Exhibit 10.1

 

CHANGE-IN-CONTROL AGREEMENT

 

AGREEMENT entered into as of March 1, 2004 by and between Home Federal Savings
Bank, a federally chartered savings bank (the “Bank”) and a wholly owned
subsidiary of HMN Financial, Inc., a Delaware corporation (the “Company”), and
Michael McNeil (the “Executive”).

 

WITNESSETH:

 

WHEREAS, the Executive is a key member of the management of the Company and the
Bank and has heretofore devoted substantial skill and effort to the affairs of
the Company and the Bank; and

 

WHEREAS, it is desirable and in the best interests of the Bank and the Company
and its shareholders to continue to obtain the benefits of the Executive’s
services and attention to the affairs of the Company and the Bank; and

 

WHEREAS, it is desirable and in the best interests of the Bank and the Company
and its shareholders to provide inducement for the Executive (A) to remain in
the service of the Company and the Bank in the event of any proposed or
anticipated change in control of the Company and (B) to remain in the service of
the Company and the Bank in order to facilitate an orderly transition in the
event of a change in control of the Company; and

 

WHEREAS, it is desirable and in the best interests of the Bank and the Company
and its shareholders that the Executive be in a position to make judgments and
advise the Company with respect to proposed changes in control of the Company or
the Bank; and

 

WHEREAS, the Executive desires to be protected in the event of certain changes
in control of the Company or the Bank; and

 

WHEREAS, Executive and the Bank are currently party to a Change-in-Control
Agreement dated November 1, 2000 (the “Prior Agreement”); and

 

WHEREAS, Executive and the Bank desire to terminate the Prior Agreement and to
enter into this Agreement to conform the renewal period of this Agreement with
that of the Executive’s Employment Agreement with the Company;  and

 

WHEREAS, for the reasons set forth above, the Bank and the Executive desire to
enter into this Agreement.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements contained herein, the Bank and the Executive agree as follows:

 

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1.                                       Employment.  The Executive has
previously executed an Employment Agreement (the “Employment Agreement”) which
governs the terms of the Executive’s employment, unless an Event shall be deemed
to have occurred as contemplated by Section 2.

 

2.                                       Events.  No amounts or benefits shall
be payable or provided for pursuant to this Agreement unless an Event shall
occur during the Term of this Agreement.

 

(a)                                  For purposes of this Agreement, an “Event”
shall be deemed to have occurred if any of the following occur:

 

(i)                                     Any “person” (as defined in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, or any
successor statute thereto (the “Exchange Act”)) acquires or becomes a
“beneficial owner” (as defined in Rule 13d-3 or any successor rule under the
Exchange Act), directly or indirectly, of securities of the Company or the Bank
representing 35% or more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of directors (“Voting
Securities”), provided, however, that the following shall not constitute an
Event pursuant to this Section 2(a)(i):

 

(A)                              any acquisition of beneficial ownership by the
Company, the Bank or a subsidiary of the Company or the Bank;

 

(B)                                any acquisition or beneficial ownership by
any employee benefit plan (or related trust) sponsored or maintained by the
Company, the Bank or one or more of their subsidiaries;

 

(C)                                any acquisition or beneficial ownership by
any corporation (including without limitation an acquisition in a transaction of
the nature described in Section 2(a)(iii)) with respect to which, immediately
following such acquisition, more than 65%, respectively, of (x) the combined
voting power of the Company’s or the Bank’s then outstanding Voting Securities
and (y) the Company’s or the Bank’s then outstanding common stock (the “Common
Stock”) is then beneficially owned, directly or indirectly, by all or
substantially all of the persons who beneficially owned Voting Securities and
Common Stock, respectively, of the Company or the Bank immediately prior to such
acquisition in substantially the same proportions as their ownership of such
Voting Securities and Common Stock, as the case may be, immediately prior to
such acquisition;

 

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(D)                               any acquisition of Voting Securities or Common
Stock directly from the Company or the Bank;

 

(ii)                                  Continuing Directors shall not constitute
a majority of the members of the Board of Directors of the Company.  For
purposes of this Section 2(a)(ii), “Continuing Directors” shall mean: 
(A) individuals who, on the date hereof, are directors of the Company,
(B) individuals elected as directors of the Company subsequent to the date
hereof for whose election proxies shall have been solicited by the Board of
Directors of the Company or (C) any individual elected or appointed by the Board
of Directors of the Company to fill vacancies on the Board of Directors of the
Company caused by death or resignation (but not by removal) or to fill
newly-created directorships, provided that a “Continuing Director” shall not
include an individual whose initial assumption of office occurs as a result of
an actual or threatened election contest with respect to the threatened election
or removal of directors (or other actual or threatened solicitation of proxies
or consents) by or on behalf of any person other than the Board of Directors of
the Company;

 

(iii)                               Consummation of a reorganization, merger or
consolidation of the Company or the Bank or a statutory exchange of outstanding
Voting Securities of the Company or the Bank, unless immediately following such
reorganization, merger, consolidation or exchange, all or substantially all of
the persons who were the beneficial owners, respectively, of Voting Securities
and Common Stock immediately prior to such reorganization, merger, consolidation
or exchange beneficially own, directly or indirectly, more than 65% of,
respectively, (x) the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors and (y) the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger, consolidation or exchange in substantially the same
proportions as their ownership, immediately prior to such reorganization,
merger, consolidation or exchange, of the Voting Securities and Common Stock, as
the case may be;

 

(iv)                              (x) Approval by the shareholders of the
Company of a complete liquidation or dissolution of the Company or the Bank or
(y)  approval by the shareholders of the Company of the sale or other
disposition of all or substantially all of the assets of the Company or the Bank
(in one or a series of transactions), other than to a corporation with respect
to which, immediately following such sale or other disposition, more than 65%
of, respectively, (1) the combined voting power of the then outstanding voting
securities of such

 

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corporation entitled to vote generally in the election of directors and (2) the
then outstanding shares of common stock of such corporation is then beneficially
owned, directly or indirectly, by all or substantially all of the persons who
were the beneficial owners, respectively, of the Voting Securities and Common
Stock immediately prior to such sale or other disposition in substantially the
same proportions as their ownership, immediately prior to such sale or other
disposition, of the Voting Securities and Common Stock, as the case may be;

 

(v)                                 The Company or the Bank enters into a letter
of intent, an agreement in principle or a definitive agreement relating to an
Event described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof that
ultimately results in such an Event, or a tender or exchange offer or proxy
contest is commenced which ultimately results in an Event described in
Section 2(a)(i) or 2(a)(ii) hereof; or

 

(vi)                              There shall be an involuntary termination or
Constructive Involuntary Termination of employment of the Executive, and the
Executive reasonably demonstrates that such event (x) was requested by a party
other than the Board of Directors of the Company or the Bank that had previously
taken other steps reasonably calculated to result in an Event described in
Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof and which ultimately
results in an Event described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or
2(a)(iv) hereof, or (y) otherwise arose in connection with or in anticipation of
an Event described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof
that ultimately occurs.

 

Notwithstanding anything stated in this Section 2(a), an Event shall not be
deemed to occur with respect to the Executive if (x) the acquisition or
beneficial ownership of the 35% or greater interest referred to in
Section 2(a)(i) is by the Executive or by a group, acting in concert, that
includes the Executive or (y) a majority of the then combined voting power of
the then outstanding voting securities (or voting equity interests) of the
surviving corporation or of any corporation (or other entity) acquiring all or
substantially all of the assets of the Company or the Bank shall, immediately
after a reorganization, merger, consolidation, exchange or disposition of assets
referred to in Section 2(a)(iii) or 2(a)(iv), be beneficially owned, directly or
indirectly, by the Executive or by a group, acting in concert, that includes the
Executive.

 

(b)                                 For purposes of this Agreement, a
“subsidiary” of the Company or the Bank shall mean any entity of which
securities or other ownership interests having general voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned by the Company or the Bank.

 

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3.                                       Payments and Benefits.  If any Event
shall occur during the Term of this Agreement, then the Executive shall be
entitled to receive from the Company, the Bank or either of their successors
(which term as used herein shall include any person acquiring all or
substantially all of the assets of the Company or the Bank) a cash payment and
other benefits on the following basis (unless the Executive’s employment by the
Company is terminated voluntarily or involuntarily prior to the occurrence of
the earliest Event to occur (the “First Event”), in which case the Executive
shall be entitled to no payment or benefits under this Section 3):

 

(a)                                  If at the time of, or at any time after,
the occurrence of the First Event and prior to the end of the Transition Period
(as defined in Section 4(d)), the employment of the Executive with the Company
or the Bank is voluntarily or involuntarily terminated for any reason (unless
such termination is a voluntary termination by the Executive other than a
Constructive Involuntary Termination or is on account of the death or Disability
of the Executive or is a termination by the Company or the Bank for Cause), the
Executive (or the Executive’s legal representative, as the case may be),

 

(i)                                     shall be entitled to receive from the
Company, the Bank or either of their successors, upon such termination of
employment with the Company, the Bank or either of their successors, a cash
payment in an amount equal to 2.99 times the average annual base salary payable
by the Bank and included in the gross income for Federal Income Tax purposes of
the Executive during the shorter of the period consisting of the five most
recently completed taxable years of the Executive ending before the First Event
(other than an Event described in Section 2(a)(v) or 2(a)(vi) unless the
Executive is terminated prior to the occurrence of an Event described in
Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv)) or that portion of such period
during which the Executive was employed by the Company or the Bank (for which
purpose compensation for a partial year shall be annualized, in accordance with
temporary or final regulations promulgated under Section 280G(d) of the Internal
Revenue Code of 1986, as amended (the “Code”), or any successor provision
thereto, before determining average annual compensation for the period, such
average annual compensation to be determined in accordance with temporary or
final regulations promulgated under Section 280G(d) of the Code or any successor
provision thereto and such payment to be made to the Executive by the Company,
the Bank or either of their successors in a lump sum at the time of such
termination of employment; and

 

(ii)                                  shall be entitled for two years after the
termination of the Executive’s employment with the Company or the Bank to
participate in any health, disability and life insurance plan or program in
which the Executive was entitled to participate immediately prior to the First
Event as if he were an

 

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employee of the Company or the Bank during such two-year period (except, with
respect to health insurance coverage, for those portions remaining during such
two-year period that duplicate health insurance coverage that is in place for
the Executive under any other policy provided at the expense of another
employer); provided however, that in the event that the Executive’s
participation in any such health, disability or life insurance plan or program
of the Company or the Bank is barred, the Company or the Bank, at its sole cost
and expense, shall arrange to provide the Executive with benefits substantially
similar to those which the Executive would be entitled to receive under such
plan or program if he were not barred from participation.

 

(b)                                 The payments provided for in this Section 3
shall be in addition to any salary or other remuneration otherwise payable to
the Executive on account of employment by the Company, the Bank or one or more
of either of their subsidiaries or successors (including any amounts received
prior to such termination of employment for personal services rendered after the
occurrence of the First Event) but shall be reduced by any severance pay which
the Executive receives from the Bank, its subsidiaries or its successor under
any other policy or agreement of the Bank or its subsidiaries in the event of
involuntary termination of Executive’s employment.

 

(c)                                  In the event that at any time from the date
of the First Event until the end of the Transition Period,

 

(i)                                     the Executive shall not be given
substantially equivalent or greater title, duties, responsibilities and
authority, in each case as compared with the Executive’s status immediately
prior to the First Event, other than for Cause or on account of Disability;

 

(ii)                                  the Executive’s annual base salary shall
be reduced from the Executive’s annual base salary in effect immediately prior
to the First Event;

 

(iii)                               the Company or the Bank shall fail to
provide the Executive with benefits under either of their pension, profit
sharing, retirement, life insurance, medical, health and accident, disability,
bonus and incentive plans and other employee benefit plans and arrangements that
in the aggregate for all such plans and arrangements are at least as favorable
to the Executive as those benefits covering the Executive immediately prior to
the First Event or shall fail to provide the Executive with at least the number
of paid vacation days to which the Executive was entitled immediately prior to
the First Event;

 

(iv)                              the Bank shall have failed to obtain
assumption of this Agreement by any successor as contemplated by Section 5(b)
hereof;

 

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(v)                                 the Company or the Bank shall require the
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 First Event or, if the Executive performed such duties
at the Company’s principal executive offices, the Company shall relocate its
principal executive offices to any location other than a location within
thirty-five miles of the location of the principal executive offices immediately
prior to the First Event; or

 

a termination of employment with the Company or the Bank by the Executive
thereafter shall constitute a Constructive Involuntary Termination.

 

(d)                                 Notwithstanding any provision to the
contrary contained herein except the last sentence of this Section 3(d), if the
lump sum cash payment due and the other benefits to which the Executive shall
become entitled under Section 3(a) hereof, either alone or together with other
payments in the nature of compensation to the Executive which are contingent on
a change in the ownership or effective control of the Company or the Bank or in
the ownership of a substantial portion of the assets of the Company or the Bank
or otherwise, would constitute a “parachute payment” as defined in Section 280G
of the Code or any successor provision thereto, such lump sum payment and/or
such other benefits and payments shall be reduced (but not below zero) to the
largest aggregate amount as will result in no portion thereof being subject to
the excise tax imposed under Section 4999 of the Code (or any successor
provision thereto) or being non-deductible to the Company or the Bank for
federal income tax purposes pursuant to Section 280G of the Code (or any
successor provision thereto).  The Company or the Bank in good faith shall
determine the amount of any reduction to be made pursuant to this Section 3(d)
and shall select from among the foregoing benefits and payments those which
shall be reduced.  No modification of, or successor provision to, Section 280G
or Section 4999 subsequent to the date of this Agreement shall, however, reduce
the benefits to which the Executive would be entitled under this Agreement in
the absence of this Section 3(d) to a greater extent than they would have been
reduced if Section 280G and Section 4999 had not been modified or superseded
subsequent to the date of this Agreement, notwithstanding anything to the
contrary provided in the first sentence of this Section 3(d).

 

(e)                                  The Executive shall not be required to
mitigate the amount of any payment or other benefit provided for in Section 3 by
seeking other employment or otherwise, nor (except as specifically provided in
Section 3(a)(ii) or 3(b)) shall the amount of any payment or other benefit
provided for in Section 3 be reduced by any compensation earned by the Executive
as the result of employment by another employer after termination, or otherwise.

 

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(f)                                    The obligations of the Company and the
Bank under this Section 3 shall survive the termination of this Agreement.

 

4.                                       Definition of Certain Additional Terms.

 

(a)                                  As used herein, other than in Section 2(a)
hereof, the term “person” shall mean an individual, partnership, corporation,
estate, trust or other entity.

 

(b)                                 As used herein, the term “Cause” shall mean,
and be limited to:

 

(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; or

 

(iii)                               the conviction of Executive of a felony.

 

(iv)                              failure of Executive to perform his duties and
responsibilities under the Employment Agreement 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, as applicable; or

 

(v)                                 material breach of any terms and conditions
of the Employment 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.

 

(c)                                  As used herein, the term “Disability” shall
mean the inability of Executive to perform on a full-time basis the duties and
responsibilities of his employment with the Company or 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.

 

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(d)                                 As used herein, the term “Transition Period”
shall mean the one year period commencing on the date of the earliest to occur
of an Event described in Section 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof
(the “Commencement Date”) and ending one year after the Commencement Date.

 

5.                                       Successors and Assigns.

 

(a)                                  This Agreement shall be binding upon and
inure to the benefit of the successors, legal representatives and assigns of the
parties hereto; provided, however, that the Executive shall not have any right
to assign, pledge or otherwise dispose of or transfer any interest in this
Agreement or any payments hereunder, whether directly or indirectly or in whole
or in part, without the written consent of the Company or the Bank or either of
their successors.

 

(b)                                 The Company and the Bank will require any
successor (whether direct or indirect, by purchase of a majority of the
outstanding voting stock of the Company or the Bank or all or substantially all
of the assets of the Company or the Bank, or by merger, consolidation or
otherwise), by agreement in form and substance satisfactory to the Executive, to
assume expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company and the Bank would be required to perform it if
no such succession had taken place.  Failure of the Company or the Bank, as
applicable, to obtain such agreement prior to the effectiveness of any such
succession (other than in the case of a merger or consolidation) shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Bank in the same amount and on the same terms as the Executive would be
entitled hereunder if the Executive terminated his employment on account of a
Constructive Involuntary Termination, except that for purposes of implementing
the foregoing, the date on which any such succession becomes effective shall be
deemed the date of termination.  As used in this Agreement, “Company” shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which is required to execute and deliver the agreement
provided for in this Section 5(b) or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law and “Bank” shall mean
the Bank as hereinbefore defined and any successor to its business and/or assets
as aforesaid which is required to execute and deliver the agreement provided for
in this Section 5(b) or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.

 

6.                                       Governing Law.  This Agreement shall be
construed in accordance with the laws of the State of Minnesota.

 

7.                                       Notices.  All notices, requests and
demands given to or made pursuant hereto shall be in writing and shall be
delivered or mailed to any such party at its address which:

 

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(a)                                  In the case of the Company or the Bank
shall be:

 

HMN Financial, Inc.
Attention:  Chairman of the Board
1016 Civic Center Drive NW
Rochester, Minnesota  55901

 

(b)                                 In the case of the Executive shall be:

 

Michael McNeil
1951 Waterford Place Southwest
Rochester, MN 55902

 

Either party may, by notice hereunder, designate a changed address.  Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.

 

8.                                       Severability; Severance.  In the event
that any portion of this Agreement is held to be invalid or unenforceable for
any reason, it is hereby agreed that such invalidity or unenforceability shall
not affect the other portions of this Agreement and that the remaining
covenants, terms and conditions or portions hereof shall remain in full force
and effect, and any court of competent jurisdiction may so modify the
objectionable provision as to make it valid, reasonable and enforceable.  In the
event that any benefits to the Executive provided in this Agreement are held to
be unavailable to the Executive as a matter of law, the Executive shall be
entitled to severance benefits from the Bank, in the event of an involuntary
termination or Constructive Involuntary Termination of employment of the
Executive (other than a termination on account of the death or Disability of the
Executive or a termination for Cause) during the term of this Agreement
occurring at the time of or following the occurrence of an Event, at least as
favorable to the Executive (when taken together with the benefits under this
Agreement that are actually received by the Executive) as the most advantageous
benefits made available by the Employer to employees of comparable position and
seniority to the Executive during the five-year period prior to the First Event.

 

9.                                       Term.  This Agreement shall commence on
the date of this Agreement and shall terminate, and the Term of this Agreement
shall end, on the later of (A) March 31, 2005,  provided that such period shall
be extended automatically for one year and from year to year thereafter until
notice of termination is given by the Company or the Executive to the other
party hereto at least 30 days prior to March 31, 2005 or the expiration of the
one-year extension period then in effect, as the case may be, or (B) if the
Commencement Date occurs on or prior to March 31, 2005 (or prior to the end of
the extension year then in effect as provided for in clause (A) hereof), one
year after the Commencement Date.

 

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10.                                 Termination of Prior Agreement.  This
Agreement supercedes the Prior Agreement which is hereby terminated and neither
party shall have any rights or obligations pursuant to the terms of the Prior
Agreement.

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

 

 

HOME FEDERAL SAVINGS BANK

 

 

 

 

 

By

 

 

 

 

Its

 

 

 

 

 

 

 

Executive

 

 

 

 

 

 

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