##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 OR
 o
    
    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.
  Delaware
    
    41-1777397(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)1016 Civic Center Drive N.W., Rochester, MN
    
    55901(Address of principal executive offices)
    
    (ZIP Code)
 (507) 535-1200
  þ o
  o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ  o þ
  Class
    
    Outstanding at April 20, 2011Common stock, $0.01 par value
    
    4,388,399




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##### 



HMN FINANCIAL, INC.
CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at March 31, 2011 and December 31, 2010
    
    
    3Consolidated Statements of Income (Loss) for the Three Months
Ended March 31, 2011 and 2010
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Income for the Three Month Period Ended March 31, 2011
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2011 and 2010
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2:
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
(Included in Item 2 under Market Risk)
    
    
    30Item 4:
    
    Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    34Item 1A:
    
    Risk Factors
    
    
    34Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3:
    
    Defaults Upon Senior Securities
    
    
    34Item 4:
    
    [Removed and Reserved]
    
    
    34Item 5:
    
    Other Information
    
    
    34Item 6:
    
    Exhibits
    
    
    34Signatures
    
    
    
    
    35EX-10.18EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1 : Financial Statements
 
 HMN FINANCIAL, INC. AND SUBSIDIARIES  Consolidated Balance Sheets
 March 31,
    
    
    December 31,(Dollars in thousands)
    
    2011
    
    
    2010(unaudited)AssetsCash and cash equivalents
    
    $
    39,976
    
    
    
    20,981Securities available for sale:Mortgage-backed and related securities

(amortized cost $28,284 and $32,036)
    
    
    29,641
    
    
    
    33,506Other marketable securities
(amortized cost $128,652 and $118,631)
    
    
    128,002
    
    
    
    118,058157,643
    
    
    
    151,564Loans held for sale
    
    
    1,624
    
    
    
    2,728Loans receivable, net
    
    
    634,282
    
    
    
    664,241Accrued interest receivable
    
    
    3,221
    
    
    
    3,311Real estate, net
    
    
    21,469
    
    
    
    16,382Federal Home Loan Bank stock, at cost
    
    
    6,410
    
    
    
    6,743Mortgage servicing rights, net
    
    
    1,575
    
    
    
    1,586Premises and equipment, net
    
    
    9,123
    
    
    
    9,450Prepaid expenses and other assets
    
    
    3,433
    
    
    
    3,632Deferred tax asset, net
    
    
    0
    
    
    
    0Total assets
    
    $
    878,756
    
    
    
    880,618Liabilities and Stockholders EquityDeposits
    
    $
    688,078
    
    
    
    683,230Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    115,000
    
    
    
    122,500Accrued interest payable
    
    
    917
    
    
    
    1,092Customer escrows
    
    
    1,422
    
    
    
    818Accrued expenses and other liabilities
    
    
    3,698
    
    
    
    3,431Total liabilities
    
    
    809,115
    
    
    
    811,071Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par value):Authorized 500,000 shares; issued shares 26,000
    
    
    24,390
    
    
    
    24,264Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    53,662
    
    
    
    56,420Retained earnings, subject to certain restrictions
    
    
    55,930
    
    
    
    55,838Accumulated other comprehensive income, net of tax
    
    
    427
    
    
    
    541Unearned employee stock ownership plan shares
    
    
    (3,336
    )
    
    
    (3,384
    )Treasury stock, at cost 4,740,263 and 4,818,263 shares
    
    
    (61,523
    )
    
    
    (64,223
    )Total stockholders equity
    
    
    69,641
    
    
    
    69,547Total liabilities and stockholders equity
    
    $
    878,756
    
    
    
    880,618
  3




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HMN FINANCIAL, INC. AND SUBSIDIARIES  Consolidated Statements of Income (Loss)
 Three Months EndedMarch 31,(Dollars in thousands)
    
    2011
    
    
    2010Interest income:Loans receivable
    
    $
    9,903
    
    
    
    11,759Securities available for sale:Mortgage-backed and related
    
    
    324
    
    
    
    535Other marketable
    
    
    417
    
    
    
    572Cash equivalents
    
    
    1
    
    
    
    1Other
    
    
    69
    
    
    
    37Total interest income
    
    
    10,714
    
    
    
    12,904Interest expense:Deposits
    
    
    1,940
    
    
    
    3,421Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    1,329
    
    
    
    1,522Total interest expense
    
    
    3,269
    
    
    
    4,943Net interest income
    
    
    7,445
    
    
    
    7,961Provision for loan losses
    
    
    1,946
    
    
    
    6,533Net interest income after provision for loan losses
    
    
    5,499
    
    
    
    1,428Non-interest income:Fees and service charges
    
    
    924
    
    
    
    842Loan servicing fees
    
    
    250
    
    
    
    268Gain on sales of loans
    
    
    495
    
    
    
    314Other
    
    
    117
    
    
    
    150Total non-interest income
    
    
    1,786
    
    
    
    1,574Non-interest expense:Compensation and benefits
    
    
    3,560
    
    
    
    3,449Loss (gain) on real estate owned
    
    
    47
    
    
    
    (761
    )Occupancy
    
    
    940
    
    
    
    1,031Deposit insurance
    
    
    404
    
    
    
    517Data processing
    
    
    253
    
    
    
    276Other
    
    
    1,588
    
    
    
    1,505Total non-interest expense
    
    
    6,792
    
    
    
    6,017Income (loss) before income tax expense (benefit)
    
    
    493
    
    
    
    (3,015
    )Income tax expense (benefit)
    
    
    76
    
    
    
    (1,168
    )Net income (loss)
    
    
    417
    
    
    
    (1,847
    )Preferred stock dividends and discount
    
    
    (449
    )
    
    
    (440
    )Net loss available to common shareholders
    
    
    (32
    )
    
    
    (2,287
    )Basic loss per common share
    
    $
    (0.01
    )
    
    
    (0.61
    )Diluted loss per common share
    
    $
    (0.01
    )
    
    
    (0.61
    )
  4




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity and Comprehensive Income
For the Three Month Period Ended March 31, 2011
 UnearnedEmployeeAccumulated
    
    Stock
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    Other
    
    Ownership
    
    
    
    
    
    Stock-Preferred
    
    Common
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Plan
    
    Treasury
    
    Holders(Dollars in thousands)
    
    Stock
    
    Stock
    
    Capital
    
    Earnings
    
    Income
    
    Shares
    
    Stock
    
    EquityBalance, December 31, 2010
    
    $
    24,264
    
    
    
    91
    
    
    
    56,420
    
    
    
    55,838
    
    
    
    541
    
    
    
    (3,384
    )
    
    
    (64,223
    )
    
    
    69,547Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417Other comprehensive loss, net of tax:Net unrealized losses on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    (114
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303Preferred stock discount amortization
    
    
    126
    
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Unearned compensation restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (2,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,700
    
    
    
    0Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79Preferred stock dividends accrued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    29Balance, March 31, 2011
    
    $
    24,390
    
    
    
    91
    
    
    
    53,662
    
    
    
    55,930
    
    
    
    427
    
    
    
    (3,336
    )
    
    
    (61,523
    )
    
    
    69,641
  5




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,(Dollars in thousands)
    
    2011
    
    
    2010Cash flows from operating activities:Net income (loss)
    
    $
    417
    
    
    
    (1,847
    )Adjustments to reconcile net income (loss) to cash provided by operating activities:Provision for loan losses
    
    
    1,946
    
    
    
    6,533Depreciation
    
    
    327
    
    
    
    397Amortization of premiums, net
    
    
    69
    
    
    
    186Amortization of deferred loan fees
    
    
    (236
    )
    
    
    (73
    )Amortization of mortgage servicing rights, net
    
    
    98
    
    
    
    109Capitalized mortgage servicing rights
    
    
    (87
    )
    
    
    (150
    )Deferred income tax expense (benefit)
    
    
    76
    
    
    
    (1,792
    )Loss (gain) on sales of real estate
    
    
    47
    
    
    
    (761
    )Gain on sales of loans
    
    
    (495
    )
    
    
    (314
    )Proceeds from sale of loans held for sale
    
    
    14,266
    
    
    
    16,361Disbursements on loans held for sale
    
    
    (9,812
    )
    
    
    (14,348
    )Amortization of restricted stock awards
    
    
    79
    
    
    
    97Amortization of unearned ESOP shares
    
    
    48
    
    
    
    48Earned employee stock ownership shares priced below original cost
    
    
    (19
    )
    
    
    (10
    )Stock option compensation
    
    
    8
    
    
    
    16Decrease in accrued interest receivable
    
    
    90
    
    
    
    238Decrease in accrued interest payable
    
    
    (175
    )
    
    
    (361
    )Decrease in other assets
    
    
    153
    
    
    
    440Increase (decrease) in other liabilities
    
    
    (61
    )
    
    
    368Other, net
    
    
    41
    
    
    
    1Net cash provided by operating activities
    
    
    6,780
    
    
    
    5,138Cash flows from investing activities:Principal collected on securities available for sale
    
    
    3,756
    
    
    
    5,168Proceeds collected on maturities of securities available for sale
    
    
    30,000
    
    
    
    17,000Purchases of securities available for sale
    
    
    (40,032
    )
    
    
    (25,072
    )Redemption of Federal Home Loan Bank stock
    
    
    333
    
    
    
    0Proceeds from sales of real estate
    
    
    1,055
    
    
    
    5,431Net decrease in loans receivable
    
    
    19,212
    
    
    
    16,251Purchases of premises and equipment
    
    
    0
    
    
    
    (34
    )Net cash provided by investing activities
    
    
    14,324
    
    
    
    18,744Cash flows from financing activities:Increase (decrease) in deposits
    
    
    4,787
    
    
    
    (6,359
    )Dividends paid to preferred stockholders
    
    
    0
    
    
    
    (325
    )Proceeds from borrowings
    
    
    0
    
    
    
    5,000Repayment of borrowings
    
    
    (7,500
    )
    
    
    (5,000
    )Increase in customer escrows
    
    
    604
    
    
    
    685Net cash used by financing activities
    
    
    (2,109
    )
    
    
    (5,999
    )Increase in cash and cash equivalents
    
    
    18,995
    
    
    
    17,883Cash and cash equivalents, beginning of period
    
    
    20,981
    
    
    
    16,418Cash and cash equivalents, end of period
    
    $
    39,976
    
    
    
    34,301Supplemental cash flow disclosures:Cash paid for interest
    
    $
    3,443
    
    
    
    5,304Cash paid for income taxes
    
    
    0
    
    
    
    39Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    6,231
    
    
    
    1,138Loans transferred to loans held for sale
    
    
    2,806
    
    
    
    1,072
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 March 31, 2011 and 2010
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
 Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20. Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses
 Receivables (Topic 310) A Creditors Determination of
Whether a Restructuring Is a Troubled Debt Restructuring.
 7




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(4) Derivative Instruments and Hedging Activities
   (5) Fair Value Measurements
 Fair Value Measurements
 Level 1
 Level 2
 Level 3
  Carrying value at March 31, 2011(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    157,643
    
    
    
    1,313
    
    
    
    156,330
    
    
    
    0Mortgage loan commitments
    
    
    (4
    )
    
    
    0
    
    
    
    (4
    )
    
    
    0Total
    
    $
    157,639
    
    
    
    1,313
    
    
    
    156,326
    
    
    
    0
 Carrying value at December 31, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    151,564
    
    
    
    1,740
    
    
    
    149,824
    
    
    
    0Mortgage loan commitments
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )
    
    
    0Total
    
    $
    151,563
    
    
    
    1,740
    
    
    
    149,823
    
    
    
    0
  8




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Three months endedCarrying value at March 31, 2011
    
    
    March 31, 2011(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total LossesLoans held for sale
    
    $
    1,624
    
    
    
    0
    
    
    
    1,624
    
    
    
    0
    
    
    
    (7
    )Mortgage servicing rights
    
    
    1,575
    
    
    
    0
    
    
    
    1,575
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    61,272
    
    
    
    0
    
    
    
    61,272
    
    
    
    0
    
    
    
    (2,082
    )Real estate, net(2)
    
    
    21,469
    
    
    
    0
    
    
    
    21,469
    
    
    
    0
    
    
    
    (88
    )Total
    
    $
    85,940
    
    
    
    0
    
    
    
    85,940
    
    
    
    0
    
    
    
    (2,177
    )
 Year endedCarrying value at December 31, 2010
    
    
    December 31, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total LossesLoans held for sale
    
    $
    2,728
    
    
    
    0
    
    
    
    2,728
    
    
    
    0
    
    
    
    (6
    )Mortgage servicing rights
    
    
    1,586
    
    
    
    0
    
    
    
    1,586
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    43,039
    
    
    
    0
    
    
    
    43,039
    
    
    
    0
    
    
    
    (18,855
    )Real estate, net(2)
    
    
    16,385
    
    
    
    0
    
    
    
    16,385
    
    
    
    0
    
    
    
    (1,782
    )Total
    
    $
    63,738
    
    
    
    0
    
    
    
    63,738
    
    
    
    0
    
    
    
    (20,643
    )
 
 (1)
    
    Represents carrying value and related write-downs of 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 of foreclosed real estate and other collateral
owned that were measured at fair value subsequent to their initial classification as foreclosed
assets. (6) Fair Value of Financial Instruments
  9




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March 31,
    
    December 31,2011
    
    2010Carrying
    
    Estimated
    
    Contract
    
    Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    amount
    
    amount
    
    fair value
    
    amountFinancial assets:Cash and cash equivalents
    
    $
    39,976
    
    
    
    39,976
    
    
    
    
    
    
    
    20,981
    
    
    
    20,981Securities available for sale
    
    
    157,643
    
    
    
    157,643
    
    
    
    
    
    
    
    151,564
    
    
    
    151,564Loans held for sale
    
    
    1,624
    
    
    
    1,624
    
    
    
    
    
    
    
    2,728
    
    
    
    2,728Loans receivable, net
    
    
    634,282
    
    
    
    625,565
    
    
    
    
    
    
    
    664,241
    
    
    
    655,508Federal Home Loan Bank stock
    
    
    6,410
    
    
    
    6,410
    
    
    
    
    
    
    
    6,743
    
    
    
    6,743Accrued interest receivable
    
    
    3,221
    
    
    
    3,221
    
    
    
    
    
    
    
    3,311
    
    
    
    3,311Financial liabilities:Deposits
    
    
    688,078
    
    
    
    688,078
    
    
    
    
    
    
    
    683,230
    
    
    
    683,230Federal Home Loan Bank advances
    
    
    115,000
    
    
    
    120,976
    
    
    
    
    
    
    
    122,500
    
    
    
    129,893Accrued interest payable
    
    
    917
    
    
    
    917
    
    
    
    
    
    
    
    1,092
    
    
    
    1,092Off-balance sheet financial instruments:Commitments to extend credit
    
    
    (4
    )
    
    
    (4
    )
    
    
    94,594
    
    
    
    56
    
    
    
    56
    
    
    
    92,313Commitments to sell loans
    
    
    11
    
    
    
    11
    
    
    
    3,419
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    3,413
 (7) Other Comprehensive Loss
  For the period ended March 31,2011
    
    
    2010(Dollars in thousands)
    
    Before tax
    
    
    Tax effect
    
    
    Net of tax
    
    
    Before tax
    
    
    Tax effect
    
    
    Net of taxSecurities available for sale:Net unrealized losses
arising during the period
    
    $
    (190
    )
    
    
    (76
    )
    
    
    (114
    )
    
    
    (376
    )
    
    
    (149
    )
    
    
    (227
    )Other comprehensive loss
    
    $
    (190
    )
    
    
    (76
    )
    
    
    (114
    )
    
    
    (376
    )
    
    
    (149
    )
    
    
    (227
    )
 (8) Securities Available For Sale
  March 31, 2011Less 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
    
    LossesOther marketable securities:U.S. Government agency
obligations
    
    
    13
    
    
    $
    62,681
    
    
    
    (225
    )
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    62,681
    
    
    
    (225
    )Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    175
    
    
    
    (525
    )
    
    
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    13
    
    
    $
    62,681
    
    
    
    (225
    )
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    62,856
    
    
    
    (750
    )
 December 31, 2010Less 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
    
    LossesOther marketable securities:U.S. Government agency
obligations
    
    
    10
    
    
    $
    47,610
    
    
    
    (266
    )
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    47,610
    
    
    
    (266
    )Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    175
    
    
    
    (525
    )
    
    
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    10
    
    
    $
    47,610
    
    
    
    (266
    )
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    47,785
    
    
    
    (791
    )
  10




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##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    valueMarch 31, 2011:Mortgage-backed securities:FHLMC
    
    $
    15,708
    
    
    
    705
    
    
    
    0
    
    
    
    16,413FNMA
    
    
    11,301
    
    
    
    614
    
    
    
    0
    
    
    
    11,915Collateralized mortgage obligations:FHLMC
    
    
    894
    
    
    
    31
    
    
    
    0
    
    
    
    925FNMA
    
    
    381
    
    
    
    7
    
    
    
    0
    
    
    
    38828,284
    
    
    
    1,357
    
    
    
    0
    
    
    
    29,641Other marketable securities:U.S. Government agency obligations
    
    
    127,952
    
    
    
    100
    
    
    
    (225
    )
    
    
    127,827Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (525
    )
    
    
    175128,652
    
    
    
    100
    
    
    
    (750
    )
    
    
    128,002$
    156,936
    
    
    
    1,457
    
    
    
    (750
    )
    
    
    157,643
 11




---



##### Table of Contents



Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    gains
    
    
    losses
    
    
    valueDecember 31, 2010:Mortgage-backed securities:FHLMC
    
    $
    17,555
    
    
    
    719
    
    
    
    0
    
    
    
    18,274FNMA
    
    
    12,800
    
    
    
    692
    
    
    
    0
    
    
    
    13,492Collateralized mortgage obligations:FHLMC
    
    
    1,299
    
    
    
    44
    
    
    
    0
    
    
    
    1,343FNMA
    
    
    382
    
    
    
    15
    
    
    
    0
    
    
    
    39732,036
    
    
    
    1,470
    
    
    
    0
    
    
    
    33,506Other marketable securities:U.S. Government agency obligations
    
    
    117,931
    
    
    
    218
    
    
    
    (266
    )
    
    
    117,883Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (525
    )
    
    
    175118,631
    
    
    
    218
    
    
    
    (791
    )
    
    
    118,058$
    150,667
    
    
    
    1,688
    
    
    
    (791
    )
    
    
    151,564
  Amortized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    valueDue less than one year
    
    $
    100,701
    
    
    
    101,228Due after one year through five years
    
    
    53,672
    
    
    
    54,288Due after five years through ten years
    
    
    1,863
    
    
    
    1,952No stated maturity
    
    
    700
    
    
    
    175Total
    
    $
    156,936
    
    
    
    157,643
  12




---



##### Table of Contents



(9) Allowance for Loan Losses and Credit Quality Information
  Commercial
    
    
    
    
    
    
    Commercial(Dollars in thousands)
    
    1-4 Family
    
    
    Real Estate
    
    
    Consumer
    
    
    Business
    
    
    TotalBalance, December 31, 2010
    
    $
    2,145
    
    
    
    24,590
    
    
    
    924
    
    
    
    15,169
    
    
    
    42,828Provision for losses
    
    
    756
    
    
    
    539
    
    
    
    147
    
    
    
    504
    
    
    
    1,946Charge-offs
    
    
    (403
    )
    
    
    (7,576
    )
    
    
    (52
    )
    
    
    (2,308
    )
    
    
    (10,339
    )Recoveries
    
    
    0
    
    
    
    5
    
    
    
    4
    
    
    
    509
    
    
    
    518Balance, March 31, 2011
    
    $
    2,498
    
    
    
    17,558
    
    
    
    1,023
    
    
    
    13,874
    
    
    
    34,953Allocated to:Specific reserves
    
    $
    1,578
    
    
    
    7,501
    
    
    
    133
    
    
    
    9,636
    
    
    
    18,848General reserves
    
    
    920
    
    
    
    10,057
    
    
    
    890
    
    
    
    4,238
    
    
    
    16,105Balance, March 31, 2011
    
    $
    2,498
    
    
    
    17,558
    
    
    
    1,023
    
    
    
    13,874
    
    
    
    34,953Loans receivable at
December 31, 2010:Individually reviewed
for impairment
    
    $
    6,729
    
    
    
    45,077
    
    
    
    299
    
    
    
    26,855
    
    
    
    78,960Collectively reviewed
for impairment
    
    
    121,806
    
    
    
    311,314
    
    
    
    70,304
    
    
    
    126,184
    
    
    
    629,608Ending balance
    
    $
    128,535
    
    
    
    356,391
    
    
    
    70,603
    
    
    
    153,039
    
    
    
    708,568Loans receivable at March
31, 2011:Individually reviewed
for impairment
    
    $
    6,113
    
    
    
    30,371
    
    
    
    293
    
    
    
    24,495
    
    
    
    61,272Collectively reviewed
for impairment
    
    
    121,509
    
    
    
    296,735
    
    
    
    67,655
    
    
    
    123,452
    
    
    
    609,351Ending balance
    
    $
    127,622
    
    
    
    327,106
    
    
    
    67,948
    
    
    
    147,947
    
    
    
    670,623
  March 31, 2011
    
    
    December, 31, 2010(Dollars in thousands)
    
    Classified
    
    
    Unclassified
    
    
    Total
    
    
    Classified
    
    
    Unclassified
    
    
    Total1-4 family
    
    $
    15,096
    
    
    
    112,526
    
    
    
    127,622
    
    
    
    15,623
    
    
    
    112,912
    
    
    
    128,535Commercial real estate:Residential developments
    
    
    34,949
    
    
    
    33,313
    
    
    
    68,262
    
    
    
    42,888
    
    
    
    44,218
    
    
    
    87,106Alternative fuels
    
    
    10,917
    
    
    
    18,783
    
    
    
    29,700
    
    
    
    11,069
    
    
    
    20,054
    
    
    
    31,123Other
    
    
    13,459
    
    
    
    215,685
    
    
    
    229,144
    
    
    
    12,882
    
    
    
    225,280
    
    
    
    238,162Consumer
    
    
    292
    
    
    
    67,656
    
    
    
    67,948
    
    
    
    306
    
    
    
    70,297
    
    
    
    70,603Commercial business:Construction/development
    
    
    6,207
    
    
    
    5,319
    
    
    
    11,526
    
    
    
    6,683
    
    
    
    5,117
    
    
    
    11,800Banking
    
    
    8,223
    
    
    
    5,829
    
    
    
    14,052
    
    
    
    8,223
    
    
    
    5,830
    
    
    
    14,053Other
    
    
    16,671
    
    
    
    105,698
    
    
    
    122,369
    
    
    
    20,468
    
    
    
    106,718
    
    
    
    127,186$
    105,814
    
    
    
    564,809
    
    
    
    670,623
    
    
    
    118,142
    
    
    
    590,426
    
    
    
    708,568
   13




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##### Table of Contents



Loans 90Days orMore Past30-59
    
    
    60-89
    
    
    90 Days
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due andDays
    
    
    Days
    
    
    or More
    
    
    Total
    
    
    Current
    
    
    Total
    
    
    Still(Dollars in thousands)
    
    Past Due
    
    
    Past Due
    
    
    Past Due
    
    
    Past Due
    
    
    Loans
    
    
    Loans
    
    
    AccruingMarch 31, 20111-4 family
    
    $
    3,069
    
    
    
    485
    
    
    
    2,013
    
    
    
    5,567
    
    
    
    122,055
    
    
    
    127,622
    
    
    
    441Commercial real estate:Residential developments
    
    
    351
    
    
    
    2,776
    
    
    
    331
    
    
    
    3,458
    
    
    
    64,804
    
    
    
    68,262
    
    
    
    0Alternative fuels
    
    
    0
    
    
    
    0
    
    
    
    4,994
    
    
    
    4,994
    
    
    
    24,706
    
    
    
    29,700
    
    
    
    0Other
    
    
    326
    
    
    
    51
    
    
    
    4,178
    
    
    
    4,555
    
    
    
    224,589
    
    
    
    229,144
    
    
    
    0Consumer
    
    
    641
    
    
    
    1
    
    
    
    238
    
    
    
    880
    
    
    
    67,068
    
    
    
    67,948
    
    
    
    83Commercial business:Construction/development
    
    
    0
    
    
    
    0
    
    
    
    1,491
    
    
    
    1,491
    
    
    
    10,035
    
    
    
    11,526
    
    
    
    0Banking
    
    
    0
    
    
    
    0
    
    
    
    8,223
    
    
    
    8,223
    
    
    
    5,829
    
    
    
    14,052
    
    
    
    0Other
    
    
    589
    
    
    
    75
    
    
    
    6,971
    
    
    
    7,635
    
    
    
    114,734
    
    
    
    122,369
    
    
    
    0$
    4,976
    
    
    
    3,388
    
    
    
    28,439
    
    
    
    36,803
    
    
    
    633,820
    
    
    
    670,623
    
    
    
    524December 31, 20101-4 family
    
    $
    2,313
    
    
    
    695
    
    
    
    3,500
    
    
    
    6,508
    
    
    
    122,027
    
    
    
    128,535
    
    
    
    178Commercial real estate:Residential developments
    
    
    444
    
    
    
    3,899
    
    
    
    15,523
    
    
    
    19,866
    
    
    
    67,240
    
    
    
    87,106
    
    
    
    0Alternative fuels
    
    
    0
    
    
    
    0
    
    
    
    4,994
    
    
    
    4,994
    
    
    
    26,129
    
    
    
    31,123
    
    
    
    0Other
    
    
    75
    
    
    
    264
    
    
    
    3,914
    
    
    
    4,253
    
    
    
    233,909
    
    
    
    238,162
    
    
    
    0Consumer
    
    
    446
    
    
    
    163
    
    
    
    207
    
    
    
    816
    
    
    
    69,787
    
    
    
    70,603
    
    
    
    0Commercial business:Construction/development
    
    
    0
    
    
    
    0
    
    
    
    4,809
    
    
    
    4,809
    
    
    
    6,991
    
    
    
    11,800
    
    
    
    0Banking
    
    
    0
    
    
    
    0
    
    
    
    8,223
    
    
    
    8,223
    
    
    
    5,830
    
    
    
    14,053
    
    
    
    0Other
    
    
    311
    
    
    
    45
    
    
    
    7,876
    
    
    
    8,232
    
    
    
    118,954
    
    
    
    127,186
    
    
    
    576$
    3,589
    
    
    
    5,066
    
    
    
    49,046
    
    
    
    57,701
    
    
    
    650,867
    
    
    
    708,568
    
    
    
    754
  14




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##### Table of Contents



March 31, 2011Unpaid
    
    
    
    
    
    
    Average
    
    
    InterestRecorded
    
    
    Principal
    
    
    Related
    
    
    Recorded
    
    
    Income(Dollars in thousands)
    
    Investment
    
    
    Balance
    
    
    Allowance
    
    
    Investment
    
    
    RecognizedLoans with no related allowance recorded:1-4 family
    
    $
    1,372
    
    
    
    1,372
    
    
    
    0
    
    
    
    686
    
    
    
    20Commercial real estate:Residential developments
    
    
    5,879
    
    
    
    5,879
    
    
    
    0
    
    
    
    2,940
    
    
    
    73Alternative fuels
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    655
    
    
    
    655
    
    
    
    0
    
    
    
    328
    
    
    
    4Consumer
    
    
    40
    
    
    
    40
    
    
    
    0
    
    
    
    20
    
    
    
    0Commercial business:Construction/development
    
    
    346
    
    
    
    346
    
    
    
    0
    
    
    
    173
    
    
    
    2Banking
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    643
    
    
    
    643
    
    
    
    0
    
    
    
    322
    
    
    
    15Loans with an allowance recorded:1-4 family
    
    
    4,741
    
    
    
    4,741
    
    
    
    1,578
    
    
    
    2,371
    
    
    
    41Commercial real estate:Residential developments
    
    
    12,895
    
    
    
    12,895
    
    
    
    2,784
    
    
    
    6,448
    
    
    
    110Alternative fuels
    
    
    4,995
    
    
    
    4,995
    
    
    
    2,728
    
    
    
    2,498
    
    
    
    0Other
    
    
    5,947
    
    
    
    6,902
    
    
    
    1,989
    
    
    
    2,974
    
    
    
    14Consumer
    
    
    253
    
    
    
    253
    
    
    
    133
    
    
    
    127
    
    
    
    3Commercial business:Construction/development
    
    
    3,986
    
    
    
    3,986
    
    
    
    1,495
    
    
    
    1,992
    
    
    
    3Banking
    
    
    8,223
    
    
    
    8,223
    
    
    
    5,535
    
    
    
    4,112
    
    
    
    0Other
    
    
    11,297
    
    
    
    11,849
    
    
    
    2,606
    
    
    
    5,649
    
    
    
    75Total:1-4 family
    
    
    6,113
    
    
    
    6,113
    
    
    
    1,578
    
    
    
    3,057
    
    
    
    61Commercial real estate:Residential developments
    
    
    18,774
    
    
    
    18,774
    
    
    
    2,784
    
    
    
    9,387
    
    
    
    183Alternative fuels
    
    
    4,995
    
    
    
    4,995
    
    
    
    2,728
    
    
    
    2,498
    
    
    
    0Other
    
    
    6,602
    
    
    
    7,557
    
    
    
    1,989
    
    
    
    3,301
    
    
    
    18Consumer
    
    
    293
    
    
    
    293
    
    
    
    133
    
    
    
    147
    
    
    
    3Commercial business:Construction/development
    
    
    4,332
    
    
    
    4,332
    
    
    
    1,495
    
    
    
    2,166
    
    
    
    5Banking
    
    
    8,223
    
    
    
    8,223
    
    
    
    5,535
    
    
    
    4,112
    
    
    
    0Other
    
    
    11,940
    
    
    
    12,492
    
    
    
    2,606
    
    
    
    5,970
    
    
    
    90$
    61,272
    
    
    
    62,779
    
    
    
    18,848
    
    
    
    30,637
    
    
    
    360
 15




---



##### Table of Contents



December 31, 2010Recorded
    
    
    Unpaid Principal
    
    
    Related(Dollars in thousands)
    
    Investment
    
    
    Balance
    
    
    AllowanceLoans with no related allowance recorded:1-4 family
    
    $
    932
    
    
    
    932
    
    
    
    0Commercial real estate:Residential developments
    
    
    6,486
    
    
    
    6,486
    
    
    
    0Alternative fuels
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    119
    
    
    
    119
    
    
    
    0Consumer
    
    
    104
    
    
    
    104
    
    
    
    0Commercial business:Construction/development
    
    
    99
    
    
    
    99
    
    
    
    0Banking
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    397
    
    
    
    397
    
    
    
    0Loans with an allowance recorded:1-4 family
    
    
    5,797
    
    
    
    5,797
    
    
    
    994Commercial real estate:Residential developments
    
    
    27,147
    
    
    
    27,147
    
    
    
    9,673Alternative fuels
    
    
    4,994
    
    
    
    4,994
    
    
    
    2,441Other
    
    
    6,331
    
    
    
    7,287
    
    
    
    1,148Consumer
    
    
    195
    
    
    
    195
    
    
    
    76Commercial business:Construction/development
    
    
    4,809
    
    
    
    4,809
    
    
    
    2,668Banking
    
    
    8,223
    
    
    
    8,223
    
    
    
    4,985Other
    
    
    13,327
    
    
    
    13,878
    
    
    
    3,049Total:1-4 family
    
    
    6,729
    
    
    
    6,729
    
    
    
    994Commercial real estate:Residential developments
    
    
    33,633
    
    
    
    33,633
    
    
    
    9,673Alternative fuels
    
    
    4,994
    
    
    
    4,994
    
    
    
    2,441Other
    
    
    6,450
    
    
    
    7,406
    
    
    
    1,148Consumer
    
    
    299
    
    
    
    299
    
    
    
    76Commercial business:Construction/development
    
    
    4,908
    
    
    
    4,908
    
    
    
    2,668Banking
    
    
    8,223
    
    
    
    8,223
    
    
    
    4,985Other
    
    
    13,724
    
    
    
    14,275
    
    
    
    3,049$
    78,960
    
    
    
    80,467
    
    
    
    25,034
   16




---



##### Table of Contents



(Dollars in thousands)
    
    March 31, 2011
    
    
    December 31, 20101-4 family
    
    $
    3,399
    
    
    $
    4,844Commercial real estate:Residential developments
    
    
    10,674
    
    
    
    25,980Alternative fuels
    
    
    4,994
    
    
    
    4,994Other
    
    
    5,941
    
    
    
    5,763Consumer
    
    
    245
    
    
    
    224Commercial business:Construction/development
    
    
    4,332
    
    
    
    4,907Banking
    
    
    8,223
    
    
    
    8,223Other
    
    
    11,274
    
    
    
    13,139$
    49,082
    
    
    $
    68,074
   (Dollars in thousands)
    
    
    
    
    
    December 31,March 31, 2011
    
    
    2010Commercial real estate
    
    $
    14,752
    
    
    
    14,871Commercial business
    
    
    3,070
    
    
    
    1,7561-4 family
    
    
    3,464
    
    
    
    2,589Consumer
    
    
    143
    
    
    
    75$
    21,429
    
    
    
    19,291
  (10) Investment in Mortgage Servicing Rights
  Three months ended
    
    
    Twelve months ended
    
    
    Three months ended(Dollars in thousands)
    
    March 31, 2011
    
    
    December 31, 2010
    
    
    March 31, 2010Mortgage servicing rights:Balance, beginning of period
    
    $
    1,586
    
    
    
    1,315
    
    
    
    1,315Originations
    
    
    87
    
    
    
    753
    
    
    
    150Amortization
    
    
    (98
    )
    
    
    (482
    )
    
    
    (109
    )Balance, end of period
    
    
    1,575
    
    
    
    1,586
    
    
    
    1,356Fair value of mortgage servicing rights
    
    $
    2,636
    
    
    
    2,263
    
    
    
    2,357
 17




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##### Table of Contents



Weighted
    
    WeightedLoan
    
    Average
    
    AveragePrincipal
    
    Interest
    
    Remaining
    
    Number(Dollars in thousands)
    
    Balance
    
    Rate
    
    Term
    
    of LoansOriginal term 30 year fixed rate
    
    $
    221,928
    
    
    
    5.22
    %
    
    
    300
    
    
    
    1,904Original term 15 year fixed rate
    
    
    100,761
    
    
    
    4.66
    
    
    
    124
    
    
    
    1,493Adjustable rate
    
    
    640
    
    
    
    3.08
    
    
    
    303
    
    
    
    8
  Gross
    
    
    
    
    
    
    UnamortizedCarrying
    
    
    Accumulated
    
    
    Intangible(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    AssetsMortgage servicing rights
    
    $
    4,140
    
    
    
    (2,565
    )
    
    
    1,575Total
    
    $
    4,140
    
    
    
    (2,565
    )
    
    
    1,575
  MortgageServicing(Dollars in thousands)
    
    RightsYear ending December 31,2011
    
    $
    2682012
    
    
    3262013
    
    
    3072014
    
    
    2772015
    
    
    230Thereafter
    
    
    167
  (11) Loss per Common Share
  Three months ended March 31,2011
    
    
    2010Weighted average number of common shares outstanding
used in basic earnings per common share calculation
    
    
    3,816,686
    
    
    
    3,736,852Net dilutive effect of:Options
    
    
    0
    
    
    
    0Restricted stock awards
    
    
    0
    
    
    
    0Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,816,686
    
    
    
    3,736,852Loss available to common shareholders
    
    $
    (31,818
    )
    
    
    (2,287,581
    )Basic loss per common share
    
    $
    (0.01
    )
    
    
    (0.61
    )Diluted loss per common share
    
    $
    (0.01
    )
    
    
    (0.61
    )
  18




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##### Table of Contents



(12) Regulatory Capital and Regulatory Oversight
    Required to beAdequately
    
    
    
    
    
    
    
    
    
    
    To Be Well Capitalized Under PromptActual
    
    
    Capitalized
    
    
    Excess Capital
    
    
    Corrective Action ProvisionsPercent 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
    
    $
    68,610Less:Net unrealized gains on certain securities
available for sale
    
    
    (1,020
    )Disallowed servicing and tax assets
    
    
    0Tier I or core capital
    
    
    67,590Tier I capital to adjusted total assets
    
    
    
    
    
    
    7.70
    %
    
    $
    35,108
    
    
    
    4.00
    %
    
    $
    32,482
    
    
    
    3.70
    %
    
    $
    43,885
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    10.15
    %
    
    $
    26,633
    
    
    
    4.00
    %
    
    $
    40,957
    
    
    
    6.15
    %
    
    $
    39,950
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    8,323Risk-based capital
    
    $
    75,913
    
    
    
    
    
    
    $
    53,266
    
    
    
    
    
    
    $
    22,647
    
    
    
    
    
    
    $
    66,583Risk-based capital to risk- weighted assets
    
    
    
    
    
    
    11.40
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    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.  19




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(13) Commitments and Contingencies
  (14) Business Segments
   20




---



##### Table of Contents



Home Federal
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in thousands)
    
    Savings Bank
    
    Other
    
    Eliminations
    
    TotalAt or for the quarter ended March 31, 2011:Interest income  external customers
    
    $
    10,714
    
    
    
    0
    
    
    
    0
    
    
    
    10,714Non-interest income  external customers
    
    
    1,788
    
    
    
    0
    
    
    
    0
    
    
    
    1,788Loss on limited partnerships
    
    
    (2
    )
    
    
    0
    
    
    
    0
    
    
    
    (2
    )Intersegment interest income
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    688
    
    
    
    (731
    )
    
    
    0Interest expense
    
    
    3,270
    
    
    
    0
    
    
    
    (1
    )
    
    
    3,269Amortization of mortgage servicing rights, net
    
    
    98
    
    
    
    0
    
    
    
    0
    
    
    
    98Other non-interest expense
    
    
    6,463
    
    
    
    274
    
    
    
    (43
    )
    
    
    6,694Income tax expense
    
    
    76
    
    
    
    0
    
    
    
    0
    
    
    
    76Net income
    
    
    690
    
    
    
    415
    
    
    
    (688
    )
    
    
    417Total assets
    
    
    878,686
    
    
    
    70,563
    
    
    
    (70,493
    )
    
    
    878,756At or for the quarter ended March 31, 2010:Interest income  external customers
    
    $
    12,904
    
    
    
    0
    
    
    
    0
    
    
    
    12,904Non-interest income  external customers
    
    
    1,582
    
    
    
    0
    
    
    
    0
    
    
    
    1,582Loss on limited partnerships
    
    
    (8
    )
    
    
    0
    
    
    
    0
    
    
    
    (8
    )Intersegment interest income
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    (1,672
    )
    
    
    1,629
    
    
    
    0Interest expense
    
    
    4,944
    
    
    
    0
    
    
    
    (1
    )
    
    
    4,943Amortization of mortgage servicing rights, net
    
    
    109
    
    
    
    0
    
    
    
    0
    
    
    
    109Other non-interest expense
    
    
    5,748
    
    
    
    203
    
    
    
    (43
    )
    
    
    5,908Income tax benefit
    
    
    (1,143
    )
    
    
    (25
    )
    
    
    0
    
    
    
    (1,168
    )Net loss
    
    
    (1,670
    )
    
    
    (1,849
    )
    
    
    1,672
    
    
    
    (1,847
    )Total assets
    
    
    1,027,274
    
    
    
    98,203
    
    
    
    (97,001
    )
    
    
    1,028,476
 21




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##### Table of Contents



HMN FINANCIAL, INC.
 
 Item 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS 
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Information
  General
  22




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##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   23




---



##### Table of Contents



Income Taxes
    RESULTS OF OPERATIONS FOR FIRST QUARTER ENDED MARCH 31, 2011 COMPARED TO FIRST QUARTER ENDED MARCH
31, 2010
 Net Income
  24




---



##### Table of Contents



Net Interest Income
     25




---



##### Table of Contents



For the three month period endedMarch 31, 2011
    
    
    March 31, 2010Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    149,928
    
    
    
    741
    
    
    
    2.00
    %
    
    $
    159,759
    
    
    
    1,107
    
    
    
    2.81
    %Loans held for sale
    
    
    1,537
    
    
    
    17
    
    
    
    4.49
    
    
    
    1,785
    
    
    
    21
    
    
    
    4.77Mortgage loans, net
    
    
    128,307
    
    
    
    1,763
    
    
    
    5.57
    
    
    
    143,667
    
    
    
    2,097
    
    
    
    5.92Commercial loans, net
    
    
    453,694
    
    
    
    7,095
    
    
    
    6.34
    
    
    
    564,322
    
    
    
    8,453
    
    
    
    6.07Consumer loans, net
    
    
    68,666
    
    
    
    1,028
    
    
    
    6.07
    
    
    
    80,991
    
    
    
    1,188
    
    
    
    5.95Cash equivalents
    
    
    24,444
    
    
    
    1
    
    
    
    0.02
    
    
    
    18,591
    
    
    
    1
    
    
    
    0.02Federal Home Loan Bank stock
    
    
    6,692
    
    
    
    69
    
    
    
    4.18
    
    
    
    7,286
    
    
    
    37
    
    
    
    2.06Total interest-earning assets
    
    
    833,268
    
    
    
    10,714
    
    
    
    5.22
    
    
    
    976,401
    
    
    
    12,904
    
    
    
    5.36Interest-bearing liabilities and
noninterest bearing deposits:NOW accounts
    
    
    79,017
    
    
    
    19
    
    
    
    0.10
    
    
    
    98,474
    
    
    
    22
    
    
    
    0.09Savings accounts
    
    
    34,676
    
    
    
    13
    
    
    
    0.15
    
    
    
    31,821
    
    
    
    10
    
    
    
    0.13Money market accounts
    
    
    113,712
    
    
    
    214
    
    
    
    0.76
    
    
    
    136,800
    
    
    
    392
    
    
    
    1.16Certificates
    
    
    254,148
    
    
    
    1,057
    
    
    
    1.69
    
    
    
    243,180
    
    
    
    1,476
    
    
    
    2.46Brokered deposits
    
    
    100,801
    
    
    
    637
    
    
    
    2.56
    
    
    
    199,257
    
    
    
    1,521
    
    
    
    3.10Federal Home Loan Bank advances
    
    
    119,833
    
    
    
    1,329
    
    
    
    4.50
    
    
    
    132,611
    
    
    
    1,522
    
    
    
    4.65Total interest-bearing liabilities
    
    
    702,187
    
    
    
    
    
    
    
    
    
    
    
    842,143Noninterest checking
    
    
    96,146
    
    
    
    
    
    
    
    
    
    
    
    79,635Other noninterest bearing escrow deposits
    
    
    1,164
    
    
    
    
    
    
    
    
    
    
    
    1,836Total interest-bearing liabilities and
noninterest bearing deposits
    
    $
    799,497
    
    
    
    3,269
    
    
    
    1.66
    
    
    $
    923,614
    
    
    
    4,943
    
    
    
    2.17Net interest income
    
    
    
    
    
    $
    7,445
    
    
    
    
    
    
    
    
    
    
    $
    7,961Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.56
    %
    
    
    
    
    
    
    
    
    
    
    3.19
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.62
    %
    
    
    
    
    
    
    
    
    
    
    3.31
    %
 Provision for Loan Losses
   (Dollars in thousands)
    
    2011
    
    
    2010Balance at January 1,
    
    $
    42,828
    
    
    $
    23,811Provision
    
    
    1,946
    
    
    
    6,533Charge offs:One-to-four family
    
    
    (403
    )
    
    
    (51
    )Consumer
    
    
    (52
    )
    
    
    (306
    )Commercial business
    
    
    (2,308
    )
    
    
    (61
    )Commercial real estate
    
    
    (7,576
    )
    
    
    (660
    )Recoveries
    
    
    518
    
    
    
    18Balance at March 31,
    
    $
    34,953
    
    
    $
    29,284General allowance
    
    $
    16,105
    
    
    $
    12,058Specific allowance
    
    
    18,848
    
    
    
    17,226$
    34,953
    
    
    $
    29,284
  26




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##### Table of Contents



Non-Interest Income
  Non-Interest Expense
  Income Taxes
  Net Loss Available to Common Shareholders
  FINANCIAL CONDITION
 Non-Performing Assets
  27




---



##### Table of Contents



March 31,
    
    
    December 31,(Dollars in thousands)
    
    2011
    
    
    2010Non-Accruing Loans:One-to-four family real estate
    
    $
    3,399
    
    
    $
    4,844Commercial real estate
    
    
    21,609
    
    
    
    36,737Consumer
    
    
    245
    
    
    
    224Commercial business
    
    
    23,829
    
    
    
    26,269Total
    
    
    49,082
    
    
    
    68,074Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    1,640
    
    
    
    972Consumer
    
    
    14
    
    
    
    14Commercial real estate
    
    
    19,829
    
    
    
    15,409Total non-performing assets
    
    $
    70,565
    
    
    $
    84,469Total as a percentage of total assets
    
    
    8.03
    %
    
    
    9.59
    %Total non-performing loans
    
    $
    49,082
    
    
    $
    68,074Total as a percentage of total loans receivable, net
    
    
    7.74
    %
    
    
    10.25
    %Allowance for loan loss to non-performing loans
    
    
    71.21
    %
    
    
    62.91
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    4,940
    
    
    $
    4,02190+ days
    
    
    178
    
    
    
    754Delinquencies as a percentage of Loan and lease portfolio (1)30+ days
    
    
    0.76
    %
    
    
    0.59
    %90+ days
    
    
    0.03
    %
    
    
    0.11
    %
 
 (1)
    
    Excludes non-accrual loans.   (Dollars in thousands)Non-performing loansJanuary 1, 2011
    
    $
    68,074Classified as non-performing
    
    
    2,445Charge offs
    
    
    (10,339
    )Principal payments received
    
    
    (939
    )Classified as accruing
    
    
    (3,928
    )Transferred to real estate owned
    
    
    (6,231
    )March 31, 2011
    
    $
    49,082Foreclosed and repossessed assetsJanuary 1, 2011
    
    $
    16,395Transferred from non-performing loans
    
    
    6,231Other foreclosures/repossessions
    
    
    0Real estate sold
    
    
    (1,054
    )Net gain on sale of assets
    
    
    81Write downs
    
    
    (170
    )March 31, 2011
    
    $
    21,483
   28




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##### Table of Contents



Principal Amount
    
    
    
    
    
    Principal Amount(Dollars in thousands)
    
    
    
    
    
    of Loans
    
    
    
    
    
    of LoansMarch 31,
    
    
    
    
    
    December 31,Industry Type
    
    #
    
    2011
    
    #
    
    2010Construction/development
    
    
    5
    
    
    $
    6,205
    
    
    
    6
    
    
    $
    9,148Finance
    
    
    1
    
    
    
    244
    
    
    
    1
    
    
    
    248Retail
    
    
    3
    
    
    
    3,129
    
    
    
    1
    
    
    
    2,504Banking
    
    
    2
    
    
    
    8,223
    
    
    
    2
    
    
    
    8,223Entertainment
    
    
    1
    
    
    
    309
    
    
    
    1
    
    
    
    315Utilities
    
    
    1
    
    
    
    4,598
    
    
    
    1
    
    
    
    4,614Restaurant
    
    
    3
    
    
    
    1,121
    
    
    
    4
    
    
    
    1,21716
    
    
    $
    23,829
    
    
    
    16
    
    
    $
    26,269
   Principal Amount
    
    
    
    
    
    Principal Amount(Dollars in thousands)
    
    
    
    
    
    of Loans
    
    
    
    
    
    of LoansMarch 31,
    
    
    
    
    
    December 31,Property Type
    
    # of relationships
    
    2011
    
    # of relationships
    
    2010Residential developments
    
    
    4
    
    
    $
    10,732
    
    
    
    9
    
    
    $
    23,661Single family homes
    
    
    2
    
    
    
    296
    
    
    
    3
    
    
    
    2,673Alternative fuel plants
    
    
    1
    
    
    
    4,994
    
    
    
    1
    
    
    
    4,994Shopping centers/retail
    
    
    2
    
    
    
    1,036
    
    
    
    3
    
    
    
    1,099Restaurants/bar
    
    
    1
    
    
    
    614
    
    
    
    1
    
    
    
    635Office buildings
    
    
    2
    
    
    
    3,937
    
    
    
    1
    
    
    
    3,67512
    
    
    $
    21,609
    
    
    
    18
    
    
    $
    36,737
  Dividends
  LIQUIDITY AND CAPITAL RESOURCES
  29




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##### Table of Contents



Market Risk
  30




---



##### Table of Contents



Rate Shock Table
  Other than trading portfolio(Dollars in thousands)
    
    Market ValueBasis point change in interest rates
    
    -100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    862,199
    
    
    
    849,463
    
    
    
    835,021
    
    
    
    819,504Total market risk sensitive liabilities
    
    
    811,797
    
    
    
    799,526
    
    
    
    786,135
    
    
    
    772,290Off-balance sheet financial instruments
    
    
    (176
    )
    
    
    0
    
    
    
    35
    
    
    
    79Net market risk
    
    $
    50,578
    
    
    
    49,937
    
    
    
    48,851
    
    
    
    47,135Percentage change from current market value
    
    
    1.28
    %
    
    
    0.00
    %
    
    
    (2.17
    )%
    
    
    (5.61
    )%
   31




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##### Table of Contents



Asset/Liability Management
  ProjectedRate Shock
    
    Change in Netin Basis
    
    Interest
    
    Percentage(Dollars in thousands)
    
    Points
    
    Income
    
    Change+200
    
    
    $
    1,062
    
    
    
    3.70
    %+100
    
    
    
    790
    
    
    
    2.750
    
    
    
    0
    
    
    
    0.00-100
    
    
    
    (1,447
    )
    
    
    (5.04
    )
     Off-Balance Sheet Arrangements
  
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 32




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##### Table of Contents



Changes in internal controls.
 33




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##### Table of Contents



HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
 ITEM 1.
    
    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. Litigation is often unpredictable and the actual results of
litigation cannot be determined with any certainty.
 
 ITEM 1A.
    
    Risk Factors.
 See Part I, Item 1.A. of the Companys Annual Report on Form 10-K for the year ended December
31, 2010 for risk factors.
 
 ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
 None.
 
 ITEM 3.
    
    Defaults Upon Senior Securities.
 The Company has deferred regular quarterly cash dividend payments on preferred stock
issued to the United States Treasury Department as part of the TARP Capital Purchase
Program. For additional information on these dividend deferrals, please see the
Companys current reports on Form 8-K filed with the Securities and Exchange
Commission.
 
 ITEM 4.
    
    [Removed and Reserved]
 
 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.
 34




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.
RegistrantDate:   May 5, 2011
    /s/ Bradley KrehbielBradley Krehbiel, President(Principal Executive Officer)Date:   May 5, 2011
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 35




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##### Table of Contents



HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q
 SequentialReference
    
    Page NumberingRegulation
    
    
    
    to Prior
    
    Where AttachedS-K
    
    
    
    Filing or
    
    Exhibits AreExhibit
    
    
    
    Exhibit
    
    Located in ThisNumber
    
    Document Attached Hereto
    
    Number
    
    Form 10-Q Report3.1
    
    Amended and Restated Certificate of
Incorporation
    
    
    *1
    
    
    N/A3.2
    
    Amended and Restated By-laws
    
    
    *2
    
    
    N/A4
    
    Form of Common Stock Certificate
    
    
    *3
    
    
    N/A10.18
    
    Description of Retention Awards for Certain
Executive Officers
    
    
    10.18
    
    
    Filed Electronically10.19
    
    Supervisory Agreement between HMN Financial,
Inc. and the Office of Thrift Supervision
    
    
    *4
    
    
    N/A10.20
    
    Supervisory Agreement between Home Federal
Savings Bank and the Office of Thrift
Supervision
    
    
    *5
    
    
    N/A31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of CEO
    
    
    31.1
    
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of CFO
    
    
    31.2
    
    
    Filed Electronically32
    
    Section 1350 Certification of CEO and CFO
    
    
    32
    
    
    Filed Electronically
 
 *1
    
    Incorporated by reference to Exhibit 3(a) 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 3.2 to the Companys Quarterly
Report on Form 10-Q, as amended, for the period ending September
30, 2008. (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).*4
    
    Incorporated by reference to the same numbered exhibit to the
Companys Annual Report on Form 10-K for the period ended December
31, 2011 (File No. 0-24100).*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, 2011 (File No. 0-24100).