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   [10,005] In the Matter of Bank of Elbow Lake, Elbow Lake, Minnesota, Docket No. FDIC-89-93b (9-15-89).

   Bank to cease and desist from practices such as operating with an excessive volume of adversely classified assets; engaging in hazardous lending and lax collection practices; operating with inadequate equity capital and allowance for loan and lease losses, with management whose policies and practices are detrimental to the Bank, with deficient or inadequate loan documentation; engaging in practices which produce inadequate operating income and excessive loan losses; failing to provide adequate supervision and direction over the affairs of the Bank; and failing to submit required Reports. (This order was modified by order of the FDIC, dated 8-28-90; see [¶15,156]. It was terminated by order of the FDIC dated 1-26-95; see ¶15,958.)
   [.1] Management—Qualifications—Compliance
   [.2] Management—Requirements—Written Plan—Officer and Staff Needs— Review
   [.3] Board of Directors—Election—Independent Directors
   [.4] Definition—"Independent with Respect to the Bank"
   [.5] Substandard Assets—Collection and Charge-off
   [.6] Equity Capital—Increase—Methods
   [.7] Equity Capital Ratio—Increase—Calculation—Written Plan
   [.8] Loan Loss Reserve—Reporting—Review and Adequacy
   [.9] Loans—Risk Position—Reduce—Written Plan
   [.10] Loans—Extension of Credit—Curtail—Exception
   [.11] Loans—Interest Accrual—Delinquent Loans
   [.12] Loan Policies—Review
   [.13] Profit Plan—Operating Performance—Budget—Review
   [.14] Funds Management Policy—Liquidity—Interest Rate Risk
   [.15] Shareholders—Dividends—Approval
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Technical Exceptions—Correct—Nonbank Concentrations of Credit— Reduce
   [.18] Violations of Law—Eliminate and/or Correct
   [.19] Compliance—Progress Reports—Frequency

In the Matter of

BANK OF ELBOW LAKE
ELBOW LAKE, MINNESOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Federal Deposit Insurance Corporation ("FDIC") on May 16, 1989, issued to Bank of Elbow Lake, Elbow Lake, Minnesota ("Bank") a NOTICE OF CHARGES AND OF HEARING ("NOTICE") under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices and having violated certain laws and regulations.
   The Bank and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT OF THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT"), dated Sep- {{3-31-95 p.C-22}}tember 7, 1989, whereby solely for the purpose of this proceeding and without admitting or denying any of the allegations in the NOTICE, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, cease and desist from the following unsafe and unsound banking practices and violations of law and regulations:
   A. operating with an excessive volume of adversely classified assets;
   B. engaging in hazardous lending and lax collection practices, including maintaining an excessive volume of adversely classified loans;
   C. operating with inadequate equity capital and allowance for loan and lease losses for the kind and quality of assets held;
   D. engaging in violations of applicable laws and regulations;
   E. operating with management whose policies and practices are detrimental to the Bank;
   F. operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, title searches or legal opinions, and cash flow and/or operating information;
   G. engaging in practices which produce inadequate operating income and excessive loan losses;
   H. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations; and
   I. failing to submit Reports of Condition and Income in accordance with prevailing instructions.
   IT IS FURTHER ORDERED, that the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank, take affirmative action as follows:

   [.1] 1. (a) (i) No more than 90 days from the effective date of this ORDER, or within the corrective period prescribed by an Order of Correction issued after November 21, 1988, by the FDIC pursuant to Section 8(a) of the Act, 12 U.S.C. § 1818(a), ("Order of Correction"), whichever is earlier, the Bank shall have and thereafter retain qualified management. Such management shall include a qualified lending staff which shall have an appropriate level of lending, collection, and loan supervision experience, and shall be comprised of an appropriate number of personnel, for the volume, type and quality of the Bank's loans. The Bank shall promptly notify the Regional Director of the FDIC's Kansas City Regional Office ("Regional Director") in writing of changes of the Bank's management. The notification shall include the name and background of any new or replacement management personnel and shall be submitted prior to the date the individual assumes the management position.

       (ii) The assessment of whether the Bank has "qualified management" shall be based upon management's conduct, both individual and joint, with respect to the Bank in: (A) complying with the requirements of this ORDER; (B) complying with applicable laws and regulations; and (C) not engaging in any unsafe or unsound banking practice which has an adverse effect of the Bank's asset quality, capital adequacy, earnings, or liquidity.

   [.2] 2. (b) The board of directors shall in no more than 30 days from the effective date of this ORDER develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:
       (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
       (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
    {{4-1-90 p.C-23}}
       (iii) evaluation of each Bank officer, and in particular the president, and staff member to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
       (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
   (c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner of Commerce for the State of Minnesota ("Commissioner") for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, and after consideration of such comment, the board of directors shall approve the written management plan and/or any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall implement and follow the written management plan and/or any subsequent modification.

   [.3] (d) (i) Within 90 days from the effective date of this ORDER, the board of directors shall prepare a list of potential candidates for the board of directors for consideration by the shareholders of the Bank. The list of candidates shall include individuals who are independent with respect to the Bank, in such number that, if elected, would cause a majority of the board of directors to be independent with respect to the Bank. The actions taken in identifying potential candidates, including any communication with such individuals, shall be documented and made part of the minutes of the board of directors. Copies of these board minutes shall be provided to the Regional Director within 120 days from the effective date of this ORDER.

       (ii) At the next meeting of the shareholders of the Bank, and at each succeeding meeting of the shareholders at which Bank directors are to be elected, the members of the board of directors who are also shareholders shall nominate and support the election of candidates to the board of directors who are independent with respect to the Bank and who have agreed to stand for election to the board of directors, in such number as are necessary to cause a majority of the board of directors to be and to remain independent with respect to the Bank.

   [.4] (iii) For purposes of this ORDER, an individual who is "independent with respect to the Bank" shall be any individual (1) who is not an officer of the Bank or any of its affiliated organizations and who does not own more than ten (10) percent of the outstanding shares of the Bank or any of its affiliated organizations, (2) who is not related by blood, marriage or common financial interest to an officer of the Bank or any of its affiliated organizations or to any stockholder owning more than ten (10) percent of the outstanding shares of the Bank or any of its affiliated organizations, and (3) who is not indebted to the Bank, directly or indirectly (including the indebtedness of any entity in which the individual has a substantial financial interest), in an amount exceeding ten (10) percent of the Bank's total equity capital and allowance for loan and lease losses.
   (e) Effective the date of this ORDER, the Bank's board of directors shall meet at least monthly. The board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. Nothing in the foregoing sentence shall preclude the board from considering matters other than those contained in the agenda. Detailed written minutes of all board meetings shall be maintained and recorded on a timely basis.

   [.5] 2. No more than 10 days from the effective date of this ORDER, the Bank: (1) shall eliminate from its books, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of November 21, 1988; and (2) shall either (A) eliminate from its books by charge-off, collection, or other proper entries, or (B) if the asset is an extension of {{4-1-90 p.C-24}}credit or lease, increase its allowance for loan and lease losses by an amount equal to, 50 percent of those assets or portions of assets classified "Doubtful" as of November 21, 1988, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.

   [.6] 3. (a) No more than 120 days from the effective date of this ORDER, or within the corrective period prescribed by the Order of Correction, whichever is earlier, the Bank shall increase its equity capital by not less than $900,000. Such increase in capital may be accomplished by:

       (i) the sale of new offerings of common stock or perpetual preferred stock;
       (ii) the sale of outstanding shares by the Bank's shareholders to any investor who has the financial capability to make the additions to the Bank's equity capital required by paragraph 3(a);
       (iii) the direct contribution of cash by the shareholders and/or directors of the Bank;
       (iv) the collection of all or part of assets classified: (A) "Loss" as of November 21, 1988, without loss or liability to the Bank, or (B) "Doubtful" as of November 21, 1988, without loss or liability to the Bank, provided any collection on such assets shall first be applied to that portion of the asset which was not charged off pursuant to paragraph 2 of this ORDER. Reductions to loans and leases classified "Loss" and "Doubtful" shall first be credited to the Bank's allowance for loan and lease losses (hereafter "allowance") and, if the board of directors' review of the adequacy of the allowance required by paragraph 4 of this ORDER indicates that such allowance has a balance in excess of that required for adequacy, any such excess may be transferred to equity capital through a negative provision for loan and lease losses;
       (v) the collection in cash of assets previously charged off;
       (vi) any combination of the above means; or
       (vii) any other means acceptable to the Regional Director.
   (b) If all or part of the increase in total equity capital required by the Bank under paragraph 3(a) of this ORDER involves an offering, other than an offering deemed not to be a public securities offering pursuant to 17 C.F.R. § 230.506 or as hereafter amended, of the Bank's (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and of this ORDER as well as the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the sale of the securities, and, in any event not less than 20 days prior to the dissemination of such materials, the materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (c) In complying with the provisions of paragraph 3(b) of this ORDER, the Bank shall provide to any subscriber and/or purchaser of Bank stock, written notice of any planned or existing development or other change which is materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph 3(c) shall be furnished within ten (10) calendar days from the date such material development or change was planned or occurred, whichever is earlier, to every purchaser and/or subscriber of Bank stock who received or was tendered the information contained in the Bank's original offering materials.

   [.7] (d) (i) No more than 120 days from the effective date of this ORDER, or within the corrective period prescribed by the Order of Correction, whichever is earlier, the Bank shall have equity capital, exclusive of the allowance for loan and lease losses, at or in excess of 6 percent of the Bank's average total assets ("equity capital ratio") and shall continue to maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.

       (ii) For the purposes of calculating the equity capital ratio required by paragraph 3(d)(i) of this ORDER: (A) The Bank's average total assets shall be the {{4-1-90 p.C-25}}average of the sum of the Bank's daily total assets for the month ending June 30 or December 31, whichever nearest precedes the date of calculation; and (B) The terms "equity capital", "allowance for loan and lease losses" and "total assets" shall have the same meaning as those terms have in the prevailing Instructions for Preparation of Reports of Condition. Subsequent to the effective date of this ORDER, the equity capital ratio shall be computed as of June 30 and December 31, as appropriate.
   (e) If during the period this ORDER is in effect, the equity capital ratio, exclusive of the allowance for loan and lease losses, declines below 6 percent, the Bank, within 30 days after the date on which the said ratio so declined, shall develop and implement a written plan to increase such ratio up to or in excess of 6 percent. No more than 60 days after the implementation of the written plan, the Bank's equity capital ratio, exclusive of the allowance for loan and lease losses, shall equal or exceed 6 percent and the Bank shall thereafter continue to maintain its equity capital ratio at or in excess of such level as calculated herein while this ORDER is in effect.
   (f) The Bank's board of directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of paragraphs 3(a) through 3(e) of this ORDER, including, at a minimum, any action to increase its equity capital by each of the methods specified in paragraphs 3(a)(i) through 3(a)(vii) of this ORDER.
   (g) Any increase in capital made after November 21, 1988, pursuant to the Order of Correction shall be applied toward the amount required by paragraph 3(a) of this ORDER, unless the Order of Correction provides otherwise.

   [.8] 4. (a) The Bank shall maintain an allowance for loan and lease losses in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions").
   (b) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including November 21, 1988, and the effective date of this ORDER, shall, at a minimum, reflect an allowance for loan and lease losses that should have been maintained in accordance with the Instructions. If necessary to comply with this paragraph 4(b), the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (c) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the board of directors of the Bank shall: (1) review the adequacy of the Bank's allowance for loan and lease losses, (2) provide for an adequate allowance, and (3) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.

   [.9] 5. (a) Within 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $50,000 or more which was classified "Substandard" or "Doubtful" as of November 21, 1988. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank shall reduce the aggregate dollar volume of "Substandard" or "Doubtful" classifications within 6 and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph 5, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
   (b) The written plan of action described by paragraph 5(a) and any subsequent mod- {{8-31-94 p.C-26}}ification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written plan of action, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall follow the written plan of action and/or any subsequent modification.

   [.10] 6. Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss", "Doubtful", or "Substandard", and is uncollected, unless a majority of the Bank's board of directors first (1) determines that such advance is in the best interest of the Bank, (2) determines that the Bank has satisfied the requirements set out in paragraph 5 of this ORDER as to such borrower, and (3) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph 6 shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph 6 do not prohibit the Bank from renewing any credit already extended to the borrower.

   [.11] 7. Effective the date of this Order, the Bank shall not accrue interest on any loan that is, or becomes, ninety (90) days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection; "well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions for the Reports of Condition and Income. The Bank shall reverse on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

   [.12] 8. No more than 30 days from the effective date of this ORDER, the Bank shall review the Bank's written loan policies and shall record the results of such review in the board of directors' minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written loan policies.

   [.13] 9. (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

       (i) identification of the major areas in, and means by, which the board of directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
   (b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director, the board of directors shall approve the written profit plan and any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification thereto.

   [.14] 10. (a) No more than 30 days from the effective date of this ORDER, the Bank shall revise its written funds management policy which shall include, at a minimum:

       (i) the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
       (ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
       (iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position; and
       (iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.
   (b) The written funds management policy and any subsequent modification thereto shall be submitted to the Regional Director {{8-31-94 p.C-27}}and the Commissioner for review and comment. No more than 30 days from the receipt of any comment from the Regional Director, the board of directors shall approve the written funds management policy and any subsequent modification thereto which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank, its directors, officers and employees shall follow the written funds management policy and/or any subsequent modification thereto.

   [.15] 11. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director.

   [.16] 12. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (1) in conjunction with the Bank's next shareholder communication, and also (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.

   [.17] 13. (a) No more than 60 days from the effective date of this ORDER, the Bank shall correct the technical exceptions on loans noted on pages 2-d through 2-d-2 of the FDIC's Report of Examination of the Bank as of November 21, 1988.
   (b) No more than 60 days from the effective date of this ORDER, the Bank shall formulate and implement a plan to reduce all nonbank concentrations of credit as noted on page 2-b of the FDIC's Report of Examination of the Bank as of November 21, 1988, to less than 25 percent of total equity capital and allowance for loan and lease losses.

   [.18] 14. No more than 30 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations committed by the Bank as described on pages 6-1 through 6-1-a of the FDIC's Report of Examination of the Bank as of November 21, 1988.

   [.19] 15. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every 90 days, beginning 90 days from the effective date of the ORDER. In addition, the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   16. This ORDER shall become effective ten (10) days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Bank.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Pursuant to delegated authority.
   Date of issuance: 9-15-89

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