Regulators Tighten Grip on Rochester Bank

The parent company of Home Federal Savings Bank-which recently announced that it would defer a $325,000 payment owed on its Troubled Asset Relief Program loan-is now under scrutiny by its regulator.

Rochester-based Home Federal Savings Bank and its parent company, HMN Financial, Inc., are under tightened regulations by the Office of Thrift Supervision (OTS), according to documents filed Friday with the U.S. Securities and Exchange Commission (SEC).

The regulatory filings state that the bank has entered into a supervisory agreement with its primary federal regulator, and it must adhere to a long list of rules.

HMN Financial recently reported a net loss of $29 million for 2010, compared to a $10.8 million loss in 2009. Its non-performing assets totaled $84.5 million-up more than $7 million from the previous year.

The bank must submit a business plan to the OTS outlining how it intends to improve its earnings and achieve profitability-and indicating that the bank has the financial and personnel resources to accomplish the goals.

Home Federal Savings Bank, which has 11 branches in Minnesota and two in Iowa, must also reduce its problem assets and revise its procedure for identifying and controlling risk associated with its loans.

“We have a positive working relationship with our regulators and continue to take all necessary steps to comply fully with their recommendations and requirements,” HMN President Bradley Krehbiel said in a statement. “As part of our supervisory agreement, we will submit a capital plan to the OTS by May 31, 2011. Additionally, the bank will continue to serve its consumer and business customer base with the financial products and services they need, and our service will not be impacted in any way.”

Many Minnesota banks have come under scrutiny by federal regulators during the recession, but Home Federal Savings Bank seems to be on a particularly short leash. Under its agreement with the OTS, the bank can't increase its total assets during any quarter in excess of the net interest credited on deposit liabilities during the prior quarter.

The bank also faces restrictions regarding the payment of dividends and changes in executives. And the OTS told the financial institution that it intends to impose a minimum capital requirement-meaning that it will need to maintain a certain ratio of its capital to its total assets. The OTS didn't yet determine the level, although regulators typically require a 10 percent Tier 1 capital ratio to categorize a bank as “well-capitalized.” Home Federal Savings Bank, however, said that it believes it is currently well-capitalized.

The bank's SEC filing came on the same day that it was previously scheduled to make a quarterly dividend payment to the U.S. Treasury under the Troubled Asset Relief Program, or TARP, the federal stimulus program. Home Federal announced in late January that it would defer the $325,000 payment “in order to preserve cash at the holding company for potential future needs.”

In addition to its other financial troubles, court documents indicate that Home Federal Savings Bank was a victim of Tom Petters' Ponzi scheme. Last month, a federal judge signed an order that will allow some victims of the fraud to get back a portion of the money they lost. Court documents state that one individual creditor and three banks-including Home Federal Savings Bank-will receive about $11.5 million. In April 2010, federal prosecutors filed court documents indicating that Home Federal Savings Bank lost about $15.7 million related to loans to Petters investors.

HMN Financial's stock price dropped about 6 percent to close at $2.41 on Tuesday following its announcement that it is under scrutiny from the OTS.