##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___to ___.
 Commission file number: 0-24100. HMN FINANCIAL, INC.  Delaware
(State or Other Jurisdiction of Incorporation or
Organization)
    
    41-1777397
(I.R.S. Employer Identification No.)1016 Civic Center Drive Northwest
PO Box 6057
Rochester, Minnesota
(Address of Principal Executive Offices)
    
    55901
(Zip Code)Registrants telephone number, including area code:
    
    (507) 535-1200
 Securities Registered Pursuant to Section 12(b) of the Act:       None Securities Registered Pursuant to Section 12(g) of the Act:      Common Stock, par value $.01 per
share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best or
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) YES þ NO o The aggregate market value of the voting stock held by non-affiliates of the registrant as of June
30, 2004 (the last business day of the Registrants most recently completed second fiscal quarter),
was approximately $89.0 million computed by reference to the average high and low prices of $27.09
on such date as reported on Nasdaq National Market. (The exclusion from such amount of the market
value of the shares owned by any person shall not be deemed an admission by the Registrant that
such person is an affiliate of the Registrant.) As
of February 25, 2005, the Registrant had issued and outstanding
4,402,432 shares of the
Registrants Common Stock. The Registrants Internet website is http://www.hmnf.com and you may access, free of charge, its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after the Registrant
electronically files such material with, or furnish it to, the Securities and Exchange Commission. DOCUMENTS INCORPORATED BY REFERENCE    1




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TABLE OF CONTENTS  
 PagePART IItem 1. BusinessGeneral
    
    
    3Market Area
    
    
    3Lending Activities
    
    
    4Origination, Purchases and Sales of Mortgage-Backed and Related Securities
    
    
    11Classified Assets and Delinquencies
    
    
    13Investment Activities
    
    
    15Sources of Funds
    
    
    18Other InformationService Corporations of the Bank
    
    
    21Competition
    
    
    22Other Corporations Owned by HMN
    
    
    22Employees
    
    
    22Regulation and Supervision
    
    
    22Executive Officers
    
    
    27Risk Factors
    
    
    27Item 2. Properties
    
    
    30Item 3. Legal Proceedings
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5.Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    31Item 6.Selected Financial Data
    
    
    31Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    31Item 7A. Quantitative and Qualitative Disclosure About Market Risk
    
    
    31Item 8.Financial Statements and Supplementary Data
    
    
    31Item 9.Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    31Item 9A. Controls and Procedures
    
    
    31Item 9B. Other Information
    
    
    33PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    34Item 11. Executive Compensation
    
    
    34Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    34Item 13. Certain Relationships and Related Transactions
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    35PART IVItem 15.Exhibits and Financial Statement Schedules
    
    
    36Signatures
    
    
    39Index to Exhibits
    
    
    40Change in Control Agreement with Michael McNeil2005 Officer Base SalariesPortions of Annual Report to Security HoldersSubsidiariesConsent of KPMG LLPRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certifications
 2




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PART I 
 ITEM 1. BUSINESS 
 General HMN Financial, Inc. (HMN or the Company) is a stock savings bank holding company that owns 100
percent of Home Federal Savings Bank (the Bank). The Bank has a community banking philosophy and
operates retail banking and loan production facilities in Minnesota and Iowa. The Bank also
provides highly personalized financial services to a select group of individuals and businesses
through Eagle Crest Capital Bank, a division of the Bank, in Edina and Rochester, Minnesota. The
Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OAI) which offers financial
planning products and services and Home Federal Holding, Inc. (HFH) which is the holding company
for Home Federal REIT, Inc. (HFREIT) which invests in real estate loans acquired from the Bank.
HMN has another wholly owned subsidiary, Security Finance Corporation (SFC) which acts as an
intermediary for the Bank in transacting like-kind property exchanges for Bank customers. The Bank
had an 80% owned subsidiary, Federal Title Services, LLC (FTS), which performed mortgage title
services for Bank customers. FTS stopped accepting title orders in the third quarter of 2004 and
was dissolved. The Bank had a 51% owned subsidiary, Home Federal Mortgage Services, LLC (HFMS),
that was a mortgage banking and mortgage brokerage business until its assets were liquidated in
2003 and it was dissolved. As a community-oriented financial institution, the Company seeks to serve the financial needs of
communities in its market area. The Companys business involves attracting deposits from the
general public and businesses and using such deposits to originate or purchase one-to-four family
residential, commercial real estate, and multi-family mortgage loans as well as consumer,
construction, and commercial business loans. The Company also invests in mortgage-backed and
related securities, U.S. government agency obligations, and other permissible investments. The
executive offices of the Company are located at 1016 Civic Center Drive Northwest, Rochester,
Minnesota 55901. Its telephone number at that address is (507) 535-1200. 
 Market Area The Company serves the southern Minnesota counties of Fillmore, Freeborn, Houston, Mower, Olmsted
and Winona and portions of Steele, Dodge, Goodhue and Wabasha through its corporate office located
in Rochester, Minnesota and its nine branch offices located in Albert Lea, Austin, LaCrescent,
Rochester, Spring Valley and Winona, Minnesota. The portion of the Companys southern Minnesota
market area consisting of Rochester and the contiguous communities is composed of primarily urban
and suburban communities, while the balance of the Companys southern Minnesota market area
consists primarily of rural areas and small towns. Primary industries in the Companys southern
Minnesota market area include manufacturing, agriculture, health care, wholesale and retail trade,
service industries and education. Major employers include IBM, Mayo Clinic, Hormel (a food
processing company), and various other companies. The Companys market area is also the home of
Winona State University, Rochester Community and Technical College, University of Minnesota -
Rochester Center, Winona State University  Rochester Center and Austins Riverland Community
College. The Company serves the Iowa counties of Marshall and Tama through its branch offices located in
Marshalltown and Toledo. Major industries in the area are Swift & Company (pork processors), Fisher
Controls International (valve and regulator manufacturing), Lennox Industries (furnace and air
conditioner manufacturing), Iowa Veterans Home (hospital care), Marshall Community School District
(education), Marshall Medical & Surgical Center (hospital care) and Meskwaki Casino (gaming
operations). Based upon information obtained from the U.S. Census Bureau for 2003 (the last year for which
information is available), the population of the six primary counties in the Banks southern
Minnesota market area was as follows: Fillmore  21,314;
Freeborn  31,961; Houston  19,980;
Mower  38,823; Olmsted  131,384; and Winona  49,482. The median household income for these six
counties ranged from $36,651 to $51,316. With respect to Iowa, the population of Marshall County
was 39,103 and the population of Tama County was 17,876. The median household income of these two
counties ranged from $37,419 to $38,268. 3




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The Company also serves a diverse high net worth customer base primarily in the seven county
metropolitan area of Minneapolis and St. Paul from Eagle Crest Capital Bank, a division of the
Bank, located in Edina, Minnesota. The Company serves a similar group of individuals and
businesses in Olmsted county from its Eagle Crest Capital Bank location in Rochester, Minnesota. 
 Lending Activities General.Historically, the Company originated 15 and 30-year, fixed-rate mortgage loans secured by
one-to-four family residences for its loan portfolio. Over the past five years, the Company has
focused on managing interest rate risk and increasing interest income by increasing its investment
in shorter term and generally higher yielding commercial real estate, commercial business,
consumer, and construction loans and reducing its investment in longer term one-to-four family real
estate loans. The Company continues to originate 15 and 30 year fixed rate mortgage loans,
adjustable rate mortgage loans that are fixed for an initial period of one, three or five years and
some shorter term fixed rate loans that have certain characteristics. The shorter term fixed rate
loans are placed into portfolio. The majority of the 15 and 30-year fixed rate mortgage loans are
sold in the secondary mortgage market. The Company also offers an array of consumer loan products
that include both open lines and closed end home equity loans. The home equity line of credit has
an adjustable interest rate based upon the Wall Street Journal prime rate plus a margin. Refer to
Note 4 of the Notes to Consolidated Financial Statements in the Annual Report for more information
on the loan portfolio. 4




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The following table shows the composition of the Companys loan portfolio by fixed and
adjustable-rate loans as of December 31: 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentFixed-Rate LoansReal Estate:One-to-four familyGEM
    
    $
    16,133
    
    
    
    2.01
    %
    
    $
    13,387
    
    
    
    1.89
    %
    
    $
    17,394
    
    
    
    3.18
    %
    
    $
    30,727
    
    
    
    6.38
    %
    
    $
    47,811
    
    
    
    9.08
    %Other
    
    
    59,937
    
    
    
    7.48
    
    
    
    65,004
    
    
    
    9.17
    
    
    
    74,510
    
    
    
    13.63
    
    
    
    110,619
    
    
    
    22.97
    
    
    
    158,083
    
    
    
    30.03Total one-to-four family
    
    
    76,070
    
    
    
    9.49
    
    
    
    78,391
    
    
    
    11.06
    
    
    
    91,904
    
    
    
    16.81
    
    
    
    141,346
    
    
    
    29.35
    
    
    
    205,894
    
    
    
    39.11Multi-family
    
    
    6,387
    
    
    
    0.79
    
    
    
    6,471
    
    
    
    0.91
    
    
    
    6,588
    
    
    
    1.20
    
    
    
    7,644
    
    
    
    1.59
    
    
    
    7,099
    
    
    
    1.35GEM  multi-family
    
    
    57
    
    
    
    0.01
    
    
    
    61
    
    
    
    0.01
    
    
    
    64
    
    
    
    0.01
    
    
    
    68
    
    
    
    0.01
    
    
    
    71
    
    
    
    0.01Commercial
    
    
    51,390
    
    
    
    6.41
    
    
    
    52,563
    
    
    
    7.42
    
    
    
    37,878
    
    
    
    6.93
    
    
    
    29,756
    
    
    
    6.18
    
    
    
    27,743
    
    
    
    5.27Construction or development
    
    
    27,557
    
    
    
    3.44
    
    
    
    17,215
    
    
    
    2.43
    
    
    
    17,234
    
    
    
    3.15
    
    
    
    15,542
    
    
    
    3.22
    
    
    
    2,126
    
    
    
    0.40Total fixed-rate real estate loans
    
    
    161,461
    
    
    
    20.14
    
    
    
    154,701
    
    
    
    21.83
    
    
    
    153,668
    
    
    
    28.10
    
    
    
    194,356
    
    
    
    40.35
    
    
    
    242,933
    
    
    
    46.14Consumer loans:Savings
    
    
    454
    
    
    
    0.06
    
    
    
    494
    
    
    
    0.07
    
    
    
    534
    
    
    
    0.10
    
    
    
    594
    
    
    
    0.12
    
    
    
    695
    
    
    
    0.13Automobile
    
    
    9,496
    
    
    
    1.18
    
    
    
    14,754
    
    
    
    2.08
    
    
    
    11,062
    
    
    
    2.02
    
    
    
    6,624
    
    
    
    1.38
    
    
    
    6,363
    
    
    
    1.21Home equity
    
    
    20,019
    
    
    
    2.50
    
    
    
    18,742
    
    
    
    2.65
    
    
    
    21,049
    
    
    
    3.85
    
    
    
    26,300
    
    
    
    5.46
    
    
    
    27,832
    
    
    
    5.29Mobile home
    
    
    2,896
    
    
    
    0.36
    
    
    
    3,665
    
    
    
    0.52
    
    
    
    4,534
    
    
    
    0.83
    
    
    
    5,456
    
    
    
    1.13
    
    
    
    4,921
    
    
    
    0.94Land/Lot Loans
    
    
    818
    
    
    
    0.10
    
    
    
    754
    
    
    
    0.11
    
    
    
    781
    
    
    
    0.15
    
    
    
    767
    
    
    
    0.16
    
    
    
    661
    
    
    
    0.13Other
    
    
    3,134
    
    
    
    0.39
    
    
    
    3,105
    
    
    
    0.43
    
    
    
    3,299
    
    
    
    0.60
    
    
    
    3,326
    
    
    
    0.69
    
    
    
    2,989
    
    
    
    0.56Total consumer loans
    
    
    36,817
    
    
    
    4.59
    
    
    
    41,514
    
    
    
    5.86
    
    
    
    41,259
    
    
    
    7.55
    
    
    
    43,067
    
    
    
    8.94
    
    
    
    43,461
    
    
    
    8.26Commercial business loans
    
    
    69,671
    
    
    
    8.69
    
    
    
    51,609
    
    
    
    7.28
    
    
    
    42,272
    
    
    
    7.73
    
    
    
    37,123
    

    
    
    7.71
    
    
    
    27,821
    
    
    
    5.28Total other loans
    
    
    106,488
    
    
    
    13.28
    
    
    
    93,123
    
    
    
    13.14
    
    
    
    83,531
    
    
    
    15.28
    
    
    
    80,190
    
    
    
    16.65
    
    
    
    71,282
    
    
    
    13.54Total fixed-rate loans
    
    
    267,949
    
    
    
    33.42
    
    
    
    247,824
    
    
    
    34.97
    
    
    
    237,199
    
    
    
    43.38
    
    
    
    274,546
    
    
    
    57.00
    
    
    
    314,215
    
    
    
    59.68Adjustable-Rate LoansReal estate:One-to-four family
    
    
    62,938
    
    
    
    7.85
    
    
    
    65,924
    
    
    
    9.30
    
    
    
    59,662
    
    
    
    10.91
    
    
    
    74,102
    
    
    
    15.38
    
    
    
    106,994
    
    
    
    20.32Multi-family
    
    
    35,478
    
    
    
    4.43
    
    
    
    25,008
    
    
    
    3.53
    
    
    
    9,113
    
    
    
    1.67
    
    
    
    6,657
    
    
    
    1.38
    
    
    
    4,920
    
    
    
    0.93Commercial
    
    
    173,554
    
    
    
    21.65
    
    
    
    146,603
    
    
    
    20.69
    
    
    
    92,539
    
    
    
    16.92
    
    
    
    41,012
    
    
    
    8.52
    
    
    
    33,911
    
    
    
    6.44Construction or development
    
    
    70,841
    
    
    
    8.84
    
    
    
    78,131
    
    
    
    11.02
    
    
    
    44,102
    
    
    
    8.07
    
    
    
    31,435
    
    
    
    6.53
    
    
    
    18,085
    
    
    
    3.44Total adjustable-rate real estate loans
    
    
    342,811
    
    
    
    42.77
    
    
    
    315,666
    
    
    
    44.54
    
    
    
    205,416
    
    
    
    37.57
    

    
    
    153,206
    
    
    
    31.81
    
    
    
    163,910
    
    
    
    31.13Consumer (home equity and other)
    
    
    67,154
    
    
    
    8.38
    
    
    
    54,425
    
    
    
    7.68
    
    
    
    52,131
    
    
    
    9.53
    
    
    
    35,770
    
    
    
    7.43
    
    
    
    26,887
    
    
    
    5.11Land/Lot loans
    
    
    10,754
    
    
    
    1.34
    
    
    
    9,732
    
    
    
    1.38
    
    
    
    2,809
    
    
    
    0.52
    
    
    
    83
    
    
    
    0.02
    
    
    
    377
    
    
    
    0.07Other
    
    
    248
    
    
    
    0.03
    
    
    
    234
    
    
    
    0.03
    
    
    
    222
    
    
    
    0.04
    
    
    
    211
    
    
    
    0.04
    
    
    
    171
    
    
    
    0.03Total consumer loans
    
    
    78,156
    
    
    
    9.75
    
    
    
    64,391
    
    
    
    9.09
    
    
    
    55,162
    
    
    
    10.09
    
    
    
    36,064
    
    
    
    7.49
    
    
    
    27,435
    
    
    
    5.21Commercial business loans
    
    
    112,698
    
    
    
    14.06
    
    
    
    80,808
    
    
    
    11.40
    

    
    
    48,989
    
    
    
    8.96
    
    
    
    17,817
    
    
    
    3.70
    
    
    
    20,939
    
    
    
    3.98Total other loans
    
    
    190,854
    
    
    
    23.81
    
    
    
    145,199
    
    
    
    20.49
    
    
    
    104,151
    
    
    
    19.05
    
    
    
    53,881
    
    
    
    11.19
    
    
    
    48,374
    
    
    
    9.19Total adjustable-rate loans
    
    
    533,665
    
    
    
    66.58
    
    
    
    460,865
    
    
    
    65.03
    
    
    
    309,567
    
    
    
    56.62
    
    
    
    207,087
    
    
    
    43.00
    
    
    
    212,284
    
    
    
    40.32Total loans
    
    
    801,614
    
    
    
    100.00
    %
    
    
    708,689
    
    
    
    100.00
    %
    
    
    546,766
    
    
    
    100.00
    %
    
    
    481,633
    
    
    
    100.00
    %
    
    
    526,499
    
    
    
    100.00
    %LessLoans in process
    
    
    7,561
    
    
    
    
    
    
    
    11,298
    
    
    
    
    
    
    
    6,826
    
    
    
    
    
    
    
    4,692
    
    
    
    
    
    
    
    2,953Unamortized discounts
    
    
    63
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    289Net deferred loan fees
    
    
    1,781
    
    
    
    
    
    
    
    1,334
    
    
    
    
    
    
    
    1,068
    
    
    
    
    
    
    
    1,212
    
    
    
    
    
    
    
    1,348Allowance for losses on loans
    
    
    8,996
    
    
    
    
    
    
    
    6,940
    
    
    
    
    
    
    
    4,824
    
    
    
    
    
    
    
    3,783
    
    
    
    
    
    
    
    3,144Total loans receivable, net
    
    $
    783,213
    
    
    
    
    
    
    $
    688,951
    
    
    
    
    
    
    $
    533,906
    
    
    
    
    
    
    $
    471,668
    
    
    
    
    
    
    $
    518,765
 5




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The following table illustrates the interest rate maturities of the Companys loan portfolio at
December 31, 2004. Loans which have adjustable or renegotiable interest rates are shown as maturing
in the period during which the contract is due. Scheduled repayments of principal are reflected in
the year in which they are scheduled to be paid. Real EstateMulti-family andOne-to-four family
    
    
    Commercial
    
    
    Construction
    
    
    Consumer
    
    
    Commercial Business
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedDue During Years Ending
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageDecember 31,
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate2005 (1)
    
    $
    14,084
    
    
    
    6.01
    %
    
    $
    42,473
    
    
    
    6.30
    %
    
    $
    47,170
    
    
    
    6.44
    %
    
    $
    19,580
    
    
    
    7.54
    %
    
    $
    92,813
    
    
    
    6.04
    %
    
    $
    216,120
    
    
    
    6.31
    %2006
    
    
    8,268
    
    
    
    5.86
    
    
    
    76,929
    
    
    
    6.70
    
    
    
    5,671
    
    
    
    5.74
    
    
    
    12,977
    
    
    
    7.25
    
    
    
    45,032
    
    
    
    6.59
    
    
    
    148,877
    
    
    
    6.632007
    
    
    7,643
    
    
    
    5.75
    
    
    
    28,691
    
    
    
    6.61
    
    
    
    4,742
    
    
    
    6.09
    
    
    
    11,499
    
    
    
    7.04
    
    
    
    15,013
    
    
    
    6.50
    
    
    
    67,588
    
    
    
    6.522008 through 2009
    
    
    15,511
    
    
    
    5.64
    
    
    
    41,817
    
    
    
    6.51
    
    
    
    9,017
    
    
    
    6.42
    
    
    
    20,306
    
    
    
    7.09
    
    
    
    14,924
    
    
    
    6.60
    
    
    
    101,575
    
    
    
    6.502010 through 2014
    
    
    35,674
    
    
    
    5.51
    
    
    
    50,829
    
    
    
    6.35
    
    
    
    11,417
    
    
    
    5.52
    
    
    
    33,168
    
    
    
    7.10
    
    
    
    13,548
    
    
    
    6.29
    
    
    
    144,636
    
    
    
    6.242015 through 2029
    
    
    63,024
    
    
    
    5.48
    
    
    
    25,655
    
    
    
    5.38
    
    
    
    2,386
    
    
    
    6.40
    
    
    
    17,428
    
    
    
    6.32
    
    
    
    1,039
    
    
    
    5.64
    
    
    
    109,532
    
    
    
    5.612030 and following
    
    
    13,271
    
    
    
    5.33
    
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    0.00
    
    
    
    15
    
    
    
    5.29
    
    
    
    0
    
    
    
    0.00
    
    
    
    13,286
    
    
    
    5.33$
    157,475
    
    
    
    
    
    
    $
    266,394
    
    
    
    
    
    
    $
    80,403
    
    
    
    
    
    
    $
    114,973
    
    
    
    
    
    
    $
    182,369
    
    
    
    
    
    
    $
    801,614
   (1)
    
    Includes demand loans, loans having no stated maturity, and overdraft loans. The total amount of loans due after December 31, 2005 which have predetermined interest rates is
$243.4 million, while the total amount of loans due after such date which have floating or
adjustable interest rates is $332.1 million. Construction or development loans for one to four
family dwellings totaled $19.8 million, multifamily totaled $19.2 million and nonresidential
totaled $41.4 million. 6




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##### Table of Contents



Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the aggregate
amount of loans that the Bank is permitted to make to any one borrower is generally limited to 15%
of unimpaired capital and surplus (25% if the security for such loan has a readily ascertainable
value or 30% for certain residential development loans). At December 31, 2004, based upon the 15%
limitation, the Banks regulatory limit for loans to one borrower was approximately $12.2 million.
At December 31, 2004, the dollar amount of outstanding loans to one group of related borrowers
exceeded this amount, but some of the loans included in these loan totals were exempt from the
lending limit due to the Direct Benefit and Common Enterprise Rules. Some of the loans were
secured by certificates of deposit or marketable securities held by the Bank, which provided the
Bank with an expanded lending limit. The total loans outstanding to this borrower at December 31,
2004 were $16.0 million. The amount outstanding, excluding those loans that were exempt from the
loans to one borrower limits because of the Direct Benefit and Common Enterprise Rules, was $5.8
million. The largest borrowing relationship is secured by an entertainment facility, hotel,
commercial real estate, and equipment and was performing in accordance with its terms at December
31, 2004. All of the Banks lending is subject to its written underwriting standards and to loan origination
procedures. Decisions on loan applications are made on the basis of detailed applications and
property valuations determined by an independent appraiser. The loan applications are designed
primarily to determine the borrowers ability to repay. The more significant items on the
application are verified through use of credit reports, financial statements, tax returns and/or
confirmations. The Bank also offers the Home Credit Plus Program which relies on the credit score
of the loan applicant instead of income, asset and employment verification procedures. The Bank
also offers low or alternative documentation underwriting procedures that conform to Federal
National Mortgage Association (FNMA) underwriting guidelines. The Banks Mortgage and Consumer Loan Committee is responsible for reviewing and approving all
loans over the Federal Home Loan Mortgage Corporation/FNMA conforming loan dollar limit (the Limit)
originated by the Bank that are not sold in the secondary loan market. The Limit was $333,700 for
2004 and $322,700 for 2003. Approval of one member of the Mortgage and Consumer Loan Committee was
obtained on all loans above the Limit. The Banks Commercial Loan Committee is responsible for reviewing and approving individual
commercial loans or loans to borrowers with aggregate lending relationships ranging from $1.0
million to $7.5 million. The Banks individual commercial loan officers have the authority to
approve loans that meet the guidelines established by the commercial loan policy for loans up to
$250,000, subject to specific loan officer authority limits. The Banks Commercial Loan Officers
Committee has the authority to approve loans that meet the commercial loan policy guidelines that
are less than $1.0 million. Individual loans of $7.5 million or more, and loans to borrowers with
aggregate lending relationships that exceed that amount, must be approved by the Companys Board of
Directors or its Executive Commercial Loan Committee. The Bank generally requires title insurance on its mortgage loans as well as fire and extended
coverage casualty insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property. The Bank also requires flood insurance to protect the
property securing its interest when the property is located in a flood plain. One-to-Four Family Residential Real Estate Lending.At December 31, 2004 the Companys one-to-four
family real estate loans, consisting of both fixed rate and adjustable rate loans, totaled $139.0
million, a decline of $5.3 million, from $144.3 million at December 31, 2003. This decrease in the
one-to-four family loans is consistent with the Companys strategy of changing the composition of
its portfolio toward commercial and consumer loans. The Company offers conventional fixed-rate one-to-four family loans that have maximum terms of 30
years. In order to manage interest rate risk, the Company sells the majority of fixed rate loan
originations or refinances with terms to maturity of 15 years or greater that are eligible for sale
in the secondary market. The interest rates charged on the fixed-rate loan products are set based
on the FNMA delivery rates, as well as other competitive factors. The Company also originates a
limited number of fixed-rate loans with terms up to 30 years that are insured by the Federal Housing
Authority, Veterans Administration and Minnesota Home Finance Administration. 7




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##### Table of Contents



The Company also offers one-year adjustable rate mortgages (ARMs) at a margin (generally 275 to 375
basis points) over the yield on the Average Monthly One Year U.S. Treasury Constant Maturity Index
for terms of up to 30 years. The ARM loans offered by the Company allow the borrower to select
(subject to pricing) an initial period of one year, three years, or five years between the loan
origination and the date the first interest rate change occurs. The ARMs generally have a 200
basis point annual interest rate change cap and a lifetime cap of 600 basis points over or under
the initial rate. Initial interest rates offered on the ARM loans during 2004 ranged from 100 basis
points below the fully indexed loan rate to 100 basis points over that rate. All borrowers are
qualified for the loan at the fully indexed rate. The Companys originated ARMs do not permit
negative amortization of principal, generally do not contain prepayment penalties and are not
convertible into fixed-rate loans. In underwriting one-to-four family residential real estate loans, the Company evaluates the
borrowers credit history; ability to make principal, interest and escrow payments; the value of
the property that will secure the loan; and debt to income ratios. Properties securing one-to-four
family residential real estate loans made by the Company are appraised by independent fee
appraisers. The Company originates residential mortgage loans with loan-to-value ratios up to 100%
for owner-occupied homes and up to 90% for non-owner occupied homes; however, private mortgage
insurance is generally required to reduce the Companys exposure to 80% or less on most loans. The
Company generally seeks to underwrite its loans in accordance with secondary market standards. The Companys residential mortgage loans customarily include due-on-sale clauses giving it the
right to declare the loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the property subject to the mortgage. Fixed rate loans in the Companys portfolio include both growing equity mortgage (GEM) loans and
conventional fixed-rate loans. The GEM loans require payments that increase after the first year.
Under the GEM loans, the monthly payments required for the first year are established based on a
30-year amortization schedule. Depending upon the program selected, the payments may increase in
the succeeding years by amounts ranging from 0% to 6.2%. Most of the GEM loans originated by the
Company provide for at least four annual payment increases over the first five years of the loan.
The increased payments required under GEM loans are applied to principal and have the effect of
shortening the term to maturity; the GEM loans do not permit negative amortization. The Company
currently offers one GEM product with a contractual maturity of approximately 15 years. The GEMs
are generally priced based upon loans with similar contractual maturities. The GEMs are popular
with consumers who anticipate future increases in income and who desire an amortization schedule of
less than 30 years. Historically low mortgage interest rates over the past several years have
decreased the demand for GEM loans as consumers have opted for shorter term fixed rate loans. Commercial Real Estate and Multi-Family Lending.The Company originates permanent commercial real
estate and multi-family loans secured by properties located primarily in its market area. It also
purchases participations in commercial real estate and multi-family loans originated by third
parties on properties outside of its market area. The commercial real estate and multi-family loan
portfolio includes loans secured by motels, hotels, apartment buildings, churches, office
buildings, business facilities, shopping malls, nursing homes, golf courses, entertainment
facilities, warehouses and other non-residential building properties primarily located in the upper
midwestern United States. Permanent commercial real estate and multi-family loans are generally originated for a maximum term
of 10 years and may have longer amortization periods with balloon maturity features. The interest
rates may be fixed for the term of the loan or have adjustable features that are tied to prime or a
published index. Commercial real estate and multi-family loans are generally written in amounts up
to 80% of the lesser of the appraised value of the property or the purchase price and generally
have a debt service coverage ratio of at least 120%. The debt service coverage is the ratio of net
cash from operations before debt service payments. The Company may originate construction loans
secured by commercial or multi-family real estate, or may purchase participation interests in third
party originated construction loans secured by commercial or multi-family real estate. 8




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##### Table of Contents



Appraisals on commercial real estate and multi-family real estate properties are performed by
independent appraisers prior to the time the loan is made. For transactions less than $250,000,
the Company may use an internal valuation. All appraisals on commercial and multi-family real
estate are reviewed and approved by a commercial loan officer, credit manager, commercial
department manager, or a qualified third party. The Banks underwriting procedures require
verification of the borrowers credit history, income and financial statements, banking
relationships and income projections for the property. All commercial real estate and multi-family
loans over $1.0 million must be approved by a majority of the Commercial Loan Committee prior to
closing. The commercial loan policy generally requires personal guarantees from the proposed
borrowers. An initial on-site inspection is generally required for all collateral properties for
loans with balances in excess of $250,000. Independent annual reviews are performed for aggregate
commercial lending relationships that exceed $500,000. The reviews cover financial performance,
documentation completeness and accuracy of loan risk ratings. At December 31, 2004, the Companys two largest commercial real estate loans totaled $10.2 million
and $9.3 million. The first loan is secured by land to be developed in Rochester, Minnesota and
the second loan is secured by a golf course development in Byron, Minnesota. Both of these loans
were performing at December 31, 2004. Multi-family and commercial real estate loans generally present a higher level of risk than loans
secured by one-to-four family residences. This greater risk is due to several factors, including
the concentration of principal in a limited number of loans and borrowers, the effects of general
economic conditions on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrowers ability to repay the loan may be impaired. At December 31,
2004, $1.1 million of loans in the commercial real estate portfolio were nonperforming. There were
three nonperforming loans in this category at December 31, 2004 with the largest one being a
$648,000 loan secured by a hotel. There can be no assurance that the amount of nonperforming loans
will not increase in the future. Construction Lending.The Company makes construction loans to individuals for the construction of
their residences and to builders for the construction of one-to-four family residences. It also
makes some loans to builders for houses built on speculation. Construction loans also include
commercial real estate loans. Almost all loans to individuals for the construction of their residences are structured as
permanent loans. Such loans are made on the same terms as residential loans, except that during
the construction phase, which typically lasts up to seven months, the borrower pays interest only.
Generally, the borrower also pays a construction fee at the time of origination equal to the
origination fee plus other costs associated with processing the loan. Residential construction
loans are underwritten pursuant to the same guidelines used for originating residential loans on

existing properties. Construction loans to builders or developers of one-to-four family residences generally carry terms
of one year or less and may permit the payment of interest from loan proceeds. Construction loans to owner occupants are generally made in amounts up to 95% of the lesser of cost
or appraised value, but no more than 85% of the loan proceeds can be disbursed until the building
is completed. The Company generally limits the loan-to-value ratios on loans to builders to 80%.
Prior to making a commitment to fund a construction loan, the Company requires a valuation of the
property, financial data, and verification of the borrowers income. The Company obtains personal
guarantees for substantially all of its construction loans to builders. Personal financial
statements of guarantors are also obtained as part of the loan underwriting process. Construction
loans are generally located in the Companys market area. Construction loans are obtained principally through continued business from builders and developers
who have previously borrowed from the Bank, as well as referrals from existing customers and
walk-in customers. The application process includes a submission to the Bank of accurate plans,
specifications and costs of the project to be constructed. These items are used as a basis to
determine the appraised value of the subject property to be built. 9




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##### Table of Contents



At December 31, 2004 construction loans totaled $98.4 million of which one-to-four family
residential loans totaled $37.8 million, multi-family residential totaled $19.2 million and
commercial real estate totaled $41.4 million. The nature of construction loans is such that they are more difficult to evaluate and monitor. The
risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate
of the propertys value upon completion of the project, experience of the builder, and the
estimated cost (including interest) of the project. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project
having a value that is insufficient to assure full repayment and/or the possibility of having to
make substantial investments to complete and sell the project. Because defaults in repayment may
not occur during the construction period it may be difficult to identify problem loans at an early
stage. In such cases, the Company may be required to modify the terms of the loan. Consumer Lending.The Company originates a variety of consumer loans, including home equity loans
(open-end and closed-end), automobile, home improvement, mobile home, lot loans, deposit account
and other loans for household and personal purposes. Consumer loan terms vary according to the type and value of collateral, length of contract and
creditworthiness of the borrower. The Companys consumer loans are made at fixed or adjustable
interest rates, with terms up to 20 years for secured loans and up to three years for unsecured
loans. The Companys home equity loans are written so that the total commitment amount, when combined with
the balance of any other outstanding mortgage liens, may not exceed 100% of the appraised value of
the property. The closed-end home equity loans are written with fixed or adjustable-rates with
terms up to 15 years. The open-end home equity lines are written with an adjustable rate with
terms up to 20 years, a 10-year draw period that requires interest only payments and a 10-year
repayment period which fully amortizes the outstanding balance. The consumer may access the
open-end home equity line either by making a withdrawal at the Bank or writing a check on the home
equity line of credit account. Open and closed-end equity loans, which are generally secured by
second mortgages on the borrowers principal residence, represented 75.8% of the consumer loan
portfolio at December 31, 2004. The underwriting standards employed by the Bank for consumer loans include a determination of the
applicants payment history on other debts and ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if any, in relation
to the proposed loan amount. Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by
rapidly depreciable assets, such as automobiles or mobile homes. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In
addition, consumer loan collections are dependent on the borrowers continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances. Furthermore, the
application of various Federal and state laws, including bankruptcy and insolvency laws, may limit
the amount that can be recovered on such loans. At December 31, 2004, $472,000 of the consumer loan
portfolio was non-performing. There can be no assurance that the amount of nonperforming loans will
not increase in the future. Commercial Business Lending.In order to satisfy the demand for financial services to individuals
and businesses in its market area, the Company maintains a portfolio of commercial business loans
primarily to retail and manufacturing operations and professional firms. The Companys commercial
business loans generally have terms ranging from six months to five years and may have either fixed
or variable interest rates. The Companys commercial business loans generally include personal
guarantees and are usually, but not always, secured by business assets such as inventory,
equipment, leasehold interests in equipment, fixtures, real estate and accounts receivable. The
underwriting process for commercial business loans includes consideration of the borrowers
financial statements, tax returns, projections of future business 10




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##### Table of Contents



operations and inspection of the
subject collateral, if any. The Company has also purchased participation interests in commercial business loans from
third party originators. These loans generally have underlying collateral of inventory or equipment
and repayment periods of less than ten years. Unlike residential mortgage loans, which generally are made on the basis of the borrowers ability
to make repayment from his or her income, and which are secured by real property whose value tends
to be more easily ascertainable, commercial business loans are of higher risk and typically are
made on the basis of the borrowers ability to make repayment from the cash flow of the borrowers
business. As a result, the availability of funds for the repayment of commercial business loans
may be substantially dependent on the success of the business itself. Furthermore, the collateral
securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. At December 31, 2004, $261,000 of loans in the
commercial business loan portfolio were non-performing. There can be no assurance that the amount
of nonperforming loans will not increase in the future. 
 Originations, Purchases and Sales of Loans and Mortgage-Backed and Related Securities Real estate loans are generally originated by the Companys staff of salaried and commissioned loan
officers. Loan applications are taken in all branch and loan production offices. The Company originates both fixed and adjustable-rate loans, however, its ability to originate
loans is dependent upon the relative customer demand for loans in its markets. Demand for
adjustable-rate loans is affected by the interest rate environment. The Company originated for its
portfolio $16.8 million of one-to-four family adjustable rate loans during 2004, a decrease of $8.6
million, from $25.4 million in 2003, compared to $8.6 million in 2002. The Company also originated
for its portfolio $5.7 million of fixed rate one-to-four family loans during 2004, a decrease of
$26.5 million, from $32.2 million for 2003, compared to $19.8 million for 2002. During the past several years, the Company has focused its portfolio loan origination efforts on
commercial real estate, commercial business and consumer loans because these loans have terms to
maturity and adjustable interest rate characteristics that are generally more beneficial to the
Company than single family fixed-rate conventional loans. The Company originated $204.4 million of
multi-family and commercial real estate, commercial business and consumer loans (which excludes
commercial real estate loans in construction or development) during 2004, a decrease of $92.6
million, from originations of $297.0 million for 2003, compared to $201.2 million for 2002. In order to supplement loan demand in the Companys market area and geographically diversify its
loan portfolio, the Company purchases participations in real estate loans from selected sellers,
with yields based upon current market rates. The Company reviews and underwrites all loans to be
purchased to ensure that they meet the Companys underwriting standards and the seller generally
continues to service the loans. The Company purchased $91.8 million of loans during 2004, a
decrease of $10.6 million, from $102.4 million during 2003, compared to $71.3 million during 2002.
The majority of the purchased one-to-four family loans have interest rates that are fixed for a
one, three or five year period and then adjust annually thereafter. The purchased commercial real
estate and commercial business loans have terms and interest rates that are similar in nature to
the Companys originated commercial and business portfolio. Refer to Note 4 of the Notes to
Consolidated Financial Statements in the Annual Report for more information on purchased loans. The Company has some mortgage-backed and related securities that are held, based on investment
intent, in the available for sale portfolio. The Company did not purchase any mortgage-backed
securities during 2004 compared to the $15.1 million purchased in 2003 and $10.1 million purchased
in 2002. The Company did not sell any mortgage-backed securities during 2004, a decrease of $22.3
million, from those sold in 2003, compared to no sales in 2002. See  Investment Activities. 11




---



##### Table of Contents



The following table shows the loan and mortgage-backed and related securities origination,
purchase, acquisition, sale and repayment activities of the Company for the periods indicated. LOANS HELD FOR INVESTMENT Year Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Originations by type:Adjustable-rate:Real-estate  one-to-four family
    
    $
    16,840
    
    
    
    25,433
    
    
    
    8,583-multi-family
    
    
    2,391
    
    
    
    5,316
    
    
    
    866-commercial
    
    
    44,046
    
    
    
    47,647
    
    
    
    25,768-construction or development
    
    
    84,328
    
    
    
    50,552
    
    
    
    63,145Non-real estate  consumer
    
    
    13,822
    
    
    
    30,561
    
    
    
    36,498-commercial business
    
    
    50,467
    
    
    
    84,406
    
    
    
    48,866Total adjustable-rate
    
    
    211,894
    
    
    
    243,915
    
    
    
    183,726Fixed-rate:Real estate-one-to-four family
    
    
    5,738
    
    
    
    32,181
    
    
    
    19,798-multi-family
    
    
    1,418
    
    
    
    250
    
    
    
    0-commercial
    
    
    17,544
    
    
    
    42,370
    
    
    
    21,666-construction or development
    
    
    38,731
    
    
    
    25,040
    
    
    
    16,335Non-real estate  consumer
    
    
    28,347
    
    
    
    38,640
    
    
    
    26,589-commercial business
    
    
    46,414
    
    
    
    47,841
    
    
    
    40,981Total fixed-rate
    
    
    138,192
    
    
    
    186,322
    
    
    
    125,369Total loans originated
    
    
    350,086
    
    
    
    430,237
    
    
    
    309,095Purchases:Real estate-one-to-four family
    
    
    0
    
    
    
    15,277
    
    
    
    11,819- mulit-family
    
    
    0
    
    
    
    7,830
    
    
    
    0- commercial
    
    
    4,125
    
    
    
    43,542
    
    
    
    23,305- construction or development
    
    
    56,798
    
    
    
    25,365
    
    
    
    25,049Non-real estate  commercial business
    
    
    30,862
    
    
    
    10,396
    
    
    
    11,105Total loans purchased
    
    
    91,785
    
    
    
    102,410
    
    
    
    71,278Sales and repayments:Real estate  commercial
    
    
    2,400
    
    
    
    18,912
    
    
    
    162Construction or development
    
    
    34,800
    
    
    
    431
    
    
    
    6,381Non-real estate  commercial business
    
    
    9,000
    
    
    
    4,105
    
    
    
    162Total sales
    
    
    46,200
    
    
    
    23,448
    
    
    
    6,705Transfers to loans held for sale
    
    
    (2,437
    )
    
    
    3,555
    
    
    
    9,502Principal repayments
    
    
    300,407
    
    
    
    322,103
    
    
    
    243,828Total reductions
    
    
    344,170
    
    
    
    349,106
    
    
    
    260,035Decrease in other items, net
    
    
    (4,776
    )
    
    
    (21,618
    )
    
    
    (55,205
    )Net increase
    
    $
    92,925
    
    
    
    161,923
    
    
    
    65,133
 12




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##### Table of Contents



LOANS HELD FOR SALE Year Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Originations by type:Adjustable-rate:Real-estate  one-to-four family
    
    $
    851
    
    
    
    5,302
    
    
    
    7,477- construction or development
    
    
    225
    
    
    
    0
    
    
    
    268Total adjustable-rate
    
    
    1,076
    
    
    
    5,302
    
    
    
    7,745Fixed-rate:Real estate-one-to-four family
    
    
    83,469
    
    
    
    269,475
    
    
    
    167,884-construction or development
    
    
    2,896
    
    
    
    5,184
    
    
    
    3,667Total fixed-rate
    
    
    86,365
    
    
    
    274,659
    
    
    
    171,551Total loans originated
    
    
    87,441
    
    
    
    279,961
    
    
    
    179,296Purchases:Real estate-one-to-four family
    
    
    0
    
    
    
    0
    
    
    
    32,203Total loans purchased
    
    
    0
    
    
    
    0
    
    
    
    32,203Sales and repayments:Real estate  one-to-four family
    
    
    88,808
    
    
    
    292,163
    
    
    
    274,602Total sales
    
    
    88,808
    
    
    
    292,163
    
    
    
    274,602Transfers to (from) loans held for investment
    
    
    2,437
    
    
    
    (3,555
    )
    
    
    (9,502
    )Total reductions
    
    
    91,245
    
    
    
    288,608
    
    
    
    265,100Net Decrease
    
    $
    (3,804
    )
    
    
    (8,647
    )
    
    
    (53,601
    )
 MORTGAGE-BACKED AND RELATED SECURITIES Year Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Purchases:Mortgage-backed securities:CMOs and REMICs (1)
    
    $
    0
    
    
    
    15,139
    
    
    
    10,063Total purchases
    
    
    0
    
    
    
    15,139
    
    
    
    10,063Sales:Mortgage-backed securities:CMOs and REMICs
    
    
    0
    
    
    
    22,268
    
    
    
    0Total sales
    
    
    0
    
    
    
    22,268
    
    
    
    0Principal repayments
    
    
    (3,898
    )
    
    
    (31,718
    )
    
    
    (24,397
    )Net decrease
    
    $
    (3,898
    )
    
    
    (38,847
    )
    
    
    (14,334
    )
   (1)
    
    Collateralized Mortgage Obligations and Real Estate Mortgage Investment Conduits 
 Classified Assets and Delinquencies Classification of Assets.Federal regulations require that each savings institution classify its
assets on a regular basis. In addition, in connection with examinations of savings institutions,
the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC)
examiners may identify problem assets and, if appropriate, require them to be classified. There
are three classifications for problem assets: substandard, doubtful and loss. Assets classified
as substandard have one or more defined weaknesses and are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets
classified as doubtful have the weaknesses of those classified as substandard, with additional
characteristics that make collection or liquidation in full on the basis of currently existing
facts, conditions and values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that continuance as an
asset on the balance sheet of the institution is not warranted. Assets classified as substandard
or doubtful require the institution to establish prudent general allowances for loan losses. If an
asset, or portion thereof, is classified as loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset classified as loss, or
charge off such amount. If an institution does not agree with an OTS or FDIC examiners
classification of an asset, it may appeal the determination to the OTS 13




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##### Table of Contents



District Director or the appropriate FDIC personnel, depending on the regulator. On the basis of managements review of its
assets, at December 31, 2004, the Bank classified a total of $9.3 million of its loans and other
assets as follows: CommercialOne-to-Four
    
    
    And
    
    
    
    
    
    
    Commercial
    
    
    Other(Dollars in thousands)
    
    Family
    
    
    Multi-family
    
    
    Consumer
    
    
    Business
    
    
    Assets
    
    
    TotalSubstandard
    
    $
    2,493
    
    
    
    1,343
    
    
    
    328
    
    
    
    2,584
    
    
    
    341
    
    
    
    7,089Doubtful
    
    
    0
    
    
    
    0
    
    
    
    59
    
    
    
    0
    
    
    
    201
    
    
    
    260Loss
    
    
    0
    
    
    
    1,812
    
    
    
    95
    
    
    
    0
    
    
    
    0
    
    
    
    1,907Total
    
    $
    2,493
    
    
    
    3,155
    
    
    
    482
    
    
    
    2,584
    
    
    
    542
    
    
    
    9,256
 The Banks classified assets consist of non-performing loans and loans and other assets of
concern discussed herein. As of the date of this report, these asset classifications are
materially consistent with those of the OTS and FDIC. Delinquency Procedures.When a borrower fails to make a required payment on a loan, the Company
attempts to cure the delinquency by contacting the borrower. A late notice is sent on all loans
over 16 days delinquent. Additional written and verbal contacts may be made with the borrower
between 30 and 60 days after the due date. If the loan is contractually delinquent 90 days, the
Company sends a 30-day demand letter to the borrower and after the loan is contractually delinquent
120 days, institutes appropriate action to foreclose on the property. If foreclosed, the property
is sold at a sheriffs sale and may be purchased by the Company. Delinquent consumer loans are
generally handled in a similar manner. The Companys procedures for repossession and sale of
consumer collateral are subject to various requirements under state consumer protection laws. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate in judgment for six to twelve months and thereafter as real estate owned
until it is sold. When property is acquired or expected to be acquired by foreclosure or deed in
lieu of foreclosure, it is recorded at the lower of cost or estimated fair value, less the
estimated cost of disposition. After acquisition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property, however, are
capitalized to the extent of fair value less disposition cost. The following table sets forth the Companys loan delinquencies by loan type, amount and percentage
of type at December 31, 2004. Loans Delinquent For:
    
    
    Total Delinquent60-89 Days
    
    
    90 Days and Over
    
    
    LoansPercent
    
    
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Percentof Loan
    
    
    
    
    
    
    
    
    
    
    of Loan
    
    
    
    
    
    
    
    
    
    
    of Loan(Dollars in thousands)
    
    Number
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    Category
    
    
    Number
    
    
    Amount
    
    
    CategoryOne-to-four family real estate
    
    
    5
    
    
    $
    902
    
    
    
    0.65
    %
    
    
    14
    
    
    $
    2,493
    
    
    
    1.79
    %
    
    
    19
    
    
    $
    3,395
    
    
    
    2.44
    %Consumer
    
    
    23
    
    
    
    648
    
    
    
    0.56
    
    
    
    23
    
    
    
    472
    
    
    
    0.41
    
    
    
    46
    
    
    
    1,120
    
    
    
    0.97Total
    
    
    28
    
    
    $
    1,550
    
    
    
    0.19
    %
    
    
    37
    
    
    $
    2,965
    
    
    
    0.37
    %
    
    
    65
    
    
    $
    4,515
    
    
    
    0.56
    %
 14




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##### Table of Contents



Investment Activities The Company and the Bank utilize the available for sale securities portfolio in virtually all
aspects of asset/liability management strategy. In making investment decisions, the
Investment-Asset/Liability Committee considers, among other things, the yield and interest rate
objectives, the credit risk position, and the Banks liquidity and projected cash flow
requirements. Securities.Federally chartered savings institutions have the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings institutions, certain
bankers acceptances, repurchase agreements and federal funds. Subject to various restrictions, the
holding company of a federally chartered savings institution may also invest its assets in
commercial paper, investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise authorized to make
directly. The investment strategy of the Company and the Bank has been directed toward a mix of high-quality
assets (primarily government agency obligations) with short and intermediate terms to maturity. At
December 31, 2004, the Company did not own any investment securities of a single issuer that
exceeded 10% of the Companys stockholders equity other than U.S. government agency obligations. The Bank invests a portion of its liquid assets in interest-earning overnight deposits of the
Federal Home Loan Bank of Des Moines (FHLB) and various money market mutual funds. Other
investments include high grade medium-term (up to three years) federal agency notes, and a variety
of other types of mutual funds that invest in adjustable-rate, mortgage-backed securities,
asset-backed securities, repurchase agreements and U.S. Treasury and agency obligations. The
Company invests in the same type of investment securities as the Bank and also invests in taxable
and tax exempt municipal obligations and corporate equities such as preferred and common stock.
Refer to Note 3 of the Notes to Consolidated Financial Statements in the Annual Report for
additional information regarding the Companys securities portfolio. 15




---



##### Table of Contents



The following table set forth the composition of the Companys securities portfolio, excluding
mortgage-backed and related securities, at the dates indicated. 2004
    
    
    2003
    
    
    2002Amort
    
    
    Adjusted
    
    
    Market
    
    
    % of
    
    
    Amort
    
    
    Adjusted
    
    
    Market
    
    
    % of
    
    
    Amort
    
    
    Adjusted
    
    
    Market
    
    
    % ofCost
    
    
    To
    
    
    Value
    
    
    Total
    
    
    Cost
    
    
    To
    
    
    Value
    
    
    Total
    
    
    Cost
    
    
    To
    
    
    Value
    
    
    TotalSecurities available for sale:U.S. Government agency obligations
    
    $
    91,371
    
    
    
    (575
    )
    
    
    90,796
    
    
    
    77.42
    %
    
    $
    86,658
    
    
    
    930
    
    
    
    87,588
    
    
    
    67.32
    %
    
    $
    61,098
    
    
    
    2,154
    
    
    
    63,252
    
    
    
    59.05
    %Municipal obligations
    
    
    65
    
    
    
    0
    
    
    
    65
    
    
    
    0.06
    
    
    
    177
    
    
    
    (7
    )
    
    
    170
    
    
    
    0.13
    
    
    
    319
    
    
    
    (11
    )
    
    
    308
    
    
    
    0.29Corporate debt
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    
    
    
    1,061
    
    
    
    16
    
    
    
    1,077
    
    
    
    1.01Corporate equity (1)
    
    
    700
    
    
    
    0
    
    
    
    700
    
    
    
    0.60
    
    
    
    700
    
    
    
    0
    
    
    
    700
    
    
    
    0.54
    
    
    
    1,300
    
    
    
    191
    
    
    
    1,491
    
    
    
    1.39Preferred stock of federal agencies (1)
    
    
    2,961
    
    
    
    0
    
    
    
    2,961
    
    
    
    2.52
    
    
    
    3,500
    
    
    
    (343
    )
    
    
    3,157
    
    
    
    2.43
    
    
    
    3,504
    
    
    
    (131
    )
    
    
    3,373
    
    
    
    3.15Subtotal
    
    
    95,097
    
    
    
    
    
    
    
    94,522
    
    
    
    80.60
    
    
    
    91,035
    
    
    
    
    
    
    
    91,615
    
    
    
    70.42
    
    
    
    67,282
    
    
    
    
    
    
    
    69,501
    
    
    
    64.89Federal Home Loan Bank stock
    
    
    9,293
    
    
    
    
    
    
    
    9,293
    
    
    
    7.92
    
    
    
    10,004
    
    
    
    
    
    
    
    10,004
    
    
    
    7.69
    
    
    
    11,881
    
    
    
    
    
    
    
    11,881
    
    
    
    11.09Total investment securities
and Federal Home Loan Bank stock
    
    
    104,390
    
    
    
    
    
    
    
    103,815
    
    
    
    88.52
    
    
    
    101,039
    
    
    
    
    
    
    
    101,619
    
    
    
    78.11
    
    
    
    79,163
    
    
    
    
    
    
    
    81,382
    
    
    
    75.98Average remaining life of
investment securities excluding
Federal Home Loan Bank stock
    
    1.5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.8 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3 yearsOther interest earning assets:Cash equivalents
    
    
    13,467
    
    
    
    
    
    
    
    13,467
    
    
    
    11.48
    
    
    
    28,497
    
    
    
    
    
    
    
    28,497
    
    
    
    21.89
    
    
    
    25,729
    
    
    
    
    
    
    
    25,729
    
    
    
    24.02Total
    
    $
    117,857
    
    
    
    
    
    

    
    117,282
    
    
    
    100.00
    %
    
    $
    129,536
    
    
    
    
    
    
    
    130,116
    
    
    
    100.00
    %
    
    $
    104,892
    
    
    
    
    
    
    
    107,111
    
    
    
    100.00
    %Average remaining life or term to
repricing of investment securities and
other interest earning assets, excluding
Federal Home Loan Bank stock
    
    1.3 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.7 years
   (1)
    
    Average life assigned to corporate equity holdings and preferred stock of
federal agencies is five years. 16




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##### Table of Contents



The composition and maturities of the investment securities portfolio, excluding Federal Home
Loan Bank stock, mortgage-backed and related securities, are indicated in the following table. December 31, 2004After 1
    
    
    After 51 Year
    
    
    through 5
    
    
    through 10
    
    
    Over
    
    
    No Stated
    
    
    Totalor Less
    
    
    Years
    
    
    Years
    
    
    10 Years
    
    
    Maturity
    
    
    SecuritiesAmortized
    
    
    Amortized
    
    
    Amortized
    
    
    Amortized
    
    
    Amortized
    
    
    Amortized
    
    
    Adjusted
    
    
    Market(Dollars in thousands)
    
    Cost
    
    
    Cost
    
    
    Cost
    
    
    Cost
    
    
    Cost
    
    
    Cost
    
    
    To
    
    
    ValueSecurities available for sale:U.S. government agency securities
    
    $
    45,912
    
    
    
    45,459
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    91,371
    
    
    
    (575
    )
    
    
    90,796Municipal obligations
    
    
    0
    
    
    
    0
    
    
    
    65
    
    
    
    0
    
    
    
    0
    
    
    
    65
    
    
    
    0
    
    
    
    65Corporate equity
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    700
    
    
    
    700
    
    
    
    0
    
    
    
    700Preferred stock of federal agencies
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2,961
    
    
    
    2,961
    
    
    
    0
    
    
    
    2,961Total stock
    
    $
    45,912
    
    
    
    45,459
    
    
    
    65
    
    
    
    0
    
    
    
    3,661
    
    
    
    95,097
    
    
    
    
    
    
    
    94,522Weighted average yield (1)
    
    
    2.77
    %
    
    
    2.60
    %
    
    
    7.25
    %
    
    
    0.00
    %
    
    
    2.92
    %
    
    
    2.70
    %
   (1)
    
    Yields are computed on a tax equivalent basis. Mortgage-Backed and Related Securities.In order to supplement loan production and achieve
its asset/liability management goals, the Company invests in mortgage-backed and related
securities. All of the mortgage-backed and related securities owned by the Company are issued,
insured or guaranteed either directly or indirectly by a federal agency or are rated AA or
higher. The Company had $9.2 million of mortgage-backed and related securities classified as
available for sale at December 31, 2004, compared to $13.0 at December 31, 2003 and $51.9 million
at December 31, 2002. The contractual maturities of the mortgage-backed and related securities portfolio without any
prepayment assumptions at December 31, 2004 are as follows: December 31,20045 Years
    
    
    5 to 10
    
    
    10 to 20
    
    
    Over 20
    
    
    Balance(Dollars in thousands)
    
    or Less
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    OutstandingSecurities available for sale:Federal Home Loan Mortgage Corporation
    
    $
    0
    
    
    
    255
    
    
    
    0
    
    
    
    0
    
    
    
    255Government National Mortgage Association
    
    
    0
    
    
    
    0
    
    
    
    23
    
    
    
    0
    
    
    
    23Collateralized Mortgage Obligations
    
    
    146
    
    
    
    0
    
    
    
    5,313
    
    
    
    3,414
    
    
    
    8,873Total
    
    $
    146
    
    
    
    255
    
    
    
    5,336
    
    
    
    3,414
    
    
    
    9,151Weighted average yield
    
    
    6.55
    %
    
    
    6.64
    %
    
    
    3.84
    %
    
    
    4.00
    %
    
    
    4.01
    %
 At December 31, 2004, the Company did not have any non-agency mortgage-backed or related
securities in excess of 10% of its stockholders equity. Collateralized Mortgage Obligations (CMOs) are securities derived by reallocating the cash flows
from mortgage-backed securities or pools of mortgage loans in order to create multiple classes, or
tranches, of securities with coupon rates and average lives that differ from the underlying
collateral as a whole. The terms to maturity of any particular tranche is dependent upon the
prepayment speed of the underlying collateral as well as the structure of the particular CMO.
Although a significant proportion of the Companys CMOs are in tranches which have been structured
(through the use of cash flow priority and support tranches) to give somewhat more predictable cash
flows, the cash flow and hence the value of CMOs is subject to change. At December 31, 2004, the Company had $52,000 invested in CMOs that have floating interest rates
that change either monthly or quarterly, compared to $84,000 at December 31, 2003 and $43.6 million
at December 31, 2002. 17




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##### Table of Contents



Mortgage-backed and related securities can serve as collateral for borrowings and, through sales
and repayments, as a source of liquidity. In addition, mortgage-backed and related securities
available for sale can be sold to respond to changes in economic conditions. 
 Sources of Funds General.The Banks primary sources of funds are retail and brokered deposits, payments of
loan principal, interest earned on loans and securities, repayments and maturities of securities,
borrowings and other funds provided from operations. Deposits.The Bank offers a variety of deposit accounts having a wide range of interest rates and
terms. The Banks deposits consist of passbook, negotiable order of withdrawal (NOW), money
market, non-interest bearing checking and certificate accounts (including individual retirement
accounts) to retail and commercial business customers. The Bank relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining
funds and to respond with flexibility to changes in consumer demand. As customers have become more
interest rate conscious, the Bank has become more susceptible to short-term fluctuations in deposit
flows. The Bank manages the pricing of its deposits in keeping with its asset/liability
management, profitability and growth objectives. Based on its experience, the Bank believes that
its passbook, NOW, and money market accounts are relatively stable sources of deposits. However,
the ability of the Bank to attract and maintain certificate deposits, and the rates paid on these
deposits, has been and will continue to be significantly affected by market conditions. The following table sets forth the savings flows at the Bank during the periods indicated. Year Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Opening balance
    
    $
    551,688
    
    
    
    432,951
    
    
    
    421,843Deposits
    
    
    3,750,395
    
    
    
    2,498,532
    
    
    
    1,444,532Withdrawals
    
    
    (3,613,887
    )
    
    
    (2,388,783
    )
    
    
    (1,442,495
    )Interest credited
    
    
    10,706
    
    
    
    8,988
    
    
    
    9,071Ending balance
    
    
    698,902
    
    
    
    551,688
    
    
    
    432,951Net increase
    
    $
    147,214
    
    
    
    118,737
    
    
    
    11,108Percent increase
    
    
    26.68
    %
    
    
    27.43
    %
    
    
    2.63
    %
 18




---



##### Table of Contents



The following table sets forth the dollar amount of savings deposits in the various types of
deposit programs offered by the Bank as of December 31: 2004
    
    
    2003
    
    
    2002Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent(Dollars in thousands)
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of TotalTransaction and Savings Deposits(1):Non-interest checking
    
    $
    42,777
    
    
    
    6.12
    %
    
    $
    37,629
    
    
    
    6.82
    %
    
    $
    28,173
    
    
    
    6.51
    %NOW Accounts  1.01%(2)
    
    
    95,294
    
    
    
    13.63
    
    
    
    61,271
    
    
    
    11.11
    
    
    
    43,509
    
    
    
    10.03Passbook Accounts  0.19%(3)
    
    
    47,416
    
    
    
    6.78
    
    
    
    35,883
    
    
    
    6.50
    
    
    
    41,033
    
    
    
    9.48Money Market Accounts  1.72%(4)
    
    
    129,098
    
    
    
    18.47
    
    
    
    91,315
    
    
    
    16.57
    
    
    
    49,510
    
    
    
    11.44Total Non-Certificates
    
    $
    314,585
    
    
    
    45.00
    %
    
    $
    226,098
    
    
    
    41.00
    %
    
    $
    162,225
    
    
    
    37.46
    %Certificates:0.00 - 0.99%
    
    $
    883
    
    
    
    0.13
    %
    
    $
    1,525
    
    
    
    0.28
    %
    
    $
    481
    
    
    
    0.11
    %1.00 - 1.99%
    
    
    62,833
    
    
    
    8.99
    
    
    
    55,629
    
    
    
    10.08
    
    
    
    22,522
    
    
    
    5.202.00 - 2.99%
    
    
    160,829
    
    
    
    23.01
    
    
    
    103,450
    
    
    
    18.75
    
    
    
    72,161
    
    
    
    16.673.00 - 3.99%
    
    
    108,938
    
    
    
    15.59
    
    
    
    71,691
    
    
    
    12.99
    
    
    
    75,445
    
    
    
    17.434.00 - 4.99%
    
    
    49,449
    
    
    
    7.08
    
    
    
    76,315
    
    
    
    13.83
    
    
    
    74,818
    
    
    
    17.285.00 - 5.99%
    
    
    1,266
    
    
    
    0.20
    
    
    
    16,621
    
    
    
    3.01
    
    
    
    23,719
    
    
    
    5.486.00 - 6.99%
    
    
    5
    
    
    
    0.00
    
    
    
    246
    
    
    
    0.04
    
    

    
    1,468
    
    
    
    0.357.00 - 7.99%
    
    
    114
    
    
    
    0.00
    
    
    
    113
    
    
    
    0.02
    
    
    
    112
    
    
    
    0.02Total Certificates
    
    
    384,317
    
    
    
    55.00
    
    
    
    325,590
    
    
    
    59.00
    
    
    
    270,726
    
    
    
    62.54Total Deposits
    
    $
    698,902
    
    
    
    100.00
    %
    
    $
    551,688
    
    
    
    100.00
    %
    
    $
    432,951
    
    
    
    100.00
    %
   (1)
    
    Reflects rates paid on transaction and savings deposits at December 31, 2004.(2)
    
    The rate on NOW Accounts for 2003 was 0.39% and 2002 was 0.30%.(3)
    
    The rate on Passbook Accounts for 2003 was 0.20% and 2002 was 0.35%.(4)
    
    The rate on Money Market Accounts for 2003 was 1.23% and 2002 was 1.16%. 19




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##### Table of Contents



The following table shows rate and maturity information for the Banks certificates of deposit as
of December 31, 2004. (Dollars in thousands)Certificate accounts maturing in
    
    0.00-
    
    
    1.00-
    
    
    2.00-
    
    
    3.00-
    
    
    4.00-
    
    
    5.00-
    
    
    6.00-
    
    
    7.00-
    
    
    
    
    
    
    Percentquarter ending:
    
    0.99%
    
    
    1.99%
    
    
    2.99%
    
    
    3.99%
    
    
    4.99%
    
    
    5.99%
    
    
    6.99%
    
    
    7.99%
    
    
    Total
    
    
    of TotalMarch 31, 2005 5
    
    $
    302
    
    
    
    24,257
    
    
    
    5,804
    
    
    
    3,272
    
    
    
    10,758
    
    
    
    293
    
    
    
    0
    
    
    
    0
    
    
    
    44,686
    
    
    
    11.63June 30, 2005
    
    
    96
    
    
    
    18,349
    
    
    
    27,493
    
    
    
    2,488
    
    
    
    17,275
    
    
    
    149
    
    
    
    0
    
    
    
    14
    
    
    
    65,864
    
    
    
    17.14September 30, 2005
    
    
    75
    
    
    
    9,753
    
    
    
    21,201
    
    
    
    18,633
    
    
    
    630
    
    
    
    110
    
    
    
    0
    
    
    
    100
    
    
    
    50,502
    
    
    
    13.14December 31, 2005
    
    
    84
    
    
    
    7,134
    
    
    
    23,883
    
    
    
    5,121
    
    
    
    308
    
    
    
    67
    
    
    
    0
    
    
    
    0
    
    
    
    36,597
    
    
    
    9.52March 31, 2006
    
    
    49
    
    
    
    1,629
    
    
    
    9,430
    
    
    
    2,985
    
    
    
    292
    
    
    
    120
    
    
    
    0
    
    
    
    0
    
    
    
    14,505
    
    
    
    3.77June 30, 2006
    
    
    22
    
    
    
    1,178
    
    
    
    8,710
    
    
    
    12,544
    
    
    
    675
    
    
    
    351
    
    
    
    0
    
    
    
    0
    
    
    
    23,480
    
    
    
    6.11September 30, 2006
    
    
    26
    
    
    
    282
    
    
    
    3,383
    
    
    
    243
    
    
    
    255
    
    
    
    7
    
    
    
    5
    
    
    
    0
    
    
    
    4,201
    
    
    
    1.09December 31, 2006
    
    
    69
    
    
    
    153
    
    
    
    33,345
    
    
    
    1,198
    
    
    
    1,204
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    35,969
    
    
    
    9.36March 31, 2007
    
    
    6
    
    
    
    93
    
    
    
    5,328
    
    
    
    4,268
    
    
    
    7,901
    
    
    
    89
    
    
    
    0
    
    
    
    0
    
    
    
    17,685
    
    
    
    4.60June 30, 2007
    
    
    20
    
    
    
    3
    
    
    
    5,309
    
    
    
    12,936
    
    
    
    1,809
    
    
    
    17
    
    
    
    0
    
    
    
    0
    
    
    
    20,094
    
    
    
    5.23September 30, 2007
    
    
    13
    
    
    
    0
    
    
    
    6,576
    
    
    
    15,885
    
    
    
    1,506
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    23,980
    
    
    
    6.25December 31, 2007
    
    
    3
    
    
    
    0
    
    
    
    1,502
    
    
    
    7,467
    
    
    
    1,336
    
    
    
    0

    
    
    
    0
    
    
    
    0
    
    
    
    10,308
    
    
    
    2.68Thereafter
    
    
    118
    
    
    
    2
    
    
    
    8,865
    
    
    
    21,898
    
    
    
    5,500
    
    
    
    63
    
    
    
    0
    
    
    
    0
    
    
    
    36,446
    
    
    
    9.48Total
    
    $
    883
    
    
    
    62,833
    
    
    
    160,829
    
    
    
    108,938
    
    
    
    49,449
    
    
    
    1,266
    
    
    
    5
    
    
    
    114
    
    
    
    384,317
    
    
    
    100.00
    %Percent of total
    
    
    0.23
    %
    
    
    16.35
    %
    
    
    41.85
    %
    
    
    28.34
    %
    
    
    12.87
    %
    
    
    0.33
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    100.00
    %
 20




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##### Table of Contents



The following table indicates the amount of the Banks certificates of deposit and other
deposits by time remaining until maturity as of December 31, 2004. MaturityOver
    
    
    Over
    
    
    Over3 Months
    
    
    3 to 6
    
    
    6 to 12
    
    
    12or Less
    
    
    Months
    
    
    Months
    
    
    months
    
    
    Total(Dollars in thousands)Certificates of deposit less than $100,000
    
    $
    26,720
    
    
    
    36,304
    
    
    
    45,266
    
    
    
    84,471
    
    
    
    192,761Certificates of deposit of $100,000 or more
    
    
    11,803
    
    
    
    17,798
    
    
    
    39,618
    
    
    
    98,229
    
    
    
    167,448Public funds less than $100,000
    
    
    63
    
    
    
    50
    
    
    
    134
    
    
    
    108
    
    
    
    355Public funds of $100,000 or more(1)
    
    
    6,100
    
    
    
    11,712
    
    
    
    2081
    
    
    
    3,860
    
    
    
    23,753Total certificates of deposit
    
    $
    44,686
    
    
    
    65,864
    
    
    
    87,099
    
    
    
    186,668
    
    
    
    384,317Passbook of $100,000 or more
    
    $
    15,198
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    15,198Accounts of $100,000 or more
    
    $
    33,101
    
    
    
    29,510
    
    
    
    41,699
    
    
    
    102,089
    
    
    
    206,399
   (1) Deposits from governmental and other public entities. For additional information regarding the composition of the Banks deposits, see Note 12 of
the Notes to Consolidated Financial Statements in the Annual Report. For additional information on
certificate maturities and the impact on the Companys liquidity see Liquidity starting on page 17
of the Annual Report. Borrowings.The Banks other available sources of funds include advances from the FHLB and other
borrowings. As a member of the FHLB, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances. Each FHLB credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLB may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment provisions. Consistent
with its asset/liability management strategy, the Bank has utilized FHLB advances from time to time
to fund loan demand and extend the term to maturity of its liabilities. The Bank also uses
short-term FHLB borrowings to offset short term cash needs due to deposit outflows or loan
fundings. At December 31, 2004, the Bank had $170.9 million of FHLB advances outstanding. On such
date, the Bank had a collateral pledge arrangement with the FHLB of Des Moines pursuant to which
the Bank may borrow up to an additional $33.0 million for liquidity purposes. Refer to Note 13 of
the Notes to Consolidated Financial Statements in the Annual Report for more information on FHLB
advances. The Company had a $2.5 million revolving line of credit established with a bank that was not drawn
at December 31, 2004. The credit line expires on November 29, 2005. 
 Service Corporations of the Bank As a federally chartered savings bank, the Bank is permitted by OTS regulations to invest up to 2%
of its assets in the stock of, or loans to, service corporation subsidiaries, and may invest an
additional 1% of its assets in service corporations where these additional funds are used for
inner-city or community development purposes. In addition to investments in service corporations,
federal institutions are permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities in which a federal savings bank may engage directly. OAI is a Minnesota corporation that was organized in 1983 and operated as an insurance agency until
1986 when its assets were sold. OAI remained inactive until 1993 when it began offering credit
life insurance, annuity and mutual fund products to the Banks customers and others. The Bank owned a 51% interest in HFMS, a Delaware limited liability company, that was formed in
2001 to operate a mortgage banking and mortgage brokerage business in Brooklyn Park, Minnesota.
HFMSs brokerage and production activity stopped in the third quarter of 2002, its assets were
liquidated in 2003, and it was dissolved. 21




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##### Table of Contents



HFH is a wholly owned Delaware corporation that was formed in 2002, and has its principal office in
Grand Cayman Islands. HFH is the holding company for HFREIT which invests in real estate loans
acquired from the Bank. The Bank owned an 80% interest in FTS, a Minnesota limited liability company formed in 2003 to
operate a mortgage title services business located in Minnetonka, Minnesota. FTS stopped accepting
title orders in the third quarter of 2004 and was dissolved. 
 Competition The Bank faces strong competition both in originating real estate, commercial and consumer loans
and in attracting deposits. Competition in originating loans comes primarily from mortgage
bankers, commercial banks, credit unions and other savings institutions, which have offices in the
Banks market area and those that operate through Internet banking operations throughout the
continental United States. The Bank competes for loans principally on the basis of the interest
rates and loan fees it charges, the types of loans it originates and the quality of services it
provides to borrowers. Competition for deposits is principally from money market and mutual funds, securities firms,
commercial banks, credit unions and other savings institutions located in the same communities and
those that operate through Internet banking operations throughout the continental United States.
The ability of the Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk, convenience and other factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours and a customer oriented
staff. 
 Other Corporations Owned by the Company HMN has one other wholly owned subsidiary, SFC which acts as an intermediary for the Bank in
transacting like kind property exchanges for Bank customers. 
 Employees At December 31, 2004, the Company had a total of 233 employees including part-time employees. None
of the employees of the Company or its subsidiaries are represented by any collective bargaining
unit. Management considers its employee relations to be good. 
 Regulation and Supervision The banking industry is highly regulated, as a savings and loan holding company, the Company
is subject to regulation by the Office of Thrift Supervision (OTS). The Bank, a
federally-chartered savings association, is subject to extensive regulation and examination by the
OTS, which is the Banks primary federal regulator. The FDIC also has some authority to regulate
the Bank. Subsidiaries of the Company and the Bank may also be subject to state regulation and/or
licensing in connection with certain insurance and investment activities. The Company and the Bank
are subject to numerous laws and regulations. These laws and regulations impose restrictions on
activities, set minimum capital requirements, impose lending and deposit restrictions and establish
other restrictions. References in this section to applicable statutes and regulations are brief
and incomplete summaries only. You should consult the statutes and regulations for a full
understanding of the details of their operation. 22




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##### Table of Contents



Holding Company Regulation An entity that owns a savings association is a savings and loan holding company (SLHC). If a
holding company owns more than one savings association, it is a multiple SLHC; if it owns only one
savings association, it is a unitary SLHC. HMN is a unitary SLHC. The Home Owners Loan Act (HOLA)
historically limited multiple SLHCs and their non-association subsidiaries to financial activities
and services and to activities authorized for bank holding companies, but unitary SLHCs, in the
past, were not subject to restrictions on the activities that could be conducted by holding
companies or their affiliates. In November of 1999 the Gramm-Leach-Bliley Act (the GLB Act) was signed into law. The GLB Act made
significant changes to laws regulating the financial services industry. Changes included: (1) a
new framework under in which bank holding companies can own securities firms, insurance companies
and other financial companies; (2) prohibitions on new unitary SLHCs from engaging in non-financial
activities or affiliating with non-financial entities; (3) new consumer protections associated with
the transfer and use of non-public personal information by financial institutions; and (4)
modifications to the Federal Home Loan Bank System. Unitary SLHCs, such as HMN, that were in
existence or had an application filed with the OTS on or before May 4, 1999, are not subject to the
new restrictions on unitary SLHCs. As a result, the GLB Act did not affect HMNs ability to
control non-financial firms or engage in non-financial activities. Acquisitions by Savings and Loan Holding Companies. Acquisition of a savings association
or a savings and loan holding company is generally subject to OTS approval and the public must have
an opportunity to comment on the proposed acquisition. Without prior approval from the OTS, HMN
may not acquire, directly or indirectly, more than 5% of the voting stock of a savings association. Examination and Reporting. Under HOLA and OTS regulations HMN, as a SLHC, must file
periodic reports with the OTS. In addition, HMN must comply with OTS record keeping requirements
and is subject to holding company examination by the OTS. The OTS may take enforcement action if
the activities of a SLHC constitute a serious risk to the financial safety, soundness or stability
of a subsidiary savings association. Affiliate Transactions. The Bank, as a holding company subsidiary that is a depository
institution, is subject to both qualitative and quantitative limitations on transactions with HMN
and HMNs other subsidiaries. SeeTransactions with Affiliates and Insiders. Capital Adequacy. HMN is not currently subject to regulatory capital requirements, the
Bank is subject to various capital requirements. See Capital Requirements. Bank Regulation As a federally-chartered savings association, the Bank is subject to regulation and supervision by
the OTS. Federal law authorizes the Bank as a federal savings association, to conduct, subject to
various conditions and limitations, business activities that include: accepting deposits and
paying interest on them; making and buying loans secured by residential and other real estate;
making a limited amount of consumer loans; making a limited amount of commercial loans; investing
in corporate obligations, government debt securities, and other securities; and offering various
banking, trust, securities and insurance agency services to its customers. OTS regulations place limits on the Banks lending and investment powers. Savings associations are
expected to conduct lending activities in a prudent, safe and sound manner. OTS regulations set
aggregate limits on certain types of loans including commercial, commercial real estate, and
consumer loans. OTS regulations also establish limits on loans to a single borrower. As of
December 31, 2004, the Banks loan limit to one borrower was approximately $12.2 million. A
federal savings association generally may not invest in noninvestment-grade debt securities. A
federal savings association may establish subsidiaries to conduct any activity the association is
authorized to conduct and may establish service corporation subsidiaries for limited preapproved
activities. 23




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##### Table of Contents



Qualified Thrift Lender Test. Savings associations, including the Bank, must be qualified
thrift lenders (QTLs). A savings association generally satisfies the QTL requirement if at least
65% of a specified asset base consists of things such as loans to small businesses and loans to
purchase or improve domestic residential real estate. Savings associations may qualify as QTLs in
other ways. Savings associations that do not qualify as QTLs are subject to significant
restrictions on their operations. If the Bank fails to meet QTL requirements the Bank and HMN
would face certain limitations, including limits on HMNs ability to control non-financial firms.
As of December 31, 2004, the Bank met the QTL test. OTS Assessments. HOLA authorizes the OTS to charge assessments to recover the costs of
examining savings associations, holding companies, and their affiliates. The assessment is done
semi-annually. The OTS bases the assessment on three factors: 1) asset size; 2) condition; and 3)
complexity of the institution. The Banks and Holding Companys OTS assessments for the year ended
December 31, 2004, were approximately $174,000. Transactions with Affiliates and Insiders. Banks and savings associations are subject to
affiliate and insider transaction restrictions. The restrictions prohibit or limit a savings
association from extending credit to, or entering into certain transactions with affiliates,
principal stockholders, directors and executive officers of the savings association and its
affiliates. The term affiliate generally includes a holding company, such as HMN, and any
company under common control with the savings association. Federal law limits transactions between
the Bank and any one affiliate to 10% of the Banks capital and surplus and with all affiliates in
the aggregate to 20%. In addition, the federal law governing unitary savings and loan holding
companies prohibits the Bank from making any loan to any affiliate whose activity is not permitted
for a subsidiary of a bank holding company. This law also prohibits the Bank from making any
equity investment in any affiliate that is not its subsidiary. The Bank is currently in compliance
with these requirements. Dividend Restrictions. Federal law limits the ability of a depository institution, such as
the Bank, to pay dividends or make other capital distributions. The Bank, as a subsidiary of a
savings and loan holding company, must file a notice with the OTS before the proposed declaration
of a dividend or approval of a proposed capital distribution by its board of directors and must
obtain prior approval from the OTS if it fails to meet certain regulatory conditions. The Bank
declared and distributed dividends to HMN of $4.0 million in 2004. Deposit Insurance The FDIC insures the deposits of the Bank. The FDIC administers two separate deposit insurance
funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). The BIF is
a deposit insurance fund for commercial banks and some state-chartered savings associations. The
SAIF is a deposit insurance fund for most savings associations. The Bank is a member of the SAIF. The FDIC has established a risk-based system for setting deposit insurance assessments. Under the
risk-based assessment system, an institutions insurance assessments vary according to the level of
capital the institution holds and the degree to which it is the subject of supervisory concern. In
addition, regardless of the potential risk to the insurance fund, federal law requires the FDIC to
establish assessment rates that will maintain each insurance funds ratio of reserves to insured
deposits at $1.25 per $100. Both funds currently exceed this reserve ratio. During 2004, the
assessment rate for both SAIF and BIF deposits ranged from zero to 0.27% of covered deposits. The
Bank qualified for the lowest rate on SAIF deposits in 2004 and thus paid $0 in 2004. It is
possible that the reserve ratio will fall below 1.25% and accordingly, it is possible the Bank will
have to pay deposit insurance assessments in 2005 or subsequent years. In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against
insured deposits to be paid to the Financing Corporation (FICO) to service FICO debt incurred in
the 1980s. The FICO assessment rate is adjusted quarterly. In 2004 the Bank paid an assessment of
approximately $91,000. 24




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##### Table of Contents



Capital Requirements The federal bank regulatory agencies, including the OTS, have a risk-based capital framework in
place. The regulators use a combination of risk based guidelines and leverage ratios to evaluate
capital adequacy. The following table sets forth the current regulatory requirement for capital ratios for savings
associations as compared with the Banks capital ratios at December 31, 2004: Core or Tier 1
    
    
    
    
    
    
    Core or Tier 1
    
    
    Total Capital toCapital to Adjusted
    
    
    Tangible Capital to
    
    
    Capital to Risk-
    
    
    Risk-WeightedTotal Assets
    
    
    Assets
    
    
    Weighted Assets
    
    
    AssetsRegulatory Minimum
    
    
    3.00%
    (1)
    
    
    1.50%
    
    
    
    4.00%
    
    
    
    8.00%The Banks Actual
    
    
    7.77%
    
    
    
    7.77%
    
    
    
    9.45%
    
    
    
    10.49%
   (1)
    Savings associations are required to maintain a leverage ratio of 4.00% or more
to be considered adequately capitalized. Capital Categories and Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created a statutory
framework that increased the importance of meeting applicable capital requirements. FDICIA
established five capital categories: (1) well-capitalized; (2) adequately capitalized; (3)
undercapitalized; (4) significantly undercapitalized; and (5) critically undercapitalized. The
activities in which a depository institution may engage and regulatory responsibilities of federal
bank regulatory agencies vary depending upon whether an institution is well-capitalized, adequately
capitalized or under capitalized. Under capitalized institutions are subject to various
restrictions such as limitations on dividends and growth. A depository institutions category
depends upon where its capital levels are in relation to relevant capital measures, which include a
risk-based capital measure and certain other factors. The federal banking agencies (including the
OTS) adopted regulations that implement this statutory framework. Under these regulations, an
institution is generally treated as well-capitalized if its ratio of total capital to risk-weighted
assets is 10.00% or more, its ratio of core capital to risk-weighted assets is 6.00% or more, its
ratio of core capital to adjusted total assets (leverage ratio) is 5.00% or more, and it is not
subject to any federal supervisory order or directive to meet a specific capital level. In order
to be adequately capitalized, an institution must have a total risk-based capital ratio of not less
than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and a leverage ratio of not
less than 4.00%. Any institution that is neither well capitalized nor adequately capitalized will
be considered undercapitalized. The Bank currently is considered well capitalized. Other Regulations and Examination Authority The FDIC has adopted regulations to protect the deposit insurance funds and depositors, including
regulations governing the deposit insurance of various forms of accounts. Federal regulation of
depository institutions is intended for the protection of depositors (and the BIF and the SAIF),
and not for the protection of stockholders or other creditors. In addition, federal law requires
that in any liquidation or other resolution of any FDIC-insured depository institution, claims for
administrative expenses of the receiver and for deposits in U.S. branches (including claims of the
FDIC as subrogee of the insured institution) shall have priority over the claims of general
unsecured creditors. The OTS may sanction any OTS-regulated bank that does not operate in accordance with OTS
regulations, policies and directives. The FDIC has additional authority to terminate insurance of
accounts, after notice and hearing, upon a finding that the insured institution is or has engaged
in any unsafe or unsound practice that has not been corrected, is operating in an unsafe or unsound
condition, or has violated any applicable law, regulation, rule, or order of or condition imposed
by the FDIC. 25




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##### Table of Contents



Federal Home Loan Bank (FHLB) System The Bank is a member of the FHLB of Des Moines, which is one of the 12 regional Federal Home Loan
Banks (FHBs), that administer the home financing credit function of savings associations. Each FHB
serves as a reserve or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the FHB System. It
makes loans or advances to members in accordance with policies and procedures established by the
board of directors of the FHB. These policies and procedures are subject to the regulation and
oversight of the Federal Housing Financing Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHB. Long-term advances are required
to be used for residential home financing and small business and agricultural loans. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. As of
December 31, 2004, the Bank had $9.3 million in FHLB stock, which was in compliance with this
requirement. The Bank receives dividends on its FHLB stock and over the past five calendar years
dividends have averaged approximately 3.9% and averaged 2.1% in 2004. Federal Reserve Regulation Under Federal Reserve Board regulations, the Bank is required to maintain reserves against
transaction accounts (primarily interest-bearing and noninterest-bearing checking accounts).
Because reserves must generally be maintained in cash or in noninterest-bearing accounts, the
effect of the reserve requirements is to increase an institutions cost of funds. These
regulations generally require that the Bank maintain reserves against net transaction accounts.
The reserve levels are subject to adjustment by the Federal Reserve Board. A savings association,
like other depository institutions maintaining reservable accounts, may, under certain conditions,
borrow from the Federal Reserve Bank discount window. Numerous other regulations promulgated by the Federal Reserve Board or the OTS affect the business
operations of the Bank. These include regulations relating to privacy, equal credit access,
electronic fund transfers, collection of checks, lending and savings disclosures, and availability
of funds. Community Reinvestment Act The Community Reinvestment Act (CRA) requires financial institutions regulated by the federal
financial supervisory agencies to ascertain and help meet the credit needs of their delineated
communities, including low-to moderate-income neighborhoods within those communities, while
maintaining safe and sound banking practices. The regulatory agency assigns one of four possible
ratings to an institutions CRA performance and is required to make public an institutions rating
and written evaluation. The four possible ratings of meeting community credit needs are
outstanding, satisfactory, needs improvement and substantial noncompliance. Under regulations that
apply to all CRA performance evaluations after July 1, 1997, many factors play a role in assessing
a financial institutions CRA performance. The institutions regulator must consider its financial
capacity and size, legal impediments, local economic conditions and demographics, including the
competitive environment in which it operates. The evaluation does not rely on absolute standards,
and the institutions are not required to perform specific activities or to provide specific amounts
or types of credit. The Bank maintains a CRA statement for public viewing, as well as an annual
CRA highlights document. These documents describe the Banks credit programs and services,
community outreach activities, public comments and other efforts to meet community credit needs.
The Banks last CRA exam was September 28, 2004 and the Bank received a Satisfactory rating. Bank Secrecy Act The Bank Secrecy Act (BSA) requires financial institutions to verify the identity of customers,
keep records and file reports that are determined to have a high degree of usefulness in criminal,
tax and regulatory matters, and to implement counter-money laundering programs and compliance
procedures. The impact on Bank operations from the BSA depends on the types of customers served by
the Bank. 26




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##### Table of Contents



Executive Officers Officers are chosen by and serve at the discretion of the Board of Directors of the Company
and the Bank. There are no family relationships among any of the directors or officers of the
Company and the Bank. The business experience of each executive officer of both the Company and
the Bank is set forth below. Michael McNeil, age 57.Mr. McNeil has been a director of the Company since 1999, the President of
the Company since November 2000 and the Chief Executive Officer of the Company since April 2004.
Mr. McNeil has been the President and Chief Executive Officer of the Bank since January 1999 and a
director of the Bank since April 1998. From April 1998 through December 1998, Mr. McNeil was the
Senior Vice President Business Development of the Bank. Prior to joining the Bank, Mr. McNeil was
the President and a director of Stearns Bank, N.A. in St. Cloud, Minnesota from August 1991 until
March 1998. Jon J. Eberle, age 39.Mr. Eberle is Chief Financial Officer, Senior Vice President and Treasurer
of the Company and the Bank. Mr. Eberle has held such positions since 2003. Prior to that he
served as a Vice President since 2000 and as the Controller since 1998. From 1994 to 1998, he
served as the Director of Internal Audit for the Company and the Bank. Dwain C. Jorgensen, age 56.Mr. Jorgensen has served as Senior Vice President of Operations of the
Company and the Bank since 1998. From 1989 to 1998, he served as Vice President, Controller and
Chief Accounting Officer of the Company and the Bank. From 1983 to 1989, Mr. Jorgensen was an
Assistant Vice President and Operations Officer for the Bank. Susan K. Kolling, age 53.Ms. Kolling has been a director of the Company since 2001. Ms. Kolling
served as a Vice President of the Bank from 1992 to 1994 and has served as a Senior Vice President
of the Bank since 1995. Ms. Kolling has served as a Vice President since June 1993 and a director
since April 1996 of Osterud Insurance Agency, Inc., a wholly owned subsidiary of the Bank. In
addition, from January 1997 through December 2003, Ms. Kolling was an owner of Kolling Family Corp.
which is doing business as Valley Home Improvement, a retail lumber yard. Ms. Kolling became a
director of Kolling Family Corp. in 2004. Since January 2000, Ms. Kolling has served as a director
of KBM Developers LLC, a townhouse development company. Ms. Kolling began her employment with the
Bank in 1969. Bradley C. Krehbiel, age 46.Mr. Krehbiel is Executive Vice President of the Bank, a position he
has held since April 2004. Mr. Krehbiel joined the Bank as Vice President of Business Banking in
1998. Prior to his employment at the Bank, Mr. Krehbiel held several positions in the financial
services industry, including six years as a private banking consultant. 
 Risk Factors Like all financial companies, the Companys business and results of operations are subject to
a number of risks, many of which are outside of the Companys control. In addition to the other
information in this report, readers should carefully consider that the following important factors,
among others, could materially impact the Companys business and future results of operations. Changes in interest rates could negatively impact the Companys results of operations. The earnings of the Company are primarily dependent on net interest income, which is the difference
between interest earned on loans and investments, and the interest paid on interest-bearing
liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors,
including government monetary and fiscal policies and domestic and international economic and
political conditions. Conditions such as inflation, recession, unemployment, money supply,
government borrowing and other factors beyond managements control may also affect interest rates.
If the Companys interest-earning assets mature, reprice or prepay more quickly than 27




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interest-bearing liabilities in a given period, a decrease in market interest rates could adversely
affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in
the case of deposits, are withdrawn by the accountholder, more quickly than interest-earning assets
in a given period, an increase in market interest rates could adversely affect net interest income. Fixed-rate loans increase the Companys exposure to interest rate risk in a rising rate environment
because interest-bearing liabilities would be subject to repricing before assets become subject to
repricing. Adjustable-rate loans decrease the risks to a lender associated with changes in
interest rates but involve other risks. As interest rates rise, the payment by the borrower rises
to the extent permitted by the terms of the loan, and the increased payment increases the potential
for default. At the same time, for secured loans, the marketability of the underlying collateral
may be adversely affected by higher interest rates. In a declining interest rate environment,
there is likely to be an increase in prepayment activity on loans as the borrowers refinance their
loans at lower interest rates. Under these circumstances, the Companys results of operations
could be negatively impacted. Changes in interest rates also can affect the value of loans, investments and other interest-rate
sensitive assets including mortgage servicing rights, and the Companys ability to realize gains on
the sale or resolution of assets. This type of income can vary significantly from
quarter-to-quarter and year-to-year based on a number of different factors, including the interest
rate environment. An increase in interest rates that adversely affects the ability of borrowers to
pay the principal or interest on loans may lead to an increase in non-performing assets and
increased loan loss reserve requirements that could have a material adverse effect on the Companys
results of operations. Changes in interest rates or prepayment speeds could negatively impact the value of capitalized
mortgage servicing rights. The capitalization, amortization and impairment of mortgage servicing rights are subject to
significant estimates. These estimates are based upon loan types, note rates and prepayment speed
assumptions. Changes in interest rates or prepayment speeds may have a material effect on the net
carrying value of mortgage servicing rights. In a declining interest rate environment, prepayment
speed assumptions will increase and result in an acceleration in the amortization of the mortgage
servicing rights as the assumed underlying portfolio declines and also may result in impairment as
the value of the mortgage servicing rights declines. During 2004 and 2003, the Company experienced
increased refinance activity, driven by continued declines in mortgage interest rates, which led to
sustained levels of high prepayments in the Companys servicing portfolio and increased
amortization of mortgage servicing rights. Regional economic changes in the Companys markets could adversely impact results from operations. Like all banks, the Company is subject to the effects of any economic downturn, and in particular a
significant decline in home values or reduced commercial development in the Companys markets could
have a negative effect on results of operations. The Companys success depends primarily on the
general economic conditions in the counties in which the Company conducts business, and in the
southern Minnesota and northern Iowa area in general. Unlike larger banks that are more
geographically diversified, the Company provides banking and financial services to customers
primarily in the southern Minnesota counties of Fillmore, Freeborn, Houston, Mower, Olmsted and
Winona and portions of Steele, Dodge, Goodhue and Wabasha counties, as well as Marshall and Tama
counties in Iowa. The local economic conditions in these market areas have a significant impact on
the Companys ability to originate loans, the ability of the borrowers to repay these loans and the
value of the collateral securing these loans. A significant decline in the general economic
conditions caused by inflation, recession, unemployment or other factors beyond the Companys
control would affect these local economic conditions and could adversely affect the Companys
financial condition and results of operations. Additionally, because the Company has a significant
amount of commercial real estate loans, decreases in tenant occupancy may also have a negative
effect on the ability of many of the Companys borrowers to make timely repayments of their loans,
which would have an adverse impact on the Companys earnings. A significant decline in home values
would likely lead to increased delinquencies and defaults in both the consumer home equity loan and
residential real estate loan portfolios and result in increased losses in these portfolios. 28




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New or revised tax, accounting and other laws, regulations, rules and standards could significantly
impact strategic initiatives, results of operations and financial condition. The financial services industry is highly regulated and laws and regulations may sometimes impose
significant limitations on operations. These limitations, and sources of potential liability for
the violation of such laws and regulations, are described in this report under the heading
Business  Regulation and Supervision. These regulations, along with the currently existing tax
and accounting laws, regulations, rules and standards, control the methods by which financial
institutions conduct business; implement strategic initiatives, as well as past, present, and
contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and
standards are constantly evolving and may change significantly over time. The nature, extent, and
timing of the adoption of significant new laws, changes in existing laws, or repeal of existing
laws may have a material impact on the Companys results of operations and financial condition, the
effects of which are impossible to predict at this time. The extended disruption of vital infrastructure could negatively impact the Companys results of
operations and financial condition. The Companys operations depend upon, among other things, its technological and physical
infrastructure, including its equipment and facilities. Extended disruption of its vital
infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking
and viruses, terrorist activity or the domestic and foreign response to such activity, or other
events outside of the Companys control, could have a material adverse impact either on the
financial services industry as a whole, or on the Companys business, results of operations, and
financial condition. Strong competition within the Companys market area may limit profitability. The Company faces significant competition both in attracting deposits and in the origination of
loans, as described under the heading Business  Competition. Mortgage bankers, commercial
banks, credit unions and other savings institutions, which have offices in the Banks market area
have historically provided most of the Companys competition for deposits; however, the Company
also competes with financial institutions that operate through Internet banking operations
throughout the continental United States. In addition, and particularly in times of high interest
rates, the Company faces additional and significant competition for funds from money market and
mutual funds, securities firms, commercial banks, credit unions and other savings institutions
located in the same communities and those that operate through Internet banking operations
throughout the continental United States. Many competitors have substantially greater financial
and other resources than the Company. Moreover, the Company may face increased competition in the
origination of loans if competing thrift institutions convert to stock form, because such
converting thrifts would likely seek to invest their new capital into loans. Finally, credit
unions do not pay federal or state income taxes and are subject to fewer regulatory constraints
than savings banks and as a result, they may enjoy a competitive advantage over the Company. The
Bank competes for loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides to borrowers. This
advantage places significant competitive pressure on the prices of loans and deposits. Loss of large checking and money market deposit customers could increase cost of funds and have a
negative effect on results of operations. The Company has a number of large deposit customers that maintain balances in checking and money
market accounts at the Bank. The ability to attract these types of deposits has a positive effect
on the Companys net interest margin as they provide a relatively low cost of funds to the Company
compared to certificates of deposits or advances. If these depositors were to withdraw these funds
and the Bank were not able to replace them with similar types of deposits, the Banks cost of funds
would increase and the Companys results of operation would be negatively impacted. 29




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If the Companys real estate investment trust (REIT) affiliate fails to qualify as a REIT, or
should states enact legislation taxing these entities, the Company will be subject to a higher
consolidated effective tax rate. The Company has a REIT and related company that acquire and hold mortgage assets and other
authorized investments to generate income. These entities are consolidated with the Bank and are
therefore included in the consolidated financial statements of the Company. The REIT must meet
specific provisions of the Internal Revenue Code (IRC) to continue to qualify as a REIT. At
December 31, 2004, the Companys REIT met applicable provisions of the IRC to qualify as a REIT.
State laws may also impose limitations or restrictions on the operations of the REIT and related
company and these laws are subject to change. If the REIT fails to meet any of the required
provisions of Federal and state tax laws, or if these tax laws change, the Companys effective tax
rate would increase. This report and other reports issued by the Company, including reports filed with the Securities
and Exchange Commission, may contain forward-looking statements, often identified by words such
as plans, expects and anticipates, that deal with future results, plans or performance. In
addition, the Companys management may make such statements orally to the media, or to securities
analysts, investors or others. Forward-looking statements deal with matters that do not relate
strictly to historical facts. The Companys future results may differ materially from historical
performance and forward-looking statements about the Companys expected financial results or other
plans are subject to a number of risks and uncertainties. These include but are not limited to
possible legislative changes and adverse economic, business and competitive developments such as
shrinking interest margins, which could be impacted by lower prepayment rates in a period of rising
interest rates; deposit outflows; reduced demand for financial services and loan and lease
products; changes in accounting policies or guidelines, or monetary, fiscal or tax policies of the
federal or state governments; changes in credit and other risks posed by the Company loan and
investment portfolios; technological, computer-related or operational difficulties; adverse changes
in securities markets; the risk that the Company could be unable to effectively manage the
volatility of its mortgage banking business, which could adversely affect earnings; results of
litigation, or other significant uncertainties. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this report. The Company
undertakes no obligation to revise any forward-looking statements in order to reflect events or
circumstances that may subsequently arise. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the other reports filed with the
Securities and Exchange Commission that advise interested parties of the risks and factors that may
affect the Companys business. 
 ITEM 2. PROPERTIES The Company leases the corporate office at 1016 Civic Center Drive NW, Rochester, Minnesota and
owns the buildings and land for 9 of its 11 full service branches. The remaining two full service
branches are leased, as well as the Eagle Crest Capital Bank locations at 5201 Eden Avenue, Suite
170, Edina, Minnesota and 1016 Civic Center Drive NW, Rochester, Minnesota. The Bank uses all
properties and they are all located in Minnesota, except for two full service branches located in
Iowa. 
 ITEM 3. LEGAL PROCEEDINGS From time to time, the Bank and the Company are involved as plaintiff or defendant in various legal
proceedings arising in the normal course of its business. While the ultimate outcome of these
various legal proceedings cannot be predicted with certainty, it is the opinion of management that
the resolution of these legal actions should not have a material effect on the Companys
consolidated financial condition or results of operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 30




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES The information on pages 19, 38, 48 and the back cover page of the Annual Report to Security
Holders for the year ended December 31, 2004 is incorporated herein by reference. (a) Total
    
    
    
    
    
    
    (c) Total Number of
    
    
    (d) Maximum Number (orNumber of
    
    
    (b) Average
    
    
    Shares (or Units)
    
    
    Approximate Dollar Value) ofShares (or
    
    
    Price Paid
    
    
    Purchased as Part of
    
    
    Shares (or Units) that MayUnits)
    
    
    per Share
    
    
    Publicly Announced
    
    
    Yet Be Purchased Under thePeriod
    
    Purchased
    
    
    (or Unit)
    
    
    Plans or Programs
    
    
    Plans or ProgramsOctober 1 though October 31, 2004
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    247,000November 1 through November 30, 2004
    
    
    20,000
    
    
    
    30.50
    
    
    
    20,000
    
    
    
    227,000December 1 through December 31, 2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    227,000Total
    
    
    20,000
    
    
    $
    30.50
    
    
    
    20,000
   (1)
    
    On February 24, 2004, the Board of Directors authorized a repurchase program for
350,000 shares of the Companys common stock. This program expires on August 24, 2005. 
 ITEM 6. SELECTED FINANCIAL DATA The information on page 5 of the Annual Report to Security Holders for the year ended December 31,
2004 is incorporated herein by reference. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information on pages 6 through 21 of the Annual Report to Security Holders for the year ended
December 31, 2004 is incorporated herein by reference. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information on pages 19 and 20 of the Annual Report to Security Holders for the year ended
December 31, 2004 is incorporated herein by reference. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information on pages 22 through 48 of the Annual Report to Security Holders for the year ended
December 31, 2004 is incorporated herein by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.An evaluation was carried out under the
supervision and with the participation of the Companys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief 31




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Financial Officer have concluded that the Companys disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms. Managements Annual Report on Internal Control over Financial Reporting.The Companys management
is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to
the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are only being
made in accordance with authorizations of management and directors of the Company; and provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Companys assets that could have a material effect on the financial statements. Any control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. The design of a control
system inherently has limitations, and the benefits of controls must be weighed against their
costs. Additionally, controls can be circumvented by the individual acts of some persons by
collusion of two or more people, or by management override of the control. Therefore, no
assessment of a cost-effective system of internal controls can provide absolute assurance that all
control issues and instances of fraud, if any, will be detected. Under the supervision and with the participation of management, including the principal executive
officer and principal financial officer, the Company conducted an evaluation of the effectiveness
of its internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on the Companys evaluation under this framework, the Companys management
concluded that the Companys internal control over financial reporting was effective as of December
31, 2004. Attestation Report of the Registered Public Accounting Firm.Managements assessment of the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004
has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their
report that follows: Report of Independent Registered Public Accounting Firm The Board of Directors
HMN Financial, Inc.: We have audited managements assessment, included in the accompanying Management Report, that HMN
Financial, Inc. maintained effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). HMN Financial, Inc.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was 32




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maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that HMN Financial, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects based on criteria established in Internal Control-Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, HMN
Financial, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of HMN Financial Inc. and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive
income, stockholders equity, and cash flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 8, 2005 expressed an unqualified opinion on those
consolidated financial statements. KPMG LLP Minneapolis, Minnesota
March 8, 2005 Changes in internal controls.No change in the Companys internal control over financial
reporting was identified in connection with the evaluation required by Rule 13a-15(d) of the
Exchange Act that occurred during the period covered by this report and that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 33




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference from the information under the
caption Executive Officers in Item 1 of this report and under the captions Director Nominees,
Directors Continuing in Office After Annual Meeting, Director Emeritus, Board Meetings and
Committees (excluding any information not related to the audit committee) and Section 16(a)
Beneficial Ownership Reporting Compliance in the Companys definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days
after the close of the Companys fiscal year ended December 31, 2004. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal
financial and accounting officer, controller and other persons performing similar functions. The
Company has posted the Code of Ethics on its website located at http:// www.hmnf.com .
The Company intends to post on its website any amendment to, or waiver from, a provision of the
Code of Ethics that applies to its principal executive officer, principal financial and accounting
officer, controller or other persons performing similar functions within five business days
following the date of such amendment or waiver. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference from the information under the
captions Executive Compensation (excluding information under caption Compensation Committee
Report on Executive Compensation and Stockholder Return Performance Presentation), Compensation
Committee Interlocks and Insider Participation and Director Compensation in the Companys
definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the Companys fiscal year ended December
31, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                          AND RELATED STOCKHOLDER
MATTERS The information required by this Item is incorporated by reference from the information under the
captions Security Ownership of Management and Certain Beneficial Owners in the Companys
definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the close of the Companys fiscal year ended December
31, 2004. The following table provides information as of December 31, 2004 for compensation plans under which
equity securities may be issued. (a)
    
    
    (b)
    
    
    (c)Number of Securities to be
    
    
    Weighted-average
    
    
    Number of securities remainingissued upon exercise of
    
    
    exercise price of
    
    
    available for future issuance underoutstanding options,
    
    
    outstanding options,
    
    
    equity compensation plans (excludingPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    securities reflected in column (a))(1)Equity compensation
plans approved by
shareholders
    
    
    353,286
    
    
    $
    15.672
    
    
    
    191,052Equity compensation
plans not approved
by shareholders
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    
    353,286
    
    
    $
    15.672
    
    
    
    191,052
   (1)
    
    Includes securities available for future issuance under stockholder approved
compensation plans other than upon the exercise of an option, warrant or right, as follows:
9,397 shares under the Companys 1995 Stock Option and Incentive Plan and 181,655 shares under
the Companys 2001 Omnibus Stock Plan. 34




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference from the information under the
captions Certain Transactions in the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
close of the Companys fiscal year ended December 31, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference from the information under the
caption Independent Auditor Fees in the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the
close of the Companys fiscal year ended December 31, 2004. 35




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 1. Financial Statements The following information appearing in the Registrants Annual Report to Security Holders
for the year ended December 31, 2004, is incorporated herein by reference. Pages inAnnual Report Section
    
    2004 Annual ReportFive Year Consolidated Financial Highlights
    
    
    5Consolidated Balance Sheets 
December 31, 2004 and 2003
    
    
    22Consolidated Statements of Income 
Each of the Years in the Three-Year Period Ended December 31, 2004
    
    
    23Consolidated Statements of Comprehensive Income 
Each of the Years in the Three-Year Period Ended December 31, 2004
    
    
    23Consolidated Statement of Stockholders
Equity  Each of the Years in the Three-Year Period Ended December 31, 2004
    
    
    24Consolidated Statements of Cash Flows 
Each of the Years in the Three-Year Period Ended December 31, 2004
    
    
    25Notes to Consolidated Financial Statements
    
    
    26 - 44Report of Independent Registered Public Accounting Firm
    
    
    45Selected Quarterly Financial Data
    
    
    46-47Other Financial Data
    
    
    48Common Stock Information
    
    
    48
 2. Financial Statement Schedules All financial statement schedules have been omitted as this information is not required
under the related instructions, is not applicable or has been included in the Notes to
Consolidated Financial Statements. 36




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3. Exhibits ExhibitNumber
    
    Exhibit2
    
    Agreement and Plan of Merger dated July 1, 1997 (1)3.1
    
    Amended and Restated Certificate of Incorporation (2)3.2
    
    Amended and Restated By-laws (3)4
    
    Form of Common Stock Certificate (4)10.1
    
    Change in Control Agreement with Michael McNeil dated as of March 1,
2004*10.2
    
    Employment Agreement with Michael McNeil dated as of January 1, 2002 (5)10.3
    
    Form of Change in Control Agreement with executive officers (6)10.4
    
    Directors Deferred Compensation Plan (7)10.5
    
    Amended and Restated HMN Financial, Inc. Recognition and Retention Plan
dated July 29, 1998 (8)10.6
    
    Amended and Restated HMN Financial, Inc. Stock Option and Incentive
Plan dated July 29, 1998 (9)10.7
    
    HMN Financial, Inc. 2001 Omnibus Stock Plan (10)10.8
    
    Form of Incentive Stock Option Agreement for HMN Financial, Inc. 2001
Omnibus Stock (11)10.9
    
    Form of Non-Statutory Stock Option Agreement for HMN Financial, Inc.
2001 Omnibus Stock (12)10.10
    
    Description of Michael McNeil 2005 Bonus Plan (13)10.11
    
    Form of Restricted Stock Option Agreement for HMN Financial, Inc. 2001
Omnibus Stock (14)10.12
    
    2005 Officer Base Salaries*13
    
    Portions of Annual Report to Security Holders incorporated by reference*21
    
    Subsidiaries of Registrant*23
    
    Consent of KPMG LLP*24
    
    Powers of Attorney (included with signatures to this Annual Report on
Form 10-K)*31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*32
    
    Section 1350 Certifications
   
    Management contract of compensatory arrangement*
    Filed herewith1
    Incorporated by reference to the same numbered exhibit to the Companys Current Report on
Form 8-K dated July 1, 1997, filed on July 10, 1997 (File No. 0-24100).2
    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). 37




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3
    Incorporated by reference to Exhibit 3 to the Companys Current Report on Form 8-K dated
February 22, 2005, filed on February 23, 2005 (File No. 0-24100).4
    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).5
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2002 (File No. 0-24100).6
    Incorporated by reference to Exhibit 10 to the Companys Quarterly Report on Form 10-Q for
the period ended June 30, 2004 (File No. 0-24100).7
    Incorporated by reference to the same numbered exhibit to the Companys Annual Report on Form
10-K for the period ended December 31, 1994 (File No. 0-24100).8
    Incorporated by reference to Exhibit 10.1(a) to the Companys Quarterly Report on Form 10-Q
for the period ended September 30, 1998 (File No. 0-24100).9
    Incorporated by reference to Exhibit 10.1(b) to the Companys Quarterly Report on Form 10-Q
for the period ended September 30, 1998 (File No. 0-24100).10
    Incorporated by reference to Exhibit B to the Companys Proxy Statement for its Annual
Meeting of Stockholders held on April 24, 2001 (File no. 0-24100).11
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
the period ended September 30, 2004 (File No. 0-24100).12
    Incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for
the period ended September 30, 2004 (File No. 0-24100).13
    Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated
January 24, 2005, filed on January 28, 2005 (File No. 0-24100).14
    Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K dated
January 24, 2005, filed on January 28, 2005 (File No. 0-24100). 38




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. HMN FINANCIAL, INC.Date: March 8, 2005
    
    By:
    
    /s/ Michael McNeilMichael McNeil,President and Chief Executive Officer
 Each of the undersigned hereby appoints Michael McNeil and Jon J. Eberle, and each of them
(with full power to act alone), as attorneys and agents for the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1934, as amended, any and all
amendments and exhibits to this Annual Report on Form 10-K and any and all applications,
instruments, and other documents to be filed with the Securities and Exchange Commission pertaining
to this Annual Report on Form 10-K or any amendments thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or desirable. Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities indicated on March 8, 2005. Name
    
    Title/s/ Michael McNeilMichael McNeil
    
    President, Chief Executive Officer andDirector (Principal Executive Officer)/s/ Jon J. Eberle
    
    Senior Vice President,Jon J. Eberle
    
    Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)/s/ Timothy R. Geisler
    
    Chairman of the BoardTimothy R. Geisler/s/ Allan R. DeBoer
    
    DirectorAllan R. DeBoer/s/ Duane D. Benson
    
    DirectorDuane D. Benson/s/ Michael J. Fogarty
    
    DirectorMichael J. Fogarty/s/ Susan K. Kolling
    
    DirectorSusan K. Kolling/s/ Malcolm W. McDonald
    
    DirectorMalcolm W. McDonald/s/ Mahlon C. Schneider
    
    DirectorMahlon C. Schneider
 39




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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    Exhibit
    
    Filing Status2
    
    Agreement and Plan of Merger dated July 1, 1997
    
    Incorporated by Reference3.1
    
    Amended and Restated Certificate of Incorporation
    
    Incorporated by Reference3.2
    
    Amended and Restated By-laws
    
    Incorporated by Reference4
    
    Form of Common Stock Certificate
    
    Incorporated by Reference10.1
    
    Change in Control Agreement with Michael McNeil
dated as of March 1, 2004
    
    Filed Electronically10.2
    
    Employment Agreement with Michael McNeil dated
as of January 1, 2002
    
    Incorporated by Reference10.3
    
    Form of Change in Control Agreement with
executive officers
    
    Incorporated by Reference10.4
    
    Directors Deferred Compensation Plan
    
    Incorporated by Reference10.5
    
    Amended and Restated HMN Financial,
Inc. Recognition and Retention Plan dated July 29, 1998
    
    Incorporated by Reference10.6
    
    Amended and Restated HMN Financial, Inc. Stock
Option and Incentive Plan dated July 29, 1998
    
    Incorporated by Reference10.7
    
    HMN Financial, Inc. 2001 Omnibus Stock Plan
    
    Incorporated by Reference10.8
    
    Form of Incentive Stock Option Agreement for HMN
Financial, Inc. 2001 Omnibus Stock
    
    Incorporated by Reference10.9
    
    Form of Non-Statutory Stock Option Agreement for
HMN Financial, Inc. 2001 Omnibus Stock
    
    Incorporated by Reference10.10
    
    Description of Michael McNeil 2005 Bonus Plan
    
    Incorporated by Reference10.11
    
    Form of Restricted Stock Option Agreement for
HMN Financial, Inc. 2001 Omnibus Stock
    
    Incorporated by Reference10.12
    
    2005 Officer Base Salaries
    
    Filed Electronically13
    
    Portions of Annual Report to Security Holders
incorporated by reference
    
    Filed Electronically21
    
    Subsidiaries of Registrant
    
    Filed Electronically23
    
    Consent of KPMG LLP
    
    Filed Electronically24
    
    Powers of Attorney
    
    Included with Signatures31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
    
    Filed Electronically31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
    
    Filed Electronically32
    
    Section 1350 Certifications
    
    Filed Electronically
 40