8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported):   July 20, 2006

HMN Financial, Inc.

(Exact name of registrant as specified in its chapter)

Delaware (State or other jurisdiction of incorporation) 0-24100 (Commission File Number) 41-1777397 (IRS Employer Identification No.)

1016 Civic Center Drive Northwest PO Box 6057 Rochester, Minnesota (Address of principal executive offices) 55903-6057 (Zip Code)

Registrant's telephone number, including area code (507) 535-1200

__________________________________________________________

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
p	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
p	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
p	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
p	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On July 20, 2006, HMN Financial, Inc. (the "Company") reported its financial results for its second fiscal quarter ended June 30, 2006. See the Company's press release dated July 20, 2006, which is furnished as Exhibit 99 and incorporated by reference in this Current Report on Form 8-K.

Item 9.01. Financial Statements and Exhibits

(c)Exhibits (the following exhibits are furnished to the SEC)

Exhibit Number	Description
99	Press release dated July 20, 2006

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	HMN Financial, Inc. (Registrant)
Date: July 21, 2006	By:	/s/ Jon Eberle
		Jon Eberle, SVP/CFO/Treasurer

EX-99.1

Exhibit 99.1

NEWS RELEASE	CONTACT:	Michael McNeil, President
		HMN Financial, Inc. (507) 535-1202
		FOR IMMEDIATE RELEASE

HMN FINANCIAL, INC. ANNOUNCES SECOND QUARTER RESULTS

Second Quarter Highlights
•	Net income of $2.9 million, up $444,000, or 17.8%, over second quarter 2005
•	Diluted earnings per share of $0.73, up $0.11, over second quarter of 2005
•	Net interest income up $1.0 million, or 11.5%, over second quarter of 2005
•	Net interest margin of 4.08%, up 38 basis points over second quarter of 2005
•	Income tax expense up $436,000, or 31.3%, over second quarter of 2005

Year to Date Highlights
•	Net income of $5.7 million, up $369,000, or 6.9%, over first six months of 2005
•	Diluted earnings per share of $1.41, up $0.08, over first six months of 2005
•	Net interest income up $1.7 million, or 9.9%, over first six months of 2005
•	Net interest margin of 4.09%, up 34 basis points over first six months of 2005
•	Income tax expense up $760,000, or 27.6%, over first six months of 2005

Earnings Summary
	Three months ended June 30,						Six months ended  June 30,
		2006			2005			2006			2005
Net income	$	2,943,370			2,499,453		$	5,683,776			5,314,517
Diluted earnings per share		0.73			0.62			1.41			1.33
Return on average assets		1.18	%		1.01	%		1.16	%		1.09	%
Return on average equity		12.34	%		11.38	%		12.08	%		12.29	%
Book value per share	$	21.38		$	19.64		$	21.38		$	19.64

ROCHESTER, MINNESOTA, July 20, 2006. . . HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $1 billion holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.9 million for the second quarter of 2006, up $444,000, or 17.8%, over net income of $2.5 million for the second quarter of 2005. Diluted earnings per common share for the second quarter of 2006 were $0.73, up $0.11, or 17.7%, from $0.62 for the second quarter of 2005.

more . . .

Second Quarter Results

Net Interest Income

Net interest income was $9.7 million for the second quarter of 2006, an increase of $1.0 million, or 11.5%, compared to $8.7 million for the second quarter of 2005. Interest income was $17.0 million for the second quarter of 2006, an increase of $2.2 million, or 15.2%, from $14.8 million for the same period in 2005. Interest income increased because of an increase in the average interest rates earned on loans and investments. Interest rates increased primarily because of the 200 basis point increase in the prime interest rate between the periods. Increases in the prime rate, which is the rate that banks charge their prime business customers, generally increase the rates on adjustable rate consumer and commercial loans in the portfolio and on new loans originated. The increase in interest income due to increased rates was partially offset by a $37 million decrease in the average outstanding loan portfolio balances between the periods. The average yield earned on interest-earning assets was 7.11% for the second quarter of 2006, an increase of 86 basis points from the 6.25% average yield for the second quarter of 2005.

Interest expense was $7.3 million for the second quarter of 2006, an increase of $1.3 million, or 20.5%, compared to $6.0 million for the second quarter of 2005. Interest expense increased because of the higher interest rates paid on deposits which were caused by the 200 basis point increase in the federal funds rate between the periods. Increases in the federal funds rate, which is the rate that banks charge other banks for short term loans, generally increase the rates banks pay for deposits. The average interest rate paid on interest-bearing liabilities was 3.23% for the second quarter of 2006, an increase of 53 basis points from the 2.70% average interest rate paid in the second quarter of 2005. Net interest margin (net interest income divided by average interest earning assets) for the second quarter of 2006 was 4.08%, an increase of 38 basis points, compared to 3.70% for the second quarter of 2005.

Provision for Loan Losses

The provision for loan losses was $980,000 for the second quarter of 2006, an increase of $73,000, or 8.0%, from $907,000 for the second quarter of 2005. The provision for loan losses increased primarily because $10.0 million of related commercial real estate loans were downgraded and classified as non-accruing during the quarter. These loans are collateralized by real estate and are guaranteed by the borrowers. The increase in the provision related to the commercial loan risk rating downgrades was partially offset by a decrease in the provision related to the $11 million reduction in the commercial loan portfolio in the second quarter of 2006 compared to the $12 million in growth that was experienced in the second quarter of 2005. The reduction in loan growth was the result of management’s decision not to pursue long-term, low fixed-rate commercial loans in an environment of rising short-term interest rates. Total non-performing assets were $13.5 million at June 30, 2006, an increase of $9.6 million from $3.9 million at December 31, 2005. Non-performing loans increased $10.0 million, foreclosed and repossessed assets decreased $275,000 and other non performing assets decreased $106,000 during the period.

Non-Interest Income and Expense

Non-interest income was $1.8 million for the second quarter of 2006, an increase of $191,000, or 12.2%, from $1.6 million for the same period in 2005. Fees and service charges increased $110,000 between the periods primarily because of increased retail deposit account activity and fees. Security gains increased $48,000 due to increased security sales. Gain on sale of loans decreased $22,000 between the periods due to a decrease in the number of single-family mortgage loans sold and a decrease in the profit margins realized on the loans that were sold. Competition in the single-family loan origination market has increased as the overall market has slowed and profit margins have been lowered in order to remain competitive and maintain  origination volumes. Other non-interest income increased $59,000 primarily because of increased revenues from the sale of uninsured investment products.

more . . .

Non-interest expense was $5.8 million for the second quarter of 2006, an increase of $242,000, or 4.4%, from $5.6 million for the same period of 2005. Compensation expense increased $333,000 primarily because of annual payroll increases and increased pension costs. Occupancy expense increased $62,000 due primarily to additional costs associated with new branch and loan origination offices opened in Rochester in the first quarter of 2006. Data processing costs increased $42,000 due to increases in the internet and other banking services provided by the Bank’s third party processor between the periods. Other non-interest expense decreased $152,000 primarily because of decreased mortgage loan expenses and professional fees incurred during the second quarter of 2006. Income tax expense increased $436,000 between the periods due to an increase in taxable income and an effective tax rate that increased from 35.8% for the second quarter of 2005 to 38.3% for the second quarter of 2006. The increase in the effective tax rate was primarily the result of state tax law changes that were enacted in the third quarter of 2005.

Return on Assets and Equity

Return on average assets for the second quarter of 2006 was 1.18%, compared to 1.01% for the second quarter of 2005. Return on average equity was 12.34% for the second quarter of

2006, compared to 11.38% for the same quarter in 2005. Book value per common share at June 30, 2006 was $21.38, compared to $19.64 at June 30, 2005.

Six Month Period Results

Net Income

Net income was $5.7 million for the six month period ended June 30, 2006, an increase of $369,000, or 6.9%, compared to $5.3 million for the six month period ended June 30, 2005. Diluted earnings per share for the six month period in 2006 were $1.41, up $0.08, or 6.0%, from $1.33 for the same period in 2005.

Net Interest Income

Net interest income was $19.1 million for the first six months of 2006, an increase of $1.7 million, or 9.9%, from $17.4 million for the same period in 2005. Interest income was $33.0 million for the six month period ended June 30, 2006, an increase of $4.0 million, or 13.9%, from $29.0 million for the same six month period in 2005. Interest income increased because of an increase in the average interest rates earned on loans and investments. Interest rates increased primarily because of the 200 basis point increase in the prime interest rate between the periods. The increase in interest income due to increased rates was partially offset by a $30 million decrease in the average outstanding loan portfolio balance between the periods. The average yield earned on interest-earning assets was 7.05% for the first six months of 2006, an increase of 82 basis points from the 6.23% average yield for the first six months of 2005.

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Interest expense was $13.9 million for the first six months of 2006, an increase of $2.3 million, or 19.9%, compared to $11.6 million for the first six months of 2005. Interest expense increased because of the higher interest rates paid on deposits which were caused by the 200 basis point increase in the federal funds rate between the periods. The average interest rate paid on interest-bearing liabilities was 3.15% for the first six months of 2006, an increase of 52 basis points from the 2.63% average interest rate paid in the first six months of 2005. Net interest margin (net interest income divided by average interest earning assets) for the first six months of 2006 was 4.09%, an increase of 34 basis points, compared to 3.75% for the first six months of 2005.

Provision for Loan Losses

The provision for loan losses was $1.5 million for the first six months of 2006, a decrease of $48,000, from $1.5 million for the same six month period in 2005. The provision for loan losses decreased primarily because of the $23 million reduction in the commercial loan portfolio in the first six months of 2006 compared to the $52 million in growth that was experienced in the first six months of 2005. The reduction in loan growth was the result of management’s decision not to pursue long-term, low fixed-rate commercial loans in an environment of rising short-term interest rates. The decrease in the provision related to the reduced loan growth was partially offset by an increase in the provision due to increased commercial loan risk rating downgrades in the first six months of 2006 when compared to the same period of 2005. Total non-performing assets were $13.5 million at June 30, 2006, an increase of $9.6 million from $3.9 million at December 31, 2005. Non-performing loans increased $10.0 million, foreclosed and repossessed assets decreased $275,000 and other non performing assets decreased $106,000 during the period.

Non-Interest Income and Expense

Non-interest income was $3.3 million for the first six months of 2006, an increase of $251,000, or 8.4%, from $3.0 million for the same period in 2005. Fees and service charges increased $223,000 between the periods primarily because of increased retail deposit account activity and fees. Security gains increased $48,000 due to increased security sales. Gain on sale of loans decreased $69,000 between the periods due to a decrease in the number of single-family mortgage loans sold and a decrease in the profit margins realized on the loans that were sold. Competition in the single-family loan origination market has increased as the overall market has slowed and profit margins have been lowered in order to remain competitive and maintain origination volumes. Other non-interest income increased $42,000 primarily because of increased revenues from the sale of uninsured investment products.

Non-interest expense was $11.7 million for the first six months of 2006, an increase of $891,000, or 8.2%, from $10.8 million for the same period of 2005. Compensation expense increased $818,000 primarily because of annual payroll increases and increased pension costs. Occupancy expense increased $167,000 due primarily to additional costs associated with new branch and loan origination offices opened in Rochester in the first quarter of 2006. Data processing costs increased $93,000 due to increases in the internet and other banking services provided by the Bank’s third party processor between the periods. Other non-interest expense decreased $172,000 primarily because of a decrease in mortgage loan expenses and professional fees. Income tax expense increased $760,000 between the periods due to an increase in taxable income and an effective tax rate that increased from 34.1% for the first six months of 2005 to 38.2% for the first six months of 2006. The increase in the effective tax rate was primarily the result of state tax law changes that were enacted in the third quarter of 2005.  

more . . .

Return on Assets and Equity

Return on average assets for the six month period ended June 30, 2006 was 1.16%, compared to 1.09% for the same period in 2005. Return on average equity was 12.08% for the six month period ended in 2006, compared to 12.29% for the same period in 2005.

President’s Statement

“Net earnings continued to improve despite the challenging interest rate environment,” said HMN President, Mike McNeil. “The increase in net income was primarily the result of an improved net interest margin that reflected an improved deposit mix. We believe that actively managing our net interest margin will continue to have a positive effect on earnings.”

General Information

HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The Bank operates ten full service offices in southern Minnesota located in Albert Lea, Austin, LaCrescent, Rochester, Spring Valley and Winona and two full service offices in Iowa located in Marshalltown and Toledo. Home Federal Savings Bank also operates loan origination offices located in Sartell and Rochester, Minnesota. Eagle Crest Capital Bank, a division of Home Federal Savings Bank, operates branches in Edina and Rochester, Minnesota.

Safe Harbor Statement

This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to those relating to the Company’s financial expectations for earnings and revenues and the management of net interest margin. A number of factors could cause actual results to differ materially from the Company's assumptions and expectations. These factors include possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; reduced demand for financial services and loan products; changes in accounting policies and guidelines, changes in monetary and fiscal policies of the federal government, or changes in tax laws. Additional factors that may cause actual results to differ from the Company's assumptions and expectations include those set forth in the Company's most recent filings with the Securities and Exchange Commission. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary statements.

(Three pages of selected consolidated financial information are included with this release.)

***END***

HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets
		June 30, 2006		December 31, 2005
		(unaudited)
Assets
Cash and cash equivalents	$	62,608,169		47,268,795
Securities available for sale:
Mortgage-backed and related securities (amortized cost $7,055,100 and $7,428,504)		6,267,160		6,879,756
Other marketable securities (amortized cost $139,615,255 and $113,749,841)		138,953,180		112,778,813
		145,220,340		119,658,569
Loans held for sale		7,128,570		1,435,141
Loans receivable, net		757,621,273		785,678,461
Accrued interest receivable		4,396,521		4,460,014
Real estate, net		1,101,060		1,214,621
Federal Home Loan Bank stock, at cost		8,400,700		8,364,600
Mortgage servicing rights, net		2,296,433		2,653,635
Premises and equipment, net		12,025,027		11,941,863
Investment in limited partnerships		125,489		141,048
Goodwill		3,800,938		3,800,938
Core deposit intangible, net		162,831		219,760
Prepaid expenses and other assets		2,530,750		1,854,948
Deferred tax asset		2,516,800		2,544,400
Total assets	$	1,009,934,901		991,236,793
Liabilities and Stockholders’ Equity
Deposits	$	748,355,396		731,536,560
Federal Home Loan Bank advances		160,900,000		160,900,000
Accrued interest payable		1,568,173		2,085,573
Advance payments by borrowers for taxes and insurance		779,722		1,038,575
Accrued expenses and other liabilities		4,707,906		4,947,816
Total liabilities		916,311,197		900,508,524
Commitments and contingencies
Stockholders’ equity:
Serial preferred stock ($.01 par value): authorized 500,000 shares; issued and outstanding none		0		0
Common stock ($.01 par value): authorized 11,000,000; issued shares 9,128,662		91,287		91,287
Additional paid-in capital		57,689,740		58,011,099
Retained earnings, subject to certain restrictions		102,784,471		98,951,777
Accumulated other comprehensive (loss)		(875,415	)	(917,577	)
Unearned employee stock ownership plan shares		(4,254,285	)	(4,350,999	)
Unearned compensation restricted stock awards		0		(182,521	)
Treasury stock, at cost 4,748,698 and 4,721,402 shares		(61,812,094	)	(60,874,797	)
Total stockholders’ equity		93,623,704		90,728,269
Total liabilities and stockholders’ equity	$	1,009,934,901		991,236,793

HMN FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited)
		Three Months Ended June 30,				Six Months Ended June 30,
		2006		2005		2006		2005
Interest income:
Loans receivable	$	15,081,511		13,769,340		29,784,291		27,102,359
Securities available for sale:
Mortgage-backed and related		68,869		84,288		139,431		174,056
Other marketable		1,322,547		654,182		2,212,178		1,295,938
Cash equivalents		452,434		175,671		708,860		227,940
Other		85,984		89,232		148,805		168,760
Total interest income		17,011,345		14,772,713		32,993,565		28,969,053
Interest expense:
Deposits		5,516,428		4,199,791		10,384,109		7,902,422
Federal Home Loan Bank advances		1,744,879		1,826,501		3,470,735		3,649,192
Total interest expense		7,261,307		6,026,292		13,854,844		11,551,614
Net interest income		9,750,038		8,746,421		19,138,721		17,417,439
Provision for loan losses		980,000		907,000		1,495,000		1,543,000
Net interest income after provision for loan losses		8,770,038		7,839,421		17,643,721		15,874,439
Non-interest income:
Fees and service charges		795,808		685,357		1,510,586		1,287,954
Mortgage servicing fees		301,259		303,363		604,934		596,343
Securities gains, net		48,122		0		48,122		0
Gains on sales of loans		302,608		324,173		548,585		617,489
Losses in limited partnerships		(9,059	)	(6,500	)	(15,559	)	(14,210	)
Other		327,223		268,206		555,627		513,754
Total non-interest income		1,765,961		1,574,599		3,252,295		3,001,330
Non-interest expense:
Compensation and benefits		3,117,702		2,784,578		6,376,573		5,558,682
Occupancy		1,103,392		1,041,460		2,203,684		2,036,714
Deposit insurance premiums		24,792		34,619		55,989		62,525
Advertising		107,501		105,765		238,159		189,673
Data processing		287,043		245,351		575,758		482,839
Amortization of mortgage servicing rights, net		236,551		271,089		453,091		510,122
Other		886,648		1,038,805		1,799,786		1,971,497
Total non-interest expense		5,763,629		5,521,667		11,703,040		10,812,052
Income before income tax expense		4,772,370		3,892,353		9,192,976		8,063,717
Income tax expense		1,829,000		1,392,900		3,509,200		2,749,200
Net income	$	2,943,370		2,499,453		5,683,776		5,314,517
Basic earnings per share	$	0.77		0.65		1.48		1.39
Diluted earnings per share	$	0.73		0.62		1.41		1.33

HMN FINANCIAL, INC. AND SUBSIDIARIES

Selected Consolidated Financial Information

(unaudited)

	Three Months Ended						Six Months Ended
SELECTED FINANCIAL DATA:	June 30,						June 30,
(dollars in thousands; except per share data)	2006			2005			2006			2005
I.   OPERATING DATA:
Interest income	$	17,011			14,773			32,994			28,969
Interest expense		7,261			6,027			13,855			11,552
Net interest income		9,750			8,746			19,139			17,417
II.   AVERAGE BALANCES:
Assets (1)		1,003,183			991,455			988,229			980,045
Loans receivable, net		767,774			806,267			772,993			803,334
Mortgage-backed and related securities (1)		7,162			8,823			7,261			9,056
Interest-earning assets (1)		959,477			948,304			944,295			937,875
Interest-bearing liabilities		900,825			896,210			886,081			886,447
Equity (1)		95,690			88,100			94,876			87,227
III. PERFORMANCE RATIOS: (1)
Return on average assets (annualized)		1.18	%		1.01	%		1.16	%		1.09	%
Interest rate spread information:
Average during period		3.88			3.55			3.89			3.60
End of period		3.92			3.65			3.92			3.65
Net interest margin		4.08			3.70			4.09			3.75
Ratio of operating expense to average
total assets (annualized)		2.30			2.23			2.39			2.22
Return on average equity (annualized)		12.34			11.38			12.08			12.29
Efficiency		50.05			53.50			52.27			52.95
		June 30,			December 31,			June 30,
		2006			2005			2005
IV.  ASSET QUALITY:
Total non-performing assets	$	13,491			3,883			12,475
Non-performing assets to total assets		1.34	%		0.39	%		1.27	%
Non-performing loans to total loans
receivable, net		1.62	%		0.30	%		1.38	%
Allowance for loan losses	$	10,216			8,778			10,223
Allowance for loan losses to total loans
receivable, net		1.35	%		1.11	%		1.25	%
Allowance for loan losses to
non-performing loans		82.93			376.88			90.26
V.   BOOK VALUE PER SHARE:
Book value per share	$	21.38			20.59			19.64
		Six Months Ended			Year Ended			Six Months Ended
		June 30, 2006			Dec 31, 2005			June 30, 2005
VI.   CAPITAL RATIOS:
Stockholders' equity to total assets,
at end of period		9.27	%		9.15	%		8.78	%
Average stockholders' equity to
average assets(1)		9.60			9.05			8.90
Ratio of average interest-earning assets to
average interest-bearing liabilities(1)		106.57			105.96			105.80
		June 30,			December 31,			June 30,
		2006			2005			2005
VII.  EMPLOYEE DATA:
Number of full time equivalent employees		212			208			209

(1)   Average balances were calculated based upon amortized cost without the market value impact of SFAS 115