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FDIC Enforcement Decisions and Orders

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{{5-31-93 p.C-239}}
   [10,047] In the Matter of Bank of Wallowa County, Joseph, Oregon, Docket No. FDIC-90-16b (2-14-90).

   Bank to cease and desist from practices such as hazardous lending and lax collection practices; operating with inadequate equity capital and reserves in relation to the volume and quality of assets, with a large volume of poor quality loans, with an inadequate loan valuation reserve, with inadequate provisions for liquidity and funds management, with inadequate routine and controls policies and operating in such a manner as to produce low earnings; and violating applicable federal laws. (This order was terminated by order of the FDIC dated 3-26-93; see ¶ 15,642.)

   [.1] Management—Qualifications—Compliance
   [.2] Primary Capital—Increase—Methods
   [.3] Assets—Adversely Classified—Reduce
   [.4] Loans—Extensions of Credit—Curtail
   [.5] Loan Loss Reserve—Adequacy—Review
   [.6] Strategic Plan—Minimum Requirements—Review
{{5-31-93 p.C-240}}
   [.7] Violations of Law—Eliminate and/or Correct—Compliance
   [.8] Asset/Liability Management—Minimum Requirements—Review
   [.9] Shareholders—Dividends—Approval
   [.10] Management Bonuses—Curtail—Exception
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Compliance—Progress Reports—Frequency

In the Matter of

BANK OF WALLOWA COUNTY
JOSEPH, OREGON
(Insured State Nonmember Depository Institution)
ORDER TO CEASE AND DESIST

   Bank of Wallowa County, Joseph, Oregon ("Insured Institution"), having been advised of its right to a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations alleged to have been committed by the Insured Institution and of its right to a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated January 17, 1990, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Insured Institution 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 Insured Institution had engaged in unsafe or unsound banking practices and had committed violations of law 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 Insured Institution, its directors, officers, employees, agents successors, assigns, and other persons participating in the conduct of affairs of the Insured Institution, cease and desist from the following unsafe or unsound banking practices and violations:
   (a) following hazardous lending and lax collection practices;
   (b) operating with inadequate equity capital and reserves in relation to the volume and quality of assets held by the Insured Institution;
   (c) operating with a large volume of poor quality loans;
   (d) operating with an inadequate loan valuation reserve;
   (e) operating with inadequate provisions for liquidity and funds management;
   (f) operating with inadequate routine and controls policies;
   (g) operating in such a manner as to produce low earnings or operating losses;
   (h) operating in violation of section 22(h) of the Federal Reserve Act, as amended, 12 U.S.C. § 375b, as more fully described on page 6-a of the Report of Examination as of August 25, 1989; and Parts 325, 326 and 349 of the FDIC's Rules and Regulations, 12 C.F.R. 325, 326, and 349, as more fully described on page 6-a-1 of the Report of Examination as of August 25, 1989; and
   (i) operating in violation of sections 708.305 and 708.340 of the Oregon Revised Statutes.
   IT IS FURTHER ORDERED that the Insured Institution take affirmative action as follows:

   [.1] 1. The Insured Institution shall have and retain qualified management.
   (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Insured Institution. Management should include a chief executive officer with proven ability in managing an insured institution of comparable size and experience in upgrading a low quality loan portfolio; and also a lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Insured Institution's loans. Each member of management shall be provided appropriate written au- {{4-1-90 p.C-241}}thority from the Insured Institution's board of directors to implement the provisions of this ORDER.
   (b) The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;
       (ii) operate the Insured Institution in a safe and sound manner;
       (iii) comply with applicable laws and regulations; and
       (iv) restore all aspects of the Insured Institution to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.
   (c) During the life of this ORDER, the Insured Institution shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Deputy Administrator, Division of Finance and Corporate Securities, State of Oregon ("Deputy Administrator") in writing when it proposes to add any individual to the institution's board of directors or employ any individual as a senior executive officer. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.
   (d) The Insured Institution may not add any individual to its board of director or employ any individual as a senior executive officer if the Regional Director issues a notice of disapproval pursuant to 914 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73 §914, 103 Stat. 183 (1989).

   [.2] 2. (a) No later than June 30, 1990, the Insured Institution shall increase primary capital by no less than the amount necessary so that the Insured Institution shall have adjusted primary capital as to equal or exceed five and three-quarters (5.75) percent of the Insured Institution's adjusted Part 325 total assets. No later than December 31, 1990, the Insured Institution shall increase primary capital by no less than the amount necessary so that the Insured Institution shall have adjusted primary capital as to equal or exceed six and one-quarter (6.25) percent of the Insured Institution's adjusted Part 325 total assets. No later than June 30, 1991, the Insured Institution shall increase primary capital by no less than the amount necessary so that the Insured Institution shall have adjusted primary capital as to equal or exceed seven (7.0) percent of the Insured Institution's adjusted Part 325 total assets. No later than December 31, 1991, the Insured Institution shall increase primary capital by no less than the amount necessary so that the Insured Institution shall have adjusted primary capital as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Insured Institution shall maintain adjusted primary capital in such an amount as to equal or exceed seven and one-half (7.5) percent of the Insured Institution's adjusted Part 325 total assets. Primary capital and Part 325 total assets shall be calculated in accordance with prevailing instructions for the preparation of Reports of Condition. The computation of adjusted primary capital and the ratio of adjusted primary capital to adjusted Part 325 total assets shall be determined by using the procedures outlined in the "Analysis of Capital and Reserves" schedule in the FDIC Report of Examination.
   (b) Any increase in primary capital necessary to meet the requirements of Paragraph 2 of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or
       (ii) the sale of perpetual preferred stock; or
       (iii) the direct contribution of cash by the board of directors and/or shareholders of the Insured Institution; or
       (iv) the reduction of the "Loss" assets specified in Paragraph 3 of this ORDER without loss or liability to the Insured Institution; or
       (v) any other means acceptable to the Regional Director and the Deputy Administrator; or
       (vi) any combination of the above means.
   (c) If all or part of the increase in primary capital required by Paragraph 2 of this ORDER is accomplished by the sale of new securities, the board of directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such addi- {{4-1-90 p.C-242}}tional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Insured Institution's securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Insured Institution and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than fifteen (15) days prior to the dissemination of such materials, the plan and any 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 plan or materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of preferred stock, then all terms and conditions of the issue, including but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Deputy Administrator for prior approval.
   (d) In complying with the provisions of Paragraph 2 of this ORDER, the Insured Institution shall provide to any subscriber and/or purchaser of the Insured Institution's securities, a written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Insured Institution securities. The written notice required by this paragraph shall be furnished within ten (10) days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Insured Institution's securities who received or was tendered the information contained in the Insured Institution's original offering materials.
   (e) For the purposes of this ORDER, the terms "primary capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, respectively subsections 325.2(h) and 325.2(k) (12 C.F.R. §§325.2(h) and 325.2(k)).

   [.3] 3. (a) Within 10 days from the effective date of this ORDER, the Insured Institution shall eliminate from its books, by charge-off or collection, all assets classified "Loss" as of August 25, 1989, that have not been previously collected or charged off. Elimination of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph.
   (b) Within 180 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "Substandard" as of August 25, 1989 to not more than $400,000.
   (c) The requirements of subparagraphs 3(a) and 3(b) of this ORDER are not to be construed as standards for future operations and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. Reduction of these assets through proceeds of other loans made by the Insured Institution is not considered collection for the purpose of this paragraph. As used in subparagraphs 3(b) and 3(c) the word "reduce" means:

       (i) to collect;
       (ii) to charge-off; or
       (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.4] 4. Beginning with the effective date of this ORDER, the Insured Institution shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Insured Institution that has been charged off or classified, in whole or in part, "Loss" and is uncollected. The requirements of this paragraph shall not prohibit the Insured Institution from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   [.5] 5. Within 10 days from the effective date of this ORDER, the Insured Institution shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income, together with collection of assets previously charged off. In complying with the provisions of this paragraph, the board of directors shall review {{4-30-92 p.C-243}}the adequacy of the Insured Institution's reserve for loan losses prior to the end of each quarter. The minutes of the board of directors meeting at which such review is undertaken shall indicate the results of the review, the amount of any increase in the reserve, and the basis for determination of the amount of the reserve provided.

   [.6] 6. Within 90 days from the effective date of this ORDER, the Insured Institution shall formulate a written strategic plan ("strategic plan"). This strategic plan shall be forwarded to the Regional Director and to the Deputy Administrator for review, and shall address, at a minimum, the following:

       (a) a business plan incorporating goals for the operations of the Insured Institution, including:
         (i) the line or lines of business the Insured Institution will pursue:
         (ii) an identification of the personnel, computer support and accounting controls necessary for each line of business;
         (iii) a budget review process to monitor the income and expenses of the Insured Institution to compare actual figures with budgetary projections; and
         (iv) short and long-term growth targets. The plan shall define the basis for the assumptions made about amounts or percentages of growth, shrinkage, or income projected. Loan losses, provisions for loan losses and nonearning assets are also to be considered in formulating income projections. Source of funds to support any projected growth must be explained.
       (b) strategies for implementing the business plan and improving and sustaining the earnings of the Insured Institution, including:
         (i) an identification of the major areas in, and means by which the board of directors will seek to improve the Insured Institution's operating performance:
         (ii) realistic and comprehensive budgets;
         (iii) a budget review process to monitor the income and expenses of the Insured Institution to compare actual figures with budgetary projections;
         (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and
         (v) an assessment of the level and source of capital necessary to provide for profitable operations of the Insured Institution.
       (c) coordination of the Insured Institution's loan, investment, and operating policies, and budget and profit planning, with the funds management policy: and
       (d) during the life of this ORDER, the board of directors shall annually review the strategic plan at a board meeting at which all directors are in attendance. Any changes in the Insured Institution's strategic plan shall be submitted to the Regional Director and the Deputy Administrator for review.

   [.7] 7. Within 60 days from the effective date of this ORDER, the Insured Institution shall eliminate and/or correct all violations of law (except those relating to 12 C.F.R. Part 325) which are more fully set out on pages 6-a and 6-a-1 of the Report of Examination of the Insured Institution as of August 25, 1989. Violations of 12 C.F.R. Part 325 shall be corrected as set forth in Paragraph 2 of this ORDER. In addition, the Insured Institution shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

[.8] 8. (a) Within 60 days from the effective date of this ORDER, the board of directors shall develop a comprehensive asset/liability management policy. The policy shall establish standards consistent with generally accepted prudent banking operations by giving specific consideration to:

       (i) establishing a range for the Insured Institution's volatile liability dependency ratio, as computed by the FDIC in its Reports of Examination:
       (ii) establishing a range for short-term investments to potentially volatile liabilities, as those terms are defined by the FDIC in its current edition of "A Users Guide for the Uniform Insured Institution Performance Report";
       (iii) establishing maturity ranges for the Insured Institution's investment portfolio;
       (iv) establishing acceptable ranges for the Insured Institution's rate sensitivity and gap ratios; and
       (v) the establishing of an asset/ {{4-30-92 p.C-244}}liability committee, including a description of its responsibilities, how often it will meet, how it will obtain information and guidance from the board of directors, and how its activities will be reported to the board of directors.

   [.9] 9. The Insured Institution shall not pay cash dividends in any amount except as follows:
       (a) such declarations and payments are made in accordance with applicable State and Federal laws and regulations:
       (b) that after payment of such dividends, the ratio of primary capital to total assets of the Insured Institution will be not less than seven and one-half (7.5) percent;
       (c) that such declaration and payment of dividends shall be approved in advance by the board of directors; and
       (d) that such declaration and payment of dividends shall be approved in advance, in writing, by the Regional Director and the Deputy Administrator, which approval shall not be unreasonable withheld.

   [.10] 10. The Insured Institution shall terminate its practice of paying bonuses to management, including the chief executive officer, based solely upon profits. The payment of bonuses shall be carefully justified and based on a broad range of factors, including asset quality, capital adequacy, liquidity, volume of earnings from operations rather than nonrecurring sources, and the Insured Institution's condition as assessed by the Insured Institution's regulators and reflected in the institution's most recent Report of Examination, and other appropriate factors.

   [.11] 11. Following the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER in conjunction with the Insured Institution's next shareholder communication and also in conjunction with its notice or proxy statement preceding the Insured Institution'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, at least fifteen (15) 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.

   [.12] 12. On the tenth day of the third month following the effective date of this ORDER, and on the tenth day of every third month thereafter, the Insured Institution shall furnish written progress reports to the Regional Director and the Deputy Administrator detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. The progress reports shall also describe the status of loans (i.e., the total amount outstanding and the delinquency) made by the Insured Institution to out-of-county borrowers. Progress Reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Insured Institution in writing from making further reports.
   The provisions of this ORDER shall be binding upon the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other persons participating in the conduct of the affairs of the Insured Institution.
   This ORDER shall become effective ten (10) days from the date of its issuance.
   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.
   Dated at San Francisco, California, this 14th day of February, 1990.

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