HMN Financial, Inc. (Form: 8-K)

The Michael McNeil 2004 Bonus Plan is designed to link Mr. McNeil’s compensation more directly to the Company’s corporate goals and performance. Under the 2004 Bonus Plan, the compensation committee sets (a) goals for the Company’s earnings, known as the financial goals, and (b) certain non-quantitative strategic goals. At the end of the year, the compensation committee determines the bonus amount for Mr. McNeil based on the Company’s attainment of the goals. Mr. McNeil is eligible to receive up to $100,000 based on the Company’s actual earnings relative to the financial goals and up to $25,000 for the satisfaction of the non-quantitative strategic goals. The compensation committee may adjust the earnings goals at the end of the year to address the “quality” of the earnings and other environmental factors that may have contributed positively or negatively to the Company’s actual earnings.

The Michael McNeil 2005 Bonus Plan is designed to link Mr. McNeil’s compensation more directly to the Company’s corporate goals and performance. Under the 2005 Bonus Plan, the compensation committee sets (a) goals for the Company’s earnings, known as the financial goals, and (b) certain non-quantitative strategic goals. At the end of the year, the compensation committee determines the bonus amount for Mr. McNeil based on the Company’s attainment of the goals. Mr. McNeil is eligible to receive up to $150,000 based on the Company’s actual earnings relative to the financial goals and up to $25,000 for the satisfaction of the non-quantitative strategic goals. The compensation committee may adjust the earnings goals at the end of the year to address the “quality” of the earnings and other environmental factors that may have contributed positively or negatively to the Company’s actual earnings.

This is a Restricted Stock Agreement (“Agreement”) between HMN Financial, Inc., a Delaware corporation (the “Company”), and the above-named employee of the Company (the “Employee”).

WHEREAS, the Company maintains the HMN Financial, Inc. 2001 Omnibus Stock Plan (the “Plan”);

WHEREAS, the Board of Directors of the Company has appointed the Compensation Committee (the “Committee”) with the authority to determine the awards to be granted under the Plan; and

WHEREAS, the Committee or its designee has determined that the Employee is eligible to receive an award under the Plan in the form of restricted stock and has set the terms thereof;


(a)	Purchase.	The Company hereby issues and sells to the Employee the number of shares specified at the beginning of this Agreement (the “Restricted Shares”) on the terms and conditions and subject to the restrictions set forth in this Agreement for a per share price of [$ ] (the “Per Share Consideration”). The term “Restricted Shares” also refers to all securities received by the Employee in replacement of or in connection with the Restricted Shares purchased hereby pursuant to a recapitalization, reclassification, stock dividend, stock split, stock combination or other relevant event.

(b)	Certificate.	As soon as practicable after the execution of this Agreement by the Employee and the Company, the Company shall deliver to the Employee a certificate or certificates representing the Restricted Shares. The Company shall pay all original issue or transfer taxes, if any, with respect to the issue or transfer of the Restricted Shares and all fees and expenses necessarily incurred by the Company in connection therewith. All Restricted Shares so issued shall be fully paid and nonassessable. Notwithstanding anything to the contrary in this Agreement, the Company shall not be required to issue or deliver any Restricted Shares prior to the completion of such registration or other qualification of such Restricted Shares for sale under the laws, rules or regulations of any state or other jurisdiction as the Company shall determine to be necessary or desirable.

(a)

Repurchase Events. Upon the occurrence of a “Repurchase Event” (as defined below), the Company shall have the irrevocable, exclusive right to purchase any or all of the Restricted Shares that have not become vested pursuant to Section 3 at a per share price equal to the Per Share Consideration, as adjusted from time to time for recapitalizations, reclassifications, stock dividends, stock splits, stock combinations or other relevant changes affecting the capital stock of the Company, by giving the Employee or the Employee’s executor written notice of the Company’s intent to repurchase. Upon delivery of such notice and payment of the repurchase price, the Restricted Shares that are repurchased shall become authorized but unissued shares of the Company’s capital stock. If the Company shall at the time of purchase hold, as original payee or assignee, indebtedness of the Employee, the Company may, but shall not be required to, by notice in writing to Employee, apply and offset all or any part of the unpaid principal and accrued interest on such indebtedness, whether or not then due or payable, against the payment of the purchase price of the Restricted Shares on a dollar-for-dollar basis. A Repurchase Event shall be defined as any of the following events:

(i)

termination of the Employee’s employment with the Company or its Affiliates for any reason, whether by the Company with or without cause, voluntarily or involuntarily by the Employee or otherwise (“Termination of Employment”); or

(ii)

any attempt to transfer or otherwise dispose of any of the Restricted Shares, or to levy any attachment or pursue any similar involuntary process with respect to any Restricted Shares, in violation of Section 2(b) of this Agreement.

For purposes of this Agreement, neither the transfer of the Employee between any combination of the Company and its Affiliates, nor a leave of absence granted to the Employee by the Company, shall be deemed a Termination of Employment.

(b)

Limitation on Transfer. Until such time as the Restricted Shares have become vested under Section 3 of this Agreement, the Employee shall not transfer the Restricted Shares and the Restricted Shares shall not be subject to pledge, hypothecation, execution, attachment or similar process. Any attempt to assign, transfer, pledge, hypothecate or otherwise dispose of any Restricted Shares contrary to the provisions hereof, and any attempt to levy any attachment or pursue any similar process with respect to them, shall be null and void.

Vesting. The Restricted Shares shall cease to be subject to repurchase under Section 2 hereof in the numbers and on the dates specified in the vesting schedule at the beginning of this Agreement; provided, however, that the Restricted Shares shall immediately cease to be subject to repurchase under Section 2 hereof upon the occurrence of a “Fundamental Change” (as such term is defined in the Plan) with respect to the Company. Restricted Shares that have so ceased to be subject to repurchase are sometimes referred to as “vested” or as “Vested Shares” in this Agreement.

Death or Disability. If the Employee’s employment with the Company or an Affiliate terminates because of death or disability, the number of shares that are subject to repurchase under this Agreement shall be prorated for the portion of the term of this award during which the Participant was employed by the Company and its Affiliates, and, with respect to such Restricted Shares, shall be Vested Shares. Any Restricted Shares which do not become vested under the preceding sentence shall terminate at the date of the Employee’s termination of employment and such Restricted Shares shall be forfeited to the Company.

Shareholder Rights. As of the date of issuance specified at the beginning of this Agreement, the Employee shall have all of the rights of a shareholder of the Company with respect to the Restricted Shares, except as otherwise specifically provided in this Agreement.

Tax Withholding. The parties hereto recognize that the Company or a subsidiary of the Company may be obligated to withhold federal and state taxes or other taxes upon the vesting of the Restricted Shares, or, in the event that the Employee elects under Code Section 83(b) to report the receipt of the Restricted Shares as income in the year of receipt, upon the Employee’s receipt of the Restricted Shares. The Employee agrees that, at such time, if the Company or a subsidiary is required to withhold such taxes, the Employee will promptly pay, in cash upon demand to the Company or the subsidiary having such obligation, such amounts as shall be necessary to satisfy such obligation. The Employee further acknowledges that the Company has directed the Employee to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which the Employee may reside, and the tax consequences of the Employee’s death.

(a)

Legends. The certificate or certificates representing the Restricted Shares shall bear the following legend (as well as any legends required by applicable state and federal corporate and securities laws) noting the existence of the restrictions and the Company’s repurchase rights set forth in this Agreement:

“THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A RESTRICTED STOCK AGREEMENT BETWEEN THE COMPANY AND THE EMPLOYEE, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.”

(b)

Stop-Transfer Notices. The Employee agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(c)

Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Restricted Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of the Restricted Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom the Restricted Shares shall have been so transferred.

Interpretation of This Agreement. All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and the Employee. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.

Not Part of Employment Contract; Discontinuance of Employment. This Agreement awards restricted stock to the Employee, but does not impose any obligation on the Company to make any future grants or issue any future awards to the Employee or otherwise continue the participation of the Employee under the Plan. This Agreement shall not give the Employee a right to continued employment with the Company or any Affiliate, and the Company or Affiliate employing the Employee may terminate his or her employment and otherwise deal with the Employee without regard to the effect it may have upon him or her under this Agreement

10.

Binding Effect. This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of the Employee.

11.

Choice of Law. This Agreement is entered into under the laws of the State of Delaware and shall be construed and interpreted thereunder (without regard to its conflict-of-law principles).

12.

Entire Agreement. This Agreement and the Plan set forth the entire agreement and understanding of the parties hereto with respect to the issuance and sale of the Restricted Shares and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the issuance and sale of these Restricted Shares and the administration of the Plan.

13.

Amendment and Waiver. Except as provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance.

14.

Acknowledgment of Receipt of Copy. By execution hereof, the Employee acknowledges having received a copy of the Plan.

IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement as of the date of issuance specified at the beginning of this Agreement.

^*Unless the context indicates otherwise, terms that are not defined in this Agreement shall have the meaning set forth in the Plan as it currently exists or as it is amended in the future.

•

Net income of $2.1 million, down $23,000, or 1.1%, from fourth quarter of 2003

•

Diluted earnings per share of $0.53, unchanged from fourth quarter of 2003

•

Net interest income up $1.5 million, or 22.1%, over fourth quarter of 2003

EARNINGS SUMMARY

Three Months Ended

Year Ended

December 31,

2004

2003

2004

2003

Net income

2,121,976

2,145,198

9,289,797

8,605,247

Diluted earnings per share

0.53

2.31

2.16

Return on average assets

0.88

1.03

1.01

1.10

Return on average equity

9.85

10.45

11.03

10.85

Book value per share

18.95

17.93

18.95

17.93

ROCHESTER, MINNESOTA, January 24, 2005. . . HMN Financial, Inc. (HMN) (NASDAQ:HMNF), the $961 million holding company for Home Federal Savings Bank (the Bank), today reported net income of $2.1 million for the fourth quarter of 2004, down $23,000, or 1.1%, from net income of $2.1 million for the fourth quarter of 2003. Diluted earnings per common share for the fourth quarter of 2004 were $0.53, unchanged from $0.53 for the fourth quarter of 2003.

Net interest income was $8.3 million for the fourth quarter of 2004, an increase of $1.5 million, or 22.1%, compared to $6.8 million for the fourth quarter of 2003. Interest income was $13.7 million for the fourth quarter of 2004, an increase of $1.8 million, or 14.7%, from $11.9 million for the same period in 2003. Interest income increased primarily because of an increase in the average interest-earning assets and because of a change in the mix of assets between the periods. The increase in interest-earning assets was caused primarily by the $105 million increase in commercial and consumer loans between the periods. The increase in interest income on commercial and consumer loans was partially offset by lower income on the single-family loan portfolio due to a decrease in the outstanding balance and lower interest rates of this portfolio in the fourth quarter of 2004 when compared to the same period in 2003. The yield earned on interest-earning assets was 6.00% for the fourth quarter of 2004, an increase of 2 basis points from the 5.98% yield for the fourth quarter of 2003.

Interest expense was $5.4 million for the fourth quarter of 2004, an increase of $262,000, or 5.1%, from $5.2 million for the fourth quarter of 2003. Interest expense increased because of the $147 million in deposit growth that was experienced between the periods which was due primarily to an increase in commercial deposit accounts. The increase in interest expense caused by the increased deposits was partially offset by a decrease in the average interest rate paid on deposits. The decrease in the average rate was primarily the result of the $88 million in growth that was experienced in checking and money market accounts between the periods, which generally have lower interest rates than other deposit accounts. The average interest rate paid on interest-bearing liabilities was 2.51% for the fourth quarter of 2004, a decrease of 24 basis points from the 2.75% paid for the fourth quarter of 2003. Net interest margin (net interest income divided by average interest earning assets) for the fourth quarter of 2004 was 3.62%, an increase of 23 basis points, compared to 3.39% for the fourth quarter of 2003.

The provision for loan losses was $714,000 for the fourth quarter of 2004, an increase of $4,000, or 0.6%, from $710,000 for the fourth quarter of 2003. The provision for loan losses increased primarily due to an increase in the reserves established on two commercial lending relationships in the fourth quarter of 2004. This increase in the provision was partially offset by the slower loan growth that was experienced in the commercial and consumer loan portfolios during the fourth quarter of 2004 when compared to the fourth quarter of 2003. Total non-performing assets were $4.9 million at December 31, 2004, a decrease of $153,000, or 3.0%, from the $5.0 million in non-performing assets at December 31, 2003. Non-performing loans decreased by $350,000, non-performing other assets decreased by $9,000, and foreclosed and repossessed assets increased by $206,000 between the periods.

Non-interest income was $1.2 million for the fourth quarter of 2004, a decrease of $737,000, or 38.8%, from $1.9 million for the fourth quarter of 2003. Security losses increased $580,000 between the periods primarily due to a write down of a Federal Home Loan Mortgage Corporation (FHLMC) preferred stock investment in the fourth quarter of 2004 whose decline in value due to decreased interest rates was determined to be other than temporary. Gain on sales of loans decreased by $213,000 due to a decrease in the mortgage loan activity in the fourth quarter of 2004 when compared to the same period of 2003. Earnings in limited partnerships decreased by $76,000 between the periods primarily because the Company’s investment in a limited partnership that invested in the common stock of other financial institutions was liquidated in the first quarter of 2004. These decreases in non-interest income were partially offset by an increase of $70,000 in fees and service charges between the periods due to an increase in the number of deposit accounts and the fees charged. Other non-interest income increased by $46,000 primarily due to increases in rental income and one time gains recognized on the sale of fixed assets.

Non-interest expense was $5.4 million for the fourth quarter of 2004, an increase of $429,000, or 8.7%, from $4.9 million for the fourth quarter of 2003. The increase was due to an increase of $363,000 in compensation and benefit expense caused primarily by increased health insurance costs in the fourth quarter of 2004 when compared to the same period of 2003. Data processing expense increased by $40,000 due to an increase in the number of customers served and the services used. Other expenses increased by $70,000 between the periods primarily because of increased costs associated with implementation of the internal control evaluation and reporting requirements of the Sarbanes Oxley legislation and increased check processing costs caused by increased activity. Income tax expense increased by $344,000 between the periods due to increased taxable income and changes in state tax allocations and tax basis.

Return on average assets for the fourth quarter of 2004 was 0.88%, compared to 1.03% for the fourth quarter of 2003. Return on average equity was 9.85% for the fourth quarter of 2004, compared to 10.45% for the same quarter in 2003. Book value per common share at December 31, 2004 was $18.95, compared to $17.93 at December 31, 2003.

Net income was $9.3 million for the year ended December 31, 2004, an increase of $685,000, or 8.0%, compared to $8.6 million for the year ended December 31, 2003. Diluted earnings per common share for the year ended December 31, 2004 were $2.31, up $0.15, or 6.9%, from $2.16 for the year ended December 31, 2003.

Net interest income was $30.6 million for the year ended December 31, 2004, an increase of $6.0 million, or 24.2%, from $24.6 million in 2003. Interest income was $51.6 million for the year ended December 31, 2004, an increase of $6.7 million, from $44.9 million for the same period in 2003. Interest income increased primarily because of an increase in average interest-earning assets and because of a change in the mix of assets between the periods. The increase in interest-earning assets was caused primarily by the $105 million increase in the commercial and consumer loan portfolios between the periods. These portfolios represented 78% of the Company’s outstanding loans at December 31, 2004. The increase in interest income as a result of the increased interest-earning assets more than offset the decrease in the interest rates earned on the assets between the periods. The yield earned on interest-earning assets was 5.90% for the year ended December 31, 2004, a decrease of 14 basis points from the 6.04% yield for the same period of 2003.

Interest expense was $21.0 million for the year ended December 31, 2004, an increase of $704,000, or 3.5%, from the $20.3 million for the same period in 2003. Interest expense on deposits and Federal Home Loan Bank advances increased by $2.1 million due to the $132 million increase in the average outstanding balance of deposits and advances between the periods. This increase was partially offset by a $1.4 million decrease in interest expense due to a decline in the interest rates paid. The average interest rate paid on interest-bearing liabilities was 2.53% for the year ended December 31, 2004, a decrease of 38 basis points from the 2.91% in 2003. Net interest margin (net interest income divided by average interest earning assets) for the year ended December 31, 2004 was 3.50%, a 19 basis point increase, compared to 3.31% for 2003.

The provision for loan losses was $2.8 million for the year ended December 31, 2004, an increase of $145,000, or 5.6%, from $2.6 million in 2003. The provision for loan losses increased primarily due to an increase in reserves established on two commercial lending relationships during the year. This increase was partially offset by the slower loan growth that was experienced in the commercial and consumer loan portfolios during 2004 when compared to 2003. Commercial and consumer loans generally require a larger provision due to the greater inherent credit risk of these loans. Total non-performing assets were $4.9 million at December 31, 2004, a decrease of $153,000, or 3.0%, from the $5.0 million in non-performing assets at December 31, 2003. Non-performing loans decreased by $350,000, non-performing other assets decreased by $9,000, and foreclosed and repossessed assets increased by $206,000 between the periods.

Non-interest income was $6.0 million for the year ended December 31, 2004, a decrease of $4.3 million, or 41.8%, from $10.3 million for the same period in 2003. Gain on sales of loans decreased by $3.5 million due to the significant decrease in mortgage loan origination activity in 2004 when compared to 2003. Non-interest income decreased by $1.8 million because of lower gains on security sales and the $539,000 write down of a FHLMC preferred stock investment in the fourth quarter of 2004 whose decline in value due to decreased interest rates was determined to be other than temporary. Fees and service charges increased by $472,000 between the periods due primarily to an overdraft protection program that was implemented during the second quarter of 2003 and because of increases in the number of deposit accounts and the fees charged. Mortgage servicing fees increased by $171,000 due to the increased size of the mortgage loan servicing portfolio between the periods. Losses from limited partnerships decreased by $217,000 between the years primarily because the Company’s investment in a limited partnership that invested in mortgage servicing rights was dissolved in the second quarter of 2003. Other non-interest income increased by $199,000 primarily because of increased revenues from the sale of uninsured investment products.

Non-interest expense was $20.2 million for the year ended December 31, 2004, an increase of $508,000, or 2.6%, from $19.7 million for the same period in 2003. Compensation and benefits expense increased by $1.5 million due to increases in health insurance and annual payroll costs due to increased staffing during the year. Occupancy expense increased by $206,000 primarily because of real estate tax increases on existing facilities and increased expenses related to the additional corporate facilities that were put in place in the first quarter of 2004. Amortization expense on mortgage servicing rights decreased by $921,000 between the periods because of a decrease in the prepayments on the mortgage loans being serviced. Data processing costs decreased by $179,000 primarily because of the renegotiation of a third party service contract in the fourth quarter of 2003. Income tax expense was $4.4 million for the year ended December 31, 2004, an increase of $349,000, or 8.7%, compared to $4.0 million for the same period in 2003. The increase in income tax expense is primarily due to an increase in taxable income.

Return on average assets for the year ended December 31, 2004 was 1.01%, compared to 1.10% for the same period in 2003. Return on average equity was 11.03% for the year ended December 31, 2004, compared to 10.85% for the same period in 2003.

“I am pleased to report record earnings in 2004 despite the $5.3 million decline in the gains recognized on the sale of securities and mortgage loans,” said HMN President Michael McNeil. “Our ability to grow and change the mix of our assets and liabilities increased net interest income by $6.0 million and was a significant factor in obtaining the record results in 2004.”

HMN Financial, Inc. and Home Federal Savings Bank are headquartered in Rochester, Minnesota. The Bank operates nine 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 St. Cloud, Minnesota and in West Des Moines, Iowa. Eagle Crest Capital Bank, a division of Home Federal Savings Bank, operates branches in Edina and Rochester, Minnesota.

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. 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.)


HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
	December 31,			December 31,
	2004			2003
Assets
Cash and cash equivalents	$	34,298,394			30,496,823
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $9,509,377 and $13,707,005)		9,150,871			13,048,718
Other marketable securities
(amortized cost $95,097,051 and $91,035,285)		94,521,512			91,615,047

		103,672,383			104,663,765

Loans held for sale		2,711,760			6,542,824
Loans receivable, net		783,213,262			688,951,119
Accrued interest receivable		3,694,133			3,462,221
Real estate, net		140,608			73,271
Federal Home Loan Bank stock, at cost		9,292,800			10,004,400
Mortgage servicing rights, net		3,231,242			3,447,843
Premises and equipment, net		12,464,265			12,110,151
Investment in limited partnerships		168,258			617,042
Goodwill		3,800,938			3,800,938
Core deposit intangible		333,617			447,474
Prepaid expenses and other assets		2,638,681			2,108,575
Deferred tax asset		1,012,700			0

Total assets	$	960,673,041			866,726,446

Liabilities and Stockholders’ Equity
Deposits	$	698,902,185			551,687,995
Federal Home Loan Bank advances		170,900,000			203,900,000
Accrued interest payable		1,314,356			766,837
Customer escrows		762,737			22,457,671
Accrued expenses and other liabilities		5,022,927			6,952,600
Deferred tax liabilities		0			26,300

Total liabilities		876,902,205			785,791,403

Commitments and contingencies
Minority interest		0			3,986
Stockholders’ equity:
Serial preferred stock: ($.01 par value)
Authorized 500,000 shares; issued and outstanding shares none		0			0
Common stock ($.01 par value):
Authorized 11,000,000; issued shares 9,128,662		91,287			91,287
Additional paid-in capital		57,875,595			57,863,726
Retained earnings, subject to certain restrictions		91,408,028			85,364,657
Accumulated other comprehensive income (loss)		(604,446	)		(50,725	)
Unearned employee stock ownership plan shares		(4,544,300	)		(4,738,084	)
Treasury stock, at cost 4,708,798 and 4,616,010		(60,455,328	)		(57,599,804	)

Total stockholders’ equity		83,770,836			80,931,057

Total liabilities and stockholders’ equity	$	960,673,041			866,726,446


HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
	(unaudited)
	Three Months Ended						Year Ended
	December 31,						December 31,
	2004			2003			2004			2003
Interest income:
Loans receivable	$	12,742,396			11,171,735			47,962,485			41,800,039
Securities available for sale:
Mortgage-backed and related		92,434			96,848			385,067			272,253
Other marketable		717,309			543,231			2,897,834			2,386,590
Cash equivalents		57,311			30,289			164,061			128,948
Other		68,224			80,270			207,240			349,150

Total interest income		13,677,674			11,922,373			51,616,687			44,936,980

Interest expense:
Deposits		3,383,353			2,835,691			12,398,505			10,274,188
Federal Home Loan Bank advances		2,044,354			2,329,989			8,594,790			10,014,865

Total interest expense		5,427,707			5,165,680			20,993,295			20,289,053

Net interest income		8,249,967			6,756,693			30,623,392			24,647,927
Provision for loan losses		714,000			710,000			2,755,000			2,610,000

Net interest income after provision
for loan losses		7,535,967			6,046,693			27,868,392			22,037,927

Non-interest income:
Fees and service charges		761,648			691,495			2,776,553			2,304,090
Mortgage servicing fees		298,971			281,697			1,168,760			998,200
Securities gains (losses), net		(539,000	)		41,308			(535,188	)		1,274,537
Gain on sales of loans		434,534			647,605			1,702,979			5,240,442
Earnings (losses) in limited partnerships		(6,501	)		69,856			(26,118	)		(243,305	)
Other		212,281			166,612			880,233			681,518

Total non-interest income		1,161,933			1,898,573			5,967,219			10,255,482

Non-interest expense:
Compensation and benefits		2,646,270			2,283,139			10,186,538			8,675,596
Occupancy		959,612			1,024,538			3,629,766			3,423,745
Federal deposit insurance premiums		25,366			17,686			95,465			72,524
Advertising		138,826			114,820			430,417			392,833
Data processing		277,604			237,438			930,144			1,109,098
Amortization of mortgage servicing rights, net
of servicing costs		265,968			276,993			1,061,407			1,982,337
Other		1,044,615			974,268			3,828,086			3,997,243

Total non-interest expense		5,358,261			4,928,882			20,161,823			19,653,376

Income before income tax expense		3,339,639			3,016,384			13,673,788			12,640,033
Income tax expense		1,218,400			874,200			4,387,100			4,037,800

Income before minority interest		2,121,239			2,142,184			9,286,688			8,602,233
Minority interest		(737	)		(3,014	)		(3,109	)		(3,014	)

Net income	$	2,121,976			2,145,198			9,289,797			8,605,247

Basic earnings per share	$	0.55			0.55			2.40			2.26

Diluted earnings per share	$	0.53			0.53			2.31			2.16


HMN FINANCIAL, INC. AND SUBSIDIARIES
Selected Consolidated Financial Information
(unaudited)
	Three Months Ended						Year Ended
SELECTED FINANCIAL DATA:	December 31,						December 31,
(dollars in thousand, except per share data)	2004			2003			2004			2003
I. OPERATING DATA:
Interest income	$	13,678			11,923			51,617			44,937
Interest expense		5,428			5,166			20,993			20,289
Net interest income		8,250			6,757			30,624			24,648
II. AVERAGE BALANCES:
Assets ⁽¹⁾		954,343			828,995			918,853			781,613
Loans receivable, net		770,747			674,561			736,987			615,553
Mortgage-backed and related securities ⁽¹⁾		9,833			15,438			11,225			21,885
Interest-earning assets ⁽¹⁾		907,174			791,154			874,563			743,892
Interest-bearing liabilities		861,977			744,713			829,929			697,539
Equity ⁽¹⁾		85,669			81,412			84,214			79,324
III. PERFORMANCE RATIOS: ⁽¹⁾
Return on average assets (annualized)		0.88	%		1.03	%		1.01	%		1.10	%
Interest rate spread information:
Average during period		3.49			3.23			3.37			3.09
End of period		3.66			3.19			3.66			3.19
Net interest margin		3.62			3.39			3.50			3.31
Ratio of operating expense to average
total assets (annualized)		2.23			2.36			2.19			2.51
Return on average equity (annualized)		9.85			10.45			11.03			10.85
Efficiency		56.93			56.95			55.10			56.31

(1)

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


Delaware	0-24100	41-1777397
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)

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


	HMN Financial, Inc.

January 28, 2005	By:	Jon J. Eberle

		Name: Jon J. Eberle
		Title: Senior Vice President, Chief Financial Officer and Treasurer


Exhibit No.		Description

10.1		Description of Michael McNeil 2004 Bonus Plan
10.2		Description of Michael McNeil 2005 Bonus Plan
10.3		Form of Restricted Stock Agreement under 2001 Omnibus Stock Plan
99		Press Release dated January 24, 2005


Name of Employee:


No. of Shares Covered:		Date of Issuance:



Vesting Schedule pursuant to Section 4:

Vesting Date(s)		No. of Shares Which Become Vested as of Such Date


	December 31,			December 31,
	2004			2003

IV. ASSET QUALITY :
Total non-performing assets	$	4,882			5,035
Non-performing assets to total assets		0.51	%		0.58	%
Non-performing loans to total loans
receivable, net		0.55	%		0.68	%
Allowance for loan losses	$	8,996			6,940
Allowance for loan losses to total loans receivable, net		1.15			1.01
Allowance for loan losses to non-performing loans		207.30			147.99

V. BOOK VALUE PER SHARE:
Book value per share	$	18.95			17.93


Date of Report (Date of Earliest Event Reported):		January 24, 2005


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


	Year Ended			Year Ended
	Dec 31, 2004			Dec 31, 2003


VI. CAPITAL RATIOS :
Stockholders’ equity to total assets,
at end of period		8.72	%		9.34	%
Average stockholders’ equity to
average assets ⁽¹⁾		9.17			10.15
Ratio of average interest-earning assets to
average interest-bearing liabilities ⁽¹⁾		105.38			106.65


Fourth Quarter Highlights


Annual Highlights