SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



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, 2003

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  (   )	No (X)

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



|Class                         |  | Outstanding at October 30, 2003
|----------------------------- |  | -------------------------------
|Common stock, $0.01 par value |  | 4,495,830                      

HMN FINANCIAL, INC.

CONTENTS

PART I - FINANCIAL INFORMATIONPageItem 1:
Financial Statements (unaudited)Consolidated Balance Sheets at September 30, 2003 and December 31, 2002
3Consolidated Statements of Income for the Three Months Ended and Nine Months Ended September 30, 2003 and 2002
4Consolidated Statements of Comprehensive Income for the Three Months Ended and Nine Months Ended September 30, 2003 and 2002
5Consolidated Statement of Stockholders' Equity for the Nine Month Period Ended September 30, 2003
6Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002
7Notes to Consolidated Financial Statements
8-16Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations
17-25Item 3:
Quantitative and Qualitative Disclosures about Market Risk Discussion included in Item 2 under Market Risk
22Item 4:
Controls and Procedures
25PART II - OTHER INFORMATIONItem 1:
Legal Proceedings
26Item 2:
Changes in Securities and Use of Proceeds
26Item 3:
Defaults Upon Senior Securities
26Item 4:
Submission of Matters to a Vote of Security Holders
26Item 5:
Other Information
26Item 6:
Exhibits and Reports on Form 8-K
26Signatures
27


PART I - FINANCIAL STATEMENTS

HMN FINANCIAL, INC. AND SUBSIDIARIESConsolidated Balance SheetsSeptember 30,

December 31,2003

2002(unaudited)AssetsCash and cash equivalents
$
17,854,947

27,729,007Securities available for sale:Mortgage-backed and related securities
(amortized cost $16,791,821 and $51,677,294)

16,326,907

51,895,832Other marketable securities
(amortized cost $71,274,037 and $67,282,379)

72,201,371

69,501,41788,528,278

121,397,249Loans held for sale

17,633,615

15,126,509Loans receivable, net

645,714,604

533,905,652Accrued interest receivable

3,575,070

3,050,636Real estate, net

226,239

426,691Federal Home Loan Bank stock, at cost

11,134,600

11,880,500Mortgage servicing rights, net

3,341,082

2,691,031Premises and equipment, net

12,351,770

12,875,816Investment in limited partnerships

547,421

862,666Goodwill

3,800,938

3,800,938Core deposit intangible

476,602

561,331Prepaid expenses and other assets

1,857,776

3,214,792Total assets
$
807,042,942

737,522,818Liabilities and Stockholders' EquityDeposits
$
490,087,780

432,951,462Federal Home Loan Bank advances

229,300,000

218,300,000Accrued interest payable

428,721

849,427Advance payments by borrowers for taxes and insurance

992,952

707,213Accrued expenses and other liabilities

6,315,018

7,614,406Deferred tax liabilities

758,500

1,456,600Total liabilities

727,882,971

661,879,108Commitments and contingenciesMinority interest

(307,234)

(420,846)Stockholders' equity:Serial preferred stock: ($.01 par value)authorized 500,000 shares; issued and outstanding none

0

0Common stock ($.01 par value):authorized 11,000,000; issued shares 9,128,662

91,287

91,287Additional paid-in capital

57,918,621

58,885,279Retained earnings, subject to certain restrictions

83,988,066

79,660,481Accumulated other comprehensive income

298,919

1,575,577Unearned employee stock ownership plan shares

(4,786,374)

(4,931,385)Treasury stock, at cost 4,646,870 and 4,722,856 shares

(58,043,314)

(59,216,683)Total stockholders' equity

79,467,205

76,064,556Total liabilities and stockholders' equity
$
807,042,942

737,522,818


See accompanying notes to consolidated financial statements.





HMN FINANCIAL, INC. AND SUBSIDIARIESConsolidated Statements of Income(unaudited)Three Months Ended

Nine Months EndedSeptember 30,

September 30,2003
2002

2003

2002Interest income:Loans receivable
$
10,744,663
9,502,274

30,628,304

28,271,049Securities available for sale:Mortgage-backed and related

72,646

485,086

175,405

1,497,251Other marketable

591,292

515,997

1,843,359

1,952,793Cash equivalents

12,762

38,564

98,659

297,916Other

86,196

90,603

268,880

265,305Total interest income

11,507,559

10,632,524

33,014,607

32,284,314Interest expense:Deposits

2,474,680

2,556,830

7,438,497

8,304,055Federal Home Loan Bank advances

2,590,574

2,616,265

7,684,876

7,788,063Total interest expense

5,065,254

5,173,095

15,123,373

16,092,118Net interest income

6,442,305

5,459,429

17,891,234

16,192,196Provision for loan losses

545,000

771,000

1,900,000

1,801,000Net interest income after provisionfor loan losses

5,897,305

4,688,429

15,991,234

14,391,196Non-interest income:Fees and service charges

625,419

418,115

1,612,595

1,212,276Mortgage servicing fees

261,198

184,769

716,503

521,931Securities gains, net

417,443

376,838

1,233,229

422,346Gain on sales of loans

1,601,047

432,095

4,592,837

1,975,124Earnings
(losses) in limited partnerships

10,153

(530,943)

(313,161)

(203,968)Other

179,112

122,539

514,906

531,519Total non-interest income

3,094,372

1,003,413

8,356,909

4,459,228Non-interest expense:Compensation and benefits

2,085,383

1,986,777

6,392,457

6,006,821Occupancy

805,890

801,026

2,399,207

2,210,714Federal deposit insurance premiums

18,047

18,173

54,838

56,280Advertising

92,161

129,254

278,013

418,336Data processing

310,614

272,696

871,660

824,080Amortization of mortgage servicingrights, net of valuation adjustmentsand servicing costs

(193,287)

502,282

1,705,344

884,588Other

1,211,288

844,581

3,022,975

2,825,635Total non-interest expense

4,330,096

4,554,789

14,724,494

13,226,454Income before income tax expense

4,661,581

1,137,053

9,623,649

5,623,970Income tax expense

1,621,300

312,200

3,163,600

1,637,400Income before minority interest

3,040,281

824,853

6,460,049

3,986,570Minority interest

0

(67,012)

0

(141,306)Net income
$
3,040,281

891,865

6,460,049

4,127,876Basic earnings per share
$
0.79

0.24

1.71

1.10Diluted earnings per share
$
0.76

0.22

1.63

1.04


See accompanying notes to consolidated financial statements.





HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income(unaudited)

Three Months Ended September 30,2003

2002Net income
$




3,040,281





891,865Other comprehensive income, net of tax:Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period

(598,636)





1,195,786Less: reclassification adjustment for gainsincluded in net income

270,043





243,738Net unrealized gains (losses) on securities



(868,679)





952,048Other comprehensive income (loss)





(868,679)





952,048Comprehensive income
$




2,171,602





1,843,913








Nine Months Ended September 30,2003

2002Net income
$




6,460,049





4,127,876Other comprehensive income, net of tax:Unrealized losses on hedging valuation

0





(35,795)Less: minority interest in hedging valuation

0





(21,950)Net unrealized losses on hedging valuation



0





(13,845)Unrealized gains (losses) on securities:Unrealized holding gains (losses) arising during period

(479,029)





680,086Less: reclassification adjustment for gainsincluded in net income

797,629





273,146Net unrealized gains (losses) on securities



(1,276,658)





406,940Other comprehensive income (loss)





(1,276,658)





393,095Comprehensive income
$




5,183,391





4,520,971


See accompanying notes to consolidated financial statements.









UnearnedEmployeeAccumulated
Stock

TotalAdditional

Other
Ownership

Stock-Common
Paid-in
Retained
Comprehensive
Plan
Treasury
Holders'Stock
Capital
Earnings
Income
Shares
Stock
EquityBalance, December 31, 2002
$           91,287
58,885,279
79,660,481
1,575,577
(4,931,385)
(59,216,683)
76,064,556Net income


6,460,049



6,460,049Other comprehensive loss



(1,276,658)


(1,276,658)Treasury stock purchases





(1,384,560)
(1,384,560)Employee stock optionsexercised

(1,404,565)



2,557,929
1,153,364Tax benefits of exercisedstock options

316,637




316,637Dividends paid


(2,132,464)



(2,132,464)Earned employee stockownership plan shares

121,270


145,011

266,281Balance, September 30, 2003
$          91,287
57,918,621
83,988,066
298,919
(4,786,374)
(58,043,314)
79,467,205


See accompanying notes to consolidated financial statements.







HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows(unaudited)

Nine Months Ended
September 30,2003

2002Cash flows from operating activities:Net income
$
6,460,049

4,127,876Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses

1,900,000

1,801,000Depreciation

1,178,607

1,012,082Amortization of premiums, net

572,084

239,534Amortization of deferred loan fees

(390,407)

(498,149)Amortization of core deposit intangible

84,729

93,134Amortization of mortgage servicing rights and net valuation and servicing costs

1,705,344

884,588Capitalized mortgage servicing rights

(2,138,477)

(1,212,272)Deferred income taxes

0

(104,400)Securities gains, net

(1,233,229)

(422,346)Gains on sales of premises

(175,883)

0Losses (gains) on sales of real estate

105,418

(1,254)Gains on sales of loans

(4,592,837)

(1,975,124)Proceeds from sales of real estate

423,295

52,435Proceeds from sales of loans held for sale

251,287,444

202,650,820Disbursements on loans held for sale

(245,789,157)

(141,643,268)Principal collected on loans held for sale

11,521

106,603Amortization of restricted stock awards

0

7,350Amortization of unearned ESOP shares

145,011

145,071Earned employee stock ownership shares priced above original cost

121,270

106,789Decrease (increase) in accrued interest receivable

(524,434)

338,622Decrease in accrued interest payable

(420,706)

(275,432)Equity losses of limited partnerships

313,161

203,968Equity losses of minority interest

0

(141,306)Decrease (Increase) in other assets

744,474

(94,329)Decrease in other liabilities

(154,792)

(1,441,860)Other, net

170,908

17,094Net cash provided by operating activities

9,803,393

63,977,226Cash flows from investing activities:Proceeds from sales of securities available for sale

40,326,825

18,036,553Principal collected on securities available for sale

27,772,873

14,077,803Proceeds collected on maturity of securities available for sale

10,000,000

19,900,000Purchases of securities available for sale

(46,491,697)

(40,055,856)Purchase of Federal Home Loan Bank stock

(373,800)

0Redemption of Federal Home Loan Bank stock

1,119,700

364,500Net increase in loans receivable

(117,617,414)

(42,391,910)Proceeds from sale of premises

291,117

0Purchases of premises and equipment

(790,012)

(3,681,249)Net cash used by investing activities

(85,762,408)

(33,750,159)Cash flows from financing activities:Increase in deposits

57,162,876

321,403Purchase of treasury stock

(1,384,560)

(658,611)Stock options exercised

1,153,364

635,497Dividends to stockholders

(2,132,464)

(1,886,127)Proceeds from Federal Home Loan Bank advances

131,000,000

0Repayment of Federal Home Loan Bank advances

(120,000,000)

(3,500,000)Increase (decrease) in advance payments by borrowers for taxes and insurance

285,739

(138,004)Net cash provided (used) by financing activities

66,084,955

(5,225,842)Increase (decrease) in cash and cash equivalents

(9,874,060)

25,001,225Cash and cash equivalents, beginning of period

27,729,007

23,019,553Cash and cash equivalents, end of period
$
17,854,947

48,020,778Supplemental cash flow disclosures:Cash paid for interest
$
15,544,079

16,367,550Cash paid for income taxes

2,141,000

1,817,500Supplemental noncash flow disclosures:Loans transferred to loans held for sale

3,741,477

4,267,484Transfer of loans to real estate

575,606

370,625Transfer of real estate to loans

16,533

0


See accompanying notes to consolidated financial statements.



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

September 30, 2003 and 2002

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 and loan production 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 Holding, Inc. (HFH) which is the holding company for Home Federal REIT, Inc. (HFREIT) which invests in real estate loans acquired from the Bank.  HMN has another wholly owned subsidiary, Security Finance Corporation (SFC) which acts as an intermediary for the Bank in transacting like-kind property exchanges for Bank customers.  The Bank has a 51% owned subsidiary, Home Federal Mortgage Services, LLC (HFMS), which was a mortgage banking and mortgage brokerage business located in Brooklyn Park, Minnesota.  HFMS's brokerage and production activity stopped during the third quarter of 2002 and the company will be dissolved in the fourth quarter of 2003. The Bank has an 80% owned subsidiary, Federal Title Services, LLC. (FTS), which performs mortgage title services for Bank customers.

The consolidated financial statements included herein are for HMN, SFC, the Bank and the Bank's consolidated entities, OAI, HFH, HFREIT, HFMS, and FTS. 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, normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included.  The statements of income for the three month and nine month periods ended September 30, 2003 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 November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others (FIN 45).   FIN 45 requires disclosures be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also requires the recognition of a liability by a guarantor at the inception of certain guarantees that it has issued and that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  Refer to Note 11 for the related FIN 45 disclosure.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The amendments to SFAS No. 123 are effective for fiscal years ending after December 15, 2002 and for condensed interim financial statements issued after December 15, 2002.  HMN has not adopted the voluntary change to the fair value based method of accounting for stock-based employee compensation as of September 30, 2003.  Refer to Note 12 for required disclosures relating to stock-based compensation.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).  FIN 46 addresses consolidation by business enterprises of variable interest entities (VIEs) that have certain characteristics.  It requires a business enterprise that has a controlling interest in a VIE (as defined by FIN 46) to include the assets, liabilities, and results of the activities of the VIE in the consolidated financial statements of the business enterprise.  The provisions of FIN No. 46 are applicable to variable interests in VIEs created after January 31, 2003.  Variable interests in VIEs created before February 1, 2003, were originally subject to the provisions of FIN No. 46 no later than July 1, 2003, however, the effective date has been delayed under certain conditions to December 31, 2003.  The impact of adopting FIN No. 46 on HMN's financial condition and results of operation will not be material.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.This Statement is effective prospectively for contracts entered into or modified after June 30, 2003, except for those provisions of the Statement that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with their respective effective dates.  The impact of adopting SFAS No. 149 on HMN's financial condition and results of operation was not material.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of those instruments were previously classified as equity.  This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, however, the effective date has been delayed under certain conditions.  The impact of adopting SFAS No. 150 on HMN's financial condition and results of operation was not material.

(4) Derivative Instruments and Hedging Activities

HMN has commitments outstanding to extend credit to future borrowers that had not closed prior to the end of the quarter, which is referred to as its mortgage pipeline. As commitments to originate loans enter the mortgage pipeline, HMN generally enters into commitments to sell the loans into the secondary market. The commitments to originate and sell loans are derivatives that are recorded at market value. As a result of marking these derivatives to market for the period ended September 30, 2003, HMN recorded a decrease in other assets of $585,446, a decrease in other liabilities of $572,601 and losses on sales of loans of $12,845.

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. As a result of marking these loans HMN recorded a decrease to loans held for sale of $54,491, a decrease in other liabilities of $249,351, and gains on sales of loans of $194,860.



(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 losses on hedging valuations.

There was no hedging valuation in the third quarter of 2003.  The gross unrealized holding losses on securities for the third quarter of 2003 was $926,000, the income tax benefit would have been $327,000 and therefore, the net loss was $599,000.  The gross reclassification adjustment for the third quarter of 2003 was $417,000, the income tax expense would have been $147,000 and therefore, the net gain was $270,000.  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 in 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.

There was no hedging valuation in the nine-month period ended September 30, 2003.  The gross unrealized holding losses on securities for the nine month period ended September 30, 2003 was $742,000, the income tax benefit would have been $263,000 and therefore, the net loss was $479,000.  The gross reclassification adjustment in the nine month period ended September 30, 2003 was $1,233,000, the income tax expense would have been $435,000 and therefore, the net reclassification adjustment was $798,000.  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 expense would have been $149,000 and therefore, the net reclassification adjustment was $273,000.

(6) Investment in Limited Partnerships

Investments in limited partnerships were as follows:

September 30,

December 31,Primary partnership activity

2003

2002Mortgage servicing rights
$
0

349,577Common stock of financial institutions

345,515

289,398Low to moderate income housing

202,106

223,691$
547,421

862,666




During the third quarter of 2003 HMN's proportionate gains from common stock investments in financial institutions was $16,653 and it recognized $6,500 of losses on low income housing partnerships. During 2003 HMN anticipates receiving low income housing credits totaling $84,000 of which $21,000 will be credited to current income tax benefits.  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 received low income housing credits totaling $84,000, of which $21,000 were credited to current income tax benefits.

During the nine month period ended September 30, 2003, HMN's proportionate loss from a mortgage servicing partnership was $349,577, its proportionate share of gains from the common stock investments in financial institutions was $55,916 and it recognized $19,500 of losses on the low income housing partnerships. During 2003 HMN anticipates receiving low income housing credits totaling $84,000, of which $63,000 will be credited to current income tax benefits. During the nine month period ended September 30, 2002, HMN's proportionate loss 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 received low income housing credits totaling $84,000, of which $63,000 were credited to current income tax benefits.  HMN's investment in a limited partnership that invested in mortgage servicing rights was dissolved in the second quarter of 2003 and the investment was written down to zero.

(7) Investment in Mortgage Servicing Rights

A summary of mortgage servicing activity is as follows:

Nine Months 
ended
Sept. 30, 2003

Twelve Months
ended
Dec. 31, 2002

Nine Months
ended
Sept. 30, 2002Mortgage servicing rightsBalance, beginning of period
$
2,701,031

1,922,736

1,922,736Originations

2,138,477

1,956,845

1,212,272Sales

0

(41,532)

0Amortization

(1,498,426)

(1,137,018)

(665,173)Balance, end of period

3,341,082

2,701,031

2,469,835Valuation reserveBalance, beginning of period

(10,000)

(19,100)

(19,100)Additions

(800,000)

(213,000)

(210,000)Reductions

810,000

222,100

10,600Balance, end of period

0

(10,000)

(218,500)Mortgage servicing rights, net
$
3,341,082

2,691,031

2,251,335Fair value of mortgage servicing rights
$
4,199,323

2,691,031

2,262,578




Mortgage servicing costs, which include professional services for valuing mortgage servicing rights, were $216,917 at September 30, 2003, and $20,014 and $29,344 for the nine and twelve months ended in September and December of 2002, respectively.

All of the loans being serviced were single family loans serviced for FNMA 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, 2003.

Loan Principal Balance

Weighted Average
Interest Rate

Weighted Average Remaining Term

Number of LoansOriginal term 30 year fixed rate
$
170,573,000

6.03
%
348

1,575Original term 15 year fixed rate

239,641,000

5.42
%
169

2,855Seven year balloon

122,000

5.75
%
64

1Adjustable rate

10,111,000

4.94
%
347

86


(8) Intangible Assets

The gross carrying amount of intangible assets and the associated accumulated amortization at September 30, 2003 is presented in the table below. Amortization expense for intangible assets was $645,841 for the quarter ended September 30, 2003 and $1,583,156 for the nine months ended September 30, 2003.



Gross



UnamortizedCarrying

Accumulated

IntangibleAmount

Amortization

AssetsAmortized intangible assets:Mortgage servicing rights
$
6,117,707

(2,776,625)

3,341,082Core deposit intangible

1,567,000

(1,090,398)

476,602Total
$
7,684,707

(3,867,023)

3,817,684


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



|                                    
|------------------------------------
|                                    
|                                    
|                                    
|                                    
|Three months ended December 31, 2003
|                                    
|Year ended December 31,             
|2004                                
|2005                                
|2006                                
|2007                                
|2008                                
|                                    

Projections of amortization are based on existing asset balances and the existing interest rate environment as of September 30, 2003.  HMN's actual experiences may be significantly different depending upon changes in mortgage interest rates and other market conditions.

(9) 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 30,2003

2002

2003

2002Weighted average number of common shares outstandingUsed in basic earnings per common share calculation

3,846,210

3,790,526

3,787,494

3,757,404Net dilutive effect of:Options

166,683

232,790

166,797

224,723Restricted stock awards

0

0

0

49Weighted average number of shares outstandingAdjusted for effect of dilutive securities

4,012,893

4,023,316

3,954,291

3,982,176Income available to common shareholders
$
3,040,281

891,865

6,460,049

4,127,876Basic earnings per common share
$
0.79

0.24

1.71

1.10Diluted earnings per common share
$
0.77

0.22

1.63

1.04


(10) 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, 2003, that the Bank meets all capital adequacy requirements to which it is subject.

Management believes that based upon the Bank's capital calculations at September 30, 2003 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, 2003 the Bank's tangible assets and adjusted total assets were $800 million and its risk-weighted assets were $634 million. The following table presents the Bank's capital amounts and ratios at September 30, 2003 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 WellRequired To Be



Capitalized UnderAdequately



Prompt CorrectiveActual


Capitalized



Excess Capital


Actions ProvisionPercent 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
$
71,522Plus:Net unrealized loss (gain) on certainsecurities available for saleand cash flow hedges

(491)Less:Goodwill and other intangibles

4,278Tier I or core capital

66,753Tier I capital to adjusted total assets



8.35%

$
31,982

4.00%

$
34,771

4.35%

$
39,978

5.00%Tier I capital to risk-weighted assets



10.53%

$
25,365

4.00%

$
41,388

6.53%

$
38,047

6.00%Plus:Allowable allowance for loan losses

5,435Risk-based capital
$
72,188



$
50,729



$
21,459



$
63,411Risk-based capital toRisk-weighted assets



11.38%




8.00%




3.38%




10.00%


(1)

The tangible capital of the Bank was in excess of the minimum 2% required at September 30, 2003 but is not reflected in the table above.

(11) Commitments and Contingencies

The Bank entered into two guaranty agreements with third parties in order for Home Federal Mortgage Services, LLC (HFMS) to secure loan purchase agreements.  Under the agreements, the Bank guarantees to satisfy and discharge all obligations of HFMS arising from transactions entered into between HFMS and the third parties if HFMS fails to fulfill their obligations.  The agreements are in effect until the obligations of HFMS are fully satisfied and the Bank's guaranty is limited to a combined maximum of $3 million.  No liability has been recorded in the consolidated financial statements of HMN for these guarantees and HMN is not aware of any outstanding obligations of HFMS to either of the third parties with whom a guarantee exists.  There is the possibility that the Bank would be required to purchase loans that were previously sold to the third parties by HFMS if the loans did not meet the requirements in the loan purchase agreements.  If this were to occur, the proceeds from the subsequent sale of these loans would enable the Bank to recover a portion of the amounts paid under the guaranty.

The Bank issued standby letters of credit which guarantee the performance of customers to third parties.  The outstanding standby letters of credit expire over the next 2 years and totaled approximately $2.5 million at September 30, 2003.  The letters of credit were collateralized primarily with commercial real estate mortgages.  Since the conditions under which the Bank is required to fund the standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments

(12) Stock-Based Compensation

Effective January 1, 1996, HMN adopted SFAS No. 123, Accounting for Stock-Based Compensation.  It elected to continue using the accounting methods prescribed by Accounting Principles Board (APB) Opinion No. 25 and related interpretations which measure compensation cost using the intrinsic value method.   Had compensation cost for HMN's stock-based plan been determined in accordance with the fair value method recommended by SFAS No. 123, HMN's net income and earnings per share would have been adjusted to the pro forma amounts indicated below:



Quarter Ended
September 30, 2003

Quarter Ended
September 30, 2002

Nine Months Ended September 30, 2003

Nine Months Ended September 30, 2002Net income:As reported	9;
$
3,040,281

891,865

6,460,049

4,127,876Deduct:  Total stock-based employeecompensation expense determinedunder fair value based method for allawards, net of related tax effects

6,788

10,524

27,043

31,572Pro forma

3,033,493

881,341

6,433,006

4,096,304Earnings per common share:As reported:Basic	9;
$
0.79

0.24

1.71

1.10Diluted

0.76

0.22

1.63

1.04Pro forma:Basic

0.79

0.23

1.70

1.09Diluted

0.76

0.22

1.63

1.03




(13) Business Segments

The Bank has been identified as a reportable operating segment in accordance with the provisions of SFAS No. 131.  SFC and HMN, the holding company, did not meet the quantitative thresholds for a reportable segment and therefore are included in the
"Other" category.

HMN evaluates performance and allocates resources based on the segment's net income, return on average assets and return on average equity. Each corporation is managed separately with its own officers and board of directors.

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





(Dollars in thousands)

Home Federal Savings Bank



Other

Eliminations

Consolidated TotalAt or for the quarter ended September 30, 2003:Interest income - external customers
$
11,477



31

0

11,508Non-interest income - external customers

2,949



134

0

3,083Earnings (loss) on limited partnerships

(6)



16

0

10Intersegment interest income

0



4

(4)

0Intersegment non-interest income

161



2,967

(3,128)

0Interest expense

5,069



0

(4)

5,065Amortization of mortgage servicing rights,net valuation adjustments, and servicing costs

(113)



0

(80)

(193)Other non-interest expense

4,456



147

(80)

4,523Income tax expense (benefit)

1,654



(33)

0

1,621Net income

2,968



3,040

(2,968)

3,040Goodwill

3,801



0

0

3,801Total assets

806,254



79,674

(78,885)

807,043Net interest margin

3.41 %



NM

NM

3.41%Return on average assets

1.51 %



NM

NM

1.53%Return on average realized common equity

16.67 %



NM

NM

15.12%At or for the quarter ended September 30, 2002:Interest income - external customers
$
10,571



62

0

10,633Non-interest income - external customers

1,455



79

0

1,534Earnings (loss) on limited partnerships

(511)



(20)

0

(531)Intersegment interest income

57



24

(81)

0Intersegment non-interest income (expense)

46



901

(947)

0Interest expense (benefit)

5,254



0

(81)

5,173Amortization of mortgage servicing rights,    net valuation adjustments, and servicing costs

553



1

(51)

503Other non-interest expense

4,045



133

(126)

4,052Income tax expense (benefit)

380



(68)

0

312Minority interest

(67)



0

0

(67)Net income

718



944

(770)

892Goodwill

3,801



0

0

3,801Total assets

720,063



75,384

(75,978)

719,469Net interest margin

3.31%



NM

NM

3.29%Return on average assets

0.49%



NM

NM

0.51%Return on average realized common equity

5.35%



NM

NM

4.58%


NM
- Not meaningful



(Dollars in thousands)

Home Federal Savings Bank



Other

Eliminations

Consolidated TotalAt or for the nine months ended September 30, 2003:Interest income - external customers
$
32,887



128

0

33,015Non-interest income - external customers

8,369



301

0

8,670Earnings (loss) on limited partnerships

(369)



56

0

(313)Intersegment interest income

28



26

(54)

0Intersegment non-interest income

669



6,256

(6,925)

0Intersegment loan loss provision

200



0

(200)

0Interest expense

15,177



0

(54)

15,123Amortization of mortgage servicing rights, net     valuation adjustments, and servicing costs

1,925



3

(223)

1,705Other non-interest expense

12,853



412

(246)

13,019Income tax expense (benefit)

3,269



(105)

0

3,164Net income

6,260



6,457

(6,257)

6,460Goodwill

3,801



0

0

3,801Total assets

806,254



79,674

(78,885)

807,043Net interest margin

3.27 %



NM

NM

3.29%Return on average assets

1.10 %



NM

NM

1.13%Return on average realized common equity

12.05 %



NM

NM

10.99%At or for the nine months ended September 30, 2002:Interest income - external customers
$
32,021



263

0

32,284Non-interest income - external customers

4,538



125

0

4,663Earnings (loss) on limited partnerships

(208)



4

0

(204)Intersegment interest income

472



24

(496)

0Intersegment non-interest income

307



4,030

(4,337)

0Interest expense

16,588



0

(496)

16,092Amortization of mortgage servicing rights, net    valuation adjustments, and servicing costs

1,026



1

(142)

885Other non-interest expense

12,376



419

(454)

12,341Income tax expense (benefit)

1,855



(218)

0

1,637Minority interest

(141)



0

0

(141)Net income

3,741



4,128

(3,741)

4,128Goodwill

3,801



0

0

3,801Total assets

720,063



75,384

(75,978)

719,469Net interest margin

3.26%



NM

NM

3.23%Return on average assets

0.77%



NM

NM

0.78%Return on average realized common equity

8.56%



NM

NM

7.33%NM - Not meaningful






Item 2:

HMN FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Information

General

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.

Critical Accounting Policies

Allowance for Loan Losses and Related Provision

Mortgage Servicing RightsMortgage servicing rights are capitalized and amortized in proportion to, and over the period of, estimated net servicing income. HMN periodically evaluates its capitalized mortgage servicing rights for impairment. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment.   The valuation of the mortgage servicing rights is based on the estimated prepayment speeds anddefault rates of the stratified portfolio.  Changes in the mix of loans, interest rates, prepayment speeds, or default rates from the estimates used in the valuation of the mortgage servicing rights may have a material effect on the amortization and valuation of mortgage servicing rights. Although management believes that the assumptions used and the values determined are reasonable, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used to determine the value of the servicing rights.  Refer to the
"Mortgage servicing rights, net" line item in the market risk table on page 23 for an indication of how the value of mortgage servicing rights may change in relation to changes in interest rates.

Income Taxes

Net Income
HMN's net income for the third quarter of 2003 was $3.0 million, an increase of $2.1 million, or 240.9%, compared to net income of $892,000 for the third quarter of 2002.  Basic earnings per share were $0.79 for the quarter ended September 30, 2003, an increase of $0.55 per share, or 229.2%, from $0.24 basic earnings per share for the same quarter of 2002.  Diluted earnings per share were $0.76 for the third quarter of 2003, an increase of $0.54, or 245.5%, from $0.22 diluted earnings per share for the third quarter of 2002.

HMN's net income for the nine months ended September 30, 2003 was $6.5 million, an increase of $2.3 million, or 56.5%, compared to net income of $4.1 million for the same nine month period of 2002.  Basic earnings per share were $1.71 for the nine months ended September 30, 2003, an increase of $0.61 per share, or 55.5%, from $1.10 basic earnings per share for the same nine month period of 2002.  Diluted earnings per share were $1.63 for the nine months ended September 30, 2003, an increase of $0.59, or 56.7%, from $1.04 diluted earnings per share for the same nine month period of 2002.



Net Interest IncomeNet interest income was $6.4 million for the third quarter of 2003, an increase of $983,000, or 18.0%, compared to $5.5 million for the third quarter of 2002.  Interest income was $11.5 million for the third quarter of 2003, an increase of $875,000, or 8.2%, compared to $10.6 million for the same period of 2002.

Net interest margin (net interest income divided by average interest earning assets) for the third quarter of 2003 was 3.41%, an increase of 12 basis points, compared to 3.29% for the third quarter of 2002.

Net interest income for the nine month period ended September 30, 2003 was $17.9 million, an increase of $1.7 million, or 10.5%, compared to $16.2 million for the same period of 2002.  Interest income for the nine month period of 2003 was $33.0 million, an increase of $730,000, or 2.3%, compared to $32.3 million for the same period of 2002.  Interest income increased primarily due to an increase in interest-earning assets and a change in the mix of assets between the periods.  The increase in interest-earning assets was caused primarily by the $136 million increase in commercial loans between the periods.  The increase in interest-earning assets totally offset the decrease in interest income caused by the lower interest rates earned on the assets between the two periods.  Interest expense was $15.1 million for the nine-month period of 2003, a decrease of $969,000, or 6.0%, from the $16.1 million for the same period in 2002.  Interest expense declined primarily due to a decrease in the interest rates paid on deposits and Federal Home Loan Bank advances and a $42 million increase in the outstanding average balances of checking and money market accounts between the periods, which generally have lower interest rates than other deposit accounts



Net interest margin (net interest income divided by average interest-earning assets) for the nine months ended September 30, 2003, was 3.29%, an increase of 6 basis points, compared to 3.23% for the same period of 2002.

Provision for Loan Losses

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



2003

2002Balance at January 1,
$4,824,217

$  3,783,112Provision
1,900,000

1,801,000Commercial loan charge offs
(19,279)

(577,125)Consumer loan charge offs
(134,025)

(260,895)Single family mortgage loan charge offs
(33,750)

(44,408)Recoveries
54,652

19,177Balance at September 30,
$6,591,815

$4,720,861


Non-Interest Income



Non-interest income was $8.4 million for the first nine months of 2003, an increase of $3.9 million, or 87.4%, from $4.5 million for the same period in 2002.  Non-interest income increased by $2.6 million due to increased gains on the sale of single-family loans.  Low mortgage rates during the first nine-months of 2003 resulted in higher loan originations when compared to the same period of 2002 as consumers took advantage of the low mortgage interest rates to purchase a home or refinance their existing home mortgage.  Gains on the sale of securities increased by $811,000 between the periods as investments were sold to fund a portion of the $78 million in loan growth that was experienced during the first nine months of 2003.  Fee and service charge income increased by $400,000 between the periods due to an

Non-Interest Expense

Non-interest expense was $14.7 million for the first nine months of 2003, an increase of $1.5 million, or 11.3%, from $13.2 million for the same period in 2002.  The increase was primarily the result of an $821,000 increase in the amortization of mortgage servicing rights caused by record loan prepayments during the first nine months of 2003.  Compensation and benefit expense increased by $386,000 due to costs associated with a separation agreement with a former executive officer and annual payroll and health insurance cost increases.  Occupancy expense increased by $188,000 due to the increased number of facilities maintained during the nine-month period in 2003.

Income Tax Expense

September 30, 2003, an increase of $1.5 million compared to $1.6 million for the same nine-month period of 2002. The increase in income tax is primarily due to an increase 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, 2003 and December 31, 2002.



|                                                    
|----------------------------------------------------
|                                                    
|(Dollars in Thousands)                              
|                                                    
|Non-Accruing Loans:                                 
|One-to-four family real estate                      
|Commercial real estate                              
|Consumer                                            
|Commercial business                                 
|                                                    
|Total                                               
|                                                    
|Accruing loans delinquent 90 days or more           
|Other assets                                        
|Foreclosed and Repossessed Assets                   
|One-to-four family real estate                      
|Consumer                                            
|Commercial                                          
|                                                    
|Total non-performing assets                         
|                                                    
|Total as a percentage of total assets               
|                                                    
|Total non-performing loans                          
|                                                    
|Total as a percentage of total loans receivable, net
|Allowance for loan loss to non-performing loans     
|                                                    

Total non-performing assets at September 30, 2003 were $6.0 million, an increase of $1.1 million, from $4.9 million at December 31, 2002.  The increase in non-performing assets relates primarily to an increase of $1.0 million in non-accruing commercial real estate loans primarily due to one commercial loan in the hospitality industry that became nonaccruing in 2003.

Dividends

During 2003, HMN has declared and paid dividends as follows:



Record date
Payable date
Dividend per share
Dividend Payout RatioFebruary 21, 2003
March 7, 2003
$0.18
64.29%May 22, 2003
June 9, 2003
$0.18
50.00%August 28, 2003
September 11, 2003
$0.20
38.46%




The annualized dividend payout ratio for the past four quarters, ending with the December 17, 2003 payment will be 39.58%.



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

HMN has certificates of deposits with outstanding balances of $163.0 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 $115.9 million of FHLB advances which mature after September 30, 2004 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 $15.0 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 months.

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 change 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, 2003.  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, 2003.







Other than trading portfolio
Market Value(Dollars in thousands)Basis point change in interest rates

-100

0

+100

+200Cash equivalents
$
17,868

17,855

17,842

17,829Securities available for sale:Fixed-rate CMOs

14,851

14,566

14,118

12,976Variable-rate CMOs

1,678

1,685

1,699

1,707Fixed-rate available for sale mortgage-backed     and related securities

536

531

522

508Variable-rate available for sale mortgage-    Backed and related securities

117

118

118

117Fixed-rate available for sale other marketable securities

72,561

71,263

69,990

68,745Variable-rate available for sale other marketable securities

111

107

104

103Federal Home Loan Bank stock

11,783

11,228

10,708

10,222Fixed-rate loans held for sale

17,692

17,677

17,663

17,648Loans receivable, net:Fixed-rate real estate loans

157,576

155,365

151,952

147,896Variable-rate real estate loans

290,277

285,185

279,976

275,179Fixed-rate other loans

83,125

82,078

80,552

79,157Variable-rate other loans

144,509

139,823

137,430

135,529Mortgage servicing rights, net

2,042

3,341

3,947

4,195Investment in limited partnerships

548

547

547

547Total market risk sensitive assets

815,274

801,369

787,168

772,358NOW deposits

75,814

75,814

75,814

75,814Passbook deposits

36,005

36,005

36,005

36,005Money market deposits

86,088

86,088

86,088

86,088Certificate deposits

301,245

297,100

293,064

289,384Fixed-rate Federal Home Loan Bank advances

232,019

223,492

217,386

212,240Variable-rate Federal Home Loan Bank advances

14,999

14,999

14,999

14,999Total market risk sensitive liabilities

746,170

733,498

723,356

714,530Off-balance sheet financial instruments:Commitments to extend credit

782

0

(782)

(1,117)Commitments to sell or deliver loans

(1,162)

0

1,162

1,661Net market risk
$
69,484

67,871

63,432

57,284Percentage change from current market value

2.38
%
0.00
%
(6.54)
%
(15.60)
%




The preceding table was prepared utilizing the following assumptions (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 7% to 52%, 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 18%, depending on the note rate and the period to maturity.  Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 7% and 23% 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 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 (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 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, 2003 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

Percentagein Basis Points

Income

Change+200

26,475,000

10.60 %+100

25,760,000

7.61 %0

23,938,000

0.00 %-100

21,781,000

-9.01 %




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 adjustments to the asset/liability position of the Bank which are reported 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

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 10 years or less.  The Bank generally follows the practice of selling all of its fixed rate single family loans with contractual terms greater than 10 years which conform to the secondary market guidelines.  HMN continues to focus its portfolio lending on the origination of commercial 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 in order to reduce interest rate risk and record a gain on the sale of loans.

Item 4: Controls and ProceduresEvaluation of disclosure controls and procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.



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 28 of this report.
2. Reports furnished on Form 8-K.

(1)  On July 25, 2003, HMN reported its financial results for its second fiscal quarter ended June 30, 2003.

(2)  On October 23, 2003, HMN reported its financial results for its third fiscal quarter ended September 30, 2003.

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 10, 2003 | /s/ Michael McNeil                                            
|                        | Michael McNeil,                                               
|                        | President/Chief Executive Officer                             
|                        | (Principal Executive Officer)
(Duly Authorized Representative)
|                        |                                                               
|Date: November 10, 2003 | /s/ Jon Eberle                                                
|                        | Jon Eberle,                                                   
|                        | Chief Financial Officer                                       
|                        | (Principal Financial Officer)                                 





HMN FINANCIAL, INC.
INDEX TO EXHIBITS
FOR FORM 10-Q





SequentialReference
Page NumberingRegulation


to Prior
Where AttachedS-K


Filing or
Exhibits AreExhibit


Exhibit
Located in ThisNumber

Document Attached Hereto
Number
Form 10-Q Report3.1

Amended and Restated Articles of Incorporation
*1
N/A3.2

Amended and Restated By-laws
*2
N/A4

Form of Common Stock
*3
N/AIncluding indentures31.1

Rule 13a-14(a)/15d-14(a) Certification of CEO
31.1
Filed Electronically31.2

Rule 13a-14(a)/15d-14(a) Certification of CFO
31.2
Filed Electronically32

Section 1350 Certification of CEO and CFO
32
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).




EXHIBIT 31.1

CERTIFICATIONS

I, Michael McNeil, certify that:

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

2.	Based on my knowledge, this 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 report;

3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)	evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)	disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 10, 2003                     			By   /s/ Michael McNeil
                                                             	President/Chief Executive Officer















EXHIBIT 31.2

CERTIFICATIONS

I, Jon Eberle, certify that:

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

2.	Based on my knowledge, this 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 report;

3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;

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

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b)	evaluated the effectiveness of the registrant's disclosure controls and procedures presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)	disclosed in this report any change in the registrant's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



Date: November 10, 2003                         			By   /s/ Jon Eberle
                                                                	Senior Vice President/CFO