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FDIC Enforcement Decisions and Orders

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{{10-31-93 p.C-967}}
   [10,215] In the Matter of Bank of Findlay, Findlay, Illinois, Docket No. FDIC-91-104b (4-8-91).

   Bank to cease and desist from engaging in hazardous lending and lax collection policies; violating state and federal laws and regulations; operating with an excessive level of classified assets; operating with inadequate liquidity; operating inadequate allowance for loan and lease losses; operating with management whose policies and practices are detrimental to the Bank; and operating with a board of directors which has failed to provide adequate supervision and direction over the affairs of the Bank. (This order was terminated by order of the FDIC dated 8-25-93; see15,720.)

   [.1] Institution-Affiliated Party—Lending Limit on Individual
   [.2] Management—Qualifications—Review
   [.3] Capital—Primary Capital—Increase/Maintain
   [.4] Loan Policy—Review/Revision Required
   [.5] Board of Directors—Loan Committee—Establish
   [.6] Loans—Risk Position—Reduce—Written Plan Required
   [.7] Violations of Law—Eliminate/Correct
   [.8] Assets—Adversely Classified—Reduce/Eliminate
   [.9] Loan Valuation Reserve—Increase/Maintain
   [.10] Liquidity/Volatile Liabilities—Written Plan Required
   [.11] Real Estate Activities—Written Appraisal Policy Required
   [.12] Investment Policy—Written Policy—Minimum Requirements
   [.13] Loans—Special Mention—Deficiencies—Correct
   [.14] Dividends—Restricted
   [.15] Shareholders—Disclosure—Cease and Desist order
   [.16] Compliance—Progress Reports—Frequency

In the Matter of

BANK OF FINDLAY
FINDLAY, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Bank of Findlay, Findlay, Illinois ("Bank"), 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 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 {{10-31-93 p.C-968}}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 16, 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 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 has engaged in unsafe or unsound banking practices and has 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. § 1813(u), and its successors and assigns, cease and desist from the unsafe or unsound banking practices and violations of law and regulation listed below:
   A. Engaging in hazardous lending and lax collection practices;
   B. Violating the State of Illinois legal lending limit restrictions as set forth in section 32 of the Illinois Banking Act, ILL. REV. STAT., ch. 17, para. 339; the more than normal risk of repayment or unfavorable features prohibition of section 215.4(a)(2) of Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. § 215.4(a)(2); the lending limit restrictions of section 215.4(c) of Regulation O, 12 C.F.R. § 215.4(c); the covered transactions lending restrictions of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; the collateral restrictions of section 23A of the Federal Reserve Act, 12 U.S.C. § 371c; the substantially same terms requirement of section 23B of the Federal Reserve Act, 12 U.S.C. § 371c-1; the advertising restrictions of section 23B(c) of the Federal Reserve Act, 12 U.S.C. § 371c-1; and the lending limit requirements of section 337.3 of the FDIC's Rules and Regulations, 12 C.F.R. § 337.3;
   C. Operating with an excessive level of classified assets;
   D. Operating without adequate liquidity in light of the Bank's asset and liability mix;
   E. Engaging in unsuitable investment practices;
   F. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   G. Operating with a management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits; and
   H. 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 its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) During the period from the effective date of this ORDER through 90 days from its effective date:

       (i) The individual lending limit of Gregory H. Bohlen (Bohlen) shall be reduced to an amount not greater than $1,000. Further, approval by Bohlen of any loans in amounts which exceed his individual lending limit shall be preliminary and subject to final approval by the Bank's Loan Committee, which shall meet twice monthly pursuant to paragraph 5 of this ORDER;
       (ii) Loan collection efforts by Bohlen shall not be restricted.
   (b) Within 90 days from the effective date of this ORDER, Bohlen shall not participate, directly or indirectly, in matters involving any loan, including but not limited to loan origination, analysis, approval, collection, or review, other than in his capacity as a member of the board of directors; and he shall not serve on any loan committee.
   (c) Within 30 days from the effective date of this ORDER and annually thereafter, the board of directors of the Bank shall conduct a review of the Bohlen's salary and benefit package to determine its reasonableness in light of his duties and responsibilities, with such review noted in the minutes of the Bank's board of directors' meeting at which such review was made.

   [.2] 2. (a) Within 90 days from the effec- {{6-30-91 p.C-969}}tive date of this ORDER, the Bank shall have, and thereafter retain a qualified lending officer acceptable to the Regional Director of the Division of Supervision of the Chicago Regional Office of the FDIC ("Regional Director"). The lending officer shall have an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loans.
   (b) Nothing in this ORDER relieves the Bank from any obligation under section 32 of the Act, 12 U.S.C. § 1831i.

   [.3] 3. Within 30 days from each June 30 and December 31 after the effective date of this ORDER, the Bank's board of directors shall determine the Bank's primary capital as a percentage of the daily average of its total assets for the quarter preceding the respective June 30 and December 31 dates. If that percentage is less than 8.0 percent, the Bank's board of directors shall, within 60 days from the date required for that review, increase that capital/asset relationship to not less than 8.0 percent as of the end of that preceding semi-annual period. For the purpose of this paragraph, the terms "primary capital" and "total assets" shall be defined as those terms are defined in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325.

   [.4] 4. (a) Within 90 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures 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' meetings at which such reviews are undertaken shall include the findings of the reviews and a description of any revisions made.
   (b) The initial revisions to the Bank's loan policy and procedures required by this paragraph, at a minimum, shall reflect consideration of the criticisms and incorporate the recommendations for improvement included on page 6-a of the Report of Examination of the bank dated September 19, 1990 ("Report").
   (c) Within 90 days from the effective date of this ORDER, the Bank shall adopt and implement a written, comprehensive loan review program designed to monitor and ensure compliance with the Bank's loan policy and procedures. The loan review program shall, at a minimum, comply with the guidelines provided in FDIC Bank Letter 27-89 dated June 20, 1989, and shall provide for a loan grading system which requires annual review of loans or lines of credit of $10,000 or more. A written report shall be provided to the board of directors at least monthly identifying the loans reviewed and the grades assigned, and outlining the reasons for the grades assigned. The minutes of the board of directors' meetings shall reflect consideration of these reports and describe any action taken as a result thereof.

   [.5] 5. (a) Within 15 days from the effective date of this ORDER, the Bank shall establish a Loan Committee which shall meet at least twice monthly. A majority of the Loan Committee members shall be directors who are not officers of the Bank. No committee member, with the exception of Director Richard Gloede, shall be 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 five percent of the Bank's primary capital. Director Gloede may be a member of the Loan Committee so long as his direct or indirect indebtedness to the Bank does not increase and does not exceed 15 percent of the Bank's primary capital at the time of his appointment to the Loan Committee. No committee member may be related by blood or marriage to any shareholder owning five percent or more of the stock of the Bank.
   (b) The Loan Committee shall review any loan or renewal of an existing loan to any borrower when the aggregate indebtedness of that borrower and that borrower's related financial interests as the Bank exceeds or would exceed $25,000. Prior approval must be given by the Loan Committee before the Bank may extend or renew credit to any such borrower.
   (c) The Loan Committee shall evaluate, grant, and/or approve loans in accordance with the Bank's loan policy. Written minutes of the committee meetings shall be kept and shall include an indication of how each member voted on each loan. Such minutes shall be submitted to the board of directors at the next board {{6-30-91 p.C-970}}meeting following the committee meeting. Consideration of the committee minutes shall be included in the minutes of the meeting of the Bank's board of directors.
   (d) At each semimonthly meeting the Loan Committee shall review and monitor the status of repayment and collection of overdue and maturing loans, as well as loans that were classified "Substandard" by the FDIC in the Report or are identified as warranting the special attention of management.

   [.6] 6. Within 90 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the Regional Director for review and comment, a written plan of action of lessen the Bank's risk position in each asset in excess of $10,000 which is classified "Substandard" in the Report. Such plan shall include, but not be limited to, the following:

       (a) Dollar levels to which the Bank shall take all steps necessary to reduce each asset within 6 and 12 months from the effective date of this ORDER; and
       (b) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.

   [.7] 7. Within 90 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-b through 6-b-5 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.8] 8. 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. These charge-offs should be reflected on the Bank's Reports of Condition and Income as of December 31, 1990. Reports of Condition and Income required by the FDIC as of December 31, 1990, shall be amended and refiled if they do not reflect the charge-off of these items. Reduction of these assets with proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph.

   [.9] 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 paragraph 8 of 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.
   (c) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to September 30, 1990, shall be amended and refiled if they do not 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, incorporate the adjustments required by this paragraph.
   (d) Prior to the submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the Bank shall review the adequacy of the loan valuation reserve and accurately report the same. The minutes of the board of directors' meeting at which such review is undertaken shall indicate the results of the review, the amount of the increase in the reserve recommended, if any, and the basis for the determination of the amount of reserve provided.

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

       (i) Requiring computation of the Bank's liquidity and volatile liability dependency ratios, utilizing a format similar to that found on page 5-a of the Report. The computed ratios shall be submitted on a monthly basis to the board of directors for their review;
       (ii) Establishing prudent limitations on the Bank's ratio of total loans to total funding liabilities, which shall, within 180 days from the effective date of this ORDER, be reduced to 75 percent and, within 360 days from the ef-
{{6-30-91 p.C-971}}
    fective date of this ORDER, be reduced to no more than 70 percent;
       (iii) Establishing a line of credit with the Federal Reserve Bank; and
       (iv) Establishing contingency plans to improve liquidity to the level established in the Bank's liquidity policy.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director 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.

   [.11] 11. Within 90 days from the effective date of this ORDER, the Bank shall adopt a Real Estate Appraisal Policy and establish review procedures which conform with the FDIC's appraisal guidelines detailed in Bank Letter 40-87 dated December 14, 1987.

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise its written investment policy to:

       (i) address all of the types of securities in which the Bank currently invests;
       (ii) define and specify the purpose and goals of the Bank's investments;
       (iii) specifically address the maturity distribution; and
       (iv) be consistent with FDIC Instructions for the Preparation of the Reports of Condition and Income, the FDIC Statement of Policy regarding Selection of Securities Dealers and Unsuitable Investment Practices, and State of Illinois laws and regulations.
   (b) The Bank's revised investment policy shall be forwarded to the Regional Director for review and comment. Within 30 days after this review, and after modifications have been made to rectify any deficiencies, the revised policy shall be adopted and implemented by the board of directors of the Bank.

   [.13] 13. Within 90 days from the effective date of this ORDER, the Bank shall correct the deficiencies noted on the loans listed for Special Mention on page 2-c of the Report.

   [.14] 14. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividends without the prior written consent of the Regional Director. Request for the consent of the Regional Director shall be provided at least 30 days prior to the date of the proposed dividend declaration. Such consent, if so given, may subsequently be rescinded for any as yet undeclared dividend if there shall have occurred in the interim any material negative developments.

   [.15] 15. 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 at Washington, D.C. 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.

   [.16] 16. Within 15 days of the end of each calendar quarter, the Bank shall furnish written progress reports to the Regional Director signed by each member of the Bank's board of directors 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 has 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: April 8, 1991.

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