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FDIC Enforcement Decisions and Orders

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{{10-31-92 p.C-683}}
   [10,150] In the Matter of Northwest Bank, Roanoke, Texas, Docket No. FDIC-90-102b (12-10-90).

   Bank to cease and desist from operating with an inadequate level of capital protection; operating with an excessive level of adversely classified assets; engaging in hazardous lending practices; failing to provide adequate loan loss reserve; operating without adequate written loan policies and procedures; extending credit without adequate security and documentation; failing to reflect the condition of the Bank in Reports of condition and Income; and operating in violation of federal and state laws and regulations. (This order was terminated by order of the FDIC dated 8-28-92; see ¶15,509.)

   [.1] Capital—Primary Capital—Increase Required—Methods
   [.2] Dividends — Restricted
   [.3] Assets — Adversely Classified — Reduce/Eliminate — Plan — Review
   [.4] Loan Loss Reserve — Establish/Maintain
   [.5] Loans — Extensions of Credit — Existing Borrowers — Curtail
   [.6] Management—Qualifications—Review
   [.7] Board of Directors—Committee to Review Compliance—Establish
   [.8] Loan Policy—Minimum Requirements
   [.9] Board of Directors—Committee to Review Loan Portfolio
   [.10] Violations of Law—Eliminate/Correct
   [.11] Shareholders—Disclosure—Cease and Desist Order
   [.12] Compliance—Progress Reports—Frequency

In the Matter of

NORTHWEST BANK
ROANOKE, TEXAS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   The Federal Deposit Insurance Corporation ("FDIC"), on June 11, 1990, issued to Northwest Bank, Roanoke, Texas ("Bank"), a NOTICE OF CHARGES AND OF HEARING ("NOTICE") under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b). The NOTICE charged the Bank with having engaged in unsafe or unsound banking practices. The Bank, through its board of directors, and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") dated December 10, 1990, whereby solely for the purpose of this proceeding and without admitting or denying 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 ORDERED, that the Bank cease and desist from the following unsafe or unsound banking practices and violations of laws and/or regulations:
{{10-31-92 p.C-684}}

       (a) Operating with an inadequate level of capital protection;
       (b) Operating the Bank with an excessive level of adversely classified assets;
       (c) Engaging in hazardous lending practices;
       (d) Failing to provide an adequate reserve for loan losses;
       (e) Operating the Bank without adequate written loan policies and procedures;
       (f) Extending credit which is inadequately secured and without adequate and appropriate supporting documentation;
       (g) Failing to accurately reflect the condition of the Bank in published statements and Consolidated Reports of Condition and Reports of Income:
       (h) Operating the Bank in violation of applicable Federal and State laws and regulations as more fully set forth on page 6-b of the Report of Examination of the Bank as of February 16, 1990.
   IT IS FURTHER ORDERED, that the Bank and institution-affiliated parties of the Bank take affirmative action as follows:

   [.1] 1. (a) Within 90 days after the effective date of this ORDER, the Bank shall increase its primary capital by no less than $650,000; and for so long thereafter as this ORDER is outstanding, the Bank shall maintain adjusted primary capital equal to or greater than 7.5 percent of the Bank's adjusted total assets. Such increase in primary capital and any increase in primary capital necessary to meet the ratio required by this ORDER may be accomplished by:

       (i) The sale of securities in the form of common stock; or
       (ii) The collection in cash of assets classified Loss or Doubtful as of February 16, 1990, and charged off in accordance with the provisions of this ORDER without loss or liability to the Bank; or
       (iii) The collection in cash of assets charged off prior to February 16, 1990; or
       (iv) The direct contribution of cash subsequent to February 16, 1990 by the directors and/or shareholders of the Bank; or
       (v) Any other method approved by the Regional Director of the FDIC's Dallas Regional Office ("Regional Director") and the Banking Commissioner for the State of Texas ("Commissioner").
   (b) If the ratio of adjusted primary capital to adjusted total assets is less than 7.5 percent as determined at an examination or visitation by the FDIC or the State banking department ("State"), the Bank shall, within 30 days after receipt of a written notice of the capital deficiency from the Regional Director or the Commissioner, present to the Regional Director and the Commissioner a plan to increase the primary capital of the Bank or to take other measures to bring the ratio to 7.5 percent. After the Regional Director and Commissioner respond to the plan, the board of directors of the Bank shall adopt the plan, including any modifications or amendments requested by the Regional Director and Commissioner. Thereafter, the Bank shall immediately initiate measures detailed in the plan, to the extent such measures have not previously been initiated, to increase its primary capital by an amount sufficient to bring the ratio to 7.5 percent within 90 days after the Regional Director and the Commissioner respond to the plan.
   (c) If all or part of the increase in primary capital required by this ORDER is to be to be accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including soliciting proxies and the voting of any shares or proxies owned or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with Federal securities laws. Prior to the implementation of the plan, and in any event, not less than 20 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 Section, Washington, D.C. 20429, for review. Any changes requested to be made
{{2-28-91 p.C-685}}in the plan or the materials by the FDIC shall be made prior to their dissemination. If the increase in primary capital is provided by the sale of perpetual preferred stock and/or mandatory convertible debentures, then all terms and conditions of the issue including, but not limited to, those terms and conditions relative to interest rate and any convertibility factor shall be presented to the Regional Director for prior approval.
   (d) In complying with the provisions of this ORDER and until such time as any such public offering is terminated, the Bank shall provide to any subscriber and/or purchaser of the Bank's securities 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 the Bank's securities. The written notice required by this paragraph shall be furnished within 10 days after the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber who received or was tendered the information contained in the Bank'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's Rules and Regulations, respectively subsections 325.2(h) and (k), 12 C.F.R. §325.2(h) and (k). "Adjusted primary capital" and "adjusted total assets" shall be calculated according to the methodology set forth in the Analysis of Capital section in a report of examination or visitation of the FDIC or the State.

   [.2] 2. While this ORDER is in effect, the Bank shall not declare or pay either directly or indirectly any cash dividend to shareholders without the prior written consent of the Regional Director and the Commissioner.

   [.3] 3. (a) Upon the effective date of this ORDER, the Bank shall, to the extent that it has not previously done so, eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss and one-half of the assets classified Doubtful by the FDIC as a result of its examination of the Bank as of February 16, 1990. Reduction of these assets through proceeds of laons made by the Bank is not considered "collection" for the purpose of this paragraph.

   (b) Within 30 days after the effective date of this ORDER, the Bank shall submit a written plan to the Regional Director and the Commissioner to reduce the remaining assets classified Doubtful and Substandard as of February 16, 1990. The plan shall address each asset so classified with a balance of $50,000 or greater and provide the following:

       (i) The name under which the asset is carried on the books of the Bank;
       (ii) Type of asset;
       (iii) Actions to be taken in order to reduce the classified asset;
       (iv) Timeframes for accomplishing the proposed actions.
   The plan shall be formulated so that, within 360 days after the effective date of this ORDER, the Bank shall achieve a reduction in the volume of the adversely classified assets reflected in the February 16, 1990 Report of Examination, to a level not to exceed 125 percent of total equity capital and reserves determined at the end of the 360 day period. The plan may include a provision for increasing capital where necessary to achieve the prescribed ratio.
   (c) The Bank shall present the plan to the Regional Director and the Commissioner for review. Within 30 days after their response, the plan, including any modifications or amendments requested by the Regional Director and the Commissioner, shall be adopted by the board of directors of the Bank. The Bank shall thereafter immediately initiate measures detailed in the plan to the extent such measures have not previously been initiated.
   (d) For purposes of the plan, the reduction of the level of adversely classified assets as of February 16, 1990, to a specified percentage of total equity capital and reserves may be accomplished by:
       (i) charge-off;
       (ii) collection;
       (iii) sufficient improvement in the quality of adversely classified assets so as to warrant removing any adverse {{2-28-91 p.C-686}}classification, as determined by the FDIC; or
       (iv) increase of total equity capital and reserves.
   (e) While this ORDER is in effect, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified Loss as determined at any examination or visitation conducted by the FDIC or the State at such time as the report of examination or visitation is received by the Bank.

   [.4] 4. (a) Within 10 days after the effective date of this ORDER, the Bank shall establish and thereafter maintain an adequate reserve for loan losses. Such reserve shall be established by charges to current operating income. Prior to the end of each calendar quarter, the board of directors of the Bank shall review the adequacy of the Bank's reserve for loan losses. Such reviews shall include, at a minimum, the Bank's loan loss experience, an estimate of potential loss exposure in the portfolio, trends of delinquent and nonaccrual loans and prevailing and prospective economic conditions. The minutes of the board meetings at which such reviews are undertaken shall include complete details of the reviews and the resulting recommended increases in the reserve for loan losses.
   (b) Within 30 days after the effective date of this ORDER, the Bank shall review Consolidated Reports of Condition and Reports of Income filed with the FDIC on or after December 31, 1989, and amend said reports if necessary to properly reflect the financial condition of the Bank as of the date of each such report. In particular, such reports shall contain an adequate provision for loan losses. Reports filed after the effective date of this ORDER shall also accurately reflect the financial condition of the Bank as of the reporting date.

   [.5] 5. (a) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who has an extension of credit with the Bank that has been classified Loss, in whole or in part, and is uncollected or to any borrower who is already obligated in any manner to the Bank on any extension of credit, including any portion thereof, that has been charged off the books of the Bank and remains uncollected. The requirements of this paragraph shall not prohibit the Bank from renewing credit already extended to a borrower after full collection, in cash, of interest due from the borrower.
   (b) While this ORDER is in effect, the Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified Doubtful and/or Substandard, in whole or in part, and is uncollected unless the Bank's board of directors has signed a detailed written statement giving reasons why failure to extend such credit would be detrimental to the best interests of the Bank. The statement shall be placed in the appropriate loan file and included in the minutes of the applicable board of directors' meeting.

   [.6] 6. Within 60 days after the effective date of this ORDER, the Board shall review the qualifications of its current management. The minutes of the Board of Directors at which such review is undertaken shall include complete details. Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management shall be assessed on its ability to: (i) comply with the requirements of the ORDER, (ii) operate the Bank in a safe and sound manner, (iii) comply with applicable laws and regulations, and (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. During the life of the ORDER, the Bank shall notify the Regional Director and the Commissioner in writing of any changes in management. The notification must include the names and background of any replacement personnel and must be provided prior to the individual assuming the new position.

   [.7] 7. Within 60 days after the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Bank complies with the provisions of this ORDER. At least 50 percent of the members of such committee shall be directors not employed in any capacity by the Bank other than as a director. The committee shall report monthly to the full board of directors and a copy of the report and any discussion relating to the report or the ORDER shall be noted in the records of the {{3-31-92 p.C-687}}board of directors. Establishment of this committee does not diminish the responsibility or liability of the entire board of directors to ensure compliance with the provisions of this ORDER.
   [.8] 8. Within 60 days after the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the Bank's lending function. Such policies and their implementation shall be in a form and manner acceptable to the Regional Director as determined at subsequent examinations or visitations and shall include, at a minimum, the following:

       (a) Standards for extending credit to Bank directors, officers, shareholders and their related interests which take into account applicable Federal and State laws governing such extensions of credit;
       (b) A provision that deviations from the written lending policies and procedures require prior approval of the board of directors of the Bank; and
       (c) Guidelines for determining what repayment terms and rates of interest will be charged on all secured and unsecured loans.
   [.9] 9. Within 60 days after the effective date of this ORDER, the board of directors shall establish a loan review committee to periodically review the Bank's loan portfolio and identify and categorize problem credits. The committee shall file a report with the board of directors. Such report shall include the following information:
       (a) The overall quality of the loan portfolio;
       (b) The identification by type and amount of each problem or delinquent loan;
       (c) The identification of all loans not in conformance with the Bank's lending policy; and
       (d) The identification of all loans to officers, directors, principal shareholders or their related interests.
   At least 50 percent of the members of the loan review committee shall be directors not employed in any capacity by the Bank other than as a director.

   [.10] 10. After the effective date of this ORDER, the Bank, consistent with sound banking practices, shall eliminate and/or correct all violations of laws and/or regulations existing in the Bank as of February 16, 1990, as more fully set forth on page 6-b of the February 16, 1990 Report of Examination. In addition, the Bank shall ensure its future compliance with all applicable laws and regulations.

   [.11] 11. After the effective date of this ORDER, the Bank shall send to its shareholders or otherwise furnish 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.

   [.12] 12. Within 30 days after the end of the first calendar quarter following the effective date of this ORDER, and within 30 days after the end of each calendar quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing from making further reports.
   13. The effective date of this ORDER shall be 10 days after the date of its issuance. This ORDER shall be binding upon the Bank and institution-affiliated parties of the Bank.
   This ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at Dallas, Texas, this 10 day of December, 1990.
   Pursuant to delegated authority.

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