##### 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, 2009
 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)
   þ o
  o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o  o þ
  Class
    
    Outstanding at April 21, 2009Common stock, $0.01 par value
    
    4,162,896




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##### 



HMN FINANCIAL, INC.
CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at March 31, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Income for the Three Months Ended March
31, 2009 and 2008
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Income (Loss) for the Three Month Period Ended March 31, 2009
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2009 and 2008
    
    
    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
(Discussion 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
    
    
    23Item 6:
    
    Exhibits
    
    
    23Signatures
    
    
    24EX-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)
    
    2009
    
    
    2008(unaudited)AssetsCash and cash equivalents
    
    $
    12,541
    
    
    
    15,729Securities available for sale:Mortgage-backed and related securities
(amortized cost $71,138 and $76,166)
    
    
    72,702
    
    
    
    77,327Other marketable securities
(amortized cost $85,503 and $95,445)
    
    
    87,167
    
    
    
    97,818159,869
    
    
    
    175,145Loans held for sale
    
    
    3,880
    
    
    
    2,548Loans receivable, net
    
    
    877,309
    
    
    
    900,889Accrued interest receivable
    
    
    4,758
    
    
    
    5,568Real estate, net
    
    
    19,753
    
    
    
    10,558Federal Home Loan Bank stock, at cost
    
    
    7,286
    
    
    
    7,286Mortgage servicing rights, net
    
    
    765
    
    
    
    728Premises and equipment, net
    
    
    13,759
    
    
    
    13,972Prepaid expenses and other assets
    
    
    4,627
    
    
    
    4,408Deferred tax asset, net
    
    
    8,812
    
    
    
    8,649Total assets
    
    $
    1,113,359
    
    
    
    1,145,480Liabilities and Stockholders EquityDeposits
    
    $
    798,369
    
    
    
    880,505Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    192,500
    
    
    
    142,500Accrued interest payable
    
    
    4,643
    
    
    
    6,307Customer escrows
    
    
    1,949
    
    
    
    639Accrued expenses and other liabilities
    
    
    6,517
    
    
    
    3,316Total liabilities
    
    
    1,003,978
    
    
    
    1,033,267Commitments and contingencies
Stockholders equity:Serial preferred stock ($.01 par value):Authorized 500,000 shares; issued shares 26,000
    
    
    23,448
    
    
    
    23,384Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    60,816
    
    
    
    60,687Retained earnings, subject to certain restrictions
    
    
    95,264
    
    
    
    98,067Accumulated other comprehensive income, net of tax
    
    
    1,947
    
    
    
    2,091Unearned employee stock ownership plan shares
    
    
    (3,722
    )
    
    
    (3,771
    )Treasury stock, at cost 4,965,766 and 4,961,032 shares
    
    
    (68,463
    )
    
    
    (68,336
    )Total stockholders equity
    
    
    109,381
    
    
    
    112,213Total liabilities and stockholders equity
    
    $
    1,113,359
    
    
    
    1,145,480
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
 Three Months EndedMarch 31,(Dollars in thousands, except per share data)
    
    2009
    
    
    2008Interest income:Loans receivable
    
    $
    13,628
    
    
    
    15,520Securities available for sale:Mortgage-backed and related
    
    
    802
    
    
    
    224Other marketable
    
    
    946
    
    
    
    1,910Cash equivalents
    
    
    0
    
    
    
    57Other
    
    
    (23
    )
    
    
    80Total interest income
    
    
    15,353
    
    
    
    17,791Interest expense:Deposits
    
    
    4,975
    
    
    
    7,870Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    1,596
    
    
    
    1,237Total interest expense
    
    
    6,571
    
    
    
    9,107Net interest income
    
    
    8,782
    
    
    
    8,684Provision for loan losses
    
    
    6,569
    
    
    
    1,560Net interest income after provision for loan losses
    
    
    2,213
    
    
    
    7,124Non-interest income:Fees and service charges
    
    
    941
    
    
    
    793Loan servicing fees
    
    
    252
    
    
    
    242Gain on sales of loans
    
    
    423
    
    
    
    156Other
    
    
    (972
    )
    
    
    327Total non-interest income
    
    
    644
    
    
    
    1,518Non-interest expense:Compensation and benefits
    
    
    3,849
    
    
    
    3,360Occupancy
    
    
    1,092
    
    
    
    1,132Advertising
    
    
    135
    
    
    
    124Data processing
    
    
    193
    
    
    
    342Amortization of mortgage servicing rights, net
    
    
    155
    
    
    
    160Other
    
    
    1,815
    
    
    
    1,134Total non-interest expense
    
    
    7,239
    
    
    
    6,252Income (loss) before income tax expense (benefit)
    
    
    (4,382
    )
    
    
    2,390Income tax expense (benefit)
    
    
    (1,760
    )
    
    
    902Net income (loss)
    
    
    (2,622
    )
    
    
    1,488Preferred stock dividends and discount
    
    
    (429
    )
    
    
    0Net income (loss) available to common shareholders
    
    
    (3,051
    )
    
    
    1,488Basic earnings (loss) per common share
    
    $
    (0.83
    )
    
    
    0.41Diluted earnings (loss) per common share
    
    $
    (0.83
    )
    
    
    0.39
  4




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss)
For the Three Month Period Ended March 31, 2009
 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, 2008
    
    $
    23,384
    
    
    
    91
    
    
    
    60,687
    
    
    
    98,067
    
    
    
    2,091
    
    
    
    (3,771
    )
    
    
    (68,336
    )
    
    
    112,213Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,622
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,622
    )Other comprehensive loss, net of tax:Net unrealized losses on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    (144
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,766
    )Preferred stock discount amortization
    
    
    64
    
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Restricted stock awards forfeited
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127
    )
    
    
    0Restricted stock awards dividend forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    32Balance, March 31, 2009
    
    $
    23,448
    
    
    
    91
    
    
    
    60,816
    
    
    
    95,264
    
    
    
    1,947
    
    
    
    (3,722
    )
    
    
    (68,463
    )
    
    
    109,381
  5




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,(Dollars in thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net (loss) income
    
    $
    (2,622
    )
    
    
    1,488Adjustments to reconcile net income (loss) to cash provided by operating activities:Provision for loan losses
    
    
    6,569
    
    
    
    1,560Provision for real estate losses
    
    
    1,024
    
    
    
    0Depreciation
    
    
    488
    
    
    
    448Amortization of (discounts) premiums, net
    
    
    122
    
    
    
    (542
    )Amortization of deferred loan fees
    
    
    (247
    )
    
    
    (203
    )Amortization of mortgage servicing rights, net
    
    
    155
    
    
    
    160Capitalized mortgage servicing rights
    
    
    (193
    )
    
    
    0Gain on sales of real estate
    
    
    79
    
    
    
    (156
    )Gain on sales of loans
    
    
    (423
    )
    
    
    (156
    )Proceeds from sale of loans held for sale
    
    
    25,088
    
    
    
    16,295Disbursements on loans held for sale
    
    
    (25,987
    )
    
    
    (15,853
    )Amortization of restricted stock awards
    
    
    76
    
    
    
    98Amortization of unearned ESOP shares
    
    
    49
    
    
    
    49Earned employee stock ownership shares priced above (below) original cost
    
    
    (17
    )
    
    
    57Stock option compensation
    
    
    7
    
    
    
    8Decrease in accrued interest receivable
    
    
    810
    
    
    
    467Decrease in accrued interest payable
    
    
    (1,664
    )
    
    
    (423
    )Decrease (increase) in other assets
    
    
    (140
    )
    
    
    49Increase (decrease) in other liabilities
    
    
    3,113
    
    
    
    (3,680
    )Other, net
    
    
    40
    
    
    
    19Net cash provided by operating activities
    
    
    6,327
    
    
    
    (315
    )Cash flows from investing activities:Principal collected on securities available for sale
    
    
    5,035
    
    
    
    852Proceeds collected on maturities of securities available for sale
    
    
    10,000
    
    
    
    30,000Purchases of Federal Home Loan Bank Stock
    
    
    0
    
    
    
    (1,374
    )Redemption of Federal Home Loan Bank Stock
    
    
    0
    
    
    
    1,992Proceeds from sales of real estate
    
    
    122
    
    
    
    1,381Net decrease (increase) in loans receivable
    
    
    6,838
    
    
    
    (17,311
    )Purchases of premises and equipment
    
    
    (310
    )
    
    
    (836
    )Net cash provided by investing activities
    
    
    21,685
    
    
    
    14,704Cash flows from financing activities:Increase (decrease) in deposits
    
    
    (82,322
    )
    
    
    5,370Purchase of treasury stock
    
    
    0
    
    
    
    (723
    )Dividends to stockholders
    
    
    (188
    )
    
    
    (917
    )Proceeds from borrowings
    
    
    592,000
    
    
    
    51,800Repayment of borrowings
    
    
    (542,000
    )
    
    
    (66,800
    )Increase in customer escrows
    
    
    1,310
    
    
    
    699Net cash used by financing activities
    
    
    (31,200
    )
    
    
    (10,571
    )Increase (decrease) in cash and cash equivalents
    
    
    (3,188
    )
    
    
    3,818Cash and cash equivalents, beginning of period
    
    
    15,729
    
    
    
    23,718Cash and cash equivalents, end of period
    
    $
    12,541
    
    
    
    27,536Supplemental cash flow disclosures:Cash paid for interest
    
    $
    8,235
    
    
    
    9,530Cash paid for income taxes
    
    
    33
    
    
    
    2,465Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    10,420
    
    
    
    3,205Loans transferred to loans held for sale
    
    
    0
    
    
    
    81
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 March 31, 2009 and 2008
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly Fair Value Measurements
 Recognition and
Presentation of
 7




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Other-Than-Temporary Impairments
 Interim Disclosures about
Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting,
 (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, 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, 2009
    
    
    March 31, 2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Gains (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
    )
 Three months endedCarrying value at March 31, 2008
    
    
    March 31, 2008(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total Gains (Losses)Loans held for sale
    
    $
    3,090
    
    
    
    0
    
    
    
    3,090
    
    
    
    0
    
    
    
    0Mortgage servicing rights
    
    
    1,110
    
    
    
    0
    
    
    
    1,110
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    23,995
    
    
    
    0
    
    
    
    23,995
    
    
    
    0
    
    
    
    (1,316
    )Real estate, net(2)
    
    
    4,184
    
    
    
    0
    
    
    
    4,184
    
    
    
    0
    
    
    
    0Total
    
    $
    32,379
    
    
    
    0
    
    
    
    32,379
    
    
    
    0
    
    
    
    (1,316
    )
 
 (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) Comprehensive Income (Loss)
  For the period ended March 31,2009
    
    
    2008(Dollars in thousands)
    
    Before tax
    
    
    Tax effect
    
    
    Net of tax
    
    
    Before tax
    
    
    Tax effect
    
    
    Net of taxSecurities available for sale:Net unrealized gains (losses)
arising during the period
    
    $
    (306
    )
    
    
    (162
    )
    
    
    (144
    )
    
    
    2,029
    
    
    
    829
    
    
    
    1,200Other comprehensive income (loss)
    
    $
    (306
    )
    
    
    (162
    )
    
    
    (144
    )
    
    
    2,029
    
    
    
    829
    
    
    
    1,200
 9




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(7) Securities Available For Sale
  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
    )
 March 31, 2008Less 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
    
    
    $
    2,453
    
    
    
    (406
    )
    
    $
    2,453
    
    
    
    (406
    )FNMA
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    2,759
    
    
    
    (147
    )
    
    
    2,759
    
    
    
    (147
    )Total temporarily impaired
securities
    
    
    0
    
    
    $
    0
    
    
    
    (0
    )
    
    
    4
    
    
    $
    5,212
    
    
    
    (553
    )
    
    $
    5,212
    
    
    
    (553
    )
  (8) Mortgage Servicing Rights
  Three months ended
    
    
    Twelve months ended
    
    
    Three months ended(Dollars in thousands)
    
    March 31, 2009
    
    
    December 31, 2008
    
    
    March 31, 2008Mortgage servicing rights:Balance, beginning of period
    
    $
    728
    
    
    
    1,270
    
    
    
    1,270Originations
    
    
    193
    
    
    
    28
    
    
    
    0Amortization
    
    
    (156
    )
    
    
    (570
    )
    
    
    (160
    )Balance, end of period
    
    
    765
    
    
    
    728
    
    
    
    1,110Fair value of mortgage servicing rights
    
    $
    2,004
    
    
    
    2,339
    
    
    
    2,875
  Weighted
    
    WeightedLoan
    
    Average
    
    AveragePrincipal
    
    Interest
    
    Remaining
    
    Number(Dollars in thousands)
    
    Balance
    
    Rate
    
    Term
    
    of LoansOriginal term 30 year fixed rate
    
    $
    193,033
    
    
    
    5.79
    %
    
    
    286
    
    
    
    1,810Original term 15 year fixed rate
    
    
    95,780
    
    
    
    5.14
    %
    
    
    107
    
    
    
    1,606Adjustable rate
    
    
    1,288
    
    
    
    5.05
    %
    
    
    290
    
    
    
    14
  10




---



##### Table of Contents



Gross
    
    
    
    
    
    
    UnamortizedCarrying
    
    
    Accumulated
    
    
    Intangible(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    AssetsAmortized intangible assets:Mortgage servicing rights
    
    $
    4,043
    
    
    
    (3,278
    )
    
    
    765Total
    
    $
    4,043
    
    
    
    (3,278
    )
    
    
    765
  MortgageServicing(Dollars in thousands)
    
    RightsYear ending December 31,2009
    
    $
    2862010
    
    
    2042011
    
    
    1152012
    
    
    652013
    
    
    40
  (9) Earnings per Share
  Three months ended March 31,2009
    
    
    2008Weighted average number of common shares outstanding
used in basic earnings per common share calculation
    
    
    3,675,984
    
    
    
    3,650,396Net dilutive effect of:Options
    
    
    0
    
    
    
    96,927Restricted stock awards
    
    
    0
    
    
    
    27,873Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,675,984
    
    
    
    3,775,196Income (loss) available to common shareholders
    
    $
    (3,050,752
    )
    
    
    1,488,000Basic earnings (loss) per common share
    
    $
    (0.83
    )
    
    
    0.41Diluted earnings (loss) per common share
    
    $
    (0.83
    )
    
    
    0.39
  (10) Regulatory Capital
   11




---



##### Table of Contents



Required to be
    
    
    
    
    
    
    
    
    
    
    To Be Well CapitalizedAdequately
    
    
    
    
    
    
    
    
    
    
    Under Prompt CorrectiveActual
    
    
    Capitalized
    
    
    Excess Capital
    
    
    Action ProvisionsPercent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of(Dollars in thousands)
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    Assets (1)
    
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    Assets(1)Bank stockholders equity
    
    $
    104,972Less:Net unrealized gains on certain securities
available for sale
    
    
    (2,156
    )Tier I or core capital
    
    
    102,816Tier I capital to adjusted total assets
    
    
    
    
    
    
    9.27
    %
    
    $
    44,351
    
    
    
    4.00
    %
    
    $
    58,465
    
    
    
    5.27
    %
    
    $
    55,439
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    11.54
    %
    
    $
    35,631
    
    
    
    4.00
    %
    
    $
    67,185
    
    
    
    7.56
    %
    
    $
    53,446
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    10,054Risk-based capital
    
    $
    112,870
    
    
    
    
    
    
    $
    71,261
    
    
    
    
    
    
    $
    41,609
    
    
    
    
    
    
    $
    89,077Risk-based capital to risk- weighted assets
    
    
    
    
    
    
    12.67
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    4.67
    %
    
    
    
    
    
    
    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) Business Segments
   12




---



##### Table of Contents



Home Federal
    
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in thousands)
    
    Savings Bank
    
    
    Other
    
    
    Eliminations
    
    
    TotalAt or for the quarter ended March 31, 2009:Interest income  external customers
    
    $
    15,353
    
    
    
    0
    
    
    
    0
    
    
    
    15,353Non-interest income  external customers
    
    
    648
    
    
    
    1
    
    
    
    0
    
    
    
    649Earnings (loss) 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
    
    
    6,929
    
    
    
    199
    
    
    
    (44
    )
    
    
    7,084Income 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
    )
    
    
    1,113,359At or for the quarter ended March 31, 2008:Interest income  external customers
    
    $
    17,787
    
    
    
    4
    
    
    
    0
    
    
    
    17,791Non-interest income  external customers
    
    
    1,513
    
    
    
    0
    
    
    
    0
    
    
    
    1,513Earnings on limited partnerships
    
    
    5
    
    
    
    0
    
    
    
    0
    
    
    
    5Intersegment interest income
    
    
    0
    
    
    
    43
    
    
    
    (43
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    1,561
    
    
    
    (1,605
    )
    
    
    0Interest expense
    
    
    9,150
    
    
    
    0
    
    
    
    (43
    )
    
    
    9,107Amortization of mortgage servicing rights, net
    
    
    160
    
    
    
    0
    
    
    
    0
    
    
    
    160Other non-interest expense
    
    
    5,959
    
    
    
    177
    
    
    
    (44
    )
    
    
    6,092Income tax expense (benefit)
    
    
    957
    
    
    
    (55
    )
    
    
    0
    
    
    
    902Net income
    
    
    1,563
    
    
    
    1,486
    
    
    
    (1,561
    )
    
    
    1,488Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,100,736
    
    
    
    100,316
    
    
    
    (96,283
    )
    
    
    1,104,769
 13




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##### Table of Contents



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




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##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   Income Taxes
  15




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Net Income (Loss)
 ,
 Net Interest Income
     16




---



##### Table of Contents



For the three month period endedMarch 31, 2009
    
    
    March 31, 2008Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    165,387
    
    
    
    1,748
    
    
    
    4.29
    %
    
    $
    169,570
    
    
    
    2,134
    
    
    
    5.06
    %Loans held for sale
    
    
    3,305
    
    
    
    41
    
    
    
    5.03
    
    
    
    2,197
    
    
    
    32
    
    
    
    5.86Mortgage loans, net
    
    
    160,762
    
    
    
    2,358
    
    
    
    5.95
    
    
    
    157,778
    
    
    
    2,442
    
    
    
    6.22Commercial loans, net
    
    
    648,210
    
    
    
    9,958
    
    
    
    6.23
    
    
    
    630,868
    
    
    
    11,490
    
    
    
    7.33Consumer loans, net
    
    
    85,407
    
    
    
    1,271
    
    
    
    6.04
    
    
    
    83,641
    
    
    
    1,556
    
    
    
    7.48Cash equivalents
    
    
    10,468
    
    
    
    1
    
    
    
    0.04
    
    
    
    14,175
    
    
    
    57
    
    
    
    1.62Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    (23
    )
    
    
    (1.28
    )
    
    
    6,587
    
    
    
    80
    
    
    
    4.88Total interest-earning assets
    
    
    1,080,825
    
    
    
    15,354
    
    
    
    5.76
    
    
    
    1,064,816
    
    
    
    17,791
    
    
    
    6.72Interest-bearing liabilities and
noninterest bearing deposits:NOW accounts
    
    
    112,143
    
    
    
    40
    
    
    
    0.14
    
    
    
    121,675
    
    
    
    607
    
    
    
    2.01Savings accounts
    
    
    29,236
    
    
    
    9
    
    
    
    0.12
    
    
    
    40,716
    
    
    
    134
    
    
    
    1.32Money market accounts
    
    
    95,983
    
    
    
    356
    
    
    
    1.50
    
    
    
    160,489
    
    
    
    1,120
    
    
    
    2.81Certificates
    
    
    260,170
    
    
    
    2,101
    
    
    
    3.28
    
    
    
    246,943
    
    
    
    2,734
    
    
    
    4.45Brokered deposits
    
    
    255,210
    
    
    
    2,469
    
    
    
    3.92
    
    
    
    262,193
    
    
    
    3,276
    
    
    
    5.03Federal Home Loan Bank advances
    
    
    192,967
    
    
    
    1,596
    
    
    
    3.35
    
    
    
    105,330
    
    
    
    1,237
    
    
    
    4.72Total interest-bearing liabilities
    
    
    945,709
    
    
    
    
    
    
    
    
    
    
    
    937,346Noninterest checking
    
    
    65,537
    
    
    
    
    
    
    
    
    
    
    
    52,633Other noninterest bearing escrow deposits
    
    
    1,306
    
    
    
    
    
    
    
    
    
    
    
    1,272Total interest-bearing liabilities and
noninterest bearing deposits
    
    $
    1,012,552
    
    
    
    6,571
    
    
    
    2.63
    
    
    $
    991,251
    
    
    
    9,108
    
    
    
    3.70Net interest income
    
    
    
    
    
    $
    8,783
    
    
    
    
    
    
    
    
    
    
    $
    8,683Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    3.02
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.30
    %
    
    
    
    
    
    
    
    
    
    
    3.28
    %
 Provision for Loan Losses
   (Dollars in thousands)
    
    2009
    
    
    2008Balance at January 1,
    
    $
    21,257
    
    
    $
    12,438Provision
    
    
    6,569
    
    
    
    1,560Charge offs:One-to-four family
    
    
    0
    
    
    
    (60
    )Consumer
    
    
    (694
    )
    
    
    (22
    )Commercial business
    
    
    (184
    )
    
    
    (24
    )Commercial real estate
    
    
    (9,461
    )
    
    
    0Recoveries
    
    
    7
    
    
    
    21Balance at March 31,
    
    $
    17,494
    
    
    $
    13,913
 17




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##### Table of Contents



Non-Interest Income
  Non-Interest Expense
  Income Tax Expense
  Non-Performing Assets
  March 31,
    
    
    December 31,(Dollars in thousands)
    
    2009
    
    
    2008Non-Accruing Loans:One-to-four family real estate
    
    $
    3,812
    
    
    $
    7,251Commercial real estate
    
    
    29,829
    
    
    
    46,953Consumer
    
    
    5,052
    
    
    
    5,298Commercial business
    
    
    11,410
    
    
    
    4,671Total
    
    
    50,103
    
    
    
    64,173Other assets
    
    
    25
    
    
    
    25Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    344
    
    
    
    258Commercial real estate
    
    
    19,409
    
    
    
    10,300Total non-performing assets
    
    $
    69,881
    
    
    $
    74,756Total as a percentage of total assets
    
    
    6.28
    %
    
    
    6.53
    %Total non-performing loans
    
    $
    50,103
    
    
    $
    64,173Total as a percentage of total loans
receivable, net
    
    
    5.71
    %
    
    
    7.12
    %Allowance for loan loss to
non-performing loans
    
    
    34.92
    %
    
    
    33.12
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    7,893
    
    
    $
    11,48890+ days
    
    
    515
    
    
    
    0Delinquencies as a percentage of
loan and lease portfolio (1)30+ days
    
    
    0.89
    %
    
    
    1.26
    %90+ days
    
    
    0.06
    %
    
    
    0.00
    %
 
 (1)
    
    Excludes non-accrual loans. 18




---



##### Table of Contents



Principal Amount
    
    
    
    
    
    Principal Amountof Loan at
    
    
    
    
    
    of Loan at(Dollars in thousands)
    
    
    
    
    
    March 31,
    
    
    
    
    
    December 31,Property Type
    
    # of relationships
    
    2009
    
    # of relationships
    
    2008Residential developments
    
    
    5
    
    
    $
    9,180
    
    
    
    6
    
    
    $
    17,680Single family homes
    
    
    3
    
    
    
    944
    
    
    
    4
    
    
    
    898Condominiums
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    5,440Hotel
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999Alternative fuel plants
    
    
    2
    
    
    
    12,528
    
    
    
    2
    
    
    
    12,493Shopping centers
    
    
    2
    
    
    
    1,205
    
    
    
    2
    
    
    
    1,237Elderly care facilities
    
    
    1
    
    
    
    40
    
    
    
    3
    
    
    
    4,037Commercial buildings
    
    
    1
    
    
    
    158
    
    
    
    1
    
    
    
    169Restaurant/bar
    
    
    1
    
    
    
    775
    
    
    
    0
    
    
    
    016
    
    
    $
    29,829
    
    
    
    20
    
    
    $
    46,953
  Dividends
  Liquidity and Capital Resources
  19




---



##### Table of Contents



Market Risk
  Rate Shock Table
   20




---



##### Table of Contents



Other than trading portfolio
    
    Market Value(Dollars in thousands)Basis point change in interest rates
    
    -100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    1,099,957
    
    
    
    1,088,304
    
    
    
    1,073,287
    
    
    
    1,057,353Total market risk sensitive liabilities
    
    
    1,006,345
    
    
    
    992,246
    
    
    
    980,113
    
    
    
    967,054Off-balance sheet financial instruments
    
    
    718
    
    
    
    0
    
    
    
    992
    
    
    
    1,884Net market risk
    
    $
    92,894
    
    
    
    96,058
    
    
    
    92,182
    
    
    
    88,415Percentage change from current market value
    
    
    (3.29
    )%
    
    
    0.00
    %
    
    
    (4.04
    )%
    
    
    (7.96)
    %
   Asset/Liability Management
  Rate Shock in Basis
    
    Projected Change in(Dollars in thousands)
    
    Points
    
    Net Interest Income
    
    Percentage Change+200
    
    
    $
    644
    
    
    
    1.90
    %+100
    
    
    
    248
    
    
    
    0.730
    
    
    
    0
    
    
    
    0.00-100
    
    
    
    (1,694
    )
    
    
    (5.01
    )
 21




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 22




---



##### Table of Contents



HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings.
  
 ITEM 1A. Risk Factors.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 (a)
    
    and (b) Not applicable(c)
    
    Information Regarding Share Repurchases
 (c) Total Number of
    
    
    (d) Maximum NumberShares Purchased as Part
    
    
    of Shares that May Yet(a) Total Number of Shares
    
    
    (b) Average Price Paid
    
    
    of Publicly Announced
    
    
    Be Purchased Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Plans or Programs
    
    
    or Programs (1)January 1 through January 31, 2009
    
    
    0
    
    
    $
    N/A
    
    
    
    0
    
    
    
    300,000February 1 through February 28, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    300,000March 1 through March 31, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    300,000Total
    
    
    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 expires on January 26, 2010. 
 ITEM 3. Defaults Upon Senior Securities.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders.
  
 ITEM 5. Other Information.
  
 ITEM 6. Exhibits.
  23




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.
RegistrantDate: May 4, 2009
    /s/ Bradley KrehbielBradley Krehbiel,President Home Federal Savings Bank
(Principal Executive Officer)
(Duly Authorized Representative)Date: May 4, 2009
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 24




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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 Including indentures
    
    
    *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). 25