Document:

exv10w1

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is effective as of May 27, 2008 by and among HMN
Financial, Inc., a Delaware corporation (the “Company”), Home Federal Savings Bank, a federally
chartered savings bank (the “Bank”) and a wholly owned subsidiary of the Company and Michael
McNeil, a resident of Rochester, Minnesota (“Executive”).

     A. The Company, the Bank and Executive are parties to an Employment Agreement dated January 1,
2002; (the “Original Agreement”); and

     B. The parties desire to amend and restate the Original Agreement in its entirety as set forth
in this Agreement.

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

     1. Employment. Effective as of May 27, 2008 Executive shall perform services for the
Company and the Bank, upon the terms and conditions set forth in this Agreement.

     2. Term of Employment. Unless terminated at an earlier date in accordance with Section
7 hereof, the term of Executive’s employment with the Company and the Bank under this Agreement
shall be for a period commencing on January 1, 2008 and ending on December 31, 2010, or any
extension hereof (such term, the “Employment Period”). Commencing on April 30, 2009 (the
“Extension Date”), this Agreement shall be extended through December 31, 2011 and on each
subsequent anniversary of the Extension Date this Agreement shall be extended for a period of
twelve (12) months in addition to the then-remaining term of employment under this Agreement,
unless any of the Company, the Bank or the Executive gives contrary written notice to the others
not less than 60 days in advance of the date on which the term of employment under this Agreement
would otherwise be extended, and provided that no extension shall occur unless prior to each
anniversary of the Extension Date, each of the Board of Directors of the Company (the “Company
Board”) and the Board of Directors of the Bank (the “Bank Board”) has reviewed a formal evaluation
of Executive’s performance during the year preceding such anniversary prepared by the Compensation
Committee of the Company Board and explicitly approved such extension of the term of this
Agreement.

     3. Position and Duties.

     (a) Employment with the Company and the Bank. During the term of Executive’s
employment with the Company and the Bank, Executive shall perform such duties and responsibilities
as the Company Board or the Bank Board shall assign to him from time to time consistent with his
position. Executive shall be an executive officer of the

 

 

Company and the Bank and Executive’s title shall be “President” of the Company and “President” and
“Chief Executive Officer” of the Bank.

     (b) Performance of Duties and Responsibilities. Executive shall serve the Company and
the Bank faithfully and to the best of his ability and shall devote his full working time,
attention and efforts to the business of the Company and the Bank during his employment with the
Company and the Bank. Executive will follow and comply with applicable policies and procedures
adopted by the Company and the Bank from time to time, including without limitation policies
relating to business ethics, conflicts of interest, nondiscrimination, and insider trading.
Executive shall not engage in other employment or other material business opportunity, except as
approved in writing by the Company Board or the Bank Board. Executive hereby represents and
confirms that he is under no contractual or legal commitments that would prevent him from
fulfilling his duties and responsibilities as set forth in this Agreement. During his employment
with the Company and the Bank, Executive may participate in charitable activities and personal
investment activities to a reasonable extent, and he may serve as a director of business
organizations in which he has personally invested, so long as such activities and directorships do
not interfere with the performance of his duties and responsibilities hereunder.

     4. Compensation.

     (a) Salary. During the Employment Period, the Bank shall pay to Executive an annual
base salary of $338,000, less deductions and withholdings, which base salary shall be paid in
accordance with the Bank’s normal payroll policies and procedures. During each year after the first
year of Executive’s employment hereunder, the Compensation Committee of the Company Board shall
conduct, prior to the Extension Date, an annual performance review of Executive and thereafter
establish Executive’s base salary in an amount not less than the base salary in effect for the
prior year.

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

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

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reimbursement; provided however, that Executive shall submit verification of expenses within 45 days after the
date the expense was incurred, and the Bank shall reimburse Executive for such expenses eligible
for reimbursement within 30 days after the date the Executive submits the expenses for
reimbursement. The right to reimbursement hereunder is not subject to liquidation or exchange for
any other benefit, and the amount of expenses eligible for reimbursement in a calendar year shall
not affect the amount of expenses eligible for reimbursement in any other calendar year.

     5. Confidential Information. Except as authorized in writing by the Company Board or
the Bank Board or as necessary in carrying out Executive’s responsibilities for the Company or the
Bank, during the Employment Period and at all times thereafter, Executive shall not at any time
during or following Executive’s employment with the Company or the Bank divulge, furnish or make
accessible to anyone or use in any way, any confidential, proprietary or secret knowledge or
information of the Company or the Bank whether developed by Executive or by others, concerning (i)
any strategic or other business, marketing, or sales plans, systems, or techniques, (ii) any
financial data or plans, (iii) any customer lists, or (iv) any other confidential or proprietary
information or secret aspects of the business of the Company or the Bank. Executive acknowledges
that the above-described knowledge and information constitute a unique and valuable asset of the
Company and the Bank and represent a substantial investment of time and expense by the Company and
the Bank, and that any disclosure or other use of such knowledge or information other than for the
sole benefit of the Company or the Bank would be wrongful and would cause irreparable harm to the
Company and the Bank. Executive shall refrain from any acts or omissions that would reduce the
value of such knowledge or information to the Company or the Bank. The foregoing obligations of
confidentiality shall not apply to any knowledge or information that (i) is now or subsequently
becomes generally publicly known in the form in which it was obtained from the Company or the Bank,
other than as a direct or indirect result of the breach by Executive of this Agreement, (ii) is
independently made available to Executive in good faith by a third party who has not violated a
confidential relationship with the Company or the Bank, or (iii) is required to be disclosed by law
or legal process. Executive understands and agrees that Executive’s obligations under this
Agreement to maintain the confidentiality of the Company and the Bank’s confidential information
are in addition to any obligations of Executive under applicable statutory or common law.

     6. Ventures. If, during the Employment Period, Executive is engaged in or associated
with the planning or implementing of any project, program or venture involving the Company or the
Bank and a third party or parties, all rights in such project, program or venture shall belong to
the Company or the Bank, as applicable. Except as approved in writing by the Company Board or the
Bank Board, Executive shall not be entitled to any interest in any such project, program or venture
or to any commission, finder’s fee or other compensation in connection therewith, other than the
compensation to be paid to Executive by the Bank as provided herein. Executive shall have no
interest, direct or indirect, in any customer or supplier that conducts business with the Company
or the Bank, unless such interest has been disclosed in writing to and approved by the Company
Board or the Bank Board, as applicable, before such customer or supplier seeks to do business with the Company or the
Bank. Ownership by Executive, as a passive investment, of less than 2.5%

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of the outstanding shares
of capital stock of any corporation listed on a national securities exchange or publicly traded in
the over-the-counter market shall not constitute a breach of this Section 6.

     7. Termination of Employment.

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

	 	(i)	 	Executive’s receipt of written notice from the
Company or the Bank of the termination of his employment;
	 
	 	(ii)	 	Receipt by the Company or the Bank of
Executive’s written resignation from the Company or the Bank;
	 
	 	(iii)	 	Executive’s receipt of written notice from the
Company or the Bank of the termination of his employment due to
disability;
	 
	 	(iv)	 	Executive’s death; or
	 
	 	(v)	 	the expiration of the Employment Period.

     (b) The date upon which Executive’s termination of employment with the Company and the Bank
occurs shall be the “Termination Date.” For purposes of Section 8(a), Executive’s Termination Date
is the date of Executive’s “separation from service” (within the meaning of Internal Revenue Code
section 409A(a)(2)(A)(i) and Treas. Reg. § 1.409A-1(h)). If Executive becomes disabled and is on a
resulting bona fide leave of absence, Executive’s Termination Date for this purpose will be
determined in accordance with Treas. Reg. § 1.409A-1(h)) (and such Termination Date will occur not
earlier than the first day following a six-month period in which Executive is unable to perform on
a full-time basis the duties and responsibilities of his employment with the Company and the Bank
by reason of his illness or other physical or mental impairment or condition).

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

     (d) If Executive is suspended or temporarily prohibited from participating in the conduct of
the affairs of the Company or the Bank by a notice served under section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act (the “Act”) (12 U.S.C. 1818(e)(3) and (g)(1)) (or any similar law or
regulation), the obligations of the Company and the Bank under this Agreement shall be suspended as
of the date of service unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Company or the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.

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     (e) If Executive is removed or permanently prohibited from participating in the conduct of the
affairs of the Company or Bank by an order issued under section 8(e)(4) or (g)(1) of the Act (12
U.S.C. 1818(e)(4) or (g)(1)) (or any similar law or regulation), all obligations of the Company and
the Bank shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.

     (f) If the Bank is in default (as defined in section 3(x)(1) of the Act), all obligations
under this Agreement shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.

     (g) All obligations under this Agreement shall be terminated, except to the extent determined
that continuation of this Agreement is necessary for the continued operation of the Company or the
Bank,

(i) by the Director of the Office of Thrift Supervision (the “Director”) or
his or her designee, at the time the Federal Deposit Insurance Corporation
or Resolution Trust Corporation enters into an agreement to provide
assistance to or on behalf of the Company or the Bank under the authority
contained in section 13(c) of the Act (or any similar law or regulation); or

(ii) by the Director or his or her designee, at the time the Director or his
or her designee approves a supervisory merger to resolve problems related to
operation of the Company or the Bank or when the Company or the Bank is
determined by the Director to be in an unsafe or unsound condition.

Any rights of the parties that have already vested, however, shall not be affected by the action of
the Director described in this section 7(g).

     8. Payments upon Termination of Employment.

     (a) If Executive’s Termination Date occurs during the Employment Period but not during the
Transition Period (as defined in the separate Change-in-Control Agreement attached hereto (the
“Change-in-Control Agreement”)) the Bank will provide to Executive the severance payments described
in Section 8(b), subject to the conditions in 8(k).

     (b) Severance payments are only available if Executive’s employment with the Company and the
Bank is terminated:

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

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

     (c) If the Executive’s termination of employment is for one of the reasons in Section 8(b),
then the Bank shall pay “Severance Pay” to Executive. For this purpose, “Severance Pay” equals the
Executive’s monthly base salary in effect on the Termination Date multiplied by the total number of
months remaining in the Employment Period. Payment of Severance Pay shall be subject to the
requirements set forth in Section 8(k). Severance Pay shall be paid as follows:

	 	(i)	 	For the first six (6) months (or the number of
months remaining in the Employment Period, if less) following
Executive’s Termination Date, Executive will receive his monthly base
salary paid in equal monthly installments, but in no event shall such
amount paid under this Section 8(c)(i) exceed the lesser of:

	 	(1)	 	$460,000 ; or
	 
	 	(2)	 	two (2) times
Executive’s annualized compensation based upon the
annual rate of pay for services to the Company and the
Bank for the calendar year prior to the calendar year in
which the Termination Date occurs (adjusted for any
increase during that year that was expected to continue
indefinitely if the Executive’s employment had not
terminated).

	 	 	 	The amount under this Section 8(c)(i) will be paid in equal monthly
installments commencing on the first regular payroll date of the Bank
that occurs following the Termination Date and following the
expiration of all applicable consideration and rescission periods
provided by law. The Company and the Bank and the Executive intend
the payments under this Section 8(c)(i) to be a “separation pay plan
due to involuntary separation from service” under Treas. Reg. §
1.409A-1(b)(9)(iii).
	 
	 	(ii)	 	The remaining Severance Pay, if any, will be
paid in equal monthly installments following the last payment made
under Section 8(c)(i).

     (d) If the Executive’s termination of employment is for one of the reasons in Section 8(b),
and if Executive (and/or Executive’s covered dependents) is eligible for and properly elects to
continue group health insurance coverage, as in place immediately prior to the Termination Date,
the Company shall pay the full amount of any such premiums or cost of coverage until the earlier of
(A) the expiration of the remaining term of the Employment Period or (B) the date Executive (and
Executive’s covered dependents) is provided health

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insurance coverage by a subsequent employer. In the event that Executive’s participation in group health insurance coverage is not possible under
any of the applicable plans and laws then in effect, the Company will purchase coverage reasonably
comparable to the coverage provided under the plan provided by the Company, to the extent such
coverage is reasonably available, and Executive will cooperate with the Company to obtain the most
favorable rate for such coverage for the Executive. All such Company-provided premiums or cost of
coverage shall be paid directly to the insurance carrier or other provider by the Company. The
continued coverage under this Section 8(d) is intended to be a reimbursement plan under Treas. Reg.
§ 409A-3(i)(1)(iv).

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

     (f) If Executive’s Termination Date occurs during the Transition Period (as defined in the
Change-in-Control Agreement), Executive’s employment terminates, Executive’s rights to payments and
benefits shall be governed solely by the Change-in-Control Agreement.

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

	 	(i)	 	Executive’s abandonment of his employment or
Executive’s resignation for any reason other than Good Reason (as
defined below),
	 
	 	(ii)	 	termination of Executive’s employment by the
Company or the Bank for Cause (as defined below),
	 
	 	(iii)	 	Executive’s death,
	 
	 	(iv)	 	the expiration of the Employment Period, or
	 
	 	(v)	 	Executive’s employment ends for reasons
described under Section 7(d), (e), (f) or (g).

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

     (h) “Cause” hereunder shall mean:

	 	(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 is injurious to the
Company or the Bank;
	 
	 	(iii)	 	willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses);
	 
	 	(iv)	 	Executive’s conviction or guilty or no contest
plea to any felony or other criminal act involving moral turpitude;
	 
	 	(v)	 	receipt of a final cease-and-desist order from
any regulatory authority;
	 
	 	(vi)	 	failure of Executive to perform his duties and
responsibilities hereunder, or to satisfy his obligations as an officer
or employee of the Company or the Bank, including incompetence, which
failure has not been cured by Executive within 30 days after written
notice thereof to Executive from the Company or the Bank; or
	 
	 	(vii)	 	material breach of any terms and conditions of
this Agreement by Executive not caused by the Company or the Bank,
which breach has not been cured by Executive within ten days after
written notice thereof to Executive from the Company or the Bank.

     (i) “Good Reason” hereunder means any of the following events arising during the Employment
Period without Executive’s consent:

	 	(i)	 	material diminution in the Executive’s
authority, duties or responsibilities;
	 
	 	(ii)	 	material reduction in the Executive’s annual
base salary;
	 
	 	(iii)	 	material diminution in the authority, duties
or responsibilities of the supervisor to whom the Executive is required
to report, 

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	 	 	 	including a requirement that the Executive report to an
officer of the Bank or the Company rather than the Board of Directors;
	 
	 	(iv)	 	material diminution in the budget over which
the Executive retains authority; or
	 
	 	(v)	 	material change in the geographic location at
which the Executive performs his primary duties (for this purpose, a
requirement that the Executive relocate his principal residence by more
than 35 miles or a relocation of the Company’s principal executive
offices (if that is where the Executive performed his duties) by more
than 35 miles shall be a “material change”); or
	 
	 	(vi)	 	any other action or inaction by the Company or
the Bank that constitutes a material breach of this Agreement.

Notwithstanding the above, the occurrence of any the events described above will not constitute
Good Reason unless (A) the Executive provides notice to the Company within 90 days of the
occurrence of any such event that the Executive believes that such event constitutes Good Reason
and describing the details of such event, (B) the Company or the Bank thereafter fails to cure any
such event within 30 days after the receipt of such notice, and (C) the Termination Date occurs
within 180 days of the initial occurrence of the event.

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

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

     9. Return of Records and Property. Upon termination of his employment with the
Company and the Bank, Executive shall promptly deliver to the Bank any and all Company or Bank
records and any and all Company or Bank property in his possession or under his control, including
without limitation any automobile, manuals, books, blank forms, documents, letters, memoranda,
notes, notebooks, reports, printouts, computer disks, computer tapes, source codes, data, tables or
calculations and all copies thereof, documents that in whole or in part contain any trade secrets
or confidential, proprietary or other secret

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information of the Company or the Bank and all copies
thereof, and keys, access cards, access codes, passwords, credit cards, personal computers,
telephones and other electronic equipment belonging to the Company or the Bank.

     10. Remedies.

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

     (b) Arbitration. Except for disputes arising under Section 5 hereof, all disputes
involving the interpretation, construction, application or alleged breach of this Agreement and all
disputes relating to the termination of Executive’s employment with the Company or the Bank shall
be submitted to final and binding arbitration in Minneapolis, Minnesota. The arbitrator shall be
selected and the arbitration shall be conducted pursuant to the then most recent Employment Dispute
Resolution Rules of the American Arbitration Association. The decision of the arbitrator shall be
final and binding, and any court of competent jurisdiction may enter judgment upon the award. All
fees and expenses of the arbitrator shall be shared equally by Executive and the Company or the
Bank. The arbitrator shall have jurisdiction and authority to interpret and apply the provisions
of this Agreement and relevant federal, state and local laws, rules and regulations insofar as
necessary to the determination of the dispute and to remedy any breaches of the Agreement and/or
violations of applicable laws, but shall not have jurisdiction or authority to award punitive
damages or alter in any way the provisions of this Agreement. The arbitrator shall have the
authority to award attorneys’ fees and costs to the prevailing party. The parties hereby agree
that this arbitration provision shall be in lieu of any requirement that either party exhaust such
party’s administrative remedies under federal, state or local law.

     11. Miscellaneous.

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

     (b) Section 409A. This Agreement is intended to satisfy the requirements of Sections
409A(2), (3) and (4) of the Internal Revenue Code of 1986 (the “Code”), including current and
future guidance and regulations interpreting such provisions, and should be interpreted
accordingly.

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

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

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

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

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

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

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

     (j) Amendment and Restatement of Original Agreement. This Agreement amends and
restated the Original Agreement in its entirety and the Original Agreement is terminated.

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

HMN FINANCIAL, INC.

By /s/ Timothy R. Geisler

Its Chairman

HOME FEDERAL SAVINGS BANK

By /s/ Timothy R. Geisler

Its Chairman

MICHAEL MCNEIL

/s/ Michael McNeil

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EXHIBIT 10.2

CHANGE-IN-CONTROL AGREEMENT

          AGREEMENT entered into as of May 27, 2008 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, 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. 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” means the occurrence of any of the
following:

 

 

     (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 1(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 1(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;

     (ii) Continuing Directors shall not constitute a majority of the members of the
Board of Directors of the Company. For purposes of this Section 1(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

-2-

 

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 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; or

     (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
1(a)(i), 1(a)(ii), 1(a)(iii) or 1(a)(iv) hereof that ultimately results in such an
Event, or a tender or exchange offer or proxy contest is commenced

-3-

 

which ultimately results in an Event described in Section 1(a)(i) or 1(a)(ii)
hereof.

Notwithstanding anything stated in this Section 1(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 1(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 1(a)(iii) or
1(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.

     2. Payments and Benefits. If any Event shall occur during the Term of this Agreement,
then the Executive shall be entitled to receive from the Company, the Bank or either of their
successors (which term as used herein shall include any person acquiring all or substantially all
of the assets of the Company or the Bank) a cash payment and other benefits on the following basis
(unless the Executive’s employment by the Company is terminated voluntarily or involuntarily prior
to the occurrence of the earliest Event to occur (the “First Event”), in which case the Executive
shall be entitled to no payment or benefits under this Section 2):

     (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 3(d)), the employment of
the Executive with the Company or the Bank is involuntarily terminated for any reason
(provided, however, that a termination on account of the death or Disability of the
Executive or a termination by the Company or the Bank for Cause does not qualify for
benefits under this Agreement), or is a Constructive Involuntary Termination, 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 sum of the
following:

-4-

 

     (A) the actual base salary payable by the Bank and included in the gross
income for Federal Income Tax purposes of the Executive during the taxable
year of the Executive ending before the First Event (other than an Event
described in Section 1(a)(v) unless the Executive is terminated prior to the
occurrence of an Event described in Section 1(a)(i), 1(a)(ii), 1(a)(iii) or
1(a)(iv)); and

     (B) the actual bonus payable by the Bank to the Executive with respect to
such taxable year (provided, however, that if Executive’s employment is
terminated under circumstances described in 2(a) above before calculation
and payment of such bonus, then the actual bonus with respect to the year
that precedes such taxable year will be used);

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. The payment
provided under this section is intended to be a short-term deferral and thus exempt
from Section 409A of the Code; and

     (ii) shall be entitled for two years after the termination of the Executive’s
employment with the Company or the Bank to participate in any health 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
two-year period (except for those portions remaining during such two-year period
that duplicate health insurance coverage that is in place for the Executive under
any other policy or program provided at the expense of another employer. In the
event that Executive’s participation in group health insurance coverage is not
possible under any of the applicable plans and laws then in effect, the Company will
purchase coverage reasonably comparable to the coverage provided under the plan
provided by the Company, to the extent such coverage is reasonably available, and
Executive will cooperate with the Company to obtain the most favorable rate for such
coverage for Executive. All such Company-provided premiums or cost of coverage
shall be paid directly to the insurance carrier or other provider by the Company.
The continued coverage under this section is intended to be a reimbursement plan and
to comply with Section 409A of the Code. In this regard, the amount of benefits
provided during Executive’s taxable year will not affect the benefits provided
during any other taxable year, and the right to continued coverage is not subject to
liquidation or exchange for another benefit; and

     (iii) shall be entitled to a lump sum payment in an amount equal to the amount
the Company or the Bank would otherwise expend for its share of the premiums for 24
months of life and disability coverage. Such lump-sum payment will be paid to
Executive at the time of the Executive’s termination of

-5-

 

employment. The payment provided under this section is intended to be a short-term
deferral and thus exempt from Section 409A of the Code.

     (b) The payments provided for in this Section 2 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) there is a material diminution in the Executive’s authority, duties or
responsibilities in each case as compared with the such authority, duties or
responsibilities immediately prior to the First Event;

     (ii) there is a material reduction in the Executive’s annual base salary as
compared to the annual base salary in effect immediately prior to the First Event;

     (iii) there is a material diminution in the authority, duties or
responsibilities of the supervisor to whom the Executive is required to report,
including a requirement that the Executive report to an officer of the Bank or the
Company rather than the Board of Directors of the Company or the Bank (but only if
the Executive reported to such Board of Directors immediately prior to the First
Event);

     (iv) there is a material diminution in the budget over which the Executive
retains authority; or

     (v) there is a material change in the geographic location at which the
Executive performs his primary duties (for this purpose, a requirement that the
Executive relocate his principal residence by more than 35 miles or a relocation of
the Company’s principal executive offices (if that is where the Executive performed
his duties) by more than 35 miles shall be a “material change”); [or

     [(vi) any other action or inaction by the Company or the Bank that constitutes
a material breach of the Executive’s employment agreement by the Company or the
Bank;]

-6-

 

and the Executive provides notice to the Company within 90 days of the occurrence of any of
the changes described in Section 2(c)(i)-(v)[(vi)] and the Company thereafter fails to cure
such change within 30 days, then 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 2(d), if the lump sum cash payment due and the other benefits to
which the Executive shall become entitled under Section 2(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 2(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 2(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 2(d).

     (e) The Executive shall not be required to mitigate the amount of any payment or other
benefit provided for in Section 2 by seeking other employment or otherwise, nor (except as
specifically provided in Section 2(a)(ii) or 2(b)) shall the amount of any payment or other
benefit provided for in Section 2 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 2 shall survive the
termination of this Agreement.

3. 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.

-7-

 

     (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 1(a)(i),
1(a)(ii), 1(a)(iii), 1(a)(iv) or 1(a)(v) hereof (the “Commencement Date”) and ending one
year after the Commencement Date.

4. 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,

-8-

 

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. 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 4(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 4(b) or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.

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

     6. 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:

	 	(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.

-9-

 

     7. 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.

     8. 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) May 30, 2010, 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 180 days prior to May 30, 2010 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 May 30, 2010 (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.

     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	 	 
	 
	 	 	 	 	 	 	 

-10-

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