<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 ---------------
                                    FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 [NO FEE REQUIRED]

                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                     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 NO.)

     101 NORTH BROADWAY, PO BOX 231                              55975-0231
        SPRING VALLEY, MINNESOTA                                 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (507) 346-1100

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (TITLE OF CLASS)

     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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.  YES  X   NO ___

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [  ]

     As of March 5, 1999, the Registrant had issued and outstanding 5,247,104
shares of the Registrant's Common Stock.  The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 5, 1999 was
$52.7 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the Registrant that such
person is an affiliate of the Registrant.)

                         DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Annual Report for the year ended December 31, 1998,
are incorporated by reference in Parts II and IV of this Form 10-K.  Parts of
the Registrant's Proxy Statement dated March 23, 1999, are incorporated by
reference in Part III of this Form 10-K.


--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                TABLE OF CONTENTS

                                     PART I

<TABLE>
<CAPTION>
                                                                                  PAGE
<S>                                                                               <C>
Item 1.   Business..................................................................3
                General.............................................................3
                Lending Activities..................................................4
                Investment Activities..............................................20
                Sources of Funds...................................................24
                Other Information
                      Service Corporations.........................................28
                      Competition..................................................28
                      Other Corporations Owned by HMN..............................28
                      Employees....................................................29
                      Executive Officers...........................................29
                Regulation.........................................................29
                Taxation...........................................................38
Item 2.   Properties...............................................................40
Item 3.   Legal Proceedings........................................................41
Item 4.   Submission of Matters to a Vote of Security Holders......................41


                                     PART II

Item 5.   Market for the Registrant's Common Stock and Related Stockholder
                Matters............................................................41
Item 6.   Selected Financial Data..................................................41
Item 7.   Management's Discussion and Analysis of Financial Condition and
                Results of Operations..............................................41
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk................41
Item 8.   Financial Statements and Supplementary Data..............................41
Item 9.   Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure...............................................42


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.......................42
Item 11.  Executive Compensation...................................................42
Item 12.  Security Ownership of Certain Beneficial Owners and Management...........42
Item 13.  Certain Relationships and Related Transactions...........................42


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K..........43

Signatures.........................................................................46

Index to Exhibits..................................................................47

</TABLE>


<PAGE>

                                        PART I

ITEM 1.   BUSINESS

GENERAL

     HMN Financial, Inc. ("HMN" or the "Corporation"), was incorporated under
the laws of the State of Delaware in March 1994 for the purpose of becoming the
savings and loan holding company of Home Federal Savings Bank ("Home Federal" or
the "Bank") in connection with the Bank's conversion from a federally chartered
mutual savings bank to a federally chartered stock savings bank. 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.  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.

     On December 5, 1997 HMN, through its wholly owned subsidiary, the Bank,
completed its merger with Marshalltown Financial Corporation (MFC) pursuant to a
merger agreement dated July 1, 1997. Refer to Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report for information on assets
acquired in the merger, HMN's Current Report on Form 8-K dated December 5, 1997,
filed on December 10, 1997 (file no. 0-24100) for a copy of the merger agreement
and HMN's Current Report on Form 8-K dated December 5, 1997, filed on February
11, 1998 (file no. 0-24100) for a copy of financial statements of the acquired
company and pro forma financial information.

     As a community-oriented financial institution, HMN seeks to serve the
financial needs of communities in its market area.  HMN's business involves
attracting deposits from the general public and using such deposits to originate
or purchase one-to-four family residential mortgage loans and, to a lesser
extent, consumer, construction, commercial real estate, commercial business and
multi-family loans.  HMN also invests in mortgage-backed and related securities,
investment securities (consisting primarily of U.S. government and government
agency obligations) and other permissible investments.  The executive offices of
HMN are located at 101 N. Broadway, PO Box 231, Spring Valley, Minnesota
55975-0231.  It's telephone number at that address is (507) 346-1100.

MARKET AREA

     HMN serves the Minnesota counties of Fillmore, Freeborn, Houston, Mower,
Olmsted and Winona and portions of Steele, Dodge, Goodhue and Wabasha Counties,
Minnesota, through its main office located in Spring Valley, Minnesota and its
six branch offices located in Albert Lea, Austin, LaCrescent, Rochester and
Winona, Minnesota.  The portion of HMN's market area consisting of Rochester and
the contiguous communities is composed of primarily urban and suburban
communities, while the balance of HMN's market area consists primarily of rural
areas and small towns.  Primary industries in HMN's market area include
manufacturing, agriculture, health care, wholesale and retail trade, service
industries and education. Major employers include IBM, the Mayo Clinic, Hormel,
a food processing company, and various small industrial and other companies.
HMN's market area is also the home of Winona State University, Rochester
Community and Technical College, University of Minnesota - Rochester Center,
Winona State University - Rochester Center and Austin's Riverland Community
College.

     HMN serves the Iowa counties of Marshall and Tama through its branch
offices located in Marshalltown and Toledo.  Major industries in the area are
Swift & Company - pork processors, Fisher Controls Int. - valve and regulator
manufacturing, Lennox Industries - furnace and air conditioner manufacturing,
Iowa Veterans Home - hospital care, Marshall Community School District -
education, Marshall Medical & Surgical Center - hospital care and Meskwaki
Casino - gaming operation.


                                      3
<PAGE>

     Based upon information obtained from the Minnesota State Demographic 
Center for 1996, the population of the six primary counties in the Bank's 
Minnesota market area was as follows:  Fillmore - 20,900; Freeborn - 33,000; 
Houston - 19,200; Mower - 37,700; Olmsted - 115,200; and Winona - 49,200.  
Total income per capita for 1996 in these six counties ranged from 
approximately $19,100 to $26,500.

     Based upon information obtained from the State Library of Iowa for 1996,
the population of Marshall County was 38,700 and the population of Tama County
was 17,600.  Total income per capita of the above mentioned Iowa counties ranged
from approximately $20,000 to $21,900.

     During the fourth quarter of 1996, HMN opened a mortgage banking and 
mortgage brokerage office which is currently located in Brooklyn Park, 
Minnesota. The office primarily originates single family residential loans 
for sale in the secondary market or purchases loans from third party 
originators located primarily in the seven county metropolitan area of 
Minneapolis and St. Paul and sells the loans in the secondary market.  The 
office also has purchased mortgage servicing rights from third parties for 
the purpose of generating loan servicing income.

LENDING ACTIVITIES

     GENERAL.  Historically, HMN originated 30-year, fixed-rate mortgage loans
secured by one-to-four family residences.  Since 1979, in order to reduce its
vulnerability to changes in interest rates, HMN has emphasized the origination
or purchase of loans for the loan portfolio which have shorter terms to maturity
such as 15 year, fixed rate residential loans and Graduated Equity Mortgages
("GEMs") which fully amortize in 15 to 20 years. HMN has also emphasized the
origination and purchase of Adjustable Rate Mortgage loans ("ARMs") for
portfolio which have interest rates which are fixed for an initial period of
one, three or five years and then generally adjust annually, thereafter, based
upon a treasury interest rate index plus a certain margin, subject to annual and
lifetime rate adjustment limits. HMN offers a competitive home equity line of
credit as well as other consumer loans. The home equity line of credit has an
adjustable interest rate based upon the Wall Street Journal prime rate plus a
margin. During 1998 HMN hired experienced commercial loan officers who actively
pursued commercial real estate, commercial business and development loans in
HMN's market area.


                                      4
<PAGE>

     LOAN PORTFOLIO COMPOSITION.  The following information concerning the
composition of HMN's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.

<TABLE>
<CAPTION>

                                                                  December 31,
                                       --------------------------------------------------------------
                                               1998                   1997                  1996
                                       -------------------   --------------------   ------------------ 
(DOLLARS IN THOUSANDS)                   Amount    Percent     Amount     Percent     Amount   Percent 
                                       ---------   -------   ----------   -------   ---------  ------- 
<S>                                    <C>         <C>       <C>          <C>       <C>        <C>     
REAL ESTATE LOANS:                                                                                     
 One-to-four family.................   $ 365,496    79.31%    $ 395,668    87.58%   $ 321,340   90.19% 
 Multi-family.......................       4,719     1.02         2,717     0.60          280    0.08  
 Commercial.........................      28,990     6.29        10,572     2.34        7,918    2.22  
 Construction or development........      15,155     3.29         5,725     1.27        3,474    0.98  
                                       ---------   ------     ---------   ------    ---------  ------  
    Total real estate loans.........     414,360    89.91       414,682    91.79      333,012   93.47  
                                       ---------   ------     ---------   ------    ---------  ------  
                                                                                                       
OTHER LOANS:                                                                                           
 Consumer loans:                                                                                       
  Savings account...................         994     0.22         1,362     0.30          938    0.26 
  Education.........................         118     0.03           123     0.03          467    0.13 
  Automobile........................       2,897     0.63         2,438     0.54          566    0.16 
  Home equity line..................      19,476     4.22        19,490     4.31       11,881    3.33 
  Home equity.......................       9,566     2.08         7,176     1.59        5,927    1.67 
  Home improvement..................         436     0.09           652     0.14          585    0.16 
  Other.............................       1,313     0.28           624     0.14          568   
                                       ---------   ------     ---------   ------    ---------  ------  
    Total consumer loans............      34,800     7.55        31,865     7.05       20,932    5.87  
 Commercial business loans..........      11,695     2.54         5,226     1.16        2,344    0.66  
                                       ---------   ------     ---------   ------    ---------  ------  
    Total other loans...............      46,495    10.09        37,091     8.21       23,276    6.53  
                                       ---------   ------     ---------   ------    ---------  ------  
       Total loans..................     460,855   100.00%      451,773   100.00%     356,288  100.00% 
                                                   ------                 ------               ------  
                                                   ------                 ------               ------  
LESS:                                                                                                  
 Loans in process...................       7,997                  4,562                 2,814          
 Unamortized discounts..............         414                    547                   417          
 Net deferred loan fees.............       1,948                  1,847                 1,695          
 Allowance for losses on loans......       3,041                  2,748                 2,340          
                                       ---------              ---------             ---------          
       Total loans receivable, net..   $ 447,455              $ 442,069             $ 349,022          
                                       ---------              ---------             ---------          
                                       ---------              ---------             ---------          
                                                                                                       
<CAPTION>

                                                        December 31,
                                         ------------------------------------------
                                                1995                   1994
                                         -------------------   --------------------
(DOLLARS IN THOUSANDS)                     Amount    Percent     Amount    Percent
                                         ---------   -------   ---------   --------
<S>                                      <C>         <C>        <C>        <C>

REAL ESTATE LOANS:
 One-to-four family.................     $ 292,497    90.62%   $ 252,943    91.14%
 Multi-family.......................           361     0.11          311     0.11
 Commercial.........................         8,744     2.71        8,316     3.00
 Construction or development........         5,082     1.58        2,799     1.01
                                         ---------   ------    ---------   ------
    Total real estate loans.........       306,684    95.02      264,369    95.26
                                         ---------   ------    ---------   ------

OTHER LOANS:
 Consumer loans:
  Savings account...................         1,210     0.37          648     0.23
  Education.........................           342     0.11        2,007     0.72
  Automobile........................           671     0.21          520     0.19
  Home equity line..................         3,509     1.09            0     0.00
  Home equity.......................         7,997     2.47        7,716     2.78
  Home improvement..................           785     0.24          870     0.31
                                         ---------   ------    ---------   ------
    Total consumer loans............        15,059     4.66       12,263     4.42
 Commercial business loans..........         1,018     0.32          897     0.32
                                         ---------   ------    ---------   ------
    Total other loans...............        16,077     4.98       13,160     4.74
                                         ---------   ------    ---------   ------
       Total loans..................       322,761   100.00%     277,529   100.00%
                                                     ------                ------
                                                     ------                ------

LESS:
 Loans in process...................         3,531                 2,327
 Unamortized discounts..............           289                   162
 Net deferred loan fees.............         1,899                 2,147
 Allowance for losses on loans......         2,191                 1,893
                                         ---------             ---------
       Total loans receivable, net..     $ 314,851             $ 271,000
                                         ---------             ---------
                                         ---------             ---------
</TABLE>

                                       5
<PAGE>

     The following table shows the composition of HMN's loan portfolio by fixed
and adjustable rate loans at the dates indicated.

<TABLE>
<CAPTION>
                                                                                           December 31,
                                              ------------------------------------------------------------------------------------
                                                       1998                            1997                         1996
                                              -----------------------        ------------------------      -----------------------
(DOLLARS IN THOUSANDS)                          Amount       Percent           Amount        Percent          Amount      Percent
                                              -----------   ---------        -----------    ---------      -----------   ---------
<S>                                           <C>           <C>              <C>            <C>            <C>           <C>
FIXED-RATE LOANS
 Real estate:
  One-to-four family
   GEM......................................  $    56,211       12.20%       $    53,258       11.79%      $    48,831      13.71%
   Other....................................      227,790       49.43            256,263       56.72           187,519      52.63
                                              -----------   ---------        -----------    --------       -----------   --------
    Total one-to-four family................      284,001       61.63            309,521       68.51           236,350      66.34
  Multi-family..............................        3,509        0.76              2,490        0.55               223       0.06
  Commercial................................       17,768        3.86              1,914        0.42             1,276       0.36
  Construction or development...............        9,366        2.03              3,180        0.71             2,970       0.83
                                              -----------   ---------        -----------    --------       -----------   --------
    Total fixed-rate real estate loans......      314,644       68.27            317,105       70.19           240,819      67.59
                                              -----------   ---------        -----------    --------       -----------   --------
 Consumer loans:
  Savings...................................          994        0.22              1,362        0.30               938       0.26
  Education.................................            0        0.00                  0        0.00               434       0.12
  Automobile................................        2,897        0.63              2,437        0.54               566       0.16
  Home equity...............................        9,384        2.04              6,701        1.48             5,338       1.50
  Home improvement..........................          436        0.09                652        0.14               585       0.16
  Other.....................................        1,175        0.25                612        0.14               568       0.16
                                              -----------   ---------        -----------    --------       -----------   --------
    Total consumer loans....................       14,886        3.23             11,764        2.60             8,429       2.36
                                              -----------   ---------        -----------    --------       -----------   --------
 Commercial business loans..................       10,157        2.20              5,226        1.16             1,344       0.38
                                              -----------   ---------        -----------    --------       -----------   --------
   Total other loans.......................        25,043        5.43             16,990        3.76             9,773       2.74
                                              -----------   ---------        -----------    --------       -----------   --------
    Total fixed-rate loans..................      339,687       73.71            334,095       73.95           250,592      70.33
                                              -----------   ---------        -----------    --------       -----------   --------
ADJUSTABLE-RATE LOANS
 Real estate:
  One-to-four family........................       81,495       17.68             86,147       19.07            84,990      23.85
  Multi-family..............................        1,210        0.26                227        0.05                57       0.02
  Commercial................................       11,222        2.44              8,658        1.92             6,642       1.87
  Construction or development...............        5,789        1.26              2,545        0.56               504       0.14
                                              -----------   ---------        -----------    --------       -----------   --------
    Total adjustable-rate real estate loans.       99,716       21.64             97,577       21.60            92,193      25.88
 Consumer...................................       19,914        4.32             20,101        4.45            12,503       3.51
 Commercial business loans..................        1,538        0.33                  0        0.00             1,000       0.28
                                              -----------   ---------        -----------    --------       -----------   --------
    Total adjustable-rate loans.............      121,168       26.29            117,678       26.05           105,696      29.67
                                              -----------   ---------        -----------    --------       -----------   --------
    Total loans.............................      460,855      100.00%           451,773      100.00%          356,288     100.00%
                                              -----------   ---------        -----------    --------       -----------   --------
                                                            ---------                       --------                     --------
LESS
 Loans in process...........................        7,997                          4,562                         2,814
 Unamortized discounts......................          414                            547                           417
 Net deferred loan fees.....................        1,948                          1,847                         1,695
 Allowance for losses on loans..............        3,041                          2,748                         2,340
                                              -----------                    -----------                   -----------
    Total loans receivable, net.............  $   447,455                    $   442,069                   $   349,022
                                              -----------                    -----------                   -----------
                                              -----------                    -----------                   -----------


<CAPTION>
                                                                December 31,
                                              ---------------------------------------------------
                                                       1995                         1994
                                              -----------------------      ----------------------
(DOLLARS IN THOUSANDS)                           Amount      Percent          Amount     Percent
                                              -----------   ---------      -----------   --------
<S>                                           <C>           <C>            <C>           <C>
FIXED-RATE LOANS
 Real estate:
  One-to-four family
   GEM......................................  $    30,175       9.35%      $    24,769      8.93%
   Other....................................      181,401      56.20           168,272     60.63
                                              -----------   --------       -----------   -------
    Total one-to-four family................      211,576      65.55           193,041     69.56
  Multi-family..............................          302       0.10               311      0.11
  Commercial................................        1,518       0.47             1,612      0.58
  Construction or development...............        4,848       1.50             1,008      0.37
                                              -----------   --------       -----------   -------
    Total fixed-rate real estate loans......      218,244      67.62           195,972     70.62
                                              -----------   --------       -----------   -------
 Consumer loans:
  Savings...................................        1,210       0.37               648      0.23
  Education.................................          299       0.09             1,278      0.46
  Automobile................................          671       0.21               520      0.19
  Home equity...............................        7,254       2.25             7,258      2.62
  Home improvement..........................          785       0.24               870      0.31
  Other.....................................          545       0.17               502      0.18
                                              -----------   --------       -----------   -------
    Total consumer loans....................       10,764       3.33            11,076      3.99
                                              -----------   --------       -----------   -------
 Commercial business loans..................        1,018       0.32               897      0.32
                                              -----------   --------       -----------   -------
    Total other loans.......................       11,782       3.65            11,973      4.31
                                              -----------   --------       -----------   -------
    Total fixed-rate loans..................      230,026      71.27           207,945     74.93
                                              -----------   --------       -----------   -------
ADJUSTABLE-RATE LOANS
 Real estate:
  One-to-four family........................       80,921      25.07            59,901     21.58
  Multi-family..............................           59       0.02                 0      0.00
  Commercial................................        7,226       2.24             6,704      2.42
  Construction or development...............          234       0.07             1,792      0.64
                                              -----------   --------       -----------   -------
    Total adjustable-rate real estate loans.       88,440      27.40            68,397     24.64
 Consumer...................................        4,295       1.33             1,187      0.43
 Commercial business loans..................            0       0.00                 0      0.00
                                              -----------   --------       -----------   -------
    Total adjustable-rate loans.............       92,735      28.73            69,584     25.07
                                              -----------   --------       -----------   -------
    Total loans.............................      322,761     100.00%          277,529    100.00%
                                              -----------   --------       -----------   -------
                                                            --------                     -------
LESS
 Loans in process...........................        3,531                        2,327
 Unamortized discounts......................          289                          162
 Net deferred loan fees.....................        1,899                        2,147
 Allowance for losses on loans..............        2,191                        1,893
                                              -----------                  -----------
    Total loans receivable, net.............  $   314,851                  $   271,000
                                              -----------                  -----------
                                              -----------                  -----------
</TABLE>


                                       6
<PAGE>

     The following schedule illustrates the interest rate sensitivity of 
HMN's loan portfolio at December 31, 1998. Loans which have adjustable or 
renegotiable interest rates are shown as maturing in the period during which 
the contract is due. Scheduled repayments of principal are reflected in the 
year in which they are scheduled to be paid.

<TABLE>
<CAPTION>
                                                           Real Estate
                          -------------------------------------------------------------------------------
                                                         Multi-family and
                             One-to-four family             Commercial                 Construction                 Consumer
                          ------------------------   ------------------------    ------------------------   ------------------------
                                          Weighted                   Weighted                    Weighted                   Weighted
                                          Average                    Average                     Average                    Average
(DOLLARS IN THOUSANDS)       Amount         Rate        Amount         Rate         Amount         Rate        Amount         Rate
                          ------------    --------   -----------     --------    -----------     --------   -----------     --------
     Due During
    Years Ending
    December 31,
-----------------------
<S>                       <C>             <C>        <C>             <C>         <C>             <C>        <C>             <C>
1999(1)...................$     23,681      7.03%    $     2,461       7.61%     $     2,873       8.49%    $     4,420       8.71%
2000......................      21,871      7.34           1,289       8.53              304       8.32           2,518       8.57
2001......................      21,345      7.29           1,403       8.71              221       8.23           2,239       8.48
2002 through 2003.........      41,134      7.24           4,860       8.82              260       7.99           2,846       8.30
2004 through 2008.........      97,120      7.22          10,683       8.36            1,411       8.37          21,950       8.35
2009 through 2023.........     145,862      7.18          13,013       8.14            7,676       7.98             827       8.84
2024 and following........      14,483      7.06               0       0.00            2,410       7.23               0       0.00
                          ------------               -----------                 -----------                -----------
                          $    365,496               $    33,709                 $    15,155                $    34,800
                          ------------               -----------                 -----------                -----------
                          ------------               -----------                 -----------                -----------

<CAPTION>
                                  Commercial
                                   Business                   Total
                          ------------------------   ------------------------
                                          Weighted                   Weighted
                                          Average                    Average 
(DOLLARS IN THOUSANDS)       Amount         Rate        Amount         Rate  
                          ------------    --------   -----------     --------
     Due During
    Years Ending
    December 31,
-----------------------
<S>                       <C>             <C>        <C>             <C>
1999(1)...................$     2,533       8.62%   $     35,968       7.50%
2000......................      1,792       8.95          27,774       7.62
2001......................      1,488       9.01          26,696       7.57
2002 through 2003.........      4,243       8.61          53,343       7.55
2004 through 2008.........        394       8.95         131,558       7.52
2009 through 2023.........      1,245       8.51         168,623       7.31
2024 and following........          0       0.00          16,893       7.08
                          ------------               -----------

                          $    11,695                $   460,855
                          ------------               -----------
                          ------------               -----------
</TABLE>

------------
(1)  Includes demand loans, loans having no stated maturity, overdraft loans and
education loans.

     The total amount of loans due after December 31, 2000 which have 
predetermined interest rates is $311.5 million, while the total amount of 
loans due after such dates which have floating or adjustable interest rates 
is $113.3 million.

     At December 31, 1998 construction or development loans for one-to-four 
family dwellings totaled $5.7 million, multi-family totaled $6.6 million, and 
non-residential totaled $2.9 million.


                                       7

<PAGE>

     Under the Financial Institutions Reform, Recovery and Enforcement Act of 
1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to 
make to any one borrower is generally limited to 15% of unimpaired capital 
and surplus (25% if the security for such loan has a "readily ascertainable" 
value or 30% for certain residential development loans). At December 31, 
1998, based upon the 15% limitation, the Bank's regulatory loans-to-one 
borrower limit was approximately $6.9 million. On the same date, the Bank had 
no borrowers with net outstanding balances in excess of this amount. At 
December 31, 1998, the largest dollar amount outstanding to one borrower or 
group of related borrowers was $6.35 million. This loan, which is secured by 
a shopping mall located in Winona, Minnesota, was performing in accordance 
with its terms at December 31, 1998.

     The Bank's Mortgage and Consumer Loan Committee is responsible for 
review and approval of all loans over the FHLMC/FNMA conforming loan dollar 
limits (the Limit) originated by the Bank. For the majority of 1998 the Limit 
was $227,150, compared to $214,600 for the majority of 1997. Approval of one 
member of the Loan Committee is required on all loans ranging from the Limit 
to $500,000. Loans greater than $500,000 must be approved by the Board of 
Directors of the Bank or its Executive Committee after review and preliminary 
approval by the Loan Committee. All loans closed each month are reviewed by 
the Board of Directors at the monthly meeting.

     During 1998, the Bank centralized its one-to-four family real estate 
loan processing, underwriting, and servicing functions in Spring Valley. Each 
of the branch's loan officers are responsible for taking the initial loan 
application. The application and other pertinent information is then 
forwarded to a central loan processor who is responsible for obtaining 
information relating to processing the loan application. A loan underwriter 
reviews the information obtained by the processor and determines whether the 
loan applicant is eligible to receive the loan in conformity with the Bank's 
written underwriting guidelines and other loan policies.

     All of the Bank's lending is subject to its written underwriting 
standards and to loan origination procedures. Decisions on loan applications 
are made on the basis of detailed applications and property valuations 
(consistent with the Bank's appraisal policy) by the Bank's staff appraiser 
or an independent appraiser. The loan applications are designed primarily to 
determine the borrower's ability to repay. The more significant items on the 
application are verified through use of credit reports, financial statements, 
tax returns and/or confirmations. During 1997 the Bank introduced the Home 
Credit Plus Program which relies on the credit score of the loan applicant 
instead of income, asset and employment verification procedures. The Bank 
also offers low or alternative documentation underwriting procedures which 
conform to FNMA underwriting guidelines.

     Generally, the Bank requires title insurance on its mortgage loans as 
well as fire and extended coverage casualty insurance in amounts at least 
equal to the principal amount of the loan or the value of improvements on the 
property, depending on the type of loan. The Bank also requires flood 
insurance to protect the property securing its interest when the property is 
located in a flood plain.

     ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING.  At December 31, 1998 
HMN's one-to-four family real estate loans totaled $365.5 million, or 79.3% 
of its total loan portfolio, and represented a decline of $30.2 million, 
compared to $395.7 million at December 31, 1997. In order to reduce its 
interest rate risk during 1998, HMN securitized and sold $27.9 million of 
one-to-four family residential loans out of its loan portfolio. It also sold 
approximately 44% of the Bank's one-to-four family residential loans that 
were originated or refinanced during 1998. The loan securitizations and the 
loan sales, when coupled with the accelerated prepayments experienced in the 
loan portfolio during 1998, caused the one-to-four family real estate loan 
portfolio to decline from December 31,1997 to December 31, 1998. See 
"Originations, Purchases and Sales of Loans and Mortgage-Backed and Related 
Securities".


                                       8

<PAGE>

     On December 5, 1997 the Bank merged with Marshalltown Financial 
Corporation ("MFC"). The Loan Portfolio Composition table includes for 
December 31, 1997 $62.9 million of one-to-four family residential loans, $2.3 
of multi-family residential, $2.1 million of commercial real estate and $2.6 
million of consumer loans which were acquired in the MFC merger.

     Prior to 1979, the Bank originated for retention in its own portfolio 
30-year fixed-rate loans secured by one-to-four family residential real 
estate. Beginning in 1979, the Bank began to emphasize the origination of 
fixed-rate loans with terms of 15 years or less for retention in its 
portfolio. In addition, in 1982, the Bank began to originate ARMs, subject to 
market conditions and consumer preference. Subsequently, the Bank also began 
to emphasize GEM originations. See "Management's Discussion and Analysis of 
Financial Condition and Results of Operations - Asset/Liability Management" 
in the Annual Report attached as Exhibit 13 hereto (the "Annual Report").

     The GEM loans require payments which increase after the first year. 
Under the GEM loans, the monthly payments required for the first year are 
established based on a 30-year amortization schedule. Depending upon the 
program selected, the payments may increase in the succeeding years by 
amounts ranging from 0% to 5%. Most of the GEM loans originated by HMN 
provide for at least three annual payment increases over the first five years 
of the loan. The increased payments required under GEM loans are applied to 
principal and have the effect of shortening the term to maturity; the GEM 
loans do not permit negative amortization. HMN has primarily offered two GEM 
programs, one with a contractual maturity of approximately 17 years and one 
with a contractual maturity of approximately 22 years. The GEMs are generally 
priced based upon loans with similar contractual maturities. The GEMs have 
been popular with consumers who anticipate future increases in income and who 
desire an amortization schedule of less than 30 years. HMN believes that GEMs 
may increase in popularity in the future if interest rates rise and consumers 
are less easily able to afford the higher monthly payments required by 
15-year, fixed-rate loans. At December 31, 1998, HMN had $56.2 million of GEM 
loans which comprised 12.2% of the total loan portfolio and represented an 
increase of $2.9 million from GEM loans of $53.3 million at December 31, 1997.

     HMN currently offers conventional fixed-rate one-to-four family loans 
with maximum terms of up to 30 years. During 1998, HMN generally sold the 
majority of new loan originations or refinances with fixed rates and terms to 
maturity ranging from 15 years to 30 years that were eligible for sale in the 
secondary market. Loans which were originated under the First Time Home 
Buyers program were not sold because many of the loans did not conform to 
secondary market underwriting requirements. The interest rates charged on the 
fixed rate loan products are generally set based on the FNMA or FHLMC 
delivery rates, as well as other competitive factors. At December 31, 1998, 
HMN had $227.8 million of fixed rate one-to-four family other loans which 
comprised 49.4% of the total loan portfolio and represented a decrease of 
$28.5 million, from $256.3 million at December 31, 1997.

     HMN also offers one-year ARMs at a margin (generally 275 basis points) 
over the yield on the Average Monthly One Year U.S. Treasury Constant 
Maturity Index for terms of up to 30 years. The ARM loans currently offered 
by HMN allow the borrower to select (subject to pricing) an initial period of 
one year, three years, or five years between the loan origination and when 
the first interest rate change occurs. Generally, the ARMs provide for an up 
to 200 basis point annual interest rate change cap and a lifetime cap 600 
basis points over or under the initial rate. Initial interest rates offered 
on the ARM loans during 1998 ranged from 4 to 186 basis points below the 
fully indexed loan rate. All borrowers are now qualified for the loan at the 
fully indexed rate. HMN's originated ARMs do not permit negative amortization 
of principal, do not contain prepayment penalties and generally are not 
convertible into fixed-rate loans. See "-Delinquencies and Non-Performing 
Assets." In the past, the Bank offered one-year ARMs with a margin of 200 to 
235 basis points over a specified index and an average annual cap of 145 
basis points. At December 31, 1998 the one-to-four family ARMs totaled $81.5 
million, or 17.7% of the total loan portfolio and represented a decrease of 
$4.6 million from $86.1 million at December 31, 1997.


                                       9

<PAGE>

     HMN has also originated a limited number of fixed-rate loans with terms 
up to 30 years which are insured by the Federal Housing Authority ("FHA"), 
Veterans Administration ("VA") and Minnesota Home Finance Administration 
("MHFA").

     In underwriting one-to-four family residential real estate loans, HMN 
evaluates both the borrower's credit history, ability to make principal, 
interest and escrow payments, the value of the property that will secure the 
loan and debt to income ratios. Properties securing one-to-four family 
residential real estate loans made by HMN are appraised by independent fee 
appraisers or by HMN's staff appraiser. HMN originates residential mortgage 
loans with loan-to-value ratios of up to 95% for owner-occupied homes and up 
to 70% for non-owner occupied homes; however, private mortgage insurance is 
required to reduce HMN's exposure to 80% or less. HMN generally seeks to 
underwrite its loans in accordance with secondary market standards.

     HMN's residential mortgage loans customarily include due-on-sale clauses 
giving it the right to declare the loan immediately due and payable in the 
event that, among other things, the borrower sells or otherwise disposes of 
the property subject to the mortgage.

     COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING.  HMN originates 
permanent commercial real estate and multi-family loans secured by properties 
located in its market area. It also purchases commercial real estate loans 
outside of its market area that are guaranteed by the Small Business 
Administration ("SBA") or originated by other third parties. During 1998 HMN 
hired experienced commercial loan officers to originate commercial real 
estate and commercial business loans in HMN's market area. HMN also purchased 
commercial real estate and multi-family loans from third party originators 
during 1998. At December 31, 1998, commercial real estate loans were $29.0 
million or 6.3% of the total loan portfolio and represented an increase of 
$18.4 million compared to $10.6 million at December 31, 1997. At December 31, 
1998 multi-family residential loans were $4.7 million, or 1.0% of the total 
loan portfolio and represented an increase of $2.0 million compared to $2.7 
million at December 31, 1997.

     The commercial real estate and multi-family loan portfolio includes 
loans secured by motels, hotels, apartment buildings, churches, small office 
buildings, small business facilities, shopping malls, nursing homes and other 
non-residential building properties primarily located in the upper Midwestern 
United States.

     Permanent commercial real estate and multi-family loans are generally 
originated for a maximum term of 15 years and may have longer amortization 
periods with balloon maturity features. The interest rates may be fixed for 
the term of the loan or have adjustable features which are tied to prime or a 
treasury index. Commercial real estate and multi-family loans are written in 
amounts of up to 75% of the lesser of the appraised value of the property or 
the purchase price and generally have a debt service coverage ratio of at 
least 120%. The debt service coverage is the ratio of net cash from 
operations before payment of debt to debt service. HMN may originate 
construction loans secured by commercial or multi-family real estate, or may 
purchase participation interests in third party originated construction loans 
secured by commercial or multi-family real estate.

     Appraisals on commercial real estate and multi-family real estate 
properties are performed by independent appraisers prior to the time the loan 
is made. All appraisals on commercial and multi-family real estate are 
reviewed and approved by the commercial loan officer. The Bank's underwriting 
procedures require verification of the borrower's credit history, income and 
financial statements, banking relationships, references and income 
projections for the property. All commercial real estate and multi-family 
loans must be approved by a majority of the commercial loan committee prior 
to closing. The commercial loan policy generally requires personal guarantees 
from the proposed borrowers. Once the loan is closed, HMN performs an annual 
on-site inspection on collateral properties for loans with balances in excess 
of $250,000 and also includes an annual review of the financial performance 
of the property to determine that it is performing as anticipated.


                                       10

<PAGE>

     At December 31, 1998, HMN's two largest commercial real estate loans 
totaled $6.35 million and $4.9 million. The first loan is secured by a 
shopping mall in Winona, Minnesota and the second loan is secured by a hotel 
and other commercial real estate in St. Cloud, Minnesota. Both of these loans 
were performing at December 31, 1998.

     Multi-family and commercial real estate loans generally present a higher 
level of risk than loans secured by one-to-four family residences. This 
greater risk is due to several factors, including the concentration of 
principal in a limited number of loans and borrowers, the effects of general 
economic conditions on income producing properties and the increased 
difficulty of evaluating and monitoring these types of loans. Furthermore, 
the repayment of loans secured by multi-family and commercial real estate is 
typically dependent upon the successful operation of the related real estate 
project. If the cash flow from the project is reduced (for example, if leases 
are not obtained or renewed), the borrower's ability to repay the loan may be 
impaired. At December 31, 1998, HMN had one commercial real estate loan 
totaling $73,000 and no multi-family loans which were 90 days or more 
delinquent.

     CONSTRUCTION LENDING.  HMN makes construction loans to individuals for 
the construction of their residences, and to a much lesser extent, to 
builders for the construction of one-to-four family residences. It also makes 
a very limited number of loans to builders for houses built on speculation. 
At December 31, 1998, HMN had $15.2 million of construction loans 
outstanding, representing 3.3% of its total loan portfolio which represents 
an increase of $9.5 million, compared to $5.7 million at December 31, 1997.

     Almost all loans to individuals for the construction of their residences 
are structured as permanent loans. Such loans are made on the same terms as 
residential loans, except that during the construction phase, which typically 
lasts up to seven months, the borrower pays interest only. Generally, the 
borrower also pays a construction fee up to $800 at the time of origination. 
Residential construction loans are underwritten pursuant to the same 
guidelines used for originating residential loans on existing properties.

     Construction loans to builders or developers of one-to-four family 
residences generally carry terms of 1 to 15 years with a construction phase 
of up to seven months. Such loans generally do not permit the payment of 
interest from loan proceeds.

     Construction loans to owner occupants are generally made in amounts of 
up to 95% of the lesser of cost or appraised value, but no more than 85% of 
the loan proceeds can be disbursed until the building is completed. The 
loan-to-value ratios on loans to builders are limited to 70%. Prior to making 
a commitment to fund a construction loan, HMN requires an appraisal of the 
property and financial data and verification of income on the borrower. HMN 
generally obtains personal guarantees for substantially all of its 
construction loans to builders. Personal financial statements of guarantors 
are also obtained as part of the loan underwriting process. Generally 
construction loans have been located in HMN's market area.

     Construction loans are obtained principally through continued business 
from builders and developers who have previously borrowed from the Bank, as 
well as referrals from existing customers and walk-in customers. The 
application process includes a submission to the Bank of accurate plans, 
specifications and costs of the project to be constructed. These items are 
used as a basis to determine the appraised value of the subject property.

     At December 31, 1998 construction loans on one-to-four family 
residential real estate totaled $5.7 million, construction on multi-family 
residential real estate totaled $6.6 million and construction on commercial 
real estate totaled $2.9 million.

     The nature of construction loans is such that they are more difficult to 
evaluate and monitor. The risk of loss on a construction loan is dependent 
largely upon the accuracy of the initial estimate of the property's value 
upon completion of the project and the estimated cost (including interest) of 
the project. If


                                       11

<PAGE>

the estimate of value proves to be inaccurate, HMN may be confronted, at or 
prior to the maturity of the loan, with a project having a value which is 
insufficient to assure full repayment and/or the possibility of having to 
make substantial investments to complete and sell the project. Because 
defaults in repayment may not occur during the construction period it may be 
difficult to identify problem loans at an early stage. In such cases, HMN may 
be required to modify the terms of the loan.

     CONSUMER LENDING.  HMN originates a variety of different types of 
consumer loans, including home equity loans (open-end and closed-end), 
education, automobile, home improvement, deposit account and other loans for 
household and personal purposes. At December 31, 1998, consumer loans totaled 
$34.8 million, and represented 7.6% of total loans outstanding, compared to 
$31.9 million at December 31, 1997.

     Consumer loan terms vary according to the type and value of collateral, 
length of contract and creditworthiness of the borrower. HMN's consumer loans 
are made at fixed and adjustable interest rates, with terms of up to 20 years 
for secured loans and up to three years for unsecured loans.

     HMN's home equity loans are written so that the total commitment amount, 
when combined with the balance of any other outstanding mortgage liens, may 
not exceed 90% of the appraised value of the property. The closed-end home 
equity loans are written with fixed or adjustable rates with terms of up to 
15 years. The open-end home equity lines are written with an adjustable rate 
with terms of up to 20 years, a 10 year draw period which requires "interest 
only" payments and a 10 year repayment period which fully amortizes the 
outstanding balance. The consumer may access the open-end home equity line 
either by making a withdrawal at the Bank or writing a check on the home 
equity line of credit account. At December 31, 1998, HMN's home equity loans 
totaled $9.6 million, or 2.1% of the total loan portfolio and the home equity 
lines totaled $19.5 million, or 4.2% of the total loan portfolio, compared to 
home equity loans of $7.2 million and home equity lines of $19.5 million at 
December 31, 1997.

     The underwriting standards employed by the Bank for consumer loans 
include a determination of the applicant's payment history on other debts and 
ability to meet existing obligations and payments on the proposed loan. 
Although creditworthiness of the applicant is of primary consideration, the 
underwriting process also includes a comparison of the value of the security, 
if any, in relation to the proposed loan amount. Consumer loans may entail 
greater credit risk than do residential mortgage loans, particularly in the 
case of consumer loans which are unsecured or are secured by rapidly 
depreciable assets, such as automobiles. In such cases, any repossessed 
collateral for a defaulted consumer loan may not provide an adequate source 
of repayment of the outstanding loan balance as a result of the greater 
likelihood of damage, loss or depreciation. In addition, consumer loan 
collections are dependent on the borrower's continuing financial stability, 
and thus are more likely to be affected by adverse personal circumstances. 
Furthermore, the application of various federal and state laws, including 
bankruptcy and insolvency laws, may limit the amount which can be recovered 
on such loans. At December 31, 1998, $86,000 of the consumer loan portfolio 
was non-performing. There can be no assurance that delinquencies will not 
increase in the future.

     COMMERCIAL BUSINESS LENDING.  In order to satisfy the demand for 
financial services available to individuals and businesses in its market 
area, HMN has maintained a portfolio of commercial business loans primarily 
to small retail operations, small manufacturing concerns and professional 
firms. Most of HMN's commercial business loans have terms ranging from six 
months to five years and carry fixed interest rates. HMN's commercial 
business loans generally include personal guarantees and are usually, but not 
always, secured by business assets such as inventory, equipment, fixtures, 
real estate and accounts receivables. The underwriting process for commercial 
business loans includes consideration of the borrower's financial statements, 
tax returns, projections of future business operations and inspection of the 
subject collateral, if any. HMN has also purchased participation interests in 
commercial business loans from third party originators. The underlying 
collateral for the loans are generally equipment and generally have repayment 
periods of less than ten years. At December 31, 1998, HMN had $11.7 million 
of commercial business loans outstanding, or 2.5% of the total loan portfolio 
compared to $5.2 million at December 31, 1997.


                                       12

<PAGE>

     Unlike residential mortgage loans, which generally are made on the basis 
of the borrower's ability to make repayment from his or her employment and 
other income, and which are secured by real property whose value tends to be 
more easily ascertainable, commercial business loans are of higher risk and 
typically are made on the basis of the borrower's ability to make repayment 
from the cash flow of the borrower's business. As a result, the availability 
of funds for the repayment of commercial business loans may be substantially 
dependent on the success of the business itself. Further, the collateral 
securing the loans may depreciate over time, may be difficult to appraise and 
may fluctuate in value based on the success of the business. At December 31, 
1998, there were no delinquent commercial business loans.

ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED AND RELATED 
SECURITIES

     Real estate loans are generally originated by HMN's staff of salaried 
and commissioned loan officers. Loan applications are taken in all branch 
offices.

     While HMN originates both fixed and adjustable-rate loans, its ability 
to originate loans is dependent upon the relative customer demand for loans 
in its market. Demand is affected by the interest rate environment. During 
the last several years, the dollar volume of conventional fixed-rate, 
one-to-four family loans has exceeded the dollar volume of GEMs and ARMs.

     In order to supplement loan demand in HMN's market area and 
geographically diversify its loan portfolio, HMN purchases real estate loans 
from selected sellers, with yields based upon current market rates. HMN 
carefully reviews and underwrites all loans to be purchased to ensure that 
they meet HMN's under-writing standards. The seller generally continues to 
service these purchased loans. During 1998, HMN originated $148.7 million of 
loans compared to $68.1 million and $56.8 million during the years ended 
December 31, 1997 and 1996, respectively. HMN purchased $71.0 million of 
loans during 1998 compared to $71.8 million and $57.3 million during the 
years ended December 31, 1997 and 1996, respectively. The majority of the 
purchased loans have interest rates that are fixed for a one, three or five 
year period and then adjust annually thereafter or were 15 year fixed rate 
loans. All purchased loans are reviewed to determine that each loan meets 
certain underwriting requirements. Refer to Note 5 of the Notes to 
Consolidated Financial Statements in the Annual Report for more information 
on purchased loans.

     HMN has substantial holdings of mortgage-backed and related securities 
which are held, depending on the investment intent, in the "available for 
sale" portfolio. During 1998, HMN purchased $1.8 million of mortgage-backed 
securities compared to $3.4 million and $7.2 million for the years ended 
December 31, 1997 and 1996. It also purchased $112.0 million of CMOs during 
1998 compared to $24.0 million and $50.4 million for the years ended December 
31, 1997 and 1996, respectively. See -"Investment Activities." During 1998, 
HMN sold $96.5 million of mortgage-backed and related securities compared to 
$67.9 million and $81.1 million for the years ended December 31, 1997 and 
1996, respectively.


                                       13
<PAGE>

     The following table shows the loan and mortgage-backed and related 
securities origination, purchase, sale and repayment activities of HMN for 
the periods indicated.

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
LOANS                                                       Year Ended December 31,
ORIGINATIONS BY TYPE:                                       1998       1997     1996
                                                          --------   -------   -------
<S>                                                       <C>        <C>       <C>
  Adjustable-rate:
   Real estate - one-to-four family....................   $  2,328     1,987     5,441
               - commercial............................      5,388     1,000         0
               - construction or development...........        787       375       916
   Non-real estate - consumer..........................     15,689    16,871    12,012
                   - commercial business...............        176         0         0
                                                          --------   -------   -------
         Total adjustable-rate.........................     24,368    20,233    18,369
                                                          --------   -------   -------
  Fixed-rate:
   Real estate - one-to-four family....................     44,413    32,024    27,036
               - multi-family..........................      1,694       263       145
               - commercial............................     16,882        50        30
               - construction or development...........     10,626     6,539     6,181
   Non-real estate - consumer..........................     13,100     7,579     4,583
                   - commercial business...............     37,672     1,409       430
                                                          --------   -------   -------
         Total fixed-rate..............................    124,387    47,864    38,405
                                                          --------   -------   -------
         Total loans originated........................    148,755    68,097    56,774
                                                          --------   -------   -------
PURCHASES:
   Real estate - one-to-four family....................     58,512    67,213    55,839
               - multi-family..........................      8,571         0         0
               - commercial............................      1,172         0         0
               - construction or development...........          0     2,425     1,500
   Non-real estate - commercial business...............      2,731     2,174         0
                                                          --------   -------   -------
         Total purchased...............................     70,986    71,812    57,339
                                                          --------   -------   -------
ACQUISITION:
   Real estate - one-to-four family....................          0    63,328         0
               - multi-family..........................          0     2,308         0
               - commercial............................          0     2,099         0
   Non-real estate - consumer..........................          0     2,599         0
                                                          --------   -------   -------
        Total loans acquired...........................          0    70,334         0
                                                          --------   -------   -------
Transfers from loans held for sale.....................          0        96         0
SALES AND REPAYMENTS:
   Real estate - one-to-four family....................      5,878     8,969     2,310
               - commercial............................        650         0         0
   Non-real estate - consumer..........................        238       339       176
                                                          --------   -------   -------
         Total sales...................................      6,766     9,308     2,486
                                                          --------   -------   -------
   Loans securitized and transferred to securities.....     27,953    16,526    15,412
   Transfers to loans held for sale....................     52,295     4,347     2,492
   Principal repayments................................    106,824    84,244    56,533
                                                          --------   -------   -------
         Total reductions..............................    193,838   114,425    76,923
                                                          --------   -------   -------
   Decrease in other items, net........................    (20,517)   (2,867)   (3,019)
                                                          --------   -------   -------
         Net increase..................................   $  5,386    93,047    34,171
                                                          --------   -------   -------
                                                          --------   -------   -------
</TABLE>


                                        14
<PAGE>

<TABLE>
<S>                                                       <C>        <C>       <C>
MORTGAGE-BACKED AND RELATED SECURITIES
     Loans securitized and transferred to securities...   $ 27,953    16,526    15,441
 PURCHASES:
  Mortgage-backed securities:(1)
    Adjustable-rate....................................          0         0         0
    Fixed-rate.........................................      1,766     3,426     7,266
  CMOs and REMICs:
    Adjustable-rate....................................     76,174     3,417     6,527
    Fixed-rate.........................................     35,839    20,617    43,831
                                                          --------   -------   -------
        Total purchases................................    113,779    27,460    57,624
                                                          --------   -------   -------
 ACQUISITION:
   Adjustable rate.....................................          0    12,522         0
   Fixed rate..........................................          0    25,738         0
                                                          --------   -------   -------
        Total acquisitions.............................          0    38,260         0
                                                          --------   -------   -------
 SALES:
  Mortgage-backed securities:(1)
    Adjustable-rate....................................     24,955     9,535         0
    Fixed-rate.........................................     46,432       344    24,786
  CMOs and REMICs:
    Adjustable-rate....................................     13,765    26,486    23,876
    Fixed-rate.........................................     11,366    31,529    32,487
                                                          --------   -------   -------
       Total sales.....................................     96,518    67,894    81,149
                                                          --------   -------   -------
 PRINCIPAL REPAYMENTS:
  Decrease in other items, net.........................     38,003    13,578    28,915
                                                          --------   -------   -------
     Net increase (decrease)...........................   $  7,211       774   (36,999)
                                                          --------   -------   -------
                                                          --------   -------   -------
</TABLE>
---------------
(1) Consists of pass-through securities.

DELINQUENCIES AND NON-PERFORMING ASSETS

     DELINQUENCY PROCEDURES.  When a borrower fails to make a required 
payment on a loan, HMN attempts to cure the delinquency by contacting the 
borrower.  A late notice is sent on all loans over 16 days delinquent.  
Additional written and verbal contacts may be made with the borrower between 
30 and 60 days after the due date.  If the loan is contractually delinquent 
90 days, HMN usually sends a 30-day demand letter to the borrower and, after 
the loan is contractually delinquent 120 days, institutes appropriate action 
to foreclose on the property.  If foreclosed, the property is sold at a 
sheriff's sale and may be purchased by HMN.  Delinquent consumer loans are 
generally handled in a similar manner.  HMN's procedures for repossession and 
sale of consumer collateral are subject to various requirements under state 
consumer protection laws.

     Real estate acquired by HMN as a result of foreclosure or by deed in 
lieu of foreclosure is classified as real estate in judgement for six months 
to one year and thereafter as real estate owned until it is sold.  When 
property is acquired or expected to be acquired by foreclosure or deed in 
lieu of foreclosure, it is recorded at the lower of cost or estimated fair 
value, less the estimated cost of disposition.  After acquisition, all costs 
incurred in maintaining the property are expensed.  Costs relating to the 
development and improvement of the property, however, are capitalized to the 
extent of fair value less disposition cost.


                                        15
<PAGE>

     The following table sets forth HMN's loan delinquencies by type, by 
amount and by percentage of type at December 31, 1998.

<TABLE>
<CAPTION>
                                            Loans Delinquent For:
                           -------------------------------------------------------        Total Delinquent
                                   60-89 Days                90 Days and Over                   Loans
                           --------------------------   --------------------------   --------------------------
                                              Percent                      Percent                      Percent
                                              of Loan                      of Loan                      of Loan
(DOLLARS IN THOUSANDS)     Number   Amount   Category   Number   Amount   Category   Number   Amount   Category
                           ------   ------   --------   ------   ------   --------   ------   ------   --------
<S>                        <C>      <C>      <C>        <C>      <C>      <C>        <C>       <C>     <C>
One-to-four family
  real estate...........      9      $297      0.08%      13      $630      0.17%      22     $  927     0.25%
Multi-family............      0         0      0.00        0         0      0.00        0          0     0.00
Commercial..............      0         0      0.00        1        73      0.25        1         73     0.25
Construction or
  development...........      0         0      0.00        0         0      0.00        0          0     0.00
Consumer................     12        68      0.20        8        86      0.25       20        154     0.44
Commercial
  business..............      0         0      0.00        0         0      0.00        0          0     0.00
                             --      ----                 --      ----                 --     ------
    Total...............     21      $365      0.08%      22      $789      0.17%      43     $1,154     0.25%
                             --      ----                 --      ----                 --     ------
                             --      ----                 --      ----                 --     ------
</TABLE>

     CLASSIFICATION OF ASSETS.  Federal regulations require that each savings 
institution classify its own assets on a regular basis.  In addition, in 
connection with examinations of savings institutions, OTS and FDIC examiners 
have authority to identify problem assets and, if appropriate, require them 
to be classified.  There are three classifications for problem assets: 
Substandard, Doubtful and Loss.  Substandard assets have one or more defined 
weaknesses and are characterized by the distinct possibility that the Bank 
will sustain some loss if the deficiencies are not corrected.  Doubtful 
assets have the weaknesses of Substandard assets, with the additional 
characteristics that the weaknesses make collection or liquidation in full on 
the basis of currently existing facts, conditions and values questionable, 
and there is a high possibility of loss.  An asset classified as Loss is 
considered uncollectible and of such little value that continuance as an 
asset on the balance sheet of the institution is not warranted.  Assets 
classified as Substandard or Doubtful require the institution to establish 
prudent general allowances for loan losses. If an asset or portion thereof is 
classified as Loss, the institution must either establish specific allowances 
for loan losses in the amount of 100% of the portion of the asset classified 
as Loss, or charge off such amount.  If an institution does not agree with an 
examiner's classification of an asset, it may appeal this determination to 
the District Director of the OTS.  On the basis of management's review of its 
assets, at December 31, 1998, the Bank had classified a total of $879,000 of 
its loans and other assets as follows:

<TABLE>
<CAPTION>
                                                           Commercial Real
                           One-to-Four   Construction or     Estate and                 Commercial
(DOLLARS IN THOUSANDS)       Family        Development      Multi-Family     Consumer    Business
                           -----------   ---------------   ---------------   --------   ----------
<S>                        <C>           <C>               <C>               <C>        <C>
Substandard.............      $716              0                 73            90           0
Doubtful................         0              0                  0             0           0
Loss....................         0              0                  0             0           0
                              ----              -                 --            --           -
    Total...............      $716              0                 73            90           0
                              ----              -                 --            --           -
                              ----              -                 --            --           -
</TABLE>

     The Bank's classified assets consist of the non-performing loans and 
loans and other assets of concern discussed herein.  As of the date hereof, 
these asset classifications are materially consistent with those of the OTS 
and FDIC.

     NON-PERFORMING ASSETS.  Loans are reviewed quarterly and any loan whose
collectibility is doubtful is placed on non-accrual status.  Loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due,
unless, in the judgment of management, the loan is well collateralized and in
the process of collection.  Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income.  Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan. 


                                        16
<PAGE>

Restructured loans include the Bank's troubled debt restructurings (which 
involved forgiving a portion of interest or principal on any loans or making 
loans at a rate materially less than the market rate).  Foreclosed assets 
include assets acquired in settlement of loans.  The following table sets 
forth the amounts and categories of non-performing assets in the Bank's 
portfolio.

<TABLE>
<CAPTION>
                                                                   December 31,
                                                    ----------------------------------------
(DOLLARS IN THOUSANDS)                               1998     1997    1996     1995     1994
                                                    -----    -----   -----    -----    -----
<S>                                                 <C>      <C>     <C>      <C>      <C>
Non-accruing loans:
 Real estate:
   One-to-four family............................   $ 317     177      235      196      178
   Commercial real estate........................      73      79       83       85        0
   Consumer......................................      86       7        7       32       57
   Commercial business...........................       0       0       13      128
                                                    -----    ----    -----    -----    -----
     Total.......................................     476     263      338      441      235
                                                    -----    ----    -----    -----    -----
Accruing loans delinquent 90 days or more:
  One-to-four family.............................     312     365        0        0        0
  Consumer.......................................       0      37        0        0        0
                                                    -----    ----    -----    -----    -----
     Total.......................................     312     402        0        0        0
                                                    -----    ----    -----    -----    -----
Restructured loans:
  Multi-family...................................       0       0        0       94      199
Foreclosed assets:
 Real estate:
   One-to-four family............................      18     142       23      315       64
                                                    -----    ----    -----    -----    -----
     Total.......................................      18     142       23      315       64
                                                    -----    ----    -----    -----    -----
Total non-performing assets......................   $ 806     807      361      850      498
                                                    -----    ----    -----    -----    -----
                                                    -----    ----    -----    -----    -----
Total as a percentage of total assets............    0.12%   0.12%    0.07%    0.16%    0.10%
                                                    -----    ----    -----    -----    -----
                                                    -----    ----    -----    -----    -----
Total non-performing loans.......................   $ 788     665    $ 338    $ 535    $ 434
                                                    -----    ----    -----    -----    -----
                                                    -----    ----    -----    -----    -----
Total as a percentage of total
 loans receivable, net...........................    0.18%   0.15%    0.10%    0.17%    0.16%
                                                    -----    ----    -----    -----    -----
                                                    -----    ----    -----    -----    -----
</TABLE>

     For the year ended December 31, 1998, gross interest income which would 
have been recorded had the non-accruing loans been current in accordance with 
their original terms amounted to $49,382.  The amounts that were included in 
interest income on such loans during 1998 were $28,618.

     Total non-performing assets were $806,000 at December 31, 1998, a 
decrease of $1,000, compared to $807,000 at December 31, 1997 and $361,000 at 
December 31, 1996.  Non-performing assets had the following activity during 
1998: sales of $142,000, transfers in of $389,000 and transfers out due to 
performance of $248,000.  Non-performing assets had the following activity 
during 1997: sales of $42,000, charge-offs of $35,000, payments of $80,000 
and net transfers to non-performing assets of $603,000.  The increase in 
non-performing assets from 1996 to 1997 is primarily the result of three 
one-to-four family purchased loans totaling $365,000 that were behind on 
their payments by more than 90 days and the foreclosure of two one-to-four 
family mortgages totaling $142,000. The decrease in the non-accruing loans is 
the result of the normal inflow and outflow of delinquent loans caused by 
borrowers getting behind on their payments and then bringing the loans 
current again.

     Total non-performing assets were $361,000 at December 31, 1996, a 
decrease of $489,000, compared to $850,000 at December 31, 1995.  The 
decrease in non-performing assets is the result of the sale of foreclosed 
assets of $315,000, the charge-off of $72,000 of commercial loans, and the 
normal inflow and outflow of delinquent loans caused by borrowers getting 
behind on their payments and then bringing the loans current again.


                                        17
<PAGE>

     OTHER LOANS OF CONCERN.  In addition to the non-performing assets set 
forth in the table above, as of December 31, 1998 there were $72,000 of loans 
with known information about the possible credit problems of the borrowers or 
the cash flows of the secured properties have caused management to have 
concerns as to the ability of the borrowers to comply with present loan 
repayment terms and which may result in the future inclusion of such items in 
the non-performing asset categories.

     Management has considered the Bank's non-performing and "of concern" 
assets in establishing its allowance for loan losses.

     ALLOWANCE FOR LOSSES ON LOANS.  The following table sets forth an 
analysis of the Bank's allowance for loan losses for the year ended:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)                              1998     1997      1996      1995      1994
                                                   ------   ------    ------    ------    ------
<S>                                                <C>      <C>       <C>       <C>       <C>
Balance at beginning of year...................    $2,748    2,341     2,191     1,893     1,489
MFC allowance for losses acquired..............         0      122         0         0         0
Provision for losses...........................       310      300       300       300       410

CHARGE-OFFS
 Real estate:
  One-to-four family...........................        (2)      (4)        0         0         0
  Multi-family.................................         0        0       (88)        0         0
  Consumer.....................................       (17)      (7)       (1)       (2)       (6)
  Commercial business..........................         0      (12)      (61)        0         0
                                                   ------   ------    ------    ------    ------
                                                      (19)     (23)     (150)       (2)       (6)
                                                   ------   ------    ------    ------    ------
RECOVERIES
 Real estate:
  Commercial business..........................         2        8         0         0         0
                                                   ------   ------    ------    ------    ------
                                                        2        8         0         0         0
                                                   ------   ------    ------    ------    ------
Net charge-offs................................       (17)     (15)     (150)       (2)       (6)
                                                   ------   ------    ------    ------    ------
Balance at end of year.........................    $3,041    2,748     2,341     2,191     1,893
                                                   ------   ------    ------    ------    ------
                                                   ------   ------    ------    ------    ------
Ratio of net charge-offs during the year to
 average loans outstanding during the year.....      0.00%    0.01%     0.05%     0.00%     0.00%
                                                   ------   ------    ------    ------    ------
                                                   ------   ------    ------    ------    ------
Ratio of allowance for losses on loans to
 total non-performing loans, at end of year....    385.79%  413.17%   691.84%   409.13%   436.52%
                                                   ------   ------    ------    ------    ------
                                                   ------   ------    ------    ------    ------
</TABLE>


                                        18
<PAGE>

     The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:

<TABLE>
<CAPTION>

                                                                  December 31,
                                   ------------------------------------------------------------------------------
                                           1998                       1997                        1996
                                   --------------------      ---------------------      -------------------------
                                               Percent                    Percent                      Percent
                                               of Loans                   of Loans                     of Loans
                                               in Each                    in Each                      in Each
                                               Category                   Category                     Category
                                               to Total                   to Total                     to Total
(DOLLARS IN THOUSANDS)               Amount      Loans         Amount       Loans         Amount         Loans
                                   ---------   ----------    ----------   ----------    ----------     ---------
<S>                                <C>         <C>           <C>          <C>           <C>            <C>
Real Estate:
  One-to-four family.............. $     544      79.31%     $      560      87.58%     $      496       90.19%
  Multi-family....................       142       1.02              80       0.60               8        0.08
  Commercial .....................       797       6.29             198       2.34             113        2.22
  Construction or development.....       455       3.29             172       1.27             104        0.98
Consumer..........................       546       7.55             527       7.05             473        5.87
Commercial business...............       328       2.54              46       1.16              29        0.66
Unallocated.......................       229       0.00           1,165       0.00           1,118        0.00
                                   ---------   --------      ----------   --------      ----------      ------
     Total.......................  $   3,041     100.00%     $    2,748     100.00%     $    2,341      100.00%
                                   ---------   --------      ----------   --------      ----------      ------
                                   ---------   --------      ----------   --------      ----------      ------

<CAPTION>
                                             1995                           1994
                                   -------------------------   ---------------------------
                                                  Percent                        Percent
                                                  of Loans                       of Loans
                                                  in Each                        in Each
                                                  Category                       Category
                                                  to Total                       to Total
(DOLLARS IN THOUSANDS)               Amount        Loans        Amount            Loans
                                   --------      -----------  -----------      -----------
<S>                                <C>            <C>          <C>              <C>
Real Estate:
  One-to-four family.............  $    452         90.62%     $     475          92.18%
  Multi-family...................        21          0.11             21           0.14
  Commercial ....................       125          2.71            128           1.80
  Construction or development....       153          1.58             84           1.31
Consumer.........................       286          4.66            280           4.14
Commercial business..............        37          0.32             27           0.43
Unallocated......................     1,117          0.00            878           0.00
                                   --------      --------      ---------       --------
     Total.......................  $  2,191        100.00%     $   1,893         100.00%
                                   --------      --------      ---------       --------
                                   --------      --------      ---------       --------
</TABLE>


                                      19
<PAGE>

     The allowance for losses on loans is established through a provision for
losses on loans charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio and changes in the nature and volume of
its loan activity.  Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses.  In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, the general level of
non-performing assets and the anticipated net realizable values, the current
loan portfolio and current economic conditions are considered.  The Bank also
requires additional reserves for all classified loans.

     While management believes that it uses the best information available to 
determine the allowance for losses on loans, unforeseen market conditions 
could result in adjustments to the allowance for losses on loans, and net 
earnings could be significantly affected, if circumstances differ 
substantially from the assumptions used in making the final determination.  
Refer to Management's Discussion and Analysis on Allowances for Loan and Real 
Estate Losses and Non-performing Assets in the Annual Report.

INVESTMENT ACTIVITIES

     HMN and the Bank utilize the available for sale securities portfolio in 
virtually all aspects of asset/liability management strategy.  In making 
investment decisions, the Investment/Asset - Liability Committee considers, 
among other things, the yield and interest rate objectives, the credit risk 
position and the projected cash flow requirements.

     The Bank must maintain minimum levels of investments that qualify as 
liquid assets under OTS regulations.  Liquidity may increase or decrease 
depending upon the availability of funds and comparative yields on 
investments in relation to the return on loans. Cash flow projections are 
regularly reviewed and updated to assure that adequate liquidity is 
maintained. At December 31, 1998, the Bank's liquidity ratio (liquid assets 
as a percentage of net withdrawable savings deposits and current borrowings) 
was 10.27%. The Bank's level of liquidity is a result of management's 
asset/liability strategy.  See "Regulation - Liquidity."

     SECURITIES.  Federally chartered savings institutions have the authority 
to invest in various types of liquid assets, including United States Treasury 
obligations, securities of various federal agencies, certain certificates of 
deposit of insured banks and savings institutions, certain bankers' 
acceptances, repurchase agreements and federal funds.  Subject to various 
restrictions, federally chartered savings institutions may also invest their 
assets in commercial paper, investment grade corporate debt securities and 
mutual funds whose assets conform to the investments that a federally 
chartered savings institution is otherwise authorized to make directly.

     The investment strategy of HMN and the Bank has been directed toward a 
mix of high-quality assets (primarily government and agency obligations) with 
short and intermediate terms to maturity.  At December 31, 1998, HMN did not 
own any investment securities of a single issuer which exceeded 10% of HMN's 
stockholder's equity other than U.S. government or federal agency obligations.

     The Bank invests a portion of its liquid assets in interest-earning 
overnight deposits of the Federal Home Loan Bank ("FHLB") of Des Moines and 
various money market mutual funds.  Other investments include high grade 
medium-term (up to three years) corporate debt securities, medium-term 
federal agency notes, and a variety of other types of mutual funds which 
invest in adjustable-rate, mortgage-backed securities, asset-backed 
securities, repurchase agreements and U.S. Treasury and agency obligations.  
HMN invests in the same type of investment securities as the Bank and also 
invests in taxable and tax exempt municipal obligations and corporate 
equities such as preferred and common stock.  See Notes 3 and 4 of the Notes 
to Consolidated Financial Statements in the Annual Report for additional 
information regarding  HMN's securities portfolio.


                                      20
<PAGE>

The following table sets forth the composition of HMN's securities portfolio,
excluding mortgage-backed and related securities, at the dates indicated.

<TABLE>
<CAPTION>
                                                                                December 31,
                                        -------------------------------------------------------------------------------------
                                                             1998                                           1997
                                        ---------------------------------------------   -------------------------------------
                                         Amortized    Adjusted   Market     % of     Amortized    Adjusted   Market     % of
(DOLLARS IN THOUSANDS)                     Cost           To      Value     Total        Cost         To      Value     Total
                                        -----------   --------   ------    ------   -----------   --------   ------    ------
<S>                                     <C>             <C>      <C>       <C>      <C>           <C>        <C>       <C>
Securities available for sale:
  U.S. government and agency
    obligations.......................  $  17,379         12     17,391     25.11%   $  43,403       (60)    43,343     49.98%
  Municipal obligations...............      2,901         (5)     2,896      4.18            0         0          0      0.00
  Corporate debt .....................      4,232         (3)     4,229      6.10        2,903         0      2,903      3.35
  Corporate equity(1).................      8,271       (296)     7,975     11.51        8,017     1,021      9,038     10.42
  Stock of federal agencies(1)........      5,874        114      5,988      8.64       14,034       605     14,639     16.88
Securities held to maturity:
  Corporate debt......................          0                     0      0.00            0                    0      0.00
                                        ---------                ------    ------    ---------               ------    ------
    Subtotal..........................     38,657                38,479     55.54       68,357               69,923     80.63
FHLB stock............................      9,838                 9,838     14.20        7,432                7,432      8.57
                                        ---------                ------    ------    ---------               ------    ------
    Total investment securities
     and FHLB stock...................     48,495                48,317     69.74       75,789               77,355     89.20
                                        ---------                ------    ------    ---------               ------    ------
Average remaining life of investment
   securities excluding FHLB stock....  4.5 years                                    2.5 years

Other Interest-earning Assets:
  Cash equivalents....................     20,961                20,961     30.26        9,365                9,365     10.80
                                        ---------                ------    ------    ---------               ------    ------
    Total.............................  $  69,456                69,278    100.00%   $  85,154               86,720    100.00%
                                        ---------                ------    ------    ---------               ------    ------
                                        ---------                ------    ------    ---------               ------    ------

Average remaining life or term
 to repricing of investment securities
 and other interest-earning assets,
 excluding FHLB stock.................  3.2 years                                    2.3 years


<CAPTION>

                                                             1996
                                        -----------------------------------------
                                        Amortized    Adjusted    Market     % of 
(DOLLARS IN THOUSANDS)                    Cost          To       Value     Total 
                                        ---------    --------    ------    ------
<S>                                     <C>          <C>         <C>       <C>
Securities available for sale:
  U.S. government and agency
    obligations.......................  $  29,600       (322)    29,278     49.93%
  Municipal obligations...............          0          0          0      0.00
  Corporate debt .....................      1,091          1      1,092      1.86
  Corporate equity(1).................      7,796        386      8,182     13.96
  Stock of federal agencies(1)........      3,874         49      3,923      6.69
Securities held to maturity:
  Corporate debt......................      1,000                 1,001      1.71
                                        ---------                ------    ------
    Subtotal..........................     43,361                43,476     74.15
FHLB stock............................      5,434                 5,434      9.27
                                        ---------                ------    ------
    Total investment securities
     and FHLB stock...................     48,795                48,910     83.42
                                        ---------                ------    ------
Average remaining life of investment
   securities excluding FHLB stock....  3.4 years

Other Interest-earning Assets:
  Cash equivalents....................      9,718                 9,718     16.58
                                        ---------                ------    ------
    Total.............................  $  58,513                58,628    100.00%
                                        ---------                ------    ------
                                        ---------                ------    ------

Average remaining life or term
 to repricing of investment securities
 and other interest-earning assets,
 excluding FHLB stock.................  2.8 years

</TABLE>


(1)  Average life assigned to corporate equity holdings and stock of federal 
agencies is five years.


                                       21

<PAGE>

     The composition and maturities of the securities portfolio, excluding 
FHLB stock, mortgage-backed and other related securities, are indicated in 
the following table.

<TABLE>
<CAPTION>
                                                                 December 31, 1998
                                      ----------------------------------------------------------
                                                   After 1      After 5
                                       1 Year     through 5    through 10    Over      No Stated
                                       or Less      Years        Years     10 Years     Maturity
                                      ---------   ---------    ---------   ---------   ---------
                                      Amortized   Amortized    Amortized   Amortized   Amortized
(DOLLARS IN THOUSANDS)                   Cost        Cost         Cost        Cost       Cost
                                      ---------   ---------    ---------   ---------   ---------
<S>                                   <C>         <C>          <C>         <C>         <C>
Securities available for sale:
  U.S. government securities........  $      0       9,887            0       7,492           0
  Municipal obligations.............         0           0            0       2,901           0
  Corporate debt....................     1,152       2,520          560           0           0
  Corporate equity..................         0           0            0           0       8,271
  Stock of federal agencies.........         0           0            0           0       5,874
                                      --------    --------     --------     -------    --------
Total stock.........................  $  1,152      12,407          560      10,393      14,145
                                      --------    --------     --------     -------    --------
                                      --------    --------     --------     -------    --------

Weighted average yield..............      6.50%       6.39%        8.00%       6.83%       5.34%

<CAPTION>
                                               December 31, 1998
                                      --------------------------------
                                                   Total
                                                Securities
                                      --------------------------------
                                      Amortized   Adjusted    Market
(DOLLARS IN THOUSANDS)                  Cost         to       Value
                                      ---------   --------   -------
<S>                                   <C>         <C>        <C>
Securities available for sale:
  U.S. government securities........    17,379        12      17,391
  Municipal obligations.............     2,901        (5)      2,896
  Corporate debt....................     4,232        (3)      4,229
  Corporate equity..................     8,271      (296)      7,975
  Stock of federal agencies.........     5,874       114       5,988
                                      --------               -------
Total stock.........................    38,657                38,479
                                      --------               -------
                                      --------               -------

Weighted average yield..............      6.15%

</TABLE>


                                       22

<PAGE>

     MORTGAGE-BACKED AND RELATED SECURITIES.  In order to supplement loan 
production (particularly those of interest rate sensitive loans) and achieve 
its asset/liability management goals, HMN invests in mortgage-backed and 
related securities. All of the mortgage-backed and related securities owned 
by HMN are issued, insured or guaranteed either directly or indirectly by a 
federal agency or are rated "AA" or higher. At December 31, 1998, HMN had 
$143.1 million of mortgage-backed and related securities all classified as 
available for sale, compared to $135.9 at December 31, 1997 and $135.2 
million at December 31, 1996, of which $133.4 million were classified as 
available for sale.

     The contractual maturities of the mortgage-backed and related securities 
portfolio without any prepayment assumptions at December 31, 1998 is as 
follows:

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                                 1998
                                                      5 Years      5 to 10        10 to 20        Over 20       Balance
(DOLLARS IN THOUSANDS)                                or Less       Years           Years          Years      Outstanding
                                                   ------------   ----------    ------------    -----------   ------------
<S>                                                <C>            <C>           <C>             <C>           <C>
Securities available for sale:
  Federal Home Loan Mortgage Corporation........   $        133          561           1,183              0          1,877
  Federal National Mortgage Association.........              0            0               0            574            574
  Government National Mortgage Association......              0           13             108          1,366          1,487
  Other mortgage-backed securities..............              0            0               0            101            101
  Collateralized Mortgage Obligations...........          1,028        2,208          18,928        116,943        139,107
                                                   ------------   ----------    ------------    -----------   ------------
     Total......................................   $      1,161        2,782          20,219        118,984        143,146
                                                   ------------   ----------    ------------    -----------   ------------
                                                   ------------   ----------    ------------    -----------   ------------

  Weighted average yield........................           7.50%        7.21%           7.03%          6.66%          6.73%
</TABLE>

     At December 31, 1998, HMN did not have any non-agency mortgage-backed or 
related securities in excess of 10% of its stockholders' equity, except for a 
$11.9 million collateralized mortgage obligation issued by Bear Stearns with 
an AAA rating by Moody's.

     CMOs are securities derived by reallocating the cash flows from 
mortgage-backed securities or pools of mortgage loans in order to create 
multiple classes, or tranches, of securities with coupon rates and average 
lives that differ from the underlying collateral as a whole. The terms to 
maturity of any particular tranche is dependent upon the prepayment speed of 
the underlying collateral as well as the structure of the particular CMO. 
Although a significant proportion of HMN's CMOs are in tranches which have 
been structured (through the use of cash flow priority and "support" 
tranches) to give somewhat more predictable cash flows, the cash flow and 
hence the value of CMOs is subject to change.

     At December 31, 1998, HMN had $94.5 million invested in CMOs which have 
floating interest rates that change either monthly or quarterly, compared to 
$23.3 million at December 31, 1997 and $43.5 million at December 31, 1996. 
During 1998 HMN increased its investment in floating rate CMOs in order to 
reduce its overall interest rate risk exposure.

     At December 31, 1998 the projected duration (period of time until half 
the interest and half the principal is collected) of the $44.6 million fixed 
rate CMO portfolio is approximately 1.0 year using median prepayment speeds 
projected by the Bloomberg security system, compared to approximately 3.3 
years for the $61.8 million fixed rate CMO security portfolio at December 31, 
1997.

     Refer to Management's Discussion and Analysis-Market Risk in the Annual 
Report for information on changes in market value of the mortgage-backed or 
related securities under different rate shock environments.

     To assess price volatility, the Federal Financial Institutions 
Examination Council ("FFIEC") adopted a policy in 1992 which required an 
annual "stress" test of mortgage derivative securities. The policy, which was 
adopted by the OTS, required the Bank to annually test its CMOs and other 
mortgage-related securities to


                                       23
<PAGE>

determine whether they were "high-risk" or "nonhigh-risk securities". During 
1998 the OTS adopted Thrift Bulletin 13A which no longer required that 
"high-risk" testing be performed on an institution's CMOs and other 
mortgage-related securities.

     Mortgage-backed and related securities can serve as collateral for 
borrowings and, through sales and repayments, as a source of liquidity. In 
addition, mortgage-backed and related securities available for sale can be 
sold to respond to changes in economic conditions. For information regarding 
the carrying and market values of HMN's mortgage-backed and related 
securities portfolio, see Notes 3 and 4 of the Notes to Consolidated 
Financial Statements in the Annual Report.

     MERGERS AND ACQUISITIONS.  On December 5, 1997 HMN, through its wholly 
owned subsidiary, the Bank, completed its merger with Marshalltown Financial 
Corporation (MFC) pursuant to a merger agreement dated July 1, 1997. Refer to 
Note 2 of the Notes to Consolidated Financial Statements in the Annual Report 
for information on assets acquired in the merger.

SOURCES OF FUNDS

     GENERAL.  The Bank's primary sources of funds are deposits, payments 
(including prepayments) of loan principal, interest earned on loans and 
securities, repayments of securities, borrowings and other funds provided 
from operations.

     DEPOSITS.  The Bank offers a variety of deposit accounts having a wide 
range of interest rates and terms. The Bank's deposits consist of passbook, 
NOW, money market, non-interest bearing checking and certificate accounts 
(including individual retirement accounts). The Bank relies primarily on 
competitive pricing policies and customer service to attract and retain these 
deposits.

     The variety of deposit accounts offered by the Bank has allowed it to be 
competitive in obtaining funds and to respond with flexibility to changes in 
consumer demand. As customers have become more interest rate conscious, the 
Bank has become more susceptible to short-term fluctuations in deposit flows. 
The Bank manages the pricing of its deposits in keeping with its 
asset/liability management, profitability and growth objectives. Based on its 
experience, the Bank believes that its passbook and NOW accounts are 
relatively stable sources of deposits. However, the ability of the Bank to 
attract and maintain certificate deposits, and the rates paid on these 
deposits, has been and will continue to be significantly affected by market 
conditions.

     The following table sets forth the savings flows at the Bank during the 
periods indicated.

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                  ----------------------------------------
(DOLLARS IN THOUSANDS)                               1998           1997            1996
                                                  ---------       --------        --------
<S>                                              <C>              <C>             <C>
Opening balance.............................     $  467,348        362,477         373,539
MFC deposits acquired.......................              0        103,612               0
Deposits....................................        536,135        370,761         351,330
Withdrawals.................................       (588,662)      (385,002)       (378,009)
Interest credited...........................         19,048         15,500          15,617
                                                 ----------       --------        --------
  Ending balance............................        433,869        467,348         362,477
                                                 ----------       --------        --------

Net increase (decrease).....................     $  (33,479)       104,871         (11,062)
                                                 ----------       --------        --------
                                                 ----------       --------        --------

Percent increase (decrease).................          (7.16)%        28.93%          (2.96)%
                                                 ----------       --------        --------
                                                 ----------       --------        --------
</TABLE>


                                       24

<PAGE>

     The following table sets forth the dollar amount of savings deposits in 
the various types of deposit programs offered by the Bank as of December 31:

<TABLE>
<CAPTION>

                                                       1998                          1997                      1996
                                            ----------------------------  --------------------------  ----------------------
                                                            Percent                      Percent                     Percent
(DOLLARS IN THOUSANDS)                         Amount       of Total       Amount        of Total      AMOUNT        of Total
                                              --------      --------      --------       --------     ---------     --------
<S>                                        <C>              <C>           <C>            <C>          <C>           <C>
TRANSACTIONS AND SAVINGS DEPOSITS(1):

Non-interest checking....................  $   13,187         3.04%      $    3,833        0.82%    $    2,389       0.66%

NOW Accounts - 1.00%(2)..................      25,459         5.87           23,144        4.95         17,589       4.85
Passbook Accounts - 2.00%(3).............      35,766         8.24           36,199        7.75         30,070       8.29
Money Market Accounts - 3.19%(4).........      29,419         6.78           24,807        5.31         16,533       4.56
                                           ----------     --------       ----------    --------      ---------    -------
  Total Non-Certificates.................  $  103,831        23.93%      $   87,983       18.83%    $   66,581      18.36%
                                           ----------     --------       ----------    --------      ---------    -------

CERTIFICATES:

 3.00 -  3.99%...........................  $    1,943         0.45%      $      727        0.15%    $      425       0.12%
 4.00 -  4.99%...........................      87,582        20.19           24,155        5.17         22,553       6.22
 5.00 -  5.99%...........................     160,630        37.02          162,916       34.86        168,040      46.36
 6.00 -  6.99%...........................      78,273        18.04          178,847       38.27         76,704      21.16
 7.00 -  7.99%...........................       1,342         0.31           11,627        2.49         28,077       7.75
 8.00 -  8.99%...........................         264         0.06            1,091        0.23             96       0.03
 9.00% and over..........................           4         0.00                2        0.00              1       0.00
                                           ----------     --------        ---------     -------      ---------    -------
  Total Certificates.....................     330,038        76.07          379,365       81.17        295,896      81.64
                                           ----------     --------       ----------    --------      ---------    -------
     Total Deposits......................  $  433,869       100.00%      $  467,348      100.00%     $ 362,477     100.00%
                                           ----------     --------       ----------     -------      ---------     ------
                                           ----------     --------       ----------     -------      ---------     ------
</TABLE>
------------
(1) Reflects rates paid on transaction and savings deposits at 
    December 31, 1998.
(2) The rate on NOW Accounts for 1997 was 1.50% and 1996 was 2.01%.
(3) The rate on Passbook Accounts for 1997 was 2.62% and 1996 was 2.50%.
(4) The rate on Money Market Accounts for 1997 was 3.34% and 1996 was 2.83%.


                                      25
<PAGE>

The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1998.


<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)
Certificate accounts maturing in           2.00-        3.00-         4.00-         5.00-        6.00-
quarter ending:                            2.99%        3.99%         4.99%         5.99%        6.99%
                                          ------        -----        ------       -------        ------
<S>                                       <C>           <C>          <C>           <C>           <C>
March 31, 1999..........................  $    0        1,322        12,578        30,572        21,601
June 30, 1999...........................       0            3        12,859        26,839         8,536
September 30, 1999......................     100           43        22,019        19,162         5,520
December 31, 1999.......................     400           39        12,675        17,599         1,654
March 31, 2000..........................       0            0        10,874         8,520         3,427
June 30, 2000...........................       0            2         2,964         4,397         1,736
September 30, 2000......................       0            0         3,891         4,031        13,958
December 31, 2000.......................       0           33         4,040         7,124         6,575
March 31, 2001..........................       0            0           278         9,072         2,832
June 30, 2001...........................       0            0           739         8,998         1,975
September 30, 2001......................       0            0         2,638         5,243         2,230
December 31, 2001.......................       0            1         1,753         1,112         2,867
Thereafter..............................       0            0           274        17,961         5,362
                                          ------        -----        ------       -------        ------
   Total................................  $  500        1,443        87,582       160,630        78,273
                                          ------        -----        ------       -------        ------
                                          ------        -----        ------       -------        ------

   Percent of total.....................   0.15%         0.44%        26.54%        48.66%        23.72%
                                          ------        -----        ------       -------        ------
                                          ------        -----        ------       -------        ------

<CAPTION>

(DOLLARS IN THOUSANDS)
Certificate accounts maturing in          7.00-         8.00-        9.00-                      Percent
quarter ending:                           7.99%         8.99%        9.99%           Total      of Total
                                          -----         -----        -----          -------     --------
<S>                                       <C>           <C>          <C>            <C>         <C>
March 31, 1999..........................    477           253            0           66,803      20.25
June 30, 1999...........................    248            11            2           48,498      14.70
September 30, 1999......................    358             0            0           47,202      14.30
December 31, 1999.......................    257             0            0           32,624       9.88
March 31, 2000..........................      0             0            1           22,822       6.92
June 30, 2000...........................      0             0            0            9,099       2.76
September 30, 2000......................      0             0            0           21,880       6.63
December 31, 2000.......................      0             0            0           17,772       5.38
March 31, 2001..........................      0             0            0           12,182       3.69
June 30, 2001...........................      0             0            0           11,712       3.55
September 30, 2001......................      0             0            1           10,112       3.06
December 31, 2001.......................      2             0            0            5,735       1.74
Thereafter..............................      0             0            0           23,597       7.15
                                          -----         -----        -----          -------     ------
   Total................................  1,342           264            4          330,038     100.00%
                                          -----         -----        -----          -------     ------
                                          -----         -----        -----          -------     ------

   Percent of total.....................   0.41%         0.08%        0.00%          100.00%
                                          -----         -----        -----          -------
                                          -----         -----        -----          -------

</TABLE>


                                      26
<PAGE>

     The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1998.

<TABLE>
<CAPTION>

                                                                              Maturity
                                                            --------------------------------------------
                                                                          Over       Over
                                                            3 Months     3 to 6     6 to 12      Over
                                                            or Less      Months     Months     12 Months       Total
                                                            --------     ------     -------    ---------      -------
<S>                                                         <C>            <C>        <C>        <C>            <C>
(DOLLARS IN THOUSANDS)
Certificates of deposit less
 than $100,000...........................................   $ 55,559     44,651      69,631      123,848      293,689
Certificates of deposit of
 $100,000 or more........................................      5,520      2,100       5,568       10,717       23,905
Public funds(1)..........................................      5,725      1,747       4,627          345       12,444
                                                            --------    -------     -------     --------      -------
  Total certificates of
    deposit..............................................   $ 66,804     48,498      79,826      134,910      330,038
                                                            --------    -------     -------     --------      -------
                                                            --------    -------     -------     --------      -------
</TABLE>

------------
(1) Deposits from governmental and other public entities.

For additional information regarding the composition of the Bank's deposits, see
Note 12 of the Notes to Consolidated Financial Statements in the Annual Report.
For additional information on certificate maturities and the impact on HMN's
liquidity see Liquidity starting on page 21 of the Annual Report.

     BORROWINGS.  The Bank's other available sources of funds include advances
from the Federal Home Loan Bank ("FHLB") of Des Moines and other borrowings.  As
a member of the FHLB of Des Moines, the Bank is required to own capital stock in
the FHLB of Des Moines and is authorized to apply for advances from the FHLB of
Des Moines.  Each FHLB credit program has its own interest rate, which may be
fixed or variable, and range of maturities.  The FHLB of Des Moines may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions.  Consistent with its
asset/liability management strategy, the Bank has utilized FHLB advances from
time to time to extend the term to maturity of its liabilities.  Also, the Bank
has used FHLB borrowings to fund loan demand and other investment opportunities
and to offset deposit outflows.  At December 31, 1998, the Bank had $185.4
million of FHLB advances outstanding.  On such date, the Bank had a collateral
pledge arrangement with the FHLB of Des Moines pursuant to which the Bank may
borrow up to an additional $60.0 million for liquidity purposes.  See "Financial
Review - Federal Home Loan Bank Advances" and Note 13 of the Notes to
Consolidated Financial Statements in the Annual Report.

     During 1998, HMN has established a $2.5 million revolving line of credit
with Norwest Bank Minnesota, N.A.  The credit line matures September 15, 1999
and floats at the Federal Funds rate plus 250 basis points.

     The following table sets forth the maximum month-end balance and average
balance of FHLB advances and the revolving line of credit ("Other Borrowings")
for the periods indicated.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                             -----------------------------------------
                                                                1998             1997            1996
                                                             ----------         -------         -------
(DOLLARS IN THOUSANDS)
<S>                                                          <C>                <C>             <C>
MAXIMUM BALANCE:
  FHLB advances and Other Borrowings........................ $  195,829         128,007         106,436
  FHLB short-term borrowings and Other Borrowings...........     46,893          60,429          64,429

AVERAGE BALANCE:
  FHLB advances and Other Borrowings........................    172,232         112,500          89,656
  FHLB short-term borrowings and Other Borrowings...........     32,320          45,598          47,949

</TABLE>


                                      27
<PAGE>

     The following table sets forth certain information as to the Bank's FHLB 
advances and Other Borrowings at the dates indicated.

<TABLE>
<CAPTION>
                                                                 December 31,
                                                         ---------------------------
                                                           1998      1997      1996
                                                         -------    ------    ------
<S>                                                      <C>        <C>       <C>
(DOLLARS IN THOUSANDS)
FHLB short-term borrowings and Other Borrowings.......   $17,500    43,250    46,429

Weighted average interest rate of
  FHLB short-term borrowings and Other Borrowings.....      5.38%     5.85%     5.52%
</TABLE>

SERVICE CORPORATIONS OF THE BANK

     As a federally chartered savings bank, the Bank is permitted by OTS 
regulations to invest up to 2% of its assets in the stock of, or loans to, 
service corporation subsidiaries, and may invest an additional 1% of its 
assets in service corporations where such additional funds are used for 
inner-city or community development purposes.  In addition to investments in 
service corporations, federal institutions are permitted to invest an 
unlimited amount in operating subsidiaries engaged solely in activities which 
a federal savings bank may engage in directly.

     Osterud Insurance Agency, Inc. ("OIAI"), a Minnesota corporation, was 
organized in 1983.  OIAI operated as an insurance agency until 1986 when its 
assets were sold.  OIAI remained inactive until 1993 when it began offering 
credit life insurance, annuity products and mutual fund products to the 
Bank's customers and others. OIAI recorded net income of $29,000 for the year 
ended December 31, 1998.

     MSL Financial Corporation ("MSL") was acquired in the MFC merger. MSL 
offered annuity products to MFC customers and also has an investment in FHLMC 
preferred stock.

COMPETITION

     The Bank faces strong competition both in originating real estate loans 
and in attracting deposits.  Competition in originating loans comes primarily 
from mortgage bankers, commercial banks, credit unions and other savings 
institutions, which also make loans secured by real estate located in the 
Bank's market area and through internet banking operations which are 
throughout the continental United States.  The Bank competes for loans 
principally on the basis of the interest rates and loan fees it charges, the 
types of loans it originates and the quality of services it provides to 
borrowers.

     Competition for deposits is principally from money market and mutual 
funds, securities firms, commercial banks and other savings institutions 
located in the same communities.  The ability of the Bank to attract and 
retain deposits depends on its ability to provide an investment opportunity 
that satisfies the requirements of investors as to rate of return, liquidity, 
risk, convenient locations and other factors.  The Bank competes for these 
deposits by offering a variety of deposit accounts at competitive rates, 
convenient business hours and a customer oriented staff.

OTHER CORPORATIONS OWNED BY HMN

     HMN has two other wholly owned subsidiaries, HMN Mortgage Services, Inc. 
("MSI") and Security Finance Corporation ("SFC"). MSI operates a mortgage 
banking and mortgage brokerage facility located in Brooklyn Park, Minnesota. 
Brooklyn Park is located in the Minneapolis/St. Paul Metropolitan area. MSI's 
primary function is to originate and/or purchase single family residential 
loans for resale on the secondary


                                        28
<PAGE>

market to FNMA, FHLMC or other third parties. It also from time to time 
purchases mortgage servicing rights from other lenders. SFC invests in 
commercial loans and commercial real estate loans located throughout the 
United States which were originated by third parties.

EMPLOYEES

     At December 31, 1998, HMN had a total of 136 full-time equivalent 
employees.  None of the employees of HMN or its subsidiaries are represented 
by any collective bargaining unit.  Management considers its employee 
relations to be good.

EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS

     Officers are elected annually by the Board of Directors of HMN and the 
Bank.  The business experience of each executive officer of HMN and the Bank 
who is not also a director of HMN is set forth below. Unless otherwise 
indicated, such individuals have held their current positions for at least 
five years.

     MICHAEL MCNEIL.  Mr. McNeil, age 51, has been the President and Chief 
Executive Officer of the Bank since January 1, 1999. From April 1, 1998 
through December 1998, Mr. McNeil was the Senior Vice President Business 
Development of the Bank. Prior to joining the Bank, Mr. McNeil was the 
President and a director of Stearns Bank, N.A. in St. Cloud, Minnesota from 
August 1, 1991 until March 1, 1998.

     DWAIN C. JORGENSEN.  Mr. Jorgensen, age 50, is Senior Vice President 
Operations of HMN and the Bank.  Mr. Jorgensen has held such positions with 
the Bank since 1998.  Prior to such time, he served as Vice President, 
Controller and Chief Accounting Officer of HMN and the Bank from 1989 to 
1998. From 1983 to 1989, Mr. Jorgensen was an Assistant Vice President and 
Operations Officer with the Bank.

     TIMOTHY P. JOHNSON.  Mr. Johnson, age 46, is Vice President and 
Treasurer of HMN and the Bank, a position he has held since 1997. He has also 
been Principal Accounting Officer since 1998. Prior to such time, he served 
as Treasurer from 1992 to 1997.  From 1983 to 1992, Mr. Johnson was Chief 
Financial Officer of St. Louis Bank for Savings, Duluth, Minnesota.

                                      REGULATION
GENERAL

     The Bank is a federally chartered savings bank, the deposits of which 
are federally insured and backed by the full faith and credit of the United 
States Government.  Accordingly, the Bank is subject to broad federal 
regulation and oversight extending to all its operations.  The Bank is a 
member of the FHLB of Des Moines and is subject to certain limited regulation 
by the Federal Reserve Board.  The Bank is a member of the Savings 
Association Insurance Fund ("SAIF") and the deposits of the Bank are insured 
by the FDIC.  As a result, the FDIC has certain regulatory and examination 
authority over the Bank.  As the savings and loan holding company of the 
Bank, HMN also is subject to federal regulation and oversight.  The purpose 
of the regulation of HMN and other holding companies is to protect subsidiary 
savings associations.

     Certain of these regulatory requirements and restrictions are discussed 
below.

FEDERAL REGULATION OF SAVINGS ASSOCIATIONS

     The OTS has extensive authority over the operations of savings 
associations.  As part of this authority, the Bank is required to file 
periodic reports with the OTS and is subject to periodic examinations by the 
OTS and the FDIC.  The last regular OTS examination of the Bank was dated 
July of 1998.  The Bank has not been scheduled for an examination in 1999, 
except for an on-site year 2000 examination which started


                                        29
<PAGE>

on March 1, 1999.  When these examinations are conducted by the OTS and the 
FDIC, the examiners may require the Bank to provide for higher general or 
specific loan loss reserves.  From time to time, financial institutions in 
various regions of the United States have been called upon by examiners to 
write down assets and to establish increased levels of reserves, primarily as 
a result of perceived weaknesses in real estate values and a more restrictive 
regulatory climate.

     The OTS has established a schedule for the assessment of fees upon all 
savings associations to fund the operations of the OTS.  The general 
assessment, to be paid on a semi-annual basis, is computed upon the savings 
association's total assets as reported in the association's latest quarterly 
thrift financial report, the savings association's condition as reflected by 
its composite rating, and the complexity of the savings association's 
business determined by the amount of trust assets administered, assets 
subject to recourse or similar obligations and the principal amount of loans 
serviced by the savings association.  Savings associations (unlike the Bank) 
with a composite rating of 3 receive a condition component equal to 25% of 
their size component and savings associations with a composite rating of 4 or 
5 receive a condition component equal to 50% of their size component. The 
Bank's OTS assessment for the year ended December 31, 1998 was approximately 
$147,000.

     The OTS also has extensive enforcement authority over all savings 
institutions and their holding companies, including the Bank and HMN.  This 
enforcement authority includes, among other things, the ability to assess 
civil money penalties, to issue cease-and-desist or removal orders and to 
initiate injunctive actions.  In general, these enforcement actions may be 
initiated for violations of laws and regulations and unsafe or unsound 
practices.  Other actions or inactions may provide the basis for enforcement 
action, including misleading or untimely reports filed with the OTS.  Except 
under certain circumstances, public disclosure of final enforcement actions 
by the OTS is required.

     In addition, the investment, lending and branching authority of the Bank 
is prescribed by federal laws and regulations, and it is prohibited from 
engaging in any activities not permitted by such laws and regulations.  For 
instance, no savings institution may invest in non-investment grade corporate 
debt securities.  In addition, unless approved by the OTS, the permissible 
level of investment by federal associations in loans secured by 
non-residential real property may not exceed 400% of regulatory capital.  
Federal savings associations are also generally authorized to branch 
nationwide.  The Bank is in compliance with the noted restrictions.

     The Bank's general permissible lending limit for loans-to-one-borrower 
is equal to the greater of $500,000, or 15%, of unimpaired capital and 
surplus (except for loans fully secured by certain readily marketable 
collateral, in which case this limit is increased to 25% of unimpaired 
capital and surplus). At December 31, 1998, the Bank's lending limit under 
this restriction was $6.9 million. The Bank is in compliance with the 
loans-to-one borrower limitation.

     In December 1991, the Federal Deposit Insurance Corporation Improvement 
Act of 1991 ("FDICIA") was enacted into law.  FDICIA provides for, among 
other things, the recapitalization of the Bank Insurance Fund; adoption of 
safety and soundness standards; enhanced federal supervision of depository 
institutions, including greater authority for the appointment of a 
conservator or receiver for undercapitalized institutions; the establishment 
of risk-based deposit insurance premiums; liberalization of the qualified 
thrift lender test; greater restrictions on transactions with affiliates; and 
mandated consumer protection disclosures with respect to deposit accounts.  
See "- Insurance of Accounts and Regulation by the FDIC," "- Regulatory 
Capital Requirements" and "- Qualified Thrift Lender Test."

     The OTS, as well as the other federal banking agencies, have issued 
proposed safety and soundness standards on matters such as credit 
underwriting and loan documentation, internal controls and audit systems, 
interest rate risk exposure, asset growth and quality, compensation and 
other employee benefits and year 2000 issues.  The proposal also establishes 
the maximum ratio of classified assets to total capital (which for this 
purpose 

                                        30
<PAGE>

includes loss allowances exceeding the amount includable for regulatory 
capital purposes) at 100% and the minimum level of earnings sufficient to 
absorb losses without impairing capital.  Earnings will be sufficient if the 
net income over the last four quarters is assumed to continue over the next 
four quarters and the institution would otherwise remain in capital 
compliance. Any institution which fails to comply with these standards must 
submit a compliance plan. A failure to submit a plan or to comply with an 
approved plan will subject the institution to further enforcement action.

     The Bank is subject to a wide array of other laws and regulations, both 
federal and state, including, but not limited to, usury laws, the Community 
Reinvestment Act and regulations thereunder, the Equal Credit Opportunity Act 
and Regulation B, Regulation E-Electronic Funds Transfer requirements, the 
Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures 
Act and Regulation X. The Bank is also subject to laws and regulations that 
may impose liability on lenders and owners for clean-up costs and other costs 
stemming from hazardous waste located on property securing real estate loans 
made by lenders or on real estate that is owned by lenders following a 
foreclosure or otherwise.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

     The Bank is a member of the SAIF, which is administered by the FDIC. 
Savings deposits are insured up to applicable limits by the FDIC and such 
insurance is backed by the full faith and credit of the United States 
Government.  As insurer, the FDIC imposes deposit insurance premiums and is 
authorized to conduct examinations of and to require reporting by 
FDIC-insured institutions.  It also may prohibit any FDIC-insured institution 
from engaging in any activity the FDIC determines by regulation or order to 
pose a serious risk to the SAIF.  The FDIC also has the authority to initiate 
enforcement actions against savings associations, after giving the OTS an 
opportunity to take such action, and may terminate the deposit insurance if 
it determines that the institution has engaged or is engaging in unsafe or 
unsound practices, or is in an unsafe or unsound condition.

     FDICIA required the FDIC to implement a risk-based deposit insurance 
assessment system. Under the system, all insured depository institutions were 
placed into one of nine categories and assessed insurance premiums, ranging 
from .04% to .31% of deposits, based upon their level of capital and 
supervisory evaluation. Institutions classified as well capitalized (I.E., a 
core capital ratio of at least 5%, a ratio of Tier 1 or core capital to 
risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a 
risk-based capital ratio of at least 10%) and considered healthy would pay 
the lowest premium while institutions that are less than adequately 
capitalized (I.E., core and Tier 1 risk-based capital ratios of less than 4% 
or a risk-based capital ratio of less than 8%) and considered of substantial 
supervisory concern would pay the highest premium.  Risk classification of 
all insured institutions will be made by the FDIC for each semi-annual 
assessment period.

     The FDIC is authorized to increase assessment rates, on a semi-annual 
basis, if it determines that the reserve ratio of the SAIF will be less than 
the designated reserve ratio of 1.25% of SAIF insured deposits.  In setting 
these increased assessments, the FDIC must seek to restore the reserve ratio 
to that designated reserve level, or such higher reserve ratio as established 
by the FDIC.  In addition, under FDICIA, the FDIC may impose special 
assessments on SAIF members to repay amounts borrowed from the United States 
Treasury or for any other reason deemed necessary by the FDIC.

     The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 
30, 1996.  DIFA addressed the inadequate funding of the (SAIF). In order to 
recapitalize the SAIF, DIFA imposed a one-time assessment on all thrift 
institutions.  The Bank's assessment was a pretax charge of $2,351,563 and 
was recognized in the third quarter of 1996.

     DIFA also addressed the funding for the Financing Corp. (FICO) bonds. 
Thrifts will pay 6.4 basis points per $100 of deposits from January 1, 1997 
to December 31, 1999.  From January 1, 2000 until the


                                        31
<PAGE>

FICO bonds are retired in 2019, the estimated assessment to retire the FICO 
bonds is expected to be 2.5 basis points per $100 of deposits.

     DIFA proposed that the Bank Insurance Fund (BIF) and SAIF be merged on 
January 1, 1999, provided no insurance depository institution is a savings 
association on that date.  At this time, HMN does not know what effect, if 
any, the proposed legislation or charter revisions will have on future 
operations.

REGULATORY CAPITAL REQUIREMENTS

     Federally insured savings associations, such as the Bank, are required 
to maintain a minimum level of regulatory capital.  The OTS has established 
capital standards, including a tangible capital requirement, a leverage ratio 
(or core capital) requirement and a risk-based capital requirement applicable 
to such savings associations.  These capital requirements must be generally 
as stringent as the comparable capital requirements for national banks.  The 
OTS is also authorized to impose capital requirements in excess of these 
standards on individual associations on a case-by-case basis.

     The capital regulations require tangible capital of at least 1.5% of 
adjusted total assets (as defined by regulation).  Tangible capital generally 
includes common stockholders' equity and retained earnings, and certain 
noncumulative perpetual preferred stock.  In addition, all intangible assets, 
other than a limited amount of purchased mortgage servicing rights, must be 
deducted from tangible capital.  At December 31, 1998, the Bank had goodwill 
and other intangibles of $5.6 million and $264,000 of mortgage servicing 
rights which were required to be deducted from stockholders' equity to arrive 
at tangible capital and Tier I capital.

     The OTS regulations establish special capitalization requirements for 
savings associations that own subsidiaries.  Under these regulations certain 
subsidiaries are consolidated for capital purposes and others are excluded 
from assets and capital.  In determining compliance with the capital 
requirements, all subsidiaries engaged solely in activities permissible for 
national banks or engaged in certain other activities solely as agent for its 
customers, or meeting other criteria, are "includable" subsidiaries that are 
consolidated for capital purposes in proportion to the association's level of 
ownership, including the assets of includable subsidiaries in which the 
association has a minority interest that is not consolidated for GAAP 
purposes.  For excludable subsidiaries the debt and equity investments in 
such subsidiaries are deducted from assets and capital. The subsidiary of the 
Bank is an includable subsidiary.

     At December 31, 1998, the Bank had tangible capital of $42.8 million, or 
6.4% of adjusted total assets, which is $16.0 million above the minimum 
requirement of 1.5% of adjusted total assets in effect on that date.

     The capital standards also require core capital or Tier I capital to 
equal at least 3% of adjusted total assets (as defined by regulation).  
Core capital generally consists of tangible capital plus certain intangible 
assets. As a result of the prompt corrective action provisions of FDICIA 
discussed below, however, a savings association must maintain a core capital 
ratio of at least 4% to be considered adequately capitalized unless its 
supervisory condition is such to allow it to maintain a 3% ratio.

      The OTS regulations only allow those savings associations rated a 
composite one (the highest rating) under the safety and soundness rating 
system for savings associations to be permitted to operate at or near the 
regulatory minimum leverage ratio of 3%.  All other savings associations are 
required to maintain a Tier I capital to adjusted total assets of 4% to 5%.  
The OTS assesses each individual savings association through the supervisory 
process on a case-by-case basis to determine the applicable requirement.   
The Bank is also required to have a Tier I capital ratio to risk-weighted 
assets of 4%.  In determining the amount of risk-weighted assets, all 
assets, including certain off-balance sheet items, will be multiplied by a 
risk weight, ranging from 0% to 100%, based on the risk inherent in the type 
of asset.  For example, the OTS has assigned a risk weight of 50% for 
prudently underwritten permanent one-to-four family first lien mortgage loans 
not more than 90 days delinquent and having a loan to value ratio of not more 
than 80% at origination


                                        32
<PAGE>

unless insured to such ratio by an insurer approved by the FNMA or the FHLMC.

     At December 31, 1998, the Bank had Tier I capital equal to $42.8 
million, or 6.4%, of adjusted total assets, which is $16.0 million above the 
minimum Tier I ratio requirement of 4% based upon the Bank's composite 
rating.  At December 31, 1998, the Bank had a Tier I capital to risk-weighted 
assets ratio of 12.9%, which is $29.5 million above the minimum requirement 
of $13.3 million.

      The OTS risk-based requirement requires savings associations to have 
total capital of at least 8% of risk-weighted assets.  Total capital consists 
of core capital, as defined above, and supplementary capital.  Supplementary 
capital consists of certain permanent and maturing capital instruments that 
do not qualify as core capital and general valuation loan and lease loss 
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary 
capital may be used to satisfy the risk-based requirement only to the extent 
of core capital. At December 31, 1998, the Bank had $3.0 million of general 
loss reserves, which were included in capital.

     Certain exclusions from capital and assets are required to be made for 
the purpose of calculating total capital, in addition to the adjustments 
required for calculating core capital.  Such exclusions consist of equity 
investments (as defined by regulation) and that portion of land loans and 
nonresidential construction loans in excess of an 80% loan-to-value ratio and 
reciprocal holdings of qualifying capital instruments.  At December 31, 1998 
the Bank had $22,000 of exclusions from capital.

     On December 31, 1998, the Bank had total "risk-based" capital of $45.8 
million and risk-weighted assets of $332.7 million, or total capital of 13.8% 
of risk-weighted assets. This amount was $19.2 million above the 8% 
requirement in effect on that date.

     Under FDICIA, all the federal banking agencies, including the OTS, were 
required to revise their risk-based capital requirements to ensure that such 
requirements account for interest rate risk, concentration of credit risk and 
the risks of non-traditional activities, and that they reflect the actual 
performance of and expected loss on multi-family loans.  Such standards were 
adopted with the enactment of FDICIA.

     The OTS had adopted a rule that required every savings association with 
more than normal interest rate risk to deduct from its total capital, for 
purposes of determining compliance with such requirement, an interest rate 
risk component ("IRR component") equal to 50% of its interest-rate risk 
exposure multiplied by the present value of its assets.  The IRR component is 
a measure of the potential decline in the net portfolio value ("NPV") of a 
savings association, greater than 2% of the present value of its assets, 
based upon a hypothetical 200 basis point increase or decrease in interest 
rates (whichever results in a greater decline).  NPV is the present value of 
expected cash flows from assets, liabilities and off-balance sheet contracts. 
The rule provided for a two quarter lag between calculating interest rate 
risk and recognizing any deduction from capital. The OTS has decided not to 
require the IRR component to be deducted from the capital calculations of all 
institutions.  It has reserved the right to take the IRR component into 
account in assessing the capital requirements for an individual institution. 
On December 1, 1998 the OTS issued Thrift Bulletin 13a ("TB 13a"), Management 
of Interest Rate Risk, Investment Securities, and Derivatives Activities, 
which among other things established guidelines for measuring an 
institution's sensitivity to market risk.  TB 13a had a table which examiners 
should use as a starting point in their analysis of an institution's level of 
interest rate risk, assuming there were no deficiencies in the institution's 
risk management practices. Based upon an IRR exposure report prepared by OTS 
from data submitted by the Bank at December 31, 1998, the Bank was deemed to 
have "minimal interest rate risk" per the table. See "Management's Discussion 
and Analysis of Financial Condition and Results of Operations - 
Asset/Liability Management" in the Annual Report.

     Pursuant to FDICIA, the federal banking agencies, including the OTS, 
have adopted regulations authorizing the agencies to require a depository 
institution to maintain an additional amount of total capital to account for 
concentration of credit risk and the risk of non-traditional activities.


                                        33
<PAGE>

     The OTS and the FDIC are authorized and, under certain circumstances, 
required to take certain actions against associations that fail to meet 
capital requirements.  Effective December 19, 1992, the federal banking 
agencies, including the OTS, were given additional enforcement authority over 
undercapitalized depository institutions.  The OTS is generally required to 
take action to restrict the activities of an "undercapitalized association" 
(generally defined to be one with less than either a 4% Tier 1 to adjusted 
total assets ratio, a 4% Tier 1 risked-based capital ratio or an 8% 
risk-based capital ratio).  Any such association must submit a capital 
restoration plan and until such plan is approved by the OTS may not increase 
its assets, acquire another institution, establish a branch or engage in any 
new activities, and generally may not make capital distributions.  The OTS is 
authorized to impose the additional restrictions, discussed below, that are 
applicable to significantly undercapitalized associations.

      As a condition to the approval of the capital restoration plan, any 
company controlling an undercapitalized association must agree that it will 
enter into a limited capital maintenance guarantee with respect to the 
institution's achievement of its capital requirements.

     Any savings association that fails to comply with its capital plan or is 
"significantly undercapitalized" (I.E., Tier 1 risk-based or Tier I to 
adjusted total assets of less than 3% or a risk-based capital ratio of less 
than 6%) must be made subject to one or more additional specified actions and 
operating restrictions mandated by FDICIA.  These actions and restrictions 
include requiring the issuance of additional voting securities; limitations 
on asset growth; mandated asset reduction; changes in senior management; 
divestiture, merger or acquisition of the association; restrictions on 
executive compensation; and any other action the OTS deems appropriate.  An 
association that becomes "critically undercapitalized" (I.E., a tangible 
equity to total asset ratio of 2% or less) is subject to further mandatory 
restrictions on its activities in addition to those applicable to 
significantly undercapitalized associations.  In addition, the OTS must 
appoint a receiver (or conservator with the concurrence of the FDIC) for a 
savings association, with certain limited exceptions, within 90 days after it 
becomes critically undercapitalized.

     Any undercapitalized association is also subject to other possible 
enforcement actions by the OTS or the FDIC.  Such actions could include a 
capital directive, a cease-and-desist order, civil money penalties, the 
establishment of restrictions on all aspects of the association's operations, 
the appointment of a receiver or conservator or a forced merger into another 
institution.

     If the OTS determines that an association is in an unsafe or unsound 
condition, or is engaged in an unsafe or unsound practice, it is authorized 
to reclassify a well-capitalized association as an adequately capitalized 
association, and if the association is adequately capitalized, to impose the 
restrictions applicable to an undercapitalized association.  If the 
association is undercapitalized, the OTS is authorized to impose the 
restrictions applicable to a significantly undercapitalized association.

     The imposition by the OTS or the FDIC of any of these measures on the 
Bank may have a substantial adverse effect on the Bank's operations and 
profitability and the value of HMN's stock.  HMN shareholders do not have 
preemptive rights, and therefore, if HMN is directed by the OTS or the FDIC 
to issue additional shares of common stock, such issuance may result in the 
dilution in the percentage of ownership of existing stockholders of HMN.

     At December 31, 1998 the Bank would be considered to be "well 
capitalized" under the prompt corrective actions provisions mentioned above.  
See Note 20 "Federal Home Loan Bank Investment, Regulatory Liquidity and 
Regulatory Capital Requirements" in the Notes to Consolidated Financial 
Statements in the Annual Report for more information on the Bank's capital.


                                        34
<PAGE>

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

     OTS regulations impose various restrictions or requirements on 
associations with respect to their ability to pay dividends or make other 
distributions of capital. OTS regulations prohibit an association from 
declaring or paying any dividends or from repurchasing any of its stock if, 
as a result, the regulatory capital of the association would be reduced below 
the amount required to be maintained for the liquidation account established 
in connection with its mutual to stock conversion.

     The OTS utilizes a three-tiered approach to permit associations, based 
on their capital level and supervisory condition, to make capital 
distributions which include dividends, stock redemptions or repurchases, 
cash-out mergers and other transactions charged to the capital account. See 
"- Regulatory Capital Requirements."

     Generally, Tier 1 associations, which are associations that before and 
after the proposed distribution meet their fully phased-in capital 
requirements, may generally make capital distributions during any calendar 
year equal to the greater of 100% of net income for the year-to-date plus 50% 
of the amount by which the lesser of the association's tangible, core or 
risk-based capital exceeds its fully phased-in capital requirement for such 
capital component, as measured at the beginning of the calendar year, or the 
amount authorized for a Tier 2 association. However, a Tier 1 association 
deemed to be in need of more than normal supervision by the OTS may be 
downgraded to a Tier 2 or Tier 3 association as a result of such a 
determination. The Bank meets the requirements for a Tier 1 association and 
has not been notified of a need for more than normal supervision. Tier 2 
associations, which include associations that before and after the proposed 
distribution meet their current minimum capital requirements, may generally 
make capital distributions of up to 75% of net income over the most recent 
four quarter period.

     Tier 3 associations (which are associations that do not meet current 
minimum capital requirements) that propose to make any capital distribution 
and Tier 2 associations that propose to make a capital distribution in excess 
of the noted safe harbor level must obtain OTS approval prior to making such 
distribution. Tier 2 associations proposing to make a capital distribution 
within the safe harbor provisions and Tier 1 associations proposing to make 
any capital distribution need only submit written notice to the OTS 30 days 
prior to such distribution. As a subsidiary of HMN, the Bank will also be 
required to give the OTS 30 days' notice prior to declaring any dividend on 
its stock. The OTS may object to the distribution during that 30-day period 
based on safety and soundness concerns. See "- Regulatory Capital 
Requirements."

     The OTS has promulgated regulations that revise the current capital 
distribution restrictions. These regulations become effective on April 1, 
1999. The regulations eliminate the current tiered structure and the 
safe-harbor percentage limitations. Under the regulations, a savings 
association that is a subsidiary of a holding company, like the Bank, must 
file either a notice or an application 30 days before declaring a dividend or 
seeking board approval of a capital distribution. A notice is required unless 
a savings association (that is a holding company subsidiary) is not eligible 
for expedited treatment under OTS regulation or would not be adequately 
capitalized after the distribution, or the distribution would cause the 
association's distributions for the calendar year to exceed its net income 
for the year to date plus retained net income for the prior two years, or the 
distribution is otherwise contrary to statute, regulation or regulatory 
agreement or condition. If any of these conditions exist, then an 
application must be filed with the OTS. As under the current rule, the OTS 
may object to a capital distribution if it would constitute an unsafe or 
unsound practice.

     In March of 1999, the Bank received notification from the OTS that 
subject to certain restrictions (which could only be calculated at the time 
of distribution) a dividend from the Bank to HMN of $4.0 million could be 
paid during 1999 and not violate the dividend limitations mentioned above.

                                       35
<PAGE>

LIQUIDITY

     All savings associations, including the Bank, are required to maintain 
an average daily balance of liquid assets equal to a certain percentage of 
the sum of its average daily balance of net withdrawable deposit accounts and 
borrowings payable in one year or less. For a discussion of what the Bank 
includes in liquid assets, see "Management's Discussion and Analysis of 
Financial Condition and Results of Operations - Liquidity" in the Annual 
Report. This liquid asset ratio requirement may vary from time to time 
(between 4% and 10%) depending upon economic conditions and savings flows of 
all savings associations. At the present time, the minimum liquid asset ratio 
is 4% or an amount that would be required to operate the Bank in a safe and 
sound manner.

ACCOUNTING

     An OTS policy statement applicable to all savings associations clarifies 
and re-emphasizes that the investment activities of a savings association 
must be in compliance with approved and documented investment policies and 
strategies, and must be accounted for in accordance with GAAP. Under the 
policy statement, management must support its classification of and 
accounting for loans and securities (I.E., whether held to maturity, sale or 
trading) with appropriate documentation. The Bank is in compliance with these 
amended rules.

     The OTS has adopted an amendment to its accounting regulations, which 
may be made more stringent than GAAP, to require that transactions be 
reported in a manner that best reflects their underlying economic substance 
and inherent risk and that financial reports must incorporate any other 
accounting regulations or orders prescribed by the OTS.

QUALIFIED THRIFT LENDER TEST

     All savings associations, including the Bank, are required to meet a 
qualified thrift lender ("QTL") test to avoid certain restrictions on their 
operations. This test requires a savings association to have at least 65% of 
its portfolio assets (which consists of total assets less intangibles, 
properties used to conduct the savings association's business and liquid 
assets not exceeding 20% of total assets) in qualified thrift investments on 
a monthly average for nine out of every 12 months on a rolling basis. For HMN 
such assets primarily consist of residential housing related loans and 
investments. At December 31, 1998, the Bank met the test and has always 
met the test since its effectiveness.

     Any savings association that fails to meet the QTL test must convert to 
a national bank charter, unless it requalifies as a QTL and thereafter 
remains a QTL. If an association does not requalify and converts to a 
national bank charter, it must remain SAIF-insured until the FDIC permits it 
to transfer to the Bank Insurance Fund. If an association that fails the test 
has not yet requalified and has not converted to a national bank, its new 
investments and activities are limited to those permissible for both a 
savings association and a national bank, and it is limited to national bank 
branching rights in its home state. In addition, the association is subject 
to national bank limits for payment of dividends. If such association has not 
requalified or converted to a national bank within three years after the 
failure, it must divest of all investments and cease all activities not 
permissible for a national bank. In addition, it may have to repay promptly 
any outstanding FHLB borrowings, which could result in prepayment penalties 
or purchase additional FHLB stock to meet the stockholder requirements of 
non-QTL members. If any association that fails the QTL test is controlled by 
a holding company, then within one year after the failure, the holding 
company must register as a bank holding company and become subject to all 
restrictions on bank holding companies. See "- Holding Company Regulation."


                                       36
<PAGE>

TRANSACTIONS WITH AFFILIATES

     Generally, transactions between a savings association or its 
subsidiaries and its affiliates are required to be on terms as favorable to 
the association as transactions with non-affiliates. In addition, certain of 
these transactions are restricted to a percentage of the association's 
capital. Affiliates of the Bank include HMN and any company which is under 
common control with the Bank. In addition, a savings association may not lend 
to any affiliate engaged in activities not permissible for a bank holding 
company, acquire the securities of most affiliates, or purchase low quality 
assets from affiliates. The Bank's subsidiaries are not deemed affiliates, 
however, the OTS has the discretion to treat subsidiaries of savings 
associations as affiliates on a case by case basis.

     Certain transactions with directors, officers or controlling persons are 
also subject to conflict of interest regulations enforced by the OTS. These 
conflict of interest regulations and other statutes also impose restrictions 
on loans to such persons and their related interests. Among other things, 
such loans must be made on terms substantially the same as for loans to 
unaffiliated individuals.

HOLDING COMPANY REGULATION

     HMN is a unitary savings and loan holding company subject to regulatory 
oversight by the OTS. As such, HMN is registered and required to file reports 
with and subject to regulation and examination by the OTS. In addition, the 
OTS has enforcement authority over HMN and its non-savings association 
subsidiaries which also permits the OTS to restrict or prohibit activities 
that are determined to be a serious risk to the subsidiary savings 
association.

     As a unitary savings and loan holding company, HMN generally is not 
subject to activity restrictions. If HMN acquires control of another savings 
association as a separate subsidiary, it would become a multiple savings and 
loan holding company, and the activities of HMN and any of its subsidiaries 
(other than the Bank or any other SAIF-insured savings association) would 
become subject to such restrictions unless such other associations qualify as 
QTLs and were acquired in a supervisory acquisition.

     If the Bank fails the QTL test, HMN must obtain the approval of the OTS 
prior to continuing after such failure, directly or through its other 
subsidiaries, any business activity other than those approved for multiple 
savings and loan holding companies or their subsidiaries. In addition, within 
one year of such failure HMN must register as, and will become subject to, 
the restrictions applicable to bank holding companies. The activities 
authorized for a bank holding company are more limited than are the 
activities authorized for a unitary or multiple savings and loan holding 
company. See "- Qualified Thrift Lender Test."

     HMN must obtain approval from the OTS before acquiring control of any 
other SAIF-insured association. Such acquisitions are generally prohibited if 
they result in a multiple savings and loan holding company controlling 
savings associations in more than one state. However, such interstate 
acquisitions are permitted based on specific state authorization or in a 
supervisory acquisition of a failing savings association.

FEDERAL SECURITIES LAW

     The stock of HMN is registered with the SEC under the Securities 
Exchange Act of 1934, as amended (the "Exchange Act"). HMN is subject to 
the information, proxy solicitation, insider trading restrictions and other 
requirements of the SEC under the Exchange Act.

     HMN stock held by persons who are affiliates (generally officers, 
directors and principal stockholders) of HMN may not be resold without 
registration or unless sold in accordance with certain resale restrictions. 
If HMN meets specified current public information requirements, each 
affiliate of HMN is able to sell in the public market, without registration, 
a limited number of shares in any three-month period.


                                       37
<PAGE>

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires all depository institutions to 
maintain non-interest bearing reserves at specified levels against their 
transaction accounts (primarily checking, NOW and Super NOW checking 
accounts). At December 31, 1998, the Bank was in compliance with these 
reserve requirements. The balances maintained to meet the reserve 
requirements imposed by the Federal Reserve Board may be used to satisfy 
liquidity requirements that may be imposed by the OTS. See "- Liquidity."

     Savings associations are authorized to borrow from the Federal Reserve 
Bank "discount window," but Federal Reserve Board regulations require 
associations to exhaust other reasonable alternative sources of funds, 
including FHLB borrowings, before borrowing from the Federal Reserve Bank.

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB of Des Moines, which is one of 12 
regional FHLBs, that administers the home financing credit function of 
savings associations. Each FHLB serves as a reserve or central bank for its 
members within its assigned region. It is funded primarily from proceeds 
derived from the sale of consolidated obligations of the FHLB System. It 
makes loans to members (I.E., advances) in accordance with policies and 
procedures established by the board of directors of the FHLB. These policies 
and procedures are subject to the regulation and oversight of the Federal 
Housing Finance Board. All advances from the FHLB are required to be fully 
secured by sufficient collateral as determined by the FHLB. In addition, all 
long-term advances are required to provide funds for residential home 
financing.

     As a member, the Bank is required to purchase and maintain stock in the 
FHLB of Des Moines. At December 31, 1998, the Bank had $9.8 million in FHLB 
stock, which was in compliance with this requirement. In past years, the Bank 
has received dividends on its FHLB stock. Over the past five calendar years 
such dividends have averaged 7.07% and were 6.62% for calendar year 1998. For 
the year ended December 31, 1998, dividends paid by the FHLB of Des Moines to 
the Bank totaled $589,000.

     Under federal law the FHLBs are required to provide funds for the 
resolution of troubled savings associations and to contribute to low and 
moderately priced housing programs through direct loans or interest subsidies 
on advances targeted for community investment and low- and moderate-income 
housing projects. These contributions have affected adversely the level of 
FHLB dividends paid and could continue to do so in the future. These 
contributions could also have an adverse effect on the value of FHLB stock in 
the future. A reduction in value of the Bank's FHLB stock may result in a 
corresponding reduction in the Bank's capital.

FEDERAL AND STATE TAXATION

     FEDERAL TAXATION.  HMN and its subsidiaries file consolidated federal 
income tax returns on a calendar year basis using the accrual method of 
accounting. Prior to 1996, savings institutions were subject to special bad 
debt reserve rules and certain other rules. During this period of time, a 
savings institution that held 60% or more of its assets in "qualifying 
assets" (as defined in the Internal Revenue Code) was permitted to maintain 
reserves for bad debts and to make annual additions to such reserves that 
qualified as deductions from taxable income. HMN was in compliance with this 
requirement.

     A qualifying thrift institution could elect annually to compute its 
allowable additions to bad debt reserves under either the percentage of 
taxable income method or the experience method. The percentage of taxable 
income method of calculating bad debt reserves limited the applicable 
percentage deduction to 8% of taxable income and could not cause the reserves 
to exceed 6% of qualifying loans at the end of the taxable year. HMN used the 
experience method to calculate additions to tax bad debt reserves through tax 
year 1995.


                                       38
<PAGE>

     Beginning in 1996, the favorable bad debt method described above was 
repealed putting savings institutions on the same tax bad debt method as 
commercial banks. This legislation required recapture of the amount of the 
tax bad debt reserves to the extent that they exceed the adjusted base year 
reserve ("the applicable excess reserves"). The applicable excess reserves 
are recaptured over a six-year period. This recapture period can be deferred 
for a period of up to two years to the extent that a certain residential 
lending test is met. HMN has previously provided taxes for the applicable 
excess reserves.

     In addition to the regular income tax, corporations, including savings 
associations such as the Bank, generally are subject to a minimum tax. An 
alternative minimum tax is imposed at a minimum tax rate of 20% on 
alternative minimum taxable income, which is the sum of a corporation's 
regular taxable income (with certain adjustments) and tax preference items, 
less any available exemption. The alternative minimum tax is imposed to the 
extent it exceeds the corporation's regular income tax and net operating 
losses can offset no more than 90% of alternative minimum taxable income.

     To the extent earnings appropriated to a savings association's bad debt 
reserves for "qualifying real property loans" and deducted for federal income 
tax purposes before 1988 exceed the allowable amount of such reserves 
computed under the experience method and to the extent of the association's 
supplemental reserves for losses on loans ("Excess"), such Excess may not, 
without adverse tax consequences, be utilized for the payment of cash 
dividends or other distributions to a shareholder (including distributions on 
redemption, dissolution or liquidation) or for any other purpose (except to 
absorb bad debt losses). As of December 31, 1998, the Bank's Excess for tax 
purposes totaled approximately $8.8 million.

     HMN was incorporated in 1994 and filed its first consolidated Federal 
income tax return with its subsidiaries for the year ended December 31, 1994. 
The return required to be filed for 1998 has been extended and will be filed 
by September 1999. The Bank and its consolidated subsidiaries have been 
audited by the IRS with respect to consolidated federal income tax returns 
through December 31, 1983. With respect to years examined by the IRS, either 
all deficiencies have been satisfied or sufficient reserves have been 
established to satisfy asserted deficiencies. In the opinion of management, 
any examination of still open returns (including returns of subsidiaries and 
predecessors of, or entities merged into, the Bank) would not result in a 
deficiency which could have a material adverse effect on the consolidated 
financial condition of HMN.

     MINNESOTA TAXATION.  HMN and its subsidiaries that operate in Minnesota 
are subject to Minnesota state taxation. A Minnesota corporation's income or 
loss is allocated based on a three-factor apportionment of the corporation's 
Minnesota gross receipts, payroll and property over the total gross receipts, 
payroll and property of all corporations in the unitary group. The corporate 
tax rate in Minnesota is 9.8%. The Minnesota Alternative Minimum Tax rate is 
5.8%.

     The Bank and it subsidiaries have not been audited by the Minnesota 
taxation authorities.

     IOWA TAXATION.  On December 5, 1997 the Bank acquired MFC and its 
subsidiaries which were located in the state of Iowa. The Bank is now subject 
to Iowa Franchise tax on an apportionment basis weighted based upon deposits 
located within Iowa to total deposits of the Bank. Income apportioned to Iowa 
is subject to a 5% tax rate.

     DELAWARE TAXATION.  As a Delaware holding company, HMN is exempted from 
Delaware corporate income tax but is required to file an annual report with 
and pay an annual fee to the State of Delaware. HMN is also subject to an 
annual franchise tax imposed by the State of Delaware.


                                       39
<PAGE>

ITEM 2.  PROPERTIES

     The following table sets forth information concerning the main office 
and each branch office of HMN at December 31, 1998.  At December 31, 1998, 
HMN's premises had an aggregate net book value of approximately $4.6 million.

<TABLE>
<CAPTION>
                                        Year       Owned or      Net Book Value at
          Location                    Acquired      Leased      December 31, 1998(1)
--------------------------            --------     --------     --------------------
                                                                   (In Thousands)
<S>                                   <C>          <C>          <C>
CORPORATE OFFICE:
101 North Broadway                      1975        Owned                 336
Spring Valley, Minnesota

FULL SERVICE BRANCHES:

715 North Broadway                      1998        Owned               1,107
Spring Valley, Minnesota

201 Oakland Avenue                      1960        Owned                 157
Austin, Minnesota

Crossroads Shopping Center              1962        Owned                 481
Rochester, Minnesota

4th & Center (2)                        1973        Owned                 111
Winona, Minnesota
175 Center Street                       1998        Owned               1,751
Winona, Minnesota

208 South Walnut                        1975        Owned                  86
LaCrescent, Minnesota

1110 6th St., NW                        1982        Owned                 849
Rochester, Minnesota

143 West Clark Street                   1993        Owned                 568
Albert Lea, Minnesota

303 W. Main St.                         1997        Owned                 694
Marshalltown, Iowa

110 W. High St.                         1997       Leased                   2
Toledo, Iowa

29 S. Center                            1997        Owned                 245
Marshalltown, Iowa

MORTGAGE BANKING/BROKERAGE OFFICES:

7101 Northland Circle, Suite 105        1997       Leased                  --
Brooklyn Park, Minnesota
</TABLE>

---------------
(1)  Does not include $2,174,857 of net furniture and equipment distributed
     between all of the above offices or its subsidiaries.
(2)  The property is the old bank building in Winona and is currently being 
     held for sale.  The portions of the property are being rented on a month 
     to month basis to tenants.

                                        40
<PAGE>

     The Bank's depositor and borrower customer files are maintained by an 
independent data processing company.  The net book value of the data 
processing and computer equipment utilized by the Bank at December 31, 1998 
was approximately $462,882.

ITEM 3.  LEGAL PROCEEDINGS

     From time to time, the Bank and HMN are involved as plaintiff or 
defendant in various legal proceedings arising in the normal course of its 
business. While the ultimate outcome of these various legal proceedings 
cannot be predicted with certainty, it is the opinion of management that the 
resolution of these legal actions should not have a material effect on HMN's 
consolidated financial condition or results of operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                      PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY 
          HOLDER MATTERS

     The information on pages 21, 52 and the back cover page of the Annual 
Report to Security Holders for the year ended December 31, 1998 is 
incorporated herein by reference.

ITEM 6.   SELECTED FINANCIAL DATA

     The information on page 11 of the Annual Report to Security Holders for 
the year ended December 31, 1998 is incorporated herein by reference.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

     The information on pages 12 through 28 of the Annual Report to Security 
Holders for the year ended December 31, 1998 is incorporated herein by 
reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The information on pages 23 through 24 of the Annual Report to Security 
Holders for the year ended December 31, 1998 is incorporated herein by 
reference.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information on pages 29 through 52 of the Annual Report to Security 
Holders for the year ended December 31, 1998 is incorporated herein by 
reference.

                                        41
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL DISCLOSURE

     None.

                                     PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information on pages 4 through 5 of the Registrant's definitive 
Proxy Statement dated March 23, 1999 is incorporated herein by reference.  
See "Business - Executive Officers" in Part I of the Form 10-K for 
information regarding executive officers.

ITEM 11.   EXECUTIVE COMPENSATION

     The information on pages 8 through 12 of the Registrant's definitive 
Proxy Statement dated March 23, 1999 is incorporated herein be reference, 
except for information contained under the heading "Compensation Committee 
Report on Executive Compensation".

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information on pages 2, 3 and 15 of the Registrant's definitive 
Proxy Statement dated March 23, 1999 is incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

                                        42
<PAGE>

                                       PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS

     1.  Financial Statements

          The following information appearing in the Registrant's Annual Report
          to Security Holders for the year ended December 31, 1998, is
          incorporated by reference in this Form 10-K Annual Report as Exhibit
          13.

<TABLE>
<CAPTION>
                                                                      Pages in
                                                                     1998 Annual
          Annual Report Section                                         Report
          ---------------------                                      -----------
          <S>                                                        <C>
          Five Year Consolidated Financial Highlights                  11

          Consolidated Balance Sheets --
            December 31, 1998 and 1997                                 29

          Consolidated Statements of Income --
            Each of the Years in the Three-Year
            Period Ended December 31, 1998                             30

          Consolidated Statements of Comprehensive Income --
            Each of the Years in the Three-Year
            Period Ended December 31, 1998                             30

          Consolidated Statement of Stockholders'
            Equity -- Each of the Years in the
            Three-Year Period Ended December 31, 1998                  31

          Consolidated Statements of Cash Flows --
            Each of the Years in the Three-Year
            Period Ended December 31, 1998                             32

          Notes to Consolidated Financial Statements                   33 - 48

          Independent Auditors' Report                                 49

          Selected Quarterly Financial Data                            50 - 51

          Other Financial Data                                         52

          Common Stock Price Information                               52
</TABLE>

     2.  Financial Statement Schedules

          All financial statement schedules have been omitted as information is
          not required under the related instructions, is not applicable or has
          been included in the Notes to Consolidated Financial Statements.

                                       43
<PAGE>

     3.  Exhibits

<TABLE>
<CAPTION>
                                                                      Reference            Sequential
                                                                       to Prior          Page Numbering
                                                                      Filing or          Where Attached
                                                                       Exhibit            Exhibits Are
Regulation S-K                                                          Number           Located in This
Exhibit Number                       Document                      Attached Hereto      Form 10-K Report
--------------     -------------------------------------------     ---------------     -------------------
<S>                <C>                                             <C>                 <C>
      2            Agreement and Plan of Merger                          5*            Not applicable
                   dated July 1, 1997

      3            (i) Articles of Incorporation                         1*            Not applicable
                       Certificate of Incorporation as amended           7*
                       on April 28, 1998
                   (ii) By-laws                                          6*            Not applicable

      4            Instruments defining the rights of security           1*            Not applicable
                   holders, including indentures

      9            Voting trust agreement                          Not applicable      Not applicable

   10.1+           Employment Agreement for Mr. Weise                    2*            Not applicable
                   dated June 29, 1994
                   Extension of Employment Contract                      8*            Not applicable

   10.2+           Employment Agreement for Mr. Gardner                  2*            Not applicable
                   dated June 29, 1994
                   Extension of Employment Contract                      8*            Not applicable

   10.3+           Change in Control Severance Agreement                10.3           Filed electronically
                   for Mr. McNeil dated April 1, 1998

   10.4+           Directors Deferred Compensation Plan                  2*            Not applicable

   10.5+           1995 Recognition and Retention Plan                   3*            Not applicable
                   Amended and Restated HMN Financial, Inc.              9*            Not applicable
                   Recognition and Retention Plan dated
                   July 29, 1998

   10.6+           1995 Stock Option and Incentive Plan                  3*            Not applicable
                   Amended and Restated HMN Financial, Inc.              9*            Not applicable
                   Stock Option and Incentive Plan dated
                   July 29, 1998

   11              Statement re: Computation of per share                11            Filed electronically
                   earnings

   12              Statement re: Computation of ratios             Not applicable      Not applicable
</TABLE>

+Management contract of compensatory arrangement.


                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                                      Reference            Sequential
                                                                       to Prior          Page Numbering
                                                                      Filing or          Where Attached
                                                                       Exhibit            Exhibits Are
Regulation S-K                                                          Number           Located in This
Exhibit Number                       Document                      Attached Hereto      Form 10-K Report
--------------     -------------------------------------------     ---------------     -------------------
<S>                <C>                                             <C>                 <C>
     13            Annual Report to Security Holders                     13            Filed electronically

     16            Letter re: Change in certifying accountant      Not applicable      Not applicable

     18            Letter re: Change in accounting principles      Not applicable      Not applicable

     21            Subsidiaries of Registrant                            21            Filed electronically

     22            Published report regarding matters              Not applicable      Not applicable
                   submitted to vote of security holders

     23            Consent of KPMG Peat Marwick LLP                      23            Filed electronically
                   dated March 30, 1999

     24            Power of Attorney                               Not applicable      Not applicable

     27            Financial Data Schedule                               27            Filed electronically
                   Year ended 1998

     99            Additional exhibits                                  None           Not applicable
</TABLE>

------------------
1*  Filed April 1, 1994, as exhibits to the Registrant's Form S-1 registration
    statement (Registration No. 33-77212) pursuant to the Securities Act of 
    1933. All of such previously filed documents are hereby incorporated 
    herein by reference in accordance with Item 601 of Regulation S-K.
2*  Filed as an exhibit to the Registrant's Form 10-K for 1994 (file no.
    0-24100).  All previously filed documents are hereby incorporated by 
    reference in accordance with Item 601 of Regulation S-K.
3*  Filed as an exhibit to the Registrant's Form 10-K for 1995 (file no.
    0-24100).  All previously filed documents are hereby incorporated by 
    reference in accordance with Item 601 of Regulation S-K.
4*  Filed as an exhibit to the Registrant's Form 10-K for 1996 (file no.
    0-24100).  All previously filed documents are hereby incorporated by 
    reference in accordance with Item 601 of Regulation S-K.
5*  Filed as an exhibit to Current Report of Form 8-K dated July 1, 1997, filed
    on July 10, 1997. All previously filed documents are hereby incorporated by
    reference.
6*  Filed as an exhibit to the Registrant's Form 10-Q for the third quarter of
    1997 (file no. 0-24100). All previously filed documents are hereby 
    incorporated by reference.
7*  Filed as an exhibit to the Registrant's Form 10-Q for the first quarter of
    1998 (file no. 0-24100). All previously filed documents are hereby 
    incorporated by reference.
8*  Filed as an exhibit to the Registrant's Form 10-Q for the second quarter of
    1998 (file no. 0-24100). All previously filed documents are hereby 
    incorporated by reference.
9*  Filed as an exhibit to the Registrant's Form 10-Q for the third quarter of
    1998 (file no. 0-24100). All previously filed documents are hereby 
    incorporated by reference.

                                        45
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.


Date:        March 30, 1999              By:   /s/ Roger P. Weise
      -----------------------------            -----------------------------
                                               Roger P. Weise
                                               (Duly Authorized Representative)

     Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below by the following persons on behalf of the 
Registrant and in the capacities and on the dates indicated.


By:   /s/ Roger P. Weise                 By:   /s/ James B. Gardner
      -----------------------------            -----------------------------
      Roger P. Weise, Chairman of              James B. Gardner,
      the Board, President and Chief           Executive Vice President 
      Executive Officer (Principal             and Director
      Executive and Operating Officer)         (Principal Financial Officer)

Date:          March 30, 1999            Date:        March 30, 1999
      -----------------------------            -----------------------------


By:   /s/ Irma R. Rathbun                By:   /s/ Timothy R. Geisler
      -----------------------------            -----------------------------
      Irma R. Rathbun, Director                Timothy R. Geisler, Director

Date:         March 30, 1999             Date:        March 30, 1999
      -----------------------------            -----------------------------


By:   /s/ M. F. Schumann                 By:   /s/ Duane D. Benson
      -----------------------------            -----------------------------
      M.F. Schumann, Director                  Duane D. Benson, Director

Date:         March 30, 1999             Date:        March 30, 1999
      -----------------------------            -----------------------------


By:   /s/ Timothy P. Johnson
      -----------------------------
      Timothy P. Johnson,
      Vice President and Treasurer
      (Principal Accounting Officer)

Date:         March 30, 1999
      -----------------------------


                                        46

<PAGE>

                                 INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                           Sequential
                                                                         Page Numbering
                                                                         Where Attached
                                                                          Exhibits Are
Regulation S-K                                                          Located in This
Exhibit Number                      Document                           Form 10-K Report
--------------                      ---------                         -------------------
<S>                  <C>                                              <C>
    10.3             Change in Control Severence Agreement for        Filed electronically
                     Michael McNeil dated April 1, 1998

    11               Statement re: Computation of per share earnings  Filed electronically

    13               Annual Report to Security Holders                Filed electronically

    21               Subsidiaries of Registrant                       Filed electronically

    23               Consent of KPMG Peat Marwick LLP                 Filed electronically
                     dated March 30, 1999

    27               Financial Data Schedule                          Filed electronically
                     Year ended 1998
</TABLE>