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 June 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



(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 NW, 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 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 classes of common stock, as of the latest practicable date.

Class
    Outstanding at August 1, 2003Common
    stock, $0.01 par value
    4,456,910


1

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HMN FINANCIAL, INC.
CONTENTS

PART I - FINANCIAL INFORMATION



PageItem 1:	Financial Statements (unaudited)Consolidated Balance Sheets at June 30, 2003 and December 31, 2002
    3Consolidated Statements of Income for the Three Months Ended and
    
        Six Months Ended June 30, 2003 and 2002
    4Consolidated Statements of Comprehensive Income for the Three Months
    
        Ended and Six Months Ended June 30, 2003 and 2002
    5Consolidated Statement of Stockholders' Equity for the Six Month Period Ended June 30, 2003
    5Consolidated Statements of Cash Flows for
    the Six Months Ended June 30, 2003 and 2002
    6Notes to Consolidated Financial Statements
    7-16Item 2:	Management's Discussion and Analysis of Financial
    Condition and Results of Operations
    17-25Item 3:	Quantitative and Qualitative Disclosures about Market RiskDiscussion 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
    26-27Item 3:	Defaults Upon Senior Securities
    26Item 4:	Submission of Matters to a Vote of Security Holders
    26Item 5:	Other Information
    27Item 6:	Exhibits and Reports on Form 8-K
    27Signatures
    28




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Part I - FINANCIAL INFORMATION

Item 1: Financial Statements

HMN FINANCIAL, INC. AND SUBSIDIARIESConsolidated Balance Sheets(unaudited)June 30, 2003

December 31, 2002AssetsCash and cash equivalents
$
20,592,743

27,729,007Securities available for sale:Mortgage-backed and related securities(amortized cost $21,238,966 and $51,677,294)

21,120,738

51,895,832Other marketable securities(amortized cost $82,586,128 and $67,282,379)

84,510,254

69,501,417105,630,992

121,397,249Loans held for sale

13,855,160

15,126,509Loans receivable, net

606,930,531

533,905,652Accrued interest receivable

3,302,099

3,050,636Real estate, net

706,375

426,691Federal Home Loan Bank stock, at cost

11,965,000

11,880,500Mortgage servicing rights, net

2,447,952

2,691,031Premises and equipment, net

12,591,030

12,875,816Investment in limited partnerships

537,606

862,666Goodwill

3,800,938

3,800,938Core deposit intangible

505,730

561,331Prepaid expenses and other assets

2,331,659

3,214,792Due from brokers/trustees

712,100

0Total assets
$
785,909,915

737,522,818Liabilities and Stockholders' EquityDeposits
$
463,185,005

432,951,462Federal Home Loan Bank advances

235,300,000

218,300,000Accrued interest payable

419,501

849,427Advance payments by borrowers for taxes and insurance

620,416

707,213Accrued expenses and other liabilities

7,999,274

7,614,406Deferred tax liabilities

1,233,300

1,456,600Total liabilities

708,757,496

661,879,108Commitments and contingenciesMinority interest

(369,401)

(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

57,930,389

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

81,728,909

79,660,481Accumulated other comprehensive income

1,167,597

1,575,577Unearned employee stock ownership plan shares

(4,834,671)

(4,931,385)Treasury stock, at cost 4,683,752 and 4,722,856 shares

(58,561,691)

(59,216,683)Total stockholders' equity

77,521,820

76,064,556Total liabilities and stockholders' equity
$
785,909,915

737,522,818


See accompanying notes to consolidated financial statements.

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



Three Months Ended

Six Months EndedJune 30,

June 30,2003

2002

2003

2002Interest income:Loans receivable
$
10,243,717

9,019,269

19,883,641

18,768,775Securities available for sale:Mortgage-backed and related

(39,454)

554,104

102,759

1,012,165Other marketable

690,848

704,003

1,252,067

1,436,796Cash equivalents

56,980

168,773

85,897

259,352Other

84,033

65,040

182,684

174,702Total interest income

11,036,124

10,511,189

21,507,048

21,651,790Interest expense:Deposits

2,492,554

2,633,678

4,963,817

5,747,225Federal Home Loan Bank advances

2,615,630

2,594,935

5,094,302

5,171,798Total interest expense

5,108,184

5,228,613

10,058,119

10,919,023Net interest income

5,927,940

5,282,576

11,448,929

10,732,767Provision for loan losses

490,000

310,000

1,355,000

1,030,000Net interest income after provision for loan   

      losses

5,437,940

4,972,576

10,093,929

9,702,767Non-interest income:Fees and service charges

555,036

390,352

987,176

794,161Mortgage servicing fees

238,729

177,229

455,305

337,162Securities gains, net

224,751

26,583

815,786

45,508Gains on sales of loans

1,526,558

498,469

2,991,790

1,543,029Earnings (losses) in limited partnerships

31,528

(51,946)

(323,314)

326,975Other

114,694

150,914

335,794

408,980Total non-interest income

2,691,296

1,191,601

5,262,537

3,455,815Non-interest expense:Compensation and benefits

2,027,572

2,068,560

4,307,074

4,020,044Occupancy

769,518

726,261

1,593,317

1,409,688Federal deposit insurance premiums

17,855

18,671

36,791

38,107Advertising

100,988

146,537

185,852

289,082Data processing

289,938

286,925

561,046

551,384Amortization of mortgage servicing     rights,  net

    of valuation adjustments and         servicing costs

1,108,101

171,104

1,898,631

382,306Other

867,136

1,107,948

1,811,687

1,981,054Total non-interest expense

5,181,108

4,526,006

10,394,398

8,671,665Income before income tax expense

2,948,128

1,638,171

4,962,068

4,486,917Income tax expense

917,900

485,100

1,542,300

1,325,200Income before minority interest

2,030,228

1,153,071

3,419,768

3,161,717Minority interest

0

(114,968)

0

(74,294)Net income
$
2,030,228

1,268,039

3,419,768

3,236,011Basic earnings per share
$
0.54

0.34

0.91

0.87Diluted earnings per share
$
0.52

0.32

0.87

0.82


See accompanying notes to consolidated financial statements.

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Three Months Ended June 30,2003

2002Net income
$




2,030,228





1,268,039Other comprehensive income, net of tax:Unrealized losses on hedging valuation

0





(13,563)Less: minority interest in hedging valuation

0





(8,116)Net unrealized losses on hedging valuation



0





(5,447)Unrealized gains on securities:Unrealized holding gains (losses) arising 
         during period

598,561





(598,418)Less: reclassification adjustment for gainsincluded in net income

145,351





17,184Net unrealized gains (losses) on securities



453,210





(615,602)Other comprehensive income (loss)





453,210





(621,049)Comprehensive income
$




2,483,438





646,990


Six Months Ended June 30,2003

2002Net income
$




3,419,768





3,236,011Other 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

119,406





(515,700)Less: reclassification adjustment for gainsincluded in net income

527,386





29,408Net unrealized losses on securities



(407,980)





(545,108)Other comprehensive loss





(407,980)





(558,953)Comprehensive income
$




3,011,788





2,677,058


See accompanying notes to consolidated financial statements.

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HMN FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six-Month Period Ended June 30, 2003(unaudited)

UnearnedEmployeeAccumulated
Stock

TotalAdditional

Other
Ownership

Stock-Common
Paid-in
Retained
Comprehensive
Plan
Treasury
Holders'Stock
Capital
Earnings
Income (Loss)
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


3,419,768



3,419,768Other comprehensive loss



(407,980)


(407,980)Treasury stock purchases





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

(1,163,247)



2,039,552
876,305Tax benefits of exercisedstock options

136,001




136,001Dividends paid


(1,351,340)



(1,351,340)Earned employee stockownership plan shares

72,356


96,714

169,070Balance, June 30, 2003
$          91,287
57,930,389
81,728,909
1,167,597
(4,834,671)
(58,561,691)
77,521,820


See accompanying notes to consolidated financial statements.





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

Six Months Ended
June 30,2003

2002Cash flows from operating activities:Net income
$
3,419,768

3,236,011Adjustments to reconcile net income to cash provided by operating activities:Provision for loan losses

1,355,000

1,030,000Depreciation

799,618

620,765Amortization of premiums, net

440,052

100,001Amortization of deferred loan fees

(196,435)

(415,631)Amortization of core deposit intangible

55,601

62,089Amortization of mortgage servicing rights and net valuation and servicing costs

1,898,631

382,306Capitalized mortgage servicing rights

(1,438,635)

(850,643)Deferred income taxes

0

(104,400)Securities gains, net

(815,786)

(45,508)Gains on sales of real estate

(117,042)

0Gain on sales of loans

(2,991,790)

(1,543,029)Proceeds from sale of loans held for sale

165,333,116

167,703,663Disbursements on loans held for sale

(158,242,116)

(105,746,755)Principal collected on loans held for sale

11,521

87,982Amortization of restricted stock awards

0

7,350Amortization of unearned ESOP shares

96,714

96,714Earned employee stock ownership shares priced above original cost

72,356

67,157Decrease (increase) in accrued interest receivable

(251,463)

224,502Decrease in accrued interest payable

(429,926)

(292,074)Equity (earnings) losses of limited partnerships

323,314

(326,975)Equity losses of minority interest

0

(74,294)Increase in other assets

(367,797)

(489,476)Increase (decrease) in other liabilities

1,221,906

(1,461,835)Other, net

83,512

2,051Net cash provided by operating activities

10,260,119

62,269,971Cash flows from investing activities:Proceeds from sales of securities available for sale

38,718,290

3,566,891Principal collected on securities available for sale

23,346,740

10,427,472Proceeds collected on maturity of securities available for sale

0

12,400,000Purchases of securities available for sale

(46,491,697)

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

(84,500)

0Net increase in loans receivable

(77,775,248)

(3,169,588)Proceeds from sale of premises

221,313

0Purchases of premises and equipment

(634,383)

(2,876,412)Net cash used by investing activities

(62,699,485)

(19,707,493)Cash flows from financing activities:Increase (decrease) in deposits

30,249,494

(22,499,992)Purchase of treasury stock

(1,384,560)

(658,611)Stock options exercised

876,305

510,924Dividends to stockholders

(1,351,340)

(1,205,394)Proceeds from Federal Home Loan Bank advances

116,000,000

0Repayment of Federal Home Loan Bank advances

(99,000,000)

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

(86,797)

(383,736)Net cash provided (used) by financing activities

45,303,102

(27,736,809)I ncrease (decrease) in cash and cash equivalents

(7,136,264)

14,825,669Cash and cash equivalents, beginning of period

27,729,007

23,019,553Cash and cash equivalents, end of period
$
20,592,743

37,845,222Supplemental cash flow disclosures:Cash paid for interest
$
10,488,045

11,211,097Cash paid for income taxes

1,152,000

1,492,500Supplemental noncash flow disclosures:Loans transferred to loans held for sale

3,077,578

3,621,521Transfer of loans to real estate

533,277

224,288Transfer of real estate to loans

16,533

0


See accompanying notes to consolidated financial statements.



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

June 30, 2003 and 2002

(1)  HMN Financial, Inc.

HMN Financial, Inc. (HMN) is a stock savings bank holding company that owns 100 percent of Home Federal Savings Bank (the Bank or Home Federal).  Home Federal has a community banking philosophy and operates retail banking facilities in Minnesota and Iowa.  The Bank has two wholly owned subsidiaries, Osterud Insurance Agency, Inc. (OAI) which offers financial planning products and services and Home Federal 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 Bank assumed responsibility for certain components of HFMS.  The majority of HFMS's assets have been liquidated and the company will be dissolved in the second half of 2003.

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

(2)  Basis of Preparation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of stockholders' equity and consolidated statements of cash flows in conformity with generally accepted accounting principles.  However, all adjustments consisting of only normal recurring adjustments that 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 and six-month periods ended June 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 12 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 June 30, 2003.  Refer to Note 13 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, are subject to the provisions of FIN No. 46 no later than July 1, 2003.  HMN has not created or obtained a variable interest in any VIEs since January 31, 2003. The impact of adopting FIN No. 46 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 will not be 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, except for mandatory redeemable financial instruments of nonpublic entities.  The impact of adopting SFAS No. 150 on HMN's financial condition and results of operation will not be 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. These commitments are referred to as its mortgage pipeline. As commitments to originate loans enter the mortgage pipeline, generally HMN simultaneously enters into commitments to sell the mortgage pipeline into the secondary market.  The commitments to originate or sell loans are derivatives.  As a result of marking the mortgage pipeline and the related commitments to sell to market for the period ended June 30, 2003, HMN recorded a decrease in other assets of  $508,022, a decrease in other liabilities of  $433,567 and a loss on sale of loans of $74,455.

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 lower of cost or market adjustment of $21, a decrease in other liabilities of $46,887, and gains on sale of loans of $46,908.

(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 second quarter of 2003.  The gross unrealized losses in hedging valuation for the second quarter of 2002 was $17,000, the income tax benefit would have been $3,000 and therefore, the net loss was $14,000.  The gross minority interest in hedging valuations for the second quarter of 2002 was $8,000.   The gross unrealized holding gains on securities for the second quarter of 2003 was $925,000, the income tax expense would have been $326,000 and therefore, the net gain was $599,000.  The gross reclassification adjustment for the second quarter of 2003 was $225,000, the income tax expense would have been $80,000 and therefore, the net gain was $145,000.  The gross unrealized holding losses on securities for the second quarter of 2002 was $916,000, the income tax benefit would have been $318,000 and therefore, the net loss was $598,000. The gross reclassification adjustment for the second quarter of 2002 was $26,000, the income tax expense would have been $9,000 and therefore, the net gain was $17,000.

There was no hedging valuation in the six month period ended June 30, 2003.  The gross unrealized losses in hedging valuation for the six month period ended June 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 six month period ended June 30, 2002 was $22,000.  The gross unrealized holding gains on securities for the six month period ended June 30, 2003 was $184,000, the income tax expense would have been $65,000 and therefore, the net gain was $119,000.  The gross reclassification adjustment in the six month period ended June 30, 2003 was $816,000, the income tax expense would have been $289,000 and therefore, the net reclassification adjustment was $527,000.  The gross unrealized holding losses on securities for the six month period ended June 30, 2002 was $814,000, the income tax benefit would have been $298,000 and therefore, the net loss was $516,000.  The gross reclassification adjustment in the six month period ended June 30, 2002 was $45,000, the income tax expense would have been $16,000 and therefore, the net reclassification adjustment was $29,000.

(6) Cash Dividend

On July 23, 2003 HMN's Board of Directors announced a cash dividend of $0.20 per share, payable on September 11, 2003 to stockholders of record on August 28, 2003.



(7) Investment in Limited Partnerships

Investments in limited partnerships were as follows:

Primary partnership activity

June 30, 2003

December 31, 2002Mortgage servicing rights
$
0

349,577Common stock of financial institutions

328,660

289,398Low to moderate income housing

208,946

223,691$
537,606

862,666


During the second quarter of 2003 HMN's proportionate gains from common stock investments in financial institutions was $38,027 and it recognized $6,500 of losses on the low income housing partnerships. During 2003 HMN anticipates receiving low income housing credits totaling $84,000, of which $21,000 were credited to current income tax benefits.  During the second quarter of 2002 HMN's proportionate loss from a mortgage servicing partnership was $50,785, its proportionate share of gains from the common stock investments in financial institutions was $5,339 and it recognized $6,500 of losses on the low income housing partnerships. During 2002 HMN received low income housing credits totaling $84,000, of which $21,000 were credited to income tax benefits in the second quarter of 2002.

During the six-month period ended June 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 $39,263 and it recognized $13,000 of losses on the low income housing partnerships. During 2003 HMN anticipates receiving low income housing credits totaling $84,000, of which $42,000 were credited to current income tax benefits.  During the six-month period ended June 30, 2002 HMN's proportionate gain from a mortgage servicing partnership was $330,858, its proportionate share of gains from common stock investments in financial institutions was $23,573 and it recognized $27,456 of losses on the low income housing partnerships. During 2002 HMN received low income housing credits totaling $84,000, of which $42,000 were credited to current income tax benefits.

(8) Investment in Mortgage Servicing Rights

A summary of mortgage servicing activity is as follows:

Six Months ended 
June 30, 2003

Twelve Months ended
December 31, 2002

Six Months ended 
June 30, 2002Mortgage servicing rightsBalance, beginning of period
$
2,701,031

1,922,736

1,922,736Originations

1,438,635

1,956,845

850,643Sales

0

(41,532)

0Amortization

(881,714)

(1,137,018)

(385,267)Balance, end of period

3,257,952

2,701,031

2,388,112Valuation reserveBalance, beginning of period

(10,000)

(19,100)

(19,100)Additions

(800,000)

(213,000)

0Reductions

0

222,100

13,600Balance, end of period

(810,000)

(10,000)

(5,500)Mortgage servicing rights, net
$
2,447,952

2,691,031

2,382,612Fair value of mortgage servicing rights
$
2,447,952

2,691,031

2,536,000


Mortgage servicing costs, which include professional services for valuing mortgage servicing rights, were $216,917 at June 30, 2003, and $10,639 and $29,344 for the six and twelve months ended in June and December 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 June 30, 2003.

Loan Principal 
Balance

Weighted Average
Interest Rate

Weighted Average Remaining Term

Number of LoansOriginal term 30 year fixed rate
$
160,876,000

6.31
%
347

1,530Original term 15 year fixed rate

223,935,000

5.66
%
165

2,758Seven year balloon

123,000

5.75
%
67

1Adjustable rate

11,502,000

4.98
%
350

93


(9) Intangible Assets

The gross carrying amount of intangible assets and the associated accumulated amortization at June 30, 2003 is presented in the table below. Amortization expense for intangible assets was $497,229 for the second quarter of 2003 and $937,315 for the six months ended June 30, 2003.



Gross





UnamortizedCarrying

Accumulated

Valuation

IntangibleAmount

Amortization

Adjustment

AssetsAmortized intangible assets:Mortgage servicing rights
$
5,417,864

(2,159,912)

(810,000)

2,447,952Core deposit intangible

1,567,000

(1,061,270)

0

505,730Total
$
6,984,864

(3,221,182)

(810,000)

2,953,682


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



Mortgage

CoreServicing

DepositRights

Intangible

TotalSix months ended December 31, 2003


338,534

55,600

394,134Year ended December 31,2004


568,877

113,857

682,7342005


449,662

113,857

563,5192006


355,103

113,857

468,9602007


280,148

108,559

388,7072008


233,954

0

233,954


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

(10)

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 June 30,

Six Months Ended June 30,2003

2002

2003

2002Weighted average number of common shares outstanding

  used in basic earnings per common share calculation

3,763,325

3,748,052

3,755,511

3,740,500Net dilutive effect of:Options

175,170

223,398

166,854

209,038Restricted stock awards

0

12

0

73Weighted average number of shares outstandingAdjusted for effect of dilutive securities

3,938,495

3,971,462

3,922,365

3,949,611Income available to common shareholders
$
2,030,228

1,268,039

3,419,768

3,236,011Basic earnings per common share
$
0.54

0.34

0.91

0.87Diluted earnings per common share
$
0.52

0.32

0.87

0.82




(11) 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 June 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 June 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 June 30, 2003 the Bank's tangible assets and adjusted total assets were $774.7 million and its risk-weighted assets were $598.8 million. The following table presents the Bank's capital amounts and ratios at June 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.

|                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                 
|                                                                                                                                                                                 
|(in thousands)                                                                                                                                                                   
|                                                                                                                                                                                 
|Bank stockholder's equity                                                                                                                                                        
|Plus:
  
Net unrealized loss on certain securities 
     available for sale                                                                                                      
|Less:                                                                                                                                                                            
|Goodwill and other intangibles                                                                                                                                                   
|Excess mortgage servicing rights                                                                                                                                                 
|                                                                                                                                                                                 
|Tier I or core capital                                                                                                                                                           
|                                                                                                                                                                                 
|Tier I capital to adjusted total assets                                                                                                                                          
|Tier I capital to risk-weighted assets                                                                                                                                           
|Plus:
  
Allowable allowance for loan losses                                                                                                                                     
|                                                                                                                                                                                 
|Risk-based capital                                                                                                                                                               
|                                                                                                                                                                                 
|Risk-based capital to risk- weighted 
    assets                                                                                                                                 
|(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 June 30, 2003 but is not reflected in the table above.



(12) 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 nine months and totaled approximately $2.2 million at June 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.

(13) 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 
June 30, 2003

Quarter Ended 
June 30, 2002

Six Months Ended
June 30, 2003

Six Months Ended
June 30, 2002Net income:As reported:
$
2,030,228

1,268,039

3,419,768

3,236,011Deduct:  Total stock-based employeecompensation expense determinedunder fair value based method for allawards, net of related tax effects

10,128

10,524

20,256

21,048Pro forma

2,020,100

1,257,515

3,399,512

3,214,963Earnings per common share:As reported:Basic
$
0.54

0.34

0.91

0.87Diluted

0.52

0.32

0.87

0.82Pro forma:Basic

0.54

0.34

0.91

0.86Diluted

0.51

0.32

0.87

0.81


(14) 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 determining reportable segments and therefore are included in the "Other" category.

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

(Dollars in thousands)

Home Federal Savings Bank


Other

Eliminations

Consolidated TotalAt or for the quarter ended June 30, 2003:Interest income - external customers
$
10,989


47

0

11,036Non-interest income - external customers

2,493


167

0

2,660Earnings (loss) on limited partnerships

(7)


38

0

31Intersegment interest income

1


9

(10)

0Intersegment non-interest income

239


1,904

(2,143)

0Interest expense

5,118


0

(10)

5,108Amortization of mortgage servicing rights,     net valuation adjustments, and servicing costs

1,176


0

(68)

1,108Other non-interest expense

4,028


132

(87)

4,073Income tax expense

914


4

0

918Net income

1,989


2,029

(1,988)

2,030Goodwill

3,801


0

0

3,801Total assets

780,760


77,658

(72,508)

785,910Net interest margin

3.22 %


NM

NM

3.24%Return on average assets

1.00 %


NM

NM

1.06%Return on average realized common equity

10.97 %


NM

NM

10.45%At or for the quarter ended June 30, 2002:Interest income - external customers
$
10,418


93

0

10,511Non-interest income - external customers

1,223


21

0

1,244Earnings on limited partnerships

(58)


6

0

(52)Intersegment interest income

99


0

(99)

0Intersegment non-interest income (expense)

(19)


1,216

(1,197)

0Interest expense

5,328


0

(99)

5,229Amortization of mortgage servicing rights,    net valuation adjustments, and servicing costs

230


0

(59)

171Other non-interest expense

4,369


147

(162)

4,354Income tax expense

593


(107)

0

486Minority interest

(115)


0

0

(115)Net income

1,028


1,216

(976)

1,268Goodwill

3,801


0

0

3,801Total assets

716,278


74,124

(96,729)

693,673Net interest margin

3.04%


NM

NM

3.17%Return on average assets

0.71%


NM

NM

0.72%Return on average realized common equity

8.00%


NM

NM

6.75%NM - Not meaningfulHome Federal Savings Bank


Other

Eliminations

Consolidated Total(Dollars in thousands)At or for the six months ended June 30, 2003:Interest income - external customers
$
21,410



97

0

21,507Non-interest income - external customers

5,419



167

0

5,585Earnings (loss) on limited partnerships

(362)



39

0

(323)Intersegment interest income

28



22

(50)

0Intersegment non-interest income

508



3,289

(3,797)

0Intersegment loan loss provision

200



0

(200)

0Interest expense

10,108



0

(50)

10,058Amortization of mortgage servicing rights, net     valuation adjustments, and servicing costs

2,039



3

(143)

1,899Other non-interest expense

8,395



265

(165)

8,495Income tax expense (benefit)

1,613



(71)

0

1,542Net income

3,292



3,417

(3,289)

3,420Goodwill

3,801



0

0

3,801Total assets

780,760



77,658

(72,508)

785,910Net interest margin

3.20 %



NM

NM

3.22%Return on average assets

0.88 %



NM

NM

0.91%Return on average realized common equity

9.63 %



NM

NM

8.84%At or for the six months ended June 30, 2002:Interest income - external customers
$
21,451



201

0

21,652Non-interest income - external customers

3,083



46

0

3,129Earnings (loss) on limited partnerships

303



24

0

327Intersegment interest income

415



0

(415)

0Intersegment non-interest income

261



3,079

(3,340)

0Interest expense

11,334



0

(415)

10,919Amortization of mortgage servicing rights, net    valuation adjustments, and servicing costs

473



0

(91)

382Other non-interest expense

8,331



286

(328)

8,289Income tax expense (benefit)

1,476



(150)

0

1,326Minority interest

(74)



0

0

(74)Net income

3,023



3,134

(2,921)

3,236Goodwill

3,801



0

0

3,801Total assets

716,278



74,124

(96,710)

693,723Net interest margin

3.13%



NM

NM

3.20%Return on average assets

0.90%



NM

NM

0.92%Return on average realized common equity

10.22%



NM

NM

8.79%NM - Not meaningful


---



Item 2:

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



Forward-looking Information

This quarterly report and other reports filed with the Securities and Exchange Commission may contain "forward-looking" statements that deal with future results, plans or performance. In addition, HMN's management may make such statements orally to the media, or to securities analysts, investors or others. Forward looking statements deal with matters that do not relate strictly to historical facts. HMN's future results may differ materially from historical performance and forward-looking statements about HMN's expected financial results or other plans are subject to a number of risks and uncertainties. These include but are not limited to possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; reduced demand for financial services and loan products; changes in accounting policies and guidelines, or monetary and fiscal policies of the federal government; changes in credit and other risks posed by HMN's loan and investment portfolios; technological, computer-related or operational difficulties; adverse changes in securities markets; results of litigation or other significant uncertainties.

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, earnings or losses on limited partnership investments, 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 single family and commercial properties, 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.  The interest rates charged by the FHLB on advances to the Bank also have a significant impact on the Bank's overall cost of funds.

Critical Accounting Policies

Critical accounting policies are those policies that management believes are the most important to the portrayal of the company's financial condition and operating results that require difficult, subjective, or complex judgment. These judgments are often the result of the need to make estimates about the effect of matters that are inherently uncertain and therefore actual results could differ significantly from the estimates used.  Management considers the following items to be the critical accounting policies of HMN.

Allowance for Loan Losses and Related Provision

The allowance for loan losses is based on periodic analysis of the loan portfolio by management. In this analysis, management considers factors including, but not limited to, specific occurrences that include loan impairment, changes in the size of the portfolios, general economic conditions, loan portfolio composition, and historical experience.  The allowance for loan losses is established for known problem loans, as well as for loans which are not currently known to require specific allowances.  Loans are charged off to the extent they are deemed to be uncollectible.  The adequacy of the allowance for loan losses is dependent upon management's estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans.  Such estimates, appraisals, evaluations and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers or properties. The estimates are reviewed periodically and adjustments, if any, are recorded in the provision for loan losses in the periods in which the adjustments become known.  Although management believes that the allowance for loan losses is maintained at an amount considered adequate to provide for probable loan losses inherent in the portfolio as of the balance sheet dates, future adjustments to the provision for loan losses may be necessary if conditions differ substantially from those in the assumptions used to determine the allowance for loan losses.

Mortgage Servicing Rights

Mortgage 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

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary

Net Income

HMN's net income was $2.0 million for the second quarter of 2003, an increase of $762,000, or 60.1%, from net income of $1.3 million for the second quarter of 2002.  Basic earnings per share were $0.54 for the quarter ended June 30, 2003, an increase of $0.20 per share, from $0.34 basic earnings per share for the same quarter of 2002.  Diluted earnings per common share for the second quarter of 2003 were $0.52, an increase of $0.20 per share, from $0.32 diluted earnings per share for the second quarter of 2002.

Net income was $3.4 million for the six month period ended June 30, 2003, an increase of $184,000, or 5.7%, compared to net income of $3.2 million for the six month period ended June 30, 2002.  Basic earnings per share were $0.91 for the six months ended June 30, 2003, an increase of $0.04, or 4.6%, from $0.87 for the same six month period in 2002.  Diluted earnings per share for the six month period in 2003 were $0.87, an increase of $0.05, or 6.1%, from $0.82 for the same six month period in 2002.

Net Interest Income

Net interest income was $5.9 million for the second quarter of 2003, an increase of $645,000, or 12.2%, compared to $5.3 million for the second quarter of 2002.  Interest income was $11.0 million for the second quarter of 2003, an increase of $525,000, or 5.0%, from $10.5 million for the same period in 2002.  Interest income increased primarily because of an increase in interest earning assets and because of a change in the mix of assets between the periods.  The increase in interest earning assets was caused primarily by the $160 million increase in commercial real estate and commercial business loans between the periods.   The increase in interest income on the loan portfolio was partially offset by a decrease in investment income due to a decrease in outstanding investment balances and because of prepayments received on some mortgage backed securities that required the premium amortization on those investments to be accelerated.  Interest expense was $5.1 million for the second quarter of 2003, a decrease of $120,000, or 2.3%, compared to $5.2 million for the same quarter in 2002.  Interest expense decreased primarily because of a decrease in the interest rates paid on deposit accounts and because of a $28 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 second quarter of 2003 was 3.24%, a 7 basis point increase, compared to 3.17% for the second quarter of 2002.

Net interest income for the six month period ended June 30, 2003 was $11.4 million, an increase of $716,000, or 6.7%, compared to $10.7 million for the same six month period in 2002.  Interest income was $21.5 million for the six month period ended June 30, 2003, a decrease of $145,000, or 0.7%, from $21.7 million for the same six month period in 2002.  Interest income declined due to a reduction in interest rates on loans and investments between the periods which was almost entirely offset by the increased interest income on the $40.6 million increase in interest earning assets between the periods.  Interest expense was $10.1 million for the six month period ended June 30, 2003, a decrease of $861,000, or 7.9%, from $10.9 million for the same six month period in 2002.  Interest expense declined due to a decrease in the interest rates paid on deposit accounts between the periods and because of the increase in checking and money market account balances, which generally have lower interest rates than other deposit accounts

Net interest margin (net interest income divided by average interest earning assets) for the six months ended June 30, 2003, was 3.22%, an increase of 2 basis points, compared to 3.20% for the same period of 2002.

Provision for Loan Losses



The provision for loan losses for the second quarter ended June 30, 2003 was $490,000, an increase of $180,000, or 58.1%, compared to $310,000 for the second quarter of 2002.  The provision for loan losses for the six months ended June 30, 2003 was $1.4 million, an increase of $325,000, or 31.6% compared to $1.0 million for the same six month period in 2002.  The provision for loan losses increased primarily due to the $74 million in growth that was experienced in the commercial and consumer loan portfolios during the first six months of 2003.  Commercial and consumer loans 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 composition of the loan portfolio, the historical level of non-performing loans, loan charge-off experience, and its assessment of the general economic conditions in the geographic area where properties securing the loan portfolio are located such as national and regional unemployment data, local single family construction permits and local economic growth rates.  Management's evaluation of probable losses inherent in the loan portfolio revealed conditions that resulted in increasing the 2003 loan loss provision compared to the provision for 2002. HMN will continue to monitor its allowance for losses as conditions dictate.  Future economic conditions and other unknown factors will impact the need for future provisions for loan losses.  As a result, no assurances can be given that increases in the allowance for loan losses will not be required during future periods

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

2003
      2002Balance at January 1,
      $4,824,217
      $ 3,783,112Provision
      1,355,000
      1,030,000Charge-offs
      (123,976	)
      (709,737)Recoveries
      33,228
      5,445Balance at June 30,
      $6,088,469
      $4,108,820


Non-Interest Income

Non-interest income was $2.7 million for the second quarter of 2003, an increase of $1.5 million, or 125.9%, from $1.2 million for the same period in 2002.  Non-interest income increased by $1.0 million due to an increase in the gains recognized on the sale of single family residential loans as consumers took advantage of the low mortgage interest rates to purchase a home or refinance their existing home mortgage.  Non-interest income also improved by $198,000 due to increased gains recognized on the sale of securities as securities were sold to fund a portion of the loan growth during the period.  Fees and service charges increased by $165,000 between the periods due to an overdraft protection program that was implemented during the second quarter of 2003 and because of increases in the fees charged and the number of deposit accounts.  Mortgage servicing fees increased by $62,000 as more loans are being serviced in 2003.  Non-interest income also increased by $32,000 due to an increase in the earnings in limited partnerships between the periods, primarily because of losses in the second quarter of 2002 on the limited partnership that invests in mortgage servicing rights.  The value of servicing rights generally decreases when mortgage rates decrease because of the anticipated increase in prepayments expected to be received on the mortgage servicing assets.  HMN was informed by the general partner that no liquidation distributions would be made to the limited partners when the servicing assets from this limited partnership are sold because of the decreased value of the servicing.  Therefore, the investment balance of this limited partnership was reduced to zero at March 31, 2003.

Non-interest income was $5.3 million for the first six months of 2003, an increase of $1.8 million, or 52.3%, from $3.5 million for the same period in 2002.  Non-interest income increased by $1.4 million due to increased gains on the sale of single family loans.  Low mortgage rates during the first six months of 2003 resulted in higher loan originations when compared to the first six months of 2002. Gains on the sale of securities increased by $770,000 during the period as investments were sold to fund a portion of the loan growth that was experienced during the first six months of 2003.  Fee and service charge income increased by $193,000 between the two periods due to an increase in the fees charged, services offered, and the number of deposit accounts.  Mortgage servicing fees increased by $118,000 between the periods because more loans were being serviced.  These increases in non-interest income were partially offset by a $323,000 decrease in earnings from limited partnerships.  Interest rates on mortgage loans decreased during the first six months of 2003 which caused the value of HMN's investment in a limited partnership that owns mortgage loan servicing assets to decrease in value. For a further discussion of the effect of decreasing interest rates on the valuation of the limited partnership, refer to the preceding paragraph.

Non-Interest Expense

Non-interest expense was $5.2 million for the second quarter of 2003, an increase of $655,000, or 14.5%, from $4.5 million for the same period in 2002.  Amortization of mortgage servicing rights increased by $937,000 primarily due to a $640,000 impairment reserve that was established and because of increased amortization of mortgage servicing rights on single family loans that prepaid during the quarter.  Other operating expenses decreased by $241,000 primarily due to a decrease in expenses related to the mortgage banking operation in Brooklyn Park, Minnesota which was phased out in the second half of 2002.

Non-interest expense was $10.4 million for the first six months of 2003, an increase of  $1.7 million, or 19.9%, from $8.7 million for the same period in 2002.  The increase was primarily the result of a $1.5 million increase in the amortization of mortgage servicing rights caused by record loan prepayments during the first six months of 2003 and because of an $800,000 impairment reserve established on the servicing portfolio during the period.  Compensation and benefit expense increased by $287,000 due to costs associated with a separation agreement with a former executive officer and because of annual payroll and health insurance cost increases.  Occupancy increased by $184,000 due to the increased number of facilities maintained during the six month period in 2003.

Income Tax Expense

Income tax expense was $918,000 for the second quarter of 2003, an increase of $433,000 compared to $485,000 for the second quarter of 2002.  Income tax expense was $1.5 million for the six months ended June 30, 2003, an increase of $217,000 compared to $1.3 million for the same six month period of 2002.  The increases in income taxes are 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 June 30, 2003 and December 31, 2002.



June 30,


December 31,(Dollars in Thousands)

2003


2002Non-Accruing LoansOne-to-four family real estate
$
1,448


695Commercial real estate

2,600


1,719Consumer

736


495Commercial business

689


427Total

5,473


3,336Accruing loans delinquent 90days or more

114


171Other assets

600


866Foreclosed and Repossessed AssetsOne-to-four family real estate

658


300Consumer

80


127Commercial business

43


107Total non-performing assets
$
6,968

$
4,907Total as a percentage of total assets

0.89
%

0.67
%Total non-performing loans
$
5,587

$
3,507Total as a percentage of totalloans receivable, net

0.92
%

0.66
%Allowance for loan loss to non-performing loans

108.97
%

134.60
%


Total non-performing assets at June 30, 2003 were $7.0 million, an increase of $2.1 million, or 42.0%, from $4.9 million at December 31, 2002.

Dividends

On July 23, 2003 HMN declared a cash dividend of $0.20 per share, payable on September 11, 2003 to shareholders of record on August 28, 2003.

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

|Record date       | Pay date      | Dividend per share | Dividend Payout Ratio
|----------------- | ------------- | ------------------ | ---------------------
|February 21, 2003 | March 7, 2003 | $0.18              | 64.29%               
|May 23, 2003      | June 9, 2003  | $0.18              | 50.00 %              

The annualized dividend payout ratio for the past four quarters, ending with the September 11, 2003 payment will be 53.62%.



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 six months ended June 30, 2003 the net cash provided by operating activities was $10.3 million.  HMN collected $38.7 million from the sale of securities and $23.3 million from principal repayments on securities.  It purchased securities available for sale of $46.5 million and premises and equipment of $634,000.  Net loans receivable increased by $77.8 million due to increased loan production.  HMN had a net increase in deposit balances of $30.2 million and received FHLB advance proceeds of $116.0 million for the six-month period.  It paid out $99.0 million on FHLB advances and $87,000 on advance payments from borrowers for taxes and insurance.  HMN received $876,000 related to the exercise of HMN stock options.  HMN purchased $1.4 million of its own stock and paid $1.4 million in dividends to its shareholders.

HMN has certificates of deposits with outstanding balances of $130.4 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 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 2003 but have call features that can be exercised by the FHLB during the next 12 months.  If the call features are exercised, HMN has the option of requesting any advance otherwise available to it pursuant to the Credit Policy of the FHLB.  HMN also has $30.4 million of FHLB advances that will mature during the next 12 months.  Since HMN has the ability to request another advance to replace the advance that is being called or is maturing, management does not anticipate that it will have a liquidity problem due to advances being called by the FHLB during the next 12 month period.



Market Risk

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

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

HMN utilizes a model which uses the discounted cash flows from its interest-earning assets and its interest-bearing liabilities to calculate the current market value of those assets and liabilities.  The model also calculates the changes in market value of the interest-earning assets and interest-bearing liabilities due to different interest rate changes.   HMN believes that over the next twelve months interest rates could conceivably fluctuate in a range of 200 basis points up or 100 basis points down from where the rates were at June 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 June 30, 2003.



|                                                                                     
|-------------------------------------------------------------------------------------
|Other than trading portfolio                                                         
|(Dollars in thousands)                                                               
|Basis point change in interest rates                                                 
|                                                                                     
|Cash and cash equivalents                                                            
|Securities available for sale:                                                       
|Fixed-rate CMOs                                                                      
|Variable-rate CMOs                                                                   
|Fixed-rate available for sale mortgage-backed     and related securities				#9;			#9;
|Variable-rate available for sale mortgage- backed and related securities             
|Fixed-rate available for sale other marketable securities                            
|Variable-rate available for sale other marketable securities                         
|Federal Home Loan Bank stock                                                         
|Loans held for sale                                                                  
|Loans receivable, net:                                                               
|Fixed-rate real estate loans                                                         
|Variable-rate real estate loans                                                      
|Fixed-rate other loans                                                               
|Variable-rate other loans                                                            
|Mortgage servicing rights, net                                                       
|Investment in limited partnerships                                                   
|                                                                                     
|Total market risk sensitive assets                                                   
|                                                                                     
|NOW deposits                                                                         
|Passbook deposits                                                                    
|Money market deposits                                                                
|Certificate deposits                                                                 
|Federal Home Loan Bank:                                                              
|Fixed-rate advances                                                                  
|Variable-rate advances                                                               
|                                                                                     
|Total market risk sensitive liabilities                                              
|                                                                                     
|Off-balance sheet financial instruments:                                             
|Commitments to extend credit                                                         
|Commitments to sell or deliver loans                                                 
|                                                                                     
|Net market risk                                                                      
|                                                                                     
|Percentage change from current market value                                          
|                                                                                     



The preceding table was prepared utilizing the following assumptions (the "Model Assumptions") regarding prepayment and decay ratios that 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 9% 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 18% and 30%, depending on the note rate and the period to maturity.  Growing Equity Mortgage (GEM) loans

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 June 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 in Basis Points
      Net Interest Income
      Percentage Change+200
      25,021
      7.05	%	9;+100	9;
      24,544
      5.01	%	9;0
      23,373
      0.00	%	9;-100	9;
      21,374
      (8.55)	%	9;


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

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

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

In managing its asset/liability mix, the Bank, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place more emphasis on managing net interest 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 portfolio 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 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.

Item 4: Controls and Procedures

Evaluation 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 (the "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.



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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.

The Annual Meeting of Stockholders of the Company was held on April 22, 2003

at 10:00 a.m.



The following is a record of the votes cast in the election of directors of the Company:

Term expiring in 2006:

|                    | For       | Withhold
|------------------- | --------- | --------
|Michael McNeil      | 3,520,401 | 325,083 
|Mahlon C. Schneider | 3,625,764 | 219,720 
|Duane D. Benson     | 3,625,101 | 220,383 

There were 0 broker non-votes and 0 abstentions for each of the directors. Accordingly the individuals named above were declared to be duly elected directors of the Company for terms to expire as stated above.

The following is a record of the votes cast in respect of the proposal to ratify the appointment of KPMG LLP as the Company's auditors for the fiscal year ending December 31, 2003.

|                | NUMBER    | PERCENTAGE OF      
|--------------- | --------- | -------------------
|                | OF VOTES  | VOTES ACTUALLY CAST
|FOR             | 3,689,421 | 95.94%             
|AGAINST         | 149,498   | 3.88%              
|ABSTAIN         | 6,565     | 0.17%              
|BROKER NON-VOTE | 0         | 0.00%              

Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Company.



ITEM 5.	Other Information.

None.

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

(a)  Exhibits.  See Index to Exhibits on page 29 of this report

1. Reports on Form 8-K -

1)

2)

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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:  August 13, 2003    | By:	/s/ Michael McNeil         
|                          | Michael McNeil, 						President
|                          | (Principal Executive Officer)  
|                          |                                
|Date:  August 13, 2003	9; | By: /s/ Jon Eberle             
|                          | Jon Eberle,                    
|                          | Interim Chief Financial Officer
|                          | (Principal Financial Officer)  

---



HMN FINANCIAL, INC.



INDEX TO EXHIBITS

FOR FORM 10-Q

|Regulation S-KExhibit Number | Document	Attached Hereto                                                          | Reference	
    to Prior
    Filing or 
    Exhibit
    NumberForm 10-Q | Sequential
 Page Numbering
 Where Attached
 Exhibits Are
  	Located in This
  	Report
|---------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|3.1                          | Amended and Restated Articles of Incorporation                                    | *1	9;                                                                  | N/A                                                                                  
|3.2                          | Amended and Restated By-laws	9;                                                   | *2                                                                     | N/A                                                                                  
|4	9;                         | Form of Common Stock		Including indentures                                        | *3	9;                                                                  | N/A                                                                                  
|31.1                         | Certification Pursuant to Section 302 of 		Sarbanes-Oxley by Michael McNeil       | 31.1	9;                                                                | Filed electronically                                                                 
|31.2                         | Certification Pursuant to Section 302 of 		Sarbanes-Oxley by Jon Eberle           | 31.2                                                                   | Filed electronically                                                                 
|32                           | Certification Pursuant to 18 U.S.C. Section 1350 by Michael McNeil and Jon Eberle | 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).

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