UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
          -------------------------------------------------------------

                                    FORM 10-Q

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

     For the quarterly period ended June 30, 1999

                                       OR

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

     For the transition period from _________ to _________

                         Commission File Number 0-24100

                                   HMN FINANCIAL, INC.

        -------------------------------------------------------------------
             (Exact name of Registrant as specified in its Charter)

                  Delaware                                       41-1777397

       -----------------------------                 --------------------------
--
     (State or other jurisdiction of                  (I.R.S. Employer
     incorporation or organization)                    Identification Number)

     101 North Broadway, Spring Valley, Minnesota      55975-0231
     --------------------------------------------------    ------------
           (Address of principal executive offices)         (ZIP Code)

Registrant's telephone number, including area  code:     (507) 346-1100
                                                        ----------------
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
     Yes /X/   No / /

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

               Class                           Outstanding at August 5, 1999
 ------------------------------------          ------------------------------
Common stock, $0.01 par value                             5,011,703

                                     1
<PAGE>
<PAGE>
                               HMN FINANCIAL, INC.

                                    CONTENTS

PART I - FINANCIAL INFORMATION
                                                               Page
                                                              ------
Item 1:   Financial Statements (unaudited)

               Consolidated Balance Sheets at
                  June 30, 1999 and December 31, 1998            3

               Consolidated Statements of Income for the
                  Three Months Ended and Six Months Ended
                  June 30, 1999 and 1998                         4

               Consolidated Statements of Comprehensive
                  Income for the Three Months and Six
                  Months Ended June 30, 1999 and 1998            5

               Consolidated Statement of Stockholders' Equity
                  for the Six Month Period Ended June 30, 1999   5

               Consolidated Statements of Cash Flows for
                  the Six Months Ended June 30, 1999 and 1998    6-7

               Notes to Consolidated Financial Statements        8

Item 2:   Management's Discussion and Analysis of Financial
             Condition and Results of Operations                 16

Item 3:   Quantitative and Qualitative Disclosures
            about Market Risk Discussion included in
            Item 2 under Market Risk                              20

PART II - OTHER INFORMATION

Item 1:   Legal Proceedings                                       27

Item 2:   Changes in Securities                                   27

Item 3:   Defaults Upon Senior Securities                         27

Item 4:   Submission of Matters to a Vote of Security Holders     27

Item 5:   Other Information                                       28

Item 6:   Exhibits and Reports on Form 8-K and Form 11-K          28

Signatures                                                        29
                                   2
<PAGE>
<PAGE>

PART I - FINANCIAL STATEMENTS

                      HMN FINANCIAL, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                   (unaudited)
<TABLE>
<CAPTION>

              ASSETS                  June 30,       December 31,
                                        1999            1998
                                   -------------    -------------
<S>                                <C>             <C>
Cash and cash equivalents        $   10,543,341        20,960,957
Securities available for sale:
   Mortgage-backed and related
    securities (amortized cost
    $111,702,277 and $144,320,926)  110,453,963       143,146,165
   Other marketable securities
     (amortized cost $75,034,116
      and $38,657,193)               72,886,769        38,478,623
                                   ------------     -------------
                                    183,340,732       181,624,788
                                   ------------     -------------

Loans held for sale                   6,721,778        13,094,528
Loans receivable, net               446,669,533       447,455,052
Accrued interest receivable           3,819,962         3,952,763
Federal Home Loan Bank stock,
 at cost                              9,837,900         9,837,900
Mortgage servicing rights, net        1,056,509         1,005,693
Real estate, net                         10,625            10,602
Premises and equipment, net           8,602,163         8,382,136
Investment in limited partnerships    2,792,773         2,437,246
Goodwill                              4,251,015         4,341,033
Core deposit intangible               1,143,023         1,259,245
Prepaid expenses and other assets       914,333           295,829
Deferred income taxes                   270,274                 0
                                   ------------      ------------
      Total assets               $  679,973,961       694,657,772
                                   ============      ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits                         $  416,192,060       433,868,907
Federal Home Loan Bank advances     192,400,000       185,400,000
Other borrowed money                          0         2,500,000
Accrued interest payable              1,287,959         1,086,013
Advance payments by borrowers for
  taxes and insurance                   682,003           657,089
Accrued expenses and other
 liabilities                          2,216,942         2,700,424
                                   ------------      ------------
      Total liabilities             612,778,964       626,212,433
                                   ------------      ------------
Commitments and contingencies
Stockholders' equity:
   Serial preferred stock:
    authorized 500,000 shares;
    issued and outstanding none               0                 0
   Common stock ($.01 par value):
    authorized 11,000,000;
    issued shares 9,128,662              91,287            91,287
   Additional paid-in capital        59,758,134        59,739,020
   Retained earnings, subject to
    certain restrictions             66,025,364        63,424,378
   Accumulated other comprehensive
    loss                             (2,087,394)        (837,838)
   Unearned employee stock ownership
     plan shares                     (5,608,499)      (5,705,152)
   Unearned compensation restricted
     stock awards                      (189,344)        (276,867)
   Treasury stock, at cost 4,058,058
    and 3,835,058 shares            (50,794,551)     (47,989,489)
                                   ------------      -----------
      Total stockholders' equity     67,194,997       68,445,339
                                   ------------      -----------
    Total liabilities and
     stockholders' equity          $679,973,961      694,657,772
                                   ============      ===========
</TABLE>
See accompanying notes to consolidated financial statements.
                                  3
<PAGE>
<PAGE>
                      HMN FINANCIAL, INC. AND SUBSIDIARIES
                        Consolidated Statements of Income
                                   (unaudited)
<TABLE>
<CAPTION>

                                Three Months Ended    Six Months Ended
                                    June 30,                June 30,
                               1999        1998        1999          1998
                            ----------------------- -----------------------
<S>                        <C>          <C>        <C>          <C>
Interest Income:
   Loans receivable         $8,763,487   8,797,708   17,407,061   17,440,080
   Securities available
    for sale:
     Mortgage-backed
      and related            1,674,934   2,158,639    3,624,430    4,377,337
     Other marketable        1,033,641   1,229,503    1,795,779    2,185,975
   Cash equivalents             34,679     110,623      131,231      271,947
   Other                       153,296     149,224      304,907      271,558
                            ----------  ----------  -----------   ----------
      Total interest income 11,660,037  12,445,697   23,263,408   24,546,897
                            ----------  ----------  -----------   ----------
Interest expense:
   Deposits                  4,521,261   5,721,279    9,143,280   11,424,803
   Federal Home Loan Bank
    advances                 2,597,437   2,454,631    5,138,758    4,539,097
   Other borrowed money              0           0        7,207            0
                            ----------  ----------  -----------   ----------
      Total interest expense 7,118,698   8,175,910   14,289,245   15,963,900
                            ----------  ----------  -----------   ----------
           Net interest
            income           4,541,339   4,269,787    8,974,163    8,582,997
Provision for loan losses       75,000      75,000      150,000      150,000
                            ----------  ----------  -----------   ----------
           Net interest income
            after provision
            for loan losses  4,466,339   4,194,787    8,824,163    8,432,997
                            ----------  ----------  -----------   ----------
Non-interest income:
   Fees and service charges    280,278     257,589      495,705      459,345
   Securities gains, net        23,332     737,632      162,770    1,634,079
   Gain on sales of loans      584,682     351,892    1,279,674      718,136
   Earnings (loss) in limited
    partnerships               345,527    (989,556)     362,594     (937,613)
   Other                        98,782     161,145      218,324      274,924
                            ----------  ----------  -----------   ----------
      Total non-interest
       income                1,332,601     518,702    2,519,067    2,148,871
                            ----------  ----------  -----------   ----------
Non-interest expense:
   Compensation and benefits 1,535,318   1,879,834    2,963,816    3,732,314
   Occupancy                   395,968     358,039      816,067      722,760
   Federal deposit
    insurance premiums          72,608      72,608      145,216      146,439
   Advertising                  84,045     135,972      153,841      228,953
   Data processing             176,836     164,503      361,548      338,558
   Amortization of mortgage
    servicing rights and net
    valuation adjustments      151,381     237,820      316,979      276,592
   Other                       575,437     593,683    1,168,016    1,218,867
                            ----------   ---------   ----------   ----------
      Total non-interest
       expense               2,991,593   3,442,459    5,925,483    6,664,483
                            ----------   ---------   ----------   ----------
      Income before income
       tax expense           2,807,347   1,271,030    5,417,747    3,917,385
Income tax expense           1,091,000     487,000    2,099,400    1,470,000
                            ----------   ---------   ----------   ----------
      Net income           $ 1,716,347     784,030    3,318,347    2,447,385
                            ==========   =========   ==========   ==========
Basic earnings per share   $      0.39        0.16         0.74         0.47
                            ==========   =========   ==========   ==========
Diluted earnings per share $      0.37        0.14         0.71         0.43
                            ==========   =========   ==========   ==========
</TABLE>
See accompanying notes to consolidated financial statements.
                 4
<PAGE>
<PAGE>
                               HMN FINANCIAL, INC.
                 Consolidated Statements of Comprehensive Income
                                   (unaudited)
<TABLE>
<CAPTION>

                                        Three Months Ended June 30,
                                      1999                      1998
                             ------------------------   -----------------------
<S>                           <C>         <C>          <C>          <C>
Net income                  $              1,716,347                    784,030
Other comprehensive
 income, net of tax:
   Unrealized gains (losses)
    on securities:
      Unrealized holding
       gains (losses)
       arising during
       period                (1,254,430)                    295,168
    Less: reclassification
     adjustment for gains
     included in net income      18,021                     452,758
                             -----------                  ----------
Other comprehensive loss                 (1,272,451)                  (157,590)

                                         ----------                   --------

Comprehensive income        $               443,896                    626,440
                                         ==========                   =========




                                         Six Months Ended June 30,
                                      1999                      1998
                             ------------------------   -----------------------
<S>                          <C>          <C>          <C>          <C>
Net income                  $              3,318,347                  2,447,385
Other comprehensive
 income, net of tax:
   Unrealized gains (losses)
    on securities:
      Unrealized holding
       gains (losses)
       arising during
       period                (1,149,648)                    747,516
    Less: reclassification
     adjustment for gains
     included in net income      99,908                   1,002,998
                             -----------                  ----------
Other comprehensive loss                 (1,249,556)                  (255,482)

                                         ----------                  ---------

Comprehensive income        $             2,068,791                  2,191,903
                                         ==========                  =========


</TABLE>
See accompanying notes to consolidated financial statements.






                      HMN FINANCIAL, INC. AND SUBSIDIARIES
                 Consolidated Statement of Stockholders' Equity
                  For the Six Month Period Ended June 30, 1999
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  Accumulated
                                     Additional                      Other
                           Common     Paid-In        Retained    Comprehensive
                            Stock     Capital        Earnings         Loss
                    ----------------------------------------------------------
<S>                      <C>       <C>            <C>           <C>
Balance,
December 31, 1998       $   91,287    59,739,020     63,424,378    (837,838)
  Net income                                          3,318,347
  Treasury stock purchases
  Other comprehensive loss                                       (1,249,556)
  Tax benefit of restricted
    stock awards                          26,743
  Employee stock options
    exercised                            (42,460)
  Tax benefit of exercised
    stock options                          3,605
  Amortization of
    restricted stock awards

 Dividends paid                                       (717,361)
  Earned employee stock
    ownership plan shares                 31,226
                          ---------   ----------    ----------   ---------
Balance, June 30, 1999  $   91,287    59,758,134    66,025,364  (2,087,394)
                          =========   ==========    ==========   =========

<CAPTION>

                            Unearned
                            Employee
                              Stock       Unearned
                           Ownership    Compensation                 Total
                              Plan       Restricted     Treasury  Stockholders'
                             Shares     Stock Awards      Stock      Equity
                          ----------------------------------------------------
<S>                       <C>          <C>         <C>           <C>
Balance,
December 31, 1998        $  (5,705,152)   (276,867)  (47,989,489)  68,445,339
  Net income                                                        3,318,347
  Treasury stock purchases                            (2,953,437)  (2,953,437)
  Other comprehensive loss                                         (1,249,556)
  Tax benefit of restricted
    stock awards                                                       26,743
  Employee stock options
    exercised                                            148,375      105,915
  Tax benefit of exercised
    stock options                                                       3,605
  Amortization of
    restricted stock awards                 87,523                     87,523
 Dividends paid                                                      (717,361)
  Earned employee stock
    ownership plan shares       96,653                                127,879
                             ---------    --------    ----------   ----------
Balance, June 30, 1999   $  (5,608,499)   (189,344)  (50,794,551)  67,194,997
                             =========    ========    ==========   ==========
</TABLE>

See accompanying notes to consolidated financial statements.
                                  5
<PAGE>
<PAGE>
                      HMN FINANCIAL, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                                   (unaudited)

<TABLE>
<CAPTION>
                                                     Six Months Ended
                                                        June 30,
                                                   1999             1998
                                               ----------------------------
<S>                                           <C>              <C>
Cash flows from operating activities:
   Net income                                 $  3,318,347       2,447,385
   Adjustments to reconcile net income to
    cash provided by operating activities:
     Provision for loan losses                     150,000         150,000
     Depreciation                                  342,174         283,577
     Amortization of (discounts) premiums, net      56,106        (128,956)
     Amortization of deferred loan fees           (425,539)       (317,266)
     Amortization of goodwill                       90,018          90,318
     Amortization of core deposit intangible       116,222         143,514
     Amortization of other purchase accounting
       adjustments                                  50,342         382,014
     Amortization of mortgage servicing rights
       and net valuation adjustments               316,979         276,592
     Capitalized mortgage servicing rights        (327,631)       (130,259)
     Increase (decrease) in deferred income taxes (145,499)        167,000
     Securities gains, net                        (162,770)     (1,634,079)
     Gain on sales of real estate                        0         (21,777)
     Gain on sales of loans                     (1,279,674)       (718,136)
     Proceeds from sale of loans
      held for sale                            111,643,954      68,990,372
     Disbursements on loans held for sale      (73,129,568)    (53,532,026)
     Principal collected on loans
      held for sale                                  1,099               0
     Amortization of restricted stock awards        87,523         120,848
     Amortization of unearned ESOP shares           96,653         227,716
     Earned employee stock ownership shares
      priced above original cost                    31,226         194,458
     Decrease (increase) in accrued
      interest receivable                          132,801        (516,568)
     Increase in accrued interest payable          201,946          20,256
     Equity (earnings) loss of limited
      partnerships                                (362,594)        937,613
     Decrease (increase) in other assets          (618,504)        581,531
     Increase (decrease) in other liabilities      219,668        (795,342)
     Other, net                                     14,976          44,179
                                                ----------      ----------
       Net cash provided by
        operating activities                    40,418,255      17,262,964
                                                ----------      ----------
Cash flows from investing activities:
   Proceeds from sales of securities
    available for sale                          10,943,970      91,763,992
   Principal collected on securities
    available for sale                          33,335,121      16,165,151
   Proceeds collected on maturity of
    securities available for sale               18,331,000      23,100,000
   Purchases of securities available for sale  (57,031,349)   (136,566,747)
   Proceeds from sales of loans receivable         216,156       3,047,939
   Purchases of mortgage servicing rights          (22,443)       (557,536)
   Purchase of interest in limited partnerships          0        (181,125)
   Purchase of Federal Home Loan Bank stock              0      (1,737,900)
   Net increase in loans receivable            (39,346,322)    (41,486,818)
   Proceeds from sale of real estate                     0         152,415
   Purchases of premises and equipment            (562,201)     (1,256,046)
   Decrease in due to stockholders of
     Marshalltown Financial Corporation            (10,716)     (3,495,888)
                                               -----------      ----------
      Net cash used by investing activities    (34,146,784)    (51,052,563)
                                               -----------      ----------
Cash flows from financing activities:
   Decrease in deposits                        (17,649,118)        (82,370)
   Purchase of treasury stock                   (2,953,437)    (14,772,787)
   Increase in unearned ESOP shares                      0      (1,476,000)
   Stock options exercised                         105,915          55,237
   Dividends to stockholders                      (717,361)       (305,982)
   Fractional shares purchased from stock split          0          (1,716)
   Proceeds from Federal Home
     Loan Bank advances                         33,100,000      92,500,000
   Repayment of Federal Home Loan Bank advances(26,100,000)    (42,214,284)
   Decrease in other borrowed money             (2,500,000)              0
   Decrease (increase) in advance payments
    by borrowers for taxes and insurance            24,914         (33,906)
                                               -----------     -----------
      Net cash provided (used) by
       financing activities                    (16,689,087)     33,668,192
                                               -----------     -----------
      Decrease in cash and cash equivalents    (10,417,616)       (121,407)
Cash and cash equivalents, beginning of period  20,960,957       9,364,635
                                               -----------     -----------
Cash and cash equivalents, end of period     $  10,543,341       9,243,228
                                               ===========     ==========

                                    6
<PAGE>


Supplemental cash flow disclosures:
   Cash paid for interest                    $  14,087,299      15,943,644
   Cash paid for income taxes                    2,554,000         967,000
Supplemental noncash flow disclosures:
   SBA certificates transferred from loans
    to securities available for sale             2,528,442               0
   Loans securitized and transferred to
    securities available for sale                6,913,219               0
   Loans transferred to loans held for sale     30,890,367      20,553,439
   Transfer of loans to real estate                      0          17,105
   Securities purchased with liability
    due to broker                                        0       1,997,812
   Securities sold with payment due from broker          0       3,051,977

</TABLE>
See accompanying notes to consolidated financial statements.
                                     7

<PAGE>
<PAGE>

                      HMN FINANCIAL, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                                   (Unaudited)

                             June 30, 1999 and 1998


(1) HMN FINANCIAL, INC.

HMN Financial, Inc.(HMN) is a stock savings bank holding company which owns 100
percent of Home Federal Savings Bank (the Bank or Home Federal).  Home Federal
has a community banking philosophy and operates retail banking facilities in
Minnesota and Iowa.  The Bank has two wholly owned subsidiaries, Osterud
Insurance Agency, Inc. (OAI) and MSL Financial Corporation (MSL), which offer
financial planning products and services.  As of April 30, 1999 MSL was
dissolved and its assets were transferred to the Bank in exchange for the stock
of MSL.  HMN has two other wholly owned subsidiaries, Security Finance
Corporation (SFC) and HMN Mortgage Services, Inc. (MSI).  SFC invests in
commercial loans and commercial real-estate loans located throughout the United
States which were originated by third parties.  MSI operates a mortgage banking
and mortgage brokerage facility located in Brooklyn Park, Minnesota.

The consolidated financial statements included herein are for HMN, SFC, MSI,
the Bank and the Bank's wholly owned subsidiaries, OAI and MSL.  Results of
operations for MSL are included through April 30, 1999, the date of its
dissolution.  All significant intercompany accounts and transactions have been
eliminated in consolidation.


(2) BASIS OF PREPARATION

The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and therefore, do not include all
disclosures necessary for a complete presentation of the consolidated balance
sheets, consolidated statements of income, consolidated statements of
comprehensive income,  consolidated statements of stockholders' equity and
consolidated statements of cash flows in conformity with generally accepted
accounting principles.  However, all adjustments consisting of only normal
recurring adjustments which are, in the opinion of management, necessary for
the fair presentation of the interim financial statements have been included.
The statement of income for the three month and six month periods ended June
30, 1999 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 June 1998, the Financial Accounting Standards Board (FASB)  issued Statement
of Financial Accounting Standards (SFAS) No. 133,  ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.

                                    8
<PAGE>

The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the resulting
designation.

-         For a derivative designated as hedging the exposure to changes in the
          fair value of a recognized asset or liability or a firm commitment
          (referred to as a fair value hedge), the gain or loss is recognized
          in earnings in the period of change together with the offsetting loss
          or gain on the hedged item attributable to the risk being hedged. The
          effect of that accounting is to reflect in earnings the extent to
          which the hedge is not effective in achieving offsetting changes in
          fair value.
-         For a derivative designated as hedging the exposure to variable cash
          flows of a forecasted transaction (referred to as a cash flow hedge),
          the effective portion of the derivative's gain or loss is initially
          reported as a component of other comprehensive income (outside
          earnings) and subsequently reclassified into earnings when the
          forecasted transaction affects earnings. The ineffective portion of
          the gain or loss is reported in earnings immediately.
-         For a derivative designated as hedging the foreign currency exposure
          of a net investment in a foreign operation, the gain or loss is
          reported in other comprehensive income (outside earnings) as part of
          the cumulative translation adjustment. The accounting for a fair
          value hedge described above applies to a derivative designated or an
          available-for-sale security. Similarly, the accounting for a cash
          flow hedge described above applies to a derivative designated as a
          hedge of the foreign currency exposure of a foreign-currency-
          denominated forecasted transaction.
-         For a derivative not designated as a hedging instrument, the gain or
          loss is recognized in earnings in the period of change.

Under SFAS No. 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.

SFAS No. 133 precludes designating a nonderivative financial instrument as a
hedge of an asset, liability, unrecognized firm commitment, or forecasted
transaction except that a nonderivative instrument denominated in a foreign
currency may be designated as a hedge of the foreign currency exposure of an
unrecognized firm commitment denominated in a foreign currency or a net
investment in a foreign operation.

Originally SFAS No. 133 was effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of SFAS No.
133.  In June of 1999 the Financial Accounting Standards Board issued SFAS No.
137 which deferred the required adoption of SFAS No. 133 to fiscal years
starting after June 15, 2000.  HMN is anticipating that it will adopt SFAS No.
133 in the first quarter of 2001. HMN is currently researching the impact on
its financial condition and results of operations of adopting SFAS No. 133.

Effective January 1, 1999 HMN adopted FASB issued SFAS No. 134,  ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE, which amended SFAS No. 65 to
require that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent
to sell or hold those investments.  The adoption of SFAS No. 134 in the first
quarter of 1999 did not have a material impact on HMN's financial condition or
the results of its operations.

(4) 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 entirely of unrealized gains and losses on securities available for
sale.

                                     9
<PAGE>

The gross unrealized holding losses for the second quarter of 1999 were
$2,040,000 the income tax benefit would have been $786,000 and therefore, the
net loss was $1,254,000.  The gross reclassification adjustment for the second
quarter of 1999 was $29,000, the income tax expense would have been $11,000 and
therefore, the net reclassification adjustment was $18,000.  The gross
unrealized holding gains for the second quarter of 1998 were $482,000, the
income tax expense would have been $187,000 and therefore, the net gain was
$295,000.  The gross reclassification adjustment for the second quarter of 1998
was $738,000, the income tax expense would have been $285,000 and therefore,
the net reclassification adjustment was $453,000.

The gross unrealized holding losses for the six month period ended June 30,
1999 were $1,880,000, the income tax benefit would have been $730,000 and
therefore, the net loss was $1,150,000.  The gross reclassification adjustment
for the first six months of 1999 was $163,000, the income tax expense would
have been $63,000 and therefore, the net gain was $100,000.  The gross
unrealized holding gains for the first six months of 1998 were $1,162,000, the
income tax expense would have been $415,000 and therefore, the net gain was
$748,000. The gross reclassification adjustment for the first six months of
1998 was $1,634,000, the income tax expense would have been $631,000 and
therefore, the net reclassification adjustment was $1,003,000.


(5) CASH DIVIDEND

On July 20, 1999 HMN's Board of Directors  announced a cash dividend of $0.08
per share, payable on September 10, 1999 to stockholders of record on August
25, 1999.


(6) INVESTMENT IN MORTGAGE SERVICING RIGHTS

A summary of mortgage servicing activity is as follows:

<TABLE>
<CAPTION>

--------------------------------------------------------------

                                     1999            1998
                                --------------  --------------
<S>                             <C>            <C>
Mortgage servicing rights
  Balance, beginning of year     $ 1,117,193       845,517
  Originations                       327,631       127,879
  Purchases                           22,443       468,998
  Amortization                      (347,558)     (105,767)
                                   ---------     ---------
  Balance, June 30,                1,119,709     1,336,627
                                   ---------     ---------

Valuation reserve
  Balance, beginning of year        (111,500)      (64,512)
  Additions                                0      (165,583)
  Reductions                          48,300        32,000
                                   ---------     ---------
  Balance, June 30,                  (63,200)     (198,095)
                                   ---------     ---------
  Mortgage servicing rights, net $ 1,056,509     1,138,532
                                   =========     =========
  Fair value of mortgage
    servicing rights             $ 1,192,509     1,162,532
                                   =========     =========
------------------------------------------------------------
</TABLE>

                                  10
<PAGE>

(7) INVESTMENT IN LIMITED PARTNERSHIPS

Investments in limited partnerships were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Primary partnership activity       June 30,      December 31,
                                     1999            1998
                                ------------    ------------
<S>                            <C>             <C>
Mortgage servicing rights       $  2,006,928       1,622,519
Common stock of financial
  institutions                       430,283         415,189
Low to moderate income housing       355,562         399,538
                                ------------    ------------
                                $  2,792,773       2,437,246
                                ============    ============
-------------------------------------------------------------
</TABLE>

During the second quarter of 1999 HMN's proportionate revenue from a mortgage
servicing partnership (which included the reduction of previously established
impairment reserves of $381,671) was $323,237, its proportionate share of gains
from the common stock investments in financial institutions was $28,790 and it
recognized $6,500 of losses on the low income housing partnerships. During 1999
HMN anticipates receiving low income housing credits totaling $80,000 of which
$20,000 were credited to current income tax benefits in the second quarter of
1999. During the second quarter of 1998, HMN's proportionate losses from the
mortgage servicing partnership was $1,112,747, its proportionate share of gains
from common stock investments in financial institutions was $123,191 and it did
not recognize any revenue or loss from the low income housing partnerships.

During the six month period ended June 30, 1999 HMN's proportionate revenue
from a mortgage servicing partnership (which included the reduction of
previously established impairment reserves of $497,043) was $384,409, its
proportionate share of gains from the common stock investments in financial
institutions was $15,094 and it recognized $36,909 of losses on the low income
housing partnerships. During 1999 HMN anticipates receiving low income housing
credits totaling $80,000 of which $40,000 were credited to current income tax
benefits in the six month period ended June 30, 1999. During the six month
period ended June 30, 1998, HMN's proportionate revenue from the mortgage
servicing partnership was $1,060,836, its proportionate share of gains from
common stock investments in financial institutions was $123,223  and it did not
recognize any revenue or loss from the low income housing partnerships.


(8) EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                               Three months ended        Six Months ended
                                    June 30,                   June 30,
                               1999          1998        1999           1998
                              ---------------------     ----------------------
<S>                         <C>        <C>           <C>         <C>
Weighted average number of
 common shares outstanding
 used in basic earnings per
 common share calculation     4,442,471   5,051,205     4,465,679    5,248,262

Net dilutive effect of:
 Options                        167,858     379,759       177,041      391,398
 Restricted stock awards         20,019      54,197        23,267       57,773
                              ---------   ---------     ---------    ---------
Weighted average number of
 shares outstanding adjusted
 for effect of dilutive
 securities                   4,630,348   5,485,161     4,665,987    5,697,433
                              =========   =========     =========    =========

Income available to common
 shareholders               $ 1,716,347     784,030     3,318,347    2,447,385

Basic earnings per
 common share               $      0.39        0.16          0.74         0.47

Diluted earnings per
 common share               $      0.37        0.14          0.71         0.43


</TABLE>
                                  11
<PAGE>


(9) 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 condition.  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 Tangible, Tier I (Core), and Risk-based capital (as defined
in the regulations) to adjusted total assets and risk-weighted assets (as
defined).  Management believes, as of June 30, 1999, 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,
1999 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, 1999 the Bank's tangible assets and adjusted total assets were
$657,048,000 and its risk-weighted assets were $346,906,000. The following
table presents the Bank's capital amounts and ratios at June 30, 1999 for
actual capital, required capital and excess capital, including ratios in order
to qualify as being well capitalized under the Prompt Corrective Actions
regulations.

<TABLE>
<CAPTION>
                                                        Required to be
                                                          Adequately
                                    Actual                Capitalized
                               ------------------    --------------------
                                       Percent of<F1>      Percent of <F1>
(IN THOUSANDS)                 Amount     Assets     Amount    Assets
                              -------- ----------- --------- -----------
<S>                         <C>       <C>         <C>       <C>
Bank stockholder's equity      $48,088
Plus:
  Net unrealized loss on
   certain securities
   available for sale            1,685
Less:
  Goodwill and other
   intangibles                   5,394
  Excess mortgage
   servicing rights                283
                               -------
Tier I or core capital          44,096
                               -------
  Tier I capital to adjusted
   total assets                           6.71%   $  26,282   4.00%

Tier I capital to risk-
   weighted assets
                                         12.71%   $  13,876   4.00%
Less:
Equity investments & other
 assets required to be deducted     22
Plus:
 Allowable allowance for
  loan losses                    3,185
                               -------
Risk-based capital             $47,259            $  27,752
                               =======
Risk-based capital to risk-
  weighted assets                         13.62%              8.00%



<CAPTION>

                                                        To Be Well Capitalized
                                                             Under Prompt
                                                          Corrective Actions
                                   Excess Capital             Provisions
                               --------------------- ------------------------
                                        Percent of<F1>        Percent of <F1>
(IN THOUSANDS)                 Amount      Assets     Amount      Assets
                              ---------- ---------- ----------- -----------
<S>                         <C>        <C>        <C>          <C>
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               $ 17,814      2.71%    $  32,852      5.00%
Tier I capital to risk-
   weighted assets            $ 30,220      8.71%    $  20,814      6.00%
Less:
Equity investments & other
 assets required to be deducted
Plus:
 Allowable allowance for
  loan losses
Risk-based capital            $ 19,507               $  34,691
Risk-based capital to risk-
  weighted assets                           5.62%                  10.00%

<FN>
<F1> 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
</FN>
</TABLE>


The tangible capital of the Bank was in excess of the minimum 2% required at
June 30, 1999, but is not reflected in the table above.

                                    12
<PAGE>


(10) BUSINESS SEGMENTS

HMN's wholly owned subsidiaries, Home Federal Savings Bank and Mortgage
Services, Inc., have been identified as reportable operating segments in
accordance with the provisions of SFAS 131.  MSI was deemed to be a segment
because it is a separate corporation which operates independently from the Bank
and it is not regulated by the Office of Thrift Supervision.  MSI has been
segmented further into Mortgage Servicing Rights and Mortgage Banking
activities.  The mortgage servicing segment owns servicing rights on loans
which have either been sold to FNMA or securitized into mortgage backed
instruments which were issued by FNMA.  MSI receives a servicing fee which is
based upon the outstanding balance of the loan being serviced and pays a
subservicer a monthly fee to service the loan.  MSI's mortgage banking activity
includes an origination function and it also purchases loans from other loan
originators.  All loans acquired either by origination or by purchase are
intended to be resold in the secondary loan market.

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

HMN evaluates performance and allocates resources based on the segment's net
income or loss, return on average assets and return on average equity. The
segments follow generally accepted accounting principles as described in the
summary of significant accounting policies.

Each corporation is managed separately with its own president, who reports
directly to HMN's chief operating decision maker and board of directors.


                                  13
<PAGE>
<PAGE>
The following table sets forth certain information about the
reconciliations of reported profit or loss and assets for each of HMN's
reportable segments.
<TABLE>
<CAPTION>

                                           HMN Mortgage Services, Inc.
                                         -------------------------------
                         Home Federal        Mortgage           Mortgage
(Dollars in thousands)   Savings Bank      Servicing Rights     Banking
-------------------------------------------------------------------------
<S>                     <C>             <C>                   <C>
At or for the three months
 ended June 30, 1999:
  Interest income -
    external customers    $  11,363                0                 95
  Non-interest income -
    external customers          645              233                 17
  Earnings (loss) on
    limited partnerships        317                0                  0
  Intersegment interest
    income                       18                0                  0
  Intersegment non-
    interest income              85                0                  0
  Interest expense            7,118                0                 84
  Amortization of mortgage
    servicing rights and
    net valuation adjustments    61               87                  0
  Other non-interest
    expense                   2,483                0                300
  Income tax expense (benefit)1,057              (25)                11
  Net income (loss)           1,633              (39)                17
  Total assets              661,088              231              6,938
  Net interest margin          2.67 %             NM                 NM
  Return on average assets     0.99 %         (57.97)%             1.15%
  Return on average
    realized common equity    13.03 %        (268.16)%             5.32%

At or for the three months
 ended June 30, 1998:
  Interest income -
    external customers     $ 11,963                0                 60
  Non-interest income -
    external customers          171              114                190
  Earnings (loss) on
    limited partnerships       (712)               0                  0
  Intersegment interest income   22                0                  0
  Intersegment non-interest
   income                        76                0                  0
  Interest expense            8,176                0                 57
  Amortization of mortgage
   servicing rights and net
   valuation adjustments          7              231                  0
  Other non-interest expense  2,761                0                295
  Income tax expense (benefit)  275              (42)               (43)
  Net income (loss)             226              (75)               (59)
  Total assets              701,501              985              5,829
  Net interest margin          2.27 %             NM                 NM
  Return on average assets     0.13 %         (28.19)%            (5.58)%
  Return on average realized
   common equity               1.85 %         (79.53)%           (16.02)%



<CAPTION>


                                  Total
                                Reportable                         Consolidated
 (DOLLARS IN THOUSANDS)         Segments     Other   Eliminations     Total
 ------------------------------------------------------------------------------
<S>                           <C>         <C>       <C>           <C>
At or for the three
 months ended June 30, 1999:
  Interest income -
   external customers       $   11,458           202            0      11,660
  Non-interest income -
   external customers              985             1            0         986
  Earnings (loss) on
   limited partnerships            317            29            0         346
  Intersegment interest
   income                           18           115         (133)          0
  Intersegment non-
   interest income                  85         1,629       (1,714)          0
  Interest expense               7,202            49         (133)      7,118
  Amortization of mortgage
   servicing rights and net
   valuation adjustments           148             0            0         148
  Other non-interest
   expense                       2,783           145          (85)      2,843
  Income tax expense (benefit)   1,043            48            0       1,091
  Net income (loss)              1,611         1,734       (1,629)      1,716
  Total assets                 668,177        69,999      (58,202)    679,974
  Net interest margin               NM            NM           NM        2.76%
  Return on average assets          NM            NM           NM        1.01%
  Return on average
   realized common equity           NM            NM           NM        9.83%

At or for the three months
 ended June 30, 1998:
  Interest income -
   external customers         $ 12,023           423            0      12,446
  Non-interest income -
   external customers              475           756            0       1,231
  Earnings (loss) on
   limited partnerships           (712)            0            0        (712)
  Intersegment interest
   income                           22           140         (162)          0
  Intersegment non-
   interest income                  76           133         (209)          0
  Interest expense               8,233           105         (162)      8,176
  Amortization of mortgage
   servicing rights and net
   valuation adjustments           238             0            0         238
  Other non-interest
   expense                       3,056           225          (76)      3,205
  Income tax expense
   (benefit)                       190           297            0         487
  Net income (loss)                 92           825         (133)        784
  Total assets                 708,315        80,420      (63,555)    725,180
  Net interest margin               NM            NM           NM        2.47%

  Return on average assets          NM            NM           NM        0.44%

  Return on average realized
   common equity                    NM            NM           NM        4.03%


</TABLE>
NM - Not meaningful


                                      14

<PAGE>
<PAGE>
<TABLE>
<CAPTION>

                                           HMN Mortgage Services, Inc.
                                         -------------------------------
                         Home Federal        Mortgage           Mortgage
(DOLLARS IN THOUSANDS)   Savings Bank      Servicing Rights     Banking
-------------------------------------------------------------------------
<S>                     <C>             <C>                   <C>
At or for the six months
 ended June 30, 1999:
  Interest income -
    external customers    $   22,689                0                 172
  Non-interest income -
    external customers         1,461               55                 595
  Earnings (loss) on
    limited partnerships         348                0                   0
  Intersegment interest
   income                         20                0                   0
  Intersegment non-
   interest income               165                0                   0
  Interest expense            14,282                0                 162
  Amortization of mortgage
   servicing rights
   and net valuation adjustments 118              199                   0
  Other non-interest
   expense                     4,917                0                 582
  Income tax expense
   (benefit)                   2,044              (56)                  8
  Net income (loss)            3,172              (88)                 15
  Total assets               661,008              231               6,938
  Net interest margin           2.65 %             NM                  NM
  Return on average assets      0.96 %         (57.88)%              0.51%
  Return on average realized
   common equity               12.91 %        (160.37)%              1.47%

At or for the six months
  ended June 30, 1998:
  Interest income -
   external customers      $  23,674                0                 108
  Non-interest income -
   external customers            789              193                 397
  Earnings (loss) on limited
   partnerships                 (658)               0                   0
  Intersegment interest
   income                         30                0                   0
  Intersegment non-
   interest income               153                0                   0
  Interest expense            15,964                0                 109
  Amortization of mortgage
   servicing rights
   and net valuation adjustments  12              265                   0
  Other non-interest
   expense                     5,607                0                 567
  Income tax expense
   (benefit)                   1,001              (28)                (66)
  Net income (loss)            1,254              (44)               (105)
  Total assets               701,501              985               5,829
  Net interest margin           2.35 %             NM                  NM
  Return on average assets      0.37 %          (9.24)%             (5.57)%
  Return on average
   realized common equity       4.93 %         (28.25)%            (17.02)%

NM - Not meaningful



                                  Total
                                Reportable                         Consolidated
 (DOLLARS IN THOUSANDS)         Segments     Other   Eliminations     Total
 ------------------------------------------------------------------------------
<S>                           <C>         <C>       <C>           <C>
At or for the six months
 ended June 30, 1999:
  Interest income -
   external customers          $   22,861       402            0        23,263
  Non-interest income -
   external customers               2,111        44            0         2,155
  Earnings (loss) on
   limited partnerships               348        15            0           363
  Intersegment interest
   income                              20       223         (243)            0
  Intersegment non-interest
   income                             165     3,135       (3,300)            0
  Interest expense                 14,444        88         (243)       14,289
  Amortization of mortgage
   servicing rights and net
   valuation adjustments              317         0            0           317
  Other non-interest
   expense                          5,499       274         (165)        5,608
  Income tax expense
   (benefit)                        1,996       103            0         2,099
  Net income (loss)                 3,099     3,354       (3,135)        3,318
  Total assets                    668,177    69,999      (58,202)      679,974
  Net interest margin                  NM        NM           NM          2.74%

  Return on average assets             NM        NM           NM          0.98%

  Return on average
   realized common equity              NM        NM           NM          9.57%


At or for the six months
  ended June 30, 1998:
  Interest income -
   external customers            $ 23,782       765            0        24,547
  Non-interest income -
   external customers               1,379     1,428            0         2,807
  Earnings (loss) on
   limited partnerships              (658)        0            0          (658)
  Intersegment interest
   income                              30       255         (285)            0
  Intersegment non-
   interest income                    153     1,194       (1,347)            0
  Interest expense                 16,073       176         (285)       15,964
  Amortization of mortgage
   servicing rights and net
   valuation adjustments              277         0            0           277
  Other non-interest
   expense                          6,174       367         (153)        6,388
  Income tax expense
   (benefit)                          907       563            0         1,470
  Net income (loss)                 1,105     2,536       (1,194)        2,447
  Total assets                    708,315    80,420      (63,555)      725,180
  Net interest margin                  NM        NM           NM          2.53%

  Return on average assets             NM        NM           NM          0.69%

  Return on average realized
   common equity                       NM        NM           NM          6.07%

NM - Not meaningful
</TABLE>
                                   15


<PAGE>

                               HMN FINANCIAL, INC.

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

GENERAL

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

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

NET INCOME

HMN's net income for the second quarter of 1999 was $1.7 million, an increase
of $932,000, or 118.9%, compared to $784,000 for the second quarter of 1998.
Basic earnings per share were $0.39 for the quarter ended June 30, 1999, an
increase of $0.23, or 143.8% per share, from $0.16 basic earnings per share for
the same quarter of 1998.  Diluted earnings per share were $0.37 for the second
quarter of 1999, an increase of $0.23, or 164.3% from $0.14 diluted earnings
per share for the second quarter of 1998.

HMN's net income for the six month period ended June 30, 1999 was $3.3 million,
an increase of $871,000, or 35.6%, compared to $2.4 million for the same period
in 1998.  Basic earnings per share were $0.74 for the six month period ended
June 30, 1999, an increase of $0.27, or 57.5% per share, from $0.47 basic
earnings per share for the same six month period of 1998.  Diluted earnings per
share were $0.71 for the six month period ended June 30, 1999, an increase of
$0.28, or 65.1%, from $0.43 diluted earnings per share for the same six month
period of 1998.

NET INTEREST INCOME

Net interest income for the second quarter of 1999 was $4.5 million, an
increase of $272,000, or 6.4%, compared to $4.3 million for the second quarter
of 1998.  Interest income for the second quarter of 1999 was $11.7 million, a
decrease of $786,000, or 6.3%, compared to $12.4 million for the second quarter
of 1998.  Interest income declined $572,000 due to a $32.2 million decrease in
net average interest-earning assets from the second quarter of 1998 to the
second quarter of 1999, principally due to interest-earning assets being used
to fund deposit outflows and to purchase HMN's common stock under its stock
repurchase program.  Interest income decreased by $214,000 because the yield
earned on interest-earning assets decreased from 7.21% for the quarter ended
June 30, 1998 to 7.09% for the quarter ended June 30, 1999 primarily due to a
decline in interest rates earned on securities and cash equivalents.  Interest

                                  16

<PAGE>



expense was $7.1 million for the second quarter of 1999, a decrease of $1.1
million, or 12.9%, compared to $8.2 million for the same quarter of 1998.
Interest expense decreased by $660,000 due to a net outflow of $46.9 million in
average outstanding deposits from the second quarter of 1998, compared to the
second quarter of 1999.  Interest expense increased by $224,000 due to an
increase of $16.6 million in the average outstanding FHLB advances from the
second quarter of 1998 to the second quarter of 1999.  FHLB advances were used
to replace a portion of the funds lost to deposit outflows. Interest expense
decreased by $621,000 primarily due to lower interest rates being paid on
customer deposits and advances from the FHLB.  The average interest rate paid
on average interest-bearing liabilities was 4.72% during the second quarter of
1999, compared to 5.17% for the second quarter of 1998.  HMN's margin was 2.76%
for the second quarter of 1999, an increase of 29 basis points, or 11.7%, from
2.47% for the second quarter of 1998.

Net interest income for the six month period ended June 30, 1999 was $9.0
million, an increase of $391,000, or 4.6%, compared to $8.6 million for the
same six month period of 1998.  Interest income for the six month period ended
in 1999 was $23.3 million, a decrease of $1.3 million, or 5.2%, compared to
$24.5 million for the same six month period of 1998.  Interest income declined
by $856,000 due to a $24.1 million decrease in net average interest-earning
assets from the six month period ended in 1998 to the same period in 1999,
principally due to interest-earning assets being used to fund deposit outflows
and to purchase HMN's common stock under its stock repurchase program.
Interest income decreased by $428,000 because the yield earned on interest-
earning assets for the six month period decreased from 7.24% at June 30, 1998
to 7.11% at June 30, 1999 primarily due to a decline in interest rates earned
on securities and cash equivalents.  Interest expense was $14.3 million for the
six month period ended June 30, 1999, a decrease of $1.7 million, or 10.5%,
compared to $16.0 million for the same six month period of 1998. Interest
expense decreased by $1.3 million due to a net outflow of $45.7 million in the
average outstanding balance of deposits from the six months ended June 30,
1998, compared to the same six month period of 1999.    Interest expense
increased by $763,000 due to an increase of $28.1 million in the average
outstanding FHLB advances for the six months ended June 30, 1998, compared to
the same six month period of 1999.  FHLB advances were used to replace a
portion of the funds lost to deposit outflows. Interest expense decreased by
$1.1 million primarily due to lower interest rates being paid on customer
deposits and advances from the FHLB.  The average interest rate paid on average
interest-bearing liabilities was 4.76% during the six month period ended June
30, 1999, compared to 5.19% for the same six month period of 1998.  HMN's
margin was 2.74% for the six month period ended June 30, 1999, an increase of
21 basis points, or 8.3%, from 2.53% for the same six month period of 1998.

PROVISION FOR LOAN LOSSES

*The provision for loan losses for the second quarters ended June 30, 1999 and
1998 were both $75,000.  The provision for loan losses for the six months ended
June 30, 1999 and 1998 were both $150,000.  The provision is the result of
management's evaluation of the loan portfolio, a historically low level of non-
performing loans, minimal loan charge-off experience, and its assessment of the
general economic conditions in the geographic area where properties securing
the loan portfolio are located such as national and regional unemployment data,
single family loan delinquencies as reported separately by the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Bank Mortgage Corporation
(FHLMC), local single family construction permits and local economic growth
rates.  Management's evaluation of probable losses inherent in the loan
portfolio did not reveal conditions that would cause it to increase the
provision for loan losses during 1999 compared to 1998. HMN will continue to
monitor its allowance for losses as these conditions dictate.  Future economic
conditions and other unknown factors will impact the need for future provisions
for loan losses.  As a result, no assurances can be given that increases in the
allowance for loan losses will not be required during future periods.

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

                                 1999                  1998
                            ------------        --------------
Balance at January 1,    $    3,041,486             2,748,219
Provision                       150,000               150,000
Charge-offs                      (4,676)               (8,099)
Recoveries                          840                 1,576
                            -----------         -------------
Balance at June 30,      $    3,187,650             2,891,696
                            ===========         =============


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

                                 17
<PAGE>

NON-INTEREST INCOME

Non-interest income for the second quarter of 1999 was $1.3 million, an
increase of $814,000, or 156.9%, from $519,000 for the same quarter of 1998.
The increase in non-interest income was principally due to a $1.3 million
increase in earnings from limited partnership interests and an increase in the
gain on the sale of loans of $233,000 which were partially offset by a $714,000
decline in net gain on the sale of securities.  In the second quarter of 1998,
HMN recognized a charge of $1.14 million as its proportionate share of an
impairment reserve established on mortgage servicing assets from its investment
in a limited partnership.  During the second quarter of 1999, the number of
single family mortgage loan refinancings declined primarily due to an increase
in the interest rates charged on mortgage loans.  The decline in single family
loan refinancings caused the loan prepayment assumptions used to calculate the
market value of mortgage servicing assets to decline which in turn caused the
market value of mortgage servicing assets to increase.  The increase in the
market value allowed HMN to reverse, during the second quarter of 1999,
$382,000 of previously established impairment reserves.   Gain on the sale of
loans increased due to improved profitability on the sale of loans.  During the
second quarter of 1999 interest rates in general were increasing which reduced
the opportunity to sell fixed rate securities at a gain.

Non-interest income for the six month period ended June 30, 1999 was $2.5
million, an increase of $370,000, or 17.2%, from $2.1 million for the same six
month period of 1998.  The increase in non-interest income was principally due
to a $1.3 million increase in earnings from limited partnerships and an
increase in gain on the sale of loans of $562,000, which were partially offset
by a $1.5 million decline in the net gain from the sale of securities.  During
the first six months of 1998, HMN recognized a charge of $1.14 million as its
proportionate share of an impairment reserve established on mortgage servicing
assets from its investment in a limited partnership.  During the first six
months of 1999, the number of single family mortgage loan refinancings declined
primarily due to an increase in the interest rates charged on mortgage loans.
The decline in single family loan refinancings caused the loan prepayment
assumptions used to calculate the market value of mortgage servicing assets to
decline which in turn caused the market value of mortgage servicing assets to
increase.  The increase in the market value allowed HMN to reverse, during the
six month period ended June 30, 1999, $497,000 of previously established
impairment reserves.   Gain on the sale of loans increased by $562,000 due to
improved profitability on the sale of loans.  The net gain on the sale of
securities for the six months ended June 30, 1999 was $163,000, a decline of
$1.5 million  from $1.63 million for the same six month period of 1998.  During
the first six months of 1999 interest rates in general were increasing which
reduced the opportunity to sell fixed rate securities at a gain.

NON-INTEREST EXPENSE

Non-interest expense was $3.0 million for the second quarter of 1999, a
decrease of $451,000, or 13.1%, from $3.4 million for the second quarter of
1998. Compensation and benefit expense decreased by $345,000, primarily due to
reduced compensation and benefits paid as a result of work force reductions,
commissions paid on declining loan production and a reduction in the stock
allocation formula for employee stock ownership participants.  Non-interest
expense declined by $86,000 due to decreased amortization recorded on mortgage
servicing assets and it decreased by $52,000 due to a change in HMN's
advertising emphasis.  Occupancy expense increased by $38,000, primarily due to
the occupancy costs related to the new retail banking facility in Winona
opening in December 1998.

Non-interest expense was $5.9 million for the six months ended June 30, 1999, a
decrease of $739,000, or 11.1%, from $6.7 million for the same period of 1998.
Compensation and benefit expense decreased by $768,000, primarily due to
reduced compensation and benefits paid as a result of work force reductions,
commissions paid on declining loan production and a reduction in the stock
allocation formula for employee stock ownership participants.  HMN changed its
advertising emphasis on media and was able to reduce its advertising expense by
$75,000.  Occupancy expense increased by $93,000 primarily due to the occupancy
costs related to new retail banking facilities located in Spring Valley and
Winona.  The Spring Valley location opened in late February of 1998 and the
Winona location  opened in December of 1998 so only a portion of the occupancy
costs for Spring Valley and none of the occupancy costs for Winona were
included in the occupancy costs for 1998, whereas a full six months of costs
were included in the six month period ended June 30, 1999.

                                 18
<PAGE>

INCOME TAX EXPENSE

Income tax expense was $1.1 million for the second quarter of 1999, an increase
of $932,000, from $784,000 for the second quarter of 1998.  The increase is
primarily due to an increase in taxable income between the two quarters.
Income tax expense was $3.3 million for the six month period ended June 30,
1999, an increase of $871,000, from $2.4 million for the same period in 1998.
The increase is primarily due to an increase in taxable income between the two
six month periods.

NON-PERFORMING ASSETS

The following table sets forth the amounts and categories of non-performing
assets in the Bank's portfolio at June 30, 1999 and December 31, 1998.

                                      June 30,             December 31,
(DOLLARS IN THOUSANDS)                  1999                  1998
                                    -----------           --------------
Non-Accruing Loans
  One-to-four family real estate      $ 154                    317
  Nonresidential real estate              0                     73
  Consumer                              143                     86
                                       ----                   ----
  Total                                 297                    476
                                       ----                   ----
Accruing loans delinquent                 9                      0
days or more                            421                    312
                                       ----                   ----
Foreclosed Assets
Real estate:
One-to-four family                       16                     18
                                       ----                   ----
   Total non-performing assets        $ 734                  $ 806
                                       ====                   ====
Total as a percentage of total
  assets                               0.11%                  0.12%
                                       ====                   ====
Total non-performing loans            $ 718                  $ 788
                                       ====                   ====
Total as a percentage of total
   loans receivable, net               0.16%                  0.18%
                                       ====                   ====

Total non-performing assets at June 30, 1999 were $734,000, a decrease of
$72,000, from $806,000 at December 31, 1998.  Non-accruing loans decreased by
$179,000, primarily related to one-to-four family real estate loans being
transferred to accruing loan status, nonresidential real estate being brought
current on late payments, and a net increase of $57,000 in non-accruing
consumer debt.

DIVIDENDS

During 1998 and 1999 HMN declared and paid dividends as follows:
                        Payable            Dividend
     Record date        date               per share    Dividend Payout Ratio
     ----------------   ---------------   -----------   ---------------------
     May 27, 1998       June 12, 1998        $0.06             21.4 %
     August 27, 1998    September 10, 1998   $0.06             42.9
     December 1, 1998   December 15, 1998    $0.06            (66.7)
     February 24, 1999  March 10, 1999       $0.08             21.6
     May 26, 1999       June 10, 1999        $0.08             23.5

On July 20, 1999 HMN's Board of Directors  announced a cash dividend of $0.08
per share, payable on September 9, 1999 to stockholders of record on August 25,
1999.  The annualized dividend payout ratio for the past four quarters was
30.3%. The dividend payout ratio is calculated by dividing dividends per share
by diluted earnings per share.

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.


                                 19
<PAGE>

LIQUIDITY

For the six month period ended June 30, 1999, the net cash provided by
operating activities was $40.4 million.  HMN collected $10.9 million from the
sale of securities; it collected $51.6 million in principal repayments or on
the maturity of securities during the period.  HMN also collected $216,000 on
the sale of loans receivable during the period.  It purchased $57.0 million of
securities, funded a net increase in loans receivable of  $39.3 million, and
purchased premises and equipment of $562,000.  HMN had a net deposit outflow of
$17.6 million,  additional net borrowing from the FHLB of $7.0 million and
borrowed $2.5 million from other sources.  HMN paid $3.0 million to purchase
234,500 shares of its own common stock during the first six months of 1999 and
it paid $717,000 in dividends to its stockholders.

*HMN has certificates of deposits with outstanding balances of $183.2 million
that come due over the next 12 months.  Based upon past experience management
anticipates that the majority of the deposits will renew for another term.  HMN
believes that deposits which do not renew will be replaced with deposits from
other customers, or funded with advances from the FHLB, or will be funded
through the sale of securities.  Management does not anticipate that it will
have a liquidity problem due to maturing deposits.

*HMN has $24.0 million of FHLB advances which mature over the next 12 months
and $14.0 million of FHLB advances which mature in 2001 but have call features
which can be exercised by the FHLB on a semiannual basis starting in August or
September of 1999.  If the call features are exercised HMN has the option of
requesting any advance otherwise available to it pursuant to the Credit Policy
of the FHLB.  Since HMN has the ability to request another advance to replace
the advance that is being called, management does not anticipate that it will
have a liquidity problem due to advances maturing or 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 how its assets will mature or reprice in comparison to how its
liabilities will mature or reprice. The MATURITY OR REPRICING TABLE located in
the Asset/Liability Management section of this report is used as part of the
monitoring process.  HMN also monitors the projected changes in net interest
income that would occur if interest rates were to suddenly change up or down.
The RATE SHOCK TABLE located 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 down from where the rates were at June 30, 1999.  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, 1999.

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

                                        20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>

------------------------------------------------------------------------------
Other than trading portfolio                 Market Value

(Dollars in thousands)
Basis point change in
interest rates                  -200     -100       0      +100     +200
------------------------------------------------------------------------------
<S>                          <C>       <C>      <C>      <C>      <C>
Cash equivalents            $   9,549    9,542    9,534    9,526    9,518
Securities available for sale:
  Fixed-rate CMOs              20,389   20,470   20,248   19,820   19,344
  Variable-rate CMOs           86,926   89,079   88,202   85,534   82,212
  Fixed-rate available for
   sale mortgage-backed
   and related securities       2,004    1,971    1,932    1,884    1,828
  Variable-rate available for
   sale mortgage-backed and
   related securities              72       70       68       67       66
  Fixed-rate available for sale
    other marketable securities87,429   85,310   82,937   79,399   76,152
  Variable-rate available for
   sale other marketable
   securities                   1,662    1,660    1,658    1,655    1,653
Fixed-rate loans held for sale  6,730    6,725    6,719    6,714    6,708
Loans receivable, net:
  Fixed-rate real
   estate loans               294,525  289,787  282,121  272,977  263,662
  Variable-rate real estate
   loans                      122,861  120,971  118,251  114,694  110,486
  Fixed-rate other loans       32,592   32,042   31,373   30,627   29,947
  Variable-rate other loans    24,510   23,978   23,943   23,921   23,898
Mortgage servicing rights, net    343      686    1,056    1,211    1,332
Investment in limited
  partnerships                    721    1,169    2,792    6,618    7,942
                              -------- -------  -------   ------  -------
Total market risk sensitive
  assets                      690,313  683,460  670,834  654,647  634,748
                              -------- -------  -------  -------  -------
NOW deposits                   32,054   32,028   32,001   31,975   31,948
Passbook deposits              34,892   33,434   32,093   30,855   29,710
Money market deposits          30,337   29,074   27,912   26,840   25,847
Certificate deposits          323,920  320,192  316,552  312,997  309,525
Fixed-rate Federal Home
  Loan Bank advances          173,721  165,257  159,858  155,310  150,921
Variable-rate Federal Home
 Loan Bank advances            31,070   31,045   31,019   30,994   30,968
                              -------  -------  -------  -------  -------
Total market risk sensitive
 liabilities                  625,994  611,030  599,435  588,971  578,919
                              -------  -------  -------  -------  -------
Off-balance sheet
  financial instruments:
Commitments to extend credit       57       56       55       53       51
                              -------  -------  -------  -------  -------
Net market risk             $  64,376   72,486   71,454   65,729   55,880
                              =======  =======  =======  =======  =======
Percentage change from
  current market value          (9.91)%  (1.44)%   0.00%   (8.01)% (21.80)%
                              =======  =======  =======  =======  =======

</TABLE>
The preceding table was prepared utilizing the following assumptions (the
"Model Assumptions") regarding prepayment and decay ratios which were
determined by management based upon their review of historical prepayment
speeds and future prepayment projections.  Fixed rate loans were assumed to
prepay at annual rates of between 8% to 45%, depending on the coupon and period
to maturity.  Adjustable rate mortgages ("ARMs") were assumed to prepay at
annual rates of between 10% and 32%, depending on coupon and the period to
maturity.  Growing Equity Mortgage (GEM) loans were assumed to prepay at annual
rates of between 18% and 55% depending on the coupon and the period to
maturity.  Mortgage-backed securities and Collateralized Mortgage Obligations
(CMOs) were projected to have prepayments based upon the underlying collateral
securing the instrument and the related cash flow priority of the CMO tranche
owned.  Certificate accounts were assumed not to be withdrawn until maturity.
Passbook and money market accounts were assumed to decay at an annual rate of
20%.  FHLB advances were projected to be called at the first call date where
the projected interest rate on similar remaining term advances exceeded the
interest rate on HMN's callable advance.


                                       21
<PAGE>
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, 1999
to determine if its current level of interest rate risk is acceptable.  The
following table projects the estimated annual impact on net interest income of
immediate interest rate changes called rate shocks.

      Rate Shock    Net Interest    Percentage
    in Basis Points    Income          Change
   ---------------   -----------    -----------
        +200        $ 21,595           6.68%
        +100          20,999           3.74%
           0          20,242           0.00%
        -100          19,406          -4.13%
        -200          18,275          -9.72%

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.


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

                                   22
<PAGE>


To the extent consistent with its interest rate spread objectives, the Bank
attempts to reduce its interest rate risk and has taken a number of steps to
restructure its assets and liabilities.  The Bank has primarily focused its
fixed rate one-to-four family residential lending program on loans with
contractual terms of 20 years or less.  The Bank generally follows the practice
of selling all of its fixed rate single family loans with contractual
maturities of thirty 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.

*The following table sets forth the interest rate sensitivity of HMN's assets
and liabilities at June 30, 1999, using certain assumptions that are described
in more detail below:

<TABLE>
<CAPTION>


--------------------------------------------------------------------------

                                Maturing or Repricing
                         -------------------------------------------------
                                      Over 6
                          6 Months   Months to    Over 1-3   Over 3-5
(DOLLARS IN THOUSANDS)     or Less   One Year       Years      Years
--------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>
Cash equivalents          $  9,543        0            0          0
Securities available
  for sale:
   Mortgage-backed and
    related securities<F1> 100,869    4,012        2,654        700
   Other marketable
     securities              8,995    3,416       27,739     20,764
Loans held for sale, net     6,722        0            0          0
Loans receivable, net<F1><F2>
   Fixed rate one-to-
    four family             27,233   24,472       75,164     48,583
   Adjustable rate
     one-to-four family     20,851   13,508       26,334     34,992
   Multi family              6,511      342        1,525        440
   Fixed rate commercial
    real estate              3,589    2,037        6,306      3,919
   Adjustable rate commercial
      real estate            5,884    2,102        2,759      3,368
   Commercial business       4,527    1,610        4,679      2,223
   Consumer loans           24,123    2,097        6,144      3,214
Federal Home Loan Bank stock     0        0            0          0
                           -------   ------      -------    -------
      Total interest-earning
       assets              218,847   53,596      153,304    118,203
                           -------   ------      -------    -------
Non-interest checking        8,008        0            0          0
NOW accounts                24,084        0            0          0
Passbooks                    3,605    3,605       10,383      6,645
Money market accounts        3,149    3,149        9,071      5,805
Certificates               118,068   65,118      103,160     28,815
Federal Home Loan Bank
  advances                  31,000   14,000       31,000    116,400
                           -------   ------      -------    -------
      Total interest-
      bearing liabilities  187,914   85,872      153,614    157,665
                           -------   ------      -------    -------
Interest-earning assets less
   interest-bearing
   liabilities           $  30,933  (32,276)        (310)   (39,462)
                           =======   ======      =======    =======

Cumulative interest-rate
   sensitivity gap       $  30,933   (1,343)      (1,653)   (41,115)
                           =======   ======      =======    =======
Cumulative interest-rate
  gap as a percentage of
  total assets at
  June 30, 1999               4.55%   (0.20)%      (0.24)%    (6.05)%
                           =======   ======      =======    =======






<CAPTION>


                               Over 5            No Stated
(DOLLARS IN THOUSANDS)         Years              Maturity           Total
--------------------------------------------------------------------------
<S>                         <C>                <C>              <C>
Cash equivalents             $     0                     0           9,543
Securities available for sale:
   Mortgage-backed and
      related securities<F1>   3,467                     0         111,702
   Other marketable
    securities                 5,533                 8,587          75,034
Loans held for sale, net           0                     0           6,722
Loans receivable, net<F1><F2>
   Fixed rate one-to-four
    family                    78,181                     0         253,633
   Adjustable rate
     one-to-four family          228                     0          95,913
   Multi family                  500                     0           9,318
   Fixed rate commercial real
     estate                    6,034                     0          21,885
   Adjustable rate commercial
      real estate                  0                     0          14,113
   Commercial business         2,957                     0          15,996
   Consumer loans              3,421                     0          38,999
Federal Home Loan Bank stock       0                 9,838           9,838
                             -------                -------        -------
      Total interest-earning
       assets                100,321                18,425         662,696
                             -------                -------        -------
Non-interest checking              0                     0           8,008
NOW accounts                       0                     0          24,084
Passbooks                     11,816                     0          36,054
Money market accounts         10,320                     0          31,494
Certificates                   1,392                     0         316,553
Federal Home Loan Bank
  advances                         0                     0         192,400
                             -------                ------         -------
      Total interest-bearing
       liabilities            23,528                     0         608,593
                             -------                ------         -------
Interest-earning assets less
   interest-bearing
    liabilities            $  76,793                18,425          54,103
                             =======                ======         =======
Cumulative interest-rate
   sensitivity gap         $  35,678                58,103          54,103
                             =======                ======         =======
Cumulative interest-rate
   gap as a percentage of
   total assets at
   June 30, 1999                5.25 %                7.96 %          7.96 %
                             =======                =======         ======

<FN>
<F1>Schedule prepared based upon the earlier of contactural maturity or
repricing date, if applicable, adjusted for scheduled repayments of principal
and projected prepayments of principal based upon experience.
<F2>Loans receivable are presented net of loans in process and deferred loan
fees.
</FN>
</TABLE>

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

                                    23


<PAGE>
<PAGE>
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.
Fixed rate loans were assumed to prepay at annual rates of between 8% to 45%,
depending on the coupon and period to maturity.  ARMs were assumed to prepay at
annual rates of between 10% and 32%, depending on coupon and the period to
maturity.  GEM loans were assumed to prepay at annual rates of between 18% and
55% depending on the coupon and the period to maturity.   Mortgage-backed
securities and Collateralized Mortgage Obligations (CMOs) were projected to
have prepayments based upon the underlying collateral securing the instrument
and the related cash flow priority of the CMO tranche owned.  Certificate
accounts were assumed not to be withdrawn until maturity.  Passbook and money
market accounts were assumed to decay at an annual rate of 20%.  FHLB advances
were projected to be called at the first call date where the projected interest
rate on similar remaining term advances exceeded the interest rate on HMN's
callable advance.

Certain shortcomings are inherent in the method of analysis presented in the
foregoing table.  Although certain assets and liabilities may have similar
maturities and periods of repricing, they may react in different degrees to
changes in market interest rates.  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.  Certain assets, such as adjustable-
rate mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset.  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 an
interest rate increase.

YEAR 2000

HMN has been actively engaged in managing the Year 2000 (Y2K) project since
September of 1997.  HMN's management has consistently met the completion
deadlines for various phases of the project that were established by the
Federal Financial Institutions Examination Council (FFIEC) guidelines.

HMN has an extensive business recovery plan that addresses the procedures that
would be implemented in the event of certain types of disasters.  A Y2K
Contingency Plan (the Plan) was developed by the Y2K Committee to document how
HMN would respond to the unique aspects of possible Y2K disruptions.  The Plan
focuses on the core business processes of HMN and the systems that support
those processes in accordance with the FFIEC guidelines.

*In developing the Plan HMN inventoried its computer hardware, computer
software, third party vendors and its other non-computer equipment and assessed
whether the items were Y2K compliant.  All non-compliant hardware was replaced
in either 1998 or 1999 at an aggregate cost of $102,000.  The computer software
inventory indicated that certain programs were not compliant.  Those software
programs were replaced during 1998 and 1999 at an aggregate cost of $80,000.
HMN has also tested computer software to determine that the software was Y2K
compliant.  The assessment of non-computer equipment for Y2K compliance
indicated that HMN did not have any significant issues in this area.

*The majority of the Bank's loan and deposit data is supported by a third party
data processing center.  Other third party providers support the automated
teller machines owned by the Bank and process the check clearings for the
Bank's negotiable order of withdrawal accounts ('checking accounts').  The Bank
is also reliant upon the Federal Home Loan Bank of Des Moines and the Federal
Reserve System to properly and efficiently conduct its business.
Notwithstanding the Bank's efforts, the failure of any of these third party
vendors to address their Y2K issues in a timely fashion may have an adverse
effect on the Bank's ability to conduct its business and/or process its
customers' transactions. The Bank's Y2K Committee has worked very closely with
its data processing center to ascertain that their software applications and
hardware will be Y2K compliant.  The Y2K Committee is also monitoring the
progress that other key third party providers are making toward becoming Y2K
compliant.  The Y2K Committee is not aware that either the data processing
center or any other key third party providers to the Bank will have issues
related to Y2K  that will have an adverse effect on the Bank's ability to
conduct its business.

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

                                   24


<PAGE>

FORWARD-LOOKING INFORMATION

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

     PROVISION FOR LOAN LOSSES
     The provision for loan losses for the second quarters ended June 30, 1999
     and 1998 were both $75,000.  The provision for loan losses for the six
     months ended June 30, 1999 and 1998 were both $150,000.  The provision is
     the result of management's evaluation of the loan portfolio, a
     historically low level of non-performing loans, minimal loan charge-off
     experience, and its assessment of the general economic conditions in the
     geographic area where properties securing the loan portfolio are located
     such as national and regional unemployment data, single family loan
     delinquencies as reported separately by the Federal National Mortgage
     Association (FNMA) and the Federal Home Loan Bank Mortgage Corporation
     (FHLMC), local single family construction permits and local economic
     growth rates.  Management's evaluation of probable losses inherent in the
     loan portfolio did not reveal conditions that would cause it to increase
     the provision for loan losses during 1999 compared to 1998. HMN will
     continue to monitor its allowance for losses as these conditions dictate.
     Future economic conditions and other unknown factors will impact the need
     for future provisions for loan losses.  As a result, no assurances can be
     given that increases in the allowance for loan losses will not be required
     during future periods.

     LIQUIDITY
     HMN has certificates of deposits with outstanding balances of $183.2
     million that come due over the next 12 months.  Based upon past experience
     management anticipates that the majority of the deposits will renew for
     another term.  HMN believes that deposits which do not renew will be
     replaced with deposits from other customers, or funded with advances from
     the FHLB, or will be funded through the sale of securities.  Management
     does not anticipate that it will have a liquidity problem due to maturing
     deposits.

     Competitive pricing by other institutions, the desire of a competitor to
     pay interest rates on deposits that are above the current rates paid by
     HMN, or the desire by customers to put more of their funds into
     nontraditional bank products such as stocks and bonds could be
     circumstances that would cause the maturing certificates to become a
     liquidity problem.

     HMN has $24.0 million of FHLB advances which mature over the next 12
     months and $14.0 million of FHLB advances which mature in 2001 but have
     call features which can be exercised by the FHLB on a semiannual basis
     starting in August or September of 1999.  If the call features are
     exercised HMN has the option of requesting any advance otherwise available
     to it pursuant to the Credit Policy of the FHLB.  Since HMN has the
     ability to request another advance to replace the advance that is being
     called, management does not anticipate that it will have a liquidity
     problem due to advances maturing or being called by the FHLB during the
     next 12 month period.

     If circumstances exist which cause the maturing certificates of deposit to
     become a liquidity problem then the advances which mature and or the
     advances that would be called by the FHLB would also become a liquidity
     problem.

     MARKET RISK
     HMN utilizes a model which uses the discounted cash flows from its
     interest-earning assets and its interest-bearing liabilities to calculate
     the current market value of those assets and liabilities.  The model also
     calculates the changes in market value of the interest-earning assets and
     interest-bearing liabilities due to different interest rate changes. HMN
     believes that over the next twelve months interest rates could conceivably
     fluctuate in a range of 200 basis points up or down from where the rates
     were at June 30, 1999.  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

                                  25
<PAGE>

     changes in interest rates from interest rates in effect on June 30, 1999.

     Interest rates could fluctuate in a range of more than 200 basis points up
     or down from where the rates were on June 30, 1999 due to the influence of
     many unforeseen factors not now known to HMN's management.

     Certain shortcomings are inherent in the method of analysis in the table
     presented in the Market Risk section.  The interest rates on certain types
     of assets and liabilities may fluctuate in advance of changes in market
     interest rates, while interest rates on other types of assets and
     liabilities may lag behind changes in market interest rates.  The model
     assumes that the difference between the current interest rate being earned
     or paid compared to a treasury instrument or other interest rate index
     with a similar term to maturity (the Interest Spread) will remain constant
     over the interest changes disclosed in the table. Changes in Interest
     Spread could impact projected market value changes.   Certain assets, such
     as ARMs, have features which restrict changes in interest rates on a
     short-term basis and over the life of the assets. The market value of the
     interest-bearing assets which are approaching their life time 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, 1999 to determine if its current level of interest rate risk is
     acceptable.  HMN's actual net interest income caused by interest rate
     changes may differ from the amounts reflected in the table in the
     Asset/Liability section which projects the estimated impact on net
     interest income of immediate interest rate changes called rate shocks.

     The following (Maturing or Repricing) table sets forth the interest rate
     risk sensitivity of HMN's assets and liabilities at June 30, 1999 using
     certain assumptions that are described in more detail below.  HMN's actual
     maturing and repricing results of its interest-earning assets and
     interest-bearing liabilities may differ from the amounts reflected in the
     gap table.

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


     YEAR 2000
     In developing the Plan HMN inventoried its computer hardware, computer
     software, third party vendors and its other non-computer equipment and
     assessed whether the items were Y2K compliant.  All non-compliant hardware
     was replaced in either 1998 or 1999 at an aggregate cost of $102,000.  The
     computer software inventory indicated that certain programs were not
     compliant.  Those software programs were replaced during 1998 and 1999 at
     an aggregate cost of $80,000.   HMN has also tested computer software to
     determine that the software was Y2K  compliant.  The assessment of non-
     computer equipment for Y2K compliance indicated that HMN did not have any
     significant issues in this area.

     The majority of the Bank's loan and deposit data is supported by a third
     party data processing center.  Other third party providers support the
     automated teller machines owned by the Bank and process the check
     clearings for the Bank's negotiable order of withdrawal accounts
     ('checking accounts').  The Bank is also reliant upon the Federal Home
     Loan Bank of Des Moines and the Federal Reserve System to properly and
     efficiently conduct its business.  Notwithstanding the Bank's efforts, the
     failure of any of these third party vendors to address their Y2K issues in
     a timely fashion may have an adverse effect on the Bank's ability to
     conduct its business and/or process its customers' transactions. The
     Bank's Y2K Committee has worked very closely with its data processing
     center to ascertain that their software applications and hardware will be
     Y2K compliant.  The Y2K Committee is also monitoring the progress that
     other key third party providers are making toward becoming Y2K compliant.
     The Y2K Committee is not aware that either the data processing

                                       26
<PAGE>

     center or any other key third party providers to the Bank will have issues
     related to Y2K  that will have an adverse effect on the Bank's ability to
     conduct its business.

     While HMN has inventoried and assessed its hardware, software and other
     non computer equipment other unforeseen issues may come to light in the
     future with the above mentioned items that would cause HMN to incur
     additional costs in order to become Y2K compliant.

     While HMN has identified and assessed the Y2K risks related to each of its
     major third party vendors and providers, it is monitoring their activities
     related to becoming Y2K compliant.  It is still possible that the vendors
     and providers may not be Y2K compliant and the Plan that HMN has developed
     would not have anticipated the problem.  An example of this situation
     would be if all the telephone communication lines became inoperative
     because of a Y2K issue on September 9, 1999, the Bank would not be able to
     process its daily activity and servicing its customers would be difficult
     without the communication lines for any extended period of time.  It would
     be difficult to have a contingency plan that would allow the Bank to
     conduct its business without using the communication lines to transmit its
     business activity.


                                     27

<PAGE>
<PAGE>
                               HMN FINANCIAL, INC.

                           PART II - OTHER INFORMATION

ITEM 1.   Legal Proceedings.

          None.

ITEM 2.   Changes in Securities.

          Not applicable

ITEM 3.   Defaults Upon Senior Securities.

          Not applicable.

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

          The Annual Meeting of Stockholders of the Company was held on April
          27, 1999 at 10:00 a.m..

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


                                    FOR          VOTE WITHHELD
                                  ----------     --------------
          Term expiring in 2000:
          Michael McNeil         4,677,368         94,331

          Term expiring in 2001:
          Richard J. Ziebell     4,686,696         85,003

          Term expiring in 2001:
          James B. Gardner       4,621,964        149,690

          Timothy R. Geisler     4,681,701         89,998

          Allan R. DeBoer        4,686,509         85,190

          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, 1999.
                            NUMBER       PERCENTAGE OF VOTES
                           OF VOTES         ACTUALLY CAST
                          -------------   ----------------

          FOR            4,703,896           98.58%

          AGAINST           31,137             .65%

          ABSTAIN           36,666             .77%

          BROKER
          NON-VOTES             --               0%


                                28
<PAGE>

          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 30 of this report.

                                   29
<PAGE>
<PAGE>

                                   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:       8/13/99                  /s/ Roger P. Weise
       -----------------------     --------------------------------
                                   Roger P. Weise,
                                   Chairman, President and
                                   Chief Executive Officer
                                   (Duly Authorized Officer)


Date:       8/13/99                 /s/ James B. Gardner
       -----------------------     --------------------------------
                                   James B. Gardner,
                                   Executive Vice President
                                   (Principal Financial Officer)



                              30
<PAGE>
                               HMN FINANCIAL, INC.
                                INDEX TO EXHIBITS
                                 FOR FORM 10-Q
                                                                Sequential
                                                 Reference    Page Numbering
                                                 to Prior      Where Attached
                                                 Filing or      Exhibits Are
                                                  Exhibit         Located
                                                  Number          In This
Regulation S-K                                   Attached         Form 10-Q
Exhibit Number          Document                  Hereto           Report
--------------   -----------------------       -------------    ------------


  3.1          Amended and Restated Articles
                 of Incorporation                 *1                N/A

  3.2          Amended and Restated By-laws       *2                N/A

  4            Form of Common Stock Certificate   *3                N/A

10.1           Extension of Employment Agreement  10.1     Filed electronically
               for Roger P. Weise dated
               May 25, 1999

10.2           Extension of Employment Agreement  10.2     Filed electronically
               for James B. Gardner dated
               May 25, 1999

  11           Computation of Earnings Per
                Common Share                      11       Filed electronically

  27           Financial Data Schedule            27       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 No.
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).

                                      31