**Exhibit10.3c**

 

**CONFIDENTIAL**

 

**SEPARATION AGREEMENT**

 

THIS SEPARATION AGREEMENT (this “Agreement”) is madeand entered into by and among Timothy P. Johnson (“Johnson”), a resident ofMinnesota, HMN Financial, Inc., a Delaware corporation (the “Company”), and HomeFederal Savings Bank, a federally chartered savings bank (the “Bank”) and awholly owned subsidiary of the Company.

 

**BACKGROUND**

 

# A.                                   Johnsonwas employed by the Company and/or the Bank since 1992.  Johnson has served as a director and as theChief Financial Officer for the Company and as a director and as the ChiefFinancial Officer for the Bank since November 1, 2000.

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# B.                                     Johnsonwas employed under the terms of an Employment Agreement effective as of January1, 2002 (the “Employment Agreement”), is party to Incentive Stock OptionAgreements dated as of June 21, 1995 and April 16, 2002 (the “OptionAgreements”), owns one share preferred stock of Home Federal REIT, Inc., aDelaware corporation and indirect subsidiary of the Bank (“REIT”), and also waseligible to participate in other plans and programs of the Company and otherplans and programs of the Bank.

#  

C.                                     Johnsonhas announced his intent to resign as an employee, officer and director of theCompany and of the Bank effective as of March 31, 2003 (the “Separation Date”).

 

# D.                                    Theparties are concluding Johnson’s employment relationship amicably, but mutuallyrecognize Johnson’s employment relationship may give rise to potential claimsor liabilities.

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# E.                                      TheCompany and the Bank expressly deny that they may be liable to Johnson on anybasis or that they have engaged in any unlawful or improper conduct towardJohnson or treated Johnson unfairly.

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F.                                      Theparties desire to resolve all issues now in dispute between Johnson and theCompany and the Bank and have agreed to a full settlement of such issues.

 

NOW THEREFORE, in consideration of the mutual promisesand provisions contained in this Agreement and the Releases referred to below,the parties, intending to be legally bound, agree as follows:

 

**AGREEMENTS**

 

## **1.**                                      **Releases.**

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## **a.****                                       Releaseby Johnson.**  On or within 21days after the Separation Date, Johnson shall execute a Release in the formattached to this Agreement as Exhibit A (the “Johnson Release”).  This Agreement will not be interpreted orconstrued to limit the Johnson Release in any manner.

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## **b.****                                       Releaseby the Company.**  On or within 21days after the Separation Date, the Company will execute a Release in the formattached to this Agreement as Exhibit B (the “Company Release”).  This Agreement will not be interpreted orconstrued to limit the Company Release in any manner.

 

**2.****                                      Resignations.**  By executing this Agreement, Johnsonconfirms his resignation of all positions held by Johnson as an employee,officer, or director of the Company, of the Bank, and of any direct or indirectaffiliate of the Company or the Bank. All such resignations are effective as of the Separation Date.  The Company and the Bank each

 

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confirm their acceptance of Johnson’s resignations, respectively.  At the same time he signs this Agreement,Johnson will also sign eight copies of a letter affirming his resignations, forinclusion in the corporate records of the Company, the Bank and theiraffiliates, in the form attached to this Agreement as Exhibit C.

 

**3.****                                      DutiesThrough Separation Date; Use of Vacation Time.**

 

## **a.****                                       Duties. **From the date of this Agreement throughthe Separation Date Johnson shall continue to serve as Chief Financial Officerof the Company and of the Bank, and will perform duties associated with suchpositions.  The Company and the Bankacknowledge Johnson’s intent to use accrued vacation time for the period fromMarch 7, 2003 through the Separation Date, and authorize Johnson taking suchvacation time; provided, however that Johnson will make himself available tothe Company and the Bank during such vacation time as necessary to fulfill hisduties as Chief Financial Officer.  TheCompany and the Bank will make a good faith effort not to unduly interruptJohnson’s vacation and to limit its requests for assistance during his vacationto once per week.

 

## **b.****                                       Vacation.**  Following the Separation Date, the Bankshall pay Johnson a lump sum for his remaining accrued and unused vacationtime.  If Johnson uses vacation time foreach business day from the date of this Agreement through the Separation Date,the lump sum will be $6,730.77, less all legally required and authorizedwithholdings, based upon an anticipated unused vacation accrual balance of 112hours.  If Johnson does not use vacationtime for each day from the date of this Agreement through the Separation Date,his accrued vacation will be adjusted upward in accordance with the regularpolicies and practices of the Bank.

 

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## **4.****                                      SeverancePayments.**  The Bank will makethe severance payments set forth in subparagraphs 4.a, 4.b, and 4.c below toJohnson or on his behalf in lieu of any further payments or compensation thathe would otherwise be entitled to receive under the Employment Agreement, anyincentive program or plan, or as an employee, officer or director of theCompany or of the Bank.  The Bank willmake such payments only if (i) Johnson has not revoked this Agreement orthe Release within the revocation period set forth in paragraph 23 below(the “Revocation Period”), (ii) the Bank has received written confirmationfrom Johnson, in the form attached to this Agreement as Exhibit D, dated notearlier than the day after the expiration of the Revocation Period, that Johnsonhas not revoked and will not revoke this Agreement or the Johnson Release, and(iii) Johnson has not breached his obligations pursuant to this Agreementor the Johnson Release.

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## **a.****                                       SeverancePay.**  The Bank shall pay Johnsonas severance pay $10,937.50, less all legally required and authorizedwithholding, payable in a lump sum on the later of (i) the Bank’s firstregularly scheduled payroll date after the Separation Date or (ii) two businessdays after the expiration of the Revocation Period.

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## **b.****                                       IncomeMaintenance.**  Subject to thelimitations set forth below, the Bank shall pay Johnson income maintenance ofup to fifteen (15) months of Johnson’s base salary as of the Separation Date,less all legally required and authorized withholdings, in equal installmentsover the period from the Separation Date through and including June 30,2004.  This income maintenance will bepayable pursuant to the Bank’s regular payroll practices and schedule,commencing on the first payroll date after the Separation Date; provided,however, that no income maintenance shall be paid until after expiration of the

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## Revocation Period. TheBank shall deduct from any income maintenance payable under this subparagraph4.b any amount earned as net income by Johnson as a result of self-employmentor as gross income as a result of employment with any other employer, otherthan income resulting from Johnson’s foster care duties, during the period fromApril 1, 2003 to June 30, 2004.

 

## **c.****                                       HealthInsurance Premiums.**  If Johnsonelects to continue his group health insurance under the terms ofparagraph 5 below, the Bank shall pay a portion of the premiums requiredto maintain such COBRA coverage, at the same level of coverage that was in effecton the Separation Date, to the same extent as if Johnson were an employee ofthe Bank (the “Employer’s Share”). Payment of the Employer’s Share of thepremiums under this paragraph will be provided for insurance coverage until theearliest of the following dates: (i) June 30, 2004; (ii) the date on which Johnson becomeseligible for comparable group health insurance coverage from any otheremployer, or (iii) the date that COBRA continuation coverage ends underthe applicable plan or laws.  Johnsonshall promptly notify the Bank if he becomes eligible for group healthinsurance coverage from any other employer. If Johnson elects to continue his group health insurance under the termsof paragraph 5 below, Johnson shall pay any portion of the premiums required tomaintain such coverage that exceeds the Employer’s Share (“Johnson’sShare”).  Johnson’s Share is currently$140.  The Bank shall deduct Johnson’sShare from any income maintenance payable under paragraph 4.b of thisAgreement.  Where the full amount ofJohnson’s Share exceeds any income maintenance payable under paragraph 4.b,Johnson shall pay the balance of Johnson’s Share when due.

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## **d.****                                       Disclosure.**  For each month from April 1, 2003through June 30, 2004, Johnson shall promptly and fully disclose to the Bank inwriting (i) the nature and amount of any earned net income fromself-employment and any gross income from employment with any other employerduring any such month (or, if no such income has been earned during any suchmonth, a statement to that effect), and (ii) whether he has become eligible forgroup health insurance coverage from any other employer.  Each monthly statement shall be provided byJohnson to the Bank’s Human Resources Director no later than the tenth day ofthe month following the calendar month to which the statement relates, with thefirst statement due May 10, 2003.  Atthe Bank’s request, Johnson will provide the Bank with documentation of suchearnings, including without limitation form W-2s, form 1099s, tax returns, wagestatements, or similar documentation. Johnson shall repay any amounts to the Bank that should have been somitigated or reduced but for Johnson’s delay, failure, or unwillingness to makesuch disclosures.

 

## **5.****                                      HealthInsurance Continuation. **Johnsonwill have the right to continue his group health insurance coverage after theSeparation Date under such terms as are made available to similarly-situatedformer employees of the Bank, pursuant to the terms and conditions of theapplicable plan and laws regarding continuation coverage.  Except as provided in paragraph 4.c of thisAgreement, such continuation coverage will be at Johnson’s expense.

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**6.****                                      StockOptions; Other Equity.**

 

## **a.****                                       CompanyOptions. **Johnson agrees andacknowledges that the options listed in this paragraph below are his onlyoptions to purchase shares of the Company’s

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## Common Stock and thatsuch options are exercisable only to the extent reflected in the “AmountExercisable” column below.  Johnsonfurther agrees and acknowledges that all of his options to purchase theCompany’s Common Stock will lapse and cease to be outstanding on June 30,2003, unless previously exercised in accordance with the terms of theapplicable option agreement and plan.

 
| **Plan** |   | **Date of  Grant** |   | **Exercise  Price** |   | **Number of  Shares** |   | **Amount  Exercisable** |   |
|----------|--------|--------------------|--------|---------------------|--------|-----------------------|--------|-------------------------|--------|
|     |   |               |   |                |   |                  |   |                    |   |
| 1995     |   | 6/21/1995          |   | $                   | 9.21   | *                | 34,231 | *                  | 29,639 | *  |
| 2001     |   | 4/16/2002          |   | $                   | 16.13  |                  | 16,447 |                    | 0      |   |

 

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* All figures in theabove chart reflect the Company’s three-for-two stock split of 1998.

 

## **b.****                                       REITEquity.**  Within five (5) daysafter the Separation Date, Johnson and the Bank will execute a Stock RepurchaseAgreement in the form attached to this Agreement as Exhibit E (the “StockRepurchase Agreement”).  Johnson will beentitled to receive any dividends declared through the Separation Date withrespect to the share currently owned by Johnson, to the same extent as otherpreferred shareholders of REIT.  Johnsonacknowledges and agrees that he does not have any other equity or ownershipinterests in the Company, the Bank, or any of their direct or indirectaffiliates, except as specifically set forth in this Agreement.

 

## **7.****                                      RetirementPlans.**  To the extent thatJohnson is currently a participant in any retirement, pension, or profitsharing plans of the Company and/or the Bank (including without limitation theemployee stock ownership plan in which Johnson is currently a participant),Johnson will be entitled to begin drawing his benefits at the times and underthe terms and conditions set forth in any such plan.

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## **8.**                                      **ConfidentialInformation.**

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## **a.****                                       GeneralStandard.**  Except as permittedin writing by the Company’s Board of Directors, Johnson shall not at any timedivulge, furnish, disclose, make accessible or use any confidential,proprietary, or secret knowledge or information of the Company or the Bank thatJohnson acquired during the term of his employment as an employee, officer, ordirector of the Company or the Bank, whether developed by himself or by others,concerning any business strategies, marketing plans or customer lists of theCompany or the Bank or any other confidential or proprietary information orsecret aspects of the business of the Company or the Bank.  Johnson acknowledges that theabove-described knowledge and information constitutes a unique and valuableasset of the Company and the Bank and represents a substantial investment oftime and expense by the Company and the Bank, and that any disclosure or otheruse of such knowledge or information other than for the sole benefit of theCompany or the Bank would be wrongful and would cause irreparable harm to theCompany and the Bank.  The foregoingobligations of confidentiality shall not apply to information that (i) is orbecomes generally available to the public in the form in which it was obtainedfrom the Company or the Bank, other than as a direct or indirect result of thebreach of this Agreement by Johnson (ii) was independently made available toJohnson in good faith by a third party who has not violated a confidentialrelationship with the Company or the Bank, or (iii) is required to be disclosedby legal process.

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## **b.****                                       EquitableRelief.**  Johnson agrees that therestrictions and agreements contained in this paragraph 8 are reasonable andnecessary to protect the legitimate interests of the Company and the Bank andthat any violation of this paragraph 8 will cause substantial

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## and irreparable harm tothe Company and the Bank that would not be quantifiable and for which noadequate remedy would exist at law and accordingly injunctive relief will beavailable for any violation of this paragraph 8.

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**9.****                                      FutureCooperation.**  At the reasonablerequest of the Company or the Bank and upon reasonable notice, Johnson will,from time to time and without further consideration, timely execute and deliversuch acknowledgements, instruments, certificates, and other ministerialdocuments (including without limitation, certification as to specific actionsperformed by Johnson in his capacity as an officer or director of the Companyor the Bank) as may be necessary or appropriate to formalize and complete theapplicable corporate records; provided, however, that nothing in this paragraph9 will require Johnson to take any action that he reasonably believes to beunlawful or unethical or to make any inaccurate statement of actual facts or toattest to matters outside his personal knowledge.  In addition, at the reasonable request of the Company or the Bankand upon reasonable notice during the period Johnson is receiving incomemaintenance pursuant to subparagraph 4.b, without further consideration,Johnson will respond to inquiries and discuss with the Company or the Bankmatters related to his responsibilities while he was employed by the Companyand the Bank, provided, however, that the Bank will compensate Johnson at therate of $100 per hour for agreed-upon time spent in excess of five hours.

 

**10.****                               PressRelease.**  Johnson understandsand agrees that the Company and the Bank will issue a press release announcinghis departure.  Johnson gives hisapproval and consent for the issuance of a press release in the form attachedto this Agreement as Exhibit F

 

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and agrees that the press release contains noinformation about him that is untrue or defamatory or that will tend to harmhis reputation in any way.

 

**11.****                               FutureReferences.**  Following theRevocation Period, the Company and the Bank shall provide to Johnson areference letter in the form attached to this Agreement as Exhibit G.  Additional originals of the reference letterwill be provided by the Bank upon the reasonable request of Johnson.  It is Johnson’s responsibility to direct orcause to be directed all future requests for references concerning him to theHuman Resources Director of the Bank**,**who will respond to such requests byconfirming the dates of Johnson’s employment, identifying the positions held,describing his duties and responsibilities, and, at his request, confirming hisbase salary.  In addition, at thereasonable request of Johnson to the Human Resources Director of the Bank, theBank will send a letter in response to reference requests substantially in theform attached to this Agreement as Exhibit G and signed by the President of theBank.

 

## **12.****                               Records,Documents, and Property. **On orbefore the date he signs this Agreement, Johnson will deliver to the Bank any andall Company or Bank records and any and all Company or Bank property in hispossession or under his control, including without limitation, manuals, books,blank forms, documents, letters, memoranda, notes, notebooks, reports,printouts, computer disks, computer tapes, data, tables, or calculations andall copies thereof, documents that in whole or in part contain any tradesecrets or confidential, proprietary, or other secret information of theCompany or the Bank and all copies thereof, and keys, access cards, accesscodes, source codes, passwords, credit cards, personal

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## computers, telephones,and other electronic equipment belonging to the Company or the Bank.

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## **13.****                               Non-disparagement.**  Johnson will not malign, defame, ordisparage the reputation, character, image, products, or services of theCompany or the Bank, or the reputation or character of the directors, officers,employees, or agents of the Company or the Bank.  The Bank will not authorize or permit any statements to be madeon behalf of the Bank that malign, defame, or disparage the reputation,character, or image of Johnson.

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## **14.****                               Johnson’sRepresentation.**  Johnsonrepresents that, during the entire period that he was an employee, officer ordirector of the Company or the Bank or any of their affiliates, he acted ingood faith, had no reasonable cause to believe that his conduct was unlawful,and reasonably believed that his conduct was in the best interests of theCompany and the Bank and their affiliates.

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## **15.****                               ClaimsInvolving the Company or the Bank.** Johnson will not recommend or suggest to any potential claimants orplaintiffs or their attorneys or agents that they initiate claims or lawsuitsagainst the Company or the Bank; any affiliates or divisions of the Company orthe Bank; or any directors, officers, employees, or agents of the Company orthe Bank or any of their affiliates. Nor will Johnson voluntarily aid, assist, or cooperate with any claimantsor plaintiffs or their attorneys or agents in any claims or lawsuits nowpending or commenced in the future against the Company or the Bank, anyaffiliates or divisions of the Company or the Bank, or any directors, officers,employees, or agents of the Company or the Bank or any of their affiliates.  However, this paragraph will not beinterpreted or construed to prevent Johnson from giving testimony in responseto questions asked pursuant to a legally

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## enforceable subpoena,deposition notice, or other legal process, during any legal proceedings orarbitrations involving the Company or the Bank, any affiliates or divisions ofthe Company or the Bank, or any directors, officers, employees, or agents ofthe Company or the Bank or any of their affiliates.

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## **16.****                               FullCompensation.**  Johnsonunderstands that the payments made and other consideration provided by theCompany and the Bank under this Agreement will fully compensate Johnson for andextinguish any and all of the potential claims Johnson is releasing in theJohnson Release, including without limitation, his claims for attorneys’ feesand costs and any and all claims for any type of legal or equitable relief.

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## **17.****                               NoAdmission of Wrongdoing.** Johnson understands that this Agreement does not constitute an admissionthat the Company or the Bank have violated any local ordinance, state orfederal statute, or principle of common law, or that the Company or the Bankhave engaged in any unlawful or improper conduct toward Johnson.  Johnson will not characterize this Agreementor the payment of any money or other consideration in accordance with thisAgreement as an admission that the Company or the Bank have engaged in anyunlawful or improper conduct toward him or treated him unfairly.

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## **18.****                               Authority.**  Johnson represents and warrants that he hasthe authority to enter into this Agreement and the Johnson Release, and that nocauses of action, claims, or demands released pursuant to this Agreement andthe Johnson Release have been assigned to any person or entity not a party tothis Agreement and the Johnson Release.

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## **19.****                               LegalRepresentation.**  Johnsonacknowledges that he has been advised by the Company and the Bank to consultwith his own attorney before executing this Agreement and

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## the Johnson Release, thathe has had a full opportunity to consider this Agreement and the Release, thathe has had a full opportunity to ask any questions that he may have concerningthis Agreement, the Johnson Release, or the settlement of his potential claimsagainst the Company or the Bank, and that he has not relied upon any statementsor representations made by the Company or the Bank or their respectiveattorneys, written or oral, other than the statements and representations thatare explicitly set forth in this Agreement, the Johnson Release, the CompanyRelease, the Option Agreements, the Stock Repurchase Agreement, and anyqualified employee benefit plans sponsored by the Bank in which Johnson is aparticipant.

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**20.****                               Assignment.**  The Company and the Bank may, without theconsent of Johnson, each assign its or their rights and obligations under thisAgreement (1) to an affiliate of either or both of them or (2) to anycorporation or other person or business entity to which the Company or the Bankor both of them may sell or transfer all or substantially all of its or theirassets.  After any such assignment bythe Company and/or the Bank, the assignor or assignors shall be discharged fromall further liability under this Agreement. Johnson may not assign his rights or obligations under this Agreementwithout prior and  express writtenconsent from the Company and the Bank.

 

## **21.****                               EntireAgreement.**  This Agreement, theJohnson Release, the Company Release, the Option Agreements, the StockRepurchase Agreement, and any qualified employee benefit plans sponsored by theBank in which Johnson is a participant are intended to define the full extentof the legally enforceable undertakings of the parties, and no promises or representations,written or oral, that are not set forth explicitly in this Agreement,

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## the Johnson Release, theCompany Release, the Option Agreements, the Stock Repurchase Agreement, or anyqualified employee benefit plans sponsored by the Bank in which Johnson is aparticipant are intended by either party to be legally binding.  All other agreements and understandingsbetween the parties, including but not limited to the Employment Agreement, arehereby cancelled, terminated, and superseded.

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**22.****                               Periodto Consider the Release and the Agreement. **Johnson understands that he has 21 days after the Separation Date toconsider whether to sign this Agreement and the Johnson Release.  If Johnson signs this Agreement and theJohnson Release before the end of the 21-day period, it will be his voluntarydecision to do so because he has decided he does not need any additional timeto decide whether to sign this Agreement and the Johnson Release.

 

## **23.****                               Rightto Rescind or Revoke.**  Johnsonunderstands that he has the right to rescind or revoke this Agreement and theJohnson Release for any reason within fifteen (15) calendar days after hesigns them.  Johnson understands thatthis Agreement will not become effective or enforceable unless and until he hasnot revoked this Agreement or the Johnson Release and the Revocation Period hasexpired.  Johnson understands that if hewishes to revoke, the revocation must be in writing and hand-delivered ormailed to Home Federal Savings Bank.  Ifhand-delivered, the revocation must be (a) addressed to Jeanne Parker,Human Resources Director,  Home FederalSavings Bank, 1016 Civic Center Dr. NW, Rochester, MN 55901 and(b) delivered to Ms. Parker within the fifteen-day period.  If mailed, the revocation must be(a) postmarked within the fifteen-day period; and

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## (b) addressed toJeanne Parker, Human Resources Director, Home Federal Savings Bank, 1016 Civic Center Dr. NW, Rochester, MN55901.

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## **24.****                               Headings.**  The descriptive headings of the paragraphsand subparagraphs of this Agreement are inserted for convenience only and donot constitute a part of this Agreement.

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## **25.****                               Counterparts.**  This Agreement may be executedsimultaneously in two or more counterparts, each of which will be deemed anoriginal, but all of which together will constitute one and the sameinstrument.

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## **26.****                               GoverningLaw.**  This Agreement, theJohnson Release, and the Company Release will be interpreted and construed inaccordance with, and any dispute or controversy arising from any breach orasserted breach of this Agreement, the Johnson Release, or the Company Releasewill be governed by, the laws of the State of Minnesota.

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**27.****                               ConflictResolution**

 

## **a.  Mediation.**  Except for actions for injunctive reliefauthorized by paragraph 8.b of this Agreement, if any dispute arises regardingthe interpretation, construction, application or alleged breach of thisAgreement, the dispute shall be submitted first to non-binding mediation by athird-party mediator mutually agreed upon by the parties within fifteen (15)days of the date on which a party provides written notice to the other partythat it or he desires to submit the dispute to mediation pursuant to thisparagraph 27.  The mediator shall beexperienced in conducting mediations, gathering facts and evidence from theparties and dealing with the subject matter of the dispute.  The mediation shall be conducted in

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## Minneapolis, Minnesota,and all fees and expenses of the mediator shall be shared equally betweenJohnson and the Company or the Bank.

 

## **b.  Arbitration. **If any party or parties isdissatisfied with the result of any mediation conducted pursuant to paragraph27.a of this Agreement, the dispute shall be submitted to final and bindingarbitration in Minneapolis, Minnesota. The arbitrator shall be selected and the arbitration shall be conductedpursuant to the then most recent Employment Dispute Resolution Rules of theAmerican Arbitration Association.  Thedecision of the arbitrator shall be final and binding, and any court ofcompetent jurisdiction may enter judgment upon the award.  All fees and expenses of the arbitratorshall be shared equally between Johnson and the Company or the Bank.  The arbitrator shall have jurisdiction andauthority to interpret and apply the provisions of this Agreement and relevantfederal, state and local laws, rules and regulations insofar as necessary tothe determination of the dispute and to remedy any breaches of the Agreementand/or violations of applicable laws, but shall not have jurisdiction orauthority to award punitive damages or alter in any way the provisions of thisAgreement.  The arbitrator shall havethe authority to award attorney’s fees and costs to the prevailing party.

 

[*signature page follows*]

 

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IN WITNESS WHEREOF, the parties have executed thisAgreement on the date stated below.

 

 
| Dated: March 17,  2003 | /s/ Timothy P.  Johnson    |           |                |
|------------------------|----------------------------|----------------|---------------------|
|                   | Timothy P.  Johnson        |           |
|                   |                       |           |
|                   |                       |           |
| Dated: March 17,  2003 | HMN FINANCIAL,  INC.       |           |
|                   |                       |           |
|                   |                       |           |
|                   | BY:                        |           | /s/ Michael  McNeil |   |   |
|                   |                       | Michael McNeil |                |
|                   |                       | Its President  |                |
|                   |                       |           |
| Dated: March 17,  2003 | HOME FEDERAL  SAVINGS BANK |           |
|                   |                       |           |
|                   |                       |           |
|                   | BY:                        |           | /s/ Michael  McNeil |   |   |
|                   |                       | Michael McNeil |                |
|                   |                       | Its President  |                |
|                        |                            |                |                     |  |  |  |  |  |  |

 

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**EXHIBITA**

 

**RELEASE BY TIMOTHY P. JOHNSON**

 

**Definitions.**  I intend all words used in this Release tohave their plain meanings in ordinary English. Specific terms that I use in this Release have the following meanings:

 

A.                                   I,me, and my include both me (Timothy P. Johnson) and anyone whohas or obtains any legal rights or claims through me.

 

B.                                     HMNmeans HMN Financial, Inc. any company related to HMN Financial, Inc. in thepresent or past (including without limitation, its predecessors, parents,subsidiaries, affiliates, and divisions), and any successor of HMN Financial,Inc.

 

C.                                     HomeFederal means Home Federal Savings Bank, any company related to HomeFederal Savings Bank in the present or past (including without limitation, itspredecessors, parents, subsidiaries, affiliates, and divisions), and anysuccessor of Home Federal Savings Bank.

 

D.                                    Companymeans HMN and Home Federal; the present and past officers, directors, governors,managers, committees, shareholders, members, and employees of HMN or HomeFederal; the present and past fiduciaries of any employee benefit plansponsored or maintained by HMN or Home Federal (other than multiemployerplans); and anyone who acted on behalf of or on instructions from HMN or HomeFederal.

 

E.                                      Agreementmeans the Separation Agreement among HMN, Home Federal and me that I executedon March 17, 2003, including all of the documents attached to the Agreement.

 

F.                                      MyClaims mean all of my rights that I now have to any relief of any kind fromthe Company, including without limitation:

 

1.                                       allclaims arising out of or relating to my employment with HMN, Home Federal,  or the termination of that employment;

 

2.                                       allclaims arising out of or relating to the statements, actions, or omissions ofthe Company;

 

3.                                       allclaims for any alleged unlawful discrimination, harassment, retaliation orreprisal, or other alleged unlawful practices arising under any federal, state,or local statute, ordinance, or regulation, including without limitation,claims under Title VII of the Civil Rights Act of 1964, the Age Discriminationin Employment Act, the Americans with

 

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Disabilities Act,42 U.S.C. § 1981, the Employee Retirement Income Security Act, the Equal PayAct, the Worker Adjustment and Retraining Notification Act, the Minnesota HumanRights Act, the Fair Credit Reporting Act, and workers’ compensationnon-interference or non-retaliation statutes (such as Minn. Stat.§ 176.82);

 

4.                                       allclaims for alleged wrongful discharge; breach of contract; breach of impliedcontract; failure to keep any promise; breach of a covenant of good faith andfair dealing; breach of fiduciary duty; estoppel; my activities, if any, as a“whistleblower”; defamation; infliction of emotional distress; fraud;misrepresentation; negligence; harassment; retaliation or reprisal;constructive discharge; assault; battery; false imprisonment; invasion ofprivacy; interference with contractual or business relationships; any otherwrongful employment practices; and violation of any other principle of commonlaw;

 

5.                                       allclaims for compensation of any kind, including without limitation, bonuses,commissions, equity-based compensation or stock options, vacation pay, andexpense reimbursements;

 

6.                                       allclaims for back pay, front pay, reinstatement, other equitable relief,compensatory damages, damages for alleged personal injury, liquidated damages,and punitive damages; and

 

7.                                       allclaims for attorneys’ fees, costs, and interest.

 

However, My Claimsdo not include any claims that the law does not allow to be waived, any claimsI may have for indemnification under the charter documents of the Company orapplicable laws, or any claims that may arise after the date on which I signthis Release.

 

**Agreementto Release My Claims.** I will receive consideration from HMN and Home Federal as set forth inthe Agreement if I sign and do not revoke this Release as provided below.  I understand and acknowledge that thatconsideration is in addition to anything of value that I would be entitled toreceive from HMN or Home Federal if I did not sign this Release or if I revokedthis Release.  In exchange for thatconsideration I give up and release all of My Claims.  I will not make any demands or claims against the Company forcompensation or damages relating to My Claims. The consideration that I am receiving is a fair compromise for therelease of My Claims.

 

**AdditionalAgreements and Understandings.**  Even though HMN and Home Federal will provide consideration forme to settle and release My Claims, the Company does not admit that it isresponsible or legally obligated to me. In fact, the Company denies that it is

 

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responsible or legally obligated to me for My Claims,denies that it engaged in any unlawful or improper conduct toward me, anddenies that it treated me unfairly.

 

**Adviceto Consult with an Attorney.**  I understand and acknowledge that I am hereby being advised bythe Company to consult with an attorney prior to signing this Release and Ihave done so.  My decision whether tosign this Release is my own voluntary decision made with full knowledge thatthe Company has advised me to consult with an attorney.

 

**Periodto Consider the Release.** I understand that I have 21 days after the last day of my employmentwith the Company to consider whether I wish to sign this Release.  If I sign this Release before the end of the21-day period, it will be my voluntary decision to do so because I have decidedthat I do not need any additional time to decide whether to sign this Release.

 

**My Rightto Revoke the Release.** I understand that I may revoke this Release at any time within 15 daysafter I sign it, not counting the day upon which I sign it.  This Release will not become effective orenforceable unless and until the 15-day revocation period has expired withoutmy revoking it.

 

**Procedure for Accepting or Revokingthe Release.**  Toaccept the terms of this Release, I must deliver the Release, after I have signedand dated it, to Home Federal by hand or by mail within the 21-day period thatI have to consider the Release.  Torevoke my acceptance of this Release, I must deliver a written, signedstatement that I revoke my acceptance to Home Federal by hand or by mail withinthe 15-day revocation period.  Alldeliveries must be made to Home Federal at the following address:

 

**Jeanne ParkerHuman Resources DirectorHome Federal Savings Bank1016 Civic Center Dr. NWRochester, MN 55901**

 

 

If I choose to deliver the revocation of my acceptance by mail, it mustbe postmarked within the period stated above and properly addressed to HomeFederal at the address stated above.

 

**Interpretation of the Release.**  This Release should be interpreted asbroadly as possible to achieve my intention to resolve all of My Claims againstthe Company.  If this Release is held bya court to be inadequate to release a particular claim encompassed within MyClaims, this Release will remain in full force and effect with respect to allthe rest of My Claims.

 

**MyRepresentations.** I am legally able and entitled to receive the consideration beingprovided  to me in settlement of MyClaims.  I have not been involved in anypersonal bankruptcy or other insolvency proceedings at any time since I beganmy employment with HMN or Home Federal. No child support orders, garnishment orders, or other orders

 

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requiring that money owed to me by HMN or Home Federal be paid to anyother person are now in effect.

 

I have read this Release carefully. I understand all of its terms. In signing this Release, I have not relied on any statements orexplanations made by the Company except as specifically set forth in theAgreement and the Company Release.  I amvoluntarily releasing My Claims against the Company.  I intend this Release to be legally binding.

 

 
| Dated:  March 17, 2003 | /s/ Timothy P.  Johnson |   |
|-----------------------------|-------------------------|--------|
|                        | Timothy P.  Johnson     |

 

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**EXHIBIT B**

 

**RELEASE BY**

**HMN FINANCIAL, INC.**

 

**Definitions.**  All words used in this Release have theirplain meanings in ordinary English. Specific terms used in this Release have the following meanings:

 

A.                                   HMNmeans HMN Financial, Inc., any company related to HMN Financial, Inc. in thepresent or past (including without limitation, its predecessors, parents,subsidiaries, affiliates, and divisions), and any successors of HMN Financial,Inc.

 

B.                                     Johnsonmeans Timothy P. Johnson and anyone who has or obtains any legal rights orclaims through Timothy P. Johnson.

 

C.                                     Agreementmeans the Separation Agreement between HMN, Home Federal Savings Bank, andJohnson that HMN executed on March 17, 2003, including all of the documentsattached to the Agreement.

 

D.                                    HMN’sClaims mean all of HMN’s rights that HMN now has to any relief of any kindfrom Johnson, including without limitation:

 

1.                                       allclaims arising out of or that relate to Johnson’s employment with HMN or thetermination of that employment;

 

2.                                       allclaims arising out of or that relate to the statements, actions, or omissionsof Johnson;

 

3.                                       allclaims for breach of contract; breach of implied contract; breach of a covenantof good faith and fair dealing; breach of fiduciary duty; estoppel; or breachof any other contract or agreement of any kind between Johnson and HMN;

 

4.                                       allclaims for damages of any kind, attorneys’ fees, costs, disbursements, andinterest.

 

However,HMN’s Claims do not include any claims that may arise after the date on whichHMN signs this Release, any claims under the Agreement, or any claims based onalleged intentional misconduct or intentional wrongdoing by Johnson.

 

**Agreementto Release HMN’s Claims.** HMN will receive consideration from Johnson as set forth in theAgreement if Johnson does not rescind or revoke the Release signed by him.  In exchange for that consideration HMN givesup all of HMN’s****Claims.  HMN will notmake any  demands or claims againstJohnson for compensation or damages relating to HMN’s Claims.  The consideration that HMN is receiving is afair compromise for the release of HMN’s Claims.

 

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**AdditionalAgreements and Understandings.**  Even though Johnson will provide consideration for HMN****tosettle and release HMN’s Claims, Johnson does not admit that he is responsibleor legally obligated to HMN.  In fact,Johnson denies that he is responsible or legally obligated to HMN for HMN’sClaims or that he engaged in any unlawful or improper conduct toward HMN.

 

**Johnson’sRight to Revoke the Release Executed by Him.**  This Release will not become effective orenforceable unless and until the revocation period set forth in the Releasesigned by Johnson has expired and Johnson has not revoked the Release signed byhim.

 

**HMN’sRepresentations.** HMN through its undersigned officer has read this Releasecarefully and understands all of its terms. HMN has had the opportunity to consult with its own attorney prior tosigning this Release.  In signing thisRelease, HMN has not relied on any statements or explanations made by Johnsonexcept as specifically set forth in the Agreement and the Release signed byJohnson.  HMN is voluntarily releasingHMN’s****Claimsagainst Johnson.

 

The undersigned officer of HMN has the authority to legally bind HMN bythe agreements that HMN is making in this Release and represents that there isnothing to prevent HMN from being legally bound by the agreements that HMN ismaking in this Release.

 

 
| Dated:March 17,  2003 | HMN FINANCIAL,  INC. |           |
|-----------------------|----------------------|----------------|
|                  |                 |           |
|                  |                 |           |
|                  | BY:                  |           | /s/ Michael  McNeil |   |   |
|                  |                 | Michael McNeil |   |
|                  |                 | Its President  |   |
|                       |                      |                |  |  |  |

 

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