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   [11,611] In the Matter of First State Bank of Sharon, Sharon, North Dakota, Docket No. 99-019b (4-9-99)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 2-7-02; see ¶16,305.)

   [.1] Management—Qualifications Specified
   [.2] Capital—Increase Required
   [.3] Assets—Adversely Classified Assets—Reduction Required
   [.4] Reports of Condition and income—Complete in Accordance with Instructions
   [.5] Loans—Risk Position—Reduction of Adversely Classified Lines of Credit Required
   [.6] Loans—Extensions of Credit—To Borrowers With Existing Adversely Classified Credits
   [.7] Loan Policy—Preparation or Revision of Policy Required
   [.8] Profit Plan—Preparation of Plan Required
   [.9] Loans—Technical Deficiencies Corrected
   [.10] Violations of Law—Correction of Violations Required
   [.11] Dividends—Dividends Restricted
   [.12] Shareholders—Disclosure of Cease and Desist Order Required
In the Matter of

FIRST STATE BANK OF SHARON
SHARON, NORTH DAKOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-99-019b

   First State Bank of Sharon, Sharon, North Dakota ("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 regulations alleged to have been committed by the Bank and of its right to a hearing on such
{{4-30-02 p.C-4710}}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 30, 1999, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices or violations of law or regulations, 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. §1813(u), and its successors and assigns, cease and desist from the following unsafe and unsound banking practices and violations of law and regulations:

       A. failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and regulations;
       B. engaging in management policies and practices which are detrimental to the Bank, including operating with an inadequate loan policy, failing to comply with the existing loan policy, and failing to properly identify the credit risk in loans;
       C. engaging in hazardous lending and lax collection practices, including, maintaining an excessive volume of adversely classified loans, extending credit which is inadequately secured, extending credit without complete and current financial information, extending additional credit to borrowers with charged-off loans, failing to establish and enforce adequate loan repayment programs, failing to properly collect delinquent or distressed credit, and failing to establish and monitor collateral values;
       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 volume of nonearning assets;
       F. operating with deficient or inadequate loan documentation, including but not limited to current financial statements, insurance coverage, title searches or legal opinions, and cash flow and/or operating information;
       G. failing to submit Reports of Condition and Income in accordance with prevailing Instructions;
       H. engaging in practices which produce inadequate operating income and excessive loan losses;
       I. operating with inadequate internal routines and controls, including failing to keep accurate books and records and properly account for transactions;
       J. operating with an excessive volume of overdue loans and net loan losses; and
       K. engaging in violations of applicable laws and regulations.
   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1] 1. (a) (i) No more than 120 days from the effective date of this ORDER, the Bank shall have and thereafter retain qualified management. Such management shall include a senior lending officer, who shall be given stated written authority by the Bank's board of directors, including responsibility for implementing and maintaining the lending policies of the Bank. The senior lending officer shall have an appropriate level of lending, collections, and loan supervision experience to perform the duties assigned to that individual by the Bank's board of directors.
   (ii) The assessment of whether the Bank has "qualified management" shall be based upon management's conduct, both individual and joint, with respect to the Bank in: (A) complying with the requirements of this ORDER; (B) complying with applicable laws and regulations; and (C) not engaging in any unsafe or unsound banking practice which has an adverse effect on the Bank's asset quality, capital adequacy, earnings, liquidity, or sensitivity to market risk.
   (iii) As long as this ORDER remains in effect, the Bank shall comply with the re- {{6-3-99 p.C-4711}}quirements of section 32 of the Act, 12 U.S.C. §1831i, and section 303.102 of the FDIC Rules and Regulations, 12 C.F.R. §303.102, prior to adding or replacing any member of its board of directors, employing any person as a senior executive officer of the Bank (including as a senior lending officer), or changing the responsibilities of any senior executive officer so that the person would assume a different senior executive officer position. The Bank shall also send a copy of the notice required by section 32 of the Act to the North Dakota Commissioner of Banking and Financial Institutions ("Commissioner").
(b) No more than 60 days from the effective date of this ORDER, the board of directors shall develop a written analysis and assessment of the Bank's management and staffing needs ("management plan"), which shall include, at a minimum:
   (i) identification of both the type and number of officer positions needed to manage and supervise properly the affairs of the Bank;
   (ii) identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;
   (iii) evaluation of each Bank officer and staff member to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and maintenance of the Bank in a safe and sound condition; and
   (iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Bank's board of directors determines are necessary to fill Bank officer or staff member positions consistent with the board's analysis, evaluation and assessment as provided in paragraphs 1(b)(i) and 1(b)(iii) of this ORDER.
(c) The written management plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of any comments from the Regional Director and the Commissioner, and after consideration of such comments, the board of directors shall approve the written management plan and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall implement and follow the written management plan and/or any subsequent modification thereto.
(d) Within 90 days from the effective date of this ORDER, the Bank shall take all steps necessary to increase the number of members of its board of directors who are independent with respect to the Bank. For purposes of this ORDER, a candidate who is independent with respect to the Bank shall be any individual (a) who is not an officer of the Bank, any subsidiary of the Bank, or any of its affiliated organizations, and who does not own more than 5 percent of the outstanding shares of the Bank, (b) who is not related by blood, marriage, or common financial interest to any officer of the Bank, or to any stockholder owning more than 5 percent of the Bank's outstanding shares, and (c) who is not 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 5 percent of the Bank's total equity capital and allowance for loan and lease losses.
(e) Effective the date of this ORDER, the Bank's board of directors shall meet at least monthly. The board shall prepare in advance and shall follow a detailed written agenda at each meeting, which shall include consideration of actions of any committees. Nothing in the foregoing sentence shall preclude the board from considering matters other than those contained in the agenda. Detailed written minutes of all board meetings shall be maintained and recorded on a timely basis.

[.2] 2. (a) As used in this ORDER:
   (i) "Tier 1 or core capital" ("Tier 1 capital") means the same as the term in section 325.2(t) of the FDIC Rules and Regulations, 12 C.F.R. §325.2(t).
   (ii) "Noncumulative perpetual preferred stock" means the same as the term in section 325.2(o) of the FDIC Rules and Regulations, 12 C.F.R. §325.2(o).
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   (iii) "Total assets" means the same as the term in section 325.2(v) of the FDIC Rules and Regulations, 12 C.F.R. §325.2(v).
   (iv) "Securities" means common and noncumulative perpetual preferred stock.
(b) After appropriate entries for an adequate allowance are made in accordance with the requirements of paragraph 4 of this ORDER, but no later than 30 days after the effective date of this ORDER, the Bank shall have and maintain Tier 1 capital at or in excess of 6 percent of the Bank's total assets ("Tier 1 leverage capital ratio"). From and after March 31, 1999, for purposes of calculating Tier 1 leverage capital ratio, Tier 1 capital and total assets shall be the dollar amount reported in the Bank's most recent Report of Condition and Income.
(c) During the period this ORDER is in effect, if the Tier 1 leverage capital ratio declines below 6 percent, the Bank shall, within 60 days after the date on which the said ratio so declined, submit a written plan to the Regional Director and the Commissioner for approval describing the means and timing by which the Bank shall increase such ratio up to or in excess of 6 percent. Upon receiving written notification of the approval of the plan, the Bank shall increase its Tier 1 leverage capital ratio to equal or exceed 6 percent in accordance with the approved plan and shall thereafter maintain its Tier 1 leverage capital ratio at or in excess of such level while this ORDER is in effect.
(d) The Bank's board of directors shall maintain in its minutes a written record of all actions taken by the Bank to comply with the capital requirements of this paragraph.

   [.3] 3. No more than 10 days from the effective date of this ORDER, the Bank: (a) shall eliminate from its records, by charge-off, collection, or other proper entries, all assets or portions of assets classified "Loss" as of September 30, 1998; and (b) shall either (i) eliminate from its records by charge-off, collection, or other proper entries, or (ii) if the asset is an extension of credit or lease, increase its allowance for loan and lease losses by an amount equal to 50 percent of those assets or portions of assets classified "Doubtful" as of September 30, 1998, which have not been previously collected, charged off, or otherwise eliminated by other proper entries. Reduction of these assets through use of proceeds of loans made by the Bank does not constitute collection for the purpose of this paragraph.

   [.4] 4. (a) As used in this ORDER, "allowance for loan and lease losses ("allowance") means the same as the term in section 325.2(a) of the FDIC's Rules and Regulations, 12 C.F.R. §325.2(a), and in the Instructions for Preparation of Reports of Condition and Income ("Instructions").
   (b) The Bank shall have and maintain an adequate allowance in accordance with the requirements of the Instructions.
   (c) Reports of Condition and Income required to be submitted by the Bank as of each Report date, as that term is used in the Instructions, between and including September 30, 1998, and the effective date of this ORDER, shall, at a minimum, reflect an allowance maintained in accordance with the Instructions. If necessary to comply with this paragraph, the Bank shall file amended Reports of Condition and Income within 10 days from the effective date of this ORDER.
   (d) Prior to filing any Report of Condition and Income after the effective date of this ORDER, the board of directors of the Bank shall: (i) review the adequacy of the Bank's allowance, (ii) provide for an adequate allowance, and (iii) accurately report the allowance in any such Report of Condition and Income. The minutes of the board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the allowance, and the basis for determining the amount of allowance provided.

   [.5] 5. (a) No more than 30 days from the effective date of this ORDER, the board of directors shall develop a written plan of action to lessen the Bank's risk position in each line of credit aggregating $50,000 or more which was classified "Substandard" or "Doubtful" as of September 30, 1998. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative repayment sources; and
       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.
   Based upon such review and evaluation, the written plan of action shall: (A) establish target dollar levels to which the Bank shall reduce the aggregate dollar vol- {{6-30-99 p.C-4713}}ume of "Substandard" and "Doubtful" classifications within 6 and 12 months from the effective date of this ORDER; and (B) provide for the submission of written monthly progress reports to the Bank's board of directors for review and notation in the board minutes. As used in this paragraph, "reduce" means to (1) collect, (2) charge off, or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC.
(b) The written plan of action described by paragraph 5(a) and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comments from the Regional Director and the Commissioner, and after consideration of such comments, the board of directors shall approve the written plan of action and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written plan of action and/or any subsequent modification thereto.

   [.6] 6. (a) Effective the date of this ORDER, the Bank shall not extend, directly or indirectly, credit to, or for the benefit of, any borrower who has a loan or other extension of credit with the Bank that has been charged off or classified, in whole or in part, "Loss," "Doubtful," or "Substandard," and is uncollected, unless a majority of the Bank's board of directors first (a) determines that such advance is in the best interest of the Bank, (b) determines that the Bank has satisfied the requirements set out in paragraph 5(a) of this ORDER as to such borrower, and (c) approves such advance. A written record of the board of directors' determination and approval of any advance under the terms of this paragraph shall be maintained in the credit file of the affected borrower(s) as well as the minutes of the board of directors. The requirements of this paragraph do not prohibit the Bank from renewing any credit already extended to the borrower.
   (b) Effective the date of this ORDER, the Bank shall not accrue interest on any loan that is, or becomes, 90 days or more delinquent as to principal or interest, unless the loan is both well secured and in the process of collection. "Well secured" and "in the process of collection" shall have the same meaning as those terms have in the prevailing Instructions. The Bank shall reverse on its books all previously accrued but uncollected interest on any loan that has ceased to accrue interest pursuant to this provision.

   [.7] 7. (a) No more than 30 days from the effective date of this ORDER, the Bank shall review its written loan policy and make such revisions as necessary to ensure the policy includes the following:

       (i) the lending authority of each loan officer;
       (ii) the lending authority of each loan or executive committee, if any;
       (iii) the responsibility of the board of directors in reviewing, ratifying and approving loans;
       (iv) the guidelines under which unsecured loans will be granted;
       (v) the guidelines for rates of interest and terms of repayment for unsecured loans and secured loans;
       (vi) with regard to secured loans: (A) limitations on the amount advanced in relation to the value of the collateral, (B) the documentation required by the Bank for each type of secured loan, and (C) guidelines for obtaining and documenting periodic appraisals and/or evaluations of collateral;
       (vii) the maintenance and review of complete and current credit files on each borrower;
       (viii) appropriate and adequate collection procedures, including, but not limited to, the actions to be taken against borrowers who fail to make timely payments;
       (ix) guidelines establishing limitations on the maximum volume of loans in relation to total assets;
       (x) appropriate limitations on extension of credit through overdrafts and case items;
       (xi) the determination and documentation of sources and terms of loan repayment;
       (xii) retention of lien searches and appraisals covering personal property and liens on real estate;
       (xiii) maintenance of written, individual loan file comments by officers;
       (xiv) provisions addressing the capitalization of accrued and unpaid interest on loans;
    {{6-30-99 p.C-4714}}
       (xv) procedures regarding designations of nonaccrual loans;
       (xvi) procedures for identifying, supervising, and collecting problem loans;
       (xvii) periodic review of the overdue, problem and/or adversely classified or special mention loans by the board of directors to monitor management's administration of such distressed credits and provide guidance;
       (xviii) periodic review by the board of directors of all loans having an unpaid balance greater than $50,000; and
       (xix) any other loan policy recommendations contained in the FDIC's Report of Examination of the Bank as of September 30, 1998.
(b) The revised written loan policies and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after receipt of any comments from the Regional Director and the Commissioner, and after consideration of such comments, the board of directors shall approve the written loan policies and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written loan policies and/or any subsequent modification thereto.

   [.8] (a) No more than 30 days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank. The written profit plan shall include, at a minimum:

       (i) identification of the major areas in, and means by which the board of directors will seek to improve the Bank's operating performance;
       (ii) realistic and comprehensive budgets;
       (iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
       (iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.
(b) The written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days from the receipt of any comments from the Regional Director and the Commissioner, and after consideration of such comments, the board of directors shall approve the written profit plan and/or any subsequent modification thereto, which approval shall be recorded in the minutes of the board of directors. Thereafter, the Bank and its institution-affiliated parties shall follow the written profit plan and/or any subsequent modification thereto.

   [.9] 9. No more than 60 days from the effective date of this ORDER, the Bank shall correct the technical deficiencies on loans noted on pages 54 through 57, "Assets with Credit Data or Collateral Documentation Exceptions," of the FDIC's Report of Examination of the Bank as of September 30, 1998.

   [.10] 10. No more than 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct violations of law and regulations committed by the Bank as described on pages 30 and 31 of the FDIC's Report of Examination of the Bank as of September 30, 1998.

   [.11] 11. The Bank shall not pay or declare any cash dividends without the prior written consent of the Regional Director and the Commissioner.

   [.12] 12. Following the effective date of this ORDER, the Bank shall send to its shareholders a description of this ORDER, (a) in conjunction with the Bank's next shareholder communication, and also (b) 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 Section, 550 17th Street, N.W. (F-6043), Washington, D.C. 20429-9990, for review at least 20 days prior to dissemination to shareholders. Any changes requested by the FDIC shall be made prior to dissemination of the description, communication, notice, or statement.
   13. The Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the form and manner of any action taken to secure compliance with this ORDER and the results thereof every six months, beginning six months from the effective date of this ORDER. In addition, {{9-30-00 p.C-4715}}the Bank shall furnish such reports on request of either the Regional Director or the Commissioner. The Regional Director may release the Bank in writing from making any or all reports required hereunder. All progress reports and other written responses to this ORDER shall be reviewed by the board of directors of the Bank and made a part of the minutes of the board meeting.
   14. All technical words or terms used in this ORDER, for which meanings are not specified or otherwise provided for by the provisions of this ORDER, shall, insofar as applicable, have meanings as defined in Chapter 3 of Title 12 of the Code of Federal Regulations or the Act, as such definitions may be amended after the execution of this ORDER, and any such technical words or terms used in this ORDER and undefined in said Code of Federal Regulations or the Act shall have meanings that accord with their best custom and usage in the banking industry.
   This ORDER shall become effective 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon the Bank and its institution-affiliated parties, 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 this 9th day of April, 1999.

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