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   [11,886] In the Matter of Harwood State Bank, Harwood, North Dakota, Docket No. 01-172b (1-8-02).

(This order was terminated by order of the FDIC dated 9-23-03; see ¶16,355.)

   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.

   [.1] Management—Qualifications Specified

   [.2] Management—Management Plan Required

   [.3] Capital—Maintain Tier 1 Capital

   [.4] Dividends—Dividends Restricted

   [.5] Loan Loss Reserve—Establishment of or Increase Required

   [.6] Assets—Charge-off or Collection

   [.7] Loans—Risk Position—Written Plan Required

   [.8] Loans—Risk Position—Reduction of Adversely Classified Lines of Credit Required

   [.9] Loans—Special Mention

   [.10] Loan Committee—Membership, Duties

   [.11] Loan Policy—Preparation or Revision of Policy Required

   [.12] Technical Exceptions—Correction of Technical Exceptions Required

   [.13] Profit Plan—Preparation of Plan Required

   [.14] Audit—Program Required

   [.15] Shareholders—Disclosure of Cease and Desist Order Required
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In the Matter of
HARWOOD STATE BANK,
HARWOOD, NORTH DAKOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-01-172b

   Harwood State Bank, Harwood, North Dakota ("Bank"), having been advised of its rights to a NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking practices alleged to have been committed by the Bank, as well as of its rights 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") dated December 20, 2001, with counsel for the Federal Deposit Insurance Corporation ("FDIC"), whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices, 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 and unsound banking practices. 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 or unsound banking practices:

   A. Operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits.

   B. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank to prevent unsafe or unsound banking practices.

   C. Operating with an inadequate level of capital protection for the kind and quality of assets held.

   D. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held, and/or failing to make provision for an adequate reserve for possible loan and lease losses.

   E. Engaging in hazardous lending and lax collection practices, including, but not limited to:

       1. the failure to obtain proper loan documentation;

       2. the failure to obtain adequate collateral;

       3. the failure to establish and monitor collateral margins of secured borrowers;

       4. the failure to establish and enforce adequate loan repayment programs;

       5. the failure to obtain current and complete financial information; and

       6. other poor credit administration practices.

   F. Operating with an excessive level of adversely classified loans or assets, and/or delinquent loans and/or non-accrual loans.

   G. Engaging in practices which produce inadequate operating income and excessive loan losses.

   H. Operating with an inadequate internal audit program.

   IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1]1. QUALIFIED MANAGEMENT

   For purposes of this Order, the qualifications of management shall be assessed on its ability to comply with the requirements of this ORDER, operate the Bank in a safe and sound manner, comply with applicable laws and regulations and restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, liquidity and sensitivity to market risk. Furthermore, "senior executive officer" shall be defined as in section 32 of the Act, 12 U.S.C. §1831(i), and section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R. §303.101(b).

   a. Each member of Bank management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank.

       i. During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC and the North Dakota Commissioner,
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       Department of Financial Institutions ("Commissioner") in writing of any changes in any of the Bank's directors or senior executive officers.

       ii. 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, supra, and Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §§ 303.100-303.104.

   b. Within NINETY days from the effective date of this ORDER, the Bank shall have and retain qualified management, who shall be provided the necessary written authority to implement the provisions of this ORDER. At a minimum, such management shall include a new senior lending officer with an appropriate level of lending, collection and loan supervision experience for the type and quality of the Bank's loan portfolio.

   [.2]c. Within SIXTY days from the effective date of this ORDER, the Bank shall develop and complete a plan ("Management Plan") for the purpose of providing qualified management for the Bank.

   d. The Management Plan shall include, at a minimum:

       i. identification of both the type and number of officer positions needed to properly manage and supervise 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 all Bank officers and staff members 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 restoration and maintenance of the Bank in a safe and sound condition; and

       iv. a plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications to fill those officer or staff member positions identified previously in this ORDER.

   e. Upon completion of the Management Plan, it shall be submitted to the Regional Director and the Commissioner for review and comment. Within THIRTY days of the receipt of any comments from the Regional Director and after due consideration of any recommended changes, the board of directors of the Bank shall meet, approve the Management Plan and record the approval in its minutes for the meeting. Thereafter, the Bank, its directors, officers and employees shall implement and follow the approved Management Plan. Any subsequent modification of the Management Plan shall require submission to the Regional Director and the Commissioner for review and comment prior to approval by the Bank.

   [.3]2. CAPITAL ADEQUACY

   For purposes of this ORDER, "capital ratio" means the level of Tier 1 capital as a percentage of total assets. Tier 1 capital and total assets shall be calculated in accordance with Part 325 of the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.

       a. After appropriate entries for an adequate allowance for loan and lease losses ("ALLL") are made in accordance with the requirements of paragraph 4 of this ORDER, but no later than THIRTY days from the effective date of the ORDER, the Bank shall have and maintain a capital ratio at or in excess of 6 percent. For purposes of calculating the capital ratio, Tier 1 capital and total assets shall be those dollar amounts reported in the Bank's most recent Report of Condition and Income.

       b. While this ORDER is in effect, if the capital ratio declines below 6 percent, the Bank shall, within SIXTY days after the date on which the said ratio so declined, submit a written plan to the Regional Director and the Commissioner, 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 from the Regional Director, the Bank shall increase its capital ratio to equal or exceed 6 percent in accordance with the approved plan and shall thereafter maintain its capital ratio at or in excess of such level while this ORDER is in effect.

       c. The Bank's board of directors shall maintain in its minutes a written record of all actions taken by the Bank to comply
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       with the capital requirements of paragraphs 2(a) and 2(b) of this ORDER.

   [.4]3. RESTRICTION ON DIVIDENDS

   As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend, capital distribution, or earnings distribution, without the prior written consent of the Regional Director.

   [.5]4. ALLOWANCE FOR LOAN AND LEASE LOSSES

   For purposes of this ORDER and in making the determinations mandated by this paragraph, the board of directors of the Bank shall consider the Federal Financial Institutions Examination Council's Instructions for the Reports of Condition and Income and any analysis of the Bank's ALLL provided by the FDIC.

       a. Within THIRTY days from the effective date of this ORDER, the Bank shall replenish its ALLL in the amount of at least $165,000.

       b. Within THIRTY days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to August 27, 2001, shall be amended and re-filed if they do not reflect a provision for loan and lease losses and an ALLL which are adequate in view of the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by this paragraph.

       c. 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 board of directors of the Bank shall review the adequacy of the Bank's ALLL, provide for adequate ALLL and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the reserve recommended, if any, and the basis for determination of the amount of reserve provided.

       d. While this ORDER is in effect, the Bank shall submit to the Regional Director and the Commissioner the analysis supporting the determination of the adequacy of its ALLL. These submissions shall be made at such times as the Bank files the progress reports otherwise required by this ORDER.

       e. ALLL entries required by this paragraph shall be made prior to any Tier 1 capital determinations required by this ORDER.

   [.6]5. LOAN CHARGE-OFF

   As of 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" as of August 27, 2001, that have not been previously collected or charged off. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

   [.7]6. REDUCTION OF SUBSTANDARD ASSETS

   For purposes of this ORDER and as used in this paragraph, "reduce" means to collect, charge off, or improve the quality of substandard assets so as to warrant removal of any adverse classification by the FDIC. Furthermore, in developing the plan mandated by this paragraph, the Bank shall, at a minimum: review the financial position of each such borrower, including source of repayment, repayment ability and alternative repayment sources; and, evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.

       a. Within SIXTY days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner, for review and comment, a written plan to reduce the Bank's risk position in each asset in excess of $25,000 which is classified "Substandard" or "Doubtful" in the FDIC's Report of Examination as of August 27, 2001. Within THIRTY days from the receipt of any comment from the Regional Director, and after due consideration of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow this plan.

   [.8]7. REDUCTION OF DELINQUENCIES

   a. Within THIRTY days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner, for review and comment, a written plan for the reduction and collection of delinquent loans.
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   b. The plan shall include, but not be limited to, provisions which:

       i. prohibit the extension of credit for the payment of interest;

       ii. establish acceptable guidelines for the collection of delinquent credits;

       iii. establish dollar levels to which the Bank shall reduce delinquencies within THREE and SIX months from the effective date of this ORDER; and

       iv. provide 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.

   c. Within THIRTY days from receipt of any comment from the Regional Director, and after the adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

   [.9]8. SPECIAL MENTION

   Within SIXTY days from the effective date of this ORDER, the Bank shall correct all deficiencies in the assets listed for "Special Mention" in the FDIC Report of Examination as of August 27, 2001.

   [.10]9. LOAN COMMITTEE

   For purposes of this ORDER, the term "related interest" is defined pursuant to section 215.2(n) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.2(n).

   a. As of the effective date of this ORDER, the Bank's loan committee shall meet at least monthly.

   b. The loan committee shall, at a minimum, perform the following functions:

       i. evaluate, grant and/or approve loans in accordance with the Bank's loan policy as amended to comply with this order;

       ii. provide a thorough written explanation of any deviations from the loan policy which shall:

   a) address how such exceptions are in the Bank's best interest;

   b) be included in the minutes of the corresponding committee meeting; and

   c) be maintained in the borrower's credit file.

       iii. review and monitor the status of repayment and collection of overdue and maturing loans, loans classified "Substandard" in the FDIC's Report of Examination as of August 27, 2001, loans adversely classified "Substandard" or "Doubtful" in subsequent Reports of Examination by the FDIC or the State and loans on the Bank's internal watch list;

       iv. review and give prior written approval for all advances, renewals, or extensions of credit to any borrower or the borrower's related interests when the aggregate volume of credit extended to the borrower and the borrower's related interests exceeds $25,000;

       v. review all applications for new loans and renewals of existing loans to Bank directors, executive officers and their related interests, prepare a written opinion as to whether the credit is in conformance with the Bank's loan policy and all applicable laws and regulations and refer each application and written opinion to the Bank's board of directors for consideration;

       vi. maintain written minutes of the committee meetings, including a record of the review and status of the loans considered.

   c. All loan committee minutes shall be made available to the Bank's board of directors at their next scheduled meeting.

   [.11]10. LOAN POLICY

   a. Within SIXTY 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.

   b. The initial revisions to the Bank's loan policy required by this paragraph, at a minimum, shall include provisions:

       i. establishing review and monitoring procedures to ensure that all lending personnel are adhering to established lending procedures and that the board of directors is receiving timely and fully documented
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       reports on loan activity, including any deviations from established policy;

       ii. requiring that all extensions of credit originated or renewed by the Bank:

         a) be supported by current credit information and collateral documentation, including lien searches and the perfection of security interests;

         b) have current financial information, profit and loss statements or copies of tax returns, and cash flow projections, which information and shall be maintained throughout the term of the loan; and

         c) have a clearly defined and stated purpose and a predetermined and realistic repayment source and schedule;

       iii. incorporating limitations on the amount that can be loaned in relation to established collateral values, including the requirement that the source of the valuations be identified and that such collateral valuations be completed prior to the disbursement of loan proceeds and be performed on a periodic basis over the term of the loan;

       iv. requiring the establishment and maintenance of a loan grading system and internal loan watch list;

       v. establishing standards for collection efforts for past due loans;

       vi. establishing guidelines for timely recognition of loss through charge-off;

       vii. requiring loan committee review and monitoring of the status of repayment and collection of overdue and maturing loans, loans classified "Substandard" in the FDIC Report of Examination as of August 27, 2001, loans adversely classified "Substandard" or "Doubtful" in subsequent Reports of Examination by the FDIC or the State and loans on the Bank's internal watch list;

       viii. requiring a written plan to lessen the risk position in each line of credit identified as a problem credit on the Bank's internal loan watch list;

       ix. prohibiting the extension of a maturity date, advancement of additional credit or renewal of a loan to a borrower whose obligations to the Bank were classified "Substandard," "Doubtful," or "Loss," whether in whole or in part, as of August 27, 2001, or by the FDIC or State authority in a subsequent Report of Examination, without the full collection in cash of accrued and unpaid interest, unless the loans are well secured and/or are adequately supported by current and complete financial information, and the renewal or extension has first been approved in writing by a majority of the Bank's board of directors;

       x. prohibiting the capitalization of interest or loan-related expenses unless the board of directors provides, in writing, a detailed explanation of why said deviation is in the best interest of the Bank;

       xi. requiring that collateral appraisals be completed prior to the making of secured extensions of credit, and that periodic collateral valuations be performed for all secured "problem loans"; and

       xii. establishing review and monitoring procedures for compliance with the FDIC's regulation on appraisals, 12 C.F.R. Part 323; and

   c. The revised written loan policy shall be submitted to the Regional Director and the Commissioner for review and comment before its completion. Within THIRTY days from the receipt of any comments from the Regional Director, and after due consideration of any recommended changes, the board of directors shall approve the written loan policy and any subsequent modification thereto, which approval shall be recorded in the minutes of a board of directors' meeting.

   d. The Bank shall inform the Regional Director and the Commissioner, in writing, how it intends to ensure compliance. Thereafter, the Bank shall implement and follow the amended written loan policy.

   [.12]11. TECHNICAL EXCEPTIONS

   Within SIXTY days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the FDIC Report of Examination as of August 27, 2001. "Correct" shall include documented attempts to collect listed information. The Bank shall initiate and implement a program to ensure its credit files contain complete, adequate and current documentation.

   [.13]12. PROFIT PLAN AND BUDGET

   The plan and budget required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, as well as a description of the operating assumptions
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   that form the basis for major projected income and expense components.

       a. Within SIXTY days from the effective date of this ORDER, the Bank shall submit to the Regional Director and the Commissioner, for review and comment, a written profit plan and a realistic/comprehensive budget for all categories of income and expense for calendar year 2002. Within THIRTY days from the receipt of any comments from the Regional Director, and after due consideration of any recommended changes, the Bank shall approve the plan and budget, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the plan and budget.

       b. Within THIRTY days from the end of each calendar quarter following completion of the profit plan and budget required by this paragraph, the Bank's board of directors shall evaluate the Bank's actual performance against them, record the results of the evaluation, and note any actions taken by the Bank in the minutes of the board of directors' meeting at which such evaluation is undertaken.

       c. A written profit plan and budget shall be prepared for each calendar year for which this ORDER is in effect. A copy of the profit plan and budget shall be submitted to the Regional Director and the Commissioner for review and comment within THIRTY days of the end of each year.

   [.14]13. AUDITS

   Within SIXTY days from the effective date of this ORDER, the Bank's board of directors shall formulate and submit to the Regional Director and the Commissioner, for review and comment, a comprehensive written audit program. Within THIRTY days from the receipt of any such comments from the Regional Director and after due consideration of any recommended changes, the Bank shall approve the audit program, which approval shall be recorded in the minutes of the board of directors' meeting. The Bank shall thereafter implement and enforce an effective system of internal and external audits. The internal auditor shall make written monthly reports of audit findings directly to the Bank's board of directors. The minutes of the meetings of the board of directors shall reflect consideration of these reports and describe any action taken as a result thereof.

   [.15]14. DISCLOSURE TO SHAREHOLDERS

   Following the effective date of this ORDER, the Bank shall send to its shareholders, or otherwise furnish a description of, this ORDER in conjunction with the Bank's next shareholder communication and 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, notice or statement shall be sent to the FDIC Registration and Disclosure Section, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, for review at least TWENTY days prior to dissemination to shareholders. Any requests for changes made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

15. PROGRESS REPORTS

   On the last day of the THIRD month following the effective date of this ORDER, and on the last day of every THIRD month thereafter, the Bank shall furnish the Regional Director and the Commissioner written progress reports, signed by each member of the Bank's board of directors, detailing the form and manner of any actions taken to secure compliance with this ORDER. 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 TEN 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 provision has been modified, terminated, suspended, or set aside by the FDIC.

   Issued Pursuant to Delegated Authority.

   Dated: January 8, 2002.

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Last Updated 12/7/2003 legal@fdic.gov