108 |
) |
(293 |
) |
(360 |
) |
(524 |
) |
(532 |
) |
||||||||
353 | 1,385 | 1,178 | 2,006 | 1,100 | |||||||||||||
0.09 | 0.34 | 0.29 | 0.50 | 0.27 | |||||||||||||
0.08 | 0.30 | 0.25 | 0.44 | 0.24 | |||||||||||||
0.33 |
% |
1.13 |
% |
1.01 |
% |
1.62 |
% |
1.08 |
% |
||||||||
2.60 | 8.74 | 7.89 | 12.32 | 7.61 | |||||||||||||
12.62 | 13.25 | 13.37 | 13.68 | 14.23 | |||||||||||||
3.42 | 3.42 | 3.31 | 3.20 | 3.59 | |||||||||||||
565,487 | 577,426 | 594,433 | 609,882 | 620,775 | |||||||||||||
2,471 | 2,909 | 3,361 | 3,878 | 4,462 | |||||||||||||
151,674 | 134,925 | 137,180 | 123,369 | 98,031 | |||||||||||||
2,663 | 2,076 | 1,235 | 3,861 | 1,425 | |||||||||||||
360,370 | 365,113 | 365,572 | 367,667 | 383,020 | |||||||||||||
483,323 | 496,750 | 504,908 | 522,853 | 522,383 | |||||||||||||
66,775 | 76,013 | 80,611 | 79,376 | 87,226 |
HMN Financial, Inc.
1016 Civic Center Drive NW
Rochester, MN 55901
(507) 535-1200
Annual Meeting
The annual meeting of shareholders will be held on Tuesday, April 26, 2016 at 10:00 a.m. (Central Time) at the Rochester Golf and Country Club, 3100 West Country Club Road, Rochester, Minnesota.
Legal Counsel
Faegre Baker Daniels LLP
2200 Wells Fargo Center
90 South Seventh Street
Minneapolis, MN 55402-3901
Independent Registered Public Accounting Firm
CliftonLarsonAllen LLP
220 South Sixth Street, Suite 300
Minneapolis, MN 55402-1436
Investor Information and Form 10-K
HMN’s Form 10-K, filed with the Securities and Exchange Commission, is available without charge upon written request from:
HMN Financial, Inc.
Attn: Cindy Hamlin,
Investor Relations
1016 Civic Center Drive NW
Rochester, MN 55901
or at www.hmnf.com
Transfer Agent and Registrar
Inquiries regarding change of address, transfer requirements, and lost certificates should be directed to HMN’s transfer agent:
Wells Fargo Bank, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
MAC N9173-010
Mendota Heights, MN 55120
www.wellsfargo.com/
shareownerservices
(800) 468-9716
Directors
Dr. Hugh C. Smith
Chairman of the Board
HMN and Home Federal Savings Bank
Retired Professor of Medicine, Mayo Clinic College of Medicine and Consultant in Cardiovascular Division, Mayo Clinic
Allen J. Berning
Chief Executive Officer
Ambient Clinical Analytics
Michael J. Fogarty
Retired Vice President
C.O. Brown Agency, Inc.
Bradley C. Krehbiel
President and Chief Executive Officer
HMN and Home Federal Savings Bank
Malcolm W. McDonald
Retired Senior Vice President
Space Center, Inc.
Bernard R. Nigon
Retired Audit P artner with
RSM US LLP
Wendy S. Shannon
Assistant Professor
Winona State University
Dr. Patricia S. Simmons
Retired Professor of Pediatric and Adolescent Medicine, Mayo Clinic College of Medicine
Mark E. Utz
Attorney at law, Wendland Utz, Ltd.
Executive Officers Who Are Not Directors
Jon J. Eberle
Senior Vice President,
Chief Financial Officer
and Treasurer of HMN and
Executive Vice President, Chief Financial Officer and Treasurer of
Home Federal Savings Bank
Susan K. Kolling
Senior Vice President
HMN and Home Federal Savings Bank
Lawrence D. McGraw
Executive Vice President and
Chief Operating Officer
Home Federal Savings Bank
Branch Offices of Bank
Albert Lea
143 West Clark Street
Albert Lea, MN 56007
(507) 379-2551
Austin
201 Oakland Avenue West
Austin, MN 55912
(507) 434-2500
Eagan
2805 Dodd Road, Suite 160
Eagan, MN 55121
(651) 405-2000
Kasson
203 West Main
Kasson, MN 55944
(507) 634-7022
502 South Mantorville Avenue
Kasson, MN 55944
(507) 634-4141
La Crescent
208 South Walnut
La Crescent, MN 55947
(507) 895-9200
Marshalltown
303 West Main Street
Marshalltown, IA 50158
(641) 754-6198
Rochester
1201 South Broadway
Rochester, MN 55901
(507) 536-2416
1016 Civic Center Drive NW
Rochester, MN 55901
(507) 535-1309
100 1 st Avenue Bldg., Suite 200
Rochester, MN 55902
(507) 280-7256
2048 Superior Drive NW, Suite 400
Rochester, MN 55901
(507) 226-0800
Spring Valley
715 North Broadway
Spring Valley, MN 55975
(507) 346-9709
Winona
175 Center Street
Winona, MN 55987
(507) 453-6460
Loan Production Offices
Sartell
50 14
th
Ave E, Suite 100
Sartell, MN 56377
(320) 654-4020
Owatonna
1850 Austin Road, Suite 103
Owatonna, MN 55060
(507) 413-6420
Delafield
3960 Hillside Drive, Suite 206
Delafield, WI 53018
(262) 337-9511
Exhibit 23.1
|
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
HMN Financial, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-8828, 33-94388, 33-94386, 33-64232, and 333-158893) on Form S-8 and (No. 333-156883) of Form S-3 of HMN Financial, Inc. of our report dated March 11, 2014, with respect to the consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2013, which report is incorporated by reference in the December 31, 2013 annual report on Form 10-K of HMN Financial, Inc.
(signed) KPMG LLP
Minneapolis, Minnesota
March 11, 2016
EXHIBIT 31.1
CERTIFICATIONS
I, Bradley Krehbiel, certify that:
1. I have reviewed this annual report on Form 10-K of HMN Financial, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 11, 2016 |
By: |
/s/ Bradley Krehbiel |
|
Bradley Krehbiel President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
EXHIBIT 31.2
CERTIFICATIONS
I, Jon J. Eberle, certify that:
1. I have reviewed this annual report on Form 10-K of HMN Financial, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 11, 2016 |
By: |
/s/Jon J. Eberle |
|
|
Jon J. Eberle Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
|
|
|
Exhibit 32
HMN FINANCIAL, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of HMN Financial, Inc. (the "Company") on Form 10-K for the period ending December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Bradley Krehbiel, President and Chief Executive Officer of HMN Financial, Inc. (the “Company”) (Principal Executive Officer of the Company), and Jon Eberle, Senior Vice President, Chief Financial Officer and Treasurer of the Company (Principal Financial Officer of the Company), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 11, 2016 |
|
/s/ Bradley Krehbiel |
|
|
Bradley Krehbiel President and Chief Executive Officer (Principal Executive Officer) |
|
|
/s/Jon Eberle |
Jon Eberle Senior Vice President/Chief Financial Officer and Treasurer (Principal Financial Officer) |