HMN Financial, Inc.

November 26, 2002

Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary

Re: File No. S7-40-02

Dear Mr. Katz:

This letter responds to the request of the Securities and Exchange Commission (the "Commission") for comments on the proposed definition of "Financial Expert" pursuant to Section 407 of the Sarbanes-Oxley Act of 2002 (the "Act"). We are a stock savings bank holding company located in Rochester, Minnesota with approximately $700,000,000 in assets. Given the nature of our business, the size of our company and our location, we suggest that the Commission broaden the proposed definition of Financial Expert to avoid inadvertently excluding audit committee members who are able to ensure that the goals of the Act are met but who otherwise do not possess all the required attributes outlined in the proposed definitions.

Public Company Experience

The Commission stated that a Financial Expert should have experience preparing or auditing financial statements of public companies "because a person with experience as a principal financial officer or principal accounting officer of a private company may not have been exposed to the reporting requirements of public companies." Although principal financial officers and principal accounting officers of private institutions may not understand all of the reporting requirements of a public company, many such officers understand the goal of an audit committee to assess (i) whether the financial statements fairly present the financial condition, results of operations and cash flows of the company in accordance with generally accepted accounting principles and (ii) whether the financial statements and other financial information, taken together, fairly present the financial condition, results of operations and cash flows of the company. The ability of any officer to understand these goals through extensive experience with a sophisticated private client should qualify such an officer to be a Financial Expert. Certain financial officers with a strong understanding of generally accepted accounting principles and past experience at similar sized private bank holding companies would be able to grasp quickly the reporting requirements of public companies, despite the lack of direct experience.

Another concern of the Commission is the ability of the Financial Expert to critically review and evaluate Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The MD&A tells the story of our company and where it is headed. A useful Financial Expert for the purposes of our MD&A would understand the local economic climate, and how that environment affects the present results of our company, as well as the trends going forward. Our business and customers are primarily located in the rural areas of southern Minnesota and northern Iowa, and only a few public companies in our industry exist in this region. As a result, our search for a Financial Expert that meets the Commission's strict definition would require us to go outside of our normal business and customer region. If we searched for a Financial Expert outside of our regional area, we would gain public company experience at the expense of regional expertise.

The "public company" requirement excludes private company experience gained through a thorough oversight of the work of outside auditors, evaluation of the adequacy of the company's internal controls and procedures and assessment of the overall adequacy and completeness of the company's financial statements and other financial information. We acknowledge that the principal financial officer of a small private company may not have sufficient expertise to constitute a Financial Expert, but we believe that the definition of Financial Expert should fall short of requiring experience with a public company. Perhaps the Commission could recommend, but not require, officers to have public company experience.

Attributes of the Financial Expert

The proposed definition requires that potential Financial Experts have five attributes related to their education and experience. While we acknowledge that those individuals possessing the five attributes would constitute Financial Experts, we suggest that the five attributes may exclude other officers and directors who possess the education and experience necessary to protect against abuses of the public company requirements. In addition, requiring a Financial Expert to possess all of the attributes ignores the fact that two or three members of an audit committee could collectively possess all of the required attributes.

With respect to the question of whether a Financial Expert should have direct experience preparing or auditing financial statements, we favor the language requiring the Financial Expert to have experience reviewing or analyzing financial statements. First, the preparation of financial statements may have been merely a mechanical experience for the officer. Preparation may contribute to, but it does not act as a substitute for, a working knowledge of the concepts to be conveyed by the financial statements.

Second, audit committee members have a duty to monitor accountants, it is not their job to ensure perfect accounting as do those who prepare and audit financial statements. Because a Financial Expert assumes the role of overseer, the Commission should recognize that reviewing and analyzing expertise is sufficient. For example, an audit committee member of a bank holding company that is a reporting company may fully understand how and when loan loss reserves are used to improperly "manage earnings," but have no experience in preparing or auditing financial statements. If the Commission does not believe that reviewing or analyzing expertise is sufficient, then it should at least incorporate the idea that supervision of the preparation or auditing of financial statements can meet the required attribute.

Two additional attributes also impose practical limitations upon the persons who can qualify as a Financial Expert for a particular company. One requires experience applying generally accepted accounting principles in connection with the accounting for estimates, accruals and reserves that "are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements" (emphasis added). The other requires experience "preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements" (emphasis added).

Under the proposed rule, an individual who served as the principal financial officer or auditor in one type of industry may not necessarily qualify as a Financial Expert for a company in another industry. Given the size of our company, we may not be able to attract an individual with bank holding company experience generally comparable to our company without hiring the officer or director of a direct or indirect competitor. Such a requirement would probably require a job search for the position located outside of our geographic area. This poses problems for a couple of reasons. First, it is costly for a company of our size, and second, our audit committee members are often selected from local communities that experience the same economic climate in which our business operates.

Our final comment with respect to the attributes concerns the requirement that a Financial Expert possess all of the attributes. We believe few companies of our size have a person who possesses all such qualities. As a possible solution, we suggest that two or three members of an audit committee could combine their attributes, so that a subset of the audit committee could qualify for the definition of Financial Expert.

Factors to Consider

The list of factors that a company should consider in assessing a potential Financial Expert's qualifications is a constructive mechanism for allowing the board of directors flexibility to make a determination whether a potential Financial Expert has the necessary attributes. However, we feel the list could be broadened to account for more diverse experience by the potential Financial Expert or the Audit Committee as a whole.

The factors closely follow the requirements regarding education and experience as well as the various attributes. Of the ten factors, four involve experience with the financial statements of public companies. We suggest that these four factors be combined into one or two separate factors. For example, the factor asking whether a person has served as a principal financial officer or principal accounting officer while the company was a public company could be combined with the factor regarding a person's level of familiarity and experience with the preparation of financial statements for public companies. Presumably, a great degree of overlap exists between the two factors as currently drafted.

The request for comments also offered an opportunity to suggest additional factors to the list. We propose that the list include whether and to what degree, the potential Financial Expert has experience with governmental agencies that scrutinize the financial statements and underlying financial condition of the company. Such experience could be as an employee of a regulatory agency, or as an officer or director of a company subject to such a regulatory agency. Bank holding companies and their subsidiaries are already subject to regulation by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency or the Office of the Thrift Supervision, and the Federal Deposit Insurance Corporation. A Financial Expert for a bank holding company would be able to transfer skills developed while working for or with any such regulatory agency to the requirements of a public company.

Financial Disclosure

According to the proposed rule, if we do not find a person who meets the company's criteria for board membership and also qualifies as a Financial Expert, we will be forced to disclose that fact and the reason we were unable to obtain a Financial Expert. Despite our best efforts to disclose the difficult nature of complying with the Financial Expert requirement and to reassure investors that our audit committee possesses the necessary expertise to assess the adequacy of financial statements and financial statement disclosures even without a Financial Expert, we believe such disclosure will be viewed negatively by the investing public. In all likelihood, investors will only notice that we have no Financial Expert, and not grasp the difficulty and cost of obtaining such an expert nor appreciate the value of diversified expertise of the audit committee as a whole . We suggest that the Commission remove the potential negative disclosure requirement altogether and replace it with a positive discussion of the overall expertise of the audit committee, including any Financial Expert that may serve on the committee.


We appreciate the opportunity to submit comments on the definition of Financial Expert before the Final Rule has been adopted. We may be reached at the above address or by telephone at (507) 535-1200 if the Commission of the Staff would like to discuss our comments.

Very truly yours,

Timothy R. Geisler
Chairman of the Board and
Chairman of the Audit Committee