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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-24100
HMN FINANCIAL, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 41-1777397
------------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1016 Civic Center Drive N.W., Rochester, MN 55901
------------------------------------------- ---------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including
area code: (507) 535-1200
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's common stock
as of the latest practicable date.
Class Outstanding at October 23, 2006
----------------------------- -------------------------------
Common stock, $0.01 par value 4,344,430
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HMN FINANCIAL, INC.
CONTENTS
Page
-----
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Consolidated Balance Sheets at
September 30, 2006 and December 31, 2005................................ 3
Consolidated Statements of Income for the
Three Months Ended and Nine Months Ended September 30, 2006 and 2005.... 4
Consolidated Statement of Stockholders' Equity and Comprehensive
Income for the Nine Month Period Ended September 30, 2006............... 5
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2006 and 2005....................... 6
Notes to Consolidated Financial Statements.............................. 7-14
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 15-24
Item 3: Quantitative and Qualitative Disclosures about Market Risk............... 24
Item 4: Controls and Procedures.................................................. 24
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.................................................... 25
Item 1A: Risk Factors ...................................................... 25
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.............. 25
Item 3: Defaults Upon Senior Securities.......................................... 25
Item 4: Submission of Matters to a Vote of Security Holders...................... 25
Item 5: Other Information........................................................ 25
Item 6: Exhibits................................................................. 25
Signatures ..................................................................... 26
2
PART I - FINANCIAL STATEMENTS
Item 1: Financial Statements
HMN FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
(unaudited)
------------- ------------
ASSETS
Cash and cash equivalents.......................................... $ 71,239,159 47,268,795
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $6,806,874 and $7,428,504)..................... 6,220,609 6,879,756
Other marketable securities
(amortized cost $139,850,065 and $113,749,841)................ 139,787,337 112,778,813
------------- ------------
146,007,946 119,658,569
------------- ------------
Loans held for sale................................................ 4,216,500 1,435,141
Loans receivable, net.............................................. 729,381,119 785,678,461
Accrued interest receivable........................................ 4,659,303 4,460,014
Real estate, net................................................... 1,033,111 1,214,621
Federal Home Loan Bank stock, at cost.............................. 7,955,700 8,364,600
Mortgage servicing rights, net..................................... 2,139,158 2,653,635
Premises and equipment, net........................................ 11,674,555 11,941,863
Investment in limited partnerships................................. 118,989 141,048
Goodwill........................................................... 3,800,938 3,800,938
Core deposit intangible............................................ 134,367 219,760
Prepaid expenses and other assets.................................. 6,697,618 1,854,948
Deferred tax asset................................................. 2,199,400 2,544,400
------------- ------------
Total assets................................................... $ 991,257,863 991,236,793
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits........................................................... $ 741,617,758 731,536,560
Federal Home Loan Bank advances.................................... 150,900,000 160,900,000
Accrued interest payable........................................... 1,434,822 2,085,573
Customer escrows................................................... 1,090,363 1,038,575
Accrued expenses and other liabilities............................. 4,150,742 4,947,816
------------- ------------
Total liabilities.............................................. 899,193,685 900,508,524
------------- ------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock: ($.01 par value)
authorized 500,000 shares; issued and outstanding none........ 0 0
Common stock ($.01 par value):
authorized 11,000,000; issued shares 9,128,662................ 91,287 91,287
Additional paid-in capital......................................... 57,786,780 58,011,099
Retained earnings, subject to certain restrictions................. 101,911,810 98,951,777
Accumulated other comprehensive loss............................... (391,792) (917,577)
Unearned employee stock ownership plan shares...................... (4,205,988) (4,350,999)
Unearned compensation restricted stock awards...................... 0 (182,521)
Treasury stock, at cost 4,785,198 and 4,721,402 shares............. (63,127,919) (60,874,797)
------------- ------------
Total stockholders' equity..................................... 92,064,178 90,728,269
------------- ------------
Total liabilities and stockholders' equity......................... $ 991,257,863 991,236,793
============= ============
See accompanying notes to consolidated financial statements.
3
HMN FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
----------- ---------- ---------- -----------
Interest income:
Loans receivable............................. $14,962,250 14,385,320 44,746,541 41,487,679
Securities available for sale:
Mortgage-backed and related.............. 66,408 78,645 205,839 252,701
Other marketable......................... 1,511,616 645,871 3,723,794 1,941,809
Cash equivalents............................. 545,550 114,872 1,254,410 342,812
Other........................................ 89,337 13,525 238,142 182,285
----------- ---------- ---------- -----------
Total interest income.................... 17,175,161 15,238,233 50,168,726 44,207,286
----------- ---------- ---------- -----------
Interest expense:
Deposits..................................... 5,813,416 4,456,305 16,197,525 12,358,727
Federal Home Loan Bank advances.............. 1,659,472 1,836,269 5,130,207 5,485,461
----------- ---------- ---------- -----------
Total interest expense................... 7,472,888 6,292,574 21,327,732 17,844,188
----------- ---------- ---------- -----------
Net interest income...................... 9,702,273 8,945,659 28,840,994 26,363,098
Provision for loan losses......................... 6,026,000 952,000 7,521,000 2,495,000
----------- ---------- ---------- -----------
Net interest income after provision
for loan losses......................... 3,676,273 7,993,659 21,319,994 23,868,098
----------- ---------- ---------- -----------
Non-interest income:
Fees and service charges..................... 820,075 706,337 2,330,661 1,994,291
Mortgage servicing fees...................... 291,157 305,417 896,091 901,760
Securities gains, net........................ 0 0 48,122 0
Gain on sales of loans....................... 481,209 624,947 1,029,794 1,242,436
Losses in limited partnerships............... (6,500) (6,500) (22,059) (20,710)
Other........................................ 149,479 90,957 705,106 604,711
----------- ---------- ---------- -----------
Total non-interest income................. 1,735,420 1,721,158 4,987,715 4,722,488
----------- ---------- ---------- -----------
Non-interest expense:
Compensation and benefits.................... 2,706,431 2,781,366 9,083,004 8,340,048
Occupancy.................................... 1,130,755 1,042,417 3,334,439 3,079,131
Deposit insurance premiums................... 23,348 34,679 79,337 97,204
Advertising.................................. 108,013 101,775 346,172 291,448
Data processing.............................. 306,542 278,880 882,300 761,719
Amortization of mortgage servicing rights, 208,202 256,763 661,293 766,885
net Other................................... 956,490 1,053,536 2,756,276 3,025,033
----------- ---------- ---------- -----------
Total non-interest expense............... 5,439,781 5,549,416 17,142,821 16,361,468
----------- ---------- ---------- -----------
Income (loss) before income tax (28,088) 4,165,401 9,164,888 12,229,118
(benefit)expense........................
Income tax (benefit) expense...................... (101,600) 1,889,000 3,407,600 4,638,200
----------- ---------- ---------- -----------
Net income............................... $ 73,512 2,276,401 5,757,288 7,590,918
=========== ========== ========== ===========
Basic earnings per share.......................... $ 0.02 0.59 1.50 1.98
=========== ========== ========== ===========
Diluted earnings per share........................ $ 0.02 0.57 1.43 1.89
=========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
4
HMN FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2006
(unaudited)
Unearned
Accumulated Employee
Other Stock Unearned Total
Additional Compreh- Ownership Compensation Stock-
Common Paid-in Retained ensive Plan Restricted Treasury Holders'
Stock Capital Earnings Income (Loss) Shares Stock Awards Stock Equity
------- ---------- ----------- ------------- ---------- ------------ ----------- ---------
Balance, December 31, 2005 $91,287 58,011,099 98,951,777 (917,577) (4,350,999) (182,521) (60,874,797) 90,728,269
Net income 5,757,288 5,757,288
Other comprehensive income,
net of tax:
Change in net unrealized
gains on securities
available for sale 525,785 525,785
----------
Total comprehensive income 6,283,073
Purchase of treasury stock (2,953,850) (2,953,850)
Employee stock options
exercised (225,832) 363,535 137,703
Tax benefits of exercised
stock options 47,648 47,648
Unearned compensation restricted
stock awards (337,193) 337,193 0
Stock option compensation expense 48,317 48,317
Reclassification for FAS 123R
adoption (182,521) 182,521 0
Amortization of restricted stock
awards 140,703 140,703
Dividends paid (2,797,255) (2,797,255)
Earned employee stock
ownership plan shares 284,559 145,011 429,570
------- ---------- ----------- ----------- ---------- ------------ ----------- ---------
Balance, September 30, 2006 $91,287 57,786,780 101,911,810 (391,792) (4,205,988) 0 (63,127,919) 92,064,178
======= ========== =========== =========== ========== ============ =========== =========
See accompanying notes to consolidated financial statements.
5
HMN FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2006 2005
-------------- ------------
Cash flows from operating activities:
Net income................................................................. $ 5,757,288 7,590,918
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan losses................................................ 7,521,000 2,495,000
Depreciation............................................................. 1,433,281 1,306,622
Amortization of discounts, net........................................... (1,189,588) (501,262)
Amortization of deferred loan fees....................................... (1,167,614) (774,907)
Amortization of core deposit intangible.................................. 85,393 85,393
Amortization of mortgage servicing rights................................ 661,293 766,885
Capitalized mortgage servicing rights.................................... (146,816) (353,163)
Deferred income taxes.................................................... 0 (180,400)
Securities gains, net.................................................... (48,122) 0
Losses on sales of real estate........................................... 19,058 19,563
Gain on sales of loans................................................... (1,029,794) (1,242,437)
Proceeds from sales of real estate....................................... 347,457 590,790
Proceeds from sales of loans held for sale............................... 59,652,131 68,666,440
Disbursements on loans held for sale..................................... (58,735,276) (65,325,644)
Amortization of restricted stock awards.................................. 140,703 71,207
Amortization of unearned ESOP shares..................................... 145,011 145,011
Earned employee stock ownership shares priced above original cost........ 284,559 257,951
Stock option compensation................................................ 48,317 0
Increase in accrued interest receivable.................................. (199,289) (819,264)
(Decrease) increase in accrued interest payable.......................... (650,751) 828,086
Equity losses of limited partnerships.................................... 22,059 20,710
(Increase) decrease in other assets...................................... (4,834,150) 771,488
(Decrease) increase in other liabilities................................. (779,815) 469,992
Other, net............................................................... 89,477 52,445
-------------- ------------
Net cash provided by operating activities.............................. 7,425,812 14,941,424
-------------- ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale....................... 2,988,122 0
Principal collected on securities available for sale....................... 617,428 1,648,554
Proceeds collected on maturities of securities available for sale.......... 105,500,000 8,000,000
Purchases of securities available for sale................................. (132,998,325) (4,991,400)
Purchase of Federal Home Loan Bank stock................................... 0 (1,904,200)
Redemption of Federal Home Loan Bank stock................................. 408,900 2,387,500
Net decrease (increase) in loans receivable................................ 46,997,713 (38,865,360)
Purchases of premises and equipment........................................ (1,188,532) (1,015,189)
-------------- ------------
Net cash provided (used) by investing activities....................... 22,325,306 (34,740,095)
-------------- ------------
Cash flows from financing activities:
Increase in deposits....................................................... 9,733,212 16,241,645
Purchase of treasury stock................................................. (2,953,850) (972,000)
Stock options exercised.................................................... 137,703 37,887
Excess tax benefits from options exercised................................. 47,648 29,907
Dividends to stockholders.................................................. (2,797,255) (2,605,530)
Proceeds from Federal Home Loan Bank advances.............................. 0 57,000,000
Repayment of Federal Home Loan Bank advances............................... (10,000,000) (57,000,000)
Proceeds from Federal Reserve Bank advances................................ 1,000,000 0
Repayment of Federal Reserve Bank advances................................. (1,000,000) 0
Decrease in customer escrows............................................... 51,788 231,207
-------------- ------------
Net cash (used) provided by financing activities....................... (5,780,754) 12,963,116
-------------- ------------
Increase (decrease) in cash and cash equivalents....................... 23,970,364 (6,835,555)
Cash and cash equivalents, beginning of period................................ 47,268,795 34,298,394
-------------- ------------
Cash and cash equivalents, end of period...................................... $ 71,239,159 27,462,839
============== ============
Supplemental cash flow disclosures:
Cash paid for interest..................................................... $ 21,978,483 17,016,102
Cash paid for income taxes................................................. 6,851,238 5,183,494
Supplemental noncash flow disclosures:
Transfer of loans to real estate........................................... 251,812 15,951,620
See accompanying notes to consolidated financial statements.
6
HMN FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SEPTEMBER 30, 2006 AND 2005
(1) HMN FINANCIAL, INC.
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
offices in Minnesota and Iowa. The Bank has one wholly owned subsidiary, Osterud
Insurance Agency, Inc. (OIA) which offers financial planning products and
services. HMN has another wholly owned subsidiary, Security Finance Corporation
(SFC) which acts as an intermediary for the Bank in transacting like-kind
property exchanges for Bank customers. During the 2005 period for which
financial information is presented in this Form 10-Q, the Bank had one other
subsidiary that is no longer operating. Home Federal Holding, Inc. (HFH), a
wholly owned subsidiary, was the holding company for Home Federal REIT, Inc.
(HFREIT) which invested in real estate loans acquired from the Bank. HFH and
HFREIT were both dissolved in 2005.
The consolidated financial statements included herein are for HMN, SFC, the Bank
and the Bank's consolidated entities as described above. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(2) BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and therefore, do not include all
disclosures necessary for a complete presentation of the consolidated balance
sheets, consolidated statements of income, consolidated statement of
stockholders' equity and consolidated statements of cash flows in conformity
with generally accepted accounting principles. However, all normal recurring
adjustments that are, in the opinion of management, necessary for the fair
presentation of the interim financial statements have been included. The results
of operations for the nine-month period ended September 30, 2006 are not
necessarily indicative of the results which may be expected for the entire year.
Certain amounts in the consolidated financial statements for prior periods may
have been reclassified to conform with the current period presentation.
(3) NEW ACCOUNTING STANDARDS
As of January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (FAS 123R) which
requires companies to recognize in compensation expense the grant-date fair
value of stock awards issued. The Company adopted FAS 123R using the modified
prospective transition method. In accordance with the modified prospective
transition method, the Company's Consolidated Financial Statements for prior
periods have not been restated to reflect the impact of FAS 123R. As a result of
applying FAS 123R, the Company recognized share-based compensation expense of
$48,317 for the nine months ended September 30, 2006 (for additional information
see Note 12).
In March 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140. Effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006,
an entity is required to recognize a servicing asset or liability each time it
undertakes an obligation to service a financial asset. SFAS No. 156 requires
that all separately recognized servicing assets and liabilities be initially
measured at fair value and permits, but does not require, the subsequent
measurement of servicing assets and liabilities at fair value. It also permits a
one-time reclassification, at the time of initial adoption, of
available-for-sale securities to trading securities by entities with recognized
servicing rights, without calling into question the treatment of other
7
available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entity's exposure to changes in the fair value of servicing assets or
liabilities that a servicer elects to subsequently measure at fair value.
Separate presentation of servicing assets and liabilities subsequently measured
at fair value are required to be disclosed in the statement of financial
position. The impact of adopting SFAS No. 156 on January 1, 2007 is not
anticipated to have a material impact on the Company's financial statements.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48). FIN 48
requires companies to recognize in their financial statements the impact of a
tax position, taken or expected to be taken, if it is more likely than not that
the position will be sustained on audit based on the technical merits of the
position. The provisions of FIN 48 are effective as of January 1, 2007 and are
not anticipated to have a material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about the
use of fair value to measure assets and liabilities. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The impact of adopting
SFAS No. 157 on January 1, 2008 is not anticipated to have a material impact on
the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R). This Statement improves financial
reporting by requiring an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. An employer with publicly traded equity securities
is required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end of the
fiscal year ending after December 15, 2006. Since the Company's only defined
benefit pension plan is a multiemployer plan, the requirements of this statement
do not apply and therefore it is not anticipated that the Statement will have a
material impact on the Company's financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that registrants should quantify errors using both a
balance sheet and an income statement approach and evaluate whether either
approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 is
effective for years ending on or after November 15, 2006. The Company does not
anticipate that the application of SAB 108 will have a material impact on its
financial statements.
(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has commitments outstanding to extend credit that had not closed
prior to the end of the quarter that it intends to sell after the loans are
closed. These commitments are referred to as its mortgage pipeline. As
commitments to originate loans enter the mortgage pipeline, the Company
generally enters into commitments to sell the mortgage pipeline into the
secondary market on a firm commitment or best efforts basis. The commitments to
originate, purchase or sell loans on a firm commitment basis are derivatives. As
a result of marking to market the mortgage pipeline and the related firm
commitments to sell for the period ended September 30, 2006, the Company
recorded an increase in other assets of $7,945, a decrease in other liabilities
of $17,259 and a gain included in the gain on sales of loans of $25,203.
The current commitments to sell loans held for sale are derivatives that do not
qualify for hedge accounting. As a result, these derivatives are marked to
market and the related loans held for sale are recorded at the lower of cost
8
or market. The Company recorded a decrease in loans held for sale of $5,858 and
an increase in other assets of $5,858 due to the mark to market adjustment on
the commitments to sell loans held for sale.
(5) COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity during a period from
transactions and other events from nonowner sources. Comprehensive income is the
total of net income and other comprehensive income, which for the Company is
comprised of unrealized gains and losses on securities available for sale. The
components of other comprehensive income and the related tax effects were as
follows:
For the three months ended September 30,
-----------------------------------------------------------------------------
2006 2005
------------------------------------- -------------------------------------
(Dollars in thousands) 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 $ 801 317 484 (200) (133) (67)
Reclassification of net
gains included in net income 0 0 0 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Net unrealized gains
(losses) arising
during the period 801 317 484 (200) (133) (67)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income
(loss) $ 801 317 484 (200) (133) (67)
========== ========== ========== ========== ========== ==========
For the three months ended September 30,
-----------------------------------------------------------------------------
2006 2005
------------------------------------- -------------------------------------
(Dollars in thousands) 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 $ 919 362 557 (573) (265) (308)
Reclassification of net
gains included in income 48 17 31 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Net unrealized gains
(losses) arising during
the period 871 345 526 (573) (265) (308)
---------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income $
(loss) 871 345 526 (573) (265) (308)
========== ========== ========== ========== ========== ==========
(6) SECURITIES AVAILABLE FOR SALE
The following table shows the gross unrealized losses and fair value for the
securities available for sale portfolio, aggregated by investment category and
length of time that individual securities have been in a continuous loss
position at September 30, 2006.
Less than twelve months Twelve months or more Total
----------------------------------- ------------------------------------- --------------------
# of Fair Unrealized # of Fair Unrealized Fair Unrealized
(Dollars in thousands) Investments Value Losses Investments Value Losses Value Losses
----------- ------- ---------- ----------- -------- ----------- ------- ----------
Mortgage backed securities:
FHLMC - $ - - 2 $ 2,591 (346) $ 2,591 (346)
FNMA - - - 3 3,287 (244) 3,287 (244)
Other marketable debt
securities:
FNMA 3 14,760 (10) 1 4,981 (18) 19,741 (28)
FHLMC 2 9,842 (2) 2 9,984 (16) 19,826 (18)
FHLB 2 9,981 (14) 5 24,863 (139) 34,844 (153)
------ ------- ---------- ------ -------- ----------- ------- ----------
Total temporarily impaired
securities 7 $34,583 (26) 13 $ 45,706 (763) $80,289 (789)
====== ======= ========== ====== ======== =========== ======= ==========
These fixed rate investments are temporarily impaired due to changes in interest
rates and the Company has the ability and intent to hold to maturity or until
the temporary loss is recovered. Mortgage backed securities in the table above
had an average remaining life of less than six years and the other marketable
securities had an average remaining life of less than one year at September 30,
2006. The Company has reviewed these securities and has concluded that the
unrealized losses are temporary and no other-than-temporary impairment has
occurred at September 30, 2006.
9
(7) INVESTMENT IN MORTGAGE SERVICING RIGHTS
A summary of mortgage servicing activity is as follows:
Twelve Months
Nine Months ended ended Nine Months ended
(Dollars in thousands) Sept. 30, 2006 Dec. 31, 200 Sept. 30, 2005
-------------- --------------- -----------------
Mortgage servicing rights
Balance, beginning of period.............. $ 2,654 3,231 3,231
Originations.............................. 147 442 353
Amortization.............................. (662) (1,019) (766)
-------------- ------------- --------------
Balance, end of period.................... 2,139 2,654 2,818
-------------- ------------- --------------
Fair value of mortgage servicing rights... $ 4,233 4,599 4,137
============== ============= ==============
All of the loans being serviced were single-family loans serviced for FNMA under
the mortgage-backed security program or individual loan sale program. The
following is a summary of the risk characteristics of the loans being serviced
at September 30, 2006.
Weighted Weighted
Loan Average Average
Principal Interest Remaining Number
(Dollars in thousands) Balance Rate Term of Loans
-------------------------------- --------- -------- --------- --------
Original term 30 year fixed rate $ 205,545 5.93% 326 1,817
Original term 15 year fixed rate 183,442 5.28% 144 2,441
Adjustable rate 4,363 5.50% 317 40
(8) INTANGIBLE ASSETS
The gross carrying amount of intangible assets and the associated accumulated
amortization at September 30, 2006 is presented in the table below. Amortization
expense for intangible assets was $746,686 for the nine-month period ended
September 30, 2006.
Gross Unamortized
Carrying Accumulated Intangible
(Dollars in thousands) Amount Amortization Assets
------------------------------- -------- ------------ -----------
Amortized intangible assets:
Mortgage servicing rights $ 4,221 (2,082) 2,139
Core deposit intangible 1,567 (1,433) 134
-------- ------------ -----------
Total $ 5,788 (3,515) 2,273
======== ============ ===========
The following table indicates the estimated future amortization expense for
amortized intangible assets:
Mortgage Core
Servicing Deposit
(Dollars in thousands) Rights Intangible Total
------------------------ --------- ---------- -----
Year ending December 31,
2006 $ 107 28 135
2007 380 106 486
2008 316 0 316
2009 262 0 262
2010 216 0 216
Projections of amortization are based on existing asset balances and the
existing interest rate environment as of September 30, 2006. The Company's
actual experience may be significantly different depending upon changes in
mortgage interest rates and other market conditions.
10
(9) EARNINGS PER SHARE
The following table reconciles the weighted average shares outstanding and the
income available to common shareholders used for basic and diluted EPS:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
----------- --------- --------- ---------
Weighted average number of common shares outstanding
used in basic earnings per common share calculation 3,807,223 3,836,397 3,834,973 3,830,264
Net dilutive effect of:
Stock options 181,737 170,316 174,474 168,320
Restricted stock awards 12,744 8,172 13,307 8,064
----------- --------- --------- ---------
Weighted average number of shares outstanding
adjusted for effect of dilutive securities 4,001,704 4,014,885 4,022,754 4,006,648
=========== ========= ========= =========
Income available to common shareholders $ 73,512 2,276,401 5,757,288 7,590,918
Basic earnings per common share $ 0.02 0.59 1.50 1.98
Diluted earnings per common share $ 0.02 0.57 1.43 1.89
(10) REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on 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. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tier I or Core capital and Risk-based capital (as defined in
the regulations) to total assets (as defined). Management believes, as of
September 30, 2006, that the Bank meets all capital adequacy requirements to
which it is subject.
Management believes that based upon the Bank's capital calculations at September
30, 2006 and other conditions consistent with the Prompt Corrective Actions
Provisions of the OTS regulations, the Bank would be categorized as well
capitalized.
On September 30, 2006 the Bank's tangible assets and adjusted total assets were
$983.4 million and its risk-weighted assets were $778.4 million. The following
table presents the Bank's capital amounts and ratios at September 30, 2006 for
actual capital, required capital and excess capital including ratios required to
qualify as a well capitalized institution under the Prompt Corrective Actions
regulations.
11
Required to be To Be Well Capitalized
Adequately Under Prompt Corrective
Actual Capitalized Excess Capital Action Provisions
--------------------- -------------------- ------------------- -----------------------
Percent of Percent of Percent of Percent of
(Dollars in thousands) Amount Assets(1) Amount Assets (1) Amount Assets(1) Amount Assets(1)
--------- ---------- -------- ---------- ------- ---------- --------- ------------
Bank stockholder's equity.................. $ 87,833
Plus:
Net unrealized loss on certain
securities available for sale........... 392
Less:
Goodwill and core deposit intangibles.... (3,935)
Disallowed assets........................ (1,747)
---------
Tier I or core capital 82,543
---------
Tier I capital to adjusted total
assets.................................. 8.39% $ 39,337 4.00% $43,206 4.39% $ 49,171 5.00%
Tier I capital to risk-weighted assets..... 10.60% $ 31,136 4.00% $51,407 6.60% $ 46,705 6.00%
Plus:
Allowable allowance for loan
losses................................... 8,717
---------
Risk-based capital......................... $ 91,260 $ 62,273 $28,987 $ 77,841
=========
Risk-based capital to
risk- weighted assets.................... 11.72% 8.00% 3.72% 10.00%
(1) Based upon the Bank's adjusted total assets for the purpose of the
tangible and core capital ratios and risk-weighted assets for the purpose
of the risk-based capital ratio.
The tangible capital of the Bank was in excess of the minimum 2% required at
September 30, 2006 but is not reflected in the table above.
(11) COMMITMENTS AND CONTINGENCIES
The Bank issued standby letters of credit which guarantee the performance of
customers to third parties. The outstanding standby letters of credit expire
over the next 3 years and totaled approximately $24.5 million at September 30,
2006. The letters of credit were collateralized primarily with commercial real
estate mortgages.
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.
(12) STOCK-BASED COMPENSATION
The Company has a stock option and incentive plan for certain key employees and
directors whereby shares of common stock have been reserved for awards in the
form of stock options or restricted stock. Under the plan, the aggregate number
of options and shares granted cannot exceed 400,000 shares with no more than
100,000 of shares issued in the form of restricted stock. The Compensation
Committee of the Board of Directors grants options from the plan at prices equal
to the fair value of the stock at the date of the grant. The options expire 10
years from the date of the grant and typically vest over a 3 to 5 year period
from the date of grant.
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (FAS 123R) on January 1, 2006 using the modified
prospective transition method. Under the modified prospective transition method,
option awards that are granted, modified or settled beginning at the date of
adoption are measured and accounted for in accordance with FAS 123R. In
addition, expense is recognized in the statement of income for unvested option
awards that were granted prior to the date of adoption based on the fair value
of the award as determined at the grant date. The consolidated financial
statements as of and for the nine months ended September 30, 2006 reflect
$48,317 of additional compensation expense as a result of implementing FAS 123R.
In accordance with the modified prospective transition method, the Consolidated
Financial Statements for prior periods have not been restated. Therefore, the
results for the third quarter and first nine months of 2006 are not directly
comparable to the same periods in 2005.
12
Stock option information as of September 30, 2006 is as follows:
Weighted-Average Aggregate
Weighted-Average Remaining Contractual Intrinsic Value
Options Exercise Price Term (years) (in thousands)
---------- ---------------- --------------------- ---------------
Options outstanding at September
30, 2006 339,040 $ 16.536 5.3 $ 796
Options exercisable at September
30, 2006 137,600 14.565 4.0 465
At September 30, 2006, 154,127 shares were available for issuance under the
plan. No stock options were granted and 11,726 options were exercised in the
first nine months of 2006.
At September 30, 2006, there was $158,000 in unrecognized compensation cost for
stock options granted under the plan. This cost is expected to be recognized
over a weighted-average period of 2.75 years.
Prior to January 1, 2006, the Company applied the existing accounting rules
under APB Opinion No. 25, which provided that no compensation expense was
recorded for options granted at an exercise price equal to the market value of
the underlying common stock on the date of the grant. Compensation for
restricted stock awards continues to be recorded in accordance with APB Opinion
No. 25 and compensation expense is recognized as the restricted stock awards are
vested. If the fair value recognition provisions of FAS 123R had been applied to
stock-based compensation for the three and nine months ended September 30, 2005,
the Company's pro forma net income and earnings per share would have been as
follows:
Quarter Ended Nine Months
September 30, Ended September
2005 30, 2005
------------- ---------------
Net income:
As reported ........................ $ 2,276,401 7,590,918
Deduct: Total stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax effects...... 13,655 33,771
------------- -------------
Pro forma .......................... 2,262,746 7,557,147
============= =============
Earnings per common share:
As reported:
Basic .............................. $ 0.59 1.98
Diluted ............................ 0.57 1.89
Pro forma:
Basic .............................. 0.59 1.97
Diluted ............................ 0.57 1.89
The Company utilizes the Black-Scholes valuation model to determine the fair
value of stock options on the date of grant. The model derives the fair value of
stock options based on certain assumptions related to the expected stock price
volatility, expected option life, risk-free rate of return and dividend yield of
the stock. The expected lives of options granted are estimated based on
historical employee exercise behavior. The risk-free rate of return coincides
with the expected life of the options and is based on the 10 year Treasury note
rate at the time the options are issued. The historical volatility levels of the
Company's common stock are used to estimate the stock price volatility. The
current dividend yield is used to estimate the expected dividend yield on the
stock.
(13) BUSINESS SEGMENTS
The Bank has been identified as a reportable operating segment in accordance
with the provisions of SFAS No. 131. SFC and HMN, the holding company, did not
meet the quantitative thresholds for a reportable segment and therefore are
included in the "Other" category.
The Company evaluates performance and allocates resources based on the segment's
net income, return on average assets and equity. Each corporation is managed
separately with its own officers and board of directors, some of whom may
overlap between the corporations.
13
The following table sets forth certain information about the reconciliations of
reported net income and assets for each of the Company's reportable segments.
Home Federal Consolidated
(Dollars in thousands) Savings Bank Other Eliminations Total
---------------------- ------------ --------- ------------ ------------
AT OR FOR THE QUARTER ENDED SEPTEMBER 30, 2006:
Interest income - external customers ............. $ 17,165 10 0 17,175
Non-interest income - external customers ......... 1,742 0 0 1,742
Loss on limited partnerships ..................... (6) 0 0 (6)
Intersegment interest income ..................... 3 0 (3) 0
Intersegment non-interest income ................. 34 223 (257) 0
Interest expense ................................. 7,473 3 (3) 7,473
Amortization of mortgage servicing rights, net.... 208 0 0 208
Other non-interest expense ....................... 5,009 257 (34) 5,232
Income tax expense (benefit) ..................... (3) (99) 0 (102)
Net income ....................................... 225 72 (223) 74
Goodwill ......................................... 3,801 0 0 3,801
Total assets ..................................... 986,694 92,742 (88,178) 991,258
AT OR FOR THE QUARTER ENDED SEPTEMBER 30, 2005:
Interest income - external customers ............. $ 15,224 14 0 15,238
Non-interest income - external customers ......... 1,727 0 0 1,727
Loss on limited partnerships ..................... (6) 0 0 (6)
Intersegment interest income ..................... 0 10 (10) 0
Intersegment non-interest income ................. 34 2,441 (2,475) 0
Interest expense ................................. 6,303 0 (10) 6,293
Amortization of mortgage servicing rights, net.... 257 0 0 257
Other non-interest expense ....................... 5,150 176 (34) 5,292
Income tax expense ............................... 1,876 13 0 1,889
Net income ....................................... 2,441 2,276 (2,441) 2,276
Goodwill ......................................... 3,801 0 0 3,801
Total assets ..................................... 979,706 88,667 (86,069) 982,304
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006:
Interest income - external customers ............. $ 50,083 86 0 50,169
Non-interest income - external customers ......... 5,010 0 0 5,010
Loss on limited partnerships ..................... (22) 0 0 (22)
Intersegment interest income ..................... 3 0 (3) 0
Intersegment non-interest income ................. 101 6,052 (6,153) 0
Interest expense ................................. 21,328 3 (3) 21,328
Amortization of mortgage servicing rights, net.... 661 0 0 661
Other non-interest expense ....................... 16,007 576 (101) 16,482
Income tax expense (benefit) ..................... 3,603 (195) 0 3,408
Net income (loss) ................................ 6,055 5,754 (6,052) 5,757
Goodwill ......................................... 3,801 0 0 3,801
Total assets ..................................... 986,694 92,742 (88,178) 991,258
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005:
Interest income - external customers ............. $ 44,159 48 0 44,207
Non-interest income - external customers ......... 4,743 0 0 4,743
Loss on limited partnerships ..................... (21) 0 0 (21)
Intersegment interest income ..................... 0 26 (26) 0
Intersegment non-interest income ................. 101 7,821 (7,922) 0
Interest expense ................................. 17,870 0 (26) 17,844
Amortization of mortgage servicing rights, net.... 767 0 0 767
Other non-interest expense ....................... 15,193 502 (101) 15,594
Income tax expense (benefit) ..................... 4,832 (194) 0 4,638
Net income ....................................... 7,825 7,587 (7,821) 7,591
Goodwill ......................................... 3,801 0 0 3,801
Total assets ..................................... 979,706 88,667 (86,069) 982,304
14
HMN FINANCIAL, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This quarterly report and other reports filed with the Securities and Exchange
Commission may contain "forward-looking" statements that deal with future
results, plans or performance. When used in this Form 10-Q, the words
"anticipates", "believes", "estimates", "expects", "intends" and similar
expressions, as they relate to the Company, the Bank and its management, are
intended to identify such forward-looking statements. In addition, the Company's
management may make such statements orally to the media, or to securities
analysts, investors or others. Forward looking statements deal with matters that
do not relate strictly to historical facts. The Company's future results may
differ materially from historical performance and forward-looking statements
about the Company's expected financial results or other plans are subject to a
number of risks and uncertainties. These include but are not limited to possible
legislative changes and adverse economic, business and competitive developments
such as shrinking interest margins; deposit outflows; 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; changes in credit and other risks posed by the Company's loan and
investment portfolios; technological, computer-related or operational
difficulties; adverse changes in securities markets; results of litigation or
other significant uncertainties. For additional discussion of the risks and
uncertainties applicable to the Company, see Item 1A. "Risk Factors" of Part I
of the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
GENERAL
The earnings of the Company are primarily dependent on the Bank's net interest
income, which is the difference between interest earned on its loans and
investments, and the interest paid on interest-bearing liabilities such as
deposits and Federal Home Loan Bank (FHLB) advances. 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. The Company's interest rate spread has been
enhanced by the increased level of commercial loans placed in portfolio and the
increased amount of lower rate deposits. Net interest income and net interest
rate spread are affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The Company's net income is also affected by the
generation of non-interest income, which consists primarily of gains or losses
from the sale of securities, gains from the sale of loans, and the generation of
fees 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 and amortization expense on mortgage
servicing assets.
The earnings of financial institutions, such as the Bank, are 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 single family and commercial properties, competition among
lenders, the level of interest rates and the availability of funds. Commercial
real estate loan activity was down in the first nine months of 2006 when
compared to the same period of 2005 due to increased rate competition on long
term fixed rate loans and we expect this trend to continue. 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. The interest rates charged by the FHLB on advances to the Bank also
have a significant impact on the Bank's overall cost of funds.
CRITICAL ACCOUNTING POLICIES
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. The Company has identified the following
policies as being critical because they require difficult, subjective, and/or
complex
15
judgments that are inherently uncertain. Therefore, actual financial results
could differ significantly depending upon the estimates used.
Allowance for Loan Losses and Related Provision
The allowance for loan losses is based on periodic analysis of the loan
portfolio. In this analysis, management considers factors including, but not
limited to, specific occurrences of loan impairment, changes in the size of the
portfolios, national and regional economic conditions such as unemployment data,
loan portfolio composition, loan delinquencies, local construction permits,
development plans, local economic growth rates, historical 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
adequacy 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 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 using a combination of the Company's own loss experience and
external industry data and are assigned to all loans without identified credit
weaknesses. The Company also performs an individual analysis of impairment on
each non-performing loan that is based on the expected cash flows or the value
of the assets collateralizing the loans. 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 of all
non-performing loans.
The adequacy 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 frequent adjustments due to
changing economic prospects of borrowers or properties. 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. 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 for
which specific reserves are not required. Future conditions may differ
substantially from those anticipated in determining the allowance for loan
losses and adjustments may be required in the future.
Mortgage Servicing Rights
The Company recognizes as an asset the rights to service mortgage loans for
others, which are referred to as mortgage servicing rights (MSRs). MSRs are
capitalized at the relative fair value of the servicing rights on the date the
mortgage loan is sold and are carried at the lower of the capitalized amount,
net of accumulated amortization, or fair value. MSRs are capitalized and
amortized in proportion to, and over the period of, estimated net servicing
income. Each quarter the Company evaluates its MSRs for impairment in accordance
with Statement of Financial Accounting Standards (SFAS) No. 140. Loan type and
interest rate are the predominant risk characteristics of the underlying loans
used to stratify the MSRs for purposes of measuring impairment. If temporary
impairment exists, a valuation allowance is established for any excess of
amortized cost over the current fair value through a charge to income. If the
Company later determines that all or a portion of the temporary impairment no
longer exists, a reduction of the valuation allowance is recorded as an increase
to income. The valuation is based on various assumptions, including the
estimated prepayment speeds and default rates of the stratified portfolio.
Changes in the mix of loans, interest rates, prepayment speeds, or default rates
from the estimates used in the valuation of the mortgage servicing rights may
have a material effect on the amortization and valuation of MSRs. Future
economic conditions may differ substantially from those anticipated in
determining the value of the MSRs and adjustments may be required in the future.
The Company does not formally hedge its MSRs because they are hedged naturally
by the Company's origination volume. Generally, as interest rates rise the
origination volume declines and the value of MSRs increases and as interest
rates decline the origination volume increases and the value of MSRs decreases.
16
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 liabilities.
NET INCOME
The Company's net income was $74,000 for the third quarter of 2006, down $2.2
million, or 96.8%, from net income of $2.3 million for the third quarter of
2005. The decrease in net income is due to a $5.1 million increase in the loan
loss provision between the periods as a result of increased commercial real
estate loan charge offs. Basic earnings per share for the third quarter of 2006
were $0.02, down $0.57, or 96.6%, from $0.59 for the same quarter of 2005.
Diluted earnings per common share for the third quarter of 2006 were $0.02, down
$0.55, or 96.5%, from $0.57 for the third quarter of 2005.
Net income was $5.8 million for the nine-month period ended September 30, 2006,
a decrease of $1.8 million, or 24.2%, compared to $7.6 million for the
nine-month period ended September 30, 2005. The decrease in net income is due to
a $5.0 million increase in the loan loss provision between the periods as a
result of increased commercial real estate loan charge offs. Basic earnings per
share were $1.50 for the nine-months ended September 30, 2006, a decrease of
$0.48, or 24.2%, from $1.98 for the same nine-month period of 2005. Diluted
earnings per common share for the nine-month period in 2006 were $1.43, down
$0.46, or 24.3%, from $1.89 for the same period in 2005.
NET INTEREST INCOME
Net interest income was $9.7 million for the third quarter of 2006, an increase
of $757,000, or 8.5%, compared to $8.9 million for the third quarter of 2005.
Interest income was $17.2 million for the third quarter of 2006, an increase of
$2.0 million, or 12.7%, from $15.2 million for the same period in 2005. Interest
income increased because of an increase in the average interest rates earned on
loans and investments. Interest rates increased primarily because of the 150
basis point increase in the prime interest rate between the periods. Increases
in the prime rate, which is the rate that banks charge their prime business
customers, generally increase the rates on adjustable rate consumer and
commercial loans in the portfolio and new loans originated. The increase in
interest income due to increased rates was partially offset by a $59 million
decrease in the average outstanding loan portfolio balance between the periods
due to an increase in commercial loan prepayments and a decrease in loan
originations. The average yield earned on interest-earning assets was 7.19% for
the third quarter of 2006, an increase of 74 basis points from the 6.45% yield
for the third quarter of 2005.
Interest expense was $7.5 million for the third quarter of 2006, an increase of
$1.2 million, or 18.8%, compared to $6.3 million for the third quarter of 2005.
Interest expense increased primarily because of higher interest rates paid on
deposits which were caused by the 150 basis point increase in the federal funds
rate between the periods. Increases in the federal funds rate, which is the rate
that banks charge other banks for short term loans, generally increase the rates
banks pay for deposits. The increase in deposit rates was partially offset by a
change in the mix of funding sources between the periods. The average
outstanding balances of brokered deposits and Federal Home Loan Bank advances of
$86 million were replaced with other less expensive deposits. The average
interest rate paid on interest-bearing liabilities was 3.34% for the third
quarter of 2006, an increase of 52 basis points from the 2.82% paid for the
third quarter of 2005.
Net interest margin (net interest income divided by average interest earning
assets) for the third quarter of 2006 was 4.06%, an increase of 27 basis points,
compared to 3.79% for the third quarter of 2005.
17
Net interest income was $28.8 million for the first nine months of 2006, an
increase of $2.4 million, or 9.4%, from $26.4 million for the same period in
2005. Interest income was $50.2 million for the nine-month period ended
September 30, 2006, an increase of $6.0 million, or 13.5%, from $44.2 million
for the same period in 2005. Interest income increased primarily because of an
increase in the average interest rates earned on loans and investments. Interest
rates increased primarily because of the 150 basis point increase in the prime
interest rate between the periods. The increase in interest income due to
increased rates was partially offset by a $40 million decrease in the average
outstanding loan portfolio balance between the periods due to an increase in
commercial loan prepayments and a decrease in loan originations. The yield
earned on interest-earning assets was 7.10% for the first nine months of 2006,
an increase of 80 basis points from the 6.30% yield for the same period in 2005.
Interest expense was $21.3 million for the nine-month period ended September 30,
2006, an increase of $3.5 million, or 19.5%, from $17.8 million for the same
period in 2005. Interest expense increased primarily because of higher interest
rates paid on deposits which were caused by the 150 basis point increase in the
federal funds rate between the periods. The increase in deposit rates was
partially offset by a change in the mix of funding sources between the periods.
The average outstanding balances of brokered deposits and Federal Home Loan Bank
advances of $45 million were replaced with other less expensive deposits. The
average interest rate paid on interest-bearing liabilities was 3.22% for the
first nine-months of 2006, an increase of 53 basis points from the 2.69% paid
for the same period of 2005.
Net interest margin (net interest income divided by average interest earning
assets) for the first nine months of 2006 was 4.08%, an increase of 32 basis
points, compared to 3.76% for the same period of 2005.
PROVISION FOR LOAN LOSSES
The provision for loan losses is recorded to bring the allowance for loan losses
to a level deemed appropriate by management based on factors disclosed in the
critical accounting policies previously discussed. The provision for loan losses
was $6.0 million for the third quarter of 2006, an increase of $5.1 million, or
533.0%, from $952,000 for the third quarter of 2005. The provision for loan
losses increased primarily because $7.4 million in related commercial real
estate development loans were charged off during the quarter. Most of the
charged off loans had been downgraded to substandard and classified as
non-accruing in the second quarter of 2006 due to nonperformance. During the
third quarter, it was determined that the properties securing the loans,
primarily developed and undeveloped single family home lots and a golf course,
would be sold at auction in order to liquidate the assets and repay the loans.
These properties were sold late in the third quarter and the proceeds realized
were substantially less than the recorded loan balance amounts due to an
unanticipated decrease in the values of the properties. The loans are personally
guaranteed and the Company is continuing to pursue repayment from the
guarantors. The amounts charged off represent an estimate of the loss incurred
after considering the auction proceeds and reviewing each guarantor's financial
position and assessing their ability to repay their personal obligations. Of the
$14.4 million aggregate principal balance of these loans at June 30, 2006, $4.2
million is recorded as non-accruing at September 30, 2006. The Company does not
anticipate making any material future cash expenditures in connection with these
loans except for those relating to possible collection costs associated with
enforcement of the personal guarantees. The actual amount of such expenditures
in the future could vary depending on the amount of professional assistance
needed and the nature of any proceedings required to resolve this matter. The
estimates used in determining the remaining non-accruing balance of these loans
will continue to be reviewed in conjunction with our normal allowance for loan
loss provision procedures and adjustments, if any, to the allowance for loan
losses will be recorded in the period in which the need for such adjustments
becomes known. The increase in the provision related to loan charge offs was
partially offset by a $22 million decrease in outstanding commercial loans
during the third quarter of 2006.
Total non-performing assets were $10.3 million at September 30, 2006, a decrease
of $3.2 million, or 23.7%, from $13.5 million at June 30, 2006. Non-performing
loans decreased $3.1 million and foreclosed, repossessed, and other assets
decreased $96,000. The decrease in non-performing loans during the quarter
relates primarily to the charge off of $6.9 million in commercial real estate
development loans described above that were previously classified as
non-performing. The decrease related to the charge offs was partially offset by
an increase in other
18
non-performing commercial real estate loans of $1.3 million, a $524,000 increase
in non-performing commercial business loans, an $895,000 increase in
non-performing single family loans, and a $1.1 million increase in
non-performing consumer loans.
The provision for loan losses was $7.5 million for the first nine-months of
2006, an increase of $5.0 million, or 201.4%, from $2.5 million for the same
nine-month period in 2005. The provision for loan losses increased primarily
because $7.4 million in related commercial real estate development loans were
charged off during the third quarter as more fully described above in the third
quarter provision for loan losses discussion. The increase in the provision
related to loan charge offs was partially offset by the $45 million decrease in
outstanding commercial loans during the first nine months of 2006. Total
non-performing assets were $10.3 million at September 30, 2006, an increase of
$6.4 million, or 165.1%, from $3.9 million at December 31, 2005. Non-performing
loans increased $6.9 million and foreclosed, repossessed and other nonperforming
assets decreased $477,000 during the first nine months of 2006. The increase in
non-performing loans during the nine month period relates primarily to a $4.3
million increase in non-performing commercial real estate loans, a $573,000
increase in non-performing commercial business loans, a $583,000 increase in
non-performing single-family mortgage loans, and a $880,000 increase in
non-performing consumer loans.
A reconciliation of the Company's allowance for loan losses for the nine-month
periods ended September 30, 2006 and 2005 is summarized as follows:
(in thousands) 2006 2005
-------- -------
Balance at January 1, $ 8,778 $ 8,996
Provision 7,521 2,495
Charge offs:
Commercial loans (7,374) (2,615)
Consumer loans (234) (195)
Single family mortgage loans 0 (231)
Recoveries 55 183
-------- -------
Balance at September 30, $ 8,746 $ 8,633
======== =======
NON-INTEREST INCOME
Non-interest income was $1.7 million for the third quarter of 2006, an increase
of $14,000, or 0.8%, from $1.7 million for the same period in 2005. Fees and
service charges increased $114,000 between the periods primarily because of
increased retail deposit account activity and fees. Gains on sales of loans
decreased $144,000 due to a decrease in the single-family mortgage loans that
were sold and a decrease in the profit margins realized on the loans that were
sold. Competition in the single-family loan origination market remained strong
and profit margins were decreased in order to remain competitive. Other
non-interest income increased $59,000 primarily because of a decrease in the
losses on the sale of repossessed assets in the third quarter of 2006 when
compared to the same period in 2005.
Non-interest income was $5.0 million for the first nine months of 2006, an
increase of $265,000, or 5.6%, from $4.7 million for the same period in 2005.
Fees and service charges increased $336,000 between the periods primarily
because of increased retail deposit account activity and fees. Security gains
increased $48,000 due to increased security sales. Gains on sales of loans
decreased $212,000 between the periods due to a decrease in the number of
single-family mortgage loans sold and a decrease in the profit margins realized
on the loans that were sold. As noted above, competition in the single-family
loan origination market remained strong and profit margins were lowered in order
to remain competitive. Other non-interest income increased $100,000 primarily
because of a decrease in the losses recognized on repossessed assets in the
first nine months of 2006 when compared to the same period of 2005.
19
NON-INTEREST EXPENSE
Non-interest expense was $5.4 million for the third quarter of 2006, a decrease
of $110,000, or 2.0%, from $5.5 million for the same period of 2005.
Compensation expense decreased $75,000 between the periods due to a decrease in
incentive compensation that was partially offset by increased pension costs and
annual pay increases. Occupancy expense increased $88,000 primarily because of
the additional costs associated with the new branch and loan origination offices
opened in Rochester in the first quarter of 2006. Data processing costs
increased $28,000 primarily because of an increase in internet and other banking
services provided by a third party processor between the periods. Other
operating expenses decreased $97,000 primarily because of decreased mortgage
loan and commercial loan foreclosure costs in the third quarter of 2006 when
compared to the same period in 2005.
Non-interest expense was $17.1 million for the first nine months of 2006, an
increase of $781,000, or 4.8%, from $16.4 million for the same period in 2005.
Compensation expense increased $743,000 primarily because of increases in
payroll due to annual pay increases and pension costs. Occupancy expense
increased $255,000 primarily because of the additional costs associated with new
branch and loan origination offices opened in Rochester in the first quarter of
2006. Data processing costs increased $121,000 primarily because of an increase
in internet and other banking services provided by a third party processor
between the periods. Other non-interest expense decreased $269,000 primarily
because of a decrease in mortgage loan expenses and professional fees.
INCOME TAX EXPENSE
Because of the pre-tax loss for the third quarter of 2006, an income tax benefit
of $102,000 was recorded, a decrease of $2.0 million, or 105.4%, compared to
$1.9 million in expense for the same period of 2005. Income tax expense was $3.4
million for the first nine months of 2006, a decrease of $1.2 million, or 26.5%,
compared to $4.6 million for the same period of 2005. Income tax expense
decreased primarily because of a decrease in taxable income.
NON-PERFORMING ASSETS
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio at September 30, 2006 and December 31, 2005.
Sept. 30, Dec. 31,
(Dollars in thousands) 2006 2005
---------------------------------------------------- ------------ -----------
Non-Accruing Loans:
One-to-four family real estate $ 1,725 626
Commercial real estate 5,284 948
Consumer 1,376 496
Commercial business 832 259
------------ -----------
Total 9,217 2,329
------------ -----------
Other assets 44 178
Foreclosed and Repossessed Assets:
One-to-four family real estate 383 565
Consumer 650 750
Commercial 0 61
------------ -----------
Total non-performing assets $ 10,294 $ 3,883
============ ===========
Total as a percentage of total assets 1.04% 0.39%
============ ===========
Total non-performing loans $ 9,217 $ 2,329
============ ===========
Total as a percentage of total loans receivable, net 1.26% 0.30%
Allowance for loan loss to non-performing loans 94.89% 376.88%
Total non-performing assets were $10.3 million at September 30, 2006, an
increase of $6.4 million, or 165.1%, from $3.9 million at December 31, 2005.
Non-performing loans increased $6.9 million and foreclosed, repossessed and
other nonperforming assets decreased $477,000 during the first nine months of
2006. The following activity occurred during the first nine months of 2006
related to non-performing assets: $17.3 million of previously performing loans
were classified as non-performing, $66,000 in non-performing loans were
20
foreclosed or repossessed, $7.8 million in loans were charged off as a loss,
$536,000 in foreclosed assets were sold, and $2.6 million in loans previously
classified as non-performing were paid off or were reclassified to performing
status.
DIVIDENDS
On October 24, 2006 the Company declared a cash dividend of $0.25 per share,
payable on December 13, 2006 to shareholders of record on November 24, 2006.
The Company has declared and paid dividends during 2006 as follows:
Record date Payable date Dividend per share Dividend Payout Ratio
----------------- ----------------- ------------------ ---------------------
February 17, 2006 March 7, 2006 $0.24 27.59%
May 19, 2006 June 7, 2006 $0.24 35.29%
August 25, 2006 September 8, 2006 $0.25 34.25%
November 24, 2006 December 13, 2006 $0.25 1250.00%
The annualized dividend payout ratio for the past four quarters, ending with the
December 13, 2006 payment will be 42.61%.
The declaration of dividends is subject to, among other things, the Company's
financial condition and results of operations, the Bank's compliance with its
regulatory capital requirements, tax considerations, industry standards,
economic conditions, regulatory restrictions, general business practices and
other factors.
LIQUIDITY
For the nine months ended September 30, 2006, the net cash provided by operating
activities was $7.4 million. The Company collected $105.5 million from the
maturities of securities, $3.0 million from the sale of securities, $617,000
from principal repayments on securities, and $52,000 of customer escrows. It
purchased securities available for sale of $133.0 million, and premises and
equipment of $1.2 million. Net loans receivable decreased $47.0 million due to
commercial loan prepayments and a decrease in originations. The Company had a
net increase in deposit balances of $9.7 million, received $1.0 million and
repaid $11.0 million in FRB and FHLB advances and received $409,000 from the
redemption of FHLB stock. The Company received $138,000 related to the exercise
of stock options, received tax benefits relating to the exercise of options of
$48,000, purchased $3.0 million of its own stock, and paid $2.8 million in
dividends to its shareholders.
The Company has certificates of deposits with outstanding balances of $184.9
million that come due over the next 12 months. Based upon past experience,
management anticipates that the majority of the deposits will renew for another
term. The Company believes that deposits that do not renew will be replaced with
deposits from other customers or brokers. FHLB advances or proceeds from the
sale of securities could also be used to replace unanticipated outflows of
deposits.
The Company has deposits of $153.8 million in checking and money market accounts
with customers that have individual balances greater than $5 million. While
these funds may be withdrawn at any time, management anticipates that the
majority will remain on deposit with the Bank over the next twelve months. If
these deposits were to be withdrawn, they would be replaced with deposits from
other customers or brokers. FHLB advances or proceeds from the sale of
securities could also be used to replace unanticipated outflows of large
checking and money market deposits.
The Company has $100.9 million of FHLB advances which mature beyond September
30, 2007 but have call features that can be exercised by the FHLB during the
next twelve months. The Company also has $40.0 million of FHLB advances that
will mature during the next twelve months. As the advances mature or if the call
features are exercised, the Company has the option of requesting any advance
otherwise available to it pursuant to the Credit Policy of the FHLB.
21
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest 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 Asset/Liability Management section of this report, which follows,
discloses the Company's projected changes in net interest income based upon
immediate interest rate changes called rate shocks.
The Company utilizes a model which uses the discounted cash flows from its
interest-earning assets and its interest-bearing liabilities to calculate the
current market value of those assets and liabilities. The model also calculates
the changes in market value of the interest-earning assets and interest-bearing
liabilities due to different interest rate changes. The Company believes that
over the next twelve months interest rates could fluctuate in a range of 200
basis points up or down from where the interest rates were at September 30,
2006. 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 September 30, 2006.
Other than trading portfolio Market Value
------------------------------------------------------------
(Dollars in thousands)
Basis point change in interest rates -200 -100 0 +100 +200
------------------------------------------- ---------- -------- -------- --------- ---------
Total market risk sensitive assets........ $1,005,356 998,852 989,696 977,808 965,426
Total market risk sensitive liabilities... 883,449 870,607 859,633 851,099 843,254
Off-balance sheet financial instruments... 133 63 0 (198) (386)
---------- ------- -------- --------- ---------
Net market risk........................... $ 122,040 128,308 130,063 126,511 121,786
========== ======= ======== ========= =========
Percentage change from current market value (6.17)% (1.35)% 0.00% (2.73)% (6.36)%
========== ======= ======== ========= =========
The preceding table was prepared utilizing the following assumptions (Model
Assumptions) regarding prepayment and decay ratios which were determined by
management based upon their review of historical prepayment speeds and future
prepayment projections. Fixed rate loans were assumed to prepay at annual rates
of between 6% to 76%, depending on the note rate and the period to maturity.
Adjustable rate mortgages (ARMs) were assumed to prepay at annual rates of
between 11% and 30%, depending on the note rate and the period to maturity.
Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of
between 5% and 47% depending on the note rate and the period to maturity.
Mortgage-backed securities and Collateralized Mortgage Obligations (CMOs) were
projected to have prepayments based upon the underlying collateral securing the
instrument and the related cash flow priority of the CMO tranche owned.
Certificate accounts were assumed not to be withdrawn until maturity. Passbook
accounts were assumed to decay at an annual rate of 23%, money market accounts
were assumed to decay at an annual rate of 32%, non-interest checking and NOW
accounts were assumed to decay at annual rates of 33% and 17%, respectively.
FHLB advances were projected to be called at the first call date where the
projected interest rate on similar remaining term advances exceeded the interest
rate on the Company's callable advance.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types of assets and liabilities may lag behind changes in market
interest rates. The model assumes that the difference between the current
interest rate being earned or paid compared to a treasury instrument or
22
other interest index with a similar term to maturity (Interest Spread) will
remain constant over the interest changes disclosed in the table. Changes in
Interest Spread could impact projected market value changes. Certain assets,
such as ARMs, have features which restrict changes in interest rates on a
short-term basis and over the life of the assets. The market value of the
interest-bearing assets which are approaching their lifetime interest rate caps
could be different from the values disclosed in the table. In the event of a
change in interest rates, prepayment and early withdrawal levels may deviate
significantly from those assumed in calculating the foregoing table. The ability
of many borrowers to service their debt may decrease in the event of a
substantial sustained interest rate increase.
ASSET/LIABILITY MANAGEMENT
The Company's management reviews the impact that changing interest rates will
have on its net interest income projected for the twelve months following
September 30, 2006 to determine if its current level of interest rate risk is
acceptable. The following table projects the estimated annual impact on net
interest income of immediate interest rate changes called rate shocks.
Projected Change in
Rate Shock Net Interest Percentage
(Dollars in thousands) in Basis Points Income Change
--------------------- --------------- ------------------- ----------
+200 $ (843) (2.06)%
+100 (282) (0.69)
0 0 0.00
-100 (271) (0.66)
-200 (1,358) (3.32)
The preceding table was prepared utilizing the Model Assumptions regarding
prepayment and decay ratios which were determined by management based upon their
review of historical prepayment speeds and future prepayment projections
prepared by third parties.
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 sustained interest rate increase
and could impact net interest income.
In order to manage its exposure to changes in interest rates, management closely
monitors interest rate risk. The Bank has an Asset/Liability Committee which
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 which 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 to assure
attainment of the Board's objectives in the most effective manner. In addition,
each quarter the Board reviews the Bank's asset/liability position, including
simulations of the effect on the Bank's capital of various interest rate
scenarios.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preferences, may place more emphasis on managing net interest margin
than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, 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. The Bank has primarily focused its fixed rate
one-to-four family residential lending program on loans that are saleable to
third parties but does place fixed rate loans that meet certain risk
characteristics into its
23
loan portfolio. The Bank also places into portfolio adjustable rate
single-family loans that reprice over one, three, or five-year period. The
Bank's commercial loan production has primarily been in adjustable rate loans
and the fixed rate commercial loans placed in portfolio have been shorter-term
loans, usually with maturities of five years or less, in order to manage the
Company's interest rate risk exposure.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risk."
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period
covered by this report, the Company conducted an evaluation, under the
supervision and with the participation of the principal executive officer and
principal financial officer, of the Company's disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 (Exchange Act)). Based on this evaluation, the principal executive
officer and principal financial officer 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 Securities and Exchange Commission rules and forms.
Changes in internal controls. There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
24
HMN FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 1A. Risk Factors
There have been no material changes in the risk factors disclosed in the
Company's December 31, 2005 Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) and (b) Not applicable
(c) Information Regarding Share Repurchases
(a) Total (c) Total Number of (d) Maximum Number (or
Number of (b) Average Shares (or Units) Approximate Dollar Value) of
Shares (or Price Paid Purchased as Part of Shares (or Units) that May
Units) per Share Publicly Announced Yet Be Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
-------------------------------------- ---------- ----------- -------------------- ----------------------------
July 1 through July 31, 2006 40,000 $ 36.05 40,000 112,000
August 1 through August 31, 2006 0 0 0 112,000
September 1 through September 30, 2006 0 0 0 112,000
---------- ----------- --------------------
Total 40,000 $ 36.05 40,000
---------- ----------- --------------------
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
Incorporated by reference to the index to exhibits included with this
report immediately following the signature page.
25
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMN FINANCIAL, INC.
Registrant
Date: November 3, 2006 /s/ Michael McNeil
-------------------------------------
Michael McNeil,
President/Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Representative)
Date: November 3, 2006 /s/ Jon Eberle
-------------------------------------
Jon Eberle,
Chief Financial Officer
(Principal Financial Officer)
26
HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
Sequential
Reference Page Numbering
Regulation to Prior Where Attached
S-K Filing or Exhibits Are
Exhibit Exhibit Located in This
Number Document Attached Hereto Number Form 10-Q Report
------------- -------------------------------------------------------- --------- --------------------
3.1 Amended and Restated Articles of Incorporation *1 N/A
3.2 Amended and Restated By-laws *2 N/A
4 Form of Common Stock *3 N/A
Including indentures
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO 31.1 Filed Electronically
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO 31.2 Filed Electronically
32 Section 1350 Certification of CEO and CFO 32 Filed Electronically
*1 Incorporated by reference to the same numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File
No. 0-24100).
*2 Incorporated by reference to Exhibit 3 to the Company's Current Report on
Form 8-K dated February 22, 2005, filed on February 23, 2005 (File No.
0-24100).
*3 Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 dated April 1, 1994 (File No.
33-77212).
27