2. UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 10, 2011
HMN Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-24100 41-1777397
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1016 Civic Center Drive Northwest
PO Box 6057
Rochester, Minnesota 55903-6057
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (507) 535-1200
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of
the following provisions
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
3. Item 1.01. Entry into a Material Definitive Agreement
On February 10, 2011, HMN Financial, Inc. (the “Company”) entered into a Supervisory Agreement (the “Company Supervisory
Agreement”) with the Office of Thrift Supervision (the “OTS”), the Company’s primary federal regulator. At the same time, the Company’s
wholly-owned subsidiary, Home Federal Savings Bank (the “Bank”), entered into a Supervisory Agreement (the “Bank Supervisory
Agreement” and, collectively with the Company Supervisory Agreement, the “Supervisory Agreements”) with the OTS. All terms and
conditions set forth in the Supervisory Agreements will be effective upon execution by the OTS. When effective, the Supervisory Agreements
will supersede the previously reported memoranda of understanding between the Company and the Bank and the OTS.
The Company Supervisory Agreement requires that the Company: (i) submit a capital plan by May 31, 2011 (and thereafter the plan shall be
updated on an annual basis commencing January 31, 2012) for approval by the OTS (the “Capital Plan”), which must include a proposed
minimum tangible equity capital ratio commensurate with the Company’s consolidated risk profile, projections demonstrating the Company’s
ability to attain and maintain the minimum tangible equity capital ratio, including detailed scenarios to stress-test such ratio; (ii) not declare,
make or pay any cash dividends on any of its stock or make any other capital distributions or purchase or redeem any of its stock without the
prior consent of the OTS; (iii) not incur any debt or pay any interest or principal payments thereon, increase any current lines of credit or
guarantee the debt of any entity without the prior consent of the OTS; (iv) comply with existing notification requirements pursuant to the
applicable rules and regulations of the OTS with respect to changes in directors and certain executive officers; (v) not make any golden
parachute payment unless such payment complies with the applicable rules and regulations of the Federal Deposit Insurance Corporation (the
“FDIC”); and (vi) not enter into any new contractual arrangement or renew or revise any existing contractual arrangement related to
compensation or benefits with any director or certain executive officers without the prior consent of the OTS, with any such arrangement to
comply with all applicable rules and regulations of the OTS and FDIC.
The Bank Supervisory Agreement requires that the Bank: (i) submit an updated business plan by May 31, 2011 (and thereafter the plan shall
be updated on an annual basis commencing January 31, 2012) for approval by the OTS (the “Business Plan”), including strategies to ensure
that the Bank has the financial and personnel resources necessary to implement the Business Plan and maintain compliance with applicable
regulatory capital requirements, plans to improve the Bank’s core earnings and achieve profitability, financial projections and strategies to
stress-test and adjust earnings forecasts based on results of operations, economic conditions and quality of the Bank’s loan portfolio; (ii) submit
a detailed plan to reduce the Bank’s level of “problem assets” which must address quarterly targets for the level of problem assets as a
percentage of Tier 1 (Core) Capital plus the allowance for loan and lease losses (“ALLL”) and a description of methods for attaining such
targets as well as specific workout plans for certain adversely classified loans (generally those in excess of $1,000,000); (iii) revise its loan
modification policy; (iv) revise its program for identifying, monitoring and controlling risk associated with concentrations of credit; (v) revise
its policies and procedures relating to the calculation of ALLL; (vi) not increase its total assets during any quarter in excess of the net interest
credited on deposit liabilities during the prior quarter without the consent of the OTS; and (vii) not enter into any significant arrangement or
contract with a third party service provider without the prior consent of the OTS. The Bank Supervisory Agreement also provides that the Bank
is subject to similar restrictions on the payment of dividends, changes in directors and certain executive officers, golden parachute payments
and employment and compensatory arrangements as applicable to the Company pursuant to the Company Supervisory Agreement and
described in the preceding paragraph.
In addition, the Bank has been informed by the OTS that it intends to impose an Individual Minimum Capital Requirement (“IMCR”) for
the Bank. An IMCR requires a bank to establish and maintain levels of capital greater than those generally required for a bank to be classified
as “well-capitalized.” The Bank has not been informed by the OTS of the timing or capital levels that may be required. The Bank believes it
continues at this time to maintain levels of capital in excess of those required to be “well-capitalized” within the meaning of applicable capital
regulations of the OTS. The proposed IMCR would not affect the Bank’s status as “well-capitalized” within the meaning of these regulations.
4. The Supervisory Agreements provide for certain monitoring and periodic reporting to the OTS with respect to the matters addressed therein.
The Supervisory Agreements will remain in effect until terminated, modified or suspended by written action of the OTS. Failure to comply
with the Supervisory Agreements or an IMCR could result in further sanctions.
The foregoing description of the Supervisory Agreements is qualified in its entirety by reference to the Company Supervisory Agreement
and the Bank Supervisory Agreement, attached hereto as Exhibits 10.1 and 10.2, respectively, which are incorporated by reference into this
Item 1.01
This Current Report on Form 8-K (including information included or incorporated by reference herein) may contain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are often identified by such forward-
looking terminology as “expect,” “intent,” “look,” “believe,” “anticipate,” “estimate,” “project,” “seek,” “may,” “will,” “would,” “could,”
“should,” “trend,” “target,” and “goal” or similar statements or variations of such terms and include, but are not limited to those relating to the
intentions of the OTS to establish an IMCR, its timing and capital requirements and the Bank’s status as “well capitalized” under applicable
regulatory standards. A number of factors could cause actual results to differ materially from the Company’s assumptions and expectations.
These include but are not limited to decisions of the OTS with respect to the nature and degree of supervisory oversight to impose on the
Company and the Bank, the possible use by the OTS of other supervisory tools or remedies, and changes in the Company’s and Bank’s
operating results, level of non-performing assets or losses arising from non-performing assets that could adversely affect the capital position of
the Company or the Bank. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionary
statements. All forward-looking statements included in this Current Report on Form 8-K are based upon information available to the Company
as of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements. For additional
discussion of the risks and uncertainties generally applicable to the Company, see the “Risk Factors” section of the Company’s Form 10-K for
the fiscal year ended December 31, 2009.
Item 9.01. Financial Statements and Exhibits
( d) Exhibits
Exhibit Number Description
10.1 Supervisory Agreement, by and between HMN Financial, Inc. and the Office of Thrift Supervision
10.2 Supervisory Agreement, by and between Home Federal Savings Bank and the Office of Thrift Supervision
5. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
HMN Financial, Inc.
(Registrant)
Date: February 10, 2011 /s/ Jon Eberle
Jon Eberle
Senior Vice President,
Chief Financial Officer and Treasurer
6. Index to Exhibits
Exhibit No. Description
Exhibit 10.1 Supervisory Agreement, by and between HMN Financial, Inc. and the Office of Thrift Supervision
Exhibit 10.2 Supervisory Agreement, by and between Home Federal Savings Bank and the Office of Thrift Supervision
7. Exhibit 10.1
SUPERVISORY AGREEMENT
This Supervisory Agreement (Agreement) is made this ___ day of ________, 2011, by and through the Board of Directors (Board) of HMN
Financial, Inc., Rochester, Minnesota, OTS Docket No. H2309 (Holding Company) and the Office of Thrift Supervision (OTS), acting by and
through its Regional Director for the Central Region (Regional Director).
WHEREAS , the OTS, pursuant to 12 U.S.C. § 1818, has the statutory authority to enter into and enforce supervisory agreements to ensure
the establishment and maintenance of appropriate safeguards in the operation of the entities it regulates; and
WHEREAS , the Holding Company is subject to examination, regulation and supervision by the OTS;
WHEREAS , based on issues identified and discussed in the August 9, 2010 Report of Examination (2010 ROE) and previous OTS reports
of examination of the Holding Company, the OTS finds that the Holding Company has engaged in unsafe or unsound practices in conducting
its consolidated operations;
WHEREAS , in furtherance of their common goal to ensure that the Holding Company addresses the unsafe or unsound practices
identified and discussed in the 2010 ROE and previous OTS reports of examination, the Holding Company and the OTS have mutually agreed
to enter into this Agreement; and
WHEREAS , on February 10, 2011, the Holding Company’s Board, at a duly constituted meeting, adopted a resolution (Board Resolution)
that authorizes the Holding Company to enter into this Agreement and directs compliance by the Holding Company and its directors, officers,
employees, and other institution-affiliated parties with each and every provision of this Agreement.
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8. NOW THEREFORE , in consideration of the above premises, it is agreed as follows:
Capital Plan.
1. By May 31, 2011, the Holding Company shall submit to the Regional Director a written plan for enhancing the consolidated capital of the
Holding Company (Capital Plan). The Capital Plan shall cover the period beginning April 1, 2011 through December 31, 2012. At a minimum,
the Capital Plan shall include:
(a) establishment by the Board of a minimum tangible capital ratio of tangible equity capital to total tangible assets commensurate with the
Holding Company’s consolidated risk profile;
(b) quarterly cash flow projections for the Holding Company on a stand alone basis through calendar year-end December 31, 2012 that
identify both the sources of funds and the expected uses of funds;
(c) quarterly pro forma consolidated and unconsolidated Holding Company balance sheets and income statements for the period covered by
the Capital Plan demonstrating the Holding Company’s ability to attain and maintain the Board established minimum tangible equity capital
ratio by June 30, 2011;
(d) detailed scenarios to stress-test the minimum tangible equity capital targets based on continuing operating results, economic conditions
and risk profile of the Holding Company’s stand alone assets and liabilities; and
(e) detailed descriptions of all relevant assumptions and projections and the supporting documentation for all relevant assumptions and
projections.
2. Upon receipt of written notice of non-objection from the Regional Director to the Capital Plan, the Holding Company shall implement and
adhere to the Capital Plan. A copy of the
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9. Capital Plan shall be provided to the Regional Director within seven (7) days after Board approval.
3. By January 31, 2012, and each January 31st thereafter, the Capital Plan shall be updated and submitted to the Regional Director pursuant to
Paragraph 1 above and shall incorporate the Holding Company’s budget plan and cash flow projections for the next two (2) fiscal years taking
into account any revisions to the Holding Company’s cash flow and operating policies.
4. Within forty-five (45) days after the end of each quarter, after implementation of the Capital Plan, the Board shall review written quarterly
variance reports on the Holding Company’s compliance with its Capital Plan (Variance Reports). The minutes of the Board meeting shall fully
document the Board’s review and discussion. The Variance Reports shall:
(a) identify variances in the Holding Company’s actual performance during the preceding quarter as compared to the projections set forth in
the Capital Plan;
(b) contain an analysis and explanation of identified variances; and
(c) discuss the specific measures taken or to be taken by the Holding Company to address identified variances.
5. A copy of each Variance Report shall be provided to the Regional Director within seven (7) days after review by the Board or a committee
designated by the Board.
Dividends and other Capital Distributions.
6. Effective immediately, the Holding Company shall not declare, make, or pay any cash dividends on either its common or preferred stock or
other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase, or redeem any Holding Company equity stock
without the prior written non-objection of the Regional Director. The Holding Company shall submit its written request for non-objection to the
Regional Director at least
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10. thirty (30) days prior to the anticipated date of the proposed dividend, capital distribution, or stock transaction.
Debt Restrictions.
7. Effective immediately, the Holding Company shall not, directly or indirectly, incur, issue, renew, rollover, or pay interest or principal on any
debt or commit to do so, increase any current lines of credit, or guarantee the debt of any entity, without prior written notice to and written non-
objection from the Regional Director. The Holding Company’s written request for approval shall be submitted to the Regional Director at least
thirty (30) days prior to incurring, issuing, renewing, rolling over or paying any interest or principal on any debt, increasing any current lines of
credit, or guaranteeing the debt of any entity. The Holding Company’s written requests for Regional Director non-objection to engage in such
debt transactions, at a minimum, shall: (a) describe the purpose of the proposed debt; (b) set forth and analyze the terms of the proposed debt
and covenants; (c) analyze the Holding Company’s current cash flow resources available to satisfy such debt repayment; and (d) set forth the
anticipated source(s) of repayment of the proposed debt. For purposes of this Paragraph, the term “debt” includes, but is not limited to, loans,
bonds, cumulative preferred stock, hybrid capital instruments such as subordinated debt or trust preferred securities, and guarantees of debt. For
purposes of this Paragraph, the term “debt” does not include liabilities incurred in the ordinary course of business to acquire goods and services
and that are normally recorded as accounts payable or accruals under generally accepted accounting principles.
Directorate and Management Changes.
8. Effective immediately, the Holding Company shall comply with the prior notification
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11. requirements for changes in directors and Senior Executive Officers 1 set forth in 12 C.F.R.
Part 563, Subpart H.
Golden Parachute Payments.
9. Effective immediately, the Holding Company shall not make any golden parachute payment 2 unless, with respect to such payment, the
Holding Company has complied with the requirements of 12 C.F.R. Part 359.
Employment Contracts and Compensation Arrangements.
10. Effective immediately, the Holding Company shall not enter into any new contractual arrangement or renew, extend or revise any existing
contractual arrangement related to compensation or benefits with any director or Senior Executive Officer of the Holding Company, unless it
first provides the Regional Director with not less than thirty (30) days prior written notice of the proposed transaction. The notice to the
Regional Director shall include a copy of the proposed employment contract or compensation arrangement, or a detailed, written description of
the compensation arrangement to be offered to such Senior Executive Officer or director, including all benefits and perquisites. The Holding
Company shall ensure that any contract, agreement or arrangement submitted to OTS fully complies with the requirements of 12 C.F.R.
Part 359, 12 C.F.R. §§ 563.39 and 563.161(b), and 12 C.F.R. Part 570-Appendix A.
Effective Date.
11. This Agreement is effective on the Effective Date as shown on the first page.
Duration.
12. This Agreement shall remain in effect until terminated, modified or suspended, by written notice of such action by the OTS, acting by and
through its authorized representatives.
1 The term “Senior Executive Officer” is defined at 12 C.F.R. § 563.555.
2 The term “golden parachute payment” is defined at 12 C.F.R. § 359.1(f).
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12. Time Calculations.
13. Calculation of time limitations for compliance with the terms of this Agreement run from the Effective Date and shall be based on calendar
days, unless otherwise noted.
Submissions and Notices.
14. All submissions to the OTS that are required by or contemplated by the Agreement shall be submitted within the specified timeframes.
15. Except as otherwise provided herein, all submissions, requests, communications, consents or other documents relating to this Agreement
shall be in writing and sent by first class U.S. mail (or by reputable overnight carrier, electronic facsimile transmission or hand delivery by
messenger) addressed as follows:
(a) To the OTS:
Regional Director
Office of Thrift Supervision
One South Wacker Drive, Suite 2000
Chicago, Illinois 60606
Facsimile: (312) 917-5001
(b) To the Holding Company:
Chairman of the Board
HMN Financial, Inc.
1016 Civic Center Drive
Rochester, Minnesota 59901
Facsimile: (507) 535-1300
No Violations Authorized.
16. Nothing in this Agreement shall be construed as allowing the Holding Company, its Board, officers or employees to violate any law, rule,
or regulation.
OTS Authority Not Affected.
17. Nothing in this Agreement shall inhibit, estop, bar or otherwise prevent the OTS from
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13. taking any other action affecting the Holding Company if at any time the OTS deems it appropriate to do so to fulfill the responsibilities placed
upon the OTS by law.
Other Governmental Actions Not Affected.
18. The Holding Company acknowledges and agrees that its execution of the Agreement is solely for the purpose of resolving the matters
addressed herein, consistent with Paragraph 17 above, and does not otherwise release, discharge, compromise, settle, dismiss, resolve, or in any
way affect any actions, charges against, or liability of the Holding Company that arise pursuant to this action or otherwise, and that may be or
have been brought by any governmental entity other than the OTS.
Miscellaneous.
19. The laws of the United States of America shall govern the construction and validity of this Agreement.
20. If any provision of this Agreement is ruled to be invalid, illegal, or unenforceable by the decision of any Court of competent jurisdiction,
the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, unless the
Regional Director in his or her sole discretion determines otherwise.
21. All references to the OTS in this Agreement shall also mean any of the OTS’s predecessors, successors, and assigns.
22. The section and paragraph headings in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.
23. The terms of this Agreement represent the final agreement of the parties with respect to the subject matters thereof, and constitute the sole
agreement of the parties with respect to such subject matters.
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14. Enforceability of Agreement.
24. This Agreement is a “written agreement” entered into with an agency within the meaning and for the purposes of 12 U.S.C. § 1818.
Signature of Directors/Board Resolution.
25. Each Director signing this Agreement attests that he or she voted in favor of a Board Resolution authorizing the consent of the Holding
Company to the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval of
execution of the Agreement at a duly called board meeting. A copy of the Board Resolution authorizing execution of this Agreement shall be
delivered to the Regional Director along with the executed original(s) of this Agreement.
[Remainder of the Page Intentionally Left Blank]
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15. WHEREFORE , the OTS, acting by and through its Regional Director, and the Board of the Holding Company, hereby execute this
Agreement.
Accepted by:
HMN FINANCIAL, INC. Office of Thrift Supervision
Rochester, Minnesota
/s/ Timothy R. Geisler By:
Timothy R. Geisler, Director Daniel T. McKee
Regional Director, Central Region
/s/ Allan R. DeBoer
Allan R. DeBoer, Director
/s/ Michael J. Fogarty
Michael J. Fogarty, Director
/s/ Karen L. Himle
Karen L. Himle, Director
/s/ Susan K. Kolling
Susan K. Kolling, Director
/s/ Bradley C. Krehbiel
Bradley C. Krehbiel, Director
/s/ Malcolm W. McDonald
Malcolm W. McDonald, Director
/s/ Mahlon C. Schneider
Mahlon C. Schneider, Director
/s/ Hugh C. Smith
Hugh C. Smith, Director
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16. Exhibit 10.2
SUPERVISORY AGREEMENT
This Supervisory Agreement (Agreement) is made this day of ___________, 2011 (Effective Date), by and through the Board of
Directors (Board) of Home Federal Savings Bank, Rochester, Minnesota, OTS Docket No. 02818 (Association) and the Office of Thrift
Supervision (OTS), acting by and through its Regional Director for the Central Region (Regional Director);
WHEREAS , the OTS, pursuant to 12 U.S.C. § 1818, has the statutory authority to enter into and enforce supervisory agreements to ensure
the establishment and maintenance of appropriate safeguards in the operation of the entities it regulates; and
WHEREAS , the Association is subject to examination, regulation and supervision by the OTS; and
WHEREAS , based on issues identified and discussed in the OTS August 9, 2010 Report of Examination (2010 ROE) and previous OTS
reports of examination of the Association, the OTS finds that the Association has engaged in unsafe or unsound practices; and
WHEREAS , in furtherance of their common goal to ensure that the Association addresses the unsafe or unsound practices identified and
discussed in the 2010 ROE and previous OTS reports of examination, the Association and the OTS have mutually agreed to enter into this
Agreement; and
WHEREAS , on February 10, 2011, the Association’s Board, at a duly constituted meeting, adopted a resolution (Board Resolution) that
authorizes the Association to enter into this Agreement and directs compliance by the Association and its directors, officers, employees, and
other institution-affiliated parties with each and every provision of this Agreement.
Home Federal Savings Bank
Rochester, Minnesota
Supervisory Agreement
Page 1 of 11
17. NOW THEREFORE , in consideration of the above premises, it is agreed as follows:
Business Plan.
1. By May 31, 2011, the Association shall submit to the Regional Director an updated business plan for the period beginning April 1, 2011
through December 31, 2012 (Business Plan). At a minimum, the Business Plan shall conform to applicable laws, regulations, and regulatory
guidance and include:
(a) strategies for ensuring that the Association has the financial and personnel resources necessary to implement and adhere to the Business
Plan, adequately support the Association’s risk profile, maintain compliance with applicable regulatory capital requirements, and comply
with this Agreement;
(b) plans to improve the Association’s core earnings and achieve profitability;
(c) quarterly pro forma financial projections (balance sheet and income statement for the period covered by the Business Plan), including
Tier 1 (Core) and Total Risk-Based Capital Ratios;
(d) strategies to stress-test and adjust earnings forecasts based on continuing operating results, economic conditions, and credit quality of the
loan portfolio; and
(e) identification of all relevant assumptions made in formulating the Business Plan and a requirement that documentation supporting such
assumptions be retained by the Association.
2. Upon receipt of written notification from the Regional Director that the Business Plan is acceptable, the Association shall implement and
adhere to the Business Plan. A copy of the Business Plan shall be provided to the Regional Director within five (5) days after Board approval.
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Rochester, Minnesota
Supervisory Agreement
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18. 3. Any material modifications 1 to the Business Plan shall receive the prior, written non-objection of the Regional Director. The Association
shall submit proposed material modifications to the Regional Director at least forty-five (45) days prior to implementation.
4. By January 31, 2012, and each January 31st thereafter, the Business Plan shall be updated and submitted to the Regional Director pursuant to
Paragraphs 1 and 2 above incorporating the Association’s budget plan and profit projections for the next two (2) fiscal years taking into
account any revisions to the Association’s loan, investment and operating policies.
5. Within forty-five (45) days after the close of each quarter, after implementation of the Business Plan, the Board shall review written
quarterly variance reports on the Association’s compliance with the Business Plan (Variance Reports). The Variance Reports shall:
(a) identify variances in the Association’s actual performance during the preceding quarter as compared to the projections set forth in the
Business Plan;
(b) contain an analysis and explanation of identified variances; and
(c) discuss the specific measures taken or to be taken by the Association to address identified variances.
6. A copy of each Variance Report shall be provided to the Regional Director within five (5) days after review by the Board or a committee
designated by the Board.
Problem Assets.
7. By March 31, 2011, the Association shall submit a detailed, written plan with specific
1 A modification shall be considered material under this Paragraph if the Association plans to: (a) engage in any activity that is inconsistent
with the Business Plan; or (b) exceed the level of any activity contemplated in the Business Plan by more than ten percent (10%).
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Rochester, Minnesota
Supervisory Agreement
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19. strategies, targets and timeframes to reduce 2 the Association’s level of Problem Assets 3 (Problem Asset Reduction Plan) to the Regional
Director. The Problem Asset Reduction Plan, at a minimum, shall include:
(a) quarterly targets for the level of Problem Assets as a percentage of Tier 1 (Core) Capital plus the Allowance for Loan and Lease Losses
(ALLL);
(b) a description of the methods for reducing the Association’s level of Problem Assets to the established targets; and
(c) all relevant assumptions and projections and documentation supporting such assumptions and projections.
8. Upon receipt of written notification from the Regional Director that the Problem Asset Reduction Plan is acceptable, the Association shall
implement and adhere to the Problem Asset Reduction Plan. The Board’s review of the Problem Asset Reduction Plan shall be documented in
the Board meeting minutes. A copy of the final Problem Asset Reduction Plan shall be provided to the Regional Director within five (5) days
of adoption by the Board.
9. Within thirty (30) days, the Association shall develop individual written specific workout plans (Asset Workout Plans) for each adversely
classified loan or group of loans to individual relationships greater than one million dollars ($1,000,000) and for each REO where the original
loan amount collateralized by the REO exceeded one million dollars ($1,000,000).
10. Within forty-five (45) days after the end of each quarter, beginning with the quarter ending June 30, 2011, the Association shall submit a
quarterly written asset status report (Quarterly Asset Report) to the Board. The Board’s review of the Quarterly Asset Report shall
2 For purposes of this Paragraph, “reduce” means to sell real estate owned (REO) and to collect, sell, charge off, or improve the quality of a
loan sufficient to warrant its removal from adverse criticism or classification.
3 The term “Problem Assets” shall include all REO and adversely classified assets.
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Rochester, Minnesota
Supervisory Agreement
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20. be documented in the Board meeting minutes. The Quarterly Asset Report shall include, at a minimum:
(a) the current status of all Asset Workout Plans;
(b) the ratio of adversely classified assets to Tier 1 (Core) Capital plus ALLL;
(c) a comparison of adversely classified assets at the current quarter end with the preceding quarter;
(d) a discussion of the actions taken during the preceding quarter to reduce the Association’s level of Problem Assets; and
(e) any recommended revisions or updates to the Problem Asset Reduction Plan.
11. Within fifty (50) days after the end of each quarter, a copy of the Quarterly Asset Report shall be provided to the Regional Director.
Loan Modification Documentation .
12. By April 30, 2011, the Association shall develop a loan modification policy (Loan Modification Policy) that addresses the corrective action
contained in the 2010 ROE concerning documentation of loan modifications. The Loan Modification Policy shall conform to all applicable
laws, regulations and regulatory guidance.
Concentrations of Credit.
13. By April 30, 2011, the Association shall revise its written program for identifying, monitoring, and controlling risks associated with
concentrations of credit (Credit Concentration Program) to address all corrective actions set forth in the 2010 ROE relating to concentrations of
credit. The Credit Concentration Program shall comply with all applicable laws, regulations and regulatory guidance.
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Rochester, Minnesota
Supervisory Agreement
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21. 14. By May 6, 2011, the Association shall submit its Credit Concentration Program to the Regional Director for review and comment. Upon
receipt of written notification from the Regional Director that the Credit Concentration Program is acceptable, the Association shall implement
and adhere to the Credit Concentration Program. The Board’s review of the Credit Concentration Program shall be documented in the Board
meeting minutes. A copy of the Credit Concentration Program shall be provided to the Regional Director within five (5) days of adoption by
the Board.
Allowance for Loan and Lease Losses .
15. By January 31, 2011, the Association shall revise its policies and procedures relating to the calculation of the ALLL (ALLL Policy) to
ensure that it addresses the corrective action set forth in the 2010 ROE relating to the ALLL. The ALLL Policy shall comply with applicable
laws, regulations, and regulatory guidance.
Dividends and Other Capital Distributions.
16. Effective immediately, the Association shall not declare or pay dividends or make any other capital distributions, as that term is defined in
12 C.F.R. § 563.141, without receiving the prior written approval of the Regional Director in accordance with applicable regulations and
regulatory guidance. The Association’s written request for approval shall be submitted to the Regional Director at least thirty (30) days prior to
the anticipated date of the proposed declaration, dividend payment or distribution of capital.
Growth.
17. Effective immediately, the Association shall not increase its total assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the prior quarter without the prior written non-objection of the Regional Director.
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Rochester, Minnesota
Supervisory Agreement
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22. Golden Parachute Payments.
18. Effective immediately, the Association shall not make any golden parachute payment 4 unless, with respect to such payment, the
Association has complied with the requirements of 12 C.F.R. Part 359.
Directorate and Management Changes.
19. Effective immediately, the Association shall comply with the prior notification requirements for changes in directors and Senior Executive
Officers 5 set forth in 12 C.F.R. Part 563, Subpart H.
Employment Contracts and Compensation Arrangements.
20. Effective immediately, the Association shall not enter into any new contractual arrangement or renew, extend, or revise any contractual
arrangement relating to compensation or benefits for any Senior Executive Officer or director of the Association, unless it first provides the
Regional Director with not less than thirty (30) days prior written notice of the proposed transaction. The notice to the Regional Director shall
include a copy of the proposed employment contract or compensation arrangement or a detailed, written description of the compensation
arrangement to be offered to such Senior Executive Officer or director, including all benefits and perquisites. The Board shall ensure that any
contract, agreement, or arrangement submitted to the Regional Director fully complies with the requirements of 12 C.F.R. Part 359, 12 C.F.R.
§§ 563.39 and 563.161(b), and 12 C.F.R. Part 570 — Appendix A.
Third Party Contracts.
21. Effective immediately, the Association shall not enter into any arrangement or contract
4 The term “golden parachute payment” is defined at 12 C.F.R. § 359.1(f).
5 The term “Senior Executive Officer” is defined at 12 C.F.R. § 563.555.
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Rochester, Minnesota
Supervisory Agreement
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23. with a third party service provider that is significant to the overall operation or financial condition of the Association 6 or outside the
Association’s normal course of business unless, with respect to each such contract, the Association has: (a) provided the Regional Director with
a minimum of thirty (30) days prior written notice of such arrangement or contract and a written determination that the arrangement or contract
complies with the standards and guidelines set forth in OTS Thrift Bulletin 82a; and (b) received written notice of non-objection from the
Regional Director.
Effective Date.
22. This Agreement is effective on the Effective Date as shown on the first page.
Duration.
23. This Agreement shall remain in effect until terminated, modified or suspended, by written notice of such action by the OTS, acting by and
through its authorized representatives.
Time Calculations.
24. Calculation of time limitations for compliance with the terms of this Agreement run from the Effective Date and shall be based on calendar
days, unless otherwise noted.
Submissions and Notices.
25. All submissions to the OTS that are required by or contemplated by the Agreement shall be submitted within the specified timeframes.
26. Except as otherwise provided herein, all submissions, requests, communications, consents or other documents relating to this Agreement
shall be in writing and sent by first class
6 A contract will be considered significant to the overall operation or financial condition of the Association where the annual contract
amount equals or exceeds two percent (2%) of the Association’s total capital, where there is a foreign service provider, or where it
involves information technology that is critical to the Association’s daily operations without regard to the contract amount.
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Rochester, Minnesota
Supervisory Agreement
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24. U.S. mail (or by reputable overnight carrier, electronic facsimile transmission or hand delivery by messenger) addressed as follows:
(a) To: the OTS
Regional Director
Office of Thrift Supervision
One South Wacker Drive, Suite 2000
Chicago, Illinois 60606
Facsimile: (312) 917-5001
(b) To: the Association
Chairman of the Board
Home Federal Savings Bank
1016 Civic Center Drive
Rochester, Minnesota 55901
Facsimile: (507) 535-1300
No Violations Authorized.
27. Nothing in this Agreement shall be construed as allowing the Association, its Board, officers or employees to violate any law, rule, or
regulation.
OTS Authority Not Affected.
28. Nothing in this Agreement shall inhibit, estop, bar or otherwise prevent the OTS from taking any other action affecting the Association if at
any time the OTS deems it appropriate to do so to fulfill the responsibilities placed upon the OTS by law.
Other Governmental Actions Not Affected.
29. The Association acknowledges and agrees that its execution of the Agreement is solely for the purpose of resolving the matters addressed
herein, consistent with Paragraph 28 above, and does not otherwise release, discharge, compromise, settle, dismiss, resolve, or in any way
affect any actions, charges against, or liability of the Association that arise pursuant to this action or otherwise, and that may be or have been
brought by any governmental entity other than the OTS.
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Rochester, Minnesota
Supervisory Agreement
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25. Miscellaneous.
30. The laws of the United States of America shall govern the construction and validity of this Agreement.
31. If any provision of this Agreement is ruled to be invalid, illegal, or unenforceable by the decision of any Court of competent jurisdiction,
the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, unless the
Regional Director in his or her sole discretion determines otherwise.
32. All references to the OTS in this Agreement shall also mean any of the OTS’s predecessors, successors, and assigns.
33. The section and paragraph headings in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.
34. The terms of this Agreement represent the final agreement of the parties with respect to the subject matters thereof, and constitute the sole
agreement of the parties with respect to such subject matters.
Enforceability of Agreement.
35. This Agreement is a “written agreement” entered into with an agency within the meaning and for the purposes of 12 U.S.C. § 1818.
Signature of Directors/Board Resolution.
36. Each Director signing this Agreement attests that he or she voted in favor of a Board Resolution authorizing the consent of the Association
to the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval of execution
of the Agreement at a duly called board meeting. A copy of the Board Resolution
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Rochester, Minnesota
Supervisory Agreement
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26. authorizing execution of this Agreement shall be delivered to the OTS, along with the executed original(s) of this Agreement.
WHEREFORE , the OTS, acting by and through its Regional Director, and the Board of the Association, hereby execute this Agreement.
HOME FEDERAL SAVINGS BANK OFFICE OF THRIFT SUPERVISION
Rochester, Minnesota
/s/ Timothy R. Geisler By:
Timothy R. Geisler, Chairman Daniel T. McKee
Regional Director, Central Region
/s/ Allan R. DeBoer
Allan R. DeBoer, Director
/s/ Michael J. Fogarty
Michael J. Fogarty, Director
/s/ Karen L. Himle
Karen L. Himle, Director
/s/ Susan K. Kolling
Susan K. Kolling, Director
/s/ Bradley C. Krehbiel
Bradley C. Krehbiel, Director
/s/ Malcolm W. McDonald
Malcolm W. McDonald, Director
/s/ Mahlon C. Schneider
Mahlon C. Schneider, Director
/s/ Hugh C. Smith
Hugh C. Smith, Director
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Rochester, Minnesota
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