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[¶11,761] In the Matter of Walhalla State Bank, Walhalla, North Dakota, Docket No. 00-125b (1-16-01).
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 1-25-02; see ¶16,303.)
[.1] ManagementQualifications Specified
[.2] AssetsAdversely Classified AssetsReduction Required
[.3] Loan Loss ReserveEstablishment of or Increase Required
[.4] Leverage RatiosDeclineWritten Plan Required
[.5] LoansRisk PositionWritten Plan Required
[.6] LoansExtensions of CreditTo Borrowers with Existing Adversely Classified Credits
[.7] LoansInterestAccrual of
[.8] Technical ExceptionsCorrection of Technical Exceptions Required
[.9] LoansSpecial Mention
[.10] Loan PolicyPreparation or Revision of Policy Required
[.11] Board of DirectorsInternal Loan Review and Grading SystemWritten
Plan Required
[.12] Violations of LawCorrection of Violations Required
[.13] Profit PlanPreparation of Plan Required
[.14] DividendsDividends Restricted
[.15] ShareholdersDisclosure of Cease and Desist Order Required
In the Matter of
WALHALLA STATE BANK
WALHALLA, NORTH DAKOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-00-125b
Walhalla State Bank ("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/or regulations
alleged to have been committed by the Bank and of its right to a
hearing on such alleged 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 AGREE
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MENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC),
dated January 4, 2001, whereby solely for the purpose of this
proceeding and without admitting or denying any unsafe or unsound
banking practices or violations of law and/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/or 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/or 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/or regulations.
B. operating with management whose policies and practices are
detrimental to the Bank;
C. operating with an excessive volume of adversely classified assets;
D. engaging in hazardous lending and lax collection practices,
including maintaining an excessive volume of adversely classified
loans;
E. operating with an inadequate allowance for loan and lease losses for
the kind and quality of assets held;
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. engaging in practices which produce inadequate operating income and
excessive loan losses; and
H. 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 60 days from the effective date of this ORDER,
the Bank shall have and thereafter retain qualified management. Such
management shall include:
(A) A qualified chief executive officer who shall be given stated
written authority by the Bank's board of directors, including
responsibility for implementing and maintaining the policies of the
Bank. The chief executive officer shall have an appropriate level of
experience to perform the duties assigned to that individual by the
Bank's board of directors. The Bank shall promptly notify the Regional
Director of the FDIC's Kansas City Regional Office ("Regional
Director") and the Commissioner of Banking and Financial
Institutions for the State of North Dakota ("Commissioner") of
the identity of said chief executive officer.
(B) A qualified 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.
The Bank shall promptly notify the Regional Director and the
Commissioner of the identity of said senior lending officer.
Prior to the addition of any individual to the board of directors
or the employment of any individual as a senior executive officer, the
Bank shall comply with the requirements 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.
(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.
(b) No more than 45 days from the effective date of this ORDER, the
board of di
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rectors 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 in particular the chief
executive 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 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 comment from the Regional Director, and after
consideration of such comment, 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.
(d) During the period this ORDER is in effect, the Bank's board of
directors, shareholders, and institution-affiliated parties shall
increase the number of the Bank's board of director members 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 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 an 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 allowances for loan and lease losses.
(e) Effective the date of this ORDER, the Bank's board of directors
shall meet at least monthly. Detailed written minutes of all board
minutes shall be maintained and recorded on a timely basis.
[.2] 2. 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" in the FDIC's Report of Examination of the Bank as of
June 30, 2000; 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" in the FDIC's Report of
Examination of the Bank as of June 30, 2000, 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.
[.3] 3. (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 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) During the period this ORDER is in effect, 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 shall at a minimum reflect an
allowance maintained in accordance with the Instructions.
(d) Prior to the submission of any Report of Condition and Income
required to be filed
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by the Bank 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.
[.4] 4. (a) During the period this ORDER is in effect, if the Bank's
"leverage ratio," as that term is defined in section 325.2(k) of
the Rules, 12 C.F.R. §325.2(k), declines below 6 percent after
making appropriate entries for an adequate allowance in accordance with
the requirements of paragraph 3 of this ORDER, the Bank shall, within
30 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
leverage ratio to equal or exceed 6 percent in accordance with the
approved plan and shall thereafter maintain its leverage ratio at or in
excess of such level while this ORDER is in effect.
(b) 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 paragraph 4(a) of this ORDER, including, at a
minimum any action to increase its leverage ratio.
[.5] (a) Within 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" in the FDIC's
Report of Examination of the Bank as of June 30, 2000. 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 volume of "Substandard" or 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 comment from the Regional Director, the
board of directors shall approve the written plan of action, 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.
[.6] 6. 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 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.
[.7] 7. 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
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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.
[.8] 8. No more than 90 days from the effective date of this ORDER, the Bank
shall correct the technical exceptions on loans noted on pages 69
through 72 of the FDIC's Report of Examination of the Bank as of June
30, 2000.
[.9] 9. No more than 90 days from the effective date of this ORDER, the Bank
shall correct the cited deficiencies in the loan listed for "Special
Mention" on page 67 of the FDIC's Report of Examination of the Bank
as of June 30, 2000.
[.10] 10. No more than 60 days from the effective date of this ORDER, the
Bank shall revise its written loan policies to address the deficiencies
noted on pages 29 and 30 of the FDIC's Report of Examination of the
Bank as of June 30, 2000. In addition, the revised loan policy shall
establish conflict of interest guidelines regarding transactions with
insiders and/or affiliates. The revised written loan policies and any
subsequent modifications 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 comment from the Regional Director, 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 subsequent modifications thereto.
[.11] 11. (a) Within 60 days from the effective date of this ORDER, the board
of directors shall develop a written internal loan review and grading
system ("System") that periodically identifies credit risk in
outstanding extensions of credit made by the Bank. At a minimum, the
System shall include a review of individual loans by persons other than
the originating loan officer and/or the loan officer responsible for
the day-to-day servicing of such loan.
(b) The System shall also include a written procedure which shall
require that at least once a month a written report shall be made to
the board of directors on the status of each extension of credit
identified under the requirements of paragraph 11(a). Each written
report submitted to the board of directors shall identify any actions
taken by the Bank, including any action to strengthen or collect any
such extensions of credit. The report shall be maintained with and made
a part of the board of director's minutes.
(c) The System and any subsequent modifications 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 comment from the
Regional Director, the board of directors shall adopt and implement the
System and/or any subsequent modifications 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 System
and/or any subsequent modifications thereto.
[.12] 12. (a) No more than 60 days from the effective date of this ORDER, the
Bank shall eliminate and/or correct all violations of law and
regulations committed by the Bank as described on pages 39 through 43
of the FDIC's Report of Examination of the Bank as of June 30, 2000.
(b) In addition, the Bank's board of directors shall review and, as
necessary, amend the policies of the Bank to ensure adequate procedures
are in place to minimize the possibility of future violations of law
and/or regulations. All actions taken in connection with such review
shall be submitted to the Regional Director and the Commissioner for
review and comment. Any comment by the Regional Director shall be
incorporated into the policies of the Bank. The Bank shall thereafter
follow the revised policies.
[.13] 13. (a) No more than 45 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, which 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 ad
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equately 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 after the
receipt of any comment from the Regional Director, the board of
directors shall approve the written profit plan and 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.
[.14] 14. The Bank shall not pay or declare any cash dividends without the
prior written consent of the Regional Director and the Commissioner.
[.15] 15. 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 of 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 to be made by the
FDIC shall be made prior to dissemination of the description,
communication, notice, or statement.
16. 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 90 days, beginning 90 days from the effective date of
this ORDER. In addition, the Bank shall furnish such reports on request
of either the Regional Director or the Commissioner. 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.
17. 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.
18. This ORDER shall become effective 10 days from the date of its
issuance.
19. The provisions of this ORDER shall be binding upon the Bank and its
institution-affiliated parties, successors and assigns.
20. 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 16th day of January, 2001.