HMN Financial, Inc. (NASDAQ:HMNF):
Earnings (Loss) Summary Three Months Ended   Nine Months Ended
September 30, September 30,
(dollars in thousands, except per share amounts) 2010 2009 2010 2009
Net income (loss) $ (9,367) 881 $ (19,046) (10,945)
Diluted earnings (loss) per share (2.60) 0.12 (5.43) (3.32)
Return on average assets (3.89) 0.34 % (2.55) (1.34) %
Return on average equity (42.01) 3.52 % (26.71) (13.79) %
Book value per share $ 12.98 18.09 $ 12.98 18.09

HMN Financial, Inc. (HMN or the Company) (NASDAQ:HMNF), the $907 million holding company for Home Federal Savings Bank (the Bank), today reported a net loss of $9.4 million for the third quarter of 2010, a $10.3 million change from net income of $881,000 for the third quarter of 2009. Net loss available to common shareholders for the third quarter of 2010 was $9.8 million, a change of $10.3 million, from net income available to common shareholders of $443,000 for the third quarter of 2009. Diluted loss per common share for the third quarter of 2010 was $2.60, down $2.72 from the diluted income per common share of $0.12 for the third quarter of 2009. The decrease in net income for the third quarter of 2010 is due primarily to an $8.6 million increase in the provision for loan losses between the periods. The increased provision is primarily the result of additional reserves established on commercial real estate loans as a result of decreases in the estimated value of the underlying collateral supporting the loans and an increase in the general reserves required for other risk rated commercial loans as a result of a loan portfolio analysis. The net loss was also adversely affected by the $3.7 million increase in income tax expense as a result of establishing an additional deferred tax valuation reserve during the third quarter of 2010 due to the tax treatment of the net operating loss incurred during the quarter. Because of the valuation allowance on the deferred tax asset, the Company was not able to record an income tax benefit during the third quarter of 2010 related to the pre-tax loss because any current income tax benefit that would normally result from a pre-tax loss is offset by additional deferred tax expense due to an increase in the required valuation allowance. Excluding the deferred tax valuation reserve, the adjusted loss was $6.1 million, or ($1.61) per diluted common share, for the third quarter of 2010 and the adjusted loss was $8.1 million, or ($2.17) per diluted common share, for the first nine months of 2010. The following table reconciles our determination of adjusted loss to the net loss available to common shareholders as prepared in accordance with generally accepted accounting principles:
Three Months Ended

September 30, 2010
  Nine Months Ended

September 30, 2010
(dollars in thousands, except per share data) Amount   Diluted per share Amount   Diluted per share
Net loss available to common shareholders $ (9,814 ) (2.60 ) $ (20,381 ) (5.43 )
Deferred tax asset valuation reserve 3,748   0.99   12,233   3.26  
Adjusted loss $ (6,066 ) (1.61 ) $ (8,148 ) (2.17 )

The Company is providing adjusted loss information in addition to reported results prepared in accordance with generally accepted accounting principles in order to present financial information without the non-cash impact of the deferred tax asset valuation reserve recognized during the three and nine months ended September 30, 2010 and required based on cumulative losses over a three-year period and other factors.