1. HMN FINANCIAL INC FORM 8-K (Current report filing)Filed 02/11/11 for the Period Ending 02/10/11Address1016 CIVIC CENTER DRIVE NORTHWEST ROCHESTER, MN 55901Telephone5075351200CIK0000921183Symbol HMNF SIC Code6035 - Savings Institutions, Federally Chartered IndustryS&Ls/Savings Banks SectorFinancialFiscal Year12/31 http://www.edgar-online.com Copyright 2011, EDGAR Online, Inc. All Rights Reserved.Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-KCURRENT REPORTPURSUANT 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 NorthwestPO Box 6057 Rochester, Minnesota55903-6057(Address of principal executive offices) (Zip Code)Registrants 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 ofthe 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 SupervisoryAgreement) with the Office of Thrift Supervision (the OTS), the Companys primary federal regulator. At the same time, the Companyswholly-owned subsidiary, Home Federal Savings Bank (the Bank), entered into a Supervisory Agreement (the Bank SupervisoryAgreement and, collectively with the Company Supervisory Agreement, the Supervisory Agreements) with the OTS. All terms andconditions set forth in the Supervisory Agreements will be effective upon execution by the OTS. When effective, the Supervisory Agreementswill 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 beupdated on an annual basis commencing January 31, 2012) for approval by the OTS (the Capital Plan), which must include a proposedminimum tangible equity capital ratio commensurate with the Companys consolidated risk profile, projections demonstrating the Companysability 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 theprior consent of the OTS; (iii) not incur any debt or pay any interest or principal payments thereon, increase any current lines of credit orguarantee the debt of any entity without the prior consent of the OTS; (iv) comply with existing notification requirements pursuant to theapplicable rules and regulations of the OTS with respect to changes in directors and certain executive officers; (v) not make any goldenparachute payment unless such payment complies with the applicable rules and regulations of the Federal Deposit Insurance Corporation (theFDIC); and (vi) not enter into any new contractual arrangement or renew or revise any existing contractual arrangement related tocompensation or benefits with any director or certain executive officers without the prior consent of the OTS, with any such arrangement tocomply 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 shallbe updated on an annual basis commencing January 31, 2012) for approval by the OTS (the Business Plan), including strategies to ensurethat the Bank has the financial and personnel resources necessary to implement the Business Plan and maintain compliance with applicableregulatory capital requirements, plans to improve the Banks core earnings and achieve profitability, financial projections and strategies tostress-test and adjust earnings forecasts based on results of operations, economic conditions and quality of the Banks loan portfolio; (ii) submita detailed plan to reduce the Banks level of problem assets which must address quarterly targets for the level of problem assets as apercentage of Tier 1 (Core) Capital plus the allowance for loan and lease losses (ALLL) and a description of methods for attaining suchtargets as well as specific workout plans for certain adversely classified loans (generally those in excess of $1,000,000); (iii) revise its loanmodification policy; (iv) revise its program for identifying, monitoring and controlling risk associated with concentrations of credit; (v) reviseits policies and procedures relating to the calculation of ALLL; (vi) not increase its total assets during any quarter in excess of the net interestcredited on deposit liabilities during the prior quarter without the consent of the OTS; and (vii) not enter into any significant arrangement orcontract with a third party service provider without the prior consent of the OTS. The Bank Supervisory Agreement also provides that the Bankis subject to similar restrictions on the payment of dividends, changes in directors and certain executive officers, golden parachute paymentsand employment and compensatory arrangements as applicable to the Company pursuant to the Company Supervisory Agreement anddescribed 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) forthe Bank. An IMCR requires a bank to establish and maintain levels of capital greater than those generally required for a bank to be classifiedas well-capitalized. The Bank has not been informed by the OTS of the timing or capital levels that may be required. The Bank believes itcontinues at this time to maintain levels of capital in excess of those required to be well-capitalized within the meaning of applicable capitalregulations of the OTS. The proposed IMCR would not affect the Banks 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 complywith 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 Agreementand the Bank Supervisory Agreement, attached hereto as Exhibits 10.1 and 10.2, respectively, which are incorporated by reference into thisItem 1.01This Current Report on Form 8-K (including information included or incorporated by reference herein) may contain forward-lookingstatements 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 theintentions of the OTS to establish an IMCR, its timing and capital requirements and the Banks status as well capitalized under applicableregulatory standards. A number of factors could cause actual results to differ materially from the Companys 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 theCompany and the Bank, the possible use by the OTS of other supervisory tools or remedies, and changes in the Companys and Banksoperating results, level of non-performing assets or losses arising from non-performing assets that could adversely affect the capital position ofthe Company or the Bank. All forward-looking statements are qualified by, and should be considered in conjunction with, such cautionarystatements. All forward-looking statements included in this Current Report on Form 8-K are based upon information available to the Companyas of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements. For additionaldiscussion of the risks and uncertainties generally applicable to the Company, see the Risk Factors section of the Companys Form 10-K forthe fiscal year ended December 31, 2009.Item 9.01. Financial Statements and Exhibits( d) ExhibitsExhibit NumberDescription 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 bythe undersigned hereunto duly authorized.HMN Financial, Inc.(Registrant)Date: February 10, 2011 /s/ Jon EberleJon EberleSenior Vice President,Chief Financial Officer and Treasurer 6. Index to ExhibitsExhibit 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 10.1SUPERVISORY AGREEMENT This Supervisory Agreement (Agreement) is made this ___ day of ________, 2011, by and through the Board of Directors (Board) of HMNFinancial, Inc., Rochester, Minnesota, OTS Docket No. H2309 (Holding Company) and the Office of Thrift Supervision (OTS), acting by andthrough 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 ensurethe 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 reportsof examination of the Holding Company, the OTS finds that the Holding Company has engaged in unsafe or unsound practices in conductingits consolidated operations;WHEREAS , in furtherance of their common goal to ensure that the Holding Company addresses the unsafe or unsound practicesidentified and discussed in the 2010 ROE and previous OTS reports of examination, the Holding Company and the OTS have mutually agreedto enter into this Agreement; andWHEREAS , on February 10, 2011, the Holding Companys 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.HMN Financial, Inc.Supervisory AgreementPage 1 of 9 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 theHolding 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 theHolding Companys consolidated risk profile;(b) quarterly cash flow projections for the Holding Company on a stand alone basis through calendar year-end December 31, 2012 thatidentify 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 bythe Capital Plan demonstrating the Holding Companys ability to attain and maintain the Board established minimum tangible equity capitalratio by June 30, 2011;(d) detailed scenarios to stress-test the minimum tangible equity capital targets based on continuing operating results, economic conditionsand risk profile of the Holding Companys stand alone assets and liabilities; and(e) detailed descriptions of all relevant assumptions and projections and the supporting documentation for all relevant assumptions andprojections.2. Upon receipt of written notice of non-objection from the Regional Director to the Capital Plan, the Holding Company shall implement andadhere to the Capital Plan. A copy of theHMN Financial, Inc.Supervisory AgreementPage 2 of 9 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 toParagraph 1 above and shall incorporate the Holding Companys budget plan and cash flow projections for the next two (2) fiscal years takinginto account any revisions to the Holding Companys 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 quarterlyvariance reports on the Holding Companys compliance with its Capital Plan (Variance Reports). The minutes of the Board meeting shall fullydocument the Boards review and discussion. The Variance Reports shall:(a) identify variances in the Holding Companys actual performance during the preceding quarter as compared to the projections set forth inthe 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 committeedesignated 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 orother capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase, or redeem any Holding Company equity stockwithout the prior written non-objection of the Regional Director. The Holding Company shall submit its written request for non-objection to theRegional Director at leastHMN Financial, Inc.Supervisory AgreementPage 3 of 9 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 anydebt 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 Companys written request for approval shall be submitted to the Regional Director at leastthirty (30) days prior to incurring, issuing, renewing, rolling over or paying any interest or principal on any debt, increasing any current lines ofcredit, or guaranteeing the debt of any entity. The Holding Companys written requests for Regional Director non-objection to engage in suchdebt transactions, at a minimum, shall: (a) describe the purpose of the proposed debt; (b) set forth and analyze the terms of the proposed debtand covenants; (c) analyze the Holding Companys current cash flow resources available to satisfy such debt repayment; and (d) set forth theanticipated 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. Forpurposes of this Paragraph, the term debt does not include liabilities incurred in the ordinary course of business to acquire goods and servicesand 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 notificationHMN Financial, Inc.Supervisory AgreementPage 4 of 9 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, theHolding 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 existingcontractual arrangement related to compensation or benefits with any director or Senior Executive Officer of the Holding Company, unless itfirst provides the Regional Director with not less than thirty (30) days prior written notice of the proposed transaction. The notice to theRegional Director shall include a copy of the proposed employment contract or compensation arrangement, or a detailed, written description ofthe compensation arrangement to be offered to such Senior Executive Officer or director, including all benefits and perquisites. The HoldingCompany 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 andthrough its authorized representatives.1The term Senior Executive Officer is defined at 12 C.F.R. 563.555.2The term golden parachute payment is defined at 12 C.F.R. 359.1(f).HMN Financial, Inc.Supervisory AgreementPage 5 of 9 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 calendardays, 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 Agreementshall be in writing and sent by first class U.S. mail (or by reputable overnight carrier, electronic facsimile transmission or hand delivery bymessenger) addressed as follows:(a) To the OTS:Regional DirectorOffice of Thrift SupervisionOne South Wacker Drive, Suite 2000Chicago, Illinois 60606Facsimile: (312) 917-5001(b) To the Holding Company:Chairman of the BoardHMN Financial, Inc.1016 Civic Center DriveRochester, Minnesota 59901Facsimile: (507) 535-1300No 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 fromHMN Financial, Inc.Supervisory AgreementPage 6 of 9 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 placedupon 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 mattersaddressed herein, consistent with Paragraph 17 above, and does not otherwise release, discharge, compromise, settle, dismiss, resolve, or in anyway affect any actions, charges against, or liability of the Holding Company that arise pursuant to this action or otherwise, and that may be orhave 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 theRegional Director in his or her sole discretion determines otherwise.21. All references to the OTS in this Agreement shall also mean any of the OTSs 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 soleagreement of the parties with respect to such subject matters.HMN Financial, Inc.Supervisory AgreementPage 7 of 9 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 HoldingCompany to the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval ofexecution of the Agreement at a duly called board meeting. A copy of the Board Resolution authorizing execution of this Agreement shall bedelivered to the Regional Director along with the executed original(s) of this Agreement.[Remainder of the Page Intentionally Left Blank]HMN Financial, Inc.Supervisory AgreementPage 8 of 9 15. WHEREFORE , the OTS, acting by and through its Regional Director, and the Board of the Holding Company, hereby execute thisAgreement.Accepted by:HMN FINANCIAL, INC. Office of Thrift SupervisionRochester, Minnesota/s/ Timothy R. GeislerBy:Timothy R. Geisler, DirectorDaniel T. McKeeRegional Director, Central Region/s/ Allan R. DeBoerAllan R. DeBoer, Director/s/ Michael J. FogartyMichael J. Fogarty, Director/s/ Karen L. HimleKaren L. Himle, Director/s/ Susan K. KollingSusan K. Kolling, Director/s/ Bradley C. KrehbielBradley C. Krehbiel, Director/s/ Malcolm W. McDonaldMalcolm W. McDonald, Director/s/ Mahlon C. SchneiderMahlon C. Schneider, Director/s/ Hugh C. SmithHugh C. Smith, DirectorHMN Financial, Inc.Supervisory AgreementPage 9 of 9 16. Exhibit 10.2SUPERVISORY AGREEMENT This Supervisory Agreement (Agreement) is made this day of ___________, 2011 (Effective Date), by and through the Board ofDirectors (Board) of Home Federal Savings Bank, Rochester, Minnesota, OTS Docket No. 02818 (Association) and the Office of ThriftSupervision (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 ensurethe 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 OTSreports of examination of the Association, the OTS finds that the Association has engaged in unsafe or unsound practices; andWHEREAS , in furtherance of their common goal to ensure that the Association addresses the unsafe or unsound practices identified anddiscussed in the 2010 ROE and previous OTS reports of examination, the Association and the OTS have mutually agreed to enter into thisAgreement; andWHEREAS , on February 10, 2011, the Associations Board, at a duly constituted meeting, adopted a resolution (Board Resolution) thatauthorizes the Association to enter into this Agreement and directs compliance by the Association and its directors, officers, employees, andother institution-affiliated parties with each and every provision of this Agreement.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 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, 2011through December 31, 2012 (Business Plan). At a minimum, the Business Plan shall conform to applicable laws, regulations, and regulatoryguidance and include:(a) strategies for ensuring that the Association has the financial and personnel resources necessary to implement and adhere to the BusinessPlan, adequately support the Associations risk profile, maintain compliance with applicable regulatory capital requirements, and complywith this Agreement;(b) plans to improve the Associations core earnings and achieve profitability;(c) quarterly pro forma financial projections (balance sheet and income statement for the period covered by the Business Plan), includingTier 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 theloan portfolio; and(e) identification of all relevant assumptions made in formulating the Business Plan and a requirement that documentation supporting suchassumptions 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 andadhere to the Business Plan. A copy of the Business Plan shall be provided to the Regional Director within five (5) days after Board approval.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 2 of 11 18. 3. Any material modifications 1 to the Business Plan shall receive the prior, written non-objection of the Regional Director. The Associationshall 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 toParagraphs 1 and 2 above incorporating the Associations budget plan and profit projections for the next two (2) fiscal years taking intoaccount any revisions to the Associations 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 writtenquarterly variance reports on the Associations compliance with the Business Plan (Variance Reports). The Variance Reports shall:(a) identify variances in the Associations actual performance during the preceding quarter as compared to the projections set forth in theBusiness 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 committeedesignated by the Board.Problem Assets.7. By March 31, 2011, the Association shall submit a detailed, written plan with specific1 A modification shall be considered material under this Paragraph if the Association plans to: (a) engage in any activity that is inconsistentwith the Business Plan; or (b) exceed the level of any activity contemplated in the Business Plan by more than ten percent (10%).Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 3 of 11 19. strategies, targets and timeframes to reduce 2 the Associations level of Problem Assets 3 (Problem Asset Reduction Plan) to the RegionalDirector. 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 Associations 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 shallimplement and adhere to the Problem Asset Reduction Plan. The Boards review of the Problem Asset Reduction Plan shall be documented inthe Board meeting minutes. A copy of the final Problem Asset Reduction Plan shall be provided to the Regional Director within five (5) daysof adoption by the Board.9. Within thirty (30) days, the Association shall develop individual written specific workout plans (Asset Workout Plans) for each adverselyclassified loan or group of loans to individual relationships greater than one million dollars ($1,000,000) and for each REO where the originalloan 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 aquarterly written asset status report (Quarterly Asset Report) to the Board. The Boards review of the Quarterly Asset Report shall2 For purposes of this Paragraph, reduce means to sell real estate owned (REO) and to collect, sell, charge off, or improve the quality of aloan sufficient to warrant its removal from adverse criticism or classification.3 The term Problem Assets shall include all REO and adversely classified assets.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 4 of 11 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 Associations 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 actioncontained in the 2010 ROE concerning documentation of loan modifications. The Loan Modification Policy shall conform to all applicablelaws, 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 withconcentrations of credit (Credit Concentration Program) to address all corrective actions set forth in the 2010 ROE relating to concentrations ofcredit. The Credit Concentration Program shall comply with all applicable laws, regulations and regulatory guidance.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 5 of 11 21. 14. By May 6, 2011, the Association shall submit its Credit Concentration Program to the Regional Director for review and comment. Uponreceipt of written notification from the Regional Director that the Credit Concentration Program is acceptable, the Association shall implementand adhere to the Credit Concentration Program. The Boards review of the Credit Concentration Program shall be documented in the Boardmeeting minutes. A copy of the Credit Concentration Program shall be provided to the Regional Director within five (5) days of adoption bythe 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) toensure that it addresses the corrective action set forth in the 2010 ROE relating to the ALLL. The ALLL Policy shall comply with applicablelaws, 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 in12 C.F.R. 563.141, without receiving the prior written approval of the Regional Director in accordance with applicable regulations andregulatory guidance. The Associations written request for approval shall be submitted to the Regional Director at least thirty (30) days prior tothe 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 interestcredited on deposit liabilities during the prior quarter without the prior written non-objection of the Regional Director.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 6 of 11 22. Golden Parachute Payments.18. Effective immediately, the Association shall not make any golden parachute payment 4 unless, with respect to such payment, theAssociation 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 ExecutiveOfficers 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 contractualarrangement relating to compensation or benefits for any Senior Executive Officer or director of the Association, unless it first provides theRegional Director with not less than thirty (30) days prior written notice of the proposed transaction. The notice to the Regional Director shallinclude a copy of the proposed employment contract or compensation arrangement or a detailed, written description of the compensationarrangement to be offered to such Senior Executive Officer or director, including all benefits and perquisites. The Board shall ensure that anycontract, 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 contract4The term golden parachute payment is defined at 12 C.F.R. 359.1(f).5The term Senior Executive Officer is defined at 12 C.F.R. 563.555.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 7 of 11 23. with a third party service provider that is significant to the overall operation or financial condition of the Association 6 or outside theAssociations normal course of business unless, with respect to each such contract, the Association has: (a) provided the Regional Director witha minimum of thirty (30) days prior written notice of such arrangement or contract and a written determination that the arrangement or contractcomplies with the standards and guidelines set forth in OTS Thrift Bulletin 82a; and (b) received written notice of non-objection from theRegional 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 andthrough 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 calendardays, 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 Agreementshall be in writing and sent by first class6A 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 Associations total capital, where there is a foreign service provider, or where it involves information technology that is critical to the Associations daily operations without regard to the contract amount.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 8 of 11 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) 535-1300No Violations Authorized.27. Nothing in this Agreement shall be construed as allowing the Association, its Board, officers or employees to violate any law, rule, orregulation.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 atany 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 addressedherein, consistent with Paragraph 28 above, and does not otherwise release, discharge, compromise, settle, dismiss, resolve, or in any wayaffect any actions, charges against, or liability of the Association that arise pursuant to this action or otherwise, and that may be or have beenbrought by any governmental entity other than the OTS.Home Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 9 of 11 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 theRegional Director in his or her sole discretion determines otherwise.32. All references to the OTS in this Agreement shall also mean any of the OTSs 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 soleagreement 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 Associationto the issuance and execution of the Agreement. This Agreement may be executed in counterparts by the directors after approval of executionof the Agreement at a duly called board meeting. A copy of the Board ResolutionHome Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 10 of 11 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 BANKOFFICE OF THRIFT SUPERVISIONRochester, Minnesota/s/ Timothy R. Geisler By:Timothy R. Geisler, Chairman Daniel T. McKee Regional Director, Central Region/s/ Allan R. DeBoerAllan R. DeBoer, Director/s/ Michael J. FogartyMichael J. Fogarty, Director/s/ Karen L. HimleKaren L. Himle, Director/s/ Susan K. KollingSusan K. Kolling, Director/s/ Bradley C. KrehbielBradley C. Krehbiel, Director/s/ Malcolm W. McDonaldMalcolm W. McDonald, Director/s/ Mahlon C. SchneiderMahlon C. Schneider, Director/s/ Hugh C. SmithHugh C. Smith, DirectorHome Federal Savings BankRochester, MinnesotaSupervisory AgreementPage 11 of 11