##### 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, 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 July 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 June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Loss for the Three Months Ended and
Six Months Ended June 30, 2010 and 2009
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Loss for the Six Month Period Ended June 30, 2010
    
    
    5Consolidated Statements of Cash Flows for
the Six Months Ended June 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
    
    
    28PART 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
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2009(unaudited)AssetsCash and cash equivalents
    
    $
    24,704
    
    
    
    16,418Securities available for sale:Mortgage-backed and related securities
(amortized cost $42,045 and $51,840)
    
    
    43,867
    
    
    
    53,559Other marketable securities
(amortized cost $112,796 and $105,723)
    
    
    112,925
    
    
    
    106,043156,792
    
    
    
    159,602Loans held for sale
    
    
    2,940
    
    
    
    2,965Loans receivable, net
    
    
    744,629
    
    
    
    799,256Accrued interest receivable
    
    
    4,306
    
    
    
    4,024Real estate, net
    
    
    11,621
    
    
    
    16,257Federal Home Loan Bank stock, at cost
    
    
    7,189
    
    
    
    7,286Mortgage servicing rights, net
    
    
    1,429
    
    
    
    1,315Premises and equipment, net
    
    
    9,993
    
    
    
    10,766Prepaid expenses and other assets
    
    
    11,640
    
    
    
    6,762Deferred tax asset, net
    
    
    0
    
    
    
    11,590Total assets
    
    $
    975,243
    
    
    
    1,036,241Liabilities and Stockholders EquityDeposits
    
    $
    746,448
    
    
    
    796,011Federal Home Loan Bank advances and Federal Reserve borrowings
    
    
    132,500
    
    
    
    132,500Accrued interest payable
    
    
    1,448
    
    
    
    2,108Customer escrows
    
    
    1,170
    
    
    
    1,427Accrued expenses and other liabilities
    
    
    3,823
    
    
    
    4,257Total liabilities
    
    
    885,389
    
    
    
    936,303Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par
value): 
authorized
500,000 shares; issued shares 26,000
    
    
    24,020
    
    
    
    23,785Common stock ($.01 par
value): 
authorized
11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    56,484
    
    
    
    58,576Retained earnings, subject to certain restrictions
    
    
    75,786
    
    
    
    86,115Accumulated other comprehensive income
    
    
    1,177
    
    
    
    1,230Unearned employee stock ownership plan shares
    
    
    (3,481
    )
    
    
    (3,577
    )Treasury stock, at cost 4,818,263 and 4,883,378 shares
    
    
    (64,223
    )
    
    
    (66,282
    )Total stockholders equity
    
    
    89,854
    
    
    
    99,938Total liabilities and stockholders equity
    
    $
    975,243
    
    
    
    1,036,241
  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)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income:Loans receivable
    
    $
    11,461
    
    
    
    13,208
    
    
    
    23,220
    
    
    
    26,836Securities available for sale:Mortgage-backed and related
    
    
    479
    
    
    
    726
    
    
    
    1,014
    
    
    
    1,528Other marketable
    
    
    591
    
    
    
    836
    
    
    
    1,163
    
    
    
    1,782Cash equivalents
    
    
    1
    
    
    
    0
    
    
    
    2
    
    
    
    1Other
    
    
    37
    
    
    
    18
    
    
    
    74
    
    
    
    (5
    )Total interest income
    
    
    12,569
    
    
    
    14,788
    
    
    
    25,473
    
    
    
    30,142Interest expense:Deposits
    
    
    3,038
    
    
    
    4,729
    
    
    
    6,459
    
    
    
    9,704Federal Home Loan Bank advances and
Federal Reserve borrowings
    
    
    1,542
    
    
    
    1,573
    
    
    
    3,064
    
    
    
    3,169Total interest expense
    
    
    4,580
    
    
    
    6,302
    
    
    
    9,523
    
    
    
    12,873Net interest income
    
    
    7,989
    
    
    
    8,486
    
    
    
    15,950
    
    
    
    17,269Provision for loan losses
    
    
    4,360
    
    
    
    13,304
    
    
    
    10,893
    
    
    
    19,873Net interest income (loss) after provision for loan
losses
    
    
    3,629
    
    
    
    (4,818
    )
    
    
    5,057
    
    
    
    (2,604
    )Non-interest income:Fees and service charges
    
    
    920
    
    
    
    1,010
    
    
    
    1,762
    
    
    
    2,037Mortgage servicing fees
    
    
    274
    
    
    
    256
    
    
    
    542
    
    
    
    508Securities gains, net
    
    
    0
    
    
    
    5
    
    
    
    0
    
    
    
    5Gains on sales of loans
    
    
    467
    
    
    
    942
    
    
    
    781
    
    
    
    1,365Other
    
    
    120
    
    
    
    73
    
    
    
    270
    
    
    
    204Total non-interest income
    
    
    1,781
    
    
    
    2,286
    
    
    
    3,355
    
    
    
    4,119Non-interest expense:Compensation and benefits
    
    
    3,411
    
    
    
    3,284
    
    
    
    6,860
    
    
    
    7,133Loss (gain) on real estate owned
    
    
    33
    
    
    
    3,066
    
    
    
    (728
    )
    
    
    4,169Occupancy
    
    
    1,035
    
    
    
    1,009
    
    
    
    2,066
    
    
    
    2,101Deposit insurance
    
    
    519
    
    
    
    826
    
    
    
    1,036
    
    
    
    1,156Data processing
    
    
    298
    
    
    
    311
    
    
    
    574
    
    
    
    590Other
    
    
    1,034
    
    
    
    2,107
    
    
    
    2,539
    
    
    
    3,882Total non-interest expense
    
    
    6,330
    
    
    
    10,603
    
    
    
    12,347
    
    
    
    19,031Loss before income tax expense (benefit)
    
    
    (920
    )
    
    
    (13,135
    )
    
    
    (3,935
    )
    
    
    (17,516
    )Income tax expense (benefit)
    
    
    6,912
    
    
    
    (3,931
    )
    
    
    5,744
    
    
    
    (5,690
    )Net loss
    
    
    (7,832
    )
    
    
    (9,204
    )
    
    
    (9,679
    )
    
    
    (11,826
    )Preferred stock dividends and discount
    
    
    448
    
    
    
    439
    
    
    
    888
    
    
    
    868Net loss available to common shareholders
    
    $
    (8,280
    )
    
    
    (9,643
    )
    
    
    (10,567
    )
    
    
    (12,694
    )Basic loss per common share
    
    $
    (2.20
    )
    
    
    (2.62
    )
    
    
    (2.82
    )
    
    
    (3.45
    )Diluted loss per common share
    
    $
    (2.20
    )
    
    
    (2.62
    )
    
    
    (2.82
    )
    
    
    (3.45
    )
  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, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,679
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,679
    )Other comprehensive loss, net of tax:Net unrealized losses on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    (53
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,732
    )Preferred stock discount amortization
    
    
    235
    
    
    
    
    
    
    
    (235
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Unearned compensation restricted stock awards
    
    
    
    
    
    
    
    
    
    
    (2,237
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,237
    
    
    
    0Restricted stock awards forfeited
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178
    )
    
    
    0Amortization of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190Preferred stock dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    77Balance, June 30, 2010
    
    $
    24,020
    
    
    
    91
    
    
    
    56,484
    
    
    
    75,786
    
    
    
    1,177
    
    
    
    (3,481
    )
    
    
    (64,223
    )
    
    
    89,854
  5




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Six Months EndedJune 30,(Dollars in thousands)
    
    2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (9,679
    )
    
    
    (11,826
    )Adjustments to reconcile net loss to cash provided by operating activities:Provision for loan losses
    
    
    10,893
    
    
    
    19,873Provision for real estate losses
    
    
    0
    
    
    
    4,141Depreciation
    
    
    837
    
    
    
    954Amortization of premiums, net
    
    
    324
    
    
    
    236Amortization of deferred loan fees
    
    
    (114
    )
    
    
    (670
    )Amortization of mortgage servicing rights, net
    
    
    219
    
    
    
    310Capitalized mortgage servicing rights
    
    
    (333
    )
    
    
    (722
    )Deferred income tax
    
    
    11,625
    
    
    
    0Securities gains, net
    
    
    0
    
    
    
    (5
    )(Gain) loss on sales of real estate
    
    
    (728
    )
    
    
    28Gains on sales of loans
    
    
    (781
    )
    
    
    (1,365
    )Proceeds from sale of loans held for sale
    
    
    39,782
    
    
    
    76,683Disbursements on loans held for sale
    
    
    (35,981
    )
    
    
    (77,080
    )Amortization of restricted stock awards
    
    
    190
    
    
    
    165Amortization of unearned ESOP shares
    
    
    96
    
    
    
    97Earned employee stock ownership shares priced below original cost
    
    
    (19
    )
    
    
    (29
    )Stock option compensation
    
    
    31
    
    
    
    13(Increase) decrease in accrued interest receivable
    
    
    (282
    )
    
    
    832Decrease in accrued interest payable
    
    
    (660
    )
    
    
    (1,746
    )Increase in other assets
    
    
    (4,926
    )
    
    
    (2,834
    )(Decrease) increase in accrued expenses and other liabilities
    
    
    (482
    )
    
    
    2,473Other, net
    
    
    3
    
    
    
    60Net cash provided by operating activities
    
    
    10,015
    
    
    
    9,588Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    0
    
    
    
    2,141Principal collected on securities available for sale
    
    
    9,803
    
    
    
    11,500Proceeds collected on maturities of securities available for sale
    
    
    63,000
    
    
    
    30,000Purchases of securities available for sale
    
    
    (70,149
    )
    
    
    (4,985
    )Purchase of Federal Home Loan Bank Stock
    
    
    (874
    )
    
    
    0Redemption of Federal Home Loan Bank Stock
    
    
    971
    
    
    
    0Proceeds from sales of real estate
    
    
    13,616
    
    
    
    266Net decrease in loans receivable
    
    
    32,695
    
    
    
    33,801Purchases of premises and equipment
    
    
    (64
    )
    
    
    (849
    )Net cash provided by investing activities
    
    
    48,998
    
    
    
    71,874Cash flows from financing activities:Decrease in deposits
    
    
    (49,820
    )
    
    
    (70,897
    )Dividends to preferred stockholders
    
    
    (650
    )
    
    
    (513
    )Proceeds from borrowings
    
    
    5,000
    
    
    
    945,500Repayment of borrowings
    
    
    (5,000
    )
    
    
    (955,500
    )(Decrease) increase in customer escrows
    
    
    (257
    )
    
    
    377Net cash used by financing activities
    
    
    (50,727
    )
    
    
    (81,033
    )Increase in cash and cash equivalents
    
    
    8,286
    
    
    
    429Cash and cash equivalents, beginning of period
    
    
    16,418
    
    
    
    15,729Cash and cash equivalents, end of period
    
    $
    24,704
    
    
    
    16,158Supplemental cash flow disclosures:Cash paid for interest
    
    $
    10,182
    
    
    
    14,619Cash paid for income taxes
    
    
    39
    
    
    
    33Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    8,254
    
    
    
    10,591Loans transferred to loans held for sale
    
    
    2,899
    
    
    
    724
  6




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 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
 (4) Derivative Instruments and Hedging Activities
  7




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(5) Fair Value Measurements
 Fair Value Measurements
 Level 1  Valuation is based upon quoted prices for identical instruments traded in
active markets that the Company has the ability to access.
 Level 2  Valuation is based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which significant assumptions are observable in the
market.
 Level 3  Valuation is generated from model-based techniques that use significant
assumptions not observable in the market and are used only to the extent that observable inputs
are not available. These unobservable assumptions reflect our own estimates of assumptions
that market participants would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar techniques.
  Carrying value at June 30, 2010(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    156,792
    
    
    
    4,136
    
    
    
    152,656
    
    
    
    0Mortgage loan commitments
    
    
    (50
    )
    
    
    0
    
    
    
    (50
    )
    
    
    0Total
    
    $
    156,742
    
    
    
    4,136
    
    
    
    152,606
    
    
    
    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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##### Table of Contents



Carrying value at June 30, 2010Three months
    
    
    Six months endedended
    
    
    June 30, 2010June 30, 2010
    
    
    Total gains(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total gains
    
    
    (losses)Loans held for sale
    
    $
    2,940
    
    
    
    0
    
    
    
    2,940
    
    
    
    0
    
    
    
    76
    
    
    
    49Mortgage servicing rights
    
    
    1,429
    
    
    
    0
    
    
    
    1,429
    
    
    
    0
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    59,523
    
    
    
    0
    
    
    
    59,523
    
    
    
    0
    
    
    
    760
    
    
    
    (7,587
    )Real estate, net(2)
    
    
    11,621
    
    
    
    0
    
    
    
    11,621
    
    
    
    0
    
    
    
    1,078
    
    
    
    (2,675
    )Total
    
    $
    75,513
    
    
    
    0
    
    
    
    75,513
    
    
    
    0
    
    
    
    1,914
    
    
    
    (10,213
    )
 Carrying value at December 31, 2009Year endedDecember 31,2009Total gains(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    (losses)Loans 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. (6) Fair Value of Financial Instruments
 Fair Value Measurements and Disclosures
 June 30, 2010Carrying
    
    Estimated
    
    Contract(Dollars in thousands)
    
    amount
    
    fair value
    
    amountFinancial assets:Cash and cash equivalents
    
    $
    24,704
    
    
    
    24,704Securities available for sale
    
    
    156,792
    
    
    
    156,792Loans held for sale
    
    
    2,940
    
    
    
    2,940Loans receivable, net
    
    
    744,629
    
    
    
    754,833Federal Home Loan Bank stock
    
    
    7,189
    
    
    
    7,189Accrued interest receivable
    
    
    4,306
    
    
    
    4,306Financial liabilities:Deposits
    
    
    746,448
    
    
    
    746,448Federal Home Loan Bank advances
    
    
    132,500
    
    
    
    140,578Accrued interest payable
    
    
    1,448
    
    
    
    1,448Off-balance sheet financial
instruments:Commitments to extend credit
    
    
    54
    
    
    
    54
    
    
    
    122,626Commitments to sell loans
    
    
    (100
    )
    
    
    (100
    )
    
    
    9,386
 9




---



##### Table of Contents



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
 (7) Comprehensive Loss
  For the three months ended June 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
    
    $
    289
    
    
    
    115
    
    
    
    174
    
    
    
    (440
    )
    
    
    (175
    )
    
    
    (265
    )Less reclassification of net gains included in net
income
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    2
    
    
    
    3Net unrealized gains (losses) arising during the period
    
    
    289
    
    
    
    115
    
    
    
    174
    
    
    
    (445
    )
    
    
    (177
    )
    
    
    (268
    )Other comprehensive income (loss)
    
    $
    289
    
    
    
    115
    
    
    
    174
    
    
    
    (445
    )
    
    
    (177
    )
    
    
    (268
    )
 For the six months ended June 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
    
    $
    (88
    )
    
    
    (35
    )
    
    
    (53
    )
    
    
    (746
    )
    
    
    (337
    )
    
    
    (409
    )Less reclassification of net gains included in net loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    5
    
    
    
    2
    
    
    
    3Net unrealized losses arising during the period
    
    
    (88
    )
    
    
    (35
    )
    
    
    (53
    )
    
    
    (751
    )
    
    
    (339
    )
    
    
    (412
    )Other comprehensive loss
    
    $
    (88
    )
    
    
    (35
    )
    
    
    (53
    )
    
    
    (751
    )
    
    
    (339
    )
    
    
    (412
    )
 (8) Securities Available For Sale
  June 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
    
    
    LossesCollateralized
mortgage obligations:FHLMC
    
    
    1
    
    
    $
    1,016
    
    
    
    (8
    )
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    1,016
    
    
    
    (8
    )Other marketable securities:Corporate preferred stock
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    175
    
    
    
    (525
    )
    
    
    175
    
    
    
    (525
    )Total temporarily impaired
securities
    
    
    1
    
    
    $
    1,016
    
    
    
    (8
    )
    
    
    1
    
    
    $
    175
    
    
    
    (525
    )
    
    $
    1,191
    
    
    
    (533
    )
 10




---



##### Table of Contents



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
    )
    Gross unrealized
    
    
    Gross unrealized(Dollars in thousands)
    
    Amortized cost
    
    
    gains
    
    
    losses
    
    
    Fair valueJune 30, 2010:Mortgage-backed securities:FHLMC
    
    $
    21,913
    
    
    
    953
    
    
    
    0
    
    
    
    22,866FNMA
    
    
    16,090
    
    
    
    775
    
    
    
    0
    
    
    
    16,865Collateralized mortgage obligations:FHLMC
    
    
    3,658
    
    
    
    85
    
    
    
    (8
    )
    
    
    3,735FNMA
    
    
    384
    
    
    
    17
    
    
    
    0
    
    
    
    40142,045
    
    
    
    1,830
    
    
    
    (8
    )
    
    
    43,867Other marketable securities:U.S. Government agency obligations
    
    
    112,096
    
    
    
    654
    
    
    
    0
    
    
    
    112,750Corporate preferred stock
    
    
    700
    
    
    
    0
    
    
    
    (525
    )
    
    
    175112,796
    
    
    
    654
    
    
    
    (525
    )
    
    
    112,925$
    154,841
    
    
    
    2,484
    
    
    
    (533
    )
    
    
    156,792
 11




---



##### Table of Contents



Amortized
    
    
    Fair(Dollars in thousands)
    
    cost
    
    
    ValueDue less than one year
    
    $
    120,925
    
    
    
    122,125Due after one year through five years
    
    
    30,003
    
    
    
    31,132Due after five years through ten years
    
    
    3,213
    
    
    
    3,360Due after ten years
    
    
    700
    
    
    
    175Total
    
    $
    154,841
    
    
    
    156,792
  (9) Investment in Mortgage Servicing Rights
  Six Months ended
    
    
    Twelve Months ended
    
    
    Six Months ended(Dollars in thousands)
    
    June 30, 2010
    
    
    December 31, 2009
    
    
    June 30, 2009Mortgage servicing rights:Balance, beginning of period
    
    $
    1,315
    
    
    
    728
    
    
    
    728Originations
    
    
    333
    
    
    
    1,143
    
    
    
    722Amortization
    
    
    (219
    )
    
    
    (556
    )
    
    
    (310
    )Balance, end of period
    
    $
    1,429
    
    
    
    1,315
    
    
    
    1,140Fair value of mortgage servicing rights
    
    $
    2,331
    
    
    
    2,339
    
    
    
    2,036
  Weighted
    
    WeightedLoan Principal
    
    Average
    
    Average
    
    Number of(Dollars in thousands)
    
    Balance
    
    Interest Rate
    
    Remaining Term
    
    LoansOriginal term 30 year fixed rate
    
    $
    226,890
    
    
    
    5.41
    %
    
    
    299
    
    
    
    1,957Original term 15 year fixed rate
    
    
    97,360
    
    
    
    4.90
    %
    
    
    117
    
    
    
    1,547Adjustable rate
    
    
    828
    
    
    
    3.39
    %
    
    
    274
    
    
    
    10
  Gross
    
    
    Accumulated
    
    
    Unamortized(Dollars in thousands)
    
    Carrying Amount
    
    
    Amortization
    
    
    Intangible AssetsMortgage servicing rights
    
    $
    4,281
    
    
    
    (2,852
    )
    
    
    1,429Total
    
    $
    4,281
    
    
    
    (2,852
    )
    
    
    1,429
 12




---



##### Table of Contents



Mortgage(Dollars in thousands)
    
    Servicing RightsYear ended December 31,2010
    
    $
    1792011
    
    
    2972012
    
    
    2582013
    
    
    2362014
    
    
    204Thereafter
    
    
    255
  (10) Loss per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 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
    
    
    3,757
    
    
    
    3,685
    
    
    
    3,747
    
    
    
    3,681Net 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
    
    
    3,757
    
    
    
    3,685
    
    
    
    3,747
    
    
    
    3,681Loss available to common shareholders
    
    $
    (8,280
    )
    
    
    (9,643
    )
    
    
    (10,567
    )
    
    
    (12,694
    )Basic loss per common share
    
    $
    (2.20
    )
    
    
    (2.62
    )
    
    
    (2.82
    )
    
    
    (3.45
    )Diluted loss per common share
    
    $
    (2.20
    )
    
    
    (2.62
    )
    
    
    (2.82
    )
    
    
    (3.45
    )
  (11) Regulatory Capital and Regulatory Oversight
     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
    
    $
    87,388Less:Net unrealized gains on certain
securities available for sale
    
    
    (2,264
    )85,124Tier I or core capitalTier I capital to adjusted total assets
    
    
    
    
    
    
    8.76
    %
    
    $
    38,881
    
    
    
    4.00
    %
    
    $
    46,243
    
    
    
    4.76
    %
    
    $
    48,601
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    11.18
    %
    
    $
    30,446
    
    
    
    4.00
    %
    
    $
    54,678
    
    
    
    7.18
    %
    
    $
    45,669
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    9,514Risk-based capital
    
    $
    94,638
    
    
    
    
    
    
    $
    60,892
    
    
    
    
    
    
    $
    33,746
    
    
    
    
    
    
    $
    76,115Risk-based capital to risk-weighted assets
    
    
    
    
    
    
    12.43
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    4.43
    %
    
    
    
    
    
    
    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) Income Taxes
  14




---



##### Table of Contents



(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 six months ended June 30, 2010:Interest income  external customers
    
    $
    25,473
    
    
    
    0
    
    
    
    0
    
    
    
    25,473Non-interest income  external customers
    
    
    3,370
    
    
    
    0
    
    
    
    0
    
    
    
    3,370Loss on limited partnerships
    
    
    (15
    )
    
    
    0
    
    
    
    0
    
    
    
    (15
    )Intersegment interest income
    
    
    0
    
    
    
    2
    
    
    
    (2
    )
    
    
    0Intersegment non-interest income
    
    
    87
    
    
    
    (9,111
    )
    
    
    9,024
    
    
    
    0Interest expense
    
    
    9,525
    
    
    
    0
    
    
    
    (2
    )
    
    
    9,523Amortization of mortgage servicing rights, net
    
    
    219
    
    
    
    0
    
    
    
    0
    
    
    
    219Other non-interest expense
    
    
    11,812
    
    
    
    403
    
    
    
    (87
    )
    
    
    12,128Income tax expense
    
    
    5,573
    
    
    
    171
    
    
    
    0
    
    
    
    5,744Net loss
    
    
    (9,107
    )
    
    
    (9,683
    )
    
    
    9,111
    
    
    
    (9,679
    )Total assets
    
    
    974,247
    
    
    
    90,402
    
    
    
    (89,406
    )
    
    
    975,243At 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 quarter ended June 30, 2010:Interest income  external customers
    
    $
    12,569
    
    
    
    0
    
    
    
    0
    
    
    
    12,569Non-interest income  external customers
    
    
    1,788
    
    
    
    0
    
    
    
    0
    
    
    
    1,788Loss on limited partnerships
    
    
    (7
    )
    
    
    0
    
    
    
    0
    
    
    
    (7
    )Intersegment interest income
    
    
    0
    
    
    
    1
    
    
    
    (1
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    (7,439
    )
    
    
    7,395
    
    
    
    0Interest expense
    
    
    4,581
    
    
    
    0
    
    
    
    (1
    )
    
    
    4,580Amortization of mortgage servicing rights, net
    
    
    110
    
    
    
    0
    
    
    
    0
    
    
    
    110Other non-interest expense
    
    
    6,064
    
    
    
    200
    
    
    
    (44
    )
    
    
    6,220Income tax expense
    
    
    6,716
    
    
    
    196
    
    
    
    0
    
    
    
    6,912Net loss
    
    
    (7,437
    )
    
    
    (7,834
    )
    
    
    7,439
    
    
    
    (7,832
    )Total assets
    
    
    974,247
    
    
    
    90,402
    
    
    
    (89,406
    )
    
    
    975,243At 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
    )
    
    
    1,053,618
 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 six month period endedJune 30, 2010
    
    
    June 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
    
    $
    162,840
    
    
    
    2,177
    
    
    
    2.70
    %
    
    $
    157,863
    
    
    
    3,311
    
    
    
    4.23
    %Loans held
for sale
    
    
    2,369
    
    
    
    58
    
    
    
    4.94
    
    
    
    3,898
    
    
    
    99
    
    
    
    5.12Mortgage
loans, net
    
    
    141,380
    
    
    
    4,045
    
    
    
    5.77
    
    
    
    155,433
    
    
    
    4,496
    
    
    
    5.83Commercial
loans, net
    
    
    552,345
    
    
    
    16,441
    
    
    
    6.00
    
    
    
    638,748
    
    
    
    19,745
    
    
    
    6.23Consumer
loans, net
    
    
    79,045
    
    
    
    2,676
    
    
    
    6.83
    
    
    
    84,236
    
    
    
    2,495
    
    
    
    5.97Cash
equivalents
    
    
    18,910
    
    
    
    2
    
    
    
    0.02
    
    
    
    10,727
    
    
    
    1
    
    
    
    0.02Federal
Home Loan Bank stock
    
    
    7,357
    
    
    
    74
    
    
    
    2.03
    
    
    
    7,286
    
    
    
    (5
    )
    
    
    (0.14
    )Total interest-earning assets
    
    
    964,246
    
    
    
    25,473
    
    
    
    5.33
    
    
    
    1,058,191
    
    
    
    30,142
    
    
    
    5.74Interest-bearing liabilities:NOW
accounts
    
    
    100,775
    
    
    
    52
    
    
    
    0.10
    
    
    
    113,439
    
    
    
    78
    
    
    
    0.14Savings
accounts
    
    
    32,422
    
    
    
    22
    
    
    
    0.14
    
    
    
    30,001
    
    
    
    19
    
    
    
    0.13Money
market accounts
    
    
    140,115
    
    
    
    762
    
    
    
    1.10
    
    
    
    98,834
    
    
    
    712
    
    
    
    1.45Certificates
    
    
    242,894
    
    
    
    2,915
    
    
    
    2.42
    
    
    
    259,645
    
    
    
    4,124
    
    
    
    3.20Brokered
deposits
    
    
    181,147
    
    
    
    2,708
    
    
    
    3.01
    
    
    
    248,010
    
    
    
    4,771
    
    
    
    3.88Advances
and other borrowings
    
    
    134,052
    
    
    
    3,064
    
    
    
    4.61
    
    
    
    176,221
    
    
    
    3,169
    
    
    
    3.63Total interest-bearing liabilities
    
    
    831,405
    
    
    
    
    
    
    
    
    
    
    
    926,150Non-interest checking
    
    
    80,544
    
    
    
    
    
    
    
    
    
    
    
    66,733Other non-interest bearing deposits
    
    
    1,663
    
    
    
    
    
    
    
    
    
    
    
    1,315Total interest-bearing liabilities and
non-interest bearing deposits
    
    $
    913,612
    
    
    
    9,523
    
    
    
    2.10
    
    
    $
    994,198
    
    
    
    12,873
    
    
    
    2.61Net interest income
    
    
    
    
    
    $
    15,950
    
    
    
    
    
    
    
    
    
    
    $
    17,269Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.23
    %
    
    
    
    
    
    
    
    
    
    
    3.13
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.34
    %
    
    
    
    
    
    
    
    
    
    
    3.29
    %
 Provision for Loan Losses
   21




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##### Table of Contents



(Dollars in thousands)
    
    2010
    
    
    2009Balance at March 31,
    
    $
    29,284
    
    
    $
    17,494Provision
    
    
    4,360
    
    
    
    13,304Charge offs:One-to-four family
    
    
    (117
    )
    
    
    (65
    )Consumer
    
    
    (84
    )
    
    
    (413
    )Commercial business
    
    
    (4,681
    )
    
    
    (5,167
    )Commercial real estate
    
    
    (2,818
    )
    
    
    (320
    )Recoveries
    
    
    83
    
    
    
    570Balance at June 30,
    
    
    26,027
    
    
    
    25,403General allowance
    
    
    11,104
    
    
    
    12,500Specific allowance
    
    
    14,923
    
    
    
    12,90326,027
    
    
    
    25,403
 (Dollars in thousands)
    
    2010
    
    
    2009Balance at January 1,
    
    $
    23,811
    
    
    $
    21,257Provision
    
    
    10,893
    
    
    
    19,873Charge offs:One-to-four family
    
    
    (168
    )
    
    
    (65
    )Consumer
    
    
    (390
    )
    
    
    (1,106
    )Commercial business
    
    
    (4,742
    )
    
    
    (5,352
    )Commercial real estate
    
    
    (3,478
    )
    
    
    (9,781
    )Recoveries
    
    
    101
    
    
    
    577Balance at June 30,
    
    $
    26,027
    
    
    $
    25,403
 Non-Interest Income
   Non-Interest Expense
  22




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##### Table of Contents



Income Tax Expense
   Non-Performing Assets
  23




---



##### Table of Contents



June 30,
    
    
    March 31,
    
    
    December 31,(Dollars in thousands)
    
    2010
    
    
    2010
    
    
    2009Non-Accruing Loans:One-to-four family real estate
    
    $
    2,431
    
    
    $
    2,194
    
    
    $
    2,132Commercial real estate
    
    
    31,916
    
    
    
    43,596
    
    
    
    37,122Consumer
    
    
    364
    
    
    
    3,499
    
    
    
    4,086Commercial business
    
    
    24,812
    
    
    
    28,709
    
    
    
    17,787Total
    
    
    59,523
    
    
    
    77,998
    
    
    
    61,127Other assetsForeclosed and Repossessed Assets:One-to-four family real estate
    
    
    934
    
    
    
    1,396
    
    
    
    1,011Consumer
    
    
    0
    
    
    
    4
    
    
    
    5Commercial real estate
    
    
    10,687
    
    
    
    11,328
    
    
    
    15,246Total non-performing assets
    
    $
    71,144
    
    
    $
    90,726
    
    
    $
    77,389Total as a percentage of total assets
    
    
    7.30
    %
    
    
    8.83
    %
    
    
    7.47
    %Total non-performing loans
    
    $
    59,523
    
    
    $
    77,998
    
    
    $
    61,127Total as a percentage of total loans receivable, net
    
    7.99%
    
    
    10.07
    %
    
    
    7.65
    %Allowance for loan loss to non-performing loans
    
    
    43.73
    %
    
    
    37.54
    %
    
    
    38.95
    %Delinquency Data:Delinquencies (1)30+ days
    
    $
    14,819
    
    
    $
    7,083
    
    
    $
    11,14090+ days
    
    
    0
    
    
    
    0
    
    
    
    0Delinquencies as a percentage of
loan and lease portfolio (1)30+ days
    
    
    1.95
    %
    
    
    0.90
    %
    
    
    1.37
    %90+ days
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
 
 (1)
    
    Excludes non-accrual loans.   (Dollars in thousands)Non-performing loansMarch 31, 2010
    
    $
    77,998Classified as non-performing
    
    
    8,188Charge offs
    
    
    (7,700
    )Principal payments received
    
    
    (11,168
    )Classified as accruing
    
    
    (1,131
    )Transferred to real estate owned
    
    
    (6,664
    )June 30, 2010
    
    $
    59,523Foreclosed and repossessed assetsMarch 31, 2010
    
    $
    12,728Transferred from non-performing loans
    
    
    6,664Other foreclosures/repossessions
    
    
    519Real estate sold
    
    
    (8,190
    )Net loss on sale of assets
    
    
    (33
    )Write downs
    
    
    (67
    )June 30, 2010
    
    $
    11,621
   24




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##### Table of Contents



(Dollars in thousands)Non-performing loansDecember 31, 2009
    
    $
    61,127Classified as non-performing
    
    
    28,095Charge offs
    
    
    (8,778
    )Principal payments received
    
    
    (12,127
    )Classified as accruing
    
    
    (1,360
    )Transferred to real estate owned
    
    
    (7,434
    )June 30, 2010
    
    $
    59,523Foreclosed and repossessed assetsDecember 31, 2009
    
    $
    16,262Transferred from non-performing loans
    
    
    7,434Other foreclosures/repossessions
    
    
    909Net gain on sale of assets
    
    
    733Real estate sold
    
    
    (13,632
    )Write downs
    
    
    (85
    )June 30, 2010
    
    $
    11,621
  Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    Principal(Dollars in thousands)
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of LoanJune 30,
    
    
    
    
    
    March 31,
    
    
    
    
    
    December 31,Industry Type
    
    #
    
    2010
    
    #
    
    2010
    
    #
    
    2009Residential developments
    
    
    7
    
    
    $
    11,895
    
    
    
    8
    
    
    $
    12,914
    
    
    
    7
    
    
    $
    12,030Single family homes
    
    
    2
    
    
    
    2,856
    
    
    
    2
    
    
    
    3,088
    
    
    
    2
    
    
    
    3,088Hotels
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999
    
    
    
    1
    
    
    
    4,999Alternative fuel plants
    
    
    1
    
    
    
    4,992
    
    
    
    2
    
    
    
    12,889
    
    
    
    2
    
    
    
    12,834Shopping centers/retail
    
    
    2
    
    
    
    1,095
    
    
    
    2
    
    
    
    1,121
    
    
    
    2
    
    
    
    1,136Restaurants/bar
    
    
    2
    
    
    
    707
    
    
    
    3
    
    
    
    2,258
    
    
    
    4
    
    
    
    2,436Office building
    
    
    1
    
    
    
    5,372
    
    
    
    1
    
    
    
    6,327
    
    
    
    1
    
    
    
    59916
    
    
    $
    31,916
    
    
    
    19
    
    
    $
    43,596
    
    
    
    19
    
    
    $
    37,122
  Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    Principal(Dollars in thousands)
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of Loan
    
    
    
    
    
    Amount of LoanJune 30,
    
    
    
    
    
    March 31,
    
    
    
    
    
    December 31,Industry Type
    
    #
    
    2010
    
    #
    
    2010
    
    #
    
    2009Construction/development
    
    
    7
    
    
    $
    7,366
    
    
    
    8
    
    
    $
    5,836
    
    
    
    5
    
    
    $
    4,094Finance
    
    
    2
    
    
    
    650
    
    
    
    4
    
    
    
    10,461
    
    
    
    2
    
    
    
    8,764Alternative fuels
    
    
    1
    
    
    
    926
    
    
    
    1
    
    
    
    791
    
    
    
    1
    
    
    
    756Retail
    
    
    1
    
    
    
    2,504
    
    
    
    1
    
    
    
    2,504
    
    
    
    1
    
    
    
    32Banking
    
    
    2
    
    
    
    8,233
    
    
    
    2
    
    
    
    8,233
    
    
    
    1
    
    
    
    3,248Entertainment
    
    
    1
    
    
    
    487
    
    
    
    1
    
    
    
    884
    
    
    
    1
    
    
    
    893Utilities
    
    
    1
    
    
    
    4,646
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    015
    
    
    $
    24,812
    
    
    
    17
    
    
    $
    28,709
    
    
    
    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(Dollars in thousands)
    
    Market ValueBasis point change in interest rates
    
    100
    
    
    0
    
    
    +100
    
    
    +200Total market risk sensitive assets
    
    $
    959,184
    
    
    
    944,702
    
    
    
    929,613
    
    
    
    910,914Total market risk sensitive liabilities
    
    
    898,057
    
    
    
    884,405
    
    
    
    870,342
    
    
    
    856,938Off-balance sheet financial instruments
    
    
    60
    
    
    
    0
    
    
    
    441
    
    
    
    738Net market risk
    
    $
    61,067
    
    
    
    60,297
    
    
    
    58,830
    
    
    
    53,238Percentage change from current market value
    
    
    1.28
    %
    
    
    0.00
    %
    
    
    (2.43)
    %
    
    
    (11.71)
    %
   27




---



##### Table of Contents



Asset/Liability Management
  (Dollars in thousands)ProjectedRate Shock in
    
    Change in Net
    
    PercentageBasis Points
    
    Interest Income
    
    Change+200
    
    
    107
    
    
    
    0.33
    %+100
    
    
    215
    
    
    
    0.67
    %0
    
    
    0
    
    
    
    0.00
    %100
    
    
    (546
    )
    
    
    (1.70
    )%
     Off-Balance Sheet Arrangements
  
 Item 4: Controls and Procedures
 Evaluation of disclosure controls and procedures.
 28




---



##### Table of Contents



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




---



##### Table of Contents



SIGNATURES
  HMN FINANCIAL, INC.RegistrantDate: August 2, 2010
    
    By:
    
    /s/ Bradley Krehbiel

Bradley Krehbiel, President(Principal Executive Officer and
Duly Authorized Representative)Date: August 2, 2010
    
    By:
    
    /s/ Jon Eberle

Jon 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
 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). 33