(This order was terminated by order of the FDIC dated 12-24-03; see ¶16,365.)
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] Capital—Increase Required
[.2] Management—Qualifications Specified
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[.3] Dividends—Dividends Restricted
[.4] Assets—Charge-off or Collection
[.5] Loan Loss Reserve—Establishment of or Increase Required
[.6] Loans—Risk Position—Reduction of Adversely Classified Lines of Credit
Required
[.7] Technical Exceptions—Correction of Technical Exceptions Required
[.8] Loans—Collections, Written Policy Required
[.9] Violations of Law—Correction of Violations Required
[.10] Profit Plan—Preparation of Plan Required
[.11] Bank Operations—Training Program Required
[.12] Golden Parachute Payments—Prohibited
[.13] Shareholders—Disclosure of Cease and Desist Order Required
[.14] Board of Directors—Committee to Review Compliance with Cease and
Desist Order Required
In the Matter of
DORCHESTER STATE BANK
DORCHESTER, WISCONSIN
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST
FDIC-02-073b
Dorchester State Bank, Dorchester, Wisconsin ("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 s. 220.04(9), Wis. Stats.,
regarding hearings before the Department of Financial Institutions for
the State of Wisconsin ("WDFI"), and 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 representatives of the WDFI and the Federal Deposit
Insurance Corporation ("FDIC") dated July 16, 2002, whereby,
solely for the purpose of this proceeding and without admitting or
denying the charges of unsafe or unsound banking practices or
violations of law and regulation, the Bank consented to the issuance of
a ORDER TO CEASE AND DESIST ("ORDER") by the WDFI and FDIC.
The WDFI and FDIC considered the matter and determined that there was
reason to believe that the Bank had engaged in unsafe or unsound
banking practices and violations of law and regulation. The WDFI and
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 an inadequate level of capital protection for the
kind and quality of assets held.
B. Operating with a board of directors that fails to exercise adequate
supervision over active Bank officers.
C. Operating with management whose policies and practices are
detrimental to the Bank.
D. Engaging in hazardous lending and lax collection practices,
including, but not limited to:
• The failure to obtain proper loan documentation;
• The failure to obtain adequate collateral;
• The failure to establish and monitor collateral margins of secured
borrowers;
• The failure to obtain current and complete financial information;
• The failure to enforce loan policy guidelines;
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• Extending and renewing credit without full payment of interest; and
• The failure to assess borrowers' ability to repay.
E. Operating with an excessive level of adversely classified
assets, failing to timely recognize loan deterioration, and failing to
timely recognize loan losses.
F. Operating with an inadequate allowance for loan and lease losses
("ALLL") for the volume, kind, and quality of loans and leases
held.
G. Failing to implement timely corrective measures to resolve
continuing asset problems.
H. Operating without adequately trained staff regarding asset/liability
management.
I. Operating without adequate liquidity in light of the Bank's asset
and liability mix.
J. Operating without a realistic budget.
K. Operating with employment contracts ("Change of Control
Agreements") that are detrimental to the interests of the Bank.
L. Violating laws and regulations, including:
Section 23A: The collateral requirements of section 23A(c)(1) of
the Federal Reserve Act, 12 U.S.C. 371c(c)(1);
Section 7(a)(1) of the Act and section 304.4 of the FDIC Rules and
Regulations: The filing requirements to the FDIC with respect to
Reports of Condition and Income and set out in section 7(a)(1) of the
Act, 12 U.S.C. 1817(a)(1), and section 304.4 of the FDIC Rules and
Regulations, 12 C.F.R. 304.4.
Section 326.8 of FDIC Rules and Regulations: The procedures for
monitoring Bank Secrecy Act compliance and requirements for developing
a written compliance program that provides for a system of internal
controls, as set out in section 326.8(c) of the FDIC Rules and
Regulations, 12 C.F.R. 326.8. This is a repeat violation.
Chapter BKG 3.04(1): The chapter of the Wisconsin Administrative Code
that requires a bank to obtain the approval of the Commissioner before
engaging in certain activities with a subsidiary. This requirement
applies to a bank pledging investment subsidiary assets for bank
repurchase agreements.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.1]1. (a) Within 30 days from the effective date of this ORDER, the Bank
shall develop and implement a plan to increase by September 30, 2002,
its Tier 1 leverage capital ratio to a level of not less than 8.0
percent of total assets.
(b) Within 30 days from the last day of each calendar quarter
following the required date of compliance with subparagraph (a) of this
paragraph, the Bank shall determine from its Report of Condition and
Income its level of Tier 1 capital as a percentage of its total assets
("capital ratio") for that calendar quarter. If the capital ratio
is less than 8.0 percent, the Bank shall, within 60 days of the
required determination, increase its capital ratio to not less than 8.0
percent calculated as of the end of that preceding quarterly period.
For purposes of this ORDER, 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.
(c) Any such increase in Tier 1 capital may be accomplished by:
(i) The sale of common stock and noncumulative perpetual
preferred stock constituting Tier 1 capital under Part 325; or
(ii) The elimination of all or part of the assets classified
"Loss" in the Joint WDFI and FDIC Report of Examination dated
February 4, 2002 ("Joint Report"), without loss or liability to
the Bank, provided any such collection on a partially charged-off asset
shall first be applied to the portion of the asset which was not
charged off pursuant to this ORDER; or
(iii) The collection in cash of assets previously charged off; or
(iv) The direct contribution of cash by the directors and/or the
shareholders of the Bank or its holding company; or
(v) Any other means acceptable to Administrator, Division of Banking,
Department of Financial Institutions for the State of Wisconsin
("Administrator") and the Regional Director of the Chicago
Regional Office of the FDIC ("Regional Director"); or
(vi) Any combination of the above means.
(d) If all or part of the increase in capital required by this
paragraph is to be accomplished by the sale of new securities, the
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board of directors of the Bank shall adopt and implement a plan for the
sale of such additional securities, including the voting of any shares
owned or proxies held by or controlled by them in favor of the plan.
Should the implementation of the plan involve a public distribution of
the Bank securities, including a distribution limited only to the
Bank's existing shareholders, the Bank shall prepare detailed offering
materials fully describing the securities being offered, including an
accurate description of the financial condition of the Bank and the
circumstances giving rise to the offering, and any other material
disclosures necessary to comply with the Federal securities laws. Prior
to the implementation of the plan and, in any event, not less than 20
days prior to the dissemination of such materials, the materials used
in the sale of securities shall be submitted to WDFI, 345 W. Washington
Avenue, 4th Floor, P.O. Box 7876, Madison, Wisconsin 53707-7876, and to
the FDIC Registration & Disclosure Section, 550 17th Street, N.W.,
Washington, D.C. 20429, for review. Any changes requested to be made in
the materials by the WDFI and FDIC shall be made prior to their
dissemination.
(e) In complying with the provisions of this paragraph, the Bank shall
provide to any subscriber and/or purchaser of Bank securities written
notice of any planned or existing development or other changes which
are materially different from the information reflected in any offering
materials used in connection with the sale of Bank securities. The
written notice required by this paragraph shall be furnished within 10
calendar days of the date any material development or change was
planned or occurred, whichever is earlier, and shall be furnished to
every purchaser and/or subscriber of the Bank's original offering
materials.
(f) The capital ratio analysis required by this paragraph 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.
[.2]2. (a) Within 60 days from the effective date of this ORDER, the Bank
shall have and retain qualified management. At a minimum, such
management shall include: (i) a chief executive officer with proven
ability in managing a bank of comparable size, with experience in
upgrading a low-quality loan portfolio, and with experience in
asset/liability management; (ii) a 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, or a
workout specialist with an appropriate level of experience in problem
or delinquent loan collection and with expertise in loan and debt
restructuring appropriate for the type and quality of the Bank's loan
portfolio; and (iii) a cashier with the appropriate level of experience
in bank accounting, budgeting, electronic data processing, operations,
and regulatory reporting appropriate to the size and condition of the
Bank. Such persons shall be provided the necessary written authority to
implement the provisions of this ORDER. 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, liquidity, and sensitivity to market risk.
(b) Within 30 days from the effective date of this ORDER, and in
any event, 30 days prior to compliance with subparagraph (a) of this
paragraph, the written descriptions of the duties ascribed to the
positions listed in subparagraph (a), as well as the names and
qualifications of the persons proposed to fill those positions, shall
be submitted to the Administrator and Regional Director for review and
comment.
[.3]3. As of the effective date of this ORDER, the bank shall pay no cash
dividends that would result in a Tier 1 leverage capital ratio of less
than 8.00 percent, without the prior written consent of the
Administrator and the Regional Director.
[.4]4. As of the effective date of the ORDER, the Bank shall eliminate from
its books, by charge-off or collection, all assets or portions of
assets classified "Loss" in the Joint Report that have not been
previously collected or charged off. Any such charged-off asset shall
not be rebooked without the prior
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written consent of the Administrator
and Regional Director. Elimination or reduction of these assets with
the proceeds of other Bank extensions of credit is not considered
collection for the purposes of this paragraph.
[.5]5. (a) Within 30 days from the effective date of this ORDER, the Bank
shall replenish its ALLL balance as of December 31, 2001 to a minimum
level of adequacy ranging between $1,000,000 and $1,070,000.
(b) Within 60 days from the effective date of this ORDER, the Bank
shall make an additional provision for loan and lease losses which,
after review and consideration by the board of directors, reflects the
potential for further losses in the remaining loans classified
"substandard" and all other loans in the portfolio.
(c) Prior to submission or publication of all Reports of Condition and
Income required by the WDFI and FDIC after the effective date of this
ORDER, the board of directors of the Bank shall review the adequacy of
the Bank's 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 ALLL recommended,
if any, and the basis for determination of the amount of the ALLL
provided.
(d) Within 30 days following the last day of each calendar quarter, the
Bank shall submit to the Administrator and the Regional Director copies
of all Reports of Condition and Income filed with the WDFI and FDIC.
(e) ALLL entries required by this paragraph shall be made prior to any
Tier 1 leverage capital ratio determinations required by this ORDER.
[.6]6. (a) Within 60 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Administrator and the Regional
Director for review and comment, a written plan to reduce the Bank's
risk position in each asset in excess of $50,000 which is classified
"substandard" in the Joint Report. In developing such a plan, the
Bank shall, at a minimum:
(i) Review the financial position of each such borrower,
including source of repayment, repayment ability, and alternate
repayment sources; and
(ii) Evaluate the available collateral for each such credit,
including possible actions to improve the Bank's collateral position.
(b) Such a plan shall include, but not be limited to:
(i) Dollar levels to which the Bank shall reduce each asset
within 6 and 12 months from the effective date of this ORDER; and
(ii) Provision for the submission of monthly written progress reports
on the plan to the Bank's board of directors for review and notation
in the minutes of the meetings of the board of directors.
(c) 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 WDFI and the
FDIC.
(d) Within 30 days from the receipt of any comment from the
Administrator and the Regional Director, and after the adoption of any
recommended changes, the board of directors shall approve the written
plan, which approval shall be recorded in the minutes of the board of
directors' meeting. Thereafter, the Bank shall implement and follow
this written plan.
[.7]7. Within 60 days from the effective date of this ORDER, the Bank shall
correct the technical exceptions listed in the Joint Report.
[.8]8. Within 45 days from the effective date of this ORDER, the Bank shall
amend its written plan for the reduction and collection of delinquent
loans. The amended plan shall include, at a minimum, a listing of all
delinquent credits noted in the Joint Report to the extent that the
credits remain delinquent. The listing shall be accompanied by actions
anticipated over the next 30, 60, and 90 days that are designed to
reduce the delinquency of the credit and to bring the credit current.
The amended plan shall also include the name of Bank personnel (or
consultant) whom the Bank expects will perform the anticipated,
scheduled actions.
[.9]9. Within 90 days from the effective date of this ORDER, the Bank
shall correct all violations of laws and regulations listed in the
Joint Report. In addition, the Bank shall establish procedures to
ensure future compliance with all applicable laws and regulations.
[.10]10. (a) Within 90 days from the effective date of this ORDER, the Bank
shall implement a written profit plan with realistic, comprehensive
budgets for all categories of income and expense for calendar years
2002 and 2003. The plan shall contain formal
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goals and strategies
consistent with sound banking practices. A copy of the plan shall be
submitted to the Administrator and the Regional Director upon its
completion.
(b) The written plan shall, at a minimum:
(i) Address strategies to improve the Bank's earnings, both
short-term and long-term;
(ii) Identify the operating assumptions used in preparing the plan; and
(iii) Include the estimated additional expenses associated with the
condition of the Bank, such as additional personnel, auditing,
accounting, legal, consulting, WDFI examination expenses, FDIC
assessments, required provisions to the ALLL, and other real estate
carrying costs.
(c) Prior to the end of each calendar quarter, the Bank's board
of directors shall evaluate the Bank's actual performance in relation
to the plan and budget required by this paragraph and record the
results or the evaluation, and any actions taken by the Bank, in the
minutes of the board of directors' meeting at which such evaluation is
undertaken.
[.11]11. (a) Within 30 days from the effective date of this ORDER, the Bank
shall arrange for appropriate officers and the board of directors to be
provided with liquidity-related training suitable to their individual
responsibilities. The details of the training shall be submitted to the
Administrator and the Regional Director for review and comment. Within
10 days from the receipt of any comments from the Administrator and
Regional Director, the training shall be amended to include any
recommended changes, and shall be scheduled for attendance by the
appropriate officers and the board of directors within 30 days.
(b) Within 30 days from the effective date of this ORDER and quarterly
thereafter, the Bank shall confirm or verify its established lines of
credit at the Federal Home Loan Bank and correspondent banks, including
the Federal Reserve Bank, and immediately notify WDFI and the FDIC if
any line of credit is reduced or eliminated. Quarterly verification of
these lines should occur after the Bank has provided each party with
the final December 31, 2001 Report of Condition and Income, and each
subsequent Report of Condition and Income thereafter.
(c) Within 30 days from the effective date of this ORDER, the Bank
shall establish written procedures for tracking the sources and uses of
funds on a daily basis. In addition, the Bank shall establish a minimum
cash flow coverage ratio that, if not exceeded, will trigger
contingency funding plans. The procedures and minimum ratio shall be
submitted to the Administrator and the Regional Director for review and
comment. Within 10 days of receipt of any comments from the
Administrator and Regional Director, the Bank shall modify and
implement the procedures consistent with such comments.
(d) Within 10 days from the effective date of this ORDER, the Bank
shall calculate and monitor its liquidity ratio on a daily basis.
(e) Within 10 days from the effective date of this ORDER, the
Bank shall establish contingency plans to: restore the liquidity ratio
to the level set by the Bank's Asset/Liability Management Policy; and
restore the cash flow coverage ratio to the minimum levels established
by the Bank pursuant to this paragraph.
[.12]12. (a) As of the effective date of this ORDER, the boards of directors
of the Bank and Dorchester Bancshares, Inc. ("Bank Holding
Company") shall pass a resolution indicating that the members of the
boards are aware that the Bank and the Bank Holding Company are subject
to the restrictions set out in section 18(k) of the Act, 12 U.S.C.
1828(k), and Part 359 of the FDIC Rules and Regulations, 12 C.F.R. Part
359. The Bank and the Bank Holding Company shall not authorize any
golden parachute payment without the prior written consent of the
Administrator and the Regional Director. As used in this ORDER,
"golden parachute payment" shall be defined as in section
359.1(f) of the FDIC Rules and Regulations, 12 C.F.R. 359.1(f).
(b) Within 10 days from the effective date of this ORDER, the Bank
shall submit to the Administrator and the Regional Director copies of
all Change of Control Agreements or other agreements that provide for
golden parachute payments ("Agreements") deemed valid by the
boards.
(c) Within 30 days from the effective date of this ORDER, the boards of
directors of the Bank and the Bank Holding Company shall review all
Agreements. Such reviews shall be reported in the minutes of the
applicable board meetings, which minutes shall be submitted to the
Administrator and the Regional Director. These reviews shall include,
at a minimum:
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(i) A statement of the boards' understanding of material
provisions of these Agreements;
(ii) The criteria that were used at the time they were entered into to
determine that the Agreements were in the best interest of the Bank.
[.13]13. Following the effective date of the ORDER, the Bank and the
Bank Holding Company shall send to its shareholders or otherwise
furnish a description of this ORDER: (1) in conjunction with the
Bank's and the Bank Holding Company's next shareholders
communication; and (2) in conjunction with its notice or proxy
statement preceding the Bank's and Bank Holding Company's next
shareholders 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 WDFI, 345 W.
Washington Avenue, 4th Floor, P.O. Box 7876, Madison, Wisconsin
53707-7876, and to the FDIC Registration and Disclosure Section, 550
17th Street, N.W., Washington, D.C., 20429, for review at least 20 days
prior to dissemination to shareholders. Any changes requested to be
made by the WDFI and FDIC shall be made prior to dissemination of the
description, communication, notice, or statement.
[.14]14. (a) Within 10 days from the effective date of this ORDER, the
Bank shall establish a compliance committee comprised of at least three
directors who are not officers of the Bank. The committee shall monitor
compliance with this ORDER and with the ORDER TO CEASE AND DESIST,
FDIC-01-118b, issued by the FDIC and WDFI on October 5, 2001 ("2001
ORDER").
(b) Within 30 days from the effective date of this ORDER and
every 30 days thereafter, the compliance committee shall submit to the
board of directors for consideration at its next regularly scheduled
meeting a written report detailing the Bank's compliance with each
provision of the 2001 ORDER and this ORDER. The minutes of the
applicable board of directors' meeting shall incorporate the
compliance report and shall note the board's consideration of the
report and any action taken as a result thereof. Establishment of this
committee does not diminish the responsibility of the entire board of
directors to ensure compliance with the provisions of the 2001 ORDER
and this ORDER.
15. Within 30 days from the end of each calendar quarter
following the effective date of this ORDER, the Bank shall furnish to
the Administrator and the Regional Director 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 the 2001
ORDER and this ORDER. Such reports may be discontinued when the
Administrator and the Regional Director have, in writing, released the
Bank from making further reports.
The effective date of this ORDER shall be 10 days after its issuance.
The provisions of this ORDER shall be binding upon the Bank, its
institution-affiliated parties, and any successors and assigns thereof.
The provisions of the 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 WDFI and FDIC. Further, the 2001 ORDER shall
also remain in effect except to the extent that any provisions
contained therein are superceded by any provisions of this ORDER.
Pursuant to delegated authority.
Dated: August 16, 2002.
