Exhibit
10.3


 


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
                                       
(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 desire to terminate the prior agreement between Executive and the Bank
and to enter into this Agreement to conform the renewal period of this
Agreement with that of other similar agreements regarding payments upon a
change in control between certain other employees and 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:


 

















 


1.                                       Employment.  This Agreement does not govern 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;


 


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


 


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(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 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 


 


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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.


 


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 


 


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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 2.0 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 one year 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 employee of the Company
or the Bank during such one-year period (except, with respect to health
insurance coverage, for those portions remaining during such one-year period
that duplicate health insurance coverage that is in place for the


 


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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;


 


(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


 


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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.


 


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


 


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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.


 


(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 


 


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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:


 


 


 


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 any prior agreement, other than stock option agreements, regarding
payments by the Bank to Executive upon a change-in-control of the Company or
the Bank and any such agreement is hereby terminated and neither party shall
have any rights or obligations pursuant to the terms of any such 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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