##### 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 September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-24100
 HMN FINANCIAL, INC.
  Delaware
    
    41-1777397(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 1016 Civic Center Drive N.W., Rochester, MN
    
    55901(Address of principal executive offices)
    
    (ZIP Code)
 (507) 535-1200
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer  o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ
  Class
    
    
    Outstanding at October 21, 2010Common stock, $0.01 par value
    
    
    4,310,399




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##### 



HMN FINANCIAL, INC.
 CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1: Financial Statements (unaudited)Consolidated Balance Sheets at September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Income (Loss) for the Three Months and
Nine Months Ended September 30, 2010 and 2009
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Loss for the Nine-Month Period Ended September 30, 2010
    
    
    5Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2010 and 2009
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3: Quantitative and Qualitative Disclosures about Market Risk
(Included in Item 2 under Market Risk)
    
    
    27Item 4: Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    30Item 1A: Risk Factors
    
    
    30Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3: Defaults Upon Senior Securities
    
    
    31Item 4: [Removed and Reserved]
    
    
    31Item 5: Other Information
    
    
    31Item 6: Exhibits
    
    
    31Signatures
    
    
    32EX-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
 September 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009(unaudited)AssetsCash and cash equivalents
    
    $
    10,917
    
    
    
    16,418Securities available for sale:Mortgage-backed and related securities
(amortized cost $37,326 and $51,840)
    
    
    39,152
    
    
    
    53,559Other marketable securities
(amortized cost $108,794 and $105,723)
    
    
    108,676
    
    
    
    106,043147,828
    
    
    
    159,602Loans held for sale
    
    
    3,405
    
    
    
    2,965Loans receivable, net
    
    
    699,877
    
    
    
    799,256Accrued interest receivable
    
    
    3,807
    
    
    
    4,024Real estate, net
    
    
    18,559
    
    
    
    16,257Federal Home Loan Bank stock, at cost
    
    
    7,806
    
    
    
    7,286Mortgage servicing rights, net
    
    
    1,517
    
    
    
    1,315Premises and equipment, net
    
    
    9,718
    
    
    
    10,766Prepaid expenses and other assets
    
    
    3,967
    
    
    
    6,762Deferred tax asset, net
    
    
    0
    
    
    
    11,590Total assets
    
    $
    907,401
    
    
    
    1,036,241Liabilities and Stockholders EquityDeposits
    
    $
    686,012
    
    
    
    796,011Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    134,000
    
    
    
    132,500Accrued interest payable
    
    
    1,038
    
    
    
    2,108Customer escrows
    
    
    1,470
    
    
    
    1,427Accrued expenses and other liabilities
    
    
    4,725
    
    
    
    4,257Total liabilities
    
    
    827,245
    
    
    
    936,303Commitments
and contingencies Stockholders equity:Serial preferred stock ($.01 par value):authorized 500,000 shares; issued shares 26,000
    
    
    24,141
    
    
    
    23,785Common stock ($.01 par value):authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    56,455
    
    
    
    58,576Retained earnings, subject to certain restrictions
    
    
    66,094
    
    
    
    86,115Accumulated other comprehensive income
    
    
    1,030
    
    
    
    1,230Unearned employee stock ownership plan shares
    
    
    (3,432
    )
    
    
    (3,577
    )Treasury stock, at cost 4,818,263 and 4,883,378 shares
    
    
    (64,223
    )
    
    
    (66,282
    )Total stockholders equity
    
    
    80,156
    
    
    
    99,938Total liabilities and stockholders equity
    
    $
    907,401
    
    
    
    1,036,241
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Income (Loss)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income:Loans receivable
    
    $
    11,023
    
    
    
    12,928
    
    
    
    34,243
    
    
    
    39,764Securities available for sale:Mortgage-backed and related
    
    
    430
    
    
    
    649
    
    
    
    1,444
    
    
    
    2,177Other marketable
    
    
    473
    
    
    
    693
    
    
    
    1,636
    
    
    
    2,475Cash equivalents
    
    
    2
    
    
    
    0
    
    
    
    4
    
    
    
    1Other
    
    
    35
    
    
    
    55
    
    
    
    109
    
    
    
    50Total interest income
    
    
    11,963
    
    
    
    14,325
    
    
    
    37,436
    
    
    
    44,467Interest expense:Deposits
    
    
    2,668
    
    
    
    4,172
    
    
    
    9,127
    
    
    
    13,876Federal Home Loan Bank advances and
Federal Reserve borrowings
    
    
    1,521
    
    
    
    1,563
    
    
    
    4,585
    
    
    
    4,732Total interest expense
    
    
    4,189
    
    
    
    5,735
    
    
    
    13,712
    
    
    
    18,608Net interest income
    
    
    7,774
    
    
    
    8,590
    
    
    
    23,724
    
    
    
    25,859Provision for loan losses
    
    
    11,946
    
    
    
    3,381
    
    
    
    22,839
    
    
    
    23,254Net interest income (loss) after provision for
loan losses
    
    
    (4,172
    )
    
    
    5,209
    
    
    
    885
    
    
    
    2,605Non-interest income:Fees and service charges
    
    
    972
    
    
    
    1,034
    
    
    
    2,734
    
    
    
    3,071Mortgage servicing fees
    
    
    264
    
    
    
    262
    
    
    
    806
    
    
    
    770Securities gains, net
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5Gains on sales of loans
    
    
    551
    
    
    
    493
    
    
    
    1,332
    
    
    
    1,858Other
    
    
    105
    
    
    
    94
    
    
    
    375
    
    
    
    298Total non-interest income
    
    
    1,892
    
    
    
    1,883
    
    
    
    5,247
    
    
    
    6,002Non-interest expense:Compensation and benefits
    
    
    3,356
    
    
    
    3,180
    
    
    
    10,216
    
    
    
    10,313(Gain) loss on real estate owned
    
    
    384
    
    
    
    (357
    )
    
    
    (344
    )
    
    
    3,812Occupancy
    
    
    1,055
    
    
    
    970
    
    
    
    3,121
    
    
    
    3,071Deposit insurance
    
    
    458
    
    
    
    372
    
    
    
    1,494
    
    
    
    1,528Data processing
    
    
    292
    
    
    
    298
    
    
    
    866
    
    
    
    888Other
    
    
    1,445
    
    
    
    1,573
    
    
    
    3,984
    
    
    
    5,455Total non-interest expense
    
    
    6,990
    
    
    
    6,036
    
    
    
    19,337
    
    
    
    25,067Income (loss) before income tax expense (benefit)
    
    
    (9,270
    )
    
    
    1,056
    
    
    
    (13,205
    )
    
    
    (16,460
    )Income tax expense (benefit)
    
    
    97
    
    
    
    175
    
    
    
    5,841
    
    
    
    (5,515
    )Net income (loss)
    
    
    (9,367
    )
    
    
    881
    
    
    
    (19,046
    )
    
    
    (10,945
    )Preferred stock dividends and discount
    
    
    447
    
    
    
    438
    
    
    
    1,335
    
    
    
    1,306Net income (loss) available to common shareholders
    
    $
    (9,814
    )
    
    
    443
    
    
    
    (20,381
    )
    
    
    (12,251
    )Basic earnings (loss) per common share
    
    $
    (2.60
    )
    
    
    0.12
    
    
    
    (5.43
    )
    
    
    (3.32
    )Diluted earnings (loss) per common share
    
    $
    (2.60
    )
    
    
    0.12
    
    
    
    (5.43
    )
    
    
    (3.32
    )
  4




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statement of Stockholders Equity and Comprehensive Loss
 For the Nine-Month Period Ended September 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,046
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,046
    )Other comprehensive loss, net of tax:Net unrealized losses on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    (200
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,246
    )Preferred stock discount amortization
    
    
    356
    
    
    
    
    
    
    
    (356
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Unearned compensation restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (2,237
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,237
    
    
    
    0Restricted stock awards forfeited
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178
    )
    
    
    0Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    280Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    112Balance, September 30, 2010
    
    $
    24,141
    
    
    
    91
    
    
    
    56,455
    
    
    
    66,094
    
    
    
    1,030
    
    
    
    (3,432
    )
    
    
    (64,223
    )
    
    
    80,156
  5




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
  Nine Months EndedSeptember 30,(Dollars in thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (19,046
    )
    
    
    (10,945
    )Adjustments to reconcile net loss to cash provided by operating activities:Provision for loan losses
    
    
    22,839
    
    
    
    23,254Provision for real estate losses
    
    
    370
    
    
    
    5,216Depreciation
    
    
    1,255
    
    
    
    1,404Amortization of premiums, net
    
    
    460
    
    
    
    320Amortization of deferred loan fees
    
    
    (256
    )
    
    
    (878
    )Amortization of mortgage servicing rights, net
    
    
    338
    
    
    
    431Capitalized mortgage servicing rights
    
    
    (540
    )
    
    
    (969
    )Deferred income tax
    
    
    11,721
    
    
    
    0Securities gains, net
    
    
    0
    
    
    
    (5
    )Gain on sales of real estate
    
    
    (714
    )
    
    
    (1,404
    )Gain on sales of loans
    
    
    (1,332
    )
    
    
    (1,858
    )Proceeds from sale of loans held for sale
    
    
    64,585
    
    
    
    103,293Disbursements on loans held for sale
    
    
    (60,653
    )
    
    
    (100,904
    )Amortization of restricted stock awards
    
    
    280
    
    
    
    269Amortization of unearned ESOP shares
    
    
    145
    
    
    
    145Earned employee stock ownership shares priced below original cost
    
    
    (33
    )
    
    
    (43
    )Stock option compensation
    
    
    47
    
    
    
    20Decrease in accrued interest receivable
    
    
    217
    
    
    
    1,616Decrease in accrued interest payable
    
    
    (1,070
    )
    
    
    (4,607
    )Increase in other assets
    
    
    2,727
    
    
    
    63Increase in accrued expenses and other liabilities
    
    
    472
    
    
    
    1,469Other, net
    
    
    18
    
    
    
    96Net cash provided by operating activities
    
    
    21,830
    
    
    
    15,983Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    0
    
    
    
    2,141Principal collected on securities available for sale
    
    
    14,527
    
    
    
    17,272Proceeds collected on maturities of securities available for sale
    
    
    100,000
    
    
    
    60,000Purchases of securities available for sale
    
    
    (103,190
    )
    
    
    (40,352
    )Purchase of Federal Home Loan Bank Stock
    
    
    (1,736
    )
    
    
    0Redemption of Federal Home Loan Bank Stock
    
    
    1,216
    
    
    
    0Proceeds from sales of real estate
    
    
    13,792
    
    
    
    7,281Net decrease in loans receivable
    
    
    58,067
    
    
    
    42,316Purchases of premises and equipment
    
    
    (222
    )
    
    
    (582
    )Net cash provided by investing activities
    
    
    82,454
    
    
    
    88,076Cash flows from financing activities:Decrease in deposits
    
    
    (110,353
    )
    
    
    (99,447
    )Dividends to preferred stockholders
    
    
    (975
    )
    
    
    (838
    )Proceeds from borrowings
    
    
    38,500
    
    
    
    1,094,000Repayment of borrowings
    
    
    (37,000
    )
    
    
    (1,094,000
    )Increase in customer escrows
    
    
    43
    
    
    
    966Net cash used by financing activities
    
    
    (109,785
    )
    
    
    (99,319
    )(Decrease) increase in cash and cash equivalents
    
    
    (5,501
    )
    
    
    4,740Cash and cash equivalents, beginning of period
    
    
    16,418
    
    
    
    15,729Cash and cash equivalents, end of period
    
    $
    10,917
    
    
    
    20,469Supplemental cash flow disclosures:Cash paid for interest
    
    $
    14,781
    
    
    
    23,215Cash paid for income taxes
    
    
    39
    
    
    
    33Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    15,751
    
    
    
    16,066Loans transferred to loans held for sale
    
    
    2,977
    
    
    
    1,234
  6




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 September 30, 2010 and 2009
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 Fair Value
Measurements and Disclosures Improving Disclosures about Fair Value Measurements.
 Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses
 7




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(4) Derivative Instruments and Hedging Activities
   (5) Fair Value Measurements
 Fair Value Measurements
 Level 1
 Level 2
 Level 3
  Carrying value at September 30, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    147,828
    
    
    
    3,265
    
    
    
    144,563
    
    
    
    0Mortgage loan commitments
    
    
    36
    
    
    
    0
    
    
    
    36
    
    
    
    0Total
    
    $
    147,864
    
    
    
    3,265
    
    
    
    144,599
    
    
    
    0
 Carrying value at December 31, 2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    159,602
    
    
    
    6,222
    
    
    
    153,380
    
    
    
    0Mortgage loan commitments
    
    
    (53
    )
    
    
    0
    
    
    
    (53
    )
    
    
    0Total
    
    $
    159,549
    
    
    
    6,222
    
    
    
    153,327
    
    
    
    0
   8




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Carrying value at September 30, 2010Nine monthsThree months
    
    
    endedended
    
    
    September 30,September 30,
    
    
    20102010
    
    
    Total gains(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total losses
    
    
    (losses)Loans held for sale
    
    $
    3,405
    
    
    
    0
    
    
    
    3,405
    
    
    
    0
    
    
    
    (36
    )
    
    
    64Mortgage servicing rights
    
    
    1,517
    
    
    
    0
    
    
    
    1,517
    
    
    
    0
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    63,006
    
    
    
    0
    
    
    
    63,006
    
    
    
    0
    
    
    
    (3,473
    )
    
    
    (11,060
    )Real estate, net(2)
    
    
    18,559
    
    
    
    0
    
    
    
    18,559
    
    
    
    0
    
    
    
    (394
    )
    
    
    (394
    )Total
    
    $
    86,487
    
    
    
    0
    
    
    
    86,487
    
    
    
    0
    
    
    
    (3,903
    )
    
    
    (11,390
    )
 Carrying value at December 31, 2009Year endedDecember 31,2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total lossesLoans held for sale
    
    $
    2,965
    
    
    
    0
    
    
    
    2,965
    
    
    
    0
    
    
    
    (50
    )Mortgage servicing rights
    
    
    1,315
    
    
    
    0
    
    
    
    1,315
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    61,127
    
    
    
    0
    
    
    
    61,127
    
    
    
    0
    
    
    
    (6,493
    )Real estate, net(2)
    
    
    16,257
    
    
    
    0
    
    
    
    16,257
    
    
    
    0
    
    
    
    (3,873
    )Total
    
    $
    81,664
    
    
    
    0
    
    
    
    81,664
    
    
    
    0
    
    
    
    (10,416
    )
 
 (1)
    
    Represents the carrying value and related specific reserves on 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. 9




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##### Table of Contents



(6) Fair Value of Financial Instruments
 Fair Value Measurements and Disclosures
 September 30, 2010Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    AmountFinancial assets:Cash and cash equivalents
    
    $
    10,917
    
    
    
    10,917Securities available for sale
    
    
    147,828
    
    
    
    147,828Loans held for sale
    
    
    3,405
    
    
    
    3,405Loans receivable, net
    
    
    699,877
    
    
    
    691,121Federal Home Loan Bank stock
    
    
    7,806
    
    
    
    7,806Accrued interest receivable
    
    
    3,807
    
    
    
    3,807Financial liabilities:Deposits
    
    
    686,012
    
    
    
    688,784Federal Home Loan Bank advances
    
    
    134,000
    
    
    
    142,389Accrued interest payable
    
    
    1,038
    
    
    
    1,038Off-balance sheet financial instruments:Commitments to extend credit
    
    
    36
    
    
    
    36
    
    
    
    105,584Commitments to sell loans
    
    
    (49
    )
    
    
    (49
    )
    
    
    14,327
 December 31, 2009Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    AmountFinancial assets:Cash and cash equivalents
    
    $
    16,418
    
    
    
    16,418Securities available for sale
    
    
    159,602
    
    
    
    159,602Loans held for sale
    
    
    2,965
    
    
    
    2,965Loans receivable, net
    
    
    799,256
    
    
    
    799,849Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    7,286Accrued interest receivable
    
    
    4,024
    
    
    
    4,024Financial liabilities:Deposits
    
    
    796,011
    
    
    
    796,011Federal Home Loan Bank advances
    
    
    132,500
    
    
    
    141,791Accrued interest payable
    
    
    2,108
    
    
    
    2,108Off-balance sheet financial instruments:Commitments to extend credit
    
    
    103
    
    
    
    103
    
    
    
    133,343Commitments to sell loans
    
    
    (53
    )
    
    
    (53
    )
    
    
    6,278
 10




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##### Table of Contents



(7) Comprehensive Income (Loss)
  For the three months ended September 30,2010
    
    
    2009(Dollars in thousands)
    
    Before tax
    
    
    Tax effect
    
    
    Net of tax
    
    
    Before tax
    
    
    Tax effect
    
    
    Net of taxSecurities available for sale:Gross unrealized gains (losses) arising during the
period
    
    $
    (243
    )
    
    
    (97
    )
    
    
    (146
    )
    
    
    50
    
    
    
    20
    
    
    
    30Less reclassification of net gains included in net loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Net unrealized gains (losses) arising during the period
    
    
    (243
    )
    
    
    (97
    )
    
    
    (146
    )
    
    
    50
    
    
    
    20
    
    
    
    30Other comprehensive income (loss)
    
    $
    (243
    )
    
    
    (97
    )
    
    
    (146
    )
    
    
    50
    
    
    
    20
    
    
    
    30
 For the nine months ended September 30,2010
    
    
    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
    
    $
    (331
    )
    
    
    (131
    )
    
    
    (200
    )
    
    
    (697
    )
    
    
    (318
    )
    
    
    (379
    )Less reclassification of net gains included in net loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    2
    
    
    
    3Net unrealized losses arising during the period
    
    
    (331
    )
    
    
    (131
    )
    
    
    (200
    )
    
    
    (702
    )
    
    
    (320
    )
    
    
    (382
    )Other comprehensive loss
    
    $
    (331
    )
    
    
    (131
    )
    
    
    (200
    )
    
    
    (702
    )
    
    
    (320
    )
    
    
    (382
    )
 (8) Securities Available For Sale
  September 30, 2010Less than twelve months
    
    Twelve months or more
    
    Total# of
    
    Fair
    
    Unrealized
    
    # of
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized(Dollars in thousands)
    
    Investments
    
    Value
    
    Losses
    
    Investments
    
    Value
    
    Losses
    
    Value
    
    LossesOther marketable securities:Corporate preferred stock
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    175
    
    
    
    (525
    )
 December 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
    
    LossesCollateralized mortgage obligations:FHLMC
    
    
    1
    
    
    $
    1,248
    
    
    
    (159
    )
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    1,248
    
    
    
    (159
    )Other marketable securities:U.S. Government agency
obligations
    
    
    6
    
    
    
    30,000
    
    
    
    (36
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    30,000
    
    
    
    (36
    )Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    175
    
    
    
    (525
    )
    
    
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    7
    
    
    $
    31,248
    
    
    
    (195
    )
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    31,423
    
    
    
    (720
    )
   11




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##### Table of Contents



Gross unrealized
    
    
    Gross unrealized(Dollars in thousands)
    
    Amortized cost
    
    
    gains
    
    
    losses
    
    
    Fair valueSeptember 30, 2010:Mortgage-backed securities:FHLMC
    
    $
    19,696
    
    
    
    949
    
    
    
    0
    
    
    
    20,645FNMA
    
    
    14,432
    
    
    
    810
    
    
    
    0
    
    
    
    15,242Collateralized mortgage obligations:FHLMC
    
    
    2,815
    
    
    
    56
    
    
    
    0
    
    
    
    2,871FNMA
    
    
    383
    
    
    
    11
    
    
    
    0
    
    
    
    39437,326
    
    
    
    1,826
    
    
    
    0
    
    
    
    39,152Other marketable securities:U.S. Government agency obligations
    
    
    108,094
    
    
    
    407
    
    
    
    0
    
    
    
    108,501Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (525
    )
    
    
    175108,794
    
    
    
    407
    
    
    
    (525
    )
    
    
    108,676$
    146,120
    
    
    
    2,233
    
    
    
    (525
    )
    
    
    147,828
  Amortized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    ValueDue less than one year
    
    $
    118,021
    
    
    
    119,100Due after one year through five years
    
    
    25,456
    
    
    
    26,508Due after five years through ten years
    
    
    1,943
    
    
    
    2,045No stated maturity
    
    
    700
    
    
    
    175Total
    
    $
    146,120
    
    
    
    147,828
  (9) Investment in Mortgage Servicing Rights
  Nine Months ended
    
    
    Twelve Months ended
    
    
    Nine Months ended(Dollars in thousands)
    
    September 30, 2010
    
    
    December 31, 2009
    
    
    September 30, 2009Mortgage servicing rights:Balance, beginning of period
    
    $
    1,315
    
    
    
    728
    
    
    
    728Originations
    
    
    540
    
    
    
    1,143
    
    
    
    969Amortization
    
    
    (338
    )
    
    
    (556
    )
    
    
    (431
    )Balance, end of period
    
    $
    1,517
    
    
    
    1,315
    
    
    
    1,266Fair value of mortgage servicing rights
    
    $
    1,905
    
    
    
    2,339
    
    
    
    2,413
 12




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##### Table of Contents



Weighted
    
    WeightedLoan Principal
    
    Average
    
    Average
    
    Number of(Dollars in thousands)
    
    Balance
    
    Interest Rate
    
    Remaining Term
    
    LoansOriginal term 30 year fixed rate
    
    $
    228,018
    
    
    
    5.33
    %
    
    
    300
    
    
    
    1,957Original term 15 year fixed rate
    
    
    100,740
    
    
    
    4.81
    %
    
    
    120
    
    
    
    1,538Adjustable rate
    
    
    723
    
    
    
    3.14
    %
    
    
    269
    
    
    
    9
  Gross
    
    
    Accumulated
    
    
    Unamortized(Dollars in thousands)
    
    Carrying Amount
    
    
    Amortization
    
    
    Intangible AssetsMortgage servicing rights
    
    $
    4,275
    
    
    
    (2,758
    )
    
    
    1,517Total
    
    $
    4,275
    
    
    
    (2,758
    )
    
    
    1,517
  Mortgage(Dollars in thousands)
    
    Servicing RightsYear ended December 31,2010
    
    $
    912011
    
    
    3272012
    
    
    2882013
    
    
    2672014
    
    
    235Thereafter
    
    
    309
  (10) Income (loss) per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands, except per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Weighted average number of common shares
outstanding used in basic loss per common
share calculation
    
    
    3,776
    
    
    
    3,702
    
    
    
    3,757
    
    
    
    3,688Net dilutive effect of:Restricted stock awards
    
    
    0
    
    
    
    83
    
    
    
    0
    
    
    
    0Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,776
    
    
    
    3,785
    
    
    
    3,757
    
    
    
    3,688Income (loss) available to common shareholders
    
    $
    (9,814
    )
    
    
    443
    
    
    
    (20,381
    )
    
    
    (12,251
    )Basic earnings (loss) per common share
    
    $
    (2.60
    )
    
    
    0.12
    
    
    
    (5.43
    )
    
    
    (3.32
    )Diluted earnings (loss) per common share
    
    $
    (2.60
    )
    
    
    0.12
    
    
    
    (5.43
    )
    
    
    (3.32
    )
 13




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##### Table of Contents



(11) Regulatory Capital and Regulatory Oversight
     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
    
    $
    78,096Less:Net unrealized gains on certain securities
available for sale
    
    
    (2,020
    )76,076Tier I or core capitalTier I capital to adjusted total assets
    
    
    
    
    
    
    8.40
    %
    
    $
    36,218
    
    
    
    4.00
    %
    
    $
    39,858
    
    
    
    4.40
    %
    
    $
    45,272
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    10.59
    %
    
    $
    28,730
    
    
    
    4.00
    %
    
    $
    47,346
    
    
    
    6.59
    %
    
    $
    43,095
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    8,978Risk-based capital
    
    $
    85,054
    
    
    
    
    
    
    $
    57,460
    
    
    
    
    
    
    $
    27,594
    
    
    
    
    
    
    $
    71,825Risk-based capital to risk-weighted assets
    
    
    
    
    
    
    11.84
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    3.84
    %
    
    
    
    
    
    
    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.  14




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##### Table of Contents



(12) Income Taxes
  (13) Commitments and Contingencies
  (14) Business Segments


15



---



##### Table of Contents



Home Federal(Dollars in thousands)
    
    Savings Bank
    
    Other
    
    Eliminations
    
    Consolidated TotalAt or for the nine months ended September 30, 2010:Interest income  external customers
    
    $
    37,436
    
    
    
    0
    
    
    
    0
    
    
    
    37,436Non-interest income  external customers
    
    
    5,270
    
    
    
    0
    
    
    
    0
    
    
    
    5,270Loss on limited partnerships
    
    
    (23
    )
    
    
    0
    
    
    
    0
    
    
    
    (23
    )Intersegment interest income
    
    
    0
    
    
    
    3
    
    
    
    (3
    )
    
    
    0Intersegment non-interest income
    
    
    131
    
    
    
    (18,258
    )
    
    
    18,127
    
    
    
    0Interest expense
    
    
    13,715
    
    
    
    0
    
    
    
    (3
    )
    
    
    13,712Amortization of mortgage servicing rights, net
    
    
    338
    
    
    
    0
    
    
    
    0
    
    
    
    338Other non-interest expense
    
    
    18,503
    
    
    
    627
    
    
    
    (131
    )
    
    
    18,999Income tax expense
    
    
    5,669
    
    
    
    172
    
    
    
    0
    
    
    
    5,841Net loss
    
    
    (18,251
    )
    
    
    (19,053
    )
    
    
    18,258
    
    
    
    (19,046
    )Total assets
    
    
    907,103
    
    
    
    80,692
    
    
    
    (80,394
    )
    
    
    907,401At or for the nine months ended September 30, 2009:Interest income  external customers
    
    $
    44,467
    
    
    
    0
    
    
    
    0
    
    
    
    44,467Non-interest income  external customers
    
    
    6,047
    
    
    
    1
    
    
    
    0
    
    
    
    6,048Loss on limited partnerships
    
    
    (46
    )
    
    
    0
    
    
    
    0
    
    
    
    (46
    )Intersegment interest income
    
    
    0
    
    
    
    12
    
    
    
    (12
    )
    
    
    0Intersegment non-interest income
    
    
    130
    
    
    
    (10,469
    )
    
    
    10,339
    
    
    
    0Interest expense
    
    
    18,620
    
    
    
    0
    
    
    
    (12
    )
    
    
    18,608Amortization of mortgage servicing rights, net
    
    
    431
    
    
    
    0
    
    
    
    0
    
    
    
    431Other non-interest expense
    
    
    24,204
    
    
    
    563
    
    
    
    (131
    )
    
    
    24,636Income tax benefit
    
    
    (5,444
    )
    
    
    (71
    )
    
    
    0
    
    
    
    (5,515
    )Net loss
    
    
    (10,467
    )
    
    
    (10,948
    )
    
    
    10,470
    
    
    
    (10,945
    )Total assets
    
    
    1,031,646
    
    
    
    101,072
    
    
    
    (100,001
    )
    
    
    1,032,717At or for the quarter ended September 30, 2010:Interest income  external customers
    
    $
    11,963
    
    
    
    0
    
    
    
    0
    
    
    
    11,963Non-interest income  external customers
    
    
    1,900
    
    
    
    0
    
    
    
    0
    
    
    
    1,900Loss on limited partnerships
    
    
    (8
    )
    
    
    0
    
    
    
    0
    
    
    
    (8
    )Intersegment interest income
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    (9,147
    )
    
    
    9,103
    
    
    
    0Interest expense
    
    
    4,190
    
    
    
    0
    
    
    
    (1
    )
    
    
    4,189Amortization of mortgage servicing rights, net
    
    
    119
    
    
    
    0
    
    
    
    0
    
    
    
    119Other non-interest expense
    
    
    6,691
    
    
    
    224
    
    
    
    (44
    )
    
    
    6,871Income tax expense
    
    
    96
    
    
    
    1
    
    
    
    0
    
    
    
    97Net loss
    
    
    (9,144
    )
    
    
    (9,370
    )
    
    
    9,147
    
    
    
    (9,367
    )Total assets
    
    
    907,103
    
    
    
    80,692
    
    
    
    (80,394
    )
    
    
    907,401At or for the quarter ended September 30, 2009:Interest income  external customers
    
    $
    14,325
    
    
    
    0
    
    
    
    0
    
    
    
    14,325Non-interest income  external customers
    
    
    1,891
    
    
    
    0
    
    
    
    0
    
    
    
    1,891Loss on limited partnerships
    
    
    (8
    )
    
    
    0
    
    
    
    0
    
    
    
    (8
    )Intersegment interest income
    
    
    0
    
    
    
    4
    
    
    
    (4
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    1,033
    
    
    
    (1,076
    )
    
    
    0Interest expense
    
    
    5,739
    
    
    
    0
    
    
    
    (4
    )
    
    
    5,735Amortization of mortgage servicing rights, net
    
    
    121
    
    
    
    0
    
    
    
    0
    
    
    
    121Other non-interest expense
    
    
    5,785
    
    
    
    174
    
    
    
    (44
    )
    
    
    5,915Income tax expense (benefit)
    
    
    194
    
    
    
    (19
    )
    
    
    0
    
    
    
    175Net income
    
    
    1,031
    
    
    
    882
    
    
    
    (1,032
    )
    
    
    881Total assets
    
    
    1,031,646
    
    
    
    101,072
    
    
    
    (100,001
    )
    
    
    1,032,717
 16




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##### Table of Contents



Item 2:
 HMN FINANCIAL, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-looking Information
  General
  17




---



##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   18




---



##### Table of Contents



Income Taxes
   Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Net Loss
  19




---



##### Table of Contents



Net Interest Income
    20




---



##### Table of Contents



For the nine month period endedSeptember 30, 2010
    
    
    September 30, 2009Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    159,031
    
    
    
    3,080
    
    
    
    2.59
    %
    
    $
    149,977
    
    
    
    4,650
    
    
    
    4.15
    %Loans held for sale
    
    
    2,498
    
    
    
    86
    
    
    
    4.60
    
    
    
    3,484
    
    
    
    134
    
    
    
    5.14Mortgage loans, net
    
    
    139,432
    
    
    
    5,998
    
    
    
    5.75
    
    
    
    151,620
    
    
    
    6,651
    
    
    
    5.86Commercial loans, net
    
    
    542,451
    
    
    
    24,368
    
    
    
    6.01
    
    
    
    626,249
    
    
    
    29,261
    
    
    
    6.25Consumer loans, net
    
    
    77,079
    
    
    
    3,791
    
    
    
    6.58
    
    
    
    83,425
    
    
    
    3,720
    
    
    
    5.96Cash equivalents
    
    
    19,747
    
    
    
    4
    
    
    
    0.03
    
    
    
    11,295
    
    
    
    1
    
    
    
    0.01Federal Home Loan Bank stock
    
    
    7,317
    
    
    
    109
    
    
    
    1.99
    
    
    
    7,286
    
    
    
    50
    
    
    
    0.91Total interest-earning assets
    
    
    947,555
    
    
    
    37,436
    
    
    
    5.28
    
    
    
    1,033,336
    
    
    
    44,467
    
    
    
    5.75Interest-bearing liabilities:NOW accounts
    
    
    98,402
    
    
    
    83
    
    
    
    0.11
    
    
    
    109,750
    
    
    
    110
    
    
    
    0.13Savings accounts
    
    
    32,638
    
    
    
    33
    
    
    
    0.14
    
    
    
    30,190
    
    
    
    28
    
    
    
    0.12Money market accounts
    
    
    138,303
    
    
    
    1,091
    
    
    
    1.05
    
    
    
    101,428
    
    
    
    1,059
    
    
    
    1.40Certificates
    
    
    242,777
    
    
    
    4,293
    
    
    
    2.36
    
    
    
    259,562
    
    
    
    6,022
    
    
    
    3.10Brokered deposits
    
    
    165,607
    
    
    
    3,627
    
    
    
    2.93
    
    
    
    240,430
    
    
    
    6,657
    
    
    
    3.70Advances and other borrowings
    
    
    133,511
    
    
    
    4,585
    
    
    
    4.59
    
    
    
    163,357
    
    
    
    4,732
    
    
    
    3.87Total interest-bearing liabilities
    
    
    811,238
    
    
    
    
    
    
    
    
    
    
    
    904,717Non-interest checking
    
    
    82,881
    
    
    
    
    
    
    
    
    
    
    
    68,369Other non-interest bearing deposits
    
    
    1,578
    
    
    
    
    
    
    
    
    
    
    
    1,324Total interest-bearing liabilities and non-interest
bearing deposits
    
    $
    895,697
    
    
    
    13,712
    
    
    
    2.05
    
    
    $
    974,410
    
    
    
    18,608
    
    
    
    2.55Net interest income
    
    
    
    
    
    $
    23,724
    
    
    
    
    
    
    
    
    
    
    $
    25,859Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.24
    %
    
    
    
    
    
    
    
    
    
    
    3.20
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.35
    %
    
    
    
    
    
    
    
    
    
    
    3.35
    %
 21




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##### Table of Contents



Provision for Loan Losses
    (in thousands)
    
    2010
    
    
    2009Balance at June 30,
    
    $
    26,027
    
    
    $
    25,403Provision
    
    
    11,946
    
    
    
    3,381Charge offs:One-to-four family
    
    
    0
    
    
    
    (17
    )Consumer
    
    
    (406
    )
    
    
    (586
    )Commercial business
    
    
    (1,061
    )
    
    
    0Commercial real estate
    
    
    (3,045
    )
    
    
    (1,236
    )Total charge offs
    
    
    (4,512
    )
    
    
    (1,839
    )Recoveries
    
    
    29
    
    
    
    99Balance at September 30,
    
    $
    33,490
    
    
    $
    27,044General allowance
    
    $
    16,292
    
    
    $
    11,877Specific allowance
    
    
    17,198
    
    
    
    15,167$
    33,490
    
    
    $
    27,044
 (in thousands)
    
    2010
    
    
    2009Balance at January 1,
    
    $
    23,811
    
    
    $
    21,257Provision
    
    
    22,839
    
    
    
    23,254Charge offs:One-to-four family
    
    
    (168
    )
    
    
    (82
    )Consumer
    
    
    (795
    )
    
    
    (1,692
    )Commercial business
    
    
    (5,803
    )
    
    
    (5,352
    )Commercial real estate
    
    
    (6,524
    )
    
    
    (11,017
    )Total charge offs
    
    
    (13,290
    )
    
    
    (18,143
    )Recoveries
    
    
    130
    
    
    
    676Balance at September 30,
    
    $
    33,490
    
    
    $
    27,044General allowance
    
    $
    16,292
    
    
    $
    11,877Specific allowance
    
    
    17,198
    
    
    
    15,167$
    33,490
    
    
    $
    27,044
 22




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##### Table of Contents



Non-Interest Income
   Non-Interest Expense
   Income Tax Expense
   23




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##### Table of Contents



Non-Performing Assets
  September 30,
    
    
    June 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2010
    
    
    2009Non-Accruing Loans:One-to-four family real estate
    
    $
    3,222
    
    
    $
    2,431
    
    
    $
    2,132Commercial real estate
    
    
    33,715
    
    
    
    31,916
    
    
    
    37,122Consumer
    
    
    348
    
    
    
    364
    
    
    
    4,086Commercial business
    
    
    25,721
    
    
    
    24,812
    
    
    
    17,787Total
    
    
    63,006
    
    
    
    59,523
    
    
    
    61,127Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    906
    
    
    
    934
    
    
    
    1,011Consumer
    
    
    14
    
    
    
    0
    
    
    
    5Commercial real estate
    
    
    17,653
    
    
    
    10,687
    
    
    
    15,246Total non-performing assets
    
    $
    81,579
    
    
    $
    71,144
    
    
    $
    77,389Total as a percentage of total assets
    
    
    8.99
    %
    
    
    7.30
    %
    
    
    7.47
    %Total non-performing loans
    
    $
    63,006
    
    
    $
    59,523
    
    
    $
    61,127Total as a percentage of total loans
receivable, net
    
    
    9.00
    %
    
    
    7.99
    %
    
    
    7.65
    %Allowance for loan loss to non-performing loans
    
    
    53.15
    %
    
    
    43.73
    %
    
    
    38.95
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    16,416
    
    
    $
    14,819
    
    
    $
    11,14090+ days
    
    
    0
    
    
    
    0
    
    
    
    0Delinquencies as a percentage of
loan and lease portfolio (1)30+ days
    
    
    2.28
    %
    
    
    1.95
    %
    
    
    1.37
    %90+ days
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 
 (1)
    
    Excludes non-accrual loans.   (Dollars in thousands)Non-performing loansJune 30, 2010
    
    $
    59,523Classified as non-performing
    
    
    17,301Charge offs
    
    
    (4,482
    )Principal payments received
    
    
    (807
    )Classified as accruing
    
    
    (1,054
    )Transferred to real estate owned
    
    
    (7,475
    )September 30, 2010
    
    $
    63,006Foreclosed and repossessed assetsJune 30, 2010
    
    $
    11,621Transferred from non-performing loans
    
    
    7,475Other foreclosures/repossessions
    
    
    45Real estate sold
    
    
    (61
    )Net gain on sale of assets
    
    
    10Write downs
    
    
    (517
    )September 30, 2010
    
    $
    18,573
  24




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##### Table of Contents



(Dollars in thousands)Non-performing loansDecember 31, 2009
    
    $
    61,127Classified as non-performing
    
    
    45,396Charge offs
    
    
    (13,260
    )Principal payments received
    
    
    (12,934
    )Classified as accruing
    
    
    (2,414
    )Transferred to real estate owned
    
    
    (14,909
    )September 30, 2010
    
    $
    63,006Foreclosed and repossessed assetsDecember 31, 2009
    
    $
    16,262Transferred from non-performing loans
    
    
    14,909Other foreclosures/repossessions
    
    
    954Real estate sold
    
    
    (13,693
    )Net gain on sale of assets
    
    
    744Write downs
    
    
    (603
    )September 30, 2010
    
    $
    18,573
  Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    PrincipalAmount of Loan
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of Loan(Dollars in thousands)
    
    
    
    
    
    September 30,
    
    
    
    
    
    June 30,
    
    
    
    
    
    December 31,Property Type
    
    #
    
    2010
    
    #
    
    2010
    
    #
    
    2009Residential developments
    
    
    9
    
    
    $
    24,311
    
    
    
    7
    
    
    $
    11,895
    
    
    
    7
    
    
    $
    12,030Single family homes
    
    
    3
    
    
    
    2,651
    
    
    
    2
    
    
    
    2,856
    
    
    
    2
    
    
    
    3,088Hotels
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999Alternative fuel plants
    
    
    1
    
    
    
    4,994
    
    
    
    1
    
    
    
    4,992
    
    
    
    2
    
    
    
    12,834Shopping centers/retail
    
    
    2
    
    
    
    1,075
    
    
    
    2
    
    
    
    1,095
    
    
    
    2
    
    
    
    1,136Restaurants/bar
    
    
    2
    
    
    
    684
    
    
    
    2
    
    
    
    707
    
    
    
    4
    
    
    
    2,436Office buildings
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    5,372
    
    
    
    1
    
    
    
    59917
    
    
    $
    33,715
    
    
    
    16
    
    
    $
    31,916
    
    
    
    19
    
    
    $
    37,122
  Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    PrincipalAmount of Loan
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of Loan(Dollars in thousands)
    
    
    
    
    
    September 30,
    
    
    
    
    
    June 30,
    
    
    
    
    
    December 31,Property Type
    
    #
    
    2010
    
    #
    
    2010
    
    #
    
    2009Construction/development
    
    
    7
    
    
    $
    7,317
    
    
    
    7
    
    
    $
    7,366
    
    
    
    5
    
    
    $
    4,094Finance
    
    
    2
    
    
    
    517
    
    
    
    2
    
    
    
    650
    
    
    
    2
    
    
    
    8,764Alternative fuels
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    926
    
    
    
    1
    
    
    
    756Retail
    
    
    1
    
    
    
    2,504
    
    
    
    1
    
    
    
    2,504
    
    
    
    1
    
    
    
    32Banking
    
    
    2
    
    
    
    8,223
    
    
    
    2
    
    
    
    8,233
    
    
    
    1
    
    
    
    3,248Entertainment
    
    
    1
    
    
    
    321
    
    
    
    1
    
    
    
    487
    
    
    
    1
    
    
    
    893Utilities
    
    
    1
    
    
    
    4,629
    
    
    
    1
    
    
    
    4,646
    
    
    
    0
    
    
    
    0Residential rental
    
    
    1
    
    
    
    350
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Service industry
    
    
    3
    
    
    
    12
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Restaurant
    
    
    2
    
    
    
    1,848
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    020
    
    
    $
    25,721
    
    
    
    15
    
    
    
    24,812
    
    
    
    11
    
    
    $
    17,787
   25




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##### Table of Contents



Dividends
  Liquidity and Capital Resources
    26




---



##### Table of Contents



Market Risk
  Rate Shock Table
   Other than trading portfolio
    
    Market Value(Dollars in thousands)Basis point change in interest rates
    
    -100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    893,193
    
    
    
    880,004
    
    
    
    865,718
    
    
    
    848,619Total market risk sensitive liabilities
    
    
    843,481
    
    
    
    830,838
    
    
    
    816,920
    
    
    
    803,145Off-balance sheet financial instruments
    
    
    406
    
    
    
    0
    
    
    
    712
    
    
    
    1,343Net market risk
    
    $
    49,306
    
    
    
    49,166
    
    
    
    48,086
    
    
    
    44,131Percentage change from current market value
    
    
    0.28
    %
    
    
    0.00
    %
    
    
    (2.20
    )%
    
    
    (10.24
    )%
  27




---



##### Table of Contents



Asset/Liability Management
  (Dollars in thousands)ProjectedRate Shock in
    
    Change in Net
    
    PercentageBasis Points
    
    Interest Income
    
    Change+200
    
    
    
    630
    
    
    
    2.16
    %+100
    
    
    
    482
    
    
    
    1.66
    %0
    
    
    
    0
    
    
    
    0.00
    %-100
    
    
    
    (695
    )
    
    
    (2.39
    )%
    28




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4T: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 29




---



##### Table of Contents



HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
 Financial reform legislation recently enacted by Congress will, among other things, eliminate the
Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection
Bureau and result in new laws and regulations that are expected to increase our costs of
operations.
      30




---



##### Table of Contents



We may be required to raise additional capital in the future, but that capital may not be available
when it is needed.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
  31




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.
RegistrantDate: November 2, 2010
    By:
    /s/ Bradley KrehbielBradley Krehbiel, President(Principal Executive Officer and
Duly Authorized Representative)Date: November 2, 2010
    By:
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 32




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##### Table of Contents



HMN FINANCIAL, INC.
 INDEX TO EXHIBITS
FOR FORM 10-Q
 SequentialPage NumberingReference
    
    
    Where Attachedto Prior
    
    
    Exhibits AreRegulation S-K
    
    
    
    Filing or
    
    
    Located in ThisExhibit Number
    
    Document Attached Hereto
    
    Exhibit
    
    
    Report3.1
    
    Amended and Restated Certificate of Incorporation
    
    
    *1
    
    
    N/A3.2
    
    Amended and Restated By-laws
    
    
    *2
    
    
    N/A4
    
    Form of Common Stock
    
    
    *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 the same numbered exhibit to the Companys Quarterly Report on Form
10-Q, as amended, for the period ended September 30, 2008 (File 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). 33