Early Retirement Agreement

EXHIBIT 10.2b


EARLY RETIREMENT AGREEMENT
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This Early Retirement Agreement (this "Agreement") is made and entered into effective as of October 24, 2000 by and between James B. Gardner ("Gardner"), a Minnesota resident, and Home Federal Savings Bank, a federally chartered savings bank (the "Bank").


BACKGROUND
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A. Gardner has been employed by the Bank for more than 19 years. Currently, Gardner is Executive Vice President and Chief Financial Officer of the Bank and of HMN Financial, Inc. (the "Holding Company"). Gardner also is a director of the Bank and of the Holding Company. In addition, Gardner is an officer and a director of HMN Mortgage Services, Inc. ("Mortgage") and Security Finance Corporation ("Finance"), both wholly-owned subsidiaries of the Holding Company and affiliates of the Bank, and of Osterud Insurance Agency, Inc. ("Insurance"), a wholly-owned subsidiary of the Bank.


B. Gardner and the Bank are parties to an Employment Agreement dated June 6, 1995 (the "Employment Agreement"). During his employment with the Bank, Gardner has been eligible to participate in certain employee benefit plans and programs sponsored by the Bank, including without limitation, the Bank's medical plan and group term life insurance program and the HMN Financial, Inc. Employee Stock Ownership Plan (the "ESOP"), the Home Federal Savings Bank Employees' Savings & Profit Sharing Plan and Trust (the "401(k) Plan"), and the Home Federal Savings Bank Financial Institutions Retirement Fund (the "FIRF").


C. Gardner and the Holding Company are parties to a Non-Qualified Stock Option Agreement dated June 21, 1995 granting Gardner an option to purchase 26,174 shares of


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Common Stock of the Holding Company (39,261 shares as a result of the Holding Company's three-for-two stock split) and an Incentive Stock Option Agreement dated June 21, 1995 ("ISO Agreement") granting Gardner an option to purchase 36,205 shares of Common Stock of the Holding Company (54,307 shares as a result of the Holding Company's three-for-two stock split) (collectively, the "Option Agreements"). All of the shares underlying the Option Agreements are fully vested and currently exercisable, except that as a result of the partial exercise by Gardner of his option to purchase shares underlying the ISO Agreement, 39,307 shares of common stock are currently exercisable pursuant to the terms of the ISO Agreement.


D. The parties have mutually agreed that it is in their interests that Gardner resign as an officer and director of the Bank, the Holding Company, Mortgage, Finance, and Insurance effective as of the date of this Agreement.


E. The parties have mutually agreed that Gardner will continue to be an employee of the Bank until June 30, 2001 (the "Retirement Date"), at which time he will retire from his employment with the Bank.


F. The parties are concluding their employment relationship amicably, but mutually recognize that the end of any employment relationship may give rise to potential claims or liabilities.


G. The parties have mutually agreed to a full settlement of all issues potentially in dispute between them.


H. The parties intend that this Agreement will provide for the exchange of consideration between the parties and will consolidate within one document the parties' obligations to each other.


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NOW THEREFORE, in consideration of the mutual promises and provisions contained in this Agreement and the Release referred to below, the parties agree as follows:


AGREEMENTS
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1. RELEASE OF CLAIMS BY GARDNER. At the same time Gardner executes this Agreement, he also will execute a Release, in the form attached to this Agreement as Exhibit A (the "Gardner Release"), in favor of the Bank and the Holding Company and their affiliates, divisions, joint venture partners, stockholders, directors, committees, officers, employees, agents, predecessors, successors, and assigns. Gardner will re-execute the Gardner Release as of the Retirement Date. This Agreement will not be interpreted or construed to limit the Gardner Release in any manner. The existence of any dispute respecting the interpretation of this Agreement or the alleged breach of this Agreement will not nullify or otherwise affect the validity or enforceability of the Gardner Release.


2. RESIGNATIONS. By executing this Agreement, Gardner confirms his resignation as an officer and a director of the Bank, the Holding Company, Mortgage, Finance, and Insurance as of the effective date of this Agreement.


3. CONTINUING SERVICES TO THE BANK. Gardner will continue to provide services to the Bank as set forth in this paragraph 3.


a. WORK PERIOD. Between the effective date of this Agreement and the Retirement Date, Gardner will be available to provide services to the Bank on a full-time basis during regular business hours and, in that capacity, will complete special projects that are assigned to him from time to time by the Chief Financial Officer of the Bank and will consult with the Bank at the request of the Chief Financial Officer of the Bank regarding general business matters. During this time period, Gardner will maintain an office at his


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residence at no expense to the Bank and will take the remainder of his accrued and unused vacation time.


b. POST-RETIREMENT ACTIVITIES. Nothing in this Agreement is intended to prevent Gardner after the Retirement Date from engaging in any business enterprise, accepting employment with another employer, or becoming an independent contractor or consultant, so long as Gardner does not disclose any of the Bank's or the Holding Company's confidential information as specified in subparagraph 11.a. below and does not breach his other obligations to the Bank or the Holding Company as specified in paragraph 11 below.


4. PAYMENTS. The Bank will make the payments set forth in subparagraphs 4.a. through 4.e. below to Gardner or for his benefit, and will provide to Gardner the benefits due under the employee benefit plans described in paragraphs 6 through 8 below, in lieu of any further payments that he would be entitled to receive under the Employment Agreement or otherwise as an employee of the Bank. The Bank will make the payments set forth in subparagraphs 4.c. through 4.e. below only if: (i) Gardner has not rescinded this Agreement or the Gardner Release within the applicable recission period; (ii) the Bank has received written confirmation from Gardner, in the form attached to this Agreement as Exhibit B, dated not earlier than the day after the expiration of the applicable rescission period, that Gardner has not rescinded and will not rescind this Agreement or the Gardner Release; and (iii) Gardner has not breached his obligations pursuant to this Agreement or the Gardner Release. Payment of any amounts set forth below will not modify or terminate the parties' obligations to each other as established by this Agreement. If Gardner dies before he receives all of the base salary and severance pay that he would otherwise be entitled to


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receive under subparagraphs 4.a and 4.c. below, the remaining severance pay installments will be paid to his wife, or if she is no longer living, to his estate. No amounts received by Gardner as compensation from another employer or as retirement benefits will reduce the amount of severance payments that the Bank is obligated to make to Gardner under subparagraph 4.c. below. The payments set forth in subparagraphs 4.a. and 4.c. below will be transferred electronically to a bank account designated by him in writing, unless he advises the Bank in writing that he wants the payments sent to him personally.


a. BASE SALARY. The Bank will continue to pay Gardner his current base salary of $11,250.00 per month, less all legally required withholding, through the Retirement Date on the Bank's regular payroll dates.


b. EMPLOYEE BENEFITS. The Bank will continue to provide Gardner with all employee benefits made available to its other senior executives under the Bank's employee benefits plans and programs and will continue to pay the employer portion of the costs incurred to continue Gardner's medical plan and group term life insurance coverages through the Retirement Date.


c. SEVERANCE PAY. Between July 1, 2001 and May 23, 2003, the Bank will pay Gardner severance pay in the amount of $11,250.00 per month, less all legally required withholding, on the Bank's regular payroll dates.


d. MEDICAL PLAN PAYMENTS. If Gardner elects to continue his medical plan coverage under the terms of subparagraph 6.a. below, the Bank will pay a portion of the costs of such coverage as specified in subparagraph 6.b. below until the later of the date on which Gardner ceases to be eligible for continuation coverage under the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended


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("COBRA"), or the last day of the period of Extended Medical Care Coverage (as defined in subparagraph 6.a. below); provided, however, that the Bank's obligation to pay a portion of such costs will cease upon the failure of Gardner to pay the corresponding portion of such costs allocable to him.


e. LIFE INSURANCE PAYMENTS. If Gardner elects to continue his group term life insurance coverage under the terms of subparagraph 7.a. below, the Bank will pay a portion of the costs of such coverage as specified in subparagraph 7.b. below until the later of the date on which Gardner ceases to be eligible for continuation coverage under the applicable provisions of Minnesota law or May 23, 2003; provided, however, that the Bank's obligation to pay a portion of such costs will cease upon the failure of Gardner to pay the corresponding portion of such costs allocable to him.


5. EXPENSE REIMBURSEMENTS. The Bank will reimburse Gardner for his regular and necessary business expenses incurred by him on behalf of the Bank through November 3, 2000 according to the Bank's regular policies and practices. Gardner will submit his requests for reimbursement supported by appropriate documentation to the Bank on or before November 24, 2000, and the Bank will make re ...