##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    Outstanding at April 21, 2008Common stock, $0.01 par value
    
    4,167,799




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##### 



HMN FINANCIAL, INC.
 CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1:
    
    Financial Statements (unaudited)Consolidated Balance Sheets at March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income for the Three Months Ended March
31, 2008 and 2007
    
    
    4Consolidated Statement of Stockholders Equity and Comprehensive
Income for the Three Month Period Ended March 31, 2008
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2008 and 2007
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2:
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14Item 3:
    
    Quantitative and Qualitative Disclosures about Market Risk
Discussion included in Item 2 under Market Risk
    
    
    20Item 4:
    
    Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1:
    
    Legal Proceedings
    
    
    23Item 1A:
    
    Risk Factors
    
    
    23Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3:
    
    Defaults Upon Senior Securities
    
    
    23Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5:
    
    Other Information
    
    
    23Item 6:
    
    Exhibits
    
    
    23Signatures
    
    
    
    
    24Certification of CEOCertification of CFOSection 1350 Certification of CEO and CFO
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1 : Financial Statements
 
 HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 March 31,
    
    
    December 31,(dollars in thousands, except per share amounts))
    
    2008
    
    
    2007(unaudited)AssetsCash and cash equivalents
    
    $
    27,536
    
    
    
    23,718Securities available for sale:Mortgage-backed and related securities
(amortized cost $17,943 and $18,786)
    
    
    17,716
    
    
    
    18,468Other marketable securities
(amortized cost $135,451 and $165,430)
    
    
    139,679
    
    
    
    167,720157,395
    
    
    
    186,188Loans held for sale
    
    
    3,090
    
    
    
    3,261Loans receivable, net
    
    
    877,756
    
    
    
    865,088Accrued interest receivable
    
    
    6,426
    
    
    
    6,893Real estate, net
    
    
    4,184
    
    
    
    2,214Federal Home Loan Bank stock, at cost
    
    
    5,580
    
    
    
    6,198Mortgage servicing rights, net
    
    
    1,110
    
    
    
    1,270Premises and equipment, net
    
    
    12,401
    
    
    
    12,024Goodwill
    
    
    3,801
    
    
    
    3,801Prepaid expenses and other assets
    
    
    1,600
    
    
    
    1,680Deferred tax asset, net
    
    
    3,890
    
    
    
    4,719Total assets
    
    $
    1,104,769
    
    
    
    1,117,054Liabilities and Stockholders EquityDeposits
    
    $
    892,977
    
    
    
    888,118Federal Home Loan Bank advances
    
    
    97,500
    
    
    
    112,500Accrued interest payable
    
    
    9,092
    
    
    
    9,515Customer escrows
    
    
    1,565
    
    
    
    866Accrued expenses and other liabilities
    
    
    4,247
    
    
    
    7,927Total liabilities
    
    
    1,005,381
    
    
    
    1,018,926Commitments and contingenciesStockholders equity:Serial preferred stock ($.01 par value):Authorized 500,000 shares; none issued and outstanding
    
    
    0
    
    
    
    0Common stock ($.01 par value):Authorized 11,000,000; issued shares 9,128,662
    
    
    91
    
    
    
    91Additional paid-in capital
    
    
    57,662
    
    
    
    58,049Retained earnings, subject to certain restrictions
    
    
    111,514
    
    
    
    110,943Accumulated other comprehensive income
    
    
    2,367
    
    
    
    1,167Unearned employee stock ownership plan shares
    
    
    (3,916
    )
    
    
    (3,965
    )Treasury stock, at cost 4,960,863 and 4,953,045 shares
    
    
    (68,330
    )
    
    
    (68,157
    )Total stockholders equity
    
    
    99,388
    
    
    
    98,128Total liabilities and stockholders equity
    
    $
    1,104,769
    
    
    
    1,117,054
  3




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
 Three Months EndedMarch 31,(dollars in thousands, except per share amounts)
    
    2008
    
    
    2007Interest income:Loans receivable
    
    $
    15,520
    
    
    
    15,745Securities available for sale:Mortgage-backed and related
    
    
    224
    
    
    
    111Other marketable
    
    
    1,910
    
    
    
    1,896Cash equivalents
    
    
    57
    
    
    
    443Other
    
    
    80
    
    
    
    84Total interest income
    
    
    17,791
    
    
    
    18,279Interest expense:Deposits
    
    
    7,870
    
    
    
    6,877Federal Home Loan Bank advances
    
    
    1,237
    
    
    
    1,618Total interest expense
    
    
    9,107
    
    
    
    8,495Net interest income
    
    
    8,684
    
    
    
    9,784Provision for loan losses
    
    
    1,560
    
    
    
    455Net interest income after provision for loan losses
    
    
    7,124
    
    
    
    9,329Non-interest income:Fees and service charges
    
    
    793
    
    
    
    696Loan servicing fees
    
    
    242
    
    
    
    271Gain on sales of loans
    
    
    156
    
    
    
    796Other
    
    
    327
    
    
    
    305Total non-interest income
    
    
    1,518
    
    
    
    2,068Non-interest expense:Compensation and benefits
    
    
    3,360
    
    
    
    3,361Occupancy
    
    
    1,132
    
    
    
    1,084Advertising
    
    
    124
    
    
    
    106Data processing
    
    
    342
    
    
    
    295Amortization of mortgage servicing rights, net
    
    
    160
    
    
    
    182Other
    
    
    1,134
    
    
    
    922Total non-interest expense
    
    
    6,252
    
    
    
    5,950Income before income tax expense
    
    
    2,390
    
    
    
    5,447Income tax expense
    
    
    902
    
    
    
    2,179Net income
    
    $
    1,488
    
    
    
    3,268Basic earnings per share
    
    $
    0.41
    
    
    
    0.87Diluted earnings per share
    
    $
    0.39
    
    
    
    0.82
  4




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity and Comprehensive Income
For the Three Month Period Ended March 31, 2008
 UnearnedEmployeeAccumulated
    
    
    Stock
    
    
    
    
    
    
    TotalAdditional
    
    
    
    
    
    
    Other
    
    
    Ownership
    
    
    
    
    
    
    Stock-Common
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Plan
    
    
    Treasury
    
    
    Holders(dollars in thousands)
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Shares
    
    
    Stock
    
    
    EquityBalance, December 31, 2007
    
    $
    91
    
    
    
    58,049
    
    
    
    110,943
    
    
    
    1,167
    
    
    
    (3,965
    )
    
    
    (68,157
    )
    
    
    98,128Net income
    
    
    
    
    
    
    
    
    
    
    1,488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,488Other comprehensive income, net of tax:Net unrealized gains on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    1,200Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,688Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (723
    )
    
    
    (723
    )Unearned compensation restricted stock awards
    
    
    
    
    
    
    (550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    0Stock compensation tax benefits
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Amortization of restricted stock awards
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Dividends paid
    
    
    
    
    
    
    
    
    
    
    (917
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (917
    )Earned employee stock ownership plan shares
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    106Balance, March 31, 2008
    
    $
    91
    
    
    
    57,662
    
    
    
    111,514
    
    
    
    2,367
    
    
    
    (3,916
    )
    
    
    (68,330
    )
    
    
    99,388
  5




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##### Table of Contents



HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 Three Months EndedMarch 31,(dollars in thousands)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    1,488
    
    
    
    3,268Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses
    
    
    1,560
    
    
    
    455Depreciation
    
    
    448
    
    
    
    483Amortization of discounts, net
    
    
    (542
    )
    
    
    (730
    )Amortization of deferred loan fees
    
    
    (203
    )
    
    
    (208
    )Amortization of core deposit intangible
    
    
    0
    
    
    
    29Amortization of mortgage servicing rights, net
    
    
    160
    
    
    
    182Capitalized mortgage servicing rights
    
    
    0
    
    
    
    (4
    )Gain on sales of real estate
    
    
    (156
    )
    
    
    (27
    )Gain on sales of loans
    
    
    (156
    )
    
    
    (796
    )Proceeds from sales of real estate
    
    
    1,381
    
    
    
    361Proceeds from sale of loans held for sale
    
    
    16,295
    
    
    
    18,764Disbursements on loans held for sale
    
    
    (15,853
    )
    
    
    (7,556
    )Amortization of restricted stock awards
    
    
    98
    
    
    
    76Amortization of unearned ESOP shares
    
    
    49
    
    
    
    48Earned employee stock ownership shares priced above original cost
    
    
    57
    
    
    
    94Stock option compensation
    
    
    8
    
    
    
    7Decrease (increase) in accrued interest receivable
    
    
    467
    
    
    
    (1,145
    )Increase (decrease) in accrued interest payable
    
    
    (423
    )
    
    
    1,027Decrease in other assets
    
    
    49
    
    
    
    617(Decrease) increase in other liabilities
    
    
    (3,680
    )
    
    
    38Other, net
    
    
    19
    
    
    
    124Net cash provided by operating activities
    
    
    1,066
    
    
    
    15,107Cash flows from investing activities:Principal collected on securities available for sale
    
    
    852
    
    
    
    275Proceeds collected on maturities of securities available for sale
    
    
    30,000
    
    
    
    45,000Purchases of securities available for sale
    
    
    0
    
    
    
    (109,193
    )Purchases of Federal Home Loan Bank Stock
    
    
    (1,374
    )
    
    
    (720
    )Redemption of Federal Home Loan Bank Stock
    
    
    1,992
    
    
    
    1,165Net increase in loans receivable
    
    
    (17,311
    )
    
    
    (44,351
    )Purchases of premises and equipment
    
    
    (836
    )
    
    
    (238
    )Net cash provided (used) by investing activities
    
    
    13,323
    
    
    
    (108,062
    )Cash flows from financing activities:Increase in deposits
    
    
    5,370
    
    
    
    146,090Purchase of treasury stock
    
    
    (723
    )
    
    
    (997
    )Stock options exercised
    
    
    0
    
    
    
    88Excess tax benefit from options exercised
    
    
    0
    
    
    
    58Dividends to stockholders
    
    
    (917
    )
    
    
    (946
    )Proceeds from borrowings
    
    
    51,800
    
    
    
    24,500Repayment of borrowings
    
    
    (66,800
    )
    
    
    (34,500
    )Increase in customer escrows
    
    
    699
    
    
    
    519Net cash (used) provided by financing activities
    
    
    (10,571
    )
    
    
    134,812Increase in cash and cash equivalents
    
    
    3,818
    
    
    
    41,857Cash and cash equivalents, beginning of period
    
    
    23,718
    
    
    
    43,776Cash and cash equivalents, end of period
    
    $
    27,536
    
    
    
    85,633Supplemental cash flow disclosures:Cash paid for interest
    
    $
    9,530
    
    
    
    7,468Cash paid for income taxes
    
    
    2,465
    
    
    
    1,010Supplemental noncash flow disclosures:Transfer of loans to real estate
    
    
    3,205
    
    
    
    3,507Loans transferred to loans held for sale
    
    
    81
    
    
    
    10,327
  6




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HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 March 31, 2008 and 2007
 (1) HMN Financial, Inc.
   (2) Basis of Preparation
   (3) New Accounting Standards
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115.
 Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51. ARB No. 51
 7




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##### Table of Contents



Business Combinations. Business Combinations
 Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133.
 (4) Derivative Instruments and Hedging Activities
   (5) Fair Value Measurements
 Fair Value Measurements
 Level 1
 Level 2
 Level 3
  8




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##### Table of Contents



Carrying value at March 31, 2008(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Securities available for sale
    
    $
    157,395
    
    
    
    13,889
    
    
    
    143,506
    
    
    
    0Mortgage loan commitments
    
    
    18
    
    
    
    0
    
    
    
    18
    
    
    
    0Total
    
    $
    157,413
    
    
    
    13,889
    
    
    
    143,524
    
    
    
    0
  Three months endedCarrying value at March 31, 2008
    
    
    March 31, 2008(Dollars in thousands)
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total lossesLoans held for sale
    
    $
    3,090
    
    
    
    0
    
    
    
    3,090
    
    
    
    0
    
    
    
    0Mortgage servicing rights
    
    
    1,110
    
    
    
    0
    
    
    
    1,110
    
    
    
    0
    
    
    
    0Loans (1)
    
    
    23,995
    
    
    
    0
    
    
    
    23,995
    
    
    
    0
    
    
    
    (1,316
    )Real estate, net(2)
    
    
    4,184
    
    
    
    0
    
    
    
    4,184
    
    
    
    0
    
    
    
    0Total
    
    $
    32,379
    
    
    
    0
    
    
    
    32,379
    
    
    
    0
    
    
    
    (1,316
    )
 
 (1)
    
    Represents carrying value and related write-downs of loans for which adjustments are based
on the appraised value of the collateral. The carrying value of loans fully charged-off is zero.(2)
    
    Represents the fair value and related losses of foreclosed real estate and other collateral
owned that were measured at fair value subsequent to their initial classification as foreclosed
assets. (6) Comprehensive Income
  For the period ended March 31,2008
    
    
    2007(Dollars in thousands)
    
    Before tax
    
    
    Tax effect
    
    
    Net of tax
    
    
    Before tax
    
    
    Tax effect
    
    
    Net of taxSecurities available for sale:Net unrealized gains
arising during the period
    
    $
    2,029
    
    
    
    829
    
    
    
    1,200
    
    
    
    373
    
    
    
    148
    
    
    
    225Other comprehensive income
    
    $
    2,029
    
    
    
    829
    
    
    
    1,200
    
    
    
    373
    
    
    
    148
    
    
    
    225
 (7) Securities Available For Sale
  Less than twelve months
    
    
    Twelve months or more
    
    
    Total# of
    
    
    Fair
    
    
    Unrealized
    
    
    #of
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized(Dollars in thousands)
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Investments
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage backed securities:FHLMC
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    1
    
    
    $
    2,453
    
    
    
    (406
    )
    
    
    2,453
    
    
    
    (406
    )FNMA
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3
    
    
    
    2,759
    
    
    
    (147
    )
    
    
    2,759
    
    
    
    (147
    )Total temporarily impaired
Securities
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    4
    
    
    $
    5,212
    
    
    
    (553
    )
    
    
    5,212
    
    
    
    (553
    )
  9




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(8) Investment in Mortgage Servicing Rights
  Three months ended
    
    
    Twelve months ended
    
    
    Three months ended(Dollars in thousands)
    
    March 31, 2008
    
    
    December 31, 2007
    
    
    March 31, 2007Mortgage servicing rights:Balance, beginning of period
    
    $
    1,270
    
    
    
    1,958
    
    
    
    1,958Originations
    
    
    0
    
    
    
    18
    
    
    
    4Amortization
    
    
    (160
    )
    
    
    (706
    )
    
    
    (182
    )Balance, end of period
    
    
    1,110
    
    
    
    1,270
    
    
    
    1,780Fair value of mortgage servicing rights
    
    $
    2,875
    
    
    
    3,261
    
    
    
    3,809
  Loan Principal
    
    Weighted Average
    
    Weighted Average(Dollars in thousands)
    
    Balance
    
    Interest Rate
    
    Remaining Term
    
    Number of LoansOriginal term 30 year fixed rate
    
    $
    209,352
    
    
    
    5.87
    %
    
    
    290
    
    
    
    1,941Original term 15 year fixed rate
    
    
    113,915
    
    
    
    5.17
    %
    
    
    113
    
    
    
    1,796Adjustable rate
    
    
    2,801
    
    
    
    6.05
    %
    
    
    301
    
    
    
    25
 (9) Intangible Assets
  Gross
    
    
    
    
    
    UnamortizedCarrying
    
    Accumulated
    
    Intangible(Dollars in thousands)
    
    Amount
    
    Amortization
    
    AssetsAmortized intangible assets:Mortgage servicing rights
    
    $
    3,851
    
    
    
    (2,741
    )
    
    
    1,110
  MortgageServicing(Dollars in thousands)
    
    RightsYear ended December 31,2008
    
    $
    3802009
    
    
    3762010
    
    
    2062011
    
    
    1002012
    
    
    39
  10




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##### Table of Contents



(10) Earnings per Share
  Three months ended March 31,2008
    
    
    2007Weighted average number of common shares outstanding
used in basic earnings per common share calculation
    
    
    3,650,396
    
    
    
    3,775,843Net dilutive effect of:Options
    
    
    96,927
    
    
    
    172,043Restricted stock awards
    
    
    27,873
    
    
    
    19,541Weighted average number of shares outstanding
adjusted for effect of dilutive securities
    
    
    3,775,196
    
    
    
    3,967,427Income available to common shareholders
    
    $
    1,488,000
    
    
    
    3,268,000Basic earnings per common share
    
    $
    0.41
    
    
    
    0.87Diluted earnings per common share
    
    $
    0.39
    
    
    
    0.82
 (11) Regulatory Capital
     11




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##### Table of Contents



To Be Well CapitalizedRequired to be
    
    
    
    
    
    
    
    
    
    
    Under PromptAdequately
    
    
    
    
    
    
    
    
    
    
    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
    
    $
    96,097Less:Net unrealized gains on certain
securities available for sale
    
    
    (2,367
    )Goodwill
    
    
    (3,801
    )Tier I or core capital
    
    
    89,929Tier I capital to adjusted total assets
    
    
    
    
    
    
    8.22
    %
    
    
    43,776
    
    
    
    4.00
    %
    
    
    46,153
    
    
    
    4.22
    %
    
    
    54,720
    
    
    
    5.00
    %Tier I capital to risk-weighted assets
    
    
    
    
    
    
    10.48
    %
    
    
    34,339
    
    
    
    4.00
    %
    
    
    55,590
    
    
    
    6.48
    %
    
    
    51,508
    
    
    
    6.00
    %Plus:Allowable allowance for loan losses
    
    
    8,720Risk-based capital
    
    $
    98,649
    
    
    
    
    
    
    
    68,677
    
    
    
    
    
    
    
    29,972
    
    
    
    
    
    
    
    85,846Risk-based capital to risk-weighted assets
    
    
    
    
    
    
    11.49
    %
    
    
    
    
    
    
    8.00
    %
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    10.00
    %
 
 (1)
    
    Based upon the Banks adjusted total assets for the tangible and core capital ratios and risk-weighted assets for the risk-based capital ratio. (12) Commitments and Contingencies
   (13) Business Segments
   12




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##### Table of Contents



Home Federal
    
    
    
    
    
    
    
    
    
    
    Consolidated(Dollars in thousands)
    
    Savings Bank
    
    
    Other
    
    
    Eliminations
    
    
    TotalAt or for the quarter ended March 31, 2008:Interest income  external customers
    
    $
    17,787
    
    
    
    4
    
    
    
    0
    
    
    
    17,791Non-interest income  external customers
    
    
    1,513
    
    
    
    0
    
    
    
    0
    
    
    
    1,513Earnings on limited partnerships
    
    
    5
    
    
    
    0
    
    
    
    0
    
    
    
    5Intersegment interest income
    
    
    0
    
    
    
    43
    
    
    
    (43
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    1,561
    
    
    
    (1,605
    )
    
    
    0Interest expense
    
    
    9,150
    
    
    
    0
    
    
    
    (43
    )
    
    
    9,107Amortization of mortgage servicing rights, net
    
    
    160
    
    
    
    0
    
    
    
    0
    
    
    
    160Other non-interest expense
    
    
    5,959
    
    
    
    177
    
    
    
    (44
    )
    
    
    6,092Income tax expense (benefit)
    
    
    957
    
    
    
    (55
    )
    
    
    0
    
    
    
    902Net income
    
    
    1,563
    
    
    
    1,486
    
    
    
    (1,561
    )
    
    
    1,488Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,100,736
    
    
    
    100,316
    
    
    
    (96,283
    )
    
    
    1,104,769At or for the quarter ended March 31, 2007:Interest income  external customers
    
    $
    18,258
    
    
    
    21
    
    
    
    0
    
    
    
    18,279Non-interest income  external customers
    
    
    2,064
    
    
    
    0
    
    
    
    0
    
    
    
    2,064Earnings on limited partnerships
    
    
    4
    
    
    
    0
    
    
    
    0
    
    
    
    4Intersegment interest income
    
    
    0
    
    
    
    41
    
    
    
    (41
    )
    
    
    0Intersegment non-interest income
    
    
    44
    
    
    
    3,325
    
    
    
    (3,369
    )
    
    
    0Interest expense
    
    
    8,536
    
    
    
    0
    
    
    
    (41
    )
    
    
    8,495Amortization of mortgage servicing rights, net
    
    
    182
    
    
    
    0
    
    
    
    0
    
    
    
    182Other non-interest expense
    
    
    5,641
    
    
    
    170
    
    
    
    (43
    )
    
    
    5,768Income tax expense (benefit)
    
    
    2,229
    
    
    
    (50
    )
    
    
    0
    
    
    
    2,179Net income
    
    
    3,327
    
    
    
    3,267
    
    
    
    (3,326
    )
    
    
    3,268Goodwill
    
    
    3,801
    
    
    
    0
    
    
    
    0
    
    
    
    3,801Total assets
    
    
    1,112,136
    
    
    
    95,417
    
    
    
    (90,499
    )
    
    
    1,117,054
 13




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##### Table of Contents



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




---



##### Table of Contents



Critical Accounting Policies
  Allowance for Loan Losses and Related Provision
   Mortgage Servicing Rights
  15




---



##### Table of Contents



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




---



##### Table of Contents



For the three month period endedMarch 31, 2008
    
    
    March 31, 2007Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestOutstanding
    
    
    Earned/
    
    
    Yield/
    
    
    Outstanding
    
    
    Earned/
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Paid
    
    
    Rate
    
    
    Balance
    
    
    Paid
    
    
    RateInterest-earning assets:Securities available for sale
    
    $
    169,570
    
    
    
    2,134
    
    
    
    5.06
    %
    
    $
    158,548
    
    
    
    2,007
    
    
    
    5.13
    %Loans held for sale
    
    
    2,197
    
    
    
    32
    
    
    
    5.84
    
    
    
    1,257
    
    
    
    20
    
    
    
    6.39Mortgage loans, net
    
    
    157,778
    
    
    
    2,442
    
    
    
    6.21
    
    
    
    138,872
    
    
    
    2,102
    
    
    
    6.14Commercial loans, net
    
    
    630,868
    
    
    
    11,490
    
    
    
    7.33
    
    
    
    562,594
    
    
    
    11,738
    
    
    
    8.46Consumer loans, net
    
    
    83,641
    
    
    
    1,556
    
    
    
    7.48
    
    
    
    86,471
    
    
    
    1,886
    
    
    
    8.84Cash equivalents
    
    
    14,175
    
    
    
    57
    
    
    
    1.61
    
    
    
    33,924
    
    
    
    442
    
    
    
    5.29Federal Home Loan Bank stock
    
    
    6,587
    
    
    
    80
    
    
    
    4.91
    
    
    
    8,036
    
    
    
    84
    
    
    
    4.24Total interest-earning assets
    
    
    1,064,816
    
    
    
    17,791
    
    
    
    6.72
    
    
    
    989,702
    
    
    
    18,279
    
    
    
    7.49Interest-bearing liabilities:Noninterest checking
    
    
    52,633
    
    
    
    0
    
    
    
    0.00
    
    
    
    56,039
    
    
    
    0
    
    
    
    0.00NOW accounts
    
    
    121,675
    
    
    
    607
    
    
    
    2.00
    
    
    
    106,921
    
    
    
    805
    
    
    
    3.05Savings accounts
    
    
    40,716
    
    
    
    134
    
    
    
    1.32
    
    
    
    40,697
    
    
    
    136
    
    
    
    1.35Money market accounts
    
    
    160,489
    
    
    
    1,120
    
    
    
    2.80
    
    
    
    197,830
    
    
    
    1,802
    
    
    
    3.69Certificates
    
    
    246,943
    
    
    
    2,734
    
    
    
    4.45
    
    
    
    235,589
    
    
    
    2,485
    
    
    
    4.28Brokered deposits
    
    
    262,193
    
    
    
    3,275
    
    
    
    5.02
    
    
    
    145,179
    
    
    
    1,649
    
    
    
    4.61Federal Home Loan Bank advances
    
    
    105,330
    
    
    
    1,237
    
    
    
    4.72
    
    
    
    150,414
    
    
    
    1,618
    
    
    
    4.36Other
    
    
    1,272
    
    
    
    0
    
    
    
    0.00
    
    
    
    1,058
    
    
    
    0
    
    
    
    0.00Total interest-bearing liabilities
    
    
    991,251
    
    
    
    9,107
    
    
    
    3.70
    
    
    
    933,727
    
    
    
    8,495
    
    
    
    3.69Net interest income
    
    
    
    
    
    $
    8,684
    
    
    
    
    
    
    
    
    
    
    $
    9,784Net interest rate spread
    
    
    
    
    
    
    
    
    
    
    3.02
    %
    
    
    
    
    
    
    
    
    
    
    3.80
    %Net earning assets
    
    $
    73,565
    
    
    
    
    
    
    
    
    
    
    $
    55,975Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.28
    %
    
    
    
    
    
    
    
    
    
    
    4.01
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    107.42
    %
    
    
    
    
    
    
    
    
    
    
    105.99
    %
 Provision for Loan Losses
  17




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##### Table of Contents



(in thousands)
    
    2008
    
    
    2007Balance at January 1,
    
    $
    12,438
    
    
    $
    9,873Provision
    
    
    1,560
    
    
    
    455Charge offs:One-to-four family
    
    
    (60
    )
    
    
    0Consumer
    
    
    (22
    )
    
    
    (580
    )Commercial
    
    
    (24
    )
    
    
    (42
    )Recoveries
    
    
    21
    
    
    
    50Balance at March 31,
    
    $
    13,913
    
    
    $
    9,756
  Non-Interest Income
  Non-Interest Expense
  Income Tax Expense
  18




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##### Table of Contents



Non-Performing Assets
  March 31,
    
    
    December 31,(Dollars in thousands)
    
    2008
    
    
    2007Non-Accruing Loans:One-to-four family real estate
    
    $
    802
    
    
    $
    1,196Commercial real estate
    
    
    17,983
    
    
    
    15,641Consumer
    
    
    1,380
    
    
    
    1,094Commercial business
    
    
    3,830
    
    
    
    1,723Total
    
    
    23,995
    
    
    
    19,654Other assets
    
    
    34
    
    
    
    34Foreclosed and Repossessed Assets:One-to-four family real estate
    
    
    2,852
    
    
    
    901Consumer
    
    
    19
    
    
    
    33Commercial real estate
    
    
    1,332
    
    
    
    1,313Total non-performing assets
    
    $
    28,232
    
    
    $
    21,935Total as a percentage of total assets
    
    
    2.56
    %
    
    
    1.96
    %Total non-performing loans
    
    $
    23,995
    
    
    $
    19,654Total as a percentage of total loans receivable, net
    
    
    2.73
    %
    
    
    2.27
    %Allowance for loan loss to non-performing loans
    
    
    57.98
    %
    
    
    63.28
    %
   Dividends
   Record date
    
    Payable date
    
    Dividend per share
    
    Dividend Payout RatioFebruary 15, 2008
    
    March 7, 2008
    
    $
    0.25
    
    
    
    34.25
    %
   19




---



##### Table of Contents



Liquidity
     Market Risk
  Rate Shock Table
  20




---



##### Table of Contents



(Dollars in thousands)
    
    Market ValueBasis point change in interest rates
    
    
    -200
    
    
    
    -100
    
    
    
    0
    
    
    
    +100
    
    
    
    +200Total market risk sensitive assets
    
    $
    1,116,624
    
    
    
    1,104,951
    
    
    
    1,090,390
    
    
    
    1,073,196
    
    
    
    1,055,512Total market risk sensitive liabilities
    
    
    1,016,465
    
    
    
    1,002,217
    
    
    
    991,167
    
    
    
    980,709
    
    
    
    971,768Off-balance sheet financial instruments
    
    
    12
    
    
    
    15
    
    
    
    0
    
    
    
    263
    
    
    
    502Net market risk
    
    $
    100,147
    
    
    
    102,719
    
    
    
    99,223
    
    
    
    92,224
    
    
    
    83,242Percentage change from current market value
    
    
    0.93
    %
    
    
    3.52
    %
    
    
    0.00
    %
    
    
    (7.05
    )%
    
    
    (16.11
    )%
   Asset/Liability Management
  Rate Shock in Basis
    
    Projected Change in(Dollars in thousands)
    
    Points
    
    Net Interest Income
    
    Percentage Change+200
    
    
    $
    (1,145
    )
    
    
    (3.52
    )%+100
    
    
    
    (640
    )
    
    
    (1.97
    )%0
    
    
    
    0
    
    
    
    0.00
    %-100
    
    
    
    133
    
    
    
    0.41
    %-200
    
    
    
    (1,803
    )
    
    
    (5.55
    )%
  21




---



##### Table of Contents



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




---



##### Table of Contents



HMN FINANCIAL, INC.
 
 PART II  OTHER INFORMATION
 
   
   
    (c)
    
    
    (d)Total Number of
    
    
    Maximum Number of(a)
    
    
    
    
    
    
    Shares Purchased as
    
    
    Shares that May YetTotal Number of
    
    
    (b)
    
    
    Part of Publicly
    
    
    Be PurchasedShares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    or ProgramsJanuary 1 through January 31, 2008
    
    
    10,000
    
    
    $
    24.00
    
    
    
    10,000
    
    
    
    126,000February 1 through February 29, 2008
    
    
    20,000
    
    
    
    24.18
    
    
    
    20,000
    
    
    
    106,000March 1 through March 31, 2008
    
    
    0
    
    
    
    N/A
    
    
    
    0
    
    
    
    106,000Total
    
    
    30,000
    
    
    $
    24.12
    
    
    
    30,000
  
   
   
   
   23




---



##### Table of Contents



HMN FINANCIAL, INC. 
RegistrantDate: May 5, 2008
    /s/ Michael McNeilMichael McNeil,President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Representative)Date: May 5, 2008
    /s/ Jon EberleJon Eberle,Chief Financial Officer
(Principal Financial Officer) 24




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##### Table of Contents



SequentialReference
    
    Page NumberingRegulation
    
    
    
    to Prior
    
    Where AttachedS-K
    
    
    
    Filing or
    
    Exhibits AreExhibit
    
    
    
    Exhibit
    
    Located in ThisNumber
    
    Document Attached Hereto
    
    Number
    
    Form 10-Q Report3.1
    
    Amended and Restated Articles of Incorporation
    
    
    *1
    
    
    N/A3.2
    
    Amended and Restated By-laws
    
    
    *2
    
    
    N/A4
    
    Form of Common Stock Certificates
    
    
    *3
    
    
    N/A31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of CEO
    
    
    31.1
    
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d14(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 Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the
period ended June 30, 2007 (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). 25