**Exhibit10.1**

 

**CHANGE-IN-CONTROL AGREEMENT**

 

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

 

WITNESSETH:

 

WHEREAS, the Executive isa key member of the management of the Company and the Bank and has heretoforedevoted substantial skill and effort to the affairs of the Company and theBank; and

 

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

 

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

 

WHEREAS, it is desirableand in the best interests of the Bank and the Company and its shareholders thatthe Executive be in a position to make judgments and advise the Company withrespect to proposed changes in control of the Company or the Bank; and

 

WHEREAS, the Executivedesires to be protected in the event of certain changes in control of theCompany or the Bank; and

 

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

 

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

 

WHEREAS, for the reasonsset forth above, the Bank and the Executive desire to enter into thisAgreement.

 

NOW, THEREFORE, inconsideration of the foregoing and the mutual covenants and agreementscontained herein, the Bank and the Executive agree as follows:

 

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

 

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

 

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

 

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

 

(A)                              anyacquisition of beneficial ownership by the Company, the Bank or a subsidiary ofthe Company or the Bank;

 

(B)                                anyacquisition or beneficial ownership by any employee benefit plan (or relatedtrust) sponsored or maintained by the Company, the Bank or one or more of theirsubsidiaries;

 

(C)                                anyacquisition or beneficial ownership by any corporation (including withoutlimitation an acquisition in a transaction of the nature described inSection 2(a)(iii)) with respect to which, immediately following suchacquisition, more than 65%, respectively, of (x) the combined voting power ofthe Company’s or the Bank’s then outstanding Voting Securities and (y) theCompany’s or the Bank’s then outstanding common stock (the “Common Stock”) isthen beneficially owned, directly or indirectly, by all or substantially all ofthe persons who beneficially owned Voting Securities and Common Stock,respectively, of the Company or the Bank immediately prior to such acquisitionin substantially the same proportions as their ownership of such VotingSecurities and Common Stock, as the case may be, immediately prior to suchacquisition;

 

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(D)                               anyacquisition of Voting Securities or Common Stock directly from the Company orthe Bank;

 

(ii)                                  ContinuingDirectors shall not constitute a majority of the members of the Board ofDirectors of the Company.  For purposesof this Section 2(a)(ii), “Continuing Directors” shall mean:  (A) individuals who, on the datehereof, are directors of the Company, (B) individuals elected as directorsof the Company subsequent to the date hereof for whose election proxies shallhave been solicited by the Board of Directors of the Company or (C) anyindividual elected or appointed by the Board of Directors of the Company tofill vacancies on the Board of Directors of the Company caused by death orresignation (but not by removal) or to fill newly-created directorships,provided that a “Continuing Director” shall not include an individual whoseinitial assumption of office occurs as a result of an actual or threatenedelection contest with respect to the threatened election or removal ofdirectors (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)                               Consummationof a reorganization, merger or consolidation of the Company or the Bank or astatutory exchange of outstanding Voting Securities of the Company or the Bank,unless immediately following such reorganization, merger, consolidation orexchange, all or substantially all of the persons who were the beneficialowners, respectively, of Voting Securities and Common Stock immediately priorto such reorganization, merger, consolidation or exchange beneficially own,directly or indirectly, more than 65% of, respectively, (x) the combined votingpower of the then outstanding voting securities entitled to vote generally inthe election of directors and (y) the then outstanding shares of common stockof the corporation resulting from such reorganization, merger, consolidation orexchange in substantially the same proportions as their ownership, immediatelyprior to such reorganization, merger, consolidation or exchange, of the VotingSecurities and Common Stock, as the case may be;

 

(iv)                              (x)Approval by the shareholders of the Company of a complete liquidation ordissolution of the Company or the Bank or (y)  approval by theshareholders of the Company of the sale or other disposition of all orsubstantially all of the assets of the Company or the Bank (in one or a seriesof 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 votingsecurities 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 thenbeneficially owned, directly or indirectly, by all or substantially all of thepersons who were the beneficial owners, respectively, of the Voting Securitiesand Common Stock immediately prior to such sale or other disposition insubstantially the same proportions as their ownership, immediately prior tosuch sale or other disposition, of the Voting Securities and Common Stock, asthe case may be;

 

(v)                                 TheCompany or the Bank enters into a letter of intent, an agreement in principleor a definitive agreement relating to an Event described inSection 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof that ultimatelyresults in such an Event, or a tender or exchange offer or proxy contest iscommenced which ultimately results in an Event described inSection 2(a)(i) or 2(a)(ii) hereof; or

 

(vi)                              Thereshall be an involuntary termination or Constructive Involuntary Termination ofemployment of the Executive, and the Executive reasonably demonstrates thatsuch event (x) was requested by a party other than the Board of Directors ofthe Company or the Bank that had previously taken other steps reasonablycalculated 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 describedin 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 inSection 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof that ultimatelyoccurs.

 

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

 

(b)                                 Forpurposes of this Agreement, a “subsidiary” of the Company or the Bank shallmean any entity of which securities or other ownership interests having generalvoting power to elect a majority of the board of directors or other personsperforming similar functions are at the time directly or indirectly owned bythe Company or the Bank.

 

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3.                                       Paymentsand Benefits.  If any Event shalloccur during the Term of this Agreement, then the Executive shall be entitledto receive from the Company, the Bank or either of their successors (which termas used herein shall include any person acquiring all or substantially all ofthe assets of the Company or the Bank) a cash payment and other benefits on thefollowing basis (unless the Executive’s employment by the Company is terminatedvoluntarily or involuntarily prior to the occurrence of the earliest Event tooccur (the “First Event”), in which case the Executive shall be entitled to nopayment or benefits under this Section 3):

 

(a)                                  Ifat the time of, or at any time after, the occurrence of the First Event andprior 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 orinvoluntarily terminated for any reason (unless such termination is a voluntarytermination by the Executive other than a Constructive Involuntary Terminationor is on account of the death or Disability of the Executive or is atermination by the Company or the Bank for Cause), the Executive (or theExecutive’s legal representative, as the case may be),

 

(i)                                     shallbe entitled to receive from the Company, the Bank or either of theirsuccessors, upon such termination of employment with the Company, the Bank oreither of their successors, a cash payment in an amount equal to 2.99 times theaverage annual base salary payable by the Bank and included in the gross incomefor Federal Income Tax purposes of the Executive during the shorter of the periodconsisting of the five most recently completed taxable years of the Executiveending before the First Event (other than an Event described inSection 2(a)(v) or 2(a)(vi) unless the Executive is terminated prior tothe 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 theExecutive was employed by the Company or the Bank (for which purposecompensation for a partial year shall be annualized, in accordance withtemporary or final regulations promulgated under Section 280G(d) of theInternal Revenue Code of 1986, as amended (the “Code”), or any successorprovision thereto, before determining average annual compensation for theperiod, such average annual compensation to be determined in accordance withtemporary or final regulations promulgated under Section 280G(d) of theCode or any successor provision thereto and such payment to be made to theExecutive by the Company, the Bank or either of their successors in a lump sumat the time of such termination of employment; and

 

(ii)                                  shallbe entitled for two years after the termination of the Executive’s employmentwith the Company or the Bank to participate in any health, disability and lifeinsurance plan or program in which the Executive was entitled to participateimmediately 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 portionsremaining during such two-year period that duplicate health insurance coveragethat is in place for the Executive under any other policy provided at theexpense of another employer); provided however, that in the event that theExecutive’s participation in any such health, disability or life insurance planor program of the Company or the Bank is barred, the Company or the Bank, atits sole cost and expense, shall arrange to provide the Executive with benefitssubstantially similar to those which the Executive would be entitled to receiveunder such plan or program if he were not barred from participation.

 

(b)                                 Thepayments provided for in this Section 3 shall be in addition to any salaryor other remuneration otherwise payable to the Executive on account ofemployment by the Company, the Bank or one or more of either of theirsubsidiaries or successors (including any amounts received prior to suchtermination of employment for personal services rendered after the occurrenceof the First Event) but shall be reduced by any severance pay which theExecutive receives from the Bank, its subsidiaries or its successor under anyother policy or agreement of the Bank or its subsidiaries in the event ofinvoluntary termination of Executive’s employment.

 

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

 

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

 

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

 

(iii)                               theCompany or the Bank shall fail to provide the Executive with benefits undereither of their pension, profit sharing, retirement, life insurance, medical,health and accident, disability, bonus and incentive plans and other employeebenefit plans and arrangements that in the aggregate for all such plans andarrangements are at least as favorable to the Executive as those benefitscovering the Executive immediately prior to the First Event or shall fail toprovide the Executive with at least the number of paid vacation days to whichthe Executive was entitled immediately prior to the First Event;

 

(iv)                              theBank shall have failed to obtain assumption of this Agreement by any successoras contemplated by Section 5(b) hereof;

 

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(v)                                 theCompany or the Bank shall require the Executive to relocate to any place otherthan a location within thirty-five miles of the location at which the Executiveperformed his primary duties immediately prior to the First Event or, if theExecutive performed such duties at the Company’s principal executive offices,the Company shall relocate its principal executive offices to any locationother than a location within thirty-five miles of the location of the principalexecutive offices immediately prior to the First Event; or

 

a termination ofemployment with the Company or the Bank by the Executive thereafter shallconstitute a Constructive Involuntary Termination.

 

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

 

(e)                                  TheExecutive shall not be required to mitigate the amount of any payment or otherbenefit provided for in Section 3 by seeking other employment orotherwise, nor (except as specifically provided in Section 3(a)(ii) or3(b)) shall the amount of any payment or other benefit provided for inSection 3 be reduced by any compensation earned by the Executive as theresult of employment by another employer after termination, or otherwise.

 

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(f)                                    Theobligations of the Company and the Bank under this Section 3 shall survivethe termination of this Agreement.

 

4.                                       Definitionof Certain Additional Terms.

 

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

 

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

 

(i)                                     anact or acts of dishonesty undertaken by Executive and intended to result insubstantial gain or personal enrichment of Executive at the expense of theCompany or the Bank;

 

(ii)                                  unlawfulconduct or gross misconduct that is willful and deliberate on Executive’s partand that, in either event, is injurious to the Company or the Bank; or

 

(iii)                               theconviction of Executive of a felony.

 

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

 

(v)                                 materialbreach of any terms and conditions of the Employment Agreement by Executive notcaused by the Company or the Bank, which breach has not been cured by Executivewithin ten days after written notice thereof to Executive from the Company orthe Bank.

 

(c)                                  Asused herein, the term “Disability” shall mean the inability of Executive toperform on a full-time basis the duties and responsibilities of his employmentwith the Company or the Bank by reason of his illness or other physical ormental impairment or condition, if such inability continues for anuninterrupted 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 acontinuous period of at least 30 days.

 

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(d)                                 Asused herein, the term “Transition Period” shall mean the one year periodcommencing on the date of the earliest to occur of an Event described inSection 2(a)(i), 2(a)(ii), 2(a)(iii) or 2(a)(iv) hereof (the “CommencementDate”) and ending one year after the Commencement Date.

 

5.                                       Successorsand Assigns.

 

(a)                                  ThisAgreement 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 otherwisedispose of or transfer any interest in this Agreement or any paymentshereunder, whether directly or indirectly or in whole or in part, without thewritten consent of the Company or the Bank or either of their successors.

 

(b)                                 TheCompany and the Bank will require any successor (whether direct or indirect, bypurchase of a majority of the outstanding voting stock of the Company or theBank or all or substantially all of the assets of the Company or the Bank, orby merger, consolidation or otherwise), by agreement in form and substancesatisfactory to the Executive, to assume expressly and agree to perform thisAgreement in the same manner and to the same extent that the Company and theBank would be required to perform it if no such succession had takenplace.  Failure of the Company or theBank, as applicable, to obtain such agreement prior to the effectiveness of anysuch succession (other than in the case of a merger or consolidation) shall bea breach of this Agreement and shall entitle the Executive to compensation fromthe Bank in the same amount and on the same terms as the Executive would beentitled hereunder if the Executive terminated his employment on account of aConstructive Involuntary Termination, except that for purposes of implementingthe foregoing, the date on which any such succession becomes effective shall bedeemed the date of termination.  As usedin this Agreement, “Company” shall mean the Company as hereinbefore defined andany successor to its business and/or assets as aforesaid which is required toexecute and deliver the agreement provided for in this Section 5(b) orwhich otherwise becomes bound by all the terms and provisions of this Agreementby operation of law and “Bank” shall mean the Bank as hereinbefore defined andany successor to its business and/or assets as aforesaid which is required toexecute and deliver the agreement provided for in this Section 5(b) orwhich otherwise becomes bound by all the terms and provisions of this Agreementby operation of law.

 

6.                                       GoverningLaw.  This Agreement shall beconstrued in accordance with the laws of the State of Minnesota.

 

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

 

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

 

HMN Financial, Inc.Attention:  Chairman of the Board1016 Civic Center Drive NWRochester, Minnesota  55901

 

(b)                                 Inthe case of the Executive shall be:

 

Michael McNeil1951 Waterford Place SouthwestRochester, MN 55902

 

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

 

8.                                       Severability;Severance.  In the event that anyportion of this Agreement is held to be invalid or unenforceable for anyreason, it is hereby agreed that such invalidity or unenforceability shall notaffect 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 objectionableprovision as to make it valid, reasonable and enforceable.  In the event that any benefits to theExecutive provided in this Agreement are held to be unavailable to theExecutive as a matter of law, the Executive shall be entitled to severancebenefits from the Bank, in the event of an involuntary termination orConstructive Involuntary Termination of employment of the Executive (other thana termination on account of the death or Disability of the Executive or atermination for Cause) during the term of this Agreement occurring at the timeof or following the occurrence of an Event, at least as favorable to theExecutive (when taken together with the benefits under this Agreement that areactually received by the Executive) as the most advantageous benefits madeavailable by the Employer to employees of comparable position and seniority tothe Executive during the five-year period prior to the First Event.

 

9.                                       Term.  This Agreement shall commence on the date ofthis 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 yearand from year to year thereafter until notice of termination is given by theCompany or the Executive to the other party hereto at least 30 days prior toMarch 31, 2005 or the expiration of the one-year extension period then ineffect, as the case may be, or (B) if the Commencement Date occurs on orprior to March 31, 2005 (or prior to the end of the extension year then ineffect as provided for in clause (A) hereof), one year after the CommencementDate.

 

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10.                                 Terminationof Prior Agreement.  This Agreementsupercedes the Prior Agreement which is hereby terminated and neither partyshall have any rights or obligations pursuant to the terms of the PriorAgreement.

 

IN WITNESS WHEREOF, theparties hereto have executed this Agreement as of the day and year first abovewritten.

 
|   | HOME FEDERAL SAVINGS  BANK |
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|   | Executive                  |
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