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                                                                   EXHIBIT 10.3b

                            EMPLOYMENT AGREEMENT


     THIS EMPLOYMENT AGREEMENT (this "Agreement") is effective as of November
1, 2000 by and among HMN Financial, Inc., a Delaware corporation (the
"Company"), Home Federal Savings Bank, a federally chartered savings bank (the
"Bank") and a wholly owned subsidiary of the Company and Michael McNeil, a
resident of Rochester, Minnesota ("Executive").

     A.  Executive currently holds the positions of President and Chief
Executive Officer of the Bank and President of the Company;

     B.  Executive will continue to serve as the President and Chief Executive
Officer of the Bank and President of the Company, all subject to the terms and
conditions set forth in this Agreement.

     NOW, THEREFORE, in consideration of the foregoing premises and the
respective agreements of the Bank, the Company and Executive set forth below,
the Bank, the Company and Executive, intending to be legally bound, agree as
follows:

      1.   EMPLOYMENT.  Effective as of November 1, 2000 Executive shall perform
services for the Company and the Bank, upon the terms and conditions set forth
in this Agreement.

      2.   TERM OF EMPLOYMENT.  Unless terminated at an earlier date in
accordance with Section 7 hereof, the term of Executive's employment with the
Company and the Bank under this Agreement shall be for a period of two years
commencing on November 1, 2000 and ending on October 31, 2002, or any one-year
extension hereof (such two year term, the "Employment Period").  Commencing on
the first anniversary of the Execution of this Agreement and on each
anniversary thereafter, this Agreement shall be extended for a period of twelve
(12) months in addition to the then-remaining term of employment under this
Agreement, unless any of the Company, the Bank or the Executive gives contrary
written notice to the others not less than 90 days in advance of the date on
which the term of employment under this Agreement would otherwise be extended,
and PROVIDED THAT no extension shall occur unless prior to each anniversary of
the effective date, each of the Company Board and the Bank Board has reviewed a
formal evaluation of Executive's performance during the year preceding such
anniversary prepared by the Compensation Committee of the Company Board and
explicitly approved such extension of the term of this Agreement.

      3.   POSITION AND DUTIES.

      (a)  EMPLOYMENT WITH THE COMPANY AND THE BANK.  During the term of
Executive's employment with the Company and the Bank, Executive shall perform
such duties and responsibilities as the Board of Directors of the Company (the
"Company Board") or the Board of Directors of the Bank (the "Bank Board") shall
assign to him from time to

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time consistent with his position.  Executive shall be an executive officer
of the Company and the Bank and Executive's title shall be "President" of the
Company  and "President" and "Chief Executive Officer" of the Bank.

      (b)  PERFORMANCE OF DUTIES AND RESPONSIBILITIES.  Executive shall serve
the Company and the Bank faithfully and to the best of his ability and shall
devote his full working time, attention and efforts to the business of the
Company and the Bank during his employment with the Company and the Bank.
Executive hereby represents and confirms that he is under no contractual or
legal commitments that would prevent him from fulfilling his duties and
responsibilities as set forth in this Agreement.  During his employment with
the Company and the Bank, Executive may participate in charitable activities
and personal investment activities to a reasonable extent, and he may serve as
a director of business organizations in which he has personally invested, so
long as such activities and directorships do not interfere with the performance
of his duties and responsibilities hereunder.

      4.   COMPENSATION.

      (a)  SALARY.  During the Employment Period, the Bank shall pay to
Executive an annual base salary of $200,000.00, less deductions and
withholdings, which base salary shall be paid in accordance with the Bank's
normal payroll policies and procedures. During each year after the first year
of Executive's employment hereunder, the Compensation Committee of the Company
Board shall conduct an annual performance review of Executive and thereafter
establish Executive's base salary in an amount not less than the base salary in
effect for the prior year,

      (b)  EMPLOYEE BENEFITS.  During the Employment Period, Executive shall be
entitled to participate in all employee benefit plans and programs of the Bank
to the extent that Executive meets the eligibility requirements for each
individual plan or program. The Bank provides no assurance as to the adoption
or continuance of any particular employee benefit plan or program, and
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations applicable thereto. In addition, Executive
shall be eligible for stock awards and stock options of the Company as
authorized from time to time by the Company Board.

      (c)  EXPENSES.  During the Employment Period, the Bank shall reimburse
Executive for all reasonable and necessary out-of-pocket business, travel and
entertainment expenses incurred by him in the performance of his duties and
responsibilities hereunder subject to the Bank's normal policies and procedures
for expense verification and documentation, including reimbursement of monthly
dues paid to the Rochester Golf and Country Club.  The Bank shall provide for
Executive's use an automobile, and shall pay for all expenses associated with
the Bank's ownership of such automobile.

      5.   CONFIDENTIAL INFORMATION.  Except as permitted by the Company Board
or the Bank Board, during the Employment Period and at all times thereafter,
Executive shall not divulge, furnish or make accessible to anyone or use in any
way other than in the ordinary course of the business of the Company or the
Bank, any confidential, proprietary or


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secret knowledge or information of the Company or the Bank that Executive has
acquired or shall acquire during the term of his work for the Company or the
Bank as an employee, whether developed by himself or by others, concerning
any business strategies, marketing plans or customer lists of the Company or
the Bank or any other confidential or proprietary information or secret
aspects of the business of the Company or the Bank.  Executive acknowledges
that the above-described knowledge and information constitutes a unique and
valuable asset of the Company and the Bank and represents a substantial
investment of time and expense by the Company and the Bank, and that any
disclosure or other use of such knowledge or information other than for the
sole benefit of the Company or the Bank would be wrongful and would cause
irreparable harm to the Company and the Bank.  During the Employment Period,
Executive shall refrain from any acts or omissions that would reduce the
value of such knowledge or information to the Company or the Bank.  The
foregoing obligations of confidentiality shall not apply to any knowledge or
information that (i) is now or subsequently becomes generally publicly known
in the form in which it was obtained from the Company or the Bank, (ii) is
independently made available to Executive in good faith by a third party who
has not violated a confidential relationship with the Company or the Bank, or
(iii) is required to be disclosed by legal process, other than as a direct or
indirect result of the breach of this Agreement by Executive.

      6.   VENTURES.  If, during the Employment Period, Executive is engaged in
or associated with the planning or implementing of any project, program or
venture involving the Company or the Bank and a third party or parties, all
rights in such project, program or venture shall belong to the Company or the
Bank, as applicable.  Except as approved in writing by the Company Board or the
Bank Board, Executive shall not be entitled to any interest in any such
project, program or venture or to any commission, finder's fee or other
compensation in connection therewith, other than the compensation to be paid to
Executive by the Bank as provided herein.  Executive shall have no interest,
direct or indirect, in any customer or supplier that conducts business with the
Company or the Bank, unless such interest has been disclosed in writing to and
approved by the Company Board or the Bank Board, as applicable, before such
customer or supplier seeks to do business with the Company or the Bank.
Ownership by Executive, as a passive investment, of less than 2.5% of the
outstanding shares of capital stock of any corporation listed on a national
securities exchange or publicly traded in the over-the-counter market shall not
constitute a breach of this Section 6.

      7.   TERMINATION OF EMPLOYMENT.

      (a)  The Executive's employment with the Company and the Bank shall
terminate immediately upon:

           (i)   Executive's receipt of written notice from the Company or the
                 Bank of the termination of his employment;

           (ii)  Receipt by the Company or the Bank of Executive's written
                 resignation from the Company or the Bank;


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           (iii) Executive's Disability (as defined below);

           (iv)  Executive's death; or

           (v)   the expiration of the Employment Period.

      (b)  The date upon which Executive's termination of employment with the
Company and the Bank occurs shall be the "Termination Date."

      (c)  In the event of Executive's termination of employment for any of the
foregoing reasons, Executive shall immediately resign as a director and/or
officer of the Company and the Bank and any of their subsidiaries.

      8.   PAYMENTS UPON TERMINATION OF EMPLOYMENT.

      (a)  If prior to a Change in Control (as defined in the separate
Change-in-Control Agreement attached hereto (the "Change-in-Control
Agreement")) or after the Transition Period as defined in the Change-in-Control
Agreement, Executive's employment with the Company and the Bank is terminated:

           (i)   by the Company or the Bank for any reason other than (A) for
                 Cause (as defined below), or (B) the delivery of a written
                 notice to Executive that the Bank elects not to extend the
                 term of this Agreement, or

           (ii)  by Executive as a result of his resignation for Good Reason
                 (as defined below), or

           (iii) by reason of Executive's Disability (as defined below),

the Bank shall:

           (i)   pay to Executive as severance pay an amount equal to his
                 current base salary during the remaining period of the
                 Employment Period; and

           (ii)  if Executive elects to continue his group health insurance
                 coverage with the Bank following the termination of his
                 employment with the Company and the Bank, reimburse him for
                 the full cost of the premiums he is required to pay to
                 maintain such coverage at the same level of coverage that was
                 in effect as of the Termination Date for the remaining term of
                 the Employment Period.

Any amount payable to Executive as severance pay or reimbursement for the cost
of the continuation of his group health insurance coverage hereunder shall be
subject to deductions


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and withholdings and shall be paid to Executive by the Bank in approximately
equal monthly installments during the remaining term of this Agreement
commencing on the first normal payroll date of the Bank following the
expiration of all applicable rescission periods provided by law and
continuing monthly thereafter.

The Bank shall be entitled to deduct from any severance pay otherwise payable
to Executive hereunder:  (i) any amount earned as income by Executive after the
Termination Date as a result of self-employment or employment with any other
employer, and (ii) any amount received by Executive after the Termination Date
under any short-term or long-term disability insurance plan or program provided
to him by the Bank.  In addition, the Bank shall be entitled to cease making
reimbursement payments to Executive for the cost of the continuation of his
group health insurance coverage with the Bank after the Termination Date if
Executive becomes eligible for comparable group health insurance coverage from
any other employer.  For purposes of mitigation and reduction of the Bank's
financial obligations to Executive under this Section 8(a), Executive shall
promptly and fully disclose to the Bank in writing:  (i) the nature and amount
of any such earned income from self-employment or employment with any other
employer, (ii) the amount of any such disability insurance payments, or (iii)
the fact that he has become eligible for comparable group health insurance
coverage from any other employer, and Executive shall be liable to repay any
amounts to the Bank that should have been so mitigated or reduced but for
Executive's failure or unwillingness to make such disclosures.

      (b)  If after a Change in Control and during the Transition Period,
Executive's employment terminates, Executive's rights to payments and benefits
shall be governed by the Change-in-Control Agreement.

      (c) If Executive's employment with the Company or the Bank is terminated
by reason of:

           (i)   Executive's abandonment of his employment or Executive's
                 resignation for any reason other than Good Reason (as defined
                 below),

           (ii)  termination of Executive's employment by the Company or the
                 Bank for Cause (as defined below),

           (iii) Executive's death, or

           (iv)  the expiration of the Employment Period,

the Bank shall pay to Executive or his beneficiary or his estate, as the case
may be, his base salary through the Termination Date.

      (d)  "Cause" hereunder shall mean:


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           (i)   an act or acts of dishonesty undertaken by Executive and
                 intended to result in substantial gain or personal enrichment
                 of Executive at the expense of the Company or the Bank;

           (ii)  unlawful conduct or gross misconduct that is willful and
                 deliberate on Executive's part and that, in either event, is
                 injurious to the Company or the Bank;

           (iii) the conviction of Executive of a felony;

           (iv)  failure of Executive to perform his duties and
                 responsibilities hereunder or to satisfy his obligations as an
                 officer or employee of the Company or the Bank, which failure
                 has not been cured by Executive within 30 days after written
                 notice thereof to Executive from the Company or the Bank; or

           (v)   material breach of any terms and conditions of this Agreement
                 by Executive not caused by the Company or the Bank, which
                 breach has not been cured by Executive within ten days after
                 written notice thereof to Executive from the Company or the
                 Bank.

      (e)  "Good Reason" hereunder shall mean:

           (i)   material breach of any terms and conditions of this Agreement
                 by the Company or the Bank not caused by Executive, which
                 breach has not been cured by the Company or the Bank within
                 ten days after written notice thereof to the Company or the
                 Bank from Executive;

           (ii)  the Company or the Bank shall require Executive to relocate to
                 any place other than a location within thirty-five miles of
                 the

                 location at which the Executive performed his primary duties
                 immediately prior to the requirement by the Company or the
                 Bank to relocate or, if the Executive performed such duties at
                 the Company's principal executive offices, the Company or the
                 Bank shall relocate its principal executive offices to any
                 location other than a location within thirty-five miles from
                 the location of the principal executive offices; or

           (iii) a material reduction of Executive's base salary, perquisites
                 or benefits unless such reduction is part of a general
                 reduction in the base salaries, perquisites and/or benefits
                 for all executive officers of the Company or the Bank.


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      (f)  "Disability" hereunder shall mean the inability of Executive to
perform on a full-time basis the duties and responsibilities of his employment
with the Company and the Bank by reason of his illness or other physical or
mental impairment or condition, if such inability continues for an
uninterrupted period of 180 days or more during any 360-day period.  A period
of inability shall be "uninterrupted" unless and until Executive returns to
full-time work for a continuous period of at least 30 days.

      (g)  In the event of termination of Executive's employment, the sole
obligation of the Company and the Bank shall be its obligation to make the
payments called for by Sections 8(a) or 8(c) hereof, as the case may be, and
the Company and the Bank shall have no other obligation to Executive or to his
beneficiary or his estate, except as otherwise provided by law, under the terms
of any other applicable agreement between Executive and the Company or the Bank
or under the terms of any employee benefit plans or programs then maintained by
the Bank in which Executive participates.

      (h)  Notwithstanding the foregoing provisions of this Section 8, the Bank
shall not be obligated to make any payments to Executive under Section 8(a)
hereof unless Executive shall have signed a release of claims in favor of the
Bank and the Company in a form to be prescribed by the Company Board or the
Bank Board, all applicable consideration periods and rescission periods
provided by law shall have expired and Executive is in strict compliance with
the terms of Section 5 hereof as of the dates of the payments.

      9.  RETURN OF RECORDS AND PROPERTY.  Upon termination of his employment
with the Company and the Bank, Executive shall promptly deliver to the Bank any
and all Company or Bank records and any and all Company or Bank property in his
possession or under his control, including without limitation any automobile,
manuals, books, blank forms, documents, letters, memoranda, notes, notebooks,
reports, printouts, computer disks, computer tapes, source codes, data, tables
or calculations and all copies thereof, documents that in whole or in part
contain any trade secrets or confidential, proprietary or other secret
information of the Company or the Bank and all copies thereof, and keys, access
cards, access codes, passwords, credit cards, personal computers, telephones
and other electronic equipment belonging to the Company or the Bank.

      10. REMEDIES.

      (a)  EQUITABLE.  Executive acknowledges that it would be difficult to
fully compensate the Company or the Bank for monetary damages resulting from
any breach by him of the provisions of Section 5 hereof.  Accordingly, in the
event of any actual or threatened breach of any such provisions, the Company
and the Bank shall, in addition to any other remedies they may have, be
entitled to injunctive and other equitable relief to enforce such provisions,
and such relief may be granted without the necessity of proving actual monetary
damages.

      (b)  ARBITRATION.  Except for disputes arising under Section 5 hereof,
all disputes involving the interpretation, construction, application or alleged
breach of this Agreement and all disputes relating to the termination of
Executive's employment with the


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Company or the Bank shall be submitted to final and binding arbitration in
Minneapolis, Minnesota.  The arbitrator shall be selected and the arbitration
shall be conducted pursuant to the then most recent Employment Dispute
Resolution Rules of the American Arbitration Association.  The decision of
the arbitrator shall be final and binding, and any court of competent
jurisdiction may enter judgment upon the award.  All fees and expenses of the
arbitrator shall be shared equally by Executive and the Company or the Bank.
The arbitrator shall have jurisdiction and authority to interpret and apply
the provisions of this Agreement and relevant federal, state and local laws,
rules and regulations insofar as necessary to the determination of the
dispute and to remedy any breaches of the Agreement and/or violations of
applicable laws, but shall not have jurisdiction or authority to award
punitive damages or alter in any way the provisions of this Agreement. The
arbitrator shall have the authority to award attorneys' fees and costs to the
prevailing party.  The parties hereby agree that this arbitration provision
shall be in lieu of any requirement that either party exhaust such party's
administrative remedies under federal, state or local law.

      11. MISCELLANEOUS.

      (a)  GOVERNING LAW.  All matters relating to the interpretation,
construction, application, validity and enforcement of this Agreement shall be
governed by the laws of the State of Minnesota without giving effect to any
choice or conflict of law provision or rule, whether of the State of Minnesota
or any other jurisdiction, that would cause the application of laws of any
jurisdiction other than the State of Minnesota.

      (b)  ENTIRE AGREEMENT.  Except for a Change in Control Agreement between
Executive and the Bank dated the date hereof, this Agreement contains the
entire agreement of the parties relating to the subject matter of this
Agreement and supersedes all prior agreements and understandings with respect
to such subject matter, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
that are not set forth herein.

      (c)  AMENDMENTS.  No amendment or modification of this Agreement shall be
deemed effective unless made in writing and signed by the parties hereto.

      (d)  NO WAIVER.  No term or condition of this Agreement shall be deemed
to have been waived, except by a statement in writing signed by the party
against whom enforcement of the waiver  is sought.  Any written waiver shall
not be deemed a continuing waiver unless specifically stated, shall operate
only as to the specific term or condition waived and shall not constitute a
waiver of such term or condition for the future or as to any act other than
that specifically waived.

      (e)  ASSIGNMENT.  This Agreement shall not be assignable, in whole or in
party, by either party without the written consent of the other party.

      (f)  COUNTERPARTS.  This Agreement may be executed in any number of
counterparts, and such counterparts executed and delivered, each as an
original, shall constitute but one and the same instrument.


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      (g)  SEVERABILITY.  To the extent that any portion of any provision of
this Agreement shall be invalid or unenforceable, it shall be considered
deleted herefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.

      (h)  CAPTIONS AND HEADINGS.  The captions and paragraph headings used in
this Agreement are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement or any of the provisions
hereof.

      IN WITNESS WHEREOF, Executive, the Company and the Bank have executed
this Agreement as of the date set forth in the first paragraph.

                                       HMN FINANCIAL, INC.


                                       By /s/ M.F. Schumann
                                          ________________________________

                                         Its Chairman
                                             _____________________________



                                       HOME FEDERAL SAVINGS BANK


                                       By /s/ M.F. Schumann
                                          ________________________________

                                         Its  Chairman
                                             _____________________________



                                       MICHAEL MCNEIL


                                       /s/ Michael McNeil
                                       ___________________________________



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