UNITED STATES

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 March 31, 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, Minnesota             |  | 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 May 3, 2002
|----------------------------- |  | --------------------------
|Common stock, $0.01 par value |  | 4,399,345                 

---





HMN FINANCIAL, INC.

CONTENTS

|PART I - FINANCIAL INFORMATION
|------------------------------
|                              
|Item 1:                       
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|Item 2:                       
|                              
|Item 3:                       
|                              
|PART II - OTHER INFORMATION   
|                              
|Item 1:                       
|                              
|Item 2:                       
|                              
|Item 3:                       
|                              
|Item 4:                       
|                              
|Item 5:                       
|                              
|Item 6:                       
|                              
|Signatures                    



2

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|HMN FINANCIAL, INC. AND SUBSIDIARIES                  
|------------------------------------------------------
|Consolidated Balance Sheets                           
|(unaudited)                                           
|                                                      
|                                                      
|                                                      
|                                                      
|Assets                                                
|Cash and cash equivalents                             
|Securities available for sale:                        
|Mortgage-backed and related securities                
|(amortized cost $64,704,962 and $65,878,534)          
|Other marketable securities                           
|(amortized cost $74,017,398 and $53,439,401)          
|                                                      
|                                                      
|                                                      
|Loans held for sale                                   
|Loans receivable, net                                 
|Accrued interest receivable                           
|Federal Home Loan Bank stock, at cost                 
|Premises and equipment, net                           
|Investment in limited partnerships                    
|Goodwill                                              
|Mortgage servicing rights, net                        
|Core deposit intangible                               
|Prepaid expenses and other assets                     
|                                                      
|Total assets                                          
|                                                      
|Liabilities and Stockholders' Equity                  
|Deposits                                              
|Federal Home Loan Bank advances                       
|Accrued interest payable                              
|Advance payments by borrowers for taxes and insurance 
|Accrued expenses and other liabilities                
|Deferred tax liabilities                              
|Due to broker                                         
|                                                      
|Total liabilities                                     
|                                                      
|Commitments and contingencies                         
|Minority interest                                     
|Stockholders' equity:                                 
|Serial preferred stock: ($.01 par value)              
|Authorized 500,000 shares; issued and outstanding
none
|Common stock ($.01 par value):                        
|Authorized 11,000,000; issued shares 9,128,662        
|Additional paid-in capital                            
|Retained earnings, subject to certain restrictions    
|Accumulated other comprehensive income                
|Unearned employee stock ownership plan shares         
|Unearned compensation restricted stock awards         
|Treasury stock, at cost 4,757,596 and 4,732,521 shares
|                                                      
|Total stockholders' equity                            
|                                                      
|Total liabilities and stockholders' equity            
|                                                      

See accompanying notes to consolidated financial statements.



3

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|HMN FINANCIAL, INC. AND SUBSIDIARIES                        
|------------------------------------------------------------
|Consolidated Statements of Income                           
|(unaudited)                                                 
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income:                                            
|Loans receivable                                            
|Securities available for sale:                              
|Mortgage-backed and related                                 
|Other marketable                                            
|Cash equivalents                                            
|Other                                                       
|                                                            
|Total interest income                                       
|                                                            
|Interest expense:                                           
|Deposits                                                    
|Federal Home Loan Bank advances                             
|                                                            
|Total interest expense                                      
|                                                            
|Net interest income                                         
|Provision for loan losses                                   
|                                                            
|Net interest income after provision for loan losses         
|                                                            
|Non-interest income:                                        
|Fees and service charges                                    
|Mortgage servicing fees                                     
|Securities gains, net                                       
|Gain on sales of loans                                      
|Earnings (losses) in limited partnerships                   
|Other                                                       
|                                                            
|Total non-interest income                                   
|                                                            
|Non-interest expense:                                       
|Compensation and benefits                                   
|Occupancy                                                   
|Federal deposit insurance premiums                          
|Advertising                                                 
|Data processing                                             
|Amortization of mortgage servicing rights, net of           
|valuation adjustments and servicing costs                   
|Other                                                       
|                                                            
|Total non-interest expense                                  
|                                                            
|Income before income tax expense                            
|Income tax expense                                          
|                                                            
|Income before minority interest                             
|Minority interest                                           
|                                                            
|Net income                                                  
|                                                            
|Basic earnings per share                                    
|                                                            
|Diluted earnings per share                                  
|                                                            
|See accompanying notes to consolidated financial statements.

4

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Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2002

(unaudited)



|                                              
|----------------------------------------------
|                                              
|                                              
|                                              
|Net income                                    
|Other comprehensive income, net of tax:       
|Unrealized losses on hedging valuation        
|Less: minority interest in hedging
valuation  
|                                              
|Net unrealized losses on hedging valuation    
|Unrealized gains on securities:               
|Unrealized holding gains arising during period
|Less: reclassification adjustment for gains   
|Included in net income                        
|                                              
|Net unrealized gains on securities            
|                                              
|Other comprehensive income                    
|                                              
|Comprehensive income                          
|                                              
|                                              

See accompanying notes to consolidated financial statements.





Consolidated Statement of Stockholders' Equity

For the Three Month Period Ended March 31, 2002

(unaudited)



|                          
|--------------------------
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|Balance, December 31, 2001
|Net income                
|Other comprehensive income
|Treasury stock purchases  
|Employee stock options    
|exercised                 
|Tax benefits of exercised 
|stock options             
|Amortization of restricted
|stock awards              
|Dividends paid            
|Earned employee stock     
|ownership plan shares     
|                          
|Balance, March 31, 2002   
|                          
|                          

See accompanying notes to consolidated financial statements.



5

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

|                                                                                    
|------------------------------------------------------------------------------------
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cash flows from operating activities:                                               
|Net income                                                                          
|Adjustments to reconcile net income to cash provided (used) by operating activities:
|Provision for loan losses                                                           
|Depreciation                                                                        
|Amortization of (discounts) premiums, net                                           
|Amortization of deferred loan fees                                                  
|Amortization of goodwill                                                            
|Amortization of core deposit intangible                                             
|Amortization of other purchase accounting adjustments                               
|Amortization of mortgage servicing rights and net valuation adjustments             
|Capitalized mortgage servicing rights                                               
|Deferred income taxes                                                               
|Securities gains, net                                                               
|Gain on sales of loans                                                              
|Proceeds from sale of loans held for sale                                           
|Disbursements on loans held for sale                                                
|Principal collected on loans held for sale                                          
|Amortization of restricted stock awards                                             
|Amortization of unearned ESOP shares                                                
|Earned employee stock ownership shares priced above original cost                   
|Decrease in accrued interest receivable                                             
|Decrease in accrued interest payable                                                
|Equity (earnings) losses of limited partnerships                                    
|Equity earnings of minority interest                                                
|Increase in other assets                                                            
|Decrease (increase) in other liabilities                                            
|Other, net                                                                          
|                                                                                    
|Net cash provided by (used) operating activities                                    
|                                                                                    
|Cash flows from investing activities:                                               
|Proceeds from sales of securities available for sale                                
|Principal collected on securities available for sale                                
|Proceeds collected on maturity of securities available for sale                     
|Purchases of securities available for sale                                          
|Net decrease (increase) in loans receivable                                         
|Purchases of premises and equipment                                                 
|                                                                                    
|Net cash provided by investing activities                                           
|Cash flows from financing activities:                                               
|Decrease in deposits                                                                
|Purchase of treasury stock                                                          
|Stock options exercised                                                             
|Dividends to stockholders                                                           
|Proceeds from Federal Home Loan Bank advances                                       
|Repayment of Federal Home Loan Bank advances                                        
|Minority interest in mortgage services                                              
|Increase in advance payments by borrowers for taxes and insurance                   
|                                                                                    
|Net cash (used) provided by financing activities                                    
|                                                                                    
|Increase in cash and cash equivalents                                               
|Cash and cash equivalents, beginning of period                                      
|                                                                                    
|Cash and cash equivalents, end of period                                            
|Supplemental cash flow disclosures:                                                 
|Cash paid for interest                                                              
|Cash paid for income taxes                                                          
|Supplemental noncash flow disclosures:                                              
|Loans transferred to loans held for sale                                            
|Transfer of loans to real estate                                                    
|                                                                                    

See accompanying notes to consolidated financial statements.







6

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HMN FINANCIAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

March 31, 2002 and 2001

(1)  HMN Financial, Inc.

HMN Financial, Inc. (HMN) is a stock savings bank holding company which 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, Security

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 statement 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 period ended March 31, 2002 is 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 July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001.  SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately.  SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.

HMN adopted the provisions of SFAS No. 141 effective July 1, 2001 and adopted SFAS No. 142 effective January 1, 2002. Intangible assets acquired in business combinations completed before July 1, 2001 were evaluated during the first quarter of 2002 to determine if the useful lives and residual values of all intangible assets acquired in purchase business combinations met the new criteria established in SFAS No. 141 for

7

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recognition apart from goodwill and to make any necessary amortization period adjustments.  Core deposit intangibles acquired in December of 1997 were assigned a remaining life of six years and are being amortized on an accelerated basis.

At December 31, 2001 the Bank (a reporting unit) had goodwill of $3,800,938 and during the first quarter of 2002 it was determined that the fair value of the Bank was in excess of the book value of the Bank therefore no impairment loss was necessary for goodwill.  In determining the fair value of the Bank, management compiled recent financial institutional sale prices for similar sized financial institutions located in the Midwest and throughout the United States to determine average price to earnings multiples and average multiples of book.  Fair value for the Bank was then determined by applying those multiples to the Bank's financial information.  On January 1, 2002, in accordance with SFAS No. 142, goodwill amortization ceased.  Goodwill amortization for the year ended 2001 was $180,036 or $45,009 per quarter.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets.  This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, And Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion).  The Statement also amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.  HMN adopted the provisions of SFAS. No. 144 effective January 1, 2002 with no impact to its financial position or results of its operations.



(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 2002, 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. On March 31, 2002, the interest rate swap had a market value adjustment of $324,559 which is included in other liabilities. The corresponding certificate of deposit was adjusted by the same amount and is reflected in deposits in the consolidated balance sheet of HMN. The interest rate swapwas deemed to be totally effective and therefore no gain or loss was recorded in the income statement.

HMN originates and purchases single family residential loans for sale into the secondary market and entersinto 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, 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. The derivative recorded in the balance sheet is a consolidated number that is partially owned by a minority interest. On March 31, 2002, the carrying value of the derivatives were marked to market by a $16,563 increase in other assets, the deferred tax liability was $3,000, the minority interest amount was $8,116, and other comprehensive income was $5,447.

As the loans held for sale are ultimately sold, the gains currently in accumulated other comprehensive income will be reclassified in the gains and losses on sale of loans in the income statement.  It is estimated that all of the loans held for sale at March 31, 2002 will be sold in the next three months.

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 refers to as its mortgage pipeline. Most of the time, as commitments to originate or purchase loans enter into the mortgage pipeline, HMN simultaneously enters into commitments to sell the mortgage pipeline into the secondary market in order to reduce the interest rate risk from when the loan is committed until it is sold.  These commitments are freestanding derivatives.  As a result of marking the mortgage pipeline and the related commitments to sell to market for the quarter ended March 31, 2002, HMN recorded an

8

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increase to other assets of $32,116 and an increase to other liabilities of $32,116.  The net impact on the income statement of recording these derivatives at fair value was zero.  Some commitments to originate or purchase loans did not have a corresponding commitment to sell at March 31, 2002.  The commitments were marked to market which resulted in a decrease to other liabilities of $50,669 and a gain in the gains or losses on sales of loans of $50,669.

Loans held for sale include loans that do not qualify for hedge accounting.  A significant portion of these loans have commitments to sell associated with them.  As a result of marking these loans to the lower of cost or market and recording the commitments to sell at fair value, loans held for sale were reduced by $204,066 and other assets were increased by $204,066.  The net impact on the income statement was zero.  A portion of these loans did not have a commitment associated with them and the lower of cost or market adjustment resulted in an increase in loans held for sale of $97,507 and a gain in gains or losses on sales of loans of $97,507.



(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.

The gross unrealized losses in hedging valuation for the first quarter of 2002 was $28,232, the income tax benefit would have been $6,000 and therefore, the net loss was $22,232.  The gross minority interest in hedging valuations for the first quarter of 2002 was $13,384.  There were no gains or losses on hedging valuation in the first quarter of 2001.

The gross unrealized holding gains for the first quarter of 2002 were $101,819, the income tax expense would have been $19,009 and therefore, the net gain was $82,810.  The gross reclassification adjustment for the first quarter of 2002 was $18,925, the income tax expense would have been $6,609 and therefore, the net reclassification adjustment was $12,316.   The gross unrealized holding gains for the first quarter of 2001 were $2.3 million, the income tax expense would have been $892,293 and therefore, the net gain was $1,357,734.  The gross reclassification adjustment for the first quarter of 2001 was a gain of $277,704, the income tax expense would have been $106,993 and therefore, the net reclassification adjustment was a gain of $170,711.



(6) Cash Dividend

On April 23, 2002 HMN's Board of Directors announced a cash dividend of $0.18 per share, payable on June 10, 2002 to stockholders of record on May 23, 2002.



(7)Investment in Limited Partnerships

Investments in limited partnerships were as follows:

|                                      
|--------------------------------------
|Primary partnership activity          
|                                      
|Mortgage servicing rights             
|Common stock of financial institutions
|Low to moderate income housing        
|                                      
|                                      
|                                      
|                                      





9

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During the first quarter of 2002 HMN's proportionate gain from a mortgage servicing partnership was $381,643, its proportionate share of gains from common stock investments in financial institutions was $18,234 and it recognized $20,956 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 first quarter of 2001 HMN's proportionate loss from a mortgage servicing partnership was $257,517, its proportionate share of losses from the common stock investments in financial institutions was $21,264 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 first quarter.



(8) Investment in Mortgage Servicing Rights

A summary of mortgage servicing activity is as follows:



|                                       
|---------------------------------------
|                                       
|                                       
|Mortgage servicing rights              
|Balance, beginning of period           
|Originations                           
|Amortization                           
|                                       
|Balance, March 31                      
|                                       
|Valuation reserve                      
|Balance, beginning of period           
|Additions                              
|Reductions                             
|                                       
|Balance, March 31                      
|                                       
|Mortgage servicing rights, net         
|                                       
|Fair value of mortgage servicing rights
|                                       
|                                       





All of the loans being serviced were single family loans serviced for the Federal National Mortgage Association (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 March 31, 2002.



|                                 |  
|-------------------------------- | -
|                                 |  
|                                 |  
|Original term 30 year fixed rate | $
|Original term 15 year fixed rate |  
|Seven year balloon               |  
|Adjustable rate                  |  
|                                 |  



10

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(9) Intangible Assets

The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2002 is presented in the table below. Amortization expense for intangible assets was $240,937 for the quarter ended March 31, 2002.



Gross





UnamortizedCarrying

Accumulated

Valuation

IntangibleAmount

Amortization

Adjustment

AssetsAmortized intangible assets:Mortgage servicing rights*
$
3,435,455

(1,145,287)

(6,100)

2,284,068Core deposit intangible

1,567,000

(912,536)

0

654,464Total
$
5,002,455

(2,057,823)

(6,100)

2,938,532


* The gross carrying amount and related accumulated amortization have been estimated because the mortgage servicing software utilized by HMN does not retain the original gross carrying amount of each mortgage servicing asset.

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



|                                   
|-----------------------------------
|                                   
|                                   
|                                   
|                                   
|Nine months ended December 31, 2002
|                                   
|Year ended December 31,            
|2003                               
|2004                               
|2005                               
|2006                               
|2007                               
|                                   

Projections of amortization are based on existing asset balances and the existing interest rate environment as of March 31, 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 first quarter of 2001 to "adjusted" earnings, which exclude goodwill amortization.



Quarter Ended March 31, 2001QuarterEnded

Reported
Earnings

Goodwill
Amortization

Adjusted
EarningsMarch 31, 2002Income before income tax expense
$
2,848,746

2,616,387

45,009

2,661,396Income tax expense

840,100

997,600

0

997,600Income before minority interest

2,008,646

1,618,787

45,009

1,663,796Minority interest

40,674

27,879

0

27,879Net income
$
1,967,972

1,590,908

45,009

1,691,675Earnings per common share
$
0.53

0.43

0.01

0.44Diluted earnings per common share
$
0.50

0.40

0.01

0.41




11

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(11) 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 March 31, | 
|---------------------------------------------------- | - | ---------------------------- | 
|                                                     |   |                              | 
|                                                     |   | 2002                         | 
|                                                     |   |                              | 
|Weighted average number of common shares outstanding |   |                              | 
|used in basic earnings per common share calculation  |   | 3,733,673                    | 
|                                                     |   |                              | 
|Net dilutive effect of:                              |   |                              | 
|Options                                              |   | 194,677                      | 
|Restricted stock awards                              |   | 135                          | 
|                                                     |   |                              | 
|Weighted average number of shares outstanding        |   |                              | 
|adjusted for effect of dilutive securities           |   | 3,928,485                    | 
|                                                     |   |                              | 
|Income available to common shareholders              | $ | 1,967,972                    | 
|Basic earnings per common share                      | $ | 0.53                         | 
|Diluted earnings per common share                    | $ | 0.50                         | 
|                                                     |   |                              | 



(12) 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



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 March 31, 2002, that the Bank meets all capital adequacy requirements to which it is subject.



Management believes that based upon the Bank's capital calculations at March 31, 2002 and other conditions consistent with the Prompt Corrective Actions Provisions of the OTS regulations, the Bank would be categorized as well capitalized.



On March 31, 2002 the Bank's tangible assets and adjusted total assets were $703.7 million and its risk-weighted assets were $451.5 million. The following table presents the Bank's capital amounts and ratios at March 31, 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.

12

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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
$
62,100Plus:Net unrealized loss (gain) on
     certain
securities availablefor sale and cash flow hedges

(391)Less:Goodwill and core deposit
      intangible

4,455Excess mortgage servicing
      rights

177Tier I or core capital

57,077Tier I capital to adjusted
       total assets



8.11%

$
28,148

4.00%

$
28,929

4.11%

$
35,185

5.00%Tier I capital to
       risk-weighted assets



12.64%

$
18,058

4.00%

$
39,019

8.64%

$
27,087

6.00%Plus:Allowable allowance for loan
       losses

3,512Risk-based capital
$
60,589



$
36,116



$
24,473



$
45,145Risk-based capital torisk-weighted assets



13.42%




8.00%




5.42%




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 March 31, 2002 but is not reflected in the table above.

(13) 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' mortgage banking activity purchases loans from other loan originators.  All loans acquired 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 segments 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 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.

13

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|                                     |   |         |   | Home Federal           |   |          |   |            |  |        |  |              | 
|------------------------------------ | - | ------- | - | ---------------------- | - | -------- | - | ---------- |  | ------ |  | ------------ | 
|                                     |   |         |   | Mortgage Services, LLC |   |          |   |            |  |        |  |              | 
|                                     |   |         |   |                        |   |          |   |            |  |        |  |              | 
|                                     |   | Home    |   |                        |   |          |   |            |  |        |  |              | 
|                                     |   | Federal |   | Mortgage               |   |          |   | Total      |  |        |  |              | 
|                                     |   | Savings |   | Servicing              |   | Mortgage |   | Reportable |  |        |  |              | 
|(Dollars in thousands)               |   | Bank    |   | Rights                 |   | Banking  |   | Segments   |  | Other  |  | Eliminations | 
|                                     |  
|At or for the quarter ended          |   |         |   |                        |   |          |   |            |  |        |  |              | 
|March 31, 2002:                      |   |         |   |                        |   |          |   |            |  |        |  |              | 
|Interest income                      |   |         |   |                        |   |          |   |            |  |        |  |              | 
|- external customers                 | $ | 10,359  |   | 0                      |   | 674      |   | 11,033     |  | 108    |  | 0            | 
|Non-interest income                  |   |         |   |                        |   |          |   |            |  |        |  |              | 
|- external customers                 |   | 1,644   |   | 11                     |   | 205      |   | 1,860      |  | 25     |  | 0            | 
|Earnings on limited partnerships     |   | 361     |   | 0                      |   | 0        |   | 361        |  | 18     |  | 0            | 
|Intersegment interest income         |   | 316     |   | 0                      |   | 0        |   | 316        |  | 0      |  | (316)        | 
|Intersegment non-interest income     |   | 280     |   | 0                      |   | 0        |   | 280        |  | 1,913  |  | (2,193)      | 
|Interest expense                     |   | 5,690   |   | 0                      |   | 316      |   | 6,006      |  | 0      |  | (316)        | 
|Amortization of mortgage servicing   |   |         |   |                        |   |          |   |            |  |        |  |              | 
|rights and net valuation adjustments |   | 226     |   | 17                     |   | 0        |   | 243        |  | 0      |  | (32)         | 
|Other non-interest expense           |   | 3,488   |   | 0                      |   | 474      |   | 3,962      |  | 139    |  | (166)        | 
|Income tax expense (benefit)         |   | 883     |   | 0                      |   | 0        |   | 883        |  | (43)   |  | 0            | 
|Minority interest                    |   | 41      |   | 0                      |   | 0        |   | 41         |  | 0      |  | 0            | 
|Net income (loss)                    |   | 1,912   |   | (6)                    |   | 89       |   | 1,995      |  | 1,968  |  | (1,995)      | 
|Goodwill                             |   | 3,801   |   | 0                      |   | 0        |   | 3,801      |  | 0      |  | 0            | 
|Total assets                         |   | 721,297 |   | 66                     |   | 17,964   |   | 739,327    |  | 73,434 |  | (193,980)    | 
|Net interest margin                  |   | 3.22    | % | NM                     |   | NM       |   | NM         |  | NM     |  | NM           | 
|Return on average assets             |   | 1.09    | % | (35.05)                | % | 0.89     | % | NM         |  | NM     |  | NM           | 
|Return on average realized           |   |         |   |                        |   |          |   |            |  |        |  |              | 
|common equity                        |   | 12.51   | % | (2,013.06)             | % | 49.95    | % | NM         |  | NM     |  | NM           | 
|                                     |   |         |   |                        |   |          |   |            |  |        |  |              | 
|At or for the quarter ended          |   |         |   |                        |   |          |   |            |  |        |  |              | 
|March 31, 2001:                      |   |         |   |                        |   |          |   |            |  |        |  |              | 
|Interest income                      |   |         |   |                        |   |          |   |            |  |        |  |              | 
|- external customers                 | $ | 12,969  |   | 0                      |   | 462      |   | 13,431     |  | 111    |  | 0            | 
|Non-interest income                  |   |         |   |                        |   |          |   |            |  |        |  |              | 
|- external customers                 |   | 943     |   | 16                     |   | 509      |   | 1,468      |  | 250    |  | 0            | 
|Earnings (loss) on                   |   |         |   |                        |   |          |   |            |  |        |  |              | 
|limited partnerships                 |   | (282)   |   | 0                      |   | 0        |   | (282)      |  | (21)   |  | 0            | 
|Intersegment interest income         |   | 418     |   | 0                      |   | 0        |   | 418        |  | 88     |  | (506)        | 
|Intersegment non-interest income     |   | 151     |   | 0                      |   | 0        |   | 151        |  | 1,401  |  | (1,552)      | 
|Interest expense                     |   | 8,410   |   | 0                      |   | 476      |   | 8,886      |  | 12     |  | (506)        | 
|Amortization of mortgage servicing   |   |         |   |                        |   |          |   |            |  |        |  |              | 
|rights and net valuation adjustments |   | 118     |   | 23                     |   | 0        |   | 141        |  | 0      |  | 0            | 
|Other non-interest expense           |   | 3,153   |   | 1                      |   | 500      |   | 3,654      |  | 128    |  | (124)        | 
|Income tax expense (benefit)         |   | 928     |   | 0                      |   | (28)     |   | 900        |  | 98     |  | 0            | 
|Minority interest                    |   | 28      |   | 0                      |   | 0        |   | 28         |  | 0      |  | 0            | 
|Net income (loss)                    |   | 1,412   |   | (8)                    |   | 23       |   | 1,427      |  | 1,591  |  | (1,427)      | 
|Goodwill                             |   | 3,936   |   | 0                      |   | 0        |   | 3,936      |  | 0      |  | 0            | 
|Total assets                         |   | 717,148 |   | 153                    |   | 43,460   |   | 760,761    |  | 69,944 |  | (100,215)    | 
|Net interest margin                  |   | 2.95    | % | NM                     |   | NM       |   | NM         |  | NM     |  | NM           | 
|Return on average assets             |   | 0.80    | % | (16.85)                | % | 0.32     | % | NM         |  | NM     |  | NM           | 
|Return on average realized           |   |         |   |                        |   |          |   |            |  |        |  |              | 
|common equity                        |   | 10.52   | % | (218.00)               | % | 8.24     | % | NM         |  | NM     |  | NM           | 
|                                     |   |         |   |                        |   |          |   |            |  |        |  |              | 

N/M -Not meaningful

14

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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 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 affected 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, 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, 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 first quarter of 2002 was $2.0 million, an increase of $377,000, or 23.7%, compared to net income of $1.6 million for the first quarter of 2001. Basic earnings per share were $0.53 for the quarter ended March 31, 2002, an increase of $0.10 per share, from $0.43 basic earnings per share for the same quarter of 2001.  Diluted earnings per share were $0.50 for the first quarter of 2002, an increase of $0.10 from $0.40 diluted earnings per share for the first quarter of 2001. The average number of outstanding shares for the basic earnings per share calculation increased by 11,046 shares from 3,722,627 at March 31, 2001, to 3,733,673 at March 31, 2002. The average number of outstanding shares for the diluted earnings per share calculation declined by 11,581 shares from 3,940,066 at March 31, 2001, to 3,928,485 at March 31, 2002.  The adoption of SFAS No. 142, Goodwill and Other Intangible Assets, increased diluted earnings per common shares by $0.01 for the quarter ended March 31, 2002. Refer to Note 10 of the Notes to Consolidated Financial Statements for more information.



Net Interest Income

Net interest income for the first quarter of 2002 was $5.5 million, an increase of $300,000, or 5.8%, compared to $5.2 million for the first quarter of 2001. Interest income for the first quarter of 2002 was $11.1 million, a decrease of $2.4 million, or 17.7%, compared to $13.5 million for the first quarter of 2001.

15

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Interest expense was $5.7 million for the first quarter of 2002, a decrease of $2.7 million, or 32.2%, compared to $8.4 million for the same quarter of 2001. Interest expense on deposits decreased by $1.4 million due to decreased interest rates paid on certificates of deposit and by $338,000 due to a decrease in the average outstanding balance of deposits.  Interest expense on Federal Home Loan Bank advances decreased by $577,000 due to decreased interest rates paid and by $177,000 due to a decrease in the average outstanding balance of advances.  The average interest rate paid on the average interest-bearing liabilities was 3.64% during the first quarter of 2002, compared to 5.27% for the first quarter of 2001. Net interest earning assets decreased from $57.2 million at March 31, 2001 to $50.0 million at March 31, 2002. The decrease in net earning assets is primarily due to stock repurchases, dividend payments to shareholders, and purchases of premises and equipment



Provision for Loan Losses



*The provision for loan losses for the first quarter ended March 31, 2002 was $720,000, an increase of $570,000, compared to $150,000 for the first quarter of 2001.  The provision for loan losses increased primarily due to increases in specific loan reserves of $451,000 on two non-accruing commercial loan relationships during the first quarter of 2002. The provision also increased due to the growth that was experienced in the commercial and consumer loan portfolios which generally require a larger provision due to the greater inherent credit risk of these loans. The provision is the result of management's evaluation of the loan portfolio, historic level of non-performing loans, an increase 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, single family loan delinquencies as reported separately by FNMA and the Federal Home Loan Mortgage Corporation (FHLMC), local single family construction permits and local economic growth rates.  Management's evaluation of probable losses inherent in the loan portfolio revealed that an increase in the provision for loan losses was required in the first quarter of 2002 compared to the first quarter of 2001.  HMN will continue to monitor its allowance for losses as these 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             | 720,000      |  | 150,000     
|Charged off           | (61,096)     |  | (3,978)     
|Recoveries            | 1,761        |  | 326         
|                      |              |  |             
|Balance at March 31,  | $  4,443,777 |  | $  3,290,094
|                      |              |  |             





Non-Interest Income

Non-interest income was $2.3 million for the first quarter of 2002, an increase of $849,000, or 60%, from $1.4 million for the first quarter of 2001. Non-interest income increased by $682,000 due to an increase in the earnings of limited partnership investments, $192,000 due to an increase in the gains recognized on loan sales, $128,000 increase in other income primarily from increased sales of non-deposit investment products and by $53,000 due to increased mortgage servicing fees. The increase in non-interest income was partially offset by a decline of $259,000 in revenue from security gains.  Interest rates on mortgage loans increased slightly during the first quarter of 2002 which caused the value of HMN's investment in a limited partnership which owns mortgage loan servicing assets to increase in value.  The value of mortgage servicing rights fluctuates with interest rates and generally increases when mortgage rates increase because of the anticipated decrease in prepayments expected to be received on the mortgage loan servicing assets.

*This paragraph contains a forward-looking statement(s).  Refer to information regarding Forward-looking Information on page 21 of this discussion

16

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Non-Interest Expense

Non-interest expense was $4.1 million for the first quarter of 2002, an increase of $346,000, or 9.1%, from $3.8 million for the first quarter of 2001. Occupancy expense increased by $118,000, or 20.9%, due to additional operating costs associated with maintaining additional facilities including the new corporate office.  Advertising expense increased by $56,000 and amortization of mortgage servicing rights, net of valuation adjustments and servicing costs increased by $71,000 because of the increase in the mortgage servicing assets.

Income Tax Expense

Income tax expense was $840,000 for the first quarter of 2002, a decrease of $158,000 compared to $998,000 for the first quarter of 2001.  During the first quarter of 2002, the Bank reduced its effective income tax rate from 38.1% to 29.5% through the use of certain state tax planning initiatives.  As a result of the change in the effective rate, HMN recognized a $104,400 tax benefit in the first quarter of 2002 when it recalculated its net deferred tax liability utilizing the lower effective income tax rate.  The lower effective rate when coupled with the deferred tax liability reduction is the primary reason for the decrease in income tax expense between the two quarters.

Non-Performing Assets

The following table sets forth the amounts and categories of non-performing assets in the Bank's portfolio at

March 31, 2002 and December 31, 2001.





|                                                     |   | March 31, |   |   | December 31, |  
|---------------------------------------------------- | - | --------- | - | - | ------------ | -
|(Dollars in Thousands)                               |   | 2002      |   |   | 2001         |  
|                                                     |   |           |   |   |              |  
|Non-Accruing Loans                                   |   |           |   |   |              |  
|One-to-four family real estate                       | $ | 975       |   |   | 771          |  
|Commercial real estate                               |   | 236       |   |   | 187          |  
|Consumer                                             |   | 389       |   |   | 311          |  
|Commercial business                                  |   | 1,803     |   |   | 890          |  
|                                                     |   |           |   |   |              |  
|Total                                                |   | 3,403     |   |   | 2,159        |  
|                                                     |   |           |   |   |              |  
|Accruing loans
delinquent 90 days or more            |   | 0         |   |   | 24           |  
|Other assets (impaired securities)                   |   | 1,390     |   |   | 1390         |  
|Foreclosed and Repossessed Assets                    |   |           |   |   |              |  
|Consumer                                             |   | 173       |   |   | 155          |  
|Commercial business                                  |   | 0         |   |   | 33           |  
|                                                     |   |           |   |   |              |  
|Total non-performing assets                          | $ | 4,966     |   | $ | 3,761        |  
|                                                     |   |           |   |   |              |  
|Total as a percentage of total assets                |   | 0.69      | % |   | 0.52         | %
|                                                     |   |           |   |   |              |  
|Total non-performing loans                           | $ | 3,403     |   | $ | 2,183        |  
|                                                     |   |           |   |   |              |  
|Total as a
percentage of total loans receivable, net |   | 0.76      | % |   | 0.46         | %
|                                                     |   |           |   |   |              |  



Total non-performing assets at March 31, 2002 were $5.0 million, an increase of $1.2 million, from $3.8 million at

December 31, 2001.

Dividends

On April 23, 2002 HMN declared a cash dividend of $.18 per share, payable on June 10, 2002 to shareholders of record on May 23, 2002.

17

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During the first quarter of 2002, HMN declared and paid dividends as follows:

Record date
               Payable date
        Dividend per share
        Dividend Payout Ratio

February 21, 2002      March 7, 2002
              $0.14
                          100.00 %

The annualized dividend payout ratio for the past four quarters, ending with the June 10, 2002 payment will be 41.10%.



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 quarter ended March 31, 2002, the net cash provided by operating activities was $46.0 million.  HMN collected $1.5 million from the sale of securities and $9.6 million in principal repayments or on the maturity of securities during the quarter.  It purchased $25.5 million in securities and received $20.6 million relating to a decrease in net loans receivable.  It purchased premises and equipment of $1.3 million. HMN had a net decrease in deposit balances of $7.7 million during the quarter. It received net proceeds of $331,000 from increased advance payments from borrowers for taxes and insurance.  HMN received $151,000 related to the exercise of HMN stock options.  HMN paid $528,000 in dividends to its shareholders and $659,000 to purchase treasury stock.

*HMN has certificates of deposits with outstanding balances of $153.7 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 which do not renew will be replaced with deposits from other customers, 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 $65.0 million of FHLB advances which mature after March 31, 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.  Since HMN has the ability to request another advance to replace the advance that is being called, 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 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 Tablelocated 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 rates were at March 31, 2002.  HMN does not have a trading portfolio. The



*This paragraph contains a forward-looking statement(s).  Refer to information regarding Forward-looking Information on page 21 of this discussion

18

---





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 March 31, 2002.

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


-100

0

+100

+200Cash and cash equivalents
$

65,379

65,425

65,275

65,223Securities available for sale:Fixed-rate CMOs


9,674

9,524

9,211

8,963Variable-rate CMOs


52,494

53,246

52,633

50,966Fixed-rate available for sale mortgage-backed
and related securities


2,259

2,190

2,121

2,050Variable-rate available for sale mortgage-backed and related securities


577

574

570

567Fixed-rate available for sale other
marketable securities


75,056

73,736

71,644

70,012Variable-rate available for sale other
marketable securities


114

113

108

108Federal Home Loan Bank stock


12,231

12,245

12,211

12,201Loans held for sale


26,823

25,810

24,735

24,287Loans receivable, net:Fixed-rate real estate loans


195,788

190,979

185,626

180,358Variable-rate real estate loans


122,724

120,596

118,416

116,250Fixed-rate other loans


77,375

76,409

74,993

73,711Variable-rate other loans


80,041

78,926

76,417

74,657Mortgage servicing rights, net


1,177

2,284

2,880

3,100Investment in limited partnerships


1,245

1,895

2,088

2,233Total market risk sensitive assets


722,957

713,952

698,928

684,686NOW deposits


57,535

57,535

57,535

57,535Passbook deposits


34,127

34,127

34,127

34,127Money market deposits


49,142

49,142

49,142

49,142Certificate deposits


281,351

278,152

275,027

271,979Federal Home Loan
Bank:Fixed-rate advances


188,224

184,614

181,827

179,214Variable-rate advances


37,531

37,442

37,417

37,391Total market risk sensitive liabilities


647,910

641,012

635,075

629,388Off-balance sheet financial instruments:Commitments to extend credit


(110)

0

(334)

(478)Commitments to sell or deliver loans


(996)

0

999

1,427Interest rate swap


(325)

(325)

(324)

(323)Net market risk
$

75,828

72,615

62,864

54,026Percentage change from current market value
$

4.42
%
0.00
%
(13.43)
%
(25.60)
%
























































*This paragraph contains a forward-looking statement(s).  Refer to information regarding Forward-looking Information on page 21 of this discussion

19

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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 7% to 38%, depending on the coupon and period to maturity.  Adjustable rate mortgages ("ARMs") were assumed to prepay at annual rates of between 11% and 28%, depending on coupon and the period to maturity.  Growing Equity Mortgage (GEM) loans were assumed to prepay at annual rates of between 12% and 43% depending on the coupon 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 (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 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 March 31, 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            |  | 23,826,000   |  | 6.39 %    
|+100            |  | 23,481,000   |  | 4.85 %    
|0               |  | 22,394,000   |  | 0.00 %    
|-100            |  | 19,443,000   |  | (13.18) % 



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

*This paragraph contains a forward-looking statement(s).  Refer to information regarding Forward-looking Information on page 21 of this discussion

20

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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 20 years or less.  The Bank generally follows the practice of selling all of its fixed rate single family loans that conform to the secondary market guidelines.  HMN has focused its portfolio lending 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 first quarter ended March 31, 2002 was $720,000, an increase of $570,000, compared to $150,000 for the first quarter of 2001. The provision for loan losses increased primarily due to increases in specific loan reserves of $451,000 on two non-accruing commercial loan relationships during the first quarter of 2002. The provision also increased due to the growth that was experienced in the commercial and consumer loan portfolios which generally require a larger provision due to the greater inherent credit risk of these loans.  The provision is the result of management's evaluation of the loan portfolio, historic level of non-performing loans, an increase 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, single family loan delinquencies as reported separately by FNMA and the Federal Home Loan Mortgage Corporation (FHLMC), local single family construction permits and local economic growth rates.  Management's evaluation of probable losses inherent in the loan portfolio revealed that an increase in the provision for loan losses was required in the first quarter of 2002 compared to the first quarter of 2001.  HMN will continue to monitor its allowance for losses as these 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 $153.7 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 which do not renew will be replaced with deposits from other customers, 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. Competitive pricing by other institutions, the desire of a competitor to pay interest rates on deposits that are

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above the current rates paid by HMN, or the desire by customers to put more of their funds into nontraditional bank products such as stocks and bonds could be circumstances that would cause the maturing certificates to become a liquidity problem.

HMN has $65.0 million of FHLB advances which mature after March 31, 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.  Since HMN has the ability to request another advance to replace the advance that is being called, 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 rates were at March 31, 2002.  HMN does not have a trading portfolio. The table in the Market Risk section 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 March 31, 2002.

Certain shortcomings are inherent in the method of analysis in the table presented in the Market Risk section.  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 rate 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 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 March 31, 2002 to determine if its current level of interest rate risk is acceptable.  HMN's actual net interest income caused by interest rate changes may differ from the amounts reflected in the table in the Asset/Liability section which projects the estimated impact on net interest income of immediate interest rate changes called rate shocks.

Certain shortcomings are inherent in the method of analysis presented in each of the tables.  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.

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HMN FINANCIAL, INC.

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings.

None.

ITEM 2.	Changes in Securities.

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.

(a)  	Exhibits.  See Index to Exhibits on page 25 of this report.

(b)	Reports on Form 8-K. None.

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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:   May 13, 2002
                                                   /s/ Michael McNeil

Michael McNeil,

President

(Principal Executive Officer)



Date:    May 13, 2002                                                   /s/ Timothy P. Johnson

Timothy P. Johnson,

Chief Financial Officer

(Principal Financial Officer)



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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 |                  |               
|           |                                                                                                                                                               |                                                |                      |                  |               
|*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).          
|           |                                                                                                                                                              





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