##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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)
 (507) 535-1200
  þ o
  o o
 
 Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o
  o þ
  Class
    
    Outstanding at July 21, 2009Common stock, $0.01 par value
    
    4,245,284




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##### 



HMN FINANCIAL, INC.
 CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Loss for the Three Months Ended and
Six Months Ended June 30, 2009 and 2008
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Loss for the Six Month Period Ended June 30, 2009
    
    
    5Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2009 and 2008
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2:
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
(Included in Item 2 under Market Risk)
    
    
    25Item 4:
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    28Item 1A:
    
    Risk Factors
    
    
    28Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3:
    
    Defaults Upon Senior Securities
    
    
    28Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5:
    
    Other Information
    
    
    29Item 6:
    
    Exhibits
    
    
    30Signatures
    
    
    31EX-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
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2009
    
    
    2008(unaudited)AssetsCash and cash equivalents
    
    $
    16,158
    
    
    
    15,729Securities available for sale:Mortgage-backed and related securities
(amortized cost $62,542 and $76,166)
    
    
    64,144
    
    
    
    77,327Other marketable securities
(amortized cost $70,541 and $95,445)
    
    
    71,722
    
    
    
    97,818135,866
    
    
    
    175,145Loans held for sale
    
    
    5,029
    
    
    
    2,548Loans receivable, net
    
    
    836,493
    
    
    
    900,889Accrued interest receivable
    
    
    4,736
    
    
    
    5,568Real estate, net
    
    
    16,771
    
    
    
    10,558Federal Home Loan Bank stock, at cost
    
    
    7,286
    
    
    
    7,286Mortgage servicing rights, net
    
    
    1,140
    
    
    
    728Premises and equipment, net
    
    
    13,832
    
    
    
    13,972Prepaid expenses and other assets
    
    
    7,528
    
    
    
    4,408Deferred tax asset
    
    
    8,779
    
    
    
    8,649Total assets
    
    $
    1,053,618
    
    
    
    1,145,480Liabilities and Stockholders EquityDeposits
    
    $
    809,965
    
    
    
    880,505Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    132,500
    
    
    
    142,500Accrued interest payable
    
    
    4,561
    
    
    
    6,307Customer escrows
    
    
    1,016
    
    
    
    639Accrued expenses and other liabilities
    
    
    5,860
    
    
    
    3,316Total liabilities
    
    
    953,902
    
    
    
    1,033,267Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par value):authorized 500,000 shares; issued shares 26,000
    
    
    23,558
    
    
    
    23,384Common stock ($.01 par value):authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    58,609
    
    
    
    60,687Retained earnings, subject to certain restrictions
    
    
    85,735
    
    
    
    98,067Accumulated other comprehensive income
    
    
    1,679
    
    
    
    2,091Unearned employee stock ownership plan shares
    
    
    (3,674
    )
    
    
    (3,771
    )Treasury stock, at cost 4,883,378 and 4,961,032 shares
    
    
    (66,282
    )
    
    
    (68,336
    )Total stockholders equity
    
    
    99,716
    
    
    
    112,213Total liabilities and stockholders equity
    
    $
    1,053,618
    
    
    
    1,145,480
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Loss
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollars in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Loans receivable
    
    $
    13,208
    
    
    
    14,419
    
    
    
    26,836
    
    
    
    29,939Securities available for sale:Mortgage-backed and related
    
    
    726
    
    
    
    213
    
    
    
    1,528
    
    
    
    437Other marketable
    
    
    836
    
    
    
    1,507
    
    
    
    1,782
    
    
    
    3,417Cash equivalents
    
    
    0
    
    
    
    61
    
    
    
    1
    
    
    
    118Other
    
    
    18
    
    
    
    53
    
    
    
    (5
    )
    
    
    133Total interest income
    
    
    14,788
    
    
    
    16,253
    
    
    
    30,142
    
    
    
    34,044Interest expense:Deposits
    
    
    4,729
    
    
    
    6,839
    
    
    
    9,704
    
    
    
    14,709Federal Home Loan Bank advances and
Federal Reserve borrowings
    
    
    1,573
    
    
    
    1,239
    
    
    
    3,169
    
    
    
    2,476Total interest expense
    
    
    6,302
    
    
    
    8,078
    
    
    
    12,873
    
    
    
    17,185Net interest income
    
    
    8,486
    
    
    
    8,175
    
    
    
    17,269
    
    
    
    16,859Provision for loan losses
    
    
    13,304
    
    
    
    1,130
    
    
    
    19,873
    
    
    
    2,690Net interest income (loss) after provision for
loan losses
    
    
    (4,818
    )
    
    
    7,045
    
    
    
    (2,604
    )
    
    
    14,169Non-interest income:Fees and service charges
    
    
    920
    
    
    
    998
    
    
    
    1,861
    
    
    
    1,791Mortgage servicing fees
    
    
    256
    
    
    
    240
    
    
    
    508
    
    
    
    482Securities gains, net
    
    
    5
    
    
    
    0
    
    
    
    5
    
    
    
    0Gains on sales of loans
    
    
    942
    
    
    
    228
    
    
    
    1,365
    
    
    
    384Other
    
    
    73
    
    
    
    290
    
    
    
    204
    
    
    
    617Total non-interest income
    
    
    2,196
    
    
    
    1,756
    
    
    
    3,943
    
    
    
    3,274Non-interest expense:Compensation and benefits
    
    
    3,284
    
    
    
    3,036
    
    
    
    7,133
    
    
    
    6,396Occupancy
    
    
    1,009
    
    
    
    1,161
    
    
    
    2,101
    
    
    
    2,293Advertising
    
    
    75
    
    
    
    92
    
    
    
    210
    
    
    
    216Data processing
    
    
    221
    
    
    
    336
    
    
    
    414
    
    
    
    678Amortization of mortgage servicing rights, net
    
    
    155
    
    
    
    154
    
    
    
    310
    
    
    
    314Goodwill impairment charge
    
    
    0
    
    
    
    3,801
    
    
    
    0
    
    
    
    3,801Other
    
    
    5,769
    
    
    
    1,220
    
    
    
    8,687
    
    
    
    2,354Total non-interest expense
    
    
    10,513
    
    
    
    9,800
    
    
    
    18,855
    
    
    
    16,052Income (loss) before income tax expense (benefit)
    
    
    (13,135
    )
    
    
    (999
    )
    
    
    (17,516
    )
    
    
    1,391Income tax expense (benefit)
    
    
    (3,931
    )
    
    
    1,026
    
    
    
    (5,690
    )
    
    
    1,928Net loss
    
    
    (9,204
    )
    
    
    (2,025
    )
    
    
    (11,826
    )
    
    
    (537
    )Preferred stock dividends and discount
    
    
    439
    
    
    
    0
    
    
    
    868
    
    
    
    0Net loss available to common shareholders
    
    $
    (9,643
    )
    
    
    (2,025
    )
    
    
    (12,694
    )
    
    
    (537
    )Basic loss per common share
    
    $
    (2.62
    )
    
    
    (0.56
    )
    
    
    (3.45
    )
    
    
    (0.15
    )Diluted loss per common share
    
    $
    (2.62
    )
    
    
    (0.56
    )
    
    
    (3.45
    )
    
    
    (0.15
    )
  4




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity and Comprehensive Loss
For the Six-Month Period Ended June 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,826
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,826
    )Other comprehensive loss, net of tax:Net unrealized losses on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (412
    )
    
    
    
    
    
    
    
    
    
    
    (412
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,238
    )Preferred stock discount amortization
    
    
    174
    
    
    
    
    
    
    
    (174
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Restricted stock awards forfeited
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127
    )
    
    
    0Restricted stock awards dividend forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Unearned compensation restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (2,181
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,181
    
    
    
    0Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    69Balance, June 30, 2009
    
    $
    23,558
    
    
    
    91
    
    
    
    58,609
    
    
    
    85,735
    
    
    
    1,679
    
    
    
    (3,674
    )
    
    
    (66,282
    )
    
    
    99,716
  5




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Six Months EndedJune 30,(Dollars in thousands)
    
    2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (11,826
    )
    
    
    (537
    )Adjustments to reconcile net loss to cash provided by operating activities:Provision for loan losses
    
    
    19,873
    
    
    
    2,690Provision for real estate losses
    
    
    4,141
    
    
    
    0Depreciation
    
    
    954
    
    
    
    872Amortization of (discounts) premiums, net
    
    
    236
    
    
    
    (477
    )Amortization of deferred loan fees
    
    
    (670
    )
    
    
    (421
    )Amortization of mortgage servicing rights and servicing costs
    
    
    310
    
    
    
    314Capitalized mortgage servicing rights
    
    
    (723
    )
    
    
    (1
    )Securities gains, net
    
    
    (5
    )
    
    
    0Loss (gain) on sales of real estate
    
    
    28
    
    
    
    (225
    )Gains on sales of loans
    
    
    (1,365
    )
    
    
    (384
    )Proceeds from sale of loans held for sale
    
    
    76,683
    
    
    
    34,513Disbursements on loans held for sale
    
    
    (77,080
    )
    
    
    (32,497
    )Amortization of restricted stock awards
    
    
    165
    
    
    
    205Amortization of unearned ESOP shares
    
    
    97
    
    
    
    98Earned employee stock ownership shares priced above (below) original cost
    
    
    (28
    )
    
    
    99Stock option compensation
    
    
    13
    
    
    
    17Decrease in accrued interest receivable
    
    
    832
    
    
    
    694Decrease in accrued interest payable
    
    
    (1,746
    )
    
    
    (2,908
    )Goodwill impairment charge
    
    
    0
    
    
    
    3,801Increase in other assets
    
    
    (2,834
    )
    
    
    (291
    )Increase (decrease) in accrued expenses and other liabilities
    
    
    2,473
    
    
    
    (4,588
    )Other, net
    
    
    60
    
    
    
    30Net cash provided by operating activities
    
    
    9,588
    
    
    
    1,004Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    2,141
    
    
    
    0Principal collected on securities available for sale
    
    
    11,500
    
    
    
    1,741Proceeds collected on maturities of securities available for sale
    
    
    30,000
    
    
    
    60,000Purchases of securities available for sale
    
    
    (4,985
    )
    
    
    0Purchase of Federal Home Loan Bank Stock
    
    
    0
    
    
    
    (4,539
    )Redemption of Federal Home Loan Bank Stock
    
    
    0
    
    
    
    3,277Proceeds from sales of real estate
    
    
    266
    
    
    
    3,916Net decrease (increase) in loans receivable
    
    
    33,801
    
    
    
    (40,752
    )Purchases of premises and equipment
    
    
    (849
    )
    
    
    (1,453
    )Net cash provided by investing activities
    
    
    71,874
    
    
    
    22,190Cash flows from financing activities:Decrease in deposits
    
    
    (70,897
    )
    
    
    (55,380
    )Purchase of treasury stock
    
    
    0
    
    
    
    (723
    )Dividends to stockholders
    
    
    (513
    )
    
    
    (1,834
    )Proceeds from borrowings
    
    
    945,500
    
    
    
    234,700Repayment of borrowings
    
    
    (955,500
    )
    
    
    (209,300
    )Increase in customer escrows
    
    
    377
    
    
    
    100Net cash used by financing activities
    
    
    (81,033
    )
    
    
    (32,437
    )Increase (decrease) in cash and cash equivalents
    
    
    429
    
    
    
    (9,243
    )Cash and cash equivalents, beginning of period
    
    
    15,729
    
    
    
    23,718Cash and cash equivalents, end of period
    
    $
    16,158
    
    
    
    14,475Supplemental cash flow disclosures:Cash paid for interest
    
    $
    14,619
    
    
    
    20,093Cash paid for income taxes
    
    
    33
    
    
    
    4,059Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    10,591
    
    
    
    5,760Loans transferred to loans held for sale
    
    
    724
    
    
    
    2,097
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 June 30, 2009 and 2008
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162,
The Hierarchy of Generally Accepted Accounting Principles
 Amendments to FASB Interpretation No. 46(R).
 7




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Accounting for Transfers of Financial Assets  an
amendment of FASB Statement No. 140. Consolidation of Variable Interest Entities,
 Subsequent Events.
 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 Other-Than-Temporary Impairments
 Interim Disclosures about
Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments, Interim Financial Reporting,
 8




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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 June 30, 2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    135,866
    
    
    
    8,815
    
    
    
    127,051
    
    
    
    0Mortgage loan commitments
    
    
    (27
    )
    
    
    0
    
    
    
    (27
    )
    
    
    0Total
    
    $
    135,839
    
    
    
    8,815
    
    
    
    127,024
    
    
    
    0
  9




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##### Table of Contents



Carrying value at June 30, 2009Threemonthsended
    
    
    Six monthsJune 30,
    
    
    ended2009
    
    
    June 30, 2009(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    

Level
2
    
    
    Level 3
    
    
    Total losses
    
    
    Total lossesLoans held for sale
    
    $
    5,029
    
    
    
    0
    
    
    
    5,029
    
    
    
    0
    
    
    
    (42
    )
    
    
    (84
    )Mortgage servicing rights
    
    
    1,140
    
    
    
    0
    
    
    
    1,140
    
    
    
    0
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    65,175
    
    
    
    0
    
    
    
    65,175
    
    
    
    0
    
    
    
    (6,505
    )
    
    
    (6,098
    )Real estate, net(2)
    
    
    16,771
    
    
    
    0
    
    
    
    16,771
    
    
    
    0
    
    
    
    (4,141
    )
    
    
    (5,165
    )Total
    
    $
    88,115
    
    
    
    0
    
    
    
    88,115
    
    
    
    0
    
    
    
    (10,688
    )
    
    
    (11,347
    )
 
 (1)
    
    Represents 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. (6) Fair Value of Financial Instruments
  June 30, 2009Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    amountFinancial assets:Cash and cash equivalents
    
    $
    16,158
    
    
    
    16,158Securities available for sale
    
    
    135,866
    
    
    
    135,866Loans held for sale
    
    
    5,029
    
    
    
    5,029Loans receivable, net
    
    
    836,493
    
    
    
    848,987Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    7,286Accrued interest receivable
    
    
    4,736
    
    
    
    4,736Financial liabilities:Deposits
    
    
    809,965
    
    
    
    809,965Federal Home Loan Bank advances
    
    
    132,500
    
    
    
    141,150Accrued interest payable
    
    
    4,561
    
    
    
    4,561Off-balance sheet financial
instruments:Commitments to extend credit
    
    
    (27
    )
    
    
    (27
    )
    
    
    129,249Commitments to sell loans
    
    
    8
    
    
    
    8
    
    
    
    13,612
 (7) Comprehensive Loss
  10




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For the three months ended June 30,2009
    
    2008(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
    
    $
    (440
    )
    
    
    (175
    )
    
    
    (265
    )
    
    
    (2,706
    )
    
    
    (1,105
    )
    
    
    (1,601
    )Less reclassification of net gains included in net loss
    
    
    5
    
    
    
    2
    
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0Net unrealized losses arising during the period
    
    
    (445
    )
    
    
    (177
    )
    
    
    (268
    )
    
    
    (2,706
    )
    
    
    (1,105
    )
    
    
    (1,601
    )Other comprehensive loss
    
    $
    (445
    )
    
    
    (177
    )
    
    
    (268
    )
    
    
    (2,706
    )
    
    
    (1,105
    )
    
    
    (1,601
    )For the six months ended June 30,2009
    
    2008(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
    
    $
    (746
    )
    
    
    (337
    )
    
    
    (409
    )
    
    
    (677
    )
    
    
    (276
    )
    
    
    (401
    )Less reclassification of net gains included in net loss
    
    
    5
    
    
    
    2
    
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0Net unrealized losses arising during the period
    
    
    (751
    )
    
    
    (339
    )
    
    
    (412
    )
    
    
    (677
    )
    
    
    (276
    )
    
    
    (401
    )Other comprehensive loss
    
    $
    (751
    )
    
    
    (339
    )
    
    
    (412
    )
    
    
    (677
    )
    
    
    (276
    )
    
    
    (401
    )
 (8) Securities Available For Sale
  Gross unrealized
    
    
    Gross unrealized(Dollars in thousands)
    
    Amortized cost
    
    
    gains
    
    
    losses
    
    
    Fair valueJune 30, 2009:Mortgage-backed securities:FHLMC
    
    $
    30,717
    
    
    
    731
    
    
    
    0
    
    
    
    31,448FNMA
    
    
    23,203
    
    
    
    678
    
    
    
    0
    
    
    
    23,881Collateralized mortgage obligations:FHLMC
    
    
    8,234
    
    
    
    190
    
    
    
    0
    
    
    
    8,424FNMA
    
    
    388
    
    
    
    3
    
    
    
    (75
    )
    
    
    39162,542
    
    
    
    1,602
    
    
    
    (415
    )
    
    
    64,144Other marketable securities:U.S. Government agency obligations
    
    
    69,841
    
    
    
    1,566
    
    
    
    0
    
    
    
    71,407Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (385
    )
    
    
    31570,541
    
    
    
    1,566
    
    
    
    (385
    )
    
    
    71,722$
    133,083
    
    
    
    3,168
    
    
    
    (385
    )
    
    
    135,866
  Amortized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    valueDue less than one year
    
    $
    70,100
    
    
    
    71,087Due after one year through five years
    
    
    56,843
    
    
    
    58,886Due after five years through ten years
    
    
    5,440
    
    
    
    5,578Due after ten years
    
    
    700
    
    
    
    315Total
    
    $
    133,083
    
    
    
    135,866
  11




---



##### Table of Contents



Less than twelve months
    
    
    Twelve months or more
    
    
    Total# of
    
    
    Fair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(Dollars in thousands)
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesOther marketable securities:Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    315
    
    
    
    (385
    )
    
    
    315
    
    
    
    (385
    )Total temporarily impaired
securities
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    1
    
    
    $
    315
    
    
    
    (385
    )
    
    $
    315
    
    
    
    (385
    )
  (9) Investment in Mortgage Servicing Rights
  Six Months ended
    
    
    Twelve Months ended
    
    
    Six Months ended(Dollars in thousands)
    
    June 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Mortgage servicing rights:Balance, beginning of period
    
    $
    728
    
    
    
    1,270
    
    
    
    1,270Originations
    
    
    722
    
    
    
    28
    
    
    
    1Amortization
    
    
    (310
    )
    
    
    (570
    )
    
    
    (314
    )Balance, end of period
    
    $
    1,140
    
    
    
    728
    
    
    
    957Fair value of mortgage servicing rights
    
    $
    2,036
    
    
    
    2,339
    
    
    
    2,915
  Weighted
    
    WeightedLoan Principal
    
    Average
    
    Average(Dollars in thousands)
    
    Balance
    
    Interest Rate
    
    Remaining Term
    
    Number of LoansOriginal term 30 year fixed rate
    
    $
    208,589
    
    
    
    5.60
    %
    
    
    294
    
    
    
    1,871Original term 15 year fixed rate
    
    
    101,357
    
    
    
    5.04
    %
    
    
    113
    
    
    
    1,616Adjustable rate
    
    
    1,214
    
    
    
    4.87
    %
    
    
    287
    
    
    
    13
  Gross
    
    
    
    
    
    
    UnamortizedCarrying
    
    
    Accumulated
    
    
    Intangible(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    AssetsAmortized intangible assets:Mortgage servicing rights
    
    $
    4,015
    
    
    
    (2,875
    )
    
    
    1,140Total
    
    $
    4,015
    
    
    
    (2,875
    )
    
    
    1,140
 12




---



##### Table of Contents



MortgageServicing(Dollars in thousands)
    
    RightsYear ended December 31,2009
    
    $
    2132010
    
    
    2732011
    
    
    1902012
    
    
    1462013
    
    
    121
  (10) Loss per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands, except per share data)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Weighted average number of common shares
outstanding
used in basic loss per common share calculation
    
    
    3,685
    
    
    
    3,647
    
    
    
    3,681
    
    
    
    3,649Net dilutive effect of:Options
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Restricted stock awards
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,685
    
    
    
    3,647
    
    
    
    3,681
    
    
    
    3,649Loss available to common shareholders
    
    $
    (9,643
    )
    
    
    (2,025
    )
    
    
    (12,694
    )
    
    
    (537
    )Basic loss per common share
    
    $
    (2.62
    )
    
    
    (0.56
    )
    
    
    (3.45
    )
    
    
    (0.15
    )Diluted loss per common share
    
    $
    (2.62
    )
    
    
    (0.56
    )
    
    
    (3.45
    )
    
    
    (0.15
    )
 (11) Regulatory Capital
    13




---



##### Table of Contents



Required to be
    
    
    
    
    
    
    
    
    
    
    To Be Well CapitalizedAdequately
    
    
    
    
    
    
    
    
    
    
    Under Prompt CorrectiveActual
    
    
    Capitalized
    
    
    Excess Capital
    
    
    Actions ProvisionsPercent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of(Dollars in thousands)
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    Assets (1)
    
    
    Amount
    
    
    Assets(1)
    
    
    Amount
    
    
    Assets(1)Bank stockholders equity
    
    $
    95,660Less:Net unrealized gains on certain securities
available for sale and cash flow hedges
    
    
    (1,908
    )Disallowed servicing and tax assets
    
    
    (6,307
    )87,445Tier I or core capitalTier I capital to adjusted total assets
    
    
    
    
    
    
    8.38
    %
    
    $
    41,726
    
    
    
    4.00
    %
    
    $
    45,719
    
    
    
    4.38
    %
    
    $
    52,158
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    10.28
    %
    
    $
    34,016
    
    
    
    4.00
    %
    
    $
    53,429
    
    
    
    6.28
    %
    
    $
    51,024
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    10,630Risk-based capital
    
    $
    98,075
    
    
    
    
    
    
    $
    68,032
    
    
    
    
    
    
    $
    30,043
    
    
    
    
    
    
    $
    85,040Risk-based capital to risk-weighted assets
    
    
    
    
    
    
    11.53
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    3.53
    %
    
    
    
    
    
    
    10.00
    %
 
 (1)
    
    Based upon the Banks adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio. (12) Commitments and Contingencies
   (13) Business Segments
   14




---



##### Table of Contents



Home Federal
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in thousands)
    
    Savings Bank
    
    Other
    
    Eliminations
    
    TotalAt or for the six months ended June 30, 2009:Interest income  external customers
    
    $
    30,142
    
    
    
    0
    
    
    
    0
    
    
    
    30,142Non-interest income  external customers
    
    
    3,980
    
    
    
    1
    
    
    
    0
    
    
    
    3,981Loss on limited partnerships
    
    
    (38
    )
    
    
    0
    
    
    
    0
    
    
    
    (38
    )Intersegment interest income
    
    
    0
    
    
    
    8
    
    
    
    (8
    )
    
    
    0Intersegment non-interest income
    
    
    87
    
    
    
    (11,502
    )
    
    
    11,415
    
    
    
    0Interest expense
    
    
    12,881
    
    
    
    0
    
    
    
    (8
    )
    
    
    12,873Amortization of mortgage servicing rights, net
    
    
    310
    
    
    
    0
    
    
    
    0
    
    
    
    310Other non-interest expense
    
    
    18,243
    
    
    
    389
    
    
    
    (87
    )
    
    
    18,545Income tax benefit
    
    
    (5,638
    )
    
    
    (52
    )
    
    
    0
    
    
    
    (5,690
    )Net loss
    
    
    (11,498
    )
    
    
    (11,830
    )
    
    
    11,502
    
    
    
    (11,826
    )Total assets
    
    
    1,052,598
    
    
    
    100,280
    
    
    
    (99,260
    )
    
    
    1,053,618At or for the six months ended June 30, 2008:Interest income  external customers
    
    $
    34,030
    
    
    
    14
    
    
    
    0
    
    
    
    34,044Non-interest income  external customers
    
    
    3,273
    
    
    
    0
    
    
    
    0
    
    
    
    3,273Earnings on limited partnerships
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    1Intersegment interest income
    
    
    0
    
    
    
    51
    
    
    
    (51
    )
    
    
    0Intersegment non-interest income
    
    
    87
    
    
    
    (367
    )
    
    
    280
    
    
    
    0Interest expense
    
    
    17,236
    
    
    
    0
    
    
    
    (51
    )
    
    
    17,185Amortization of mortgage servicing rights, net
    
    
    314
    
    
    
    0
    
    
    
    0
    
    
    
    314Other non-interest expense
    
    
    15,468
    
    
    
    357
    
    
    
    (87
    )
    
    
    15,738Income tax expense (benefit)
    
    
    2,047
    
    
    
    (119
    )
    
    
    0
    
    
    
    1,928Net loss
    
    
    (364
    )
    
    
    (540
    )
    
    
    367
    
    
    
    (537
    )Total assets
    
    
    1,075,128
    
    
    
    95,950
    
    
    
    (94,915
    )
    
    
    1,076,163At or for the quarter ended June 30, 2009:Interest income  external customers
    
    $
    14,788
    
    
    
    0
    
    
    
    0
    
    
    
    14,788Non-interest income  external customers
    
    
    2,229
    
    
    
    0
    
    
    
    0
    
    
    
    2,229Loss on limited partnerships
    
    
    (33
    )
    
    
    0
    
    
    
    0
    
    
    
    (33
    )Intersegment interest income
    
    
    0
    
    
    
    4
    
    
    
    (4
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    (9,045
    )
    
    
    9,002
    
    
    
    0Interest expense
    
    
    6,306
    
    
    
    0
    
    
    
    (4
    )
    
    
    6,302Amortization of mortgage servicing rights, net
    
    
    155
    
    
    
    0
    
    
    
    0
    
    
    
    155Other non-interest expense
    
    
    10,211
    
    
    
    190
    
    
    
    (43
    )
    
    
    10,358Income tax benefit
    
    
    (3,907
    )
    
    
    (24
    )
    
    
    0
    
    
    
    (3,931
    )Net loss
    
    
    (9,042
    )
    
    
    (9,207
    )
    
    
    9,045
    
    
    
    (9,204
    )Total assets
    
    
    1,052,598
    
    
    
    100,280
    
    
    
    (99,260
    )
    
    
    1,053,618At or for the quarter ended June 30, 2008:Interest income  external customers
    
    $
    16,243
    
    
    
    10
    
    
    
    0
    
    
    
    16,253Non-interest income  external customers
    
    
    1,760
    
    
    
    0
    
    
    
    0
    
    
    
    1,760Loss on limited partnerships
    
    
    (4
    )
    
    
    0
    
    
    
    0
    
    
    
    (4
    )Intersegment interest income
    
    
    0
    
    
    
    8
    
    
    
    (8
    )
    
    
    0Intersegment non-interest income
    
    
    43
    
    
    
    (1,928
    )
    
    
    1,885
    
    
    
    0Interest expense
    
    
    8,086
    
    
    
    0
    
    
    
    (8
    )
    
    
    8,078Amortization of mortgage servicing rights, net
    
    
    154
    
    
    
    0
    
    
    
    0
    
    
    
    154Other non-interest expense
    
    
    9,509
    
    
    
    180
    
    
    
    (43
    )
    
    
    9,646Income tax expense (benefit)
    
    
    1,090
    
    
    
    (64
    )
    
    
    0
    
    
    
    1,026Net loss
    
    
    (1,927
    )
    
    
    (2,026
    )
    
    
    1,928
    
    
    
    (2,025
    )Total assets
    
    
    1,075,128
    
    
    
    95,950
    
    
    
    (94,915
    )
    
    
    1,076,163
 15




---



##### Table of Contents



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




---



##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   Income Taxes
  17




---



##### Table of Contents



Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
 Net Loss
   18




---



##### Table of Contents



Net Interest Income
       19




---



##### Table of Contents



For the six month period endedJune 30, 2009
    
    
    June 30, 2008Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    157,863
    
    
    
    3,311
    
    
    
    4.23
    %
    
    $
    153,123
    
    
    
    3,853
    
    
    
    5.06
    %Loans held for sale
    
    
    3,898
    
    
    
    99
    
    
    
    5.12
    
    
    
    2,484
    
    
    
    73
    
    
    
    5.88Mortgage loans, net
    
    
    155,433
    
    
    
    4,496
    
    
    
    5.83
    
    
    
    161,743
    
    
    
    5,019
    
    
    
    6.22Commercial loans, net
    
    
    638,748
    
    
    
    19,745
    
    
    
    6.23
    
    
    
    632,565
    
    
    
    21,875
    
    
    
    6.95Consumer loans, net
    
    
    84,236
    
    
    
    2,495
    
    
    
    5.97
    
    
    
    83,324
    
    
    
    2,973
    
    
    
    7.17Cash equivalents
    
    
    10,727
    
    
    
    1
    
    
    
    0.02
    
    
    
    15,172
    
    
    
    118
    
    
    
    1.57Federal Home Loan Bank stock
    
    
    7,286
    
    
    
    (5
    )
    
    
    (0.14
    )
    
    
    6,462
    
    
    
    133
    
    
    
    4.14Total interest-earning assets
    
    
    1,058,191
    
    
    
    30,142
    
    
    
    5.74
    
    
    
    1,054,873
    
    
    
    34,044
    
    
    
    6.49Interest-bearing liabilities:NOW accounts
    
    
    113,439
    
    
    
    78
    
    
    
    0.14
    
    
    
    124,305
    
    
    
    988
    
    
    
    1.59Savings accounts
    
    
    30,001
    
    
    
    19
    
    
    
    0.13
    
    
    
    41,287
    
    
    
    239
    
    
    
    1.16Money market accounts
    
    
    98,834
    
    
    
    712
    
    
    
    1.45
    
    
    
    142,134
    
    
    
    1,800
    
    
    
    2.54Certificates
    
    
    259,645
    
    
    
    4,124
    
    
    
    3.20
    
    
    
    245,068
    
    
    
    5,177
    
    
    
    4.25Brokered deposits
    
    
    248,010
    
    
    
    4,771
    
    
    
    3.88
    
    
    
    269,270
    
    
    
    6,505
    
    
    
    4.86Advances and other borrowings
    
    
    176,221
    
    
    
    3,169
    
    
    
    3.63
    
    
    
    106,364
    
    
    
    2,476
    
    
    
    4.68Total interest-bearing liabilities
    
    
    926,150
    
    
    
    
    
    
    
    
    
    
    
    928,428Non-interest checking
    
    
    66,733
    
    
    
    
    
    
    
    
    
    
    
    53,603Other non-interest bearing deposits
    
    
    1,315
    
    
    
    
    
    
    
    
    
    
    
    1,103Total interest bearing liabilities and non-interest
bearing deposits
    
    $
    994,198
    
    
    
    12,873
    
    
    
    2.61
    
    
    $
    983,134
    
    
    
    17,185
    
    
    
    3.52Net interest income
    
    
    
    
    
    $
    17,269
    
    
    
    
    
    
    
    
    
    
    $
    16,859Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    2.98
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.29
    %
    
    
    
    
    
    
    
    
    
    
    3.21
    %
 Provision for Loan Losses
   20




---



##### Table of Contents



(Dollars in thousands)
    
    2009
    
    
    2008Balance at March 31,
    
    $
    17,494
    
    
    $
    13,913Provision
    
    
    13,304
    
    
    
    1,130Charge offs:Commercial
    
    
    (5,168
    )
    
    
    (0
    )Commercial real estate
    
    
    (320
    )
    
    
    (75
    )One-to-four family
    
    
    (65
    )
    
    
    (0
    )Consumer
    
    
    (412
    )
    
    
    (48
    )Recoveries
    
    
    570
    
    
    
    4Balance at June 30,
    
    $
    25,403
    
    
    $
    14,924
 (Dollars in thousands)
    
    2009
    
    
    2008Balance at January 1,
    
    $
    21,257
    
    
    $
    12,438Provision
    
    
    19,873
    
    
    
    2,690Charge offs:Commercial
    
    
    (5,352
    )
    
    
    (24
    )Commercial real estate
    
    
    (9,781
    )
    
    
    (75
    )One-to-four family
    
    
    (65
    )
    
    
    (60
    )Consumer
    
    
    (1,106
    )
    
    
    (69
    )Recoveries
    
    
    577
    
    
    
    24Balance at June 30,
    
    $
    25,403
    
    
    $
    14,924
 Non-Interest Income
   Non-Interest Expense
  21




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##### Table of Contents



Income Tax Expense
    Non-Performing Assets
  22




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##### Table of Contents



June 30,
    
    
    March 31,
    
    
    December 31,(Dollars in thousands)
    
    2009
    
    
    2009
    
    
    2008Non-Accruing Loans:One-to-four family real estate
    
    $
    700
    
    
    $
    3,812
    
    
    $
    7,251Commercial real estate
    
    
    42,393
    
    
    
    29,829
    
    
    
    46,953Consumer
    
    
    5,942
    
    
    
    5,052
    
    
    
    5,297Commercial business
    
    
    13,632
    
    
    
    11,410
    
    
    
    4,671Total
    
    
    62,667
    
    
    
    50,103
    
    
    
    64,172Other assets
    
    
    25
    
    
    
    25
    
    
    
    25Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    536
    
    
    
    344
    
    
    
    258Commercial real estate
    
    
    16,235
    
    
    
    19,409
    
    
    
    10,300Total non-performing assets
    
    $
    79,463
    
    
    $
    69,881
    
    
    $
    74,756Total as a percentage of total assets
    
    
    7.55
    %
    
    
    6.28
    %
    
    
    6.53
    %Total non-performing loans
    
    $
    62,667
    
    
    $
    50,103
    
    
    $
    64,172Total as a percentage of total loans receivable, net
    
    
    7.49
    %
    
    
    5.71
    %
    
    
    7.12
    %Allowance for loan loss to non-performing loans
    
    
    40.54
    %
    
    
    34.92
    %
    
    
    33.12
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    10,080
    
    
    $
    7,893
    
    
    $
    11,48890+ days
    
    
    0
    
    
    
    515
    
    
    
    0Delinquencies as a percentage of
loan and lease portfolio (1)30+ days
    
    
    1.18
    %
    
    
    0.89
    %
    
    
    1.26
    %90+ days
    
    
    0.00
    %
    
    
    0.06
    %
    
    
    0.00
    %
 
 (1)
    
    Excludes non-accrual loans.  (Dollars in thousands)Non-performing loansMarch 31, 2009
    
    $
    50,103Classified as non-performing
    
    
    20,175Charge offs
    
    
    (5,965
    )Principal payments received
    
    
    (1,242
    )Classified as accruing
    
    
    (156
    )Transferred to real estate owned
    
    
    (248
    )June 30, 2009
    
    $
    62,667Foreclosed and repossessed assetsMarch 31, 2009
    
    $
    19,778Transferred from non-performing loans
    
    
    248Real estate sold
    
    
    (113
    )Writedowns
    
    
    (3,117
    )June 30, 2009
    
    $
    16,796
   23




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##### Table of Contents



(Dollars in thousands)Non-performing loansDecember 31, 2008
    
    $
    64,172Classified as non-performing
    
    
    28,284Charge offs
    
    
    (16,305
    )Principal payments received
    
    
    (2,176
    )Classified as accruing
    
    
    (717
    )Transferred to real estate owned
    
    
    (10,591
    )June 30, 2009
    
    $
    62,667Foreclosed and repossessed assetsDecember 31, 2008
    
    $
    10,584Transferred from non-performing loans
    
    
    10,591Real estate sold
    
    
    (219
    )Writedowns
    
    
    (4,160
    )June 30, 2009
    
    $
    16,796
  Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    PrincipalAmount of Loan
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of Loanat
    
    
    
    
    
    at
    
    
    
    
    
    at(Dollars in thousands)
    
    
    
    
    
    June 30,
    
    
    
    
    
    March 31,
    
    
    
    
    
    December 31,Property Type
    
    #
    
    2009
    
    #
    
    2009
    
    #
    
    2008Residential developments
    
    
    8
    
    
    $
    18,891
    
    
    
    5
    
    
    $
    9,180
    
    
    
    6
    
    
    $
    17,680Single family homes
    
    
    3
    
    
    
    1,674
    
    
    
    3
    
    
    
    944
    
    
    
    4
    
    
    
    898Condominiums
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    5,440Hotels
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999Alternative fuel plants
    
    
    2
    
    
    
    12,676
    
    
    
    2
    
    
    
    12,528
    
    
    
    2
    
    
    
    12,493Shopping centers
    
    
    2
    
    
    
    1,182
    
    
    
    2
    
    
    
    1,205
    
    
    
    2
    
    
    
    1,237Elderly care facilities
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    40
    
    
    
    3
    
    
    
    4,037Restaurant/bars
    
    
    3
    
    
    
    2,971
    
    
    
    2
    
    
    
    933
    
    
    
    1
    
    
    
    16919
    
    
    $
    42,393
    
    
    
    16
    
    
    $
    29,829
    
    
    
    20
    
    
    $
    46,953
 Dividends
  Liquidity and Capital Resources
  24




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##### Table of Contents



Market Risk
  Rate
Shock Table
  25




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##### Table of Contents



Other than trading portfolio(Dollars in thousands)
    
    Market ValueBasis point change in interest rates
    
    -100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    1,040,070
    
    
    
    1,028,222
    
    
    
    1,014,116
    
    
    
    1,000,010Total market risk sensitive liabilities
    
    
    944,960
    
    
    
    931,038
    
    
    
    917,630
    
    
    
    904,106Off-balance sheet financial instruments
    
    
    113
    
    
    
    0
    
    
    
    601
    
    
    
    1,132Net market risk
    
    $
    94,997
    
    
    
    97,184
    
    
    
    95,885
    
    
    
    94,772Percentage change from current market value
    
    
    (2.25)
    %
    
    
    0.00
    %
    
    
    (1.34)
    %
    
    
    (2.48)
    %
   Asset/Liability Management
  (Dollars in thousands)ProjectedRate Shock in
    
    Change in Net
    
    PercentageBasis Points
    
    Interest Income
    
    Change+200
    
    
    1,641
    
    
    
    4.97
    %+100
    
    
    633
    
    
    
    1.92
    %0
    
    
    0
    
    
    
    0.00
    %-100
    
    
    (1,623
    )
    
    
    (4.92
    )%
  26




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal controls.
 27




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##### 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) Total
    
    
    
    
    
    
    (c) Total Number of
    
    
    (d) Maximum NumberNumber of
    
    
    
    
    
    
    Shares Purchased as Part
    
    
    of Shares that May YetShares
    
    
    (b) Average Price
    
    
    of Publicly Announced
    
    
    Be Purchased Under thePeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Plans or Programs
    
    
    Plans or Programs (1)April 1 through April 30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    106,000May 1 through May 31, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    106,000June 1 through June 30, 2009
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    106,000Total
    
    
    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. 
 28




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##### Table of Contents



Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
    For
    
    WithholdMahlon C. Schneider
    
    
    3,158,622
    
    
    
    210,981Hugh C. Smith
    
    
    3,174,145
    
    
    
    195,458
 
 NUMBEROF VOTESFOR
    
    
    3,225,025AGAINST
    
    
    92,933ABSTAIN
    
    
    51,645BROKER NON-VOTE
    
    
    0
   NUMBEROF VOTESFOR
    
    
    2,019,743AGAINST
    
    
    586,487ABSTAIN
    
    
    43,049BROKER NON-VOTE
    
    
    720,324
   NUMBEROF VOTESFOR
    
    
    2,303,104AGAINST
    
    
    982,938ABSTAIN
    
    
    83,560BROKER NON-VOTE
    
    
    0
  29




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##### Table of Contents



Item 5. Other Information.
  
 Item 6. Exhibits.
  30




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##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.
RegistrantDate:  August 3, 2009
    By:
    /s/ Bradley KrehbielBradley Krehbiel,Principal Executive Officer
(Duly Authorized Representative)Date:  August 3, 2009
    By:
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 31




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##### Table of Contents



HMN FINANCIAL, INC.
 INDEX TO EXHIBITS
FOR FORM 10-Q
 Reference
    
    Sequentialto Prior
    
    Page NumberingFiling or
    
    Where AttachedExhibit
    
    Exhibits AreRegulation S-K
    
    
    
    Number
    
    Located in ThisExhibit Number
    
    Document Attached Hereto
    
    Form 10-Q
    
    Report3.1
    
    Amended and Restated 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). 32