HMN FINANCIAL, INC. INCENTIVE STOCK OPTION AGREEMENT UNDER THE 2009 EQUITY INCENTIVE PLAN

Number of Shares Covered:

Grant Date:

Exercise Price Per Share:

Expiration Date:

Vesting and Exercise Schedule:

Date(s)

Number of Shares as to Which

Option Becomes Vested and Exercisable

PARTICIPANT: 

HMN FINANCIAL, INC.  

By:

Title:

2.

Vesting and Exercisability of Option.

(1)

Your Service to the Company ends due to your death or Disability, in which case this Option will remain exercisable for twelve months following your termination of Service (but in no event later than its Expiration Date as specified on the cover page); or

(2)

A Change in Control or a Corporate Transaction of the type described in clauses (i) and (ii) of the definition thereof occurs. In such case, this Option will remain fully exercisable for twenty-four months after the Change in Control or Corporate Transaction (but in no event later than its Expiration Date as specified on the cover page), subject to the remainder of this subsection. Notwithstanding the foregoing, the Committee may elect to take action as described in Section 13(a)(1), 13(a)(2) or 13(a)(5) of the Plan under the circumstances described in this subsection 2(b)(2). If the Committee acts under Section 13(a)(1), any stock option substituted for this Option shall be fully vested and exercisable and remain exercisable for the same period as this Option. If the Committee acts under either Section 13(a)(2) or 13(a)(5), the accelerated vesting and exercisability, cancellation and any buyout of this Option Award shall occur as provided therein.

3.

Expiration. This Option will expire and will no longer be exercisable on the earliest of:

(a)

At 4:00 p.m. Central Time on the Expiration Date specified on the cover page of this Agreement;

(b)

At 4:00 p.m. Central Time on the expiration date of any applicable period specified in Section 6(d)(3) of the Plan or Section 2(b)(1) of this Agreement during which this Option may be exercised after your termination of Service;

(c)

Immediately upon your termination of Service for Cause; or

(d)

At 4:00 p.m. Central Time on the date (if any) fixed for termination or cancellation of this Option pursuant to Section 13(a)(2) or 13(a)(5) of the Plan.

4.

Procedure to Exercise Option.

5.

Service Requirement. Except as otherwise provided in Section 6(d)(3) of the Plan or Section 2(b) of this Agreement, this Option may be exercised only while you continue to provide Service to the Company or any Affiliate, and only if you have continuously provided such Service since the Grant Date of this Option.

6.

Limitation on Transfer. During your lifetime, only you (or your Successor or Transferee) may exercise this Option. The Option may not be assigned or transferred other than by will or the laws of descent and distribution or pursuant to a divorce decree or qualified domestic relations order as defined by the Code, or Title I of ERISA. Any attempt to assign, transfer, pledge, hypothecate, or otherwise dispose of this Option contrary to the provisions hereof, and the levy of any attachment or similar process upon this Option, will be void.

7.

No Stockholder Rights Before Exercise. Neither you nor any Successor or Transferee will have any rights as a stockholder of the Company with respect to any Shares subject to this Option unless and until the date you have become, or your Successor or Transferee has become, the holder of record of such Shares.

8.

Adjustment for Changes in Capitalization. If an “equity restructuring” (as defined in Section 17 of the Plan) occurs that causes the per share value of the Shares to change, the Committee will make such equitable adjustments to the Option as are contemplated by Section 17 of the Plan in order to avoid dilution or enlargement of your rights hereunder. The Committee may make such equitable adjustments to this Option as and to the extent provided in Section 17 of the Plan in connection with other changes in the Company’s capitalization contemplated by Section 17 of the Plan.

9.

Tax Consequences. You hereby acknowledge that if any Shares received pursuant to the exercise of any portion of this Option are sold within two years from the Grant Date or within one year from the effective date of exercise of this Option, or if certain other requirements of the Internal Revenue Code (the “Code”) are not satisfied, such Shares will be deemed under the Code not to have been acquired by you pursuant to an “incentive stock option” as defined in the Code, with potentially negative tax consequences for you. You agree to promptly notify the Company if you sell any Shares received upon the exercise of this Option within the time periods specified in the previous sentence. The Company shall not be liable to you if this Option for any reason is deemed not to be an “incentive stock option” within the meaning of the Code.

10.

Interpretation of This Agreement. All decisions and interpretations made by the Committee with regard to any question arising under this Agreement or the Plan will be binding and conclusive upon the Company and you (or your Successor or Transferee). If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan will govern.

11.

Discontinuance of Employment. Neither this Agreement, the Plan, nor the Option will confer on you any right with respect to continued Service with the Company or any of its Affiliates, nor interfere in any way with the right of the Company or any Affiliate to terminate your Service. Nothing in this Agreement will be construed as creating an employment contract for any specified term between you and the Company or any Affiliate. Neither any period of notice, if any, nor any payment in lieu thereof, upon termination of Service, wrongful or otherwise, will be considered as extending your period of Service for the purposes of the Plan or any Option granted thereunder.

12.

Obligation to Reserve Sufficient Shares. The Company will at all times during the term of this Option reserve and keep available a sufficient number of Shares to satisfy this Agreement.

13.

Binding Effect. This Agreement will be binding in all respects on your heirs, representatives, successors and assigns (and included for the sake of clarification, a Successor or Transferee of yours), and on the successors and assigns of the Company.

14.

Choice of Law. This Agreement is entered into under the laws of the State of Delaware and will be construed and interpreted thereunder (without regard to its conflict-of-law principles).

15.

Entire Agreement. This Agreement and the Plan set forth the entire agreement and understanding of the parties hereto with respect to the grant and exercise of this Option and the administration of the Plan and supersede all prior agreements, arrangements, plans, and understandings relating to the grant and exercise of this Option and the administration of the Plan.

16.

Amendment and Waiver. Except as otherwise provided in the Plan, this Agreement may be amended, waived, modified, or canceled only by a written instrument executed by the parties or, in the case of a waiver, by the party waiving compliance.

17.

Acknowledgment of Receipt of Copy. By execution hereof, you acknowledge having received a copy of the Plan.

18.

Regulatory Compliance. Notwithstanding any other provision of this Agreement:

(a)

Any payment or benefit to be made or provided to you pursuant to this Agreement shall be subject to and conditioned upon compliance with 12 CFR Part 359, “Golden Parachute and Indemnification Payments.”

(b)

Incorporated by reference herein are the terms required to be contained in employment contracts by 12 CFR Section 563.39.

Participant’s Name: 

Grant Date:

Exercise Price Per Share:

Number of Shares With Respect to Which the Option is Hereby Exercised:

Exercise Price:

☐

Issue a certificate (the “Certificate”) for the Shares (net of any Shares withheld in payment of the Exercise price) in the name of the person(s) indicated below and deliver the Certificate to the address indicated:

☐

Electronic delivery of the Shares to my brokerage account as indicated below:

☐

Create a book-entry registration of the Shares (net of any Shares withheld in payment of the Exercise price) in the name of the person(s) indicated below: