Federal Deposit
Insurance Corporation

{{12-31-91 p.C-1604}}
   [¶10,363] In the Matter of Water Tower Bank, Chicago, Illinois, Docket No. FDIC-91-350b (10-31-91).

   Bank to cease and desist from such unsafe or unsound practices as following hazardous lending and lax collection practices; operating with inadequate capital; operating with excessive volumes of adversely classified assets; operating with an excessive level of overdue loans and failing to recognize nonaccrual loans; operating with hazardous concentrations of credit; operating with inadequate allowance for loan and lease losses; operating without adequate earnings;
{{10-31-94 p.C-1605}}operating with inadequate liquidity; operating in violation of Regulation O; operating with management whose policies are detrimental to the Bank; and failing to provide adequate supervision over the Bank's affairs. (This order was terminated by order of the FDIC dated 8-22-94; see ¶ 15,907.)

   [.1] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.2] Management—Qualifications—Review
   [.3] Board of Directors—Election—Outside Directors Added
   [.4] Loan Policy—Written Revision—Minimum Requirements
   [.5] Loans—Risk Position—Reduce—Written Plan Required
   [.6] Violations of Law—Eliminate/Correct
   [.7] Assets—Adversely Classified—Eliminate/Reduce
   [.8] Loan Loss Reserve—Establish/Maintain
   [.9] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.10] Loans—Concentrations of Credit—Reduction Plan
   [.11] Loans—Special Mention—Correct Deficiencies
   [.12] Profit Plan—Minimum Requirements
   [.13] Bank Operations—Internal Routine and Controls—Correction
   [.14] Audit—External—Reports to FDIC
   [.15] Dividends—Restricted
   [.16] Technical Exceptions—Eliminate/Correct
   [.17] Loans—Overdue—Ratio—Reduction Required
   [.18] Liquidity Ratio—Written Plan Required
   [.19] Liabilities—Volatile—Reduction Required
   [.20] Reports of Condition and Income—Policy
   [.21] Shareholders—Disclosure—Cease and Desist Order
   [.22] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.23] Compliance Reports—Frequency

In the Matter of

WATER TOWER BANK
CHICAGO, ILLINOIS
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Water Tower Bank, Chicago, 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 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 October 28, 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 had engaged in unsafe or unsound banking practices and violated laws and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term
{{10-31-94 p.C-1606}}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. Operating with inadequate capital for the kind and quality of assets held;
   C. Operating with an excessive level of classified assets;
   D. Operating with an excessive level of overdue loans and failing to recognize nonaccrual loans;
   E. Operating with hazardous concentrations of credit;
   F. Operating without an adequate allowance for loan and lease losses for the volume, kind, and quality of loans held;
   G. Operating without adequate earnings;
   H. Operating with an inadequate liquidity position;
   I. Extending credit to executive officers and directors in violation of sections 215.4(a), 215.4(b), 215.4(c) and 215.7 of Regulation O of the Board of Governors of the Federal Reserve System, ("Regulation O"), 12 C.F.R. §§ 215.4(a), 215.4(b), 215.4(c) and 215.7; entering into covered transactions with affiliates in violation of sections 23A(a) and 23A(c) of the Federal Reserve Act, 12 U.S.C. § 371c(a) and § 371c(c); entering into transactions with affiliates in violation of section 23B of the Federal Reserve Act, 12 U.S.C. § 371c-1; disclosing information from FDIC reports of examination in violation of section 309.6(c) of the FDIC's Rules and Regulations, 12 C.F.R. § 309.6(c); failing to adhere to the standards for appraisals and appraiser independence of sections 323.4 and 323.5 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 323.4 and 323.5; operating in violation of the minimum capital requirements of section 325.3 and the risk based capital requirements of the appendix to section 325 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 325.5 and Part 325 Appendix A; paying interest on demand deposits in violation of section 329.2 of the FDIC's Rules and Regulations, 12 C.F.R. §329.2; violating the disclosure requirements of sections 350.4(a), 350.4(d), and 350.10 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 350.4(a), 350.4(d) and 350.10; submitting inaccurate Consolidated Reports of Condition and Income required by section 304.4 of the FDIC's Rules and Regulations, 12 C.F.R. § 304.4; violating the loan purpose disclosure and record retention requirements of sections 103.33(a), 103.34(b)(3), and 103.34(b)(10) of the Treasury Department's Financial Recordkeeping Regulations, 12 C.F.R. §§ 103.33, and 103.34; exceeding the State of Illinois legal lending limits restrictions as set forth in section 32 of the Illinois Banking Act, ILL. REV. STAT. Ch. 17, para. 339; and failing to maintain the minimum number of directors and maintain adequate records required by sections 16(2)(a) and 16(8) of the Illinois Banking Act, ILL. REV. STAT. Ch. 17, para. 323(2)(a) and (8);
   J. Operating with a management whose policies and practices are detrimental to the Bank and which jeopardize the safety of its deposits; and
   K. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank.

   [.1] 1. (a) Within 30 days from the effective date of this ORDER, the Bank shall formulate and adopt a written plan to maintain the Bank's Tier 1 capital to total assets ratio at a minimum of 7.5 percent. The plan shall include a provision to increase the Bank's Tier 1 capital by a minimum of $1,000,000 by March 31, 1992.
   (b) The written plan required to be developed by this paragraph shall be submitted to the Regional Director of the FDIC's Chicago Regional Office ("Regional Director") and the Commissioner of Banks and Trust Companies for the State of Illinois ("Commissioner") for review and comment. Within 30 days of receipt of any comment from the Regional Director or Commissioner, and after amending the plan in accordance with any recommended changes, the Bank shall approve and implement the plan. The approval shall be recorded in the minutes of a board of directors' meeting.
   (c) Within 30 days from each June 30 {{12-31-91 p.C-1607}}and December 31 following the date required for compliance with paragraph 1(a) of this ORDER, the Bank's board of directors shall determine the Bank's Tier 1 capital as a percentage of the daily average of its total assets for the quarter preceding the respective June 30 and December 31 dates ("Tier 1 capital ratio"). If the Tier 1 capital ratio is less than 7.5 percent, the Bank's board of directors shall, within 60 days from the date of that review, increase its Tier 1 capital ratio to not less than 7.5 percent as of the end of that preceding semi-annual period. For the purpose of this paragraph, "Tier 1 capital" and "total assets" shall have the meaning ascribed to those terms in Part 325 of the FDIC's Rules and Regulations, 12 C.F.R. Part 325.
   (d) The formal capital ratio analysis as of June 30 and December 31 of each year described in paragraph 1(c) of this ORDER shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital protection for the kind, quality and degree of market depreciation of assets held by the Bank.
   (e) Any increase in Tier 1 capital necessary to meet the requirements of this paragraph may be accomplished by the following:

   (i) The sale of equity securities allowed as Tier 1 capital under 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) Any combination of the above means; or
   (v) Any other method acceptable to the Regional Director.

   [.2] 2. (a) As of the effective date of this ORDER, the Bank shall maintain qualified management. 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 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 effective internal controls.

   [.3] 3. As of the effective date of this ORDER, the Bank shall maintain a board of directors composed of at least 3 independent directors. For purposes of this ORDER, a person who is an independent director shall be any individual (a) who was not a member of the board of directors as of December 31, 1990; (b) who is not an officer of the Bank or any subsidiary of the Bank or any of its affiliated organizations; (c) who does not own more than 5 percent of the outstanding shares of the Bank; (d) who is not related by blood or marriage to an officer of or director of the Bank or to any shareholder owning more than 5 percent of the Bank's outstanding shares, and who does not otherwise share a common financial interest with such officer, director or shareholder; and (e) who is not indebted to the Bank directly or indirectly by blood, marriage or common financial interest, including the indebtedness of any entity in which the individual has a substantial financial interest in an amount exceeding 5 percent of the Bank's total Tier 1 capital and allowance for loan and lease losses. The addition of any new Bank directors required by this paragraph may be accomplished, to the extent permissible by the state statute or the Bank's bylaw, by means of appointment or by election at a regular or special meeting of the Bank's shareholders.

   [.4] 4. (a) Within 60 days from the effective date of this ORDER, and at least annually thereafter, the Bank shall review its loan policy and practices for adequacy and, based upon this review, shall appropriately revise and implement the policy to strengthen lending procedures and abate additional loan deterioration. The reviews required by this paragraph shall be recorded in the minutes of the board of directors' meeting.
   (b) The initial revision of the Bank's loan policy required by this paragraph, at a minimum, shall include the following:

   (i) Provisions which address: the board's responsibility in reviewing, ratifying, and approving loans, including specific provisions for prior approval depending upon the amount of credit extended, and type of loan; guidelines for obtaining and reviewing real estate appraisals in compliance with Part 323 of the FDIC's Rules and Regulations, 12 C.F.R. Part 323; maintenance and review of complete, accurate and current credit files, and financial information on each borrower; guidelines for rates of interest and the terms of repayment; collateral requirements for loan proceeds advanced; limitations on the maximum volume of loans in relation to total assets; description of the Bank's normal trade area and circumstances under which the Bank may extend credit outside of such area; guidelines addressing portfolio mix, risk diversification, and concentrations of credit; guidelines addressing the Bank's review of the allowance of loan and lease losses.
   (ii) A provision requiring that advances or renewals of all extensions of credit in amounts exceeding $25,000 be supported by complete financial data attested to by the borrower; a clearly defined purpose and full explanation of any adverse credit report information; a predetermined repayment source and schedule; and where applicable, complete collateral documentation.
   (iii) 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 Report of Examination as of March 4, 1991 ("Report") or in any future examination conducted by the FDIC or State authorities.
   (iv) Provisions specifically addressing limitations on land development, construction and bridge loans.
   (v) Provisions requiring a nonaccrual policy in accordance with the Federal Financial Institutions Examination Council's ("FFIEC's") instructions for
{{12-31-91 p.C-1609}}the Consolidated Reports of Condition and Income.

   [.5] 5. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to lessen the Bank's risk position in each line of credit in excess of $25,000 which is classified "Substandard" in the Report. Such plan shall include, but not be limited to, the following:

   (i) Dollar levels to which the Bank will reduce each line of credit within 6 to 12 months from the effective date of this ORDER;
   (ii) 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; and
   (iii) Provisions for the submission of bi-monthly written progress reports to the Regional Director and Commissioner.

   [.6] 6. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulation described on pages 6-a through 6-a-5 of the Report. In addition, the Bank shall implement procedures to ensure future compliance with all applicable laws and regulations.

   [.7] 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 portion of assets classified "Loss" in the Report, unless the Regional Director gives written permission to retain certain of these assets on the Bank's books. These charge-offs should be reflected on the Bank's Reports of Condition and Income as of March 31, 1991. Reports of Condition and Income required by the FDIC as of March 31, 1991, 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.

   [.8] 8. (a) Within 30 days from the effective date of this ORDER, the Bank shall replenish its allowance for loan and lease losses by an expense entry in an amount equal to those loans required to be charged off by paragraph 6 of this ORDER.
   (b) Within 30 days from the effective date of this ORDER, the Bank shall make a provision to the allowance for loan and lease losses 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. In no event, shall the allowance for loan and lease losses represent less than 2.00 percent of total loans and leases.
   (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 January 2, 1991, shall be amended and refiled if they do not reflect a provision for loan and lease losses which is adequate considering the condition of the Bank's loan and lease 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 Reports of Income required by the FDIC after the effective date of this ORDER, the Bank shall review the adequacy of the
{{12-31-91 p.C-1610}}allowance for loan and lease losses 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 allowance recommended, if any, and the basis for determination of the amount of the allowance provided.

   [.9] 9. (a) Following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, 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 so long as such credit remains uncollected.
   (b) following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Substandard," or "Doubtful," or is listed for "Special Mention" and is uncollected, unless the Bank's board of directors has adopted a detailed written statement of explanation which supports the extension and includes, at a minimum, the reasons why extending such credit is in the best interests of the Bank. A copy of the statement shall be placed in the appropriate loan file and recorded in the minutes of the applicable board of directors' meeting.
   (c) Following the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower whose loan or other credit has been listed in the Report as a concentration of credit unless the Bank's board of directors has adopted a detailed written statement of explanation which supports the extension and includes, at a minimum, the reasons why extending such credit is in the best interests of the Bank. A copy of the statement shall be placed in the appropriate loan file and recorded in the minutes of the applicable board of directors' meeting.
   (d) Following the effective date of this ORDER, the Bank shall require specific purpose statements on all new loans, including a statement identifying the person or entity which will ultimately receive the proceeds.
   (e) Following the effective date of this ORDER, the Bank shall make no unsecured loans over $15,000, unless the Bank's board of directors has adopted a detailed written statement of explanation which supports the extension and includes, at a minimum, the reasons why extending such credit is in the best interests of the Bank. A copy of the statement shall be placed in the appropriate loan file and recorded in the minutes of the applicable board of directors' meeting.
   (f) Following the effective date of this ORDER, the Bank shall accept only first lien positions on commercial real estate that secure new loans.
   (g) Following the effective date of this ORDER, the Bank shall have perfected liens on collateral securing commercial real estate loans before the subject loan proceeds are advanced to the borrower.
   (h) Following the effective date of this ORDER, no loan collateral shall be released until the respective loan is paid in full, unless the Bank's board of directors has adopted a detailed written statement of explanation which supports the release of collateral and includes, at a minimum, the reasons why releasing the loan collateral before full loan repayment is in the best interests of the Bank. A copy of the statement shall be placed in the appropriate loan file and recorded in the minutes of the applicable board of directors' meeting.
   (i) Following the effective date of this ORDER, all commercial and commercial real estate loans over $25,000 shall have a written repayment plan which requires monthly, semi-annual, or annual payments of principle and interest.

   [.10] 10. (a) Within 120 days from the effective date of this ORDER, the Bank shall undertake all prudent banking measures to reduce the "Karris Family and George Collins" concentration of credit detailed on page 2-b of the Report to 25% or less of Tier I capital.
   (b) Within 120 days from the effective date of this ORDER, the Bank shall undertake all prudent banking measures to reduce the "Dellaportas Family Related Interests" concentration of credit detailed on page 2-b of the Report to 25% or less of Tier I capital.
   (c) Within 120 days from the effective date of this ORDER, the Bank shall un- {{12-31-91 p.C-1611}}dertake all prudent banking measures to reduce the "Retail Shopping Malls" concentration of credit detailed on page 2-b-1 of the Report to 100% or less of Tier I capital.
   (d) Within 120 days from the effective date of this ORDER, the Bank shall undertake all prudent banking measures to reduce the "Speculative Real Estate" concentration of credit detailed on page 2-b-1 of the Report to 100% or less of Tier I capital.

   [.11] 11. Within 60 days from the effective date of this ORDER, the Bank shall correct all deficiencies in those assets listed for "Special Mention" in the Report.

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written Profit Plan. This plan shall address, at a minimum, the following:

   (i) Goals and strategies for improving and sustaining the earnings of the Bank, including:

   (a) an identification of the major areas in, and means by which, the board will seek to improve the Bank's operating performance;
   (b) realistic and comprehensive budgets;
   (c) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections;
   (d) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components; and
   (e) periodic salary review.

   (ii) Coordination of the Bank's loan, investment, and operating policies and budget and profit planning, with the funds management policy.

   [.13] 13. Within 90 days from the effective date of this ORDER, the Bank shall correct the deficiencies in internal routines and controls described on pages 6-b through 6-b-2 in the Report. For the purpose of this paragraph, "total assets" has the meaning ascribed to that term by the FFIEC's instructions for the Consolidated Reports of Condition and Income. Nothing in this paragraph shall relieve the Bank from its obligation to comply with sections 304.6 and 337.6 of the FDIC's Rules and Regulations, 12 C.F.R. §§ 304.6 and 337.6.

   [.14] 14. (a) During the life of the ORDER, the board of directors will at least semiannually record in its minutes the level of external audit coverage desired by bank.
   (b) During the life of this ORDER, the Bank shall forward copies of any external audit reports to the Regional Director and Commissioner within 10 days from the Bank's receipt of such reports.

   [.15] 15. During the life of this ORDER, the Bank shall not declare or pay any dividends without the prior written approval of the Regional Director and Commissioner.

   [.16] 16. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all of the technical exceptions described on pages 2-e through 2-e-2 of the Report. In addition, the Bank shall implement procedures to preclude future technical exceptions.

   [.17] 17. Within 30 days from the effective date of this ORDER, the Bank shall establish and implement a plan to reduce its ratio of overdue loans and leases to gross loans and leases to no more than 5 percent.

   [.18] 18. Within 60 days from the effective date of the ORDER, the Bank shall submit a plan to the Regional Director describing how the Bank will attain by March 31, 1992, and thereafter maintain, a liquidity ratio (net cash, short term, and marketable assets divided by net deposits and short term liabilities) of no less than 30 percent as calculated on page 5-b of the Report.

   [.19] 19. The Bank shall reduce its dependency ratio (net potentially volatile liabilities divided by total earning assets less total short term investments) as calculated {{12-31-91 p.C-1612}}on page 5-b of the Report to no more than 2.00 percent by March 31, 1992.

   [.20] 20. Within 30 days from the effective date of this ORDER, the Bank shall develop and implement policies and procedures to provide reasonable assurance that the Bank's Consolidated Reports of Condition and Income are accurate.

   [.21] 21. 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 twenty (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.

   [.22] 22. Within 30 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised of at least three directors. No committee member may be an executive officer or principal shareholder, as those terms are defined in sections 215.2(d) and (j) of Regulation O, 12 C.F.R. §§ 215.2(d) and (j). The committee shall monitor compliance with this ORDER, and on a monthly basis, shall submit to the board of directors a written report detailing the Bank's compliance with this ORDER, including compliance with its written loan and audit policies. The monthly compliance report shall be incorporated into the minutes of the corresponding board of directors' meeting.

   [.23] 23. 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 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 its successors and assigns.
   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: October 31, 1991.