Fed hits worker-owned bank with enforcement action

Andrew Harrer/Bloomberg

The Federal Reserve has issued an enforcement action against a small, worker-owned bank in Minnesota. 

The Heritage Bancshares Group Inc. Employee Ownership Stock Plan and Trust, the holding company for Spicer, Minnesota-based Heritage Bank, entered into a written agreement with the Fed last week. 

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The $590 million bank promised to make improvements to its cash flow, capital management and overall compliance practices, according to a public enforcement letter published Thursday. Heritage must also get written approval from its supervisors before paying dividends, repurchasing stock or otherwise making capital distributions. 

Heritage has been under scrutiny from bank regulators for months. In April, the Office of the Comptroller of the Currency — the bank's primary regulator — issued a cease-and-desist order against the bank, citing unsafe and unsound practices related to "capital adequacy, capital and strategic planning, credit review, ongoing monitoring of the credit portfolio, liquidity and liquidity management practices, and the allowance methodology."

In their public enforcement letters, the Fed and the OCC did not disclose specific violations or shortcomings at the banks, which is standard practice for such announcements.

Heritage offers a "jumbo deposit" product targeting customers that maintain balances of $100,000. This includes a 4.25% annual percentage yield on balances of $2 million or more. It also promotes Federal Deposit Insurance on holdings of up to $7 million, going beyond the government's $250,000 guarantee with supplemental coverage through the IntraFi Cash Service. 

The bank also offers traditional checking and savings accounts, mortgages, business loans and agriculture loans. 

Shortly after the OCC issued its consent order against Heritage on April 2, the bank announced the sale of one of its branch locations to Sioux Falls, South Dakota-based Levo Credit Union. That deal was announced on April 18. 

The branch, located in Sioux City, Iowa, was Heritage's last remaining location in the Hawkeye State. At one point, the bank had 10 branches in northwest Iowa. It now has just four branches in rural central Minnesota and one location in Sioux Falls. 

Founded as a family run corporation in the 1960s, Heritage launched an employee stock ownership plan in November 2014, giving its 150 employees an initial ownership stake of 6% that was set to grow over time through the bank's qualified retirement plan. 

Bank of Eufaula

The Fed also announced an enforcement action against Eufaula, Oklahoma-based SNB Bancshares Inc., the holding company of Bank of Eufaula. 

Supervisors from the Federal Reserve Bank of Kansas City identified several deficiencies with Bank of Eufaula, according to the public consent agreement. The $105 million-asset bank has agreed to make various changes to its corporate governance, internal controls and conflict of interest policies, among other reforms. 

The bank has also agreed to clean up its books by charging off all assets categorized as a loss and revise its allowances for credit losses. It also needs a new capital plan, improved funds and liquidity management and will have to retain earnings to build up capital.