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FDIC Enforcement Decisions and Orders

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{{11-30-94 p.C-871}}
   [10,195] In the Matter of Bank St. Croix, Roberts, Wisconsin, Docket No. FDIC-91-65b (3-15-91).

   Bank to cease and desist from operating with inadequate capital; engaging in hazardous lending and lax collection practices; operating in violation of law and regulations; operating with inadequate allowance for loan and lease losses; operating with an inadequate liquidity level; failing to maintain adequate documentation of expenses; failing to monitor insider transactions; operating with management whose policies are detrimental to the bank; and failing to provide adequate supervision and direction over the affairs of the bank. (This order was terminated by order of the FDIC dated 9-1-94; see ¶15,913.)
   [.1] Bank Branches—Establishment—FDIC Consent Required
   [.2] Management—Qualifications—Review
   [.3] Officers/Directors—Limitations on Individual
   [.4] Growth Plan—Written Plan—Minimum Requirements—Review
   [.5] Loan Policy—Written Revisions—Minimum Requirements—Review
   [.6] Assets—Adversely Classified—Reduce/Eliminate
   [.7] Loans—Overdue—Collection Plan
   [.8] Loan Valuation Reserve—Increase/Maintain—Report
   [.9] Bank Operations—Expense Reimbursement—Policy Required
   [.10] Technical Exceptions—Correct
   [.11] Violations of Law—Eliminate/Correct
   [.12] Liquidity Ratio—Written Plan Required
   [.13] Capital—Primary Capital—Increase/Maintain
   [.14] Dividends—Restricted
   [.15] Compliance Program—Internal Monitoring
   [.16] Shareholders—Disclosure—Cease and Desist Order
   [.17] Compliance—Progress Reports—Frequency

In the Matter of

BANK ST. CROIX
ROBERTS, WISCONSIN
(Insured State Nonmember
Bank)
ORDER TO CEASE AND DESIST

   Bank St. Croix, Roberts, Wisconsin ("Bank"), having been advised of its rights to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices and violations of law and/or regulation alleged to have been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), 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 March 5, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law and/or regulation, 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 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 institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12 U.S.C. {{11-30-94 p.C-872}}§ 1813(u), and its successors and assigns, cease and desist from the following unsafe or unsound banking practices and/or violations of law and regulation:
   A. Operating with an inadequate level of capital protection for the kind and quality of assets held;
   B. Engaging in hazardous lending and lax collection practices, as evidenced by an excessive volume of adversely classified loans, loan delinquencies, loans lacking proper documentation and other poor credit administration practices;
   C. Violating sections 215.4(a)(1) and 215.4(d) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §§ 215.4(a)(1) and 215.4(d); violating section 23A(c)(1) of the Federal Reserve Act, 12 U.S.C. § 371c(c)(1); violating the State of Wisconsin legal lending limit restrictions as set forth in section 221.29(1)(a) of the Wisconsin Statutes, WIS. STAT. § 221.29(1)(a); violating section 18(d)(1) of the Act, 12 U.S.C. § 1828(d)(1); and violating section 304.4(a) of FDIC Rules and Regulations, 12 C.F.R. § 304.4(a);
   D. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   E. Operating with an excessive level of loans to deposits which has led to an inadequate liquidity level;
   F. Failing to maintain adequate documentation of business expenses;
   G. Failing to monitor in a prudent manner transactions involving its officers and directors;
   H. Operating with a management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and
   I. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and any successors and assigns thereof, take affirmative action as follows:

   [.1] 1. While this ORDER is in effect, the Bank shall not establish the operation of a branch, including the acceptance of deposits and the making of loans, in Hudson, Wisconsin, or at any other location, without obtaining prior written consent of the FDIC as required under section 18(d)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(d)(1), and approval of the State of Wisconsin as required under section 221.04(1)(jm) of the Wisconsin Statutes, Wis. Stat. 221.04(1)(jm).

   [.2] 2. (a) Within 90 days from the effective date of this ORDER, the bank shall have, and thereafter retain, qualified management. Each executive officer, as that term is defined in Section 303.14(a)(3) of the FDIC Rules and Regulations, 12 C.F.R. § 303.14(a)(3), shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Further, during the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's Chicago Regional Office ("Regional Director") and the Commissioner of Banking for the State of Wisconsin ("Commissioner") prior to any changes in any of the Bank's executive officers and shall submit to the Regional Director and Commissioner a written statement of the qualifications of any new executive officer.
   (b) The qualify of management shall be assessed on its ability to:

       (i) Comply with the requirements of this 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.
   (c) Within 60 days from the effective date of this ORDER, the Bank shall retain a new qualified chief lending officer with an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans. Such person shall report directly to the Bank's board of directors and shall be provided written authority to include, at a minimum, the responsibility for maintaining prudent lending policies and practices.
   (d) No provisions of this paragraph shall be construed to exempt the Bank from the requirements of section 32 of the Act ("section 32"), 12 U.S.C. § 1831 (i).

   [.3] 3. (a) Within 15 days from the effective date of this order the bank shall prohibit Steven J. Hirsch. President ("President Hirsch") from engaging or participating in the authorization, making, sale, {{5-31-91 p.C-873}}purchase, renewal or modification of any loan or other extension of credit, except in his capacity as a member of the board of directors.
   (b) President Hirsch shall also be prohibited from serving as a member of the Bank's loan committees.

   [.4] 4. (a) Within 60 days from the effective date of this ORDER, and every six months thereafter while this ORDER is in effect, the Bank shall prepare a written growth plan. The plan shall include, at a minimum, the level of projected growth in total assets for the following three-month period, the funding sources to support the projected growth, as well as the anticipated use of funds, and the anticipated capital to assets ratio at the end of the three month period. Such plan shall be submitted to the Regional Director and Commissioner for review and comment. "Total Assets" has the meaning ascribed to that term by the Federal Financial Institutions Examination Council's Instructions for the Consolidated Reports of Condition and Income.
   (b) The level of asset growth allowed for under paragraph 4(a) shall not exceed 20 percent of total assets for the period June 1, 1991 through June 1, 1992. Thereafter, while this ORDER is in effect, asset growth shall be limited to 4 percent for each subsequent three-month period.

   [.5] 5. (a) Within 90 days from the effective date of the ORDER, and annually thereafter, the board of directors shall review the Bank's loan policy and practices for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The minutes of the board of directors' meeting at which such reviews are undertaken shall indicate the findings of the reviews and a description of any revisions made.
   (b) Results of the reviews and any revisions made shall be forwarded to the Regional Director and Commissioner for review and opportunity for comment. Within 60 days of the receipt of any such comments, and after appropriate consideration of any changes recommended, the board of directors of the Bank shall approve the policy and it shall be consistently followed by the loan officers thereafter.
   (c) The initial revision to the Bank's loan policy required by this paragraph, at a minimum, shall include the following:

       (i) Provisions requiring that all extensions of credit originated or renewed above $10,000 be supported by current and complete financial data and/or complete collateral documentation; have a clearly defined purpose; and have a predetermined and realistic repayment source and schedule.
       (ii) Provisions requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, as well as those loans which were classified "Substandard" in the FDIC Report of Examination as of October 1, 1990 ("Report"), or in any future examination conducted by the FDIC or State authority.
       (iii) Provisions requiring the establishment and maintenance of a loan grading system and internal loan watch list.
       (iv) Provisions requiring a written plan to lessen the risk position in each line of credit identified as a problem credit on the Bank's internal loan watch list.
   (d) Within 60 days following adoption of the revisions required in this paragraph, the Bank shall implement a written, detailed internal audit program designed to monitor and ensure compliance with the Bank's loan policy and procedures.

   [.6] 6. Within 180 days from the effective data of this ORDER, the Bank shall reduce and/or eliminate assets classified "Substandard" as of October 1, 1990, to not more than 75 percent of total equity capital and reserves; and within 360 days from the effective date of this ORDER, the Bank shall reduce the above described classified assets to not more than 50 percent of total equity capital and reserves. As used in this ORDER, the words "reduce" and "eliminate" mean (1) to collect, (2) to charge-off, or (3) to substantially improve the quality of assets adversely classified to warrant removing any adverse classification. The requirements of this paragraph are not to be construed as standards for future operations and in addi- {{5-31-91 p.C-874}}tion to the foregoing, the Bank shall eventually reduce all other adversely classified assets.
   7. Within 30 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" in the Report. Reduction of these assets with proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   [.7] 8. Within 90 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the Regional Director and Commissioner for review and comment, a plan of action for the reduction and collection of delinquent loans. Said plan shall include, at a minimum, provisions which prohibit extending credit for the payment of interest, clearly define areas of responsibility, and establish acceptable guidelines for the collection of troubled credits.

   [.8] 9. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its loan valuation reserve by an expense entry in an amount equal to those loans required to be charged off by this ORDER.

       (b) Within 30 days from the effective date of this ORDER, the Bank shall make a provision to the loan valuation reserve which, after careful review and consideration by the board of directors, reflects the potential for further losses in the "Substandard" loan classifications and all other loans in its portfolio. The results of the board of directors' review and consideration shall be recorded in the minutes of the board meeting at which the matter is considered. At a minimum, the loan valuation reserve shall equal at least 2 percent of outstanding loans and leases.
       (c) Within 30 days from the effective date of this ORDER, Reports of Conditions and Reports of Income required by the FDIC and filed by the Bank on March 31, June 30, and September 30, 1990, shall be amended and refiled to reflect a provision for loan losses and loan valuation reserve which are adequate considering the condition of the Bank's loan portfolio and which, at a minimum, meet the level of 2 percent of total loans and leases as required in paragraph 9(b).
       (d) Prior to the submission or publication of all Reports of Condition and Reports of Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's loan valuation reserve and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

   [.9] 10. (a) Within 90 days from the effective date of this ORDER, the bank shall adopt and implement a detailed written policy covering expense reimbursements to its directors, officers, and employees. At a minimum, the policy shall include the following:
       (i) Provisions which specify the reasonable limitations for all categories of expenses related to customer entertainment and business development;
       (ii) Provisions which require complete documentation of all expenses related to customer entertainment and business development. At a minimum, the Bank shall require the submission of an original receipt, identification of the person or persons entertained, and the business purpose of the expense before a check is issued for payment by the Bank; and
       (iii) Provisions prohibiting the reimbursement of personal expenses of the Bank's directors, officers, and employees.
   (b) While the ORDER is in effect, the Bank's board of directors shall conduct monthly reviews of all expenses submitted for customer entertainment, business development, or any other expense submitted by the Bank's officers and directors, with the results of the review expressly stated in the minutes of the meetings of the board of directors at which such reviews are performed. On a monthly basis, the Bank will either seek reimbursement for any expenses paid which are not in conformance with the policy required by paragraph 10(a) or will expressly state in the minutes of the board of directors the full justification for deviations from the policy.
   (c) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall review the expenses detailed on pages 4-b-1 and 4-b-2 of the {{5-31-91 p.C-875}}Report. Thereafter, prompt reimbursement shall be requested for those expenses which are not justified/support by the director or officer responsible for the expense.

   [.10] 11. Within 60 days from the effective date of this ORDER, the Bank shall correct all Technical Exceptions listed on pages 2-d of the Report.

   [.11] 12. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and/or regulation described on pages 6-a through 6-a-3 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.12] 13.(a) Within 60 days from the effective date of this ORDER, the board of directors of the Bank shall formulate a written plan for monitoring liquidity and the Bank's relationship of volatile liabilities to temporary investments. The plan shall include, but not be limited to the following:

       (i) Provisions requiring maintenance of no less than a 25 percent liquidity ratio;
       (ii) Limitation of the Bank's ratio of total loans to total deposits to no more than 75 percent;
       (iii) Formal establishment of a desirable range for volatile liability dependence; and
       (iv) A requirement that monthly calculations of the liquidity and dependency ratios, following the format utilized in regulatory reports of examination, be provided to the board of directors for review, with such review noted in the board minutes.
       (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director and Commissioner for review and comment. Within 30 days of the receipt of any such comments, and after appropriate consideration of any changes recommended, the board of directors shall approve and implement the plan. The approval shall be recorded in the applicable minutes of the meeting of the board of directors.

   [.13] 14. (a) Within 30 days from each June 30 and December 31 following the effective date of this ORDER, the Bank's board of directors shall determine the Bank's level of primary capital as a percentage of its total assets for the quarter preceding the respective June 30 and December 31 dates. If that percentage is less than 8.50 percent, the Bank shall, within 90 days from the date of that determination, increase the capital/asset relationship to not less than 8.50 percent. For the purpose of this ORDER, the terms "primary capital" and "total assets" utilized in computing the relationships shall be defined and calculated in accordance with the provisions of Part 325 of FDIC Rules and Regulations. 12 C.F.R. Part 325.
   (b) To the extent that the Bank has reduced and/or eliminated classified assets to not more than 75 percent of total equity capital and reserves, the level of primary capital required in paragraph 14(a) shall be 8.25 percent of total assets; and to the extent that classified assets have been reduced and/or eliminated to not more than 50 percent of total equity capital and reserves, the required level of primary capital shall be 8.00 percent of total assets.
   (c) Any increase in primary capital necessary to meet the requirements of this paragraph may be accomplished by the following:
       (i) The sale of equity securities allowed as primary capital under 12. C.F.R. Part 325; or
       (ii) The collection in cash of assets previously charged off; or
       (iii) The direct contribution of cash by the directors and/or the shareholders of the Bank; or
       (iv) Retained earnings; or
       (v) Any combination of the above means; or
       (vi) Any other method acceptable to the Regional Director and Commissioner.
   (d) If all or part of the increase in primary capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a plan for the sale of such additional securities, including the voting of the shares owned or proxies held or controlled by them in favor of said plan. Should the implementation of the plan in- {{5-31-91 p.C-876}}volve a public distribution of the Bank's securities, 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 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 20 days prior to the dissemination of such materials, the material used in the sale of the securities shall be submitted to the FDIC at Washington, D.C., for its review. Any changes requested to be made in the materials by the FDIC shall be made prior to their dissemination.
   (e) In complying with the provisions of subparagraph (c) of this paragraph, 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 changes which are 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 shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank's original offering materials.
   (f) The formal capital ratio analysis required by this paragraph shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital and protection for the kind, quality and degree of market depreciation of assets held by the Bank.

   [.14] 15. As of the effective date of this ORDER, the Bank shall pay no cash dividends which would cause the Bank's primary capital to total asset ratio to fall below the levels required in paragraphs 14(a) and/ or (b).

   [.15] 16. Within 30 days from the effective date of this ORDER, the Bank's board of directors shall develop and adopt a program that will provide for proper monitoring of the Bank's compliance with this ORDER, and with its written loan, investment, and asset/liability management policies, on a monthly basis.

   [.16] 17. Following 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 (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 in Washington, D.C., for review at least 20 days prior to dissemination to shareholders. Any material changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.17] 18. On the last day of the second month following the date of issuance of this ORDER, and every third month thereafter, the Bank shall furnish written progress reports, signed by each member of the Bank's board of directors, to the Regional Director and Commissioner detailing the form and manner of any actions taken to secure compliance with the 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 Commissioner have in writing released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days after its issuance by the FDIC.
   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.
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: March 15, 1991.

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