exv10w2






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

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Supervisory Agreement

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     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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3. Any material modifications1 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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strategies, targets and timeframes to reduce2 the Association’s level of Problem
Assets3 (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

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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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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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Golden Parachute Payments.



18. Effective immediately, the Association shall not make any golden parachute payment4
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 Officers5 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

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with a third party service provider that is significant to the overall operation or financial condition of
the Association6 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

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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

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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

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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

Supervisory Agreement

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