##### 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 June 30, 2007
 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)Registrants telephone number, including area code:
    
    (507) 535-1200
  þ o
   o þ o
  o þ
  Class
    
    Outstanding at July 23, 2007Common stock, $0.01 par value
    
    4,276,140




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##### 



HMN FINANCIAL, INC.
 CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income for the
Three Months Ended and Six Months Ended June 30, 2007 and 2006
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Income for the Six Month Period Ended June 30, 2007
    
    
    5Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2:
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
Included in Item 2 under Market Risk
    
    
    20Item 4:
    
    Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    23Item 1A:
    
    Risk Factors
    
    
    23Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3:
    
    Defaults Upon Senior Securities
    
    
    23Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5:
    
    Other Information
    
    
    24Item 6:
    
    Exhibits
    
    
    24Signatures
    
    
    25Amended and Restated By-LawsCertificationCertificationCertification
  2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1: Financial Statements
 HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
 June 30,
    
    
    December 31,(dollars in thousands)
    
    2007
    
    
    2006(unaudited)AssetsCash and cash equivalents
    
    $
    35,592
    
    
    
    43,776Securities available for sale:Mortgage-backed and related securities
(amortized cost $15,357 and $6,671)
    
    
    14,417
    
    
    
    6,178Other marketable securities
(amortized cost $189,911 and $119,940)
    
    
    189,511
    
    
    
    119,962203,928
    
    
    
    126,140Loans held for sale
    
    
    4,454
    
    
    
    1,493Loans receivable, net
    
    
    843,221
    
    
    
    768,232Accrued interest receivable
    
    
    7,111
    
    
    
    5,061Real estate, net
    
    
    4,703
    
    
    
    2,072Federal Home Loan Bank stock, at cost
    
    
    6,412
    
    
    
    7,956Mortgage servicing rights, net
    
    
    1,597
    
    
    
    1,958Premises and equipment, net
    
    
    10,977
    
    
    
    11,372Goodwill
    
    
    3,801
    
    
    
    3,801Core deposit intangible, net
    
    
    49
    
    
    
    106Prepaid expenses and other assets
    
    
    2,148
    
    
    
    2,943Deferred tax asset
    
    
    3,433
    
    
    
    2,879Total assets
    
    $
    1,127,426
    
    
    
    977,789Liabilities and Stockholders EquityDeposits
    
    $
    925,511
    
    
    
    725,959Federal Home Loan Bank advances
    
    
    97,500
    
    
    
    150,900Accrued interest payable
    
    
    4,406
    
    
    
    1,176Customer escrows
    
    
    814
    
    
    
    721Accrued expenses and other liabilities
    
    
    4,479
    
    
    
    5,891Total liabilities
    
    
    1,032,710
    
    
    
    884,647Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par value):authorized 500,000 shares; issued and outstanding none
    
    
    0
    
    
    
    0Common stock ($.01 par value):authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    57,691
    
    
    
    57,914Retained earnings, subject to certain restrictions
    
    
    107,225
    
    
    
    103,643Accumulated other comprehensive loss
    
    
    (809
    )
    
    
    (284
    )Unearned employee stock ownership plan shares
    
    
    (4,061
    )
    
    
    (4,158
    )Treasury stock, at cost 4,852,522 and 4,813,232 shares
    
    
    (65,421
    )
    
    
    (64,064
    )Total stockholders equity
    
    
    94,716
    
    
    
    93,142Total liabilities and stockholders equity
    
    $
    1,127,426
    
    
    
    977,789
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Loans receivable
    
    $
    16,629
    
    
    
    15,081
    
    
    
    32,374
    
    
    
    29,784Securities available for sale:Mortgage-backed and related
    
    
    171
    
    
    
    69
    
    
    
    282
    
    
    
    140Other marketable
    
    
    2,417
    
    
    
    1,322
    
    
    
    4,313
    
    
    
    2,212Cash equivalents
    
    
    279
    
    
    
    453
    
    
    
    722
    
    
    
    709Other
    
    
    132
    
    
    
    85
    
    
    
    216
    
    
    
    149Total interest income
    
    
    19,628
    
    
    
    17,011
    
    
    
    37,907
    
    
    
    32,994Interest expense:Deposits
    
    
    8,346
    
    
    
    5,516
    
    
    
    15,223
    
    
    
    10,384Federal Home Loan Bank advances
    
    
    1,427
    
    
    
    1,745
    
    
    
    3,045
    
    
    
    3,471Total interest expense
    
    
    9,773
    
    
    
    7,261
    
    
    
    18,268
    
    
    
    13,855Net interest income
    
    
    9,855
    
    
    
    9,750
    
    
    
    19,639
    
    
    
    19,139Provision for loan losses
    
    
    1,028
    
    
    
    980
    
    
    
    1,483
    
    
    
    1,495Net interest income after provision
for loan losses
    
    
    8,827
    
    
    
    8,770
    
    
    
    18,156
    
    
    
    17,644Non-interest income:Fees and service charges
    
    
    781
    
    
    
    795
    
    
    
    1,477
    
    
    
    1,510Mortgage servicing fees
    
    
    265
    
    
    
    302
    
    
    
    536
    
    
    
    605Securities gains, net
    
    
    0
    
    
    
    48
    
    
    
    0
    
    
    
    48Gains on sales of loans
    
    
    189
    
    
    
    303
    
    
    
    985
    
    
    
    549Other
    
    
    57
    
    
    
    318
    
    
    
    362
    
    
    
    540Total non-interest income
    
    
    1,292
    
    
    
    1,766
    
    
    
    3,360
    
    
    
    3,252Non-interest expense:Compensation and benefits
    
    
    3,262
    
    
    
    3,118
    
    
    
    6,623
    
    
    
    6,377Occupancy
    
    
    1,112
    
    
    
    1,103
    
    
    
    2,196
    
    
    
    2,203Advertising
    
    
    195
    
    
    
    107
    
    
    
    301
    
    
    
    238Data processing
    
    
    321
    
    
    
    287
    
    
    
    616
    
    
    
    576Amortization of mortgage servicing
rights, net
    
    
    189
    
    
    
    236
    
    
    
    371
    
    
    
    453Other
    
    
    1,070
    
    
    
    912
    
    
    
    1,992
    
    
    
    1,856Total non-interest expense
    
    
    6,149
    
    
    
    5,763
    
    
    
    12,099
    
    
    
    11,703Income before income tax expense
    
    
    3,970
    
    
    
    4,773
    
    
    
    9,417
    
    
    
    9,193Income tax expense
    
    
    1,520
    
    
    
    1,829
    
    
    
    3,699
    
    
    
    3,509Net income
    
    $
    2,450
    
    
    
    2,944
    
    
    
    5,718
    
    
    
    5,684Basic earnings per share
    
    $
    0.65
    
    
    
    0.77
    
    
    
    1.52
    
    
    
    1.48Diluted earnings per share
    
    $
    0.62
    
    
    
    0.73
    
    
    
    1.45
    
    
    
    1.41
  4




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity and Comprehensive Income
For the Six-Month Period Ended June 30, 2007
 UnearnedEmployeeAccumulated
    
    
    StockAdditional
    
    
    
    
    
    
    Other
    
    
    Ownership
    
    
    Total
    
    
    Stock-Common
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Plan
    
    
    Treasury
    
    
    Holders(dollars in thousands)
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Shares
    
    
    Stock
    
    
    EquityBalance, December 31, 2006
    
    $
    91
    
    
    
    57,914
    
    
    
    103,643
    
    
    
    (284
    )
    
    
    (4,158
    )
    
    
    (64,064
    )
    
    
    93,142Net income
    
    
    
    
    
    
    
    
    
    
    5,718
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,718Other comprehensive income, net of tax:Net unrealized losses on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (525
    )
    
    
    
    
    
    
    
    
    
    
    (525
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,193Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,194
    )
    
    
    (2,194
    )FIN 48  cumulative effect adjustment
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )Employee stock options exercised
    
    
    
    
    
    
    (246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385
    
    
    
    139Tax benefits of exercised stock options
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99Unearned compensation restricted stock awards
    
    
    
    
    
    
    (469
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    469
    
    
    
    0Restricted stock awards forfeited
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Amortization of restricted stock awards
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Dividends paid
    
    
    
    
    
    
    
    
    
    
    (1,886
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,886
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    286Balance, June 30, 2007
    
    $
    91
    
    
    
    57,691
    
    
    
    107,225
    
    
    
    (809
    )
    
    
    (4,061
    )
    
    
    (65,421
    )
    
    
    94,716
  5




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Six Months EndedJune 30,(dollars in thousands)
    
    2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    5,718
    
    
    
    5,684Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses
    
    
    1,483
    
    
    
    1,495Depreciation
    
    
    959
    
    
    
    952Amortization of discounts, net
    
    
    (1,510
    )
    
    
    (588
    )Amortization of deferred loan fees
    
    
    (478
    )
    
    
    (781
    )Amortization of core deposit intangible
    
    
    57
    
    
    
    57Amortization of mortgage servicing rights
    
    
    371
    
    
    
    453Capitalized mortgage servicing rights
    
    
    (10
    )
    
    
    (96
    )Securities gains, net
    
    
    0
    
    
    
    (48
    )Losses on sales of real estate
    
    
    133
    
    
    
    19Gain on sales of loans
    
    
    (985
    )
    
    
    (549
    )Proceeds from sale of real estate
    
    
    1,557
    
    
    
    347Proceeds from sale of loans held for sale
    
    
    34,883
    
    
    
    34,976Disbursements on loans held for sale
    
    
    (26,616
    )
    
    
    (38,908
    )Amortization of restricted stock awards
    
    
    165
    
    
    
    91Amortization of unearned ESOP shares
    
    
    97
    
    
    
    97Earned employee stock ownership shares priced above original cost
    
    
    189
    
    
    
    184Stock option compensation
    
    
    22
    
    
    
    32(Increase) decrease in accrued interest receivable
    
    
    (2,051
    )
    
    
    63Increase (decrease) in accrued interest payable
    
    
    3,230
    
    
    
    (517
    )Decrease (increase) in other assets
    
    
    437
    
    
    
    (496
    )Decrease in other liabilities
    
    
    (1,447
    )
    
    
    (331
    )Other, net
    
    
    115
    
    
    
    9Net cash provided by operating activities
    
    
    16,319
    
    
    
    2,145Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    0
    
    
    
    2,988Principal collected on securities available for sale
    
    
    967
    
    
    
    371Proceeds collected on maturities of securities available for sale
    
    
    75,000
    
    
    
    55,500Purchases of securities available for sale
    
    
    (153,376
    )
    
    
    (83,465
    )Purchase of Federal Home Loan Bank Stock
    
    
    (999
    )
    
    
    (36
    )Redemption of Federal Home Loan Bank Stock
    
    
    2,543
    
    
    
    0Net (increase) decrease in loans receivable
    
    
    (90,743
    )
    
    
    25,805Purchases of premises and equipment
    
    
    (562
    )
    
    
    (1,045
    )Net cash (used) provided by investing activities
    
    
    (167,170
    )
    
    
    118Cash flows from financing activities:Increase in deposits
    
    
    199,815
    
    
    
    16,570Purchase of treasury stock
    
    
    (2,194
    )
    
    
    (1,512
    )Stock options exercised
    
    
    139
    
    
    
    81Excess tax benefits from options exercised
    
    
    99
    
    
    
    48Dividends to stockholders
    
    
    (1,886
    )
    
    
    (1,851
    )Proceeds from Federal Home Loan Bank advances
    
    
    111,100
    
    
    
    0Repayment of Federal Home Loan Bank advances
    
    
    (164,500
    )
    
    
    0Proceeds from Federal Reserve Bank advances
    
    
    2,000
    
    
    
    1,000Repayment of Federal Reserve Bank advances
    
    
    (2,000
    )
    
    
    (1,000
    )Increase (decrease) in customer escrows
    
    
    94
    
    
    
    (259
    )Net cash provided by financing activities
    
    
    142,667
    
    
    
    13,077(Decrease) increase in cash and cash equivalents
    
    
    (8,184
    )
    
    
    15,340Cash and cash equivalents, beginning of period
    
    
    43,776
    
    
    
    47,269Cash and cash equivalents, end of period
    
    $
    35,592
    
    
    
    62,609Supplemental cash flow disclosures:Cash paid for interest
    
    $
    15,038
    
    
    
    14,372Cash paid for income taxes
    
    
    5,206
    
    
    
    4,889Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    4,438
    
    
    
    252Loans transferred to loans held for sale
    
    
    10,309
    
    
    
    1,285
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 30, 2007 and 2006
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115.
 7




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##### Table of Contents



Fair Value
Measurements
 (4) Derivative Instruments and Hedging Activities
   (5) Comprehensive Income
  For the three months ended June 30,2007
    
    2006(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
    
    $
    (1,242
    )
    
    
    (492
    )
    
    
    (750
    )
    
    
    (113
    )
    
    
    (47
    )
    
    
    (66
    )Less reclassification of net
gains included in net income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    48
    
    
    
    17
    
    
    
    31Other comprehensive loss
    
    $
    (1,242
    )
    
    
    (492
    )
    
    
    (750
    )
    
    
    (161
    )
    
    
    (64
    )
    
    
    (97
    )
 For the six months ended June 30,2007
    
    2006(Dollars in thousands)
    
    Before tax
    
    Tax effect
    
    Net of tax
    
    Before tax
    
    Tax effect
    
    Net of taxSecurities available for sale:Net unrealized (losses) gains
arising during the period
    
    $
    (869
    )
    
    
    (344
    )
    
    
    (525
    )
    
    
    118
    
    
    
    45
    
    
    
    73Less reclassification of net
gains included in net
income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    48
    
    
    
    17
    
    
    
    31Other comprehensive (loss)
income
    
    $
    (869
    )
    
    
    (344
    )
    
    
    (525
    )
    
    
    70
    
    
    
    28
    
    
    
    42
 ( 6 ) Securities Available For Sale
  8




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##### Table of Contents



Less than twelve months
    
    
    Twelve months or more
    
    
    Total# of
    
    
    Fair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(Dollars in thousands)
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage backed securities:FHLMC
    
    
    1
    
    
    $
    4,578
    
    
    
    (61
    )
    
    
    1
    
    
    $
    2,360
    
    
    
    (534
    )
    
    
    6,938
    
    
    
    (595
    )FNMA
    
    
    2
    
    
    
    4,409
    
    
    
    (42
    )
    
    
    3
    
    
    
    2,887
    
    
    
    (307
    )
    
    
    7,296
    
    
    
    (349
    )Other marketable securities:FNMA Notes
    
    
    9
    
    
    
    54,588
    
    
    
    (60
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    54,588
    
    
    
    (60
    )FHLMC Notes
    
    
    2
    
    
    
    9,920
    
    
    
    (12
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,920
    
    
    
    (12
    )FFCB Notes
    
    
    3
    
    
    
    14,855
    
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,855
    
    
    
    (49
    )FHLB Notes
    
    
    16
    
    
    
    89,565
    
    
    
    (285
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    89,565
    
    
    
    (285
    )Total temporarily impaired
Securities
    
    
    33
    
    
    $
    177,915
    
    
    
    (509
    )
    
    
    4
    
    
    $
    5,247
    
    
    
    (841
    )
    
    
    183,162
    
    
    
    (1,350
    )
  (7) Investment in Mortgage Servicing Rights
  Six Months ended
    
    
    Twelve Months ended
    
    
    Six Months ended(Dollars in thousands)
    
    June 30, 2007
    
    
    December 31, 2006
    
    
    June 30, 2006Mortgage servicing rights:Balance, beginning of period
    
    $
    1,958
    
    
    
    2,654
    
    
    
    2,654Originations
    
    
    10
    
    
    
    152
    
    
    
    95Amortization
    
    
    (371
    )
    
    
    (848
    )
    
    
    (453
    )Balance, end of period
    
    $
    1,597
    
    
    
    1,958
    
    
    
    2,296Fair value of mortgage servicing rights
    
    $
    3,810
    
    
    
    3,823
    
    
    
    4,458
  WeightedLoan Principal
    
    Average
    
    Weighted Average
    
    Number of(Dollars in thousands)
    
    Balance
    
    Interest Rate
    
    Remaining Term
    
    LoansOriginal term 30 year fixed rate
    
    $
    192,494
    
    
    
    5.93
    %
    
    318 months
    
    
    1,713Original term 15 year fixed rate
    
    
    163,103
    
    
    
    5.28
    %
    
    136 months
    
    
    2,283Adjustable rate
    
    
    3,655
    
    
    
    5.84
    %
    
    308 months
    
    
    34
 (8) Intangible Assets
  Gross
    
    
    
    
    
    
    UnamortizedCarrying
    
    
    Accumulated
    
    
    Intangible(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    AssetsAmortized intangible assets:Mortgage servicing rights
    
    $
    4,082
    
    
    
    (2,485
    )
    
    
    1,597Core deposit intangible
    
    
    1,567
    
    
    
    (1,518
    )
    
    
    49Total
    
    $
    5,649
    
    
    
    (4,003
    )
    
    
    1,646
 9




---



##### Table of Contents



Mortgage
    
    CoreServicing
    
    Deposit(Dollars in thousands)
    
    Rights
    
    Intangible
    
    TotalYear ended December 31,
2007
    
    $
    289
    
    
    
    49
    
    
    
    3382008
    
    
    541
    
    
    
    0
    
    
    
    5412009
    
    
    397
    
    
    
    0
    
    
    
    3972010
    
    
    217
    
    
    
    0
    
    
    
    2172011
    
    
    105
    
    
    
    0
    
    
    
    105
  (9) Earnings per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average number of common shares outstanding
used in basic earnings per common share calculation
    
    
    3,751,616
    
    
    
    3,842,994
    
    
    
    3,763,663
    
    
    
    3,849,078Net dilutive effect of:Options
    
    
    164,482
    
    
    
    174,480
    
    
    
    168,262
    
    
    
    169,670Restricted stock awards
    
    
    20,766
    
    
    
    14,303
    
    
    
    20,157
    
    
    
    13,593Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,936,864
    
    
    
    4,031,777
    
    
    
    3,952,082
    
    
    
    4,032,341Income available to common shareholders
    
    $
    2,449,730
    
    
    
    2,943,370
    
    
    
    5,717,504
    
    
    
    5,683,776Basic earnings per common share
    
    $
    0.65
    
    
    
    0.77
    
    
    
    1.52
    
    
    
    1.48Diluted earnings per common share
    
    $
    0.62
    
    
    
    0.73
    
    
    
    1.45
    
    
    
    1.41
 (10) Regulatory Capital
     10




---



##### Table of Contents



Required to be
    
    
    
    
    
    
    
    
    
    
    To Be Well CapitalizedAdequately
    
    
    
    
    
    
    
    
    
    
    Under Prompt CorrectiveActual
    
    
    Capitalized
    
    
    Excess Capital
    
    
    Actions 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
    
    $
    92,071Plus:Net unrealized loss on certain securities
available for sale
    
    
    809Less:Goodwill and core deposit intangibles
    
    
    (3,850
    )Disallowed assets
    
    
    (2,519
    )Tier I or core capital
    
    
    86,511Tier I capital to adjusted total assets
    
    
    
    
    
    
    7.71
    %
    
    $
    44,880
    
    
    
    4.00
    %
    
    $
    41,631
    
    
    
    3.71
    %
    
    $
    56,100
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    9.75
    %
    
    $
    35,475
    
    
    
    4.00
    %
    
    $
    51,036
    
    
    
    5.75
    %
    
    $
    53,212
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    10,063Risk-based capital
    
    $
    96,574
    
    
    
    
    
    
    $
    70,950
    
    
    
    
    
    
    $
    25,624
    
    
    
    
    
    
    $
    88,687Risk-based capital to risk- weighted assets
    
    
    
    
    
    
    10.89
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    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.  (11) Commitments and Contingencies
    (12) Income Taxes
  11




---



##### Table of Contents



(13) Business Segments
   12




---



##### Table of Contents



Home Federal(Dollars in thousands)
    
    Savings Bank
    
    Other
    
    Eliminations
    
    Consolidated TotalAt or for the six months ended June 30, 2007:Interest income  external customers
    
    $
    37,869
    
    
    
    38
    
    
    
    0
    
    
    
    37,907Non-interest income  external customers
    
    
    3,360
    
    
    
    0
    
    
    
    0
    
    
    
    3,360Intersegment interest income
    
    
    0
    
    
    
    58
    
    
    
    (58
    )
    
    
    0Intersegment non-interest income
    
    
    87
    
    
    
    5,866
    
    
    
    (5,953
    )
    
    
    0Interest expense
    
    
    18,326
    
    
    
    0
    
    
    
    (58
    )
    
    
    18,268Amortization of mortgage servicing rights, net
    
    
    371
    
    
    
    0
    
    
    
    0
    
    
    
    371Other non-interest expense
    
    
    11,456
    
    
    
    359
    
    
    
    (87
    )
    
    
    11,728Income tax expense (benefit)
    
    
    3,810
    
    
    
    (111
    )
    
    
    0
    
    
    
    3,699Net income
    
    
    5,869
    
    
    
    5,715
    
    
    
    (5,866
    )
    
    
    5,718Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,124,354
    
    
    
    95,369
    
    
    
    (92,297
    )
    
    
    1,127,426At or for the six months ended June 30, 2006:Interest income  external customers
    
    $
    32,918
    
    
    
    76
    
    
    
    0
    
    
    
    32,994Non-interest income  external customers
    
    
    3,252
    
    
    
    0
    
    
    
    0
    
    
    
    3,252Intersegment non-interest income
    
    
    67
    
    
    
    5,829
    
    
    
    (5,896
    )
    
    
    0Interest expense
    
    
    13,855
    
    
    
    0
    
    
    
    0
    
    
    
    13,855Amortization of mortgage servicing rights, net
    
    
    453
    
    
    
    0
    
    
    
    0
    
    
    
    453Other non-interest expense
    
    
    10,998
    
    
    
    319
    
    
    
    (67
    )
    
    
    11,250Income tax expense (benefit)
    
    
    3,605
    
    
    
    (96
    )
    
    
    0
    
    
    
    3,509Net income
    
    
    5,832
    
    
    
    5,681
    
    
    
    (5,829
    )
    
    
    5,684Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,006,973
    
    
    
    94,271
    
    
    
    (91,309
    )
    
    
    1,009,935At or for the quarter ended June 30, 2007:Interest income  external customers
    
    $
    19,611
    
    
    
    17
    
    
    
    0
    
    
    
    19,628Non-interest income  external customers
    
    
    1,292
    
    
    
    0
    
    
    
    0
    
    
    
    1,292Intersegment interest income
    
    
    0
    
    
    
    17
    
    
    
    (17
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    2,541
    
    
    
    (2,584
    )
    
    
    0Interest expense
    
    
    9,790
    
    
    
    0
    
    
    
    (17
    )
    
    
    9,773Amortization of mortgage servicing rights, net
    
    
    189
    
    
    
    0
    
    
    
    0
    
    
    
    189Other non-interest expense
    
    
    5,815
    
    
    
    189
    
    
    
    (44
    )
    
    
    5,960Income tax expense (benefit)
    
    
    1,581
    
    
    
    (61
    )
    
    
    0
    
    
    
    1,520Net income
    
    
    2,542
    
    
    
    2,448
    
    
    
    (2,540
    )
    
    
    2,450Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,124,354
    
    
    
    95,369
    
    
    
    (92,297
    )
    
    
    1,127,426At or for the quarter ended June 30, 2006:Interest income  external customers
    
    $
    16,979
    
    
    
    32
    
    
    
    0
    
    
    
    17,011Non-interest income  external customers
    
    
    1,766
    
    
    
    0
    
    
    
    0
    
    
    
    1,766Intersegment non-interest income
    
    
    33
    
    
    
    3,021
    
    
    
    (3,054
    )
    
    
    0Interest expense
    
    
    7,261
    
    
    
    0
    
    
    
    0
    
    
    
    7,261Amortization of mortgage servicing rights, net
    
    
    236
    
    
    
    0
    
    
    
    0
    
    
    
    236Other non-interest expense
    
    
    5,400
    
    
    
    162
    
    
    
    (34
    )
    
    
    5,528Income tax expense (benefit)
    
    
    1,880
    
    
    
    (51
    )
    
    
    0
    
    
    
    1,829Net income
    
    
    3,022
    
    
    
    2,941
    
    
    
    (3,020
    )
    
    
    2,943Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,006,973
    
    
    
    94,271
    
    
    
    (91,309
    )
    
    
    1,009,935
 13




---



##### Table of Contents



Item 2:
 HMN FINANCIAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Information
  General
   Critical Accounting Policies
  14




---



##### Table of Contents



Allowance for Loan Losses and Related Provision
   Mortgage Servicing Rights
  Income Taxes
  15




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109
 Net Income
   Net Interest Income
    16




---



##### Table of Contents



For the six month period endingJune 30, 2007
    
    
    June 30, 2006Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    180,616
    
    
    
    4,595
    
    
    
    5.13
    %
    
    $
    126,153
    
    
    
    2,352
    
    
    
    3.76
    %Loans held for sale
    
    
    2,316
    
    
    
    71
    
    
    
    6.21
    
    
    
    3,380
    
    
    
    106
    
    
    
    6.34Mortgage loans, net
    
    
    139,721
    
    
    
    4,309
    
    
    
    6.22
    
    
    
    127,315
    
    
    
    3,724
    
    
    
    5.90Commercial loans, net
    
    
    578,852
    
    
    
    24,304
    
    
    
    8.47
    
    
    
    546,175
    
    
    
    21,799
    
    
    
    8.05Consumer loans, net
    
    
    84,933
    
    
    
    3,690
    
    
    
    8.76
    
    
    
    99,504
    
    
    
    4,155
    
    
    
    8.42Cash equivalents
    
    
    27,867
    
    
    
    722
    
    
    
    5.23
    
    
    
    33,389
    
    
    
    709
    
    
    
    4.28Federal Home Loan Bank stock
    
    
    7,541
    
    
    
    216
    
    
    
    5.78
    
    
    
    8,380
    
    
    
    149
    
    
    
    3.58Total interest-earning assets
    
    
    1,021,846
    
    
    
    37,907
    
    
    
    7.48
    
    
    
    944,296
    
    
    
    32,994
    
    
    
    7.05Interest-bearing liabilities:Noninterest checking
    
    
    55,079
    
    
    
    0
    
    
    
    0.00
    
    
    
    48,245
    
    
    
    0
    
    
    
    0.00NOW accounts
    
    
    110,918
    
    
    
    1,723
    
    
    
    3.13
    
    
    
    99,184
    
    
    
    1,208
    
    
    
    2.46Savings accounts
    
    
    40,750
    
    
    
    273
    
    
    
    1.35
    
    
    
    74,495
    
    
    
    712
    
    
    
    1.93Money market accounts
    
    
    223,058
    
    
    
    4,226
    
    
    
    3.82
    
    
    
    124,862
    
    
    
    1,855
    
    
    
    3.00Certificates
    
    
    235,205
    
    
    
    5,092
    
    
    
    4.37
    
    
    
    231,534
    
    
    
    4,007
    
    
    
    3.49Brokered deposits
    
    
    162,837
    
    
    
    3,909
    
    
    
    4.84
    
    
    
    145,955
    
    
    
    2,602
    
    
    
    3.60Federal Home Loan Bank advances
    
    
    135,679
    
    
    
    3,045
    
    
    
    4.53
    
    
    
    160,906
    
    
    
    3,471
    
    
    
    4.35Other
    
    
    958
    
    
    
    0
    
    
    
    0.00
    
    
    
    901
    
    
    
    0
    
    
    
    0.00Total interest-bearing liabilities
    
    
    964,484
    
    
    
    18,268
    
    
    
    3.82
    
    
    
    886,082
    
    
    
    13,855
    
    
    
    3.15Net interest income
    
    
    
    
    
    $
    19,639
    
    
    
    
    
    
    
    
    
    
    $
    19,139Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.66
    %
    
    
    
    
    
    
    
    
    
    
    3.89
    %Net earning assets
    
    $
    57,362
    
    
    
    
    
    
    
    
    
    
    $
    58,214Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.88
    %
    
    
    
    
    
    
    
    
    
    
    4.09
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    105.95
    %
    
    
    
    
    
    
    
    
    
    
    106.57
    %
 17




---



##### Table of Contents



Provision for Loan Losses
    (in thousands)
    
    2007
    
    
    2006Balance at January 1,
    
    $
    9,873
    
    
    $
    8,778Provision
    
    
    1,483
    
    
    
    1,495Charge offs:Commercial business
    
    
    (17
    )
    
    
    0Commercial real estate
    
    
    (70
    )
    
    
    0Consumer
    
    
    (632
    )
    
    
    (109
    )Recoveries
    
    
    88
    
    
    
    52Balance at June 30,
    
    $
    10,725
    
    
    $
    10,216
  Non-Interest Income
   18




---



##### Table of Contents



Non-Interest Expense
   Income Tax Expense
  Non-Performing Assets
  June 30,
    
    
    December 31,(Dollars in thousands)
    
    2007
    
    
    2006Non-Accruing Loans:One-to-four family real estate
    
    $
    634
    
    
    
    1,364Commercial real estate
    
    
    8,361
    
    
    
    5,296Consumer
    
    
    972
    
    
    
    1,254Commercial business
    
    
    1,641
    
    
    
    394Total
    
    
    11,608
    
    
    
    8,308Other assets
    
    
    44
    
    
    
    44Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    4,052
    
    
    
    1,422Commercial real estate
    
    
    650
    
    
    
    650Consumer
    
    
    11
    
    
    
    0Total non-performing assets
    
    $
    16,365
    
    
    $
    10,424Total as a percentage of total assets
    
    
    1.45
    %
    
    
    1.07
    %Total non-performing loans
    
    $
    11,608
    
    
    $
    8,308Total as a percentage of total loans receivable, net
    
    
    1.38
    %
    
    
    1.08
    %Allowance for loan loss to non-performing loans
    
    
    92.39
    %
    
    
    118.84
    %
  19




---



##### Table of Contents



Dividends
   Record date
    
    Pay date
    
    Dividend per share
    
    Dividend Payout RatioFebruary 16, 2007
    
    March 7, 2007
    
    $
    0.25
    
    
    
    37.31
    %May 18, 2007
    
    June 7, 2007
    
    $
    0.25
    
    
    
    30.49
    %
   Liquidity
     Market Risk
  20




---



##### Table of Contents



Rate Shock Table
  (Dollars in thousands)
    
    Market ValueBasis point change in interest rates
    
    -200
    
    
    -100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    1,126,075
    
    
    
    1,115,503
    
    
    
    1,102,127
    
    
    
    1,087,573
    
    
    
    1,071,786Total market risk sensitive liabilities
    
    
    1,014,023
    
    
    
    1,001,991
    
    
    
    992,055
    
    
    
    984,395
    
    
    
    977,712Off-balance sheet financial instruments
    
    
    (303
    )
    
    
    (143
    )
    
    
    0
    
    
    
    268
    
    
    
    515Net market risk
    
    $
    112,355
    
    
    
    113,655
    
    
    
    110,072
    
    
    
    102,910
    
    
    
    93,559Percentage change from current market value
    
    
    2.07
    %
    
    
    3.26
    %
    
    
    0.00
    %
    
    
    (6.51
    )%
    
    
    (15.00
    )%
   21




---



##### Table of Contents



Asset/Liability Management
  ProjectedRate Shock
    
    Change inin Basis
    
    Net Interest
    
    Percentage(Dollars in thousands)
    
    Points
    
    Income
    
    Change+200
    
    
    $
    (1,395
    )
    
    
    (3.50
    )%+100
    
    
    
    (568
    )
    
    
    (1.43
    )%0
    
    
    
    0
    
    
    
    0.00
    %-100
    
    
    
    (688
    )
    
    
    (1.73
    )%-200
    
    
    
    (1,322
    )
    
    
    (3.32
    )%
     
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 22




---



##### Table of Contents



Changes in internal controls.
 HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
   
   
  
 (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 ProgramsApril 1 through April 30, 2007
    
    
    15,000
    
    
    $
    34.10
    
    
    
    15,000
    
    
    
    256,000May 1 through May 31, 2007
    
    
    20,000
    
    
    
    34.26
    
    
    
    20,000
    
    
    
    236,000June 1 through June 30, 2007
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    236,000Total
    
    
    35,000
    
    
    $
    34.19
    
    
    
    35,000
 
 (1)
    
    On January 23, 2007 the Board of Directors authorized the repurchase of up to
300,000 shares of the Companys common stock. This program expires on July 23, 2008.
 
   
     For
    
    WithholdMichael J. Fogarty
    
    
    3,723,332
    
    
    
    174,743Susan K. Kolling
    
    
    3,749,531
    
    
    
    148,544Malcolm W. McDonald
    
    
    3,784,444
    
    
    
    113,630
  23




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##### Table of Contents



Director
    
    Term of Office ExpiresAllan DeBoer
    
    2008Timothy Geisler
    
    2008Karen Himle
    
    2008Michael McNeil
    
    2009Duane Benson
    
    2009Mahlon Schneider
    
    2009
  NUMBER
    
    PERCENTAGE OFOF VOTES
    
    VOTES ACTUALLY CASTFOR
    
    
    3,846,290
    
    
    
    98.67
    %AGAINST
    
    
    33,288
    
    
    
    0.85
    %ABSTAIN
    
    
    18,498
    
    
    
    0.47
    %BROKER NON-VOTE
    
    
    0
    
    
    
    0.00
    %
  
   
   24




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.
RegistrantDate:  August 3, 2007
    By:
    /s/ Michael McNeilMichael McNeil,President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Representative)Date:  August 3, 2007
    By:
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 25




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##### Table of Contents



HMN FINANCIAL, INC.
 
 INDEX TO EXHIBITS
FOR FORM 10-Q
 Reference
    
    Sequentialto Prior
    
    Page NumberingFiling or
    
    Where AttachedExhibit
    
    Exhibits AreRegulation S-K
    
    
    
    Number
    
    Located in ThisExhibit Number
    
    Document Attached Hereto
    
    Form 10-Q
    
    Report3.1
    
    
    Amended and Restated Articles of Incorporation
    
    
    *1
    
    
    N/A3.2
    
    
    Amended and Restated By-laws
    
    
    3
    
    
    Filed electronically4
    
    
    Form of Common Stock
Including indentures
    
    
    *2
    
    
    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 the same numbered exhibit to the Companys Quarterly Report on Form
10-Q for the period ended March 31, 1998 (File No. 0-24100).*2
    
    Incorporated by reference to the same numbered exhibit to the Companys Registration Statement
on Form S-1 dated April 1, 1994 (File No. 33-77212). 26