##### 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, 2010OR
 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)
 Registrants telephone number, including area code:
 (507) 535-1200
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  Class
    
    Outstanding at April 21, 2010Common stock, $0.01 par value
    
    4,316,359




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##### 



HMN FINANCIAL, INC.
CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at March 31, 2010 and December 31, 2009
    
    3Consolidated Statements of Loss for the Three Months Ended March 31, 2010 and 2009
    
    4Consolidated Statement of Stockholders Equity and Comprehensive Loss for the Three Month Period Ended March 31, 2010
    
    5Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
    
    6Notes to Consolidated Financial Statements
    
    7Item 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk (Included in Item 2 under Market Risk)
    
    24Item 4:
    
    Controls and Procedures
    
    26PART II  OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    27Item 1A:
    
    Risk Factors
    
    27Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    28Item 3:
    
    Defaults Upon Senior Securities
    
    28Item 4:
    
    [Removed and Reserved]
    
    28Item 5:
    
    Other Information
    
    28Item 6:
    
    Exhibits
    
    28Signatures
    
    
    
    29EX-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)
    
    2010
    
    
    2009(unaudited)AssetsCash and cash equivalents
    
    $
    34,301
    
    
    
    16,418Securities available for sale:Mortgage-backed and related securities
(amortized cost $46,676 and $51,840)
    
    
    48,368
    
    
    
    53,559Other marketable securities
(amortized cost $113,744 and $105,723)
    
    
    113,714
    
    
    
    106,043162,082
    
    
    
    159,602Loans held for sale
    
    
    2,386
    
    
    
    2,965Loans receivable, net
    
    
    774,336
    
    
    
    799,256Accrued interest receivable
    
    
    3,786
    
    
    
    4,024Real estate, net
    
    
    12,725
    
    
    
    16,257Federal Home Loan Bank stock, at cost
    
    
    7,286
    
    
    
    7,286Mortgage servicing rights, net
    
    
    1,356
    
    
    
    1,315Premises and equipment, net
    
    
    10,403
    
    
    
    10,766Prepaid expenses and other assets
    
    
    6,284
    
    
    
    6,762Deferred tax asset, net
    
    
    13,531
    
    
    
    11,590Total assets
    
    $
    1,028,476
    
    
    
    1,036,241Liabilities and Stockholders EquityDeposits
    
    $
    789,792
    
    
    
    796,011Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    132,500
    
    
    
    132,500Accrued interest payable
    
    
    1,747
    
    
    
    2,108Customer escrows
    
    
    2,112
    
    
    
    1,427Accrued expenses and other liabilities
    
    
    4,635
    
    
    
    4,257Total liabilities
    
    
    930,786
    
    
    
    936,303Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par value):Authorized 500,000 shares; issued shares 26,000
    
    
    23,901
    
    
    
    23,785Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    56,326
    
    
    
    58,576Retained earnings, subject to certain restrictions
    
    
    83,943
    
    
    
    86,115Accumulated other comprehensive income, net of tax
    
    
    1,003
    
    
    
    1,230Unearned employee stock ownership plan shares
    
    
    (3,529
    )
    
    
    (3,577
    )Treasury stock, at cost 4,812,303 and 4,965,766 shares
    
    
    (64,045
    )
    
    
    (66,282
    )Total stockholders equity
    
    
    97,690
    
    
    
    99,938Total liabilities and stockholders equity
    
    $
    1,028,476
    
    
    
    1,036,241
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Loss
  Three Months EndedMarch 31,(Dollars in thousands)
    
    2010
    
    
    2009Interest income:Loans receivable
    
    $
    11,759
    
    
    
    13,628Securities available for sale:Mortgage-backed and related
    
    
    535
    
    
    
    802Other marketable
    
    
    572
    
    
    
    946Cash equivalents
    
    
    1
    
    
    
    0Other
    
    
    37
    
    
    
    (23
    )Total interest income
    
    
    12,904
    
    
    
    15,353Interest expense:Deposits
    
    
    3,421
    
    
    
    4,975Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    1,522
    
    
    
    1,596Total interest expense
    
    
    4,943
    
    
    
    6,571Net interest income
    
    
    7,961
    
    
    
    8,782Provision for loan losses
    
    
    6,533
    
    
    
    6,569Net interest income after provision for loan losses
    
    
    1,428
    
    
    
    2,213Non-interest income:Fees and service charges
    
    
    842
    
    
    
    1,027Loan servicing fees
    
    
    268
    
    
    
    252Gain on sales of loans
    
    
    314
    
    
    
    423Other
    
    
    150
    
    
    
    131Total non-interest income
    
    
    1,574
    
    
    
    1,833Non-interest expense:Compensation and benefits
    
    
    3,449
    
    
    
    3,849(Gain) loss on real estate owned
    
    
    (761
    )
    
    
    1,103Occupancy
    
    
    1,031
    
    
    
    1,092Deposit insurance
    
    
    517
    
    
    
    330Data processing
    
    
    276
    
    
    
    279Other
    
    
    1,505
    
    
    
    1,775Total non-interest expense
    
    
    6,017
    
    
    
    8,428Loss before income tax benefit
    
    
    (3,015
    )
    
    
    (4,382
    )Income tax benefit
    
    
    (1,168
    )
    
    
    (1,760
    )Net loss
    
    
    (1,847
    )
    
    
    (2,622
    )Preferred stock dividends and discount
    
    
    (440
    )
    
    
    (429
    )Net loss available to common shareholders
    
    
    (2,287
    )
    
    
    (3,051
    )Basic loss per common share
    
    $
    (0.61
    )
    
    
    (0.83
    )Diluted loss per common share
    
    $
    (0.61
    )
    
    
    (0.83
    )
  4




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HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity and Comprehensive Loss
 For the Three Month Period Ended March 31, 2010
  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, 2009
    
    $
    23,785
    
    
    
    91
    
    
    
    58,576
    
    
    
    86,115
    
    
    
    1,230
    
    
    
    (3,577
    )
    
    
    (66,282
    )
    
    
    99,938Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,847
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,847
    )Other comprehensive loss, net of tax:Net
unrealized losses on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227
    )
    
    
    
    
    
    
    
    
    
    
    (227
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,074
    )Preferred stock discount amortization
    
    
    116
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Unearned compensation restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (2,237
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,237
    
    
    
    0Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    38Balance, March 31, 2010
    
    $
    23,901
    
    
    
    91
    
    
    
    56,326
    
    
    
    83,943
    
    
    
    1,003
    
    
    
    (3,529
    )
    
    
    (64,045
    )
    
    
    97,690
  5




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HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
  Three Months EndedMarch 31,(Dollars in thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (1,847
    )
    
    
    (2,622
    )Adjustments to reconcile net loss to cash provided by operating activities:Provision for loan losses
    
    
    6,533
    
    
    
    6,569Provision for real estate losses
    
    
    0
    
    
    
    1,024Depreciation
    
    
    397
    
    
    
    488Amortization of premiums, net
    
    
    186
    
    
    
    122Amortization of deferred loan fees
    
    
    (73
    )
    
    
    (247
    )Amortization of mortgage servicing rights, net
    
    
    109
    
    
    
    155Capitalized mortgage servicing rights
    
    
    (150
    )
    
    
    (193
    )Deferred income tax
    
    
    (1,792
    )
    
    
    0Gain(loss) on sales of real estate
    
    
    (761
    )
    
    
    79Gain on sales of loans
    
    
    (314
    )
    
    
    (423
    )Proceeds from sale of loans held for sale
    
    
    16,361
    
    
    
    25,088Disbursements on loans held for sale
    
    
    (14,348
    )
    
    
    (25,987
    )Amortization of restricted stock awards
    
    
    97
    
    
    
    76Amortization of unearned ESOP shares
    
    
    48
    
    
    
    49Earned employee stock ownership shares priced below original cost
    
    
    (10
    )
    
    
    (17
    )Stock option compensation
    
    
    16
    
    
    
    7Decrease in accrued interest receivable
    
    
    238
    
    
    
    810Decrease in accrued interest payable
    
    
    (361
    )
    
    
    (1,664
    )Decrease (increase) in other assets
    
    
    440
    
    
    
    (140
    )Increase in other liabilities
    
    
    368
    
    
    
    3,113Other, net
    
    
    1
    
    
    
    40Net cash provided by operating activities
    
    
    5,138
    
    
    
    6,327Cash flows from investing activities:Principal collected on securities available for sale
    
    
    5,168
    
    
    
    5,035Proceeds collected on maturities of securities available for sale
    
    
    17,000
    
    
    
    10,000Purchases of securities available for sale
    
    
    (25,072
    )
    
    
    0Proceeds from sales of real estate
    
    
    5,431
    
    
    
    122Net decrease in loans receivable
    
    
    16,251
    
    
    
    6,838Purchases of premises and equipment
    
    
    (34
    )
    
    
    (310
    )Net cash provided by investing activities
    
    
    18,744
    
    
    
    21,685Cash flows from financing activities:Decrease in deposits
    
    
    (6,359
    )
    
    
    (82,322
    )Dividends to preferred stockholders
    
    
    (325
    )
    
    
    (188
    )Proceeds from borrowings
    
    
    5,000
    
    
    
    592,000Repayment of borrowings
    
    
    (5,000
    )
    
    
    (542,000
    )Increase in customer escrows
    
    
    685
    
    
    
    1,310Net cash used by financing activities
    
    
    (5,999
    )
    
    
    (31,200
    )Increase (decrease) in cash and cash equivalents
    
    
    17,883
    
    
    
    (3,188
    )Cash and cash equivalents, beginning of period
    
    
    16,418
    
    
    
    15,729Cash and cash equivalents, end of period
    
    $
    34,301
    
    
    
    12,541Supplemental cash flow disclosures:Cash paid for interest
    
    $
    5,304
    
    
    
    8,235Cash paid for income taxes
    
    
    39
    
    
    
    33Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    1,138
    
    
    
    10,420Loans transferred to loans held for sale
    
    
    1,072
    
    
    
    0
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 March 31, 2010 and 2009
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement
No. 162, The Hierarchy of Generally Accepted Accounting Principles
 Amendments to FASB Interpretation No. 46(R).
 7




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Accounting for Transfers of Financial Assets
 an amendment of FASB Statement No. 140. Consolidation of Variable Interest Entities,
 Fair Value Measurements and Disclosures Improving Disclosures about Fair Value Measurements.
 (4) Derivative Instruments and Hedging Activities
   (5) Fair Value Measurements
 Fair Value Measurements
 Level 1
 Level 2
 Level 3
 8




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Carrying value at March 31, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    162,082
    
    
    
    4,970
    
    
    
    157,112
    
    
    
    0Mortgage loan commitments
    
    
    (64
    )
    
    
    0
    
    
    
    (64
    )
    
    
    0Total
    
    $
    162,018
    
    
    
    4,970
    
    
    
    157,048
    
    
    
    0
 Carrying value at March 31, 2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    159,869
    
    
    
    12,285
    
    
    
    147,584
    
    
    
    0Mortgage loan commitments
    
    
    8
    
    
    
    0
    
    
    
    8
    
    
    
    0Total
    
    $
    159,877
    
    
    
    12,285
    
    
    
    147,592
    
    
    
    0
   Three months endedCarrying value at March 31, 2010

    
    
    March 31, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total LossesLoans held for sale
    
    $
    2,386
    
    
    
    0
    
    
    
    2,386
    
    
    
    0
    
    
    
    (27
    )Mortgage servicing rights
    
    
    1,356
    
    
    
    0
    
    
    
    1,356
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    77,998
    
    
    
    0
    
    
    
    77,998
    
    
    
    0
    
    
    
    (8,647
    )Real estate, net(2)
    
    
    12,725
    
    
    
    0
    
    
    
    12,725
    
    
    
    0
    
    
    
    0Total
    
    $
    94,465
    
    
    
    0
    
    
    
    94,465
    
    
    
    0
    
    
    
    (8,674
    )
 Three months endedMarch 31, 2009Carrying value at March 31, 2009

    
    
    Total Gains(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (Losses)Loans held for sale
    
    $
    3,880
    
    
    
    0
    
    
    
    3,880
    
    
    
    0
    
    
    
    (42
    )Mortgage servicing rights
    
    
    765
    
    
    
    0
    
    
    
    765
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    58,559
    
    
    
    0
    
    
    
    58,559
    
    
    
    0
    
    
    
    407Real estate, net(2)
    
    
    19,753
    
    
    
    0
    
    
    
    19,753
    
    
    
    0
    
    
    
    (1,024
    )Total
    
    $
    82,957
    
    
    
    0
    
    
    
    82,957
    
    
    
    0
    
    
    
    (659
    )
 
 (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 31,2010
    
    2009Carrying
    
    Estimated
    
    Contract
    
    Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    amount
    
    amount
    
    fair value
    
    amountFinancial assets:Cash and cash equivalents
    
    $
    34,301
    
    
    
    34,301
    
    
    
    
    
    
    
    12,541
    
    
    
    12,541Securities available for sale
    
    
    162,082
    
    
    
    162,082
    
    
    
    
    
    
    
    159,869
    
    
    
    159,869Loans held for sale
    
    
    2,386
    
    
    
    2,386
    
    
    
    
    
    
    
    3,880
    
    
    
    3,904Loans receivable, net
    
    
    774,336
    
    
    
    778,796
    
    
    
    
    
    
    
    877,309
    
    
    
    897,342Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    7,286
    
    
    
    
    
    
    
    7,286
    
    
    
    7,286Accrued interest receivable
    
    
    3,786
    
    
    
    3,786
    
    
    
    
    
    
    
    4,758
    
    
    
    4,758Financial liabilities:Deposits
    
    
    789,792
    
    
    
    789,792
    
    
    
    
    
    
    
    798,369
    
    
    
    798,369Federal Home Loan Bank advances
    
    
    132,500
    
    
    
    141,499
    
    
    
    
    
    
    
    132,500
    
    
    
    141,791Federal Reserve line of credit
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    60,000
    
    
    
    59,999Accrued interest payable
    
    
    1,747
    
    
    
    1,747
    
    
    
    
    
    
    
    4,643
    
    
    
    4,643Off-balance sheet financial instruments:Commitments to extend credit
    
    
    (64
    )
    
    
    (64
    )
    
    
    138,784
    
    
    
    8
    
    
    
    8
    
    
    
    167,053Commitments to sell loans
    
    
    66
    
    
    
    66
    
    
    
    9,595
    
    
    
    (112
    )
    
    
    (112
    )
    
    
    25,538
 (7) Comprehensive Loss
  For the period ended March 31,2010
    
    
    2009(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
    
    $
    (376
    )
    
    
    (149
    )
    
    
    (227
    )
    
    
    (306
    )
    
    
    (162
    )
    
    
    (144
    )Other comprehensive loss
    
    $
    (376
    )
    
    
    (149
    )
    
    
    (227
    )
    
    
    (306
    )
    
    
    (162
    )
    
    
    (144
    )
 (8) Securities Available For Sale
  March 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
    
    
    LossesMortgage backed securities:FHLMC
    
    
    1
    
    
    $
    1,102
    
    
    
    (59
    )
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    1,102
    
    
    
    (59
    )Other marketable securities:FNMA Notes
    
    
    2
    
    
    
    9,984
    
    
    
    (50
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,984
    
    
    
    (50
    )FHLMC Notes
    
    
    2
    
    
    
    9,984
    
    
    
    (27
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,984
    
    
    
    (27
    )FHLB Notes
    
    
    2
    
    
    
    10,008
    
    
    
    (6
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    10,008
    
    
    
    (6
    )Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    175
    
    
    
    (525
    )
    
    
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    7
    
    
    $
    31,078
    
    
    
    (142
    )
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    31,253
    
    
    
    (667
    )
 10




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##### Table of Contents



March 31, 2009Less 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
    
    
    LossesMortgage backed securities:FHLMC
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    1
    
    
    $
    2,782
    
    
    
    (63
    )
    
    $
    2,782
    
    
    
    (63
    )FNMA
    
    
    1
    
    
    
    9
    
    
    
    0
    
    
    
    1
    
    
    
    2,128
    
    
    
    (5
    )
    
    
    2,137
    
    
    
    (5
    )Other marketable securities:Corporate preferred stock
    
    
    1
    
    
    
    350
    
    
    
    (350
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    350
    
    
    
    (350
    )Total temporarily impaired
securities
    
    
    2
    
    
    $
    359
    
    
    
    (350
    )
    
    
    2
    
    
    $
    4,910
    
    
    
    (68
    )
    
    $
    5,269
    
    
    
    (418
    )
    Gross unrealized
    
    
    Gross unrealized(Dollars in thousands)
    
    Amortized cost
    
    
    gains
    
    
    losses
    
    
    Fair valueMarch 31, 2010:Mortgage-backed securities:FHLMC
    
    $
    24,022
    
    
    
    877
    
    
    
    0
    
    
    
    24,899FNMA
    
    
    17,747
    
    
    
    753
    
    
    
    0
    
    
    
    18,500Collateralized mortgage obligations:FHLMC
    
    
    4,522
    
    
    
    102
    
    
    
    (59
    )
    
    
    4,565FNMA
    
    
    385
    
    
    
    19
    
    
    
    0
    
    
    
    40446,676
    
    
    
    1,751
    
    
    
    (59
    )
    
    
    48,368Other marketable securities:U.S. Government agency obligations
    
    
    113,044
    
    
    
    578
    
    
    
    (83
    )
    
    
    113,539Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (525
    )
    
    
    175113,744
    
    
    
    578
    
    
    
    (608
    )
    
    
    113,714$
    160,420
    
    
    
    2,329
    
    
    
    (667
    )
    
    
    162,082
 11




---



##### Table of Contents



Amortized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    valueDue less than one year
    
    $
    128,506
    
    
    
    129,519Due after one year through five years
    
    
    27,495
    
    
    
    28,522Due after five years through ten years
    
    
    3,719
    
    
    
    3,866Due after 10 years
    
    
    700
    
    
    
    175Total
    
    $
    160,420
    
    
    
    162,082
  (9) Investment in Mortgage Servicing Rights
  Three months ended
    
    
    Twelve months ended
    
    
    Three months ended(Dollars in thousands)
    
    March 31, 2010
    
    
    December 31, 2009
    
    
    March 31, 2009Mortgage servicing rights:Balance, beginning of period
    
    $
    1,315
    
    
    
    728
    
    
    
    728Originations
    
    
    150
    
    
    
    1,143
    
    
    
    192Amortization
    
    
    (109
    )
    
    
    (556
    )
    
    
    (155
    )Balance, end of period
    
    
    1,356
    
    
    
    1,315
    
    
    
    765Fair value of mortgage servicing rights
    
    $
    2,357
    
    
    
    2,339
    
    
    
    2,004
  Weighted
    
    WeightedLoan
    
    Average
    
    AveragePrincipal
    
    Interest
    
    Remaining
    
    Number(Dollars in thousands)
    
    Balance
    
    Rate
    
    Term
    
    of LoansOriginal term 30 year fixed rate
    
    $
    223,406
    
    
    
    5.44
    %
    
    
    299
    
    
    
    1,943Original term 15 year fixed rate
    
    
    98,100
    
    
    
    4.95
    
    
    
    115
    
    
    
    1,571Adjustable rate
    
    
    1,254
    
    
    
    4.03
    
    
    
    303
    
    
    
    11
  Gross
    
    
    
    
    
    
    UnamortizedCarrying
    
    
    Accumulated
    
    
    Intangible(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    AssetsMortgage servicing rights
    
    $
    4,216
    
    
    
    (2,860
    )
    
    
    1,356Total
    
    $
    4,216
    
    
    
    (2,860
    )
    
    
    1,356
 12




---



##### Table of Contents



MortgageServicing(Dollars in thousands)
    
    RightsYear ending December 31,2010
    
    $
    2592011
    
    
    2702012
    
    
    2312013
    
    
    2082014
    
    
    176Thereafter
    
    
    212
  (10) Loss per Share
  Three months ended March 31,2010
    
    
    2009Weighted average number of common shares outstanding
used in basic earnings per common share calculation
    
    
    3,736,852
    
    
    
    3,675,984Net dilutive effect of:Options
    
    
    0
    
    
    
    0Restricted stock awards
    
    
    0
    
    
    
    0Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,736,852
    
    
    
    3,675,984Loss available to common shareholders
    
    $
    (2,287,581
    )
    
    
    (3,050,752
    )Basic loss per common share
    
    $
    (0.61
    )
    
    
    (0.83
    )Diluted loss per common share
    
    $
    (0.61
    )
    
    
    (0.83
    )
  (11) Regulatory Capital and Regulatory Oversight
    13




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##### Table of Contents



Required to beAdequately
    
    
    
    
    
    
    
    
    
    
    To Be Well Capitalized Under PromptActual
    
    
    Capitalized
    
    
    Excess Capital
    
    
    Corrective Action ProvisionsPercent of
    
    
    
    
    
    
    Percent of Assets
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of(Dollars in thousands)
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    (1)
    
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    Assets(1)Bank stockholders equity
    
    $
    94,650Less:Net unrealized gains on certain securities
available for sale
    
    
    1,315Disallowed servicing and tax assets
    
    
    13,666Tier I or core capital
    
    
    79,669Tier I capital to adjusted total assets
    
    
    
    
    
    
    7.88
    %
    
    $
    40,458
    
    
    
    4.00
    %
    
    $
    39,211
    
    
    
    3.88
    %
    
    $
    50,573
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    10.05
    %
    
    $
    31,712
    
    
    
    4.00
    %
    
    $
    47,957
    
    
    
    6.05
    %
    
    $
    47,568
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    9,910Risk-based capital
    
    $
    89,579
    
    
    
    
    
    
    $
    63,424
    
    
    
    
    
    
    $
    26,155
    
    
    
    
    
    
    $
    79,280Risk-based capital to risk- weighted assets
    
    
    
    
    
    
    11.30
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    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.   (12) Commitments and Contingencies
  14




---



##### Table of Contents



(13) Business Segments
    Home Federal
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in thousands)
    
    Savings Bank
    
    Other
    
    Eliminations
    
    TotalAt 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
    )
    
    
    1,028,476At or for the quarter ended March 31, 2009:Interest income  external customers
    
    $
    15,353
    
    
    
    0
    
    
    
    0
    
    
    
    15,353Non-interest income  external customers
    
    
    1,837
    
    
    
    1
    
    
    
    0
    
    
    
    1,838Loss on limited partnerships
    
    
    (5
    )
    
    
    0
    
    
    
    0
    
    
    
    (5
    )Intersegment interest income
    
    
    0
    
    
    
    4
    
    
    
    (4
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    (2,457
    )
    
    
    2,413
    
    
    
    0Interest expense
    
    
    6,575
    
    
    
    0
    
    
    
    (4
    )
    
    
    6,571Amortization of mortgage servicing rights, net.
    
    
    155
    
    
    
    0
    
    
    
    0
    
    
    
    155Other non-interest expense
    
    
    8,118
    
    
    
    199
    
    
    
    (44
    )
    
    
    8,273Income tax benefit
    
    
    (1,732
    )
    
    
    (28
    )
    
    
    0
    
    
    
    (1,760
    )Net loss
    
    
    (2,456
    )
    
    
    (2,623
    )
    
    
    2,457
    
    
    
    (2,622
    )Total assets
    
    
    1,112,271
    
    
    
    109,981
    
    
    
    (108,893
    )
    
    
    1,113,359
 15




---



##### Table of Contents



HMN FINANCIAL, INC.
 
 Item 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Information
  General
  16




---



##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   17




---



##### Table of Contents



Income Taxes
     18




---



##### Table of Contents



Net Loss
 ,
 Net Interest Income
    19




---



##### Table of Contents



For the three month period endedMarch 31, 2010
    
    
    March 31, 2009Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    159,759
    
    
    
    1,107
    
    
    
    2.81
    %
    
    $
    165,387
    
    
    
    1,748
    
    
    
    4.29
    %Loans held for sale
    
    
    1,785
    
    
    
    21
    
    
    
    4.77
    
    
    
    3,305
    
    
    
    41
    
    
    
    5.03Mortgage loans, net
    
    
    143,667
    
    
    
    2,097
    
    
    
    5.92
    
    
    
    160,762
    
    
    
    2,358
    
    
    
    5.95Commercial loans, net
    
    
    564,322
    
    
    
    8,453
    
    
    
    6.07
    
    
    
    648,210
    
    
    
    9,958
    
    
    
    6.23Consumer loans, net
    
    
    80,991
    
    
    
    1,188
    
    
    
    5.95
    
    
    
    85,407
    
    
    
    1,271
    
    
    
    6.04Cash equivalents
    
    
    18,591
    
    
    
    1
    
    
    
    0.02
    
    
    
    10,468
    
    
    
    1
    
    
    
    0.04Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    37
    
    
    
    2.06
    
    
    
    7,286
    
    
    
    (23
    )
    
    
    (1.28
    )Total interest-earning assets
    
    
    976,401
    
    
    
    12,904
    
    
    
    5.36
    
    
    
    1,080,825
    
    
    
    15,354
    
    
    
    5.76Interest-bearing liabilities and
noninterest bearing deposits:NOW accounts
    
    
    98,474
    
    
    
    22
    
    
    
    0.09
    
    
    
    112,143
    
    
    
    40
    
    
    
    0.14Savings accounts
    
    
    31,821
    
    
    
    10
    
    
    
    0.13
    
    
    
    29,236
    
    
    
    9
    
    
    
    0.12Money market accounts
    
    
    136,800
    
    
    
    392
    
    
    
    1.16
    
    
    
    95,983
    
    
    
    356
    
    
    
    1.50Certificates
    
    
    243,180
    
    
    
    1,476
    
    
    
    2.46
    
    
    
    260,170
    
    
    
    2,101
    
    
    
    3.28Brokered deposits
    
    
    199,257
    
    
    
    1,521
    
    
    
    3.10
    
    
    
    255,210
    
    
    
    2,469
    
    
    
    3.92Federal Home Loan Bank advances
    
    
    132,611
    
    
    
    1,522
    
    
    
    4.65
    
    
    
    192,967
    
    
    
    1,596
    
    
    
    3.35Total interest-bearing liabilities
    
    
    842,143
    
    
    
    
    
    
    
    
    
    
    
    945,709Noninterest checking
    
    
    79,635
    
    
    
    
    
    
    
    
    
    
    
    65,537Other noninterest bearing escrow deposits
    
    
    1,836
    
    
    
    
    
    
    
    
    
    
    
    1,306Total interest-bearing liabilities and
noninterest bearing deposits
    
    $
    923,614
    
    
    
    4,943
    
    
    
    2.17
    
    
    $
    1,012,552
    
    
    
    6,571
    
    
    
    2.63Net interest income
    
    
    
    
    
    $
    7,961
    
    
    
    
    
    
    
    
    
    
    $
    8,783Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.19
    %
    
    
    
    
    
    
    
    
    
    
    3.13
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.31
    %
    
    
    
    
    
    
    
    
    
    
    3.30
    %
 Provision for Loan Losses
   (Dollars in thousands)
    
    2010
    
    
    2009Balance at January 1,
    
    $
    23,811
    
    
    $
    21,257Provision
    
    
    6,533
    
    
    
    6,569Charge offs:One-to-four family
    
    
    (51
    )
    
    
    0Consumer
    
    
    (306
    )
    
    
    (694
    )Commercial business
    
    
    (61
    )
    
    
    (184
    )Commercial real estate
    
    
    (660
    )
    
    
    (9,461
    )Recoveries
    
    
    18
    
    
    
    7Balance at March 31,
    
    $
    29,284
    
    
    $
    17,494General allowance
    
    
    12,080
    
    
    
    10,002Specific allowance
    
    
    17,204
    
    
    
    7,492$
    29,284
    
    
    $
    17,494
 Non-Interest Income
  20




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##### Table of Contents



Non-Interest Expense
  Income Tax Benefit
  Non-Performing Assets
  March 31,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009Non-Accruing Loans:One-to-four family real estate
    
    $
    2,194
    
    
    $
    2,132Commercial real estate
    
    
    43,596
    
    
    
    37,122Consumer
    
    
    3,499
    
    
    
    4,086Commercial business
    
    
    28,709
    
    
    
    17,787Total
    
    
    77,998
    
    
    
    61,127Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    1,396
    
    
    
    1,011Consumer
    
    
    4
    
    
    
    5Commercial real estate
    
    
    11,328
    
    
    
    15,246Total non-performing assets
    
    $
    90,726
    
    
    $
    77,389Total as a percentage of total assets
    
    
    8.83
    %
    
    
    7.47
    %Total non-performing loans
    
    $
    77,998
    
    
    $
    61,127Total as a percentage of total loans receivable, net
    
    
    10.07
    %
    
    
    7.65
    %Allowance for loan loss to non-performing loans
    
    
    37.54
    %
    
    
    38.95
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    7,083
    
    
    $
    11,14090+ days
    
    
    0
    
    
    
    0Delinquencies as a percentage ofLoan and lease portfolio (1)30+ days
    
    
    0.90
    %
    
    
    1.37
    %90+ days
    
    
    0.00
    %
    
    
    0.00
    %
 
 (1)
    
    Excludes non-accrual loans.  21




---



##### Table of Contents



(Dollars in thousands)Non-performing loans
    
    
    
    
    
    Foreclosed and repossessed
assetsJanuary 1, 2010
    
    $
    61,127
    
    
    January 1, 2010
    
    $
    16,262Classified as non-performing
    
    
    19,907
    
    
    Transferred from non-performing loans
    
    
    770Charge offs
    
    
    (1,079
    )
    
    Other foreclosures/repossessions
    
    
    389Principal payments received
    
    
    (958
    )
    
    Real estate sold
    
    
    (5,442
    )Classified as accruing
    
    
    (229
    )
    
    Net gain on sale of assets
    
    
    767Transferred to real estate owned
    
    
    (770
    )
    
    Write downs
    
    
    (18
    )March 31, 2010
    
    $
    77,998
    
    
    March 31, 2010
    
    $
    12,728
  Principal Amount of
    
    
    
    
    
    
    Principal Amount ofLoans at
    
    
    
    
    
    
    Loans at(Dollars in thousands)
    
    
    
    
    
    March 31,
    
    
    
    
    
    
    December 31,Property Type
    
    # of relationships
    
    
    2010
    
    
    # of relationships
    
    
    2009Residential developments
    
    
    8
    
    
    $
    12,914
    
    
    
    7
    
    
    $
    12,030Single family homes
    
    
    2
    
    
    
    3,088
    
    
    
    2
    
    
    
    3,088Hotel
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999Alternative fuel plants
    
    
    2
    
    
    
    12,889
    
    
    
    2
    
    
    
    12,834Shopping centers/retail
    
    
    2
    
    
    
    1,121
    
    
    
    2
    
    
    
    1,136Restaurants/bar
    
    
    3
    
    
    
    2,258
    
    
    
    4
    
    
    
    2,436Office building
    
    
    1
    
    
    
    6,327
    
    
    
    1
    
    
    
    59919
    
    
    $
    43,596
    
    
    
    19
    
    
    $
    37,122
  Principal Amount of
    
    
    
    
    
    
    Principal Amount ofLoans at
    
    
    
    
    
    
    Loans at(Dollars in thousands)
    
    
    
    
    
    March 31,
    
    
    
    
    
    
    December 31,Industry
    
    # of relationships
    
    
    2010
    
    
    # of relationships
    
    
    2009Construction/development
    
    
    8
    
    
    $
    5,836
    
    
    
    5
    
    
    $
    4,094Finance
    
    
    4
    
    
    
    10,461
    
    
    
    2
    
    
    
    8,764Alternative fuels
    
    
    1
    
    
    
    791
    
    
    
    1
    
    
    
    756Retail
    
    
    1
    
    
    
    2,504
    
    
    
    1
    
    
    
    32Banking
    
    
    2
    
    
    
    8,233
    
    
    
    1
    
    
    
    3,248Entertainment
    
    
    1
    
    
    
    883
    
    
    
    1
    
    
    
    89317
    
    
    $
    28,709
    
    
    
    11
    
    
    $
    17,787
   Dividends
  22




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##### Table of Contents



Liquidity and Capital Resources
       23




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##### Table of Contents



Market Risk
  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
    
    $
    1,009,437
    
    
    
    997,573
    
    
    
    983,489
    
    
    
    968,597Total market risk sensitive liabilities
    
    
    923,338
    
    
    
    909,260
    
    
    
    896,586
    
    
    
    882,936Off-balance sheet financial instruments
    
    
    48
    
    
    
    0
    
    
    
    342
    
    
    
    616Net market risk
    
    $
    86,051
    
    
    
    88,313
    
    
    
    86,561
    
    
    
    85,045Percentage change from current market value
    
    
    (2.56)
    %
    
    
    0.00
    %
    
    
    (1.98
    )%
    
    
    (3.70)
    %
  24




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##### Table of Contents



Asset/Liability Management
  Rate Shock
    
    
    Projectedin Basis
    
    
    Change in Net
    
    
    Percentage(Dollars in thousands)
    
    Points
    
    
    Interest Income
    
    
    Change+200
    
    
    $
    2,067
    
    
    
    6.50
    %+100
    
    
    
    1,261
    
    
    
    3.970
    
    
    
    0
    
    
    
    0.00-100
    
    
    
    (1,934
    )
    
    
    (6.08
    )
    25




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 26




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##### Table of Contents



HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
   
 ITEM 1A. Risk Factors.
 We may be required to raise additional capital in the future, but that capital may not be available
when it is needed.
   If we incur additional losses, we may be required to write down or write off our deferred tax
assets.
   27




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##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   (a) Total
    
    
    
    
    
    
    (c) Total Number of
    
    
    (d) Maximum NumberNumber of
    
    
    
    
    
    
    Shares Purchased as Part
    
    
    of Shares that May YetShares
    
    
    (b) Average Price
    
    
    of Publicly Announced
    
    
    Be Purchased Under the PlansPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Plans or Programs
    
    
    or Programs (1)January 1 through January 31, 2010
    
    
    0
    
    
    $
    N/A
    
    
    
    0
    
    
    
    0February 1 through February 28, 2010
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    0March 1 through March 31, 2010
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    0Total
    
    
    0
    
    
    $
    N/A
    
    
    
    0
 
 (1)
    
    On July 22, 2008 the Board of Directors authorized the repurchase of up to 300,000 shares of
the Companys common stock. This program expired on January 26, 2010. 
 ITEM 3. Defaults Upon Senior Securities.
  
 ITEM 4. [Removed and Reserved]
 
 ITEM 5. Other Information.
  
 ITEM 6. Exhibits.
  28




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC. 

RegistrantDate:   May 5, 2010
    /s/ Bradley KrehbielBradley Krehbiel,Principal Executive Officer
(Duly Authorized Representative)Date:   May 5, 2010
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 29




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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/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). 30