10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

                    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) FOR THE
                    SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number 0-24100

HMN FINANCIAL, INC.

(Exact name of Registrant as specified in its Charter)

Delaware	41-1777397
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1016 Civic Center Drive N.W., Rochester, MN	55901
(Address of principal executive offices)	(ZIP Code)
Registrant's telephone number, including area code:	(507) 535-1200

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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X)         No ( )

Indicate the number of shares outstanding of each of the issuer's common stock as of the latest practicable date.

Class	Outstanding at November 6, 2002
Common stock, $0.01 par value	4,449,006

HMN FINANCIAL, INC.

CONTENTS

PART I - FINANCIAL INFORMATION
		Page
Item 1:	Financial Statements (unaudited)
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	3
	Consolidated Statements of Income for the Three Months Ended and Nine Months Ended September 30, 2002 and 2001	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended and Nine Months Ended September 30, 2002 and 2001	5
	Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended September 30, 2002	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001	7
	Notes to Consolidated Financial Statements	8-16
Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	17-26
Item 3:	Quantitative and Qualitative Disclosures about Market Risk Discussion included in Item 2 under Market Risk	22
Item 4:	Controls and Procedures	26
PART II - OTHER INFORMATION
Item 1:	Legal Proceedings	28
Item 2:	Changes in Securities	28
Item 3:	Defaults Upon Senior Securities	28
Item 4:	Submission of Matters to a Vote of Security Holders	28
Item 5:	Other Information	28
Item 6:	Exhibits and Reports on Form 8-K	28
Signatures		29

2

PART I - FINANCIAL STATEMENTS

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
		September 30,	December 31,
		2002	2001
Assets
Cash and cash equivalents	$	48,020,778	23,019,553
Securities available for sale:
Mortgage-backed and related securities
(amortized cost $62,334,585 and $65,878,534)		61,882,400	66,229,732
Other marketable securities
(amortized cost $45,181,323 and $53,439,401)		46,810,846	53,665,502
		108,693,246	119,895,234
Loans held for sale		14,418,617	68,017,570
Loans receivable, net		508,035,550	471,667,772
Accrued interest receivable		3,170,206	3,508,828
Federal Home Loan Bank stock, at cost		11,880,500	12,245,000
Mortgage servicing rights, net		2,251,335	1,903,636
Premises and equipment, net		13,518,659	10,860,756
Investment in limited partnerships		1,318,491	1,523,650
Goodwill		3,800,938	3,800,938
Core deposit intangible		592,375	685,509
Prepaid expenses and other assets		3,768,574	3,985,625
Total assets	$	719,469,269	721,114,071
Liabilities and Stockholders' Equity
Deposits	$	422,346,889	421,843,369
Federal Home Loan Bank advances		214,300,000	217,800,000
Accrued interest payable		742,024	1,017,456
Advance payments by borrowers for taxes and insurance		877,566	1,015,570
Accrued expenses and other liabilities		5,299,054	6,535,734
Deferred tax liabilities		1,143,300	976,900
Total liabilities		644,708,833	649,189,029
Commitments and contingencies
Minority interest		(419,878)	(236,309)
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		58,934,419	59,168,782
Retained earnings, subject to certain restrictions		79,198,727	76,956,978
Accumulated other comprehensive income		760,839	367,744
Unearned employee stock ownership plan shares		(4,979,675)	(5,124,746)
Unearned compensation restricted stock awards		0	(7,350)
Treasury stock, at cost 4,701,656 and 4,732,521 shares		(58,825,283)	(59,291,344)
Total stockholders' equity		75,180,314	72,161,351
Total liabilities and stockholders' equity	$	719,469,269	721,114,071

See accompanying notes to consolidated financial statements.

3

HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
		Three Months Ended September 30, 2002                        2001					Nine Months Ended September 30, 2002                                   2001
Interest income:
Loans receivable	$		9,502,274	11,057,446		28,271,049					33,605,383
Securities available for sale:
Mortgage-backed and related			485,086		893,913			1,497,251	3,171,869
Other marketable			515,997		441,500			1,952,793	1,931,904
Cash equivalents			38,564		65,571			297,916	137,107
Other			90,603		117,777			265,305		414,505
Total interest income			10,632,524		12,576,207			32,284,314				39,260,768
Interest expense:
Deposits			2,556,830		4,636,529			8,304,055				14,607,907
Federal Home Loan Bank advances			2,616,265		2,851,114			7,788,063				9,199,980
Total interest expense			5,173,095		7,487,643			16,092,118				23,807,887
Net interest income			5,459,429		5,088,564			16,192,196				15,452,881
Provision for loan losses			771,000		300,000			1,801,000				750,000
Net interest income after provision
for loan losses			4,688,429		4,788,564			14,391,196				14,702,881
Non-interest income:
Fees and service charges			418,115		417,116			1,212,276				1,131,667
Mortgage servicing fees			184,769		113,908			521,931				328,139
Securities gains (losses), net			376,838		71,338			422,346				(260,958)
Gain on sales of loans			432,095		591,881			1,975,124				2,733,313
Earnings (losses) in limited
partnerships			(530,943)		104,896			(203,968)				(523,643)
Other			122,539		119,908			531,519				449,859
Total non-interest income			1,003,413		1,419,047			4,459,228				3,858,377
Non-interest expense:
Compensation and benefits			1,986,777		1,924,282			6,006,821				5,879,340
Occupancy			801,026		528,192			2,210,714				1,607,983
Federal deposit insurance premiums			18,173		19,841			56,280				60,613
Advertising			129,254		94,914			418,336				295,057
Data processing			272,696		238,728			824,060				710,482
Amortization of mortgage servicing
rights, net of valuation adjustments
and servicing costs			502,282		157,850			884,588				493,888
Other			844,581		812,812			2,825,635				2,302,096
Total noninterest expense			4,554,789		3,776,619			13,226,454				11,349,459
Income before income tax expense			1,137,053		2,430,992			5,623,970				7,211,799
Income tax expense			312,200		571,285			1,637,400				2,356,185
Income before minority interest			824,853		1,859,707			3,986,570				4,855,614
Minority interest			(67,012)		(163,373)			(141,306)				(30,493)
Net income	$		891,865		2,023,080			4,127,876				4,886,107
Basic earnings per share	$		0.24		0.53			1.10				1.30
Diluted earnings per share	$		0.22		0.50			1.04				1.23

See accompanying notes to consolidated financial statements.

4

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
(unaudited)

		Three Months Ended September 30,
		2002			2001
Net income	$			891,865			2,023,080
Other comprehensive income, net of tax:
Unrealized losses on hedging valuation		0			(218,985)
Less: minority interest in hedging valuation		0			(91,484)
Net unrealized losses on hedging valuation			0			(127,501)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		1,195,786			(555,035)
Less: reclassification adjustment for gains
included in net income		243,738			43,038
Net unrealized gains (losses) on securities			952,048			(598,073)
Other comprehensive income (loss)				952,048			(725,574)
Comprehensive income	$			1,843,913			1,297,506

		Nine Months Ended September 30,
		2002			2001
Net income	$			4,127,876				4,886,107
Other comprehensive income, net of tax:
Unrealized losses on hedging valuation		(35,795)			(300,606)
Less: minority interest in hedging valuation		(21,950)			(122,173)
Net unrealized losses on hedging valuation			(13,845)			(178,433)
Unrealized gains on securities:
Unrealized holding gains arising during period		680,086			1,388,158
Less: reclassification adjustment for gains (losses)
included in net income		273,146			(154,550)
Net unrealized gains on securities			406,940				1,542,708
Other comprehensive income				393,095				1,364,275
Comprehensive income	$			4,520,971				6,250,382

See accompanying notes to consolidated financial statements.

5

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders' Equity

For the Nine Month Period Ended September 30, 2002

(unaudited)

					Unearned
				Accumulated	Employee	Unearned
				Accumulated	Stock	Compensation		Total
		Additional		Other	Ownership	Restricted		Stock-
	Common	Paid-in	Retained	Comprehensive	Plan	Stock	Treasury	Holders'
	Stock	Capital	Earnings	Income	Shares	Awards	Stock	Equity
Balance, December 31, 2001	$ 91,287	59,168,782	76,956,978	367,744	(5,124,746)	(7,350)	(59,291,344)	72,161,351
Net income			4,127,876					4,127,876
Other comprehensive income				393,095				393,095
Treasury stock purchases							(658,611)	(658,611)
Employee stock options
exercised		(489,175)					1,124,672	635,497
Tax benefits of exercised
stock options		148,023						148,023
Amortization of restricted
stock awards						7,350		7,350
Dividends paid			(1,886,127)					(1,886,127)
Earned employee stock
ownership plan shares		106,789			145,071			251,860
Balance, September 30, 2002	$ 91,287	58,934,419	79,198,727	760,839	(4,979,675)	0	(58,825,283)	75,180,314

See accompanying notes to consolidated financial statements.

6

HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

		Nine Months Ended September 30,
		2002	2001
Cash flows from operating activities:
Net income	$	4,127,876	4,886,107
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		1,801,000	750,000
Depreciation		1,012,082	754,227
Amortization of premiums, net		239,534	72,127
Amortization of deferred loan fees		(498,149)	(390,794)
Amortization of goodwill		0	135,027
Amortization of core deposit intangible		93,134	85,802
Amortization of other purchase accounting adjustments		7,495	9,025
Amortization of mortgage servicing rights and net valuation adjustments		864,573	493,829
Capitalized mortgage servicing rights		(1,212,272)	(990,324)
Deferred income taxes		(104,400)	125,000
Securities (gains) losses, net		(422,346)	260,958
Gain on sales of real estate		(1,254)	(17,293)
Gain on sales of loans		(1,975,124)	(2,733,403)
Proceeds from sale of loans held for sale		202,650,820	568,937,142
Disbursements on loans held for sale		(141,643,268)	(623,170,040)
Principal collected on loans held for sale		106,603	154,425
Amortization of restricted stock awards		7,350	2,450
Amortization of unearned ESOP shares		145,071	145,031
Earned employee stock ownership shares priced above original cost		106,789	76,850
Decrease in accrued interest receivable		338,622	658,288
Decrease in accrued interest payable		(275,432)	(475,151)
Equity losses of limited partnerships		203,968	523,643
Equity (losses) of minority interest		(141,306)	(30,493)
Increase in other assets		(94,329)	(2,214,259)
Increase (decrease) in other liabilities		(1,441,860)	2,044,898
Other, net		29,614	(33,054)
Net cash provided (used) by operating activities		63,924,791	(49,939,982)
Cash flows from investing activities:
Proceeds from sales of securities available for sale		18,036,553	19,135,721
Principal collected on securities available for sale		14,077,803	13,667,575
Proceeds collected on maturity of securities available for sale		19,900,000	12,695,000
Purchases of securities available for sale		(40,055,856)	0
Proceeds from sales of loans receivable		0	12,156
Net decrease (increase) in loans receivable		(42,391,910)	17,585,021
Redemption of Federal Home Loan Bank stock		364,500	0
Proceeds from sale of real estate		52,435	316,797
Purchases of premises and equipment		(3,681,249)	(1,743,705)
Net cash provided (used) by investing activities		(33,697,724)	61,668,565
Cash flows from financing activities:
Increase in deposits		321,403	7,588,014
Purchase of treasury stock		(658,611)	(74,152)
Stock options exercised		635,497	475,586
Dividends to stockholders		(1,886,127)	(1,347,740)
Proceeds from Federal Home Loan Bank advances		0	259,700,000
Repayment of Federal Home Loan Bank advances		(3,500,000)	(271,800,000)
Minority interest in mortgage services		0	125,000
Increase (decrease) in advance payments by borrowers for taxes and insurance		(138,004)	511,738
Net cash used by financing activities		(5,225,842)	(4,821,554)
Increase in cash and cash equivalents		25,001,225	6,907,029
Cash and cash equivalents, beginning of period		23,019,553	14,416,861
Cash and cash equivalents, end of period	$	48,020,778	21,323,890
Supplemental cash flow disclosures:
Cash paid for interest	$	16,367,550	24,283,038
Cash paid for income taxes		1,817,500	2,168,000
Supplemental noncash flow disclosures:
Loans transferred to loans held for sale		4,267,484	1,216,509
Transfer of loans to real estate		370,625	86,123

See accompanying notes to consolidated financial statements.

7

HMN FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

September 30, 2002 and 2001

(1) HMN Financial, Inc.

HMN Financial, Inc. (HMN) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank or Home Federal). Home Federal has a community banking philosophy and operates retail banking facilities in Minnesota and Iowa. The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OAI) which offers financial planning products and services and Home Federal REIT, Inc. (HFREIT) which invests in real estate loans acquired from the Bank. HMN has another wholly owned subsidiary, SecurityFinance Corporation (SFC) which holds a limited number of commercial loans originated by third parties. The Bank has a 51% owned subsidiary, Home Federal Mortgage Services, LLC (HFMS), which is a mortgage banking and mortgage brokerage business located in Brooklyn Park, Minnesota. The Bank is in the process of liquidating the assets of HFMS and mortgage production has ceased as of September 30, 2002.

The consolidated financial statements included herein are for HMN, SFC, the Bank and the Bank's subsidiaries, OAI, HFREIT and HFMS. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2) Basis of Preparation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with generally accepted accounting principles. However, all adjustments consisting of only normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The statement of income for the three month and nine month periods ended September 30, 2002 are not necessarily indicative of the results which may be expected for the entire year.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current period presentation.

(3) New Accounting Standards
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. Except for transactions between two or more mutual enterprises, this statement requires the application of the purchase method of accounting to all acquisitions of financial institutions. In addition, this statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provision that SFAS No. 144 requires for other long-lived assets that are held and used. The provisions of SFAS No. 147, which relate to the application of the purchase method of accounting, are effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. The impact of adopting SFAS No. 147 on HMN's financial condition and its results of operations will not be material.
 

8

(4) Derivative Instruments and Hedging Activities
HMN adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in the first quarter of 2001. In July of 2001, HMN entered into an interest rate swap for $15 million. Under the interest rate swap, HMN pays interest based upon the three month London Inter-Bank Offer Rate (LIBOR) and receives interest payments based upon a fixed rate of 6.0% on a notional value of $15 million in a fair value hedge with no ineffectiveness. The hedge is offsetting a callable certificate of deposit for $15 million that was issued by HMN. In July of 2002, the interest rate swap was called and the corresponding certificate of deposit was also called. As of September 30, 2002, HMN has not entered into any other interest rate swaps.

HMN originates and purchases single family residential loans for sale into the secondary market and enters into commitments to sell or securitize those loans in order to mitigate the interest rate risk associated with holding the loans until they are sold. At the beginning of the second quarter of 2001, certain commitments to sell Loans Held for Sale were designated as a cash flow hedge of a forecasted transaction and were accounted for in accordance with SFAS No. 133 with no ineffectiveness recognized in the income statement. In the second quarter of 2002 cash flow hedge accounting was discontinued because HMN ceased delivery of loans under a mortgage backed security program. The mortgage banking operations  in the Brooklyn Park location were eliminated and some of the activity was moved to other branches within HMN.

HMN has commitments outstanding to extend credit to future borrowers or to purchase loans that had not closed prior to the end of the quarter which it intends to sell. These commitments are referred to as its mortgage pipeline. As commitments to originate or purchase loans enter the mortgage pipeline, generally HMN simultaneously enters into commitments to sell the mortgage pipeline into the secondary market. The commitments to originate, purchase or sell loans are derivatives. As a result of marking the mortgage pipeline and the related commitments to sell to market for the third quarter ended September 30, 2002, HMN recorded an increase in Other Assets of $757,633, and an increase in Other Liabilities of $757,633.

The current commitments to sell Loans Held for Sale are derivatives that do not qualify for hedge accounting. As a result, these derivatives are marked to market. The Loans Held for Sale that are not hedged are recorded at the lower of cost or market. The lower of cost or market and the market value adjustments as of and for the quarter ended September 30, 2002 include loans that do not qualify for hedge accounting. As a result of marking these loans, HMN recorded a decrease to Loans Held for Sale of $1,567 and an increase in Other Liabilities of $188,487, and a net loss in gains or losses on sales of loans of $190,054. The unrealized gains on loans held for sale of $188,487 will not be recognized in income until the loans are sold in the fourth quarter of 2002.

(5) Comprehensive Income
Comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income, which for HMN is comprised of unrealized gains and losses on securities available for sale and unrealized gains and losses on hedging activity for loans held for sale and certificates of deposit with matching interest rate swaps.

There was no hedging activity for the third quarter of 2002 due to the phase down of the mortgage banking operations of HFMS. The gross unrealized holding gains on securities for the third quarter of 2002 was $1,837,000, the income tax expense would have been $641,000 and therefore, the net gain was $1,196,000. The gross reclassification adjustment for the third quarter of 2002 was $377,000, the income tax expense would have been $133,000 and therefore, the net gain was $244,000. The gross unrealized losses in hedging valuation for the third quarter of 2001 was $362,000, the income tax benefit would have been $143,000 and therefore, the net loss was $219,000. The gross minority interest in hedging valuation for the third quarter of 2001 was $151,000, the income tax benefit would have been $60,000 and therefore, the net loss was $91,000. The gross unrealized holding losses on securities for the third quarter of 2001 was $906,000, the income tax benefit would have been $351,000 and therefore, the net lo ss was $555,000. The gross reclassification adjustment in the third quarter of

9

2001 was $71,000, the income tax expense would have been $28,000 and therefore, the net reclassification adjustment was a gain of $43,000.

The gross unrealized losses in hedging valuation for the nine month period ended September 30, 2002 was $45,000, the income tax benefit would have been $9,000 and therefore, the net loss was $36,000. The gross minority interest in hedging valuation for the nine month period ended September 30, 2002 was $22,000. The gross unrealized holding gains on securities for the nine month period ended September 30, 2002 was $1,022,000, the income tax expense would have been $342,000 and therefore, the net gain was $680,000. The gross reclassification adjustment in the nine month period ended September 30, 2002 was $422,000, the income tax benefit would have been $149,000 and therefore, the net loss was $273,000. The gross minority interest in hedging valuation for the nine month period ended September 30, 2001 was $201,000, the income tax benefit would have been $79,000 and therefore, the net loss was $122,000. The gross unrealized holding gains on securities for the nine month period ended September 30, 2001 was $2,31 9,000, the income tax benefit would have been $931,000 and therefore, the net gain was $1,388,000. The gross reclassification adjustment in the nine month period ended September 30, 2001 was $261,000, the income tax benefit would have been $106,000 and therefore, the net reclassification adjustment was $155,000.

(6) Cash Dividend
On October 22, 2002 HMN's Board of Directors announced a cash dividend of $0.18 per share, payable on December 11, 2002 to stockholders of record on November 22, 2002.

(7) Investment in Mortgage Servicing Rights
A summary of mortgage servicing activity is as follows:

		Nine Months ended Sept. 30, 2002	Twelve Months ended Dec. 31, 2001	Nine Months ended Sept. 30, 2001
Mortgage servicing rights
Balance, beginning of period	$	1,922,736	1,188,928	1,188,928
Originations		1,212,272	1,458,321	990,324
Amortization		(665,173)	(724,513)	(493,829)
Balance, end of period		2,469,835	1,922,736	1,685,423
Valuation reserve
Balance, beginning of period		(19,100)	0	0
Additions		(210,000)	(19,100)	(1,988)
Reductions		10,600	0	0
Balance, end of period		(218,500)	(19,100)	(1,988)
Mortgage servicing rights, net	$	2,251,335	1,903,636	1,683,435
Fair value of mortgage servicing rights	$	2,262,578	1,939,000	1,842,000

Mortgage servicing costs, which include professional services for valuing mortgage servicing rights, were $20,014 at September 30, 2002, and $11,802 and $15,365 for the nine and twelve months ended in September and December 2001, respectively.

10

All of the loans being serviced were single family loans serviced for FNMA and FHLMC under the mortgage-backed security program or the individual loan sale program. The following is a summary of the risk characteristics of the loans being serviced at September 30, 2002.

		Loan Principal Balance	Weighted Average Interest Rate		Weighted Average Remaining Term	Number of Loans
Original term 30 year fixed rate	$	138,360,000	6.97	%	341	1,451
Original term 15 year fixed rate		144,673,000	6.39	%	160	2,065
Seven year balloon		160,000	6.09	%	127	2
Adjustable rate		6,597,000	5.67	%	334	48

(8) Investment in Limited Partnerships
Investments in limited partnerships were as follows:

Primary partnership activity		September 30, 2002	December 31, 2001
Mortgage servicing rights	$	818,022	991,941
Common stock of financial institutions		269,863	265,955
Low to moderate income housing		230,606	265,754
	$	1,318,491	1,523,650

During the third quarter of 2002 HMN's proportionate loss from a mortgage servicing partnership was $504,777, its proportionate share of losses from common stock investments in financial institutions was $19,665 and it recognized $6,500 of losses on low income housing partnerships. During 2002 HMN anticipates receiving low income housing credits totaling $84,000, of which $21,000 were credited to current income tax benefits. During the third quarter of 2001 HMN's proportionate gains from a mortgage servicing partnership was $125,879, its proportionate share of losses from the common stock investments in financial institutions was $14,483 and it recognized $6,500 of losses on the low income housing partnerships. During 2001 HMN received low income housing credits totaling $84,000, of which $21,000 were credited to current income tax benefits in the third quarter of 2001.

During the nine month period ended September 30, 2002, HMN's proportionate losses from a mortgage servicing partnership was $173,919, its proportionate share of gains from the common stock investments in financial institutions was $3,907 and it recognized $33,956 of losses on the low income housing partnerships. During 2002 HMN anticipates receiving low income housing credits totaling $84,000, of which $63,000 were credited to current income tax benefits in the nine month period ended September 30, 2002. During the nine month period ended September 30, 2001 HMN's proportionate loss from a mortgage servicing partnership was $483,020, its proportionate share of losses from the common stock investments in financial institutions was $21,123 and it recognized $19,500 of losses on the low income housing partnerships. During 2001 HMN received low income housing credits totaling $84,000, of which $63,000 were credited to current income tax benefits in the nine month period ended September 30, 2001.
 

11

(9) Intangible Assets

The gross carrying amount of intangible assets and the associated accumulated amortization at September 30, 2002 is presented in the table below. Amortization expense for intangible assets was $758,307 for the nine months ended September 30, 2002.

		Gross			Unamortized
		Carrying	Accumulated	Valuation	Intangible
		Amount	Amortization	Adjustment	Assets
Amortized intangible assets:
Mortgage servicing rights	$	3,633,153	(1,163,318)	(218,500)	2,251,335
Core deposit intangible		1,567,000	(974,625)	0	592,375
Total	$	5,200,153	(2,137,943)	(218,500)	2,843,710

The following table indicates the estimated future amortization expense for amortized intangible assets:

		Mortgage	Core
		Servicing	Deposit
		Rights	Intangible	Total
Three months ended December 31, 2002	$	111,041	31,044	142,085
Year ended December 31,
2003		402,167	113,857	516,024
2004		342,248	113,857	456,105
2005		290,869	113,857	404,726
2006		246,789	113,857	360,646
2007		213,279	105,902	319,181

Projections of amortization are based on existing asset balances and the existing interest rate environment as of September 30, 2002. HMN's actual experiences may be significantly different depending upon changes in mortgage interest rates and other market conditions.

(10) "Adjusted" Earnings SFAS No. 142 Transitional Disclosure

Effective January 1, 2002, the amortization of goodwill was discontinued. The table below reconciles reported earnings for the third quarter of 2001 to "adjusted" earnings, which exclude goodwill amortization.

				Quarter Ended September 30, 2001
			Quarter
			Ended		Reported		Goodwill		Adjusted
			September 30, 2002		Earnings		Amortization		Earnings
Income before income tax expense		$	1,137,053		2,430,992		45,009		2,476,001
Income tax expense			312,200		571,285		0		571,285
Income before minority interest			824,853		1,859,707		45,009		1,904,716
Minority interest			(67,012)		(163,373)		0		(163,373)
Net income		$	891,865		2,023,080		45,009		2,068,089
Earnings per common share		$	0.24		0.53		0.02		0.55
Diluted earnings per common share		$	0.22		0.50		0.02		0.52
12
				Nine Months Ended September 30, 2001
			Nine Months
			Ended		Reported	Goodwill		Adjusted
			September 30, 2002		Earnings	Amortization		Earnings
Income before income tax expense	$		5,623,970		7,211,799	135,027		7,346,826
Income tax expense			1,637,400		2,356,185	0		2,356,185
Income before minority interest			3,986,570		4,855,614	135,027		4,990,641
Minority interest			(141,306)		(30,493)	0		(30,493)
Net income	$		4,127,876		4,886,107	135,027		5,021,134
Earnings per common share	$		1.10		1.30	0.04		1.34
Diluted earnings per common share	$		1.04		1.23	0.03		1.26

(11) Employee Benefits

On July 23, 2002 the Board of Directors of the Bank resolved to freeze the accrual of benefits for existing participants and the addition of new enrollments to the Financial Institutions Retirement Fund (FIRF) as of September 1, 2002. The costs associated with operating the plan from June 30, 2002 to the freeze date of September 1, 2002 are not known at this time and are being calculated by the plan actuaries. Declines in the financial markets during 2002 and 2001 have caused many companies with defined benefit plans to make additional contributions to their plans to offset losses incurred in plan assets.

(12) Earnings per Share

The following table reconciles the weighted average shares outstanding and the income available to common shareholders used for basic and diluted EPS:

		Three months ended September 30,		Nine months ended September 30,
		2002	2001	2002	2001
Weighted average number of common shares outstanding
Used in basic earnings per common share calculation		3,790,526	3,785,130	3,757,404	3,751,198
Net dilutive effect of:
Options		232,790	226,322	224,723	220,716
Restricted stock awards		0	435	49	584
Weighted average number of shares outstanding
Adjusted for effect of dilutive securities		4,023,316	4,011,887	3,982,176	3,972,498
Income available to common shareholders	$	891,865	2,023,080	4,127,876	4,886,107
Basic earnings per common share	$	0.24	0.53	1.10	1.30
Diluted earnings per common share	$	0.22	0.50	1.04	1.23

(13) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on HMN's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier I or Core capital and Risk-based capital (as defined in the regulations) to total assets (as defined). Management believes, as of September 30, 2002, that the Bank meets all capital adequacy requirements to which it is subject.

13

Management believes that based upon the Bank's capital calculations at September 30, 2002 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized.

On September 30, 2002 the Bank's tangible assets and adjusted total assets were $710 million and its risk-weighted assets were $494.2 million. The following table presents the Bank's capital amounts and ratios at September 30, 2002 for actual capital, required capital and excess capital including ratios in order to qualify as being well capitalized under the Prompt Corrective Actions regulations.

											To Be Well
					Required to be						Capitalized Under
					Adequately						Prompt Corrective
		Actual			Capitalized			Excess Capital			Actions Provision
			Percent of			Percent of			Percent of			Percent of
(in thousands)		Amount	Assets (1)		Amount	Assets (1)		Amount	Assets (1)		Amount	Assets (1)
Bank stockholder's equity	$	64,527
Plus:
Net unrealized loss (gain) on certain
securities available for sale
and cash flow hedges		(778)
Less:
Goodwill and other intangibles		4,393
Excess mortgage servicing rights		316
Tier I or core capital		59,040
Tier I capital to adjusted total assets			8.32%	$	28,399	4.00%	$	30,641	4.32%	$	35,499	5.00%
Tier I capital to risk-weighted assets			11.95%	$	19,767	4.00%	$	39,273	7.95%	$	29,651	6.00%
Plus:
Allowable allowance for loan losses		4,109
Risk-based capital	$	63,149		$	39,534		$	23,615		$	49,418
Risk-based capital to
Risk-weighted assets			12.78%			8.00%			4.78%			10.00%

(1) Based upon the Bank's adjusted total assets for the purpose of the tangible and core capital ratios and risk-weighted assets for the purpose of the risk-based capital ratio.

The tangible capital of the Bank was in excess of the minimum 2% required at September 30, 2002 but is not reflected in the table above.

(14) Business Segments
HMN's subsidiary, Home Federal Savings Bank and the Bank's subsidiary, Home Federal Mortgage Services, LLC (HFMS), have been identified as reportable operating segments in accordance with the provisions of SFAS 131. HFMS was deemed to be a segment because its operations were conducted independently from the Bank. HFMS has been segmented further into Mortgage Servicing Rights and Mortgage Banking activities. The mortgage servicing segment owns servicing rights on loans which have either been sold to FNMA or securitized into mortgage-backed instruments which were issued by FNMA. HFMS receives a servicing fee that is based upon the outstanding balance of the loan being serviced and pays a subservicer a monthly fee to service the loan. HFMS's mortgage production activity ceased to operate during the third quarter of 2002. All loans that were acquired prior to that time are intended to be resold in the secondary loan market.

Security Finance Corporation and HMN, the holding company, did not meet the quantitative thresholds for determining reportable segments and therefore are included in the "Other" category.

HMN evaluates performance and allocates resources based on the segment's net income or loss, return on average assets and return on average equity. Each corporation is managed separately with its own president, who reports directly to HMN's chief operating decision maker, and the Board of Directors.

The following table sets forth certain information about the reconciliations of reported profit or loss and assets for each of HMN's reportable segments.

14

				Home Federal
				Mortgage Services, LLC
		Home
		Federal		Mortgage				Total
		Savings		Servicing		Mortgage		Reportable			Consolidated
(Dollars in thousands)		Bank		Rights		Banking		Segments	Other	Eliminations	Total
At or for the three-months ended
September 30, 2002
Interest income
- external customers	$	10,494		0		77		10,571	62	0	10,633
Non-interest income
- external customers		1,391		8		56		1,455	87	0	1,534
Earnings (loss) on limited partnerships		(511)		0		0		(511)	(20)	0	(531)
Intersegment interest income		57		0		0		57	24	(81)	0
Intersegment non-interest income		46		0		0		46	901	(947)	0
Interest expense		5,197		0		57		5,254	0	(81)	5,173
Amortization of mortgage servicing rights
and net valuation adjustments and		525		28		0		553	1	(51)	503
servicing costs
Other non-interest expense		3,853		0		192		4,045	133	(126)	4,052
Income tax expense (benefit)		379		0		1		380	(68)	0	312
Minority interest		(67)		0		0		(67)	0	0	(67)
Net income (loss)		855		(20)		(117)		718	944	(770)	892
Goodwill		3,801		0		0		3,801	0	0	3,801
Total assets		715,022		44		4,997		720,063	75,384	(75,978)	719,469
Net interest margin		3.31	%	NM		NM		NM	NM	NM	3.29	%
Return on average assets		0.49	%	(141.02)	%	(7.79)	%	NM	NM	NM	0.51	%
Return on average realized
common equity		5.35	%	(9,581.32)	%	(526.14)	%	NM	NM	NM	4.58	%
At or for the three-months ended
September 30, 2001
Interest income
- external customers	$	11,596		0		892		12,488	89	0	12,577
Non-interest income
- external customers		979		6		106		1,091	253	0	1,344
Earnings (loss) on
Limited partnerships		120		0		0		120	(15)	0	105
Intersegment interest income		766		0		0		766	49	(815)	0
Intersegment non-interest income		(87)		0		0		(87)	1,763	(1,676)	0
Interest expense		7,520		0		783		8,303	0	(815)	7,488
Amortization of mortgage servicing
rights and net valuation adjustments		146		12		0		158	0	0	158
and servicing costs
Other non-interest expense		2,986		0		543		3,529	263	(141)	3,651
Income tax expense (benefit)		692		0		0		692	(121)	0	571
Minority interest		(163)		0		0		(163)	0	0	(163)
Net income (loss)		1,894		(6)		(328)		1,560	1,998	(1,535)	2,023
Goodwill		3,891		0		0		3,891	0	0	3,891
Total assets		712,716		114		65,381		778,211	72,435	(129,219)	721,427
Net interest margin		2.83	%	NM		NM		NM	NM	NM	2.93	%
Return on average assets		1.05	%	(2.06)	%	(2.11)	%	NM	NM	NM	1.12	%
Return on average realized common equity		13.17	%	(106.35)	%	(110.11)	%	NM	NM	NM	11.06	%

                    NM - Not meaningful

15

				Home Federal
				Mortgage Services, LLC
		Home
		Federal		Mortgage				Total
		Savings		Servicing		Mortgage		Reportable			Consolidated
(Dollars in thousands)		Bank		Rights		Banking		Segments	Other	Eliminations	Total
At or for the nine-months ended
September 30, 2002
Interest income
- external customers	$	31,092		0		929		32,021	263	0	32,284
Non-interest income
- external customers		4,182		29		327		4,538	125	0	4,663
Earnings (loss) on limited partnerships		(208)		0		0		(208)	4	0	(204)
Intersegment interest income		472		0		0		472	24	(496)	0
Intersegment non-interest income		307		0		0		307	4,030	(4,337)	0
Interest expense		16,116		0		472		16,588	0	(496)	16,092
Amortization of mortgage servicing rights
and net valuation adjustments and		974		52		0		1,026	1	(142)	885
servicing costs
Other non-interest expense		11,327		0		1,049		12,376	419	(454)	12,341
Income tax expense (benefit)		1,854		0		1		1,855	(218)	0	1,637
Minority interest		(141)		0		0		(141)	0	0	(141)
Net income (loss)		4,030		(23)		(266)		3,741	4,128	(3,741)	4,128
Goodwill		3,801				0		3,801	0	0	3,801
Total assets		715,022		44		4,997		720,063	75,384	(75,978)	719,469
Net interest margin		3.26	%	NM		NM		NM	NM	NM	3.23	%
Return on average assets		0.77	%	(49.88)	%	(1.86)	%	NM	NM	NM	0.78	%
Return on average realized
common equity		8.56	%	(2,651.34)	%	(98.16)	%	NM	NM	NM	7.33	%
At or for the nine-months ended
September 30, 2001
Interest income
- external customers	$	36,691		0		2,265		38,956	305	0	39,261
Non-interest income
- external customers		2,464		34		1,289		3,787	595	0	4,382
Earnings (loss) on
Limited partnerships		(503)		0		0		(503)	(21)	0	(524)
Intersegment interest income		2,018		0		0		2,018	222	(2,240)	0
Intersegment non-interest income		294		0		0		294	4,528	(4,822)	0
Interest expense		23,905		0		2,128		26,033	15	(2,240)	23,808
Amortization of mortgage servicing
rights and net valuation adjustments		430		64		0		494	0	0	494
and servicing costs
Other non-interest expense		8,978		0		1,528		10,506	760	(411)	10,855
Income tax expense (benefit)		2,391		0		(28)		2,363	(7)	0	2,356
Minority interest		(30)		0		0		(30)	0	0	(30)
Net income (loss)		4,540		(30)		(74)		4,436	4,861	(4,411)	4,886
Goodwill		3,891		0		0		3,891	0	0	3,891
Total assets		712,716		114		65,381		778,211	72,435	(129,219)	721,427
Net interest margin		2.89	%	NM		NM		NM	NM	NM	2.97	%
Return on average assets		0.84	%	(21.74)	%	(0.22)	%	NM	NM	NM	0.90	%
Return on average realized common equity		10.78	%	(507.40)	%	(9.09)	%	NM	NM	NM	9.13	%

                    NM - Not meaningful

16

                                                                                HMN FINANCIAL, INC.

Item 2:                                             MANAGEMENT'S DISCUSSION AND ANALYSIS
                                            OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

HMN's net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and the interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between the yield earned on interest-earning assets and interest rates paid on interest-bearing liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. HMN's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net interest margin is calculated by dividing net interest income by the average interest-earning assets and is normally expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. HMN's net income is also affec ted by the generation of non-interest income, which primarily consists of gains from the sale of securities, gains from sale of loans, service charges, fees and other income. In addition, net income is affected by the level of operating expenses, provisions made for loan losses and impairment reserve adjustments required on mortgage servicing assets.

The operations of financial institutions, including the Bank, are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest primarily on competing investments, the mix of deposit accounts, account maturities and the levels of personal income and savings in the market area of the Bank.

Net Income

HMN's net income for the third quarter of 2002 was $892,000, a decrease of $1.1 million, or 55.9%, compared to net income of $2.0 million for the third quarter of 2001. Basic earnings per share were $0.24 for the quarter ended September 30, 2002, a decrease of $0.29 per share, or 54.7%, from $0.53 basic earnings per share for the same quarter of 2001. Diluted earnings per share were $0.22 for the third quarter of 2002, a decrease of $0.28 or 56.0%, from $0.50 diluted earnings per share for the third quarter of 2001.

HMN's net income for the nine months ended September 30, 2002 was $4.1 million, a decrease of $758,000, or 15.5%, compared to net income of $4.9 million for the same nine month period of 2001. Basic earnings per share were $1.10 for the nine months ended September 30, 2002, a decrease of $0.20 per share or 15.5%, from $1.30 basic earnings per share for the same nine month period of 2001. Diluted earnings per share were $1.04 for the nine months ended September 30, 2002, a decrease of $0.19, or 15.4%, from $1.23 diluted earnings per share for the same nine month period of 2001.

Net Interest Income

Net interest income for the third quarter of 2002 was $5.5 million, an increase of $371,000, or 7.3%, compared to $5.1 million for the third quarter of 2001. Interest income for the third quarter of 2002 was $10.6 million, a decrease of $1.9 million, or 15.5%, compared to $12.5 million for the same period of 2001. Interest income decreased by $540,000 due to a decrease in interest earning assets of $30.5 million from the third quarter of 2001 to the third quarter of 2002. The decrease in average interest-earning assets is the result of HMN using cash to fund the outflow of deposits and the repayment of Federal Home Loan Bank advances. Average deposits declined between the periods as HMN lowered the interest rates it paid on deposits to take advantage of the lower interest rate environment. Interest earning assets also decreased because of increased investments in premises and equipment for four additional banking facilities, the payment of dividends on HMN common stock, and the

17

purchase of treasury stock. Interest income decreased by $1.4 million due to lower interest rates on assets being added to the portfolio and also due to a general decline in interest rates from the third quarter of 2001 through the third quarter of 2002. During the 12-month period ended September 30, 2002, the Federal Reserve reduced the Federal Funds interest rate three times and the Wall Street Journal prime rate decreased from 6.00% to 4.75%. As a result, loans with rates that were indexed to prime, such as commercial loans and consumer lines of credit, earned less interest income and the funds generated from fixed rate loans that prepaid during the period were reinvested in loans at lower rates. The yield earned on interest-earning assets decreased from 7.24% at September 30, 2001, to 6.41% at September 30, 2002.

Interest expense was $5.2 million for the third quarter of 2002, a decrease of $2.3 million, or 30.9%, compared to $7.5 million for the same quarter of 2001. Interest expense on deposits was $2.6 million for the third quarter of 2002, a decrease of $2.1 million, or 44.9%, from $4.6 million for the third quarter of 2001. Interest expense on deposits decreased primarily due to a decrease in the average interest rates that were paid on deposits. Interest expense decreased by $213,000 due to a $19.1 million decrease in the average outstanding deposits between the periods. The outflow of deposits were funded with excess cash made available from prepayments on mortgage loans. Interest expense on Federal Home Loan Bank (FHLB) advances and other borrowed money was $2.6 million for the third quarter of 2002, a decrease of $235,000, or 8.2%, from $2.9 million for the third quarter of 2001. Interest expense decreased due to a decrease in the cost of borrowing from the FHLB including a $187,000 decrease due to declining interest rates between the two periods. The average interest rate paid on the average interest-bearing liabilities was 3.35% during the third quarter of 2002, compared to 4.68% for the third quarter of 2001.

Net interest margin (net interest income divided by average interest earning assets) for the third quarter of 2002 was 3.29%, an increase of 36 basis points, compared to 2.93% for the third quarter of 2001.

Net interest income for the nine month period ended September 30, 2002 was $16.2 million, an increase of $739,000, or 4.8%, compared to $15.5 million for the same period of 2001. Interest income for the nine month period of 2002 was $32.3 million, a decrease of $7 million, or 17.8%, compared to $39.3 million for the same period of 2001. Interest income declined due to a reduction in interest rates and a decline in the average interest earning assets. Interest income declined by $1.4 million due to a $26.3 million net decrease in average interest-earning assets from the nine month period of 2001 to the same nine month period in 2002. The decrease in average interest-earning assets is the result of HMN using cash to fund the outflow of deposits and the repayment of Federal Home Loan Bank advances. Deposits declined between the periods as HMN lowered the interest rates it paid on deposits to take advantage of the lower interest rate environment. Interest income decreased by $5.5 million due to lower interest ra tes being earned on the loan and investment portfolios. The decline in rates decreased the yield earned on interest earning assets from 7.53% at September 30, 2001 to 6.44% at September 30, 2002.

Interest expense was $16.1 million for the nine months ended September 30, 2002, a decrease of $7.7 million, or 32.4%, compared to $23.8 million for the same nine month period of 2001. Interest expense on deposits was $8.3 million for the nine months ended September 30, 2002, a decrease of $6.3 million, or 43.2%, from $14.7 million for the same nine month period in 2001. Interest expense on deposits decreased by $336,000 due to a decrease in the average balance of outstanding deposits from the nine month period ended in September of 2002 to the same nine month period in 2001. Interest expense decreased by $6.0 million related to lower rates being paid on deposits. Interest expense on FHLB advances was $7.8 million for the nine month period of 2002, a decrease of $1.4 million, or 15.3%, from $9.2 million for the same period of 2001. Interest expense decreased by $331,000 due to a $8.3 million decrease in the average outstanding advances from the FHLB. The advances were paid off with excess cash made available from prepayments of single family mortgage loans. Interest expense decreased by $1.1 million due to a decrease in the cost of borrowing from the FHLB due to lowering interest rates between the two periods. The average interest rate paid on the average interest-bearing liabilities was 3.46% during the nine months ended September 30, 2002, compared to 4.96% for the same period of 2001.

18

Net interest margin (net interest income divided by average interest earning assets) for the nine months ended September 30, 2002, was 3.23%, an increase of 26 basis points, compared to 2.97% for the same period of 2001.

Provision for Loan Losses

*The provision for loan losses for the third quarter ended September 30, 2002 was $771,000, an increase of $471,000, or 157.0%, compared to $300,000 for the third quarter of 2001. The provision for loan losses increased primarily due to the $81 million in growth that was experienced in the commercial and consumer loan portfolios between the periods. Commercial and consumer loans generally require a larger provision due to the greater inherent credit risk of these loans.

*The provision for loan losses for the nine months ended September 30, 2002 was $1,801,000, an increase of $1,051,000, or 140.1% compared to $750,000 for the same nine month period ended in 2001. The provision is the result of management's evaluation of the composition of the loan portfolio, the historical level of non-performing loans, increases in loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located such as national and regional unemployment data, local single family construction permits and local economic growth rates. Management's evaluation of probable losses inherent in the loan portfolio revealed conditions that resulted in increasing the 2002 loan loss provision compared to the provision for 2001. This increase was due primarily to the $81 million in growth that was experienced in the commercial and consumer loan portfolios between the end of the third quarter of 2001 and the end of the third quarter of 2002. Commercial and consumer loans generally require a larger provision due to the greater inherent credit risk of these loans. HMN will continue to monitor its allowance for losses and adjust it as conditions dictate. Future economic conditions and other unknown factors will impact the need for future provisions for loan losses. As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods.

A reconciliation of HMN's allowance for loan losses is summarized as follows:

	2002	2001
Balance at January 1,	$ 3,783,112	$  3,143,746
Provision	1,801,000	750,000
Commercial loan charge offs	(577,125)	(347,308)
Consumer loan charge offs	(260,895)	(111,788)
Single family mortgage loan charge offs	(44,408)	0
Recoveries	19,177	1,540
Balance at September 30,	$ 4,720,861	$  3,436,190

Non-Interest Income

Non-interest income was $1.0 million for the third quarter of 2002, a decrease of $416,000, or 29.2%, from $1.4 million for the third quarter of 2001. Non-interest income decreased by $636,000 due to additional losses on investments in limited partnerships. The value of HMN's investment in a limited partnership that invests in mortgage servicing rights declined during the third quarter of 2002 as a result of lowering interest rates. Generally, as interest rates decline the value of fixed rate mortgage servicing rights decreases and as interest rates rise the value of the mortgage servicing rights increases due to changes in the anticipated cash flows from prepayments on the loans being serviced. This decrease was partially offset by an increase of $306,000 in the gains recognized on the sale of investments and an increase of $71,000 in mortgage servicing fees due to the increased number of loans being serviced.

^{* This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion.}

19

Non-interest income was $4.5 million for the nine months ended September 30, 2002, an increase of $601,000, or 15.6%, from $3.9 million for the same nine month period of 2001.Non-interest income increased by $683,000

due to increased gains recognized on the sale of securities. The increase in securities gains is primarily due to the $610,000 impairment loss recognized in the securities portfolio during the first nine months of 2001. Lower losses on investments in limited partnerships increased non-interest income by $320,000. The lower losses resulted because of a less severe drop in interest rates during the nine-month period of 2002 as compared to the nine-month period of 2001. Mortgage servicing fees increased by $194,000 as a result of servicing more loans. Fees and service charges increased by $81,000 and other income increased by $82,000 from the same period in 2001. These increases were partially offset by a decrease of $758,000 in gain on the sale of loans, which was caused primarily by the phase down of the mortgage banking operation in Brooklyn Park during 2002.

Non-Interest Expense

Non-interest expense was $4.6 million for the third quarter of 2002, an increase of $778,000, or 20.6%, from $3.8 million for the third quarter of 2001. Amortization of mortgage servicing rights increased by $344,000, or 218.2%, due to an increase in the number of serviced loans that prepaid during the period and a valuation reserve of $210,000 established on the existing servicing portfolio because the value of the mortgage servicing rights declined due to lowering interest rates. Occupancy expense increased by $273,000, or 51.7%, due to the costs associated with maintaining four additional facilities including the new corporate office. Data processing expense increased by $34,000, or 14.2%, due to the increased costs of various services offered to customers and the increased number of accounts. Advertising expense increased by $34,000 as a result of an increased focus on advertising.

Non-interest expense was $13.2 million for the nine months ended September 30, 2002 an increase of $1.9 million or 16.5%, from $11.3 for the same nine month period of 2001. Occupancy expense increased by $603,000, or 37.5%, as a result of maintaining four additional facilities including the new corporate headquarters. Data processing increased by $114,000 due to the increased costs of various services offered to customers and the increased number of accounts. Amortization of mortgage servicing rights increased by $391,000, or 79.1%, due to an increase in the number of serviced loans that prepaid during the period and a valuation reserve of $210,000 established on the existing servicing portfolio because the value of the mortgage servicing rights declined due to lowering interest rates. Other expenses increased by $524,000 primarily due to $245,000 of reserves established for losses on merchant and other accounts receivables and additional increases in general and administrative expenses relating to operating additional facilities in 2002.

Income Tax Expense

Income tax expense was $312,200 for the third quarter of 2002, a decrease of $259,000 compared to $571,000 for the third quarter of 2001. Income tax expense was $1.6 million for the nine months ended September 30, 2002, a decrease of $719,000 compared to $2.4 million for the same nine month period of 2001. The decreases in income taxes are primarily due to the Bank reducing its effective income tax rate through the use of certain state tax planning initiatives and a reduction in taxable income.

Non-Performing Assets

The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at
September 30, 2002 and December 31, 2001.

20

		Sept.30,			Dec.31,
(Dollars in Thousands)		2002			2001
Non-Accruing Loans
One-to-four family real estate	$	1,810			771
Commercial real estate		167			187
Consumer		279			311
Commercial business		990			890
Total		3,246			2,159
Accruing loans delinquent 90 days or more		118			24
Other assets		936			1,390
Foreclosed and Repossessed Assets
One-to-four family real estate		309			0
Consumer		112			155
Commercial business		0			33
Total non-performing assets	$	4,721		$	3,761
Total as a percentage of total assets		0.66	%		0.52	%
Total non-performing loans	$	3,364		$	2,183
Total as a percentage of total loans receivable, net		0.66	%		0.46	%

Total non-performing assets at September 30, 2002 were $4,721,000, an increase of $959,000, from $3,761,000 at December 31, 2001. The increase in non-performing assets relates primarily to an increase of $1.0 million in non-accruing single-family loans primarily due to the phase down of the mortgage banking operation in Brooklyn Park.

Dividends

On October 22, 2002 HMN declared a cash dividend of $0.18 per share, payable on December 11, 2002 to shareholders of record on November 22, 2002.

During 2002, HMN has declared and paid dividends as follows:

Record date	Payable date	Dividend per share	Dividend Payout Ratio
February 21, 2002	March 7, 2002	$0.14	100.0%
May 23, 2002	June 10, 2002	$0.18	36.0%
August 27, 2002	September 10, 2002	$0.18	56.3%

The annualized dividend payout ratio for the past four quarters, ending with the December 11, 2002 payment will be 57.6%.

The declaration of dividends are subject to, among other things, HMN's financial condition and results of operations, the Bank's compliance with its regulatory capital requirements, including the fully phased-in capital requirements, tax considerations, industry standards, economic conditions, regulatory restrictions, general business practices and other factors.

Liquidity
For the nine months ended September 30, 2002, the net cash provided by operating activities was $63.9 million. HMN collected $18.0 million from the sale of securities, $34.0 million from principal repayments and the maturity of securities and $52,000 in proceeds from the sale of real estate. It purchased premises and equipment of $3.7 million, purchased securities available for sale of $40.1 million and net loans receivable increased by $42.3 million due to loan growth primarily in the commercial and consumer loan areas. HMN had a net increase in deposit

21

balances of $321,000 for the nine month period. It paid out $3.5 million and $138,000 on advance payments from borrowers for taxes and insurance. HMN received $635,000 related to the exercise of stock options, purchased $659,000 of its own stock, and paid $1,886,000 in dividends to its shareholders.

*HMN has certificates of deposits with outstanding balances of $134.3 million that come due over the next 12 months. Based upon past experience management anticipates that the majority of the deposits will renew for another term. HMN believes that deposits that do not renew will be replaced with deposits from other customers or brokers, or funded with advances from the FHLB, or will be funded through the sale of securities. Management does not anticipate that it will have a liquidity problem due to maturing deposits.

*HMN has $105 million of FHLB advances which mature after September 30, 2003 but have call features that can be exercised by the FHLB during the next 12 months. If the call features are exercised HMN has the option of requesting any advance otherwise available to it pursuant to the Credit Policy of the FHLB. HMN also has $60.0 million of FHLB advances which will mature during the next 12 months. Since HMN has the ability to request another advance to replace the advance that is being called or is maturing, management does not anticipate that it will have a liquidity problem due to advances being called by the FHLB during the next 12 month period.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. HMN's market risk arises primarily from interest rate risk inherent in its investing, lending and deposit taking activities. Management actively monitors and manages its interest rate risk exposure.

HMN's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact HMN's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. HMN monitors the projected changes in net interest income that occur if interest rates were to suddenly change up or down. The Rate Shock Table located below in the Asset/Liability Management section of this report discloses HMN's projected changes in net interest income based upon immediate interest rate changes called rate shocks.

*HMN utilizes a model which uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities due to different interest rate changes. HMN believes that over the next twelve months interest rates could conceivably fluctuate in a range of 200 basis points up or 100 basis points down from where the interest rates were at September 30, 2002. HMN does not have a trading portfolio. The following table discloses the projected changes in market value to HMN's interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on September 30, 2002.

^{* This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion.}

²²

Other than trading portfolio	Market Value
(Dollars in thousands) Basis point change in interest rates		-100		0		+100		+200
Cash equivalents	$	48,021		47,983		47,945		47,907
Securities available for sale:
Fixed-rate CMOs		9,666		9,634		9,178		8,651
Variable-rate CMOs		49,436		49,539		49,850		49,147
Fixed-rate available for sale mortgage-backed and related securities		2,182		2,135		2,076		2,012
Variable-rate available for sale mortgage- backed and related securities		574		575		572		570
Fixed-rate available for sale other marketable securities		47,399		46,701		45,215		44,166
Variable-rate available for sale other marketable securities		111		110		105		105
Federal Home Loan Bank stock		11,892		11,878		11,864		11,851
Fixed-rate loans held for sale		15,225		14,381		14,219		14,003
Loans receivable, net:
Fixed-rate real estate loans		224,624		220,668		214,885		208,648
Variable-rate real estate loans		127,748		125,433		122,993		120,957
Fixed-rate other loans		80,815		79,926		78,183		76,652
Variable-rate other loans		113,240		111,765		108,388		106,023
Mortgage servicing rights, net		1,224		2,251		3,657		4,112
Investment in limited partnerships		991		1,319		1,653		1,775
Total market risk sensitive assets		733,148		724,298		710,783		696,579
NOW deposits		62,790		62,790		62,790		62,790
Passbook deposits		40,671		40,671		40,671		40,671
Money market deposits		47,741		47,741		47,741		47,741
Certificate deposits		277,914		274,130		270,437		266,831
Fixed-rate Federal Home Loan Bank advances		200,761		193,236		186,110		182,276
Variable-rate Federal Home Loan Bank advances		33,958		33,874		33,834		33,794
Total market risk sensitive liabilities		663,835		652,442		641,583		634,103
Off-balance sheet financial instruments:
Commitments to extend credit		1,580		0		(1,580)		(2,257)
Commitments to sell or deliver loans		(1,580)		0		1,580		1,499
Net market risk	$	69,313		71,856		69,200		63,234
Percentage change from current market value		(3.54)	%	0.00	%	(3.70)	%	(12.00)	%

The preceding table was prepared utilizing the following assumptions (the "Model Assumptions") regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections. Fixed rate loans were assumed to prepay at annual rates of between 6% to 46%, depending on the note rate and the period to maturity. Adjustable rate mortgages ("ARMs") were assumed to prepay at annual rates of between 11% and 27%, depending on the note rate and the period to maturity. Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 6% and 46% depending on the note rate and the period to maturity. Mortgage-backed securities and Collateralized Mortgage Obligations (CMOs) were projected to have prepayments based upon the underlying collateral securing the

23

instrument and the related cash flow priority of the CMO tranche owned. Certificate accounts were assumed not to be withdrawn until maturity. Passbook and money market accounts were assumed to decay at an annual rate of 20%. FHLB advances were projected to be called at the first call date where the projected interest rate on similar remaining term advances exceeded the interest rate on HMN's callable advance.

*Certain shortcomings are inherent in the method of analysis presented in the foregoing table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the "Interest Spread") will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets which are approaching their lifetime interest rate caps could be different from the values disclosed in the table. In the event of a change in interest rat es, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

Asset/Liability Management

*HMN's management reviews the impact that changing interest rates will have on its net interest income projected for the twelve months following September 30, 2002 to determine if its current level of interest rate risk is acceptable. The following table projects the estimated annual impact on net interest income of immediate interest rate changes called rate shocks.

Rate Shock	Net Interest	Percentage
in Basis Points	Income	Change
+200	24,252,000	10.47 %
+100	23,587,000	7.44 %
0	21,954,000	0.00 %
-100	19,428,000	-11.51 %

The preceding table was prepared utilizing the Model Assumptions regarding prepayment and decay ratios which were determined by management based upon their review of historical prepayment speeds and future prepayment projections.

*Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income.

In an attempt to manage its exposure to changes in interest rates, management closely monitors interest rate risk. The Bank has an Asset/Liability Committee consisting of executive officers which meets at least quarterly to review the interest rate risk position and projected profitability. The committee makes recommendations for adjustments to the asset/liability position of the Bank to the Board of Directors of the Bank. This Committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In addition, the Board reviews on a quarterly basis the Bank's asset/liability position, including simulations of the effect on the Bank's capital of various interest rate scenarios.

In managing its asset/liability mix, the Bank, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place more emphasis on managing net interest
^{* This paragraph contains a forward-looking statement(s). Refer to information regarding Forward-looking Information on page 25 of this discussion.}

²⁴

margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to enhance net interest income. Management believes that the increased net interest income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates.

To the extent consistent with its interest rate spread objectives, the Bank attempts to reduce its interest rate risk and has taken a number of steps to restructure its assets and liabilities. The Bank has primarily focused its fixed rate one-to-four family residential lending program on loans with contractual terms of 20 years or less. The Bank generally follows the practice of selling all of its fixed rate single family loans which conform to the secondary market guidelines. HMN has focused its portfolio lending since 1999 on the origination of commercial loan
products and consumer loans which generally have shorter weighted average terms to maturity and/or interest rates which adjust at least every three years. At times, depending on its interest rate sensitivity, the Bank may sell fixed rate single family loans with shorter contractual maturities than thirty years in order to reduce interest rate risk and record a gain on the sale of loans.

Forward-looking Information

The following paragraphs within Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements and actual results may differ materially from the expectations disclosed within this Discussion and Analysis. These forward-looking statements are subject to risks and uncertainties, including those discussed below. HMN assumes no obligations to publicly release results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences.

Provision for Loan Losses

The provision for loan losses for the third quarter ended September 30, 2002 was $771,000, an increase of $471,000, or 157.0%, compared to $300,000 for the third quarter of 2001. The provision for loan losses increased primarily due to the $81 million in growth that was experienced in the commercial and consumer loan portfolios between the periods. Commercial and consumer loans generally require a larger provision due to the greater inherent credit risk of these loans.

The provision for loan losses for the nine months ended September 30, 2002 was $1,801,000, an increase of $1,051,000, or 140.1% compared to $750,000 for the same nine month period ended in 2001. The provision is the result of management's evaluation of the composition of the loan portfolio, the historical level of non-performing loans, increases in loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located such as national and regional unemployment data, local single family construction permits and local economic growth rates. Management's evaluation of probable losses inherent in the loan portfolio revealed conditions that resulted in increasing the 2002 loan loss provision compared to the provision for 2001. This increase was due primarily to the $81 million in growth that was experienced in the commercial and consumer loan portfolios. Commercial and consumer loans gene rally require a larger provision due to the greater inherent credit risk of these loans. HMN will continue to monitor its allowance for losses and adjust it as conditions dictate. Future economic conditions and other unknown factors will impact the need for future provisions for loan losses. As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods.

Liquidity

HMN has certificates of deposits with outstanding balances of $134.3 million that come due over the next 12 months. Based upon past experience management anticipates that the majority of the deposits will renew for another term. HMN believes that deposits that do not renew will be replaced with deposits from other customers or brokers, or funded with advances from the FHLB, or will be funded through the sale of securities. Management does not anticipate that it will have a liquidity problem due to maturing deposits.

25

HMN has $105 million of FHLB advances which mature after September 30, 2003 but have call features that can be exercised by the FHLB during the next 12 months. If the call features are exercised HMN has the option of requesting any advance otherwise available to it pursuant to the Credit Policy of the FHLB. HMN also has $60.0 million of FHLB advances which will mature during the next 12 months. Since HMN has the ability to request another advance to replace the advance that is being called or is maturing, management does not anticipate that it will have a liquidity problem due to advances being called by the FHLB during the next 12 month period.

Market Risk

HMN utilizes a model which uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities. The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities due to different interest rate changes. HMN believes that over the next twelve months interest rates could conceivably fluctuate in a range of 200 basis points up or 100 basis points down from where the interest rates were at September 30, 2002. HMN does not have a trading portfolio. The following table discloses the projected changes in market value to HMN's interest-earning assets and interest-bearing liabilities based upon incremental 100 basis point changes in interest rates from interest rates in effect on September 30, 2002.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. The model assumes that the difference between the current interest rate being earned or paid compared to a treasury instrument or other interest index with a similar term to maturity (the "Interest Spread") will remain constant over the interest changes disclosed in the table. Changes in Interest Spread could impact projected market value changes. Certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. The market value of the interest-bearing assets which are approaching their lifetime interest rate caps could be different from the values disclosed in the table. In the event of a change in intere st rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

Asset/Liability Management

HMN's management reviews the impact that changing interest rates will have on its net interest income projected for the twelve months following September 30, 2002 to determine if its current level of interest rate risk is acceptable. The table in the asset/liability section projects the estimated annual impact on net interest income of immediate interest rate changes called rate shocks.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. In the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the foregoing table. The ability of many borrowers to service their debt may decrease in the event of a substantial increase in interest rates and could impact net interest income.

Item 4: Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's principal executive officer and its principal financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 7, 2002, have concluded that, as of such date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

26

Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken.

27

HMN FINANCIAL, INC.
PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

    None.

ITEM 2. Changes in Securities and Use of Proceeds.

    Not applicable.

ITEM 3. Defaults Upon Senior Securities.

    Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders.

    None.

ITEM 5. Other Information.

    None.

ITEM 6. Exhibits and Reports on Form 8-K.

1. Exhibits. See Index to Exhibits on page 30 of this report.
2. Reports filed on Form 8-K.

None.

28

SIGNATURES

Pursuant to the requirement 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.
	Registrant
Date: November 13, 2002 & #9;	/s/ Michael McNeil
	Michael McNeil,
	President/Chief Executive Officer
	(Principal Executive Officer)
Date: November 13, 2002	/s/ Timothy P. Johnson
	Timothy P. Johnson,
	Chief Financial Officer
	(Principal Financial Officer)

CERTIFICATIONS

I, Michael McNeil, President and Chief Executive Officer, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of HMN Financial, Inc.

2.      Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.      The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

         c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.      The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

29

         a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

         b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.      The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002                    By /s/ Michael McNeil

                                                            President/Chief Executive Officer

CERTIFICATIONS

I, Timothy P. Johnson, Treasurer and Chief Financial Officer, certify that:

1.      I have reviewed this quarterly report on Form 10-Q of HMN Financial, Inc.

2.      Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.      The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exhange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

         c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.      The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

         a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

30

         b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.       The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002                     By /s/ Timothy P. Johnson

                                                            Treasurer and Chief Financial Officer

31

HMN FINANCIAL, INC.

INDEX TO EXHIBITS

FOR FORM 10-Q

				Sequential
			Reference	Page Numbering
Regulation			to Prior	Where Attached
S-K			Filing or	Exhibits Are
Exhibit			Exhibit	Located in This
Number		Document Attached Hereto	Number	Form 10-Q Report
3.1		Amended and Restated Articles of Incorporation	*1	N/A
3.2		Amended and Restated By-laws	*2	N/A
4		Form of Common Stock	*3	N/A
		Including indentures
99.1		Certification Pursuant to 18 U.S.C. Section 1350 by Michael McNeil	99.1	Filed Electronically
99.2		Certification Pursuant to 18 U.S.C. Section 1350 by Timothy Johnson	99.2	Filed Electronically
*1	Incorporated by reference to the same numbered exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998 (File No. 0-24100).
*2	Incorporated by reference to the same numbered exhibit to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997 (File 0-24100).
*3	Incorporated by reference to the same numbered exhibit to the Company's Registration Statement on Form S-1 dated April 1, 1994 (File No. 33-77212).

32

EX-99

Exhibit 99.1

HMN FINANCIAL, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HMN Financial, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael McNeil, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: 11/13/2002 /s/ Michael McNeil

Michael McNeil, President

(Principal Executive Officer)

M1:901989.01

EX-99

Exhibit 99.2

HMN FINANCIAL, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of HMN Financial, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy P. Johnson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: 11/13/2002 /s/ Timothy P. Johnson

Timothy P. Johnson,

Chief Financial Officer

(Principal Financial Officer)

M1:901996.01