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FDIC Enforcement Decisions and Orders

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   [12,045] In the Matter of The Cowlitz Bank, Longview, Washington, Docket No. 03-097b (5-15-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent engaged in unsafe and unsound practices.

(This order was terminated by order of the FDIC dated 3-12-04; see ¶16,373.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Review Bank Affairs

   [.3] Capital—Maintain Tier One Capital

   [.4] Loan Loss Reserve—Policy for Determining Adequacy of

   [.5] Assets—Charge-off or Collection

   [.6] Reports of Condition and Income—Procedures for Filing
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   [.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credit

   [.8] Strategic Plan—Review Required

   [.9] Profit Plan—Revision Required

   [.10] Violations of Law—Correction of Violations Required

   [.11] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.12] Dividends—Dividends Restricted

   [.13] Audit—Required

   [.14] Audit—Internal Audit—Plan to Implement Consultant's Recommendations

   [.15] Shareholders—Disclosure of Cease and Desist Order Required

   [.16] Compliance Reports—Compliance Reports

In the Matter of
THE COWLITZ BANK
LONGVIEW, WASHINGTON
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-097b

   The Cowlitz Bank, Longview, Washington ("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 the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b)(1), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated May 6, 2003, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and/or regulations, the Bank consented to the issuance of an ORDER ("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 committed violations of law and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER

   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 regulation:

       (a) engaging in hazardous lending and lax collection practices;

       (b) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;

       (c) operating with a large volume of poor quality loans;

       (d) operating with an inadequate loan valuation reserve;

       (e) operating with inadequate provisions for liquidity;

       (f) operating with inadequate internal routine and controls policies;

       (g) operating in such a manner as to produce low earnings;

       (h) operating in violation of section 23A and 23B of the Federal Reserve Act, 12 U.S.C. §371c, and 12 U.S.C. 371c-1 made applicable to state nonmember insured institutions by section 18(j)(1) of the Act, 12 U.S.C. §1828(j)(1), as more fully described on pages 17–19 of the Report of Examination dated November 4, 2002;

       (i) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits; and

       (j) operating with a board of directors that has not provided adequate supervision over and direction to the active management of the Bank.

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

   [.1]1. The Bank shall have and retain qualified management.

   (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Management shall include a chief executive officer with proven ability in managing a Bank of comparable size, and experience in upgrading a low quality loan portfolio, improving earnings, and other matters needing particular attention. Management shall also include a credit administrator with significant appropriate lending, collection, and loan supervision experience and experience in upgrading a low quality loan portfolio. Each member of management shall be provided appropriate written authority from the Bank's board of directors to implement the provisions of this ORDER.

   (b) The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;

       (ii) operate the Bank in a safe and sound manner;

       (iii) comply with applicable laws and regulations; and

       (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's San Francisco Regional Office ("Regional Director") and the Director of Banks, Department of Financial Institutions for the State of Washington ("Director of Banks") in writing when it proposes to add any individual to the Bank's board of directors or employ any individual as a senior executive officer. The term "senior executive officer" shall have the same meaning ascribed to it in 12 C.F.R. §303.101(b). The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed.

   [.2]2. The Board of Directors shall immediately assume full responsibility for the formulation, approval, and implementation of sound policies and objectives for all of the Bank's activities, consistent with the role and expertise commonly expected for directors of Banks of comparable size. The Board of Directors shall meet no less frequently than monthly at which, at a minimum, the following areas of the bank's condition and performance shall be reviewed and approved: reports of income and expenses with particular emphasis on material variances of actual operating results from projected results; new, overdue, renewed, insider, charged-off and recovered loans; investment activity; and individual committee actions. Operating policies shall be reviewed and approved by the Board of Directors at least annually. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   [.3]3. (a) During the life of this ORDER, the Bank shall maintain Tier 1 capital in such an amount as to consistently equal or exceed eight (8.0%) percent of the Bank's total assets.

   (b) Within 60 days from the effective date of this ORDER, the Board of Directors shall revise and adopt the Bank's capital plan to ensure compliance with the minimum risk-based capital requirements as described in the FDIC Statement of Policy on Risk-Based Capital contained in Appendix A to Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325, Appendix A. The Plan shall be in a form and manner acceptable to the Regional Director and the Director of Banks as determined at subsequent examinations and shall take into consideration the minimum capital ratio required by Paragraph 3(a) of this Order.

   (c) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Paragraph 3(a) shall be in addition to a fully funded allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Regional Director and the Director of Banks as determined at subsequent examinations and/or visitations.

   (d) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may be accomplished by the following:

       (i) the sale of common stock; or

       (ii) the sale of noncumulative perpetual preferred stock; or
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       (iii) the direct contribution of cash by the parent holding company; or

       (iv) any other means acceptable to the Regional Director and the Director of Banks; or

       (v) any combination of the above.

   Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may not be accomplished through a deduction from the 's allowance for loan and lease losses.

   (e) If all or part of the increase in Tier 1 capital required by Paragraph 3 of this ORDER is accomplished by the sale of new securities, the Board of Directors shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Bank's securities (including a distribution limited only to the Bank's existing shareholders), the shall prepare 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 fifteen (15) days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Accounting and Securities Section, Washington, D.C. 20429, for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the increase in Tier 1 capital is provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue including, but not limited to, those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional Director and the Director of Banks for prior approval.

   (f) In complying with the provisions of Paragraph 3 of this ORDER, the shall provide to any subscriber and/or purchaser of the Bank's securities, a 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 securities. The written notice required by this paragraph shall be furnished within 10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every subscriber and/or purchaser of the Bank's securities who received or was tendered the information contained in the Bank's original offering materials.

   (g) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(t) and 325.2(v).

   [.4]4. Within 10 days from the effective date of this ORDER, the shall establish and thereafter maintain an adequate allowance for loan and lease losses.

   Additionally, within 30 days from the effective date of this ORDER, the Board of Directors shall formulate, adopt and implement a comprehensive policy for determining the adequacy of the allowance for loan and lease losses. The policy should, among other things, ensure accurate and timely loan grading. For the purpose of this determination, the adequacy of the allowance for loan and lease losses shall be determined after the charge-off of all loans or other items classified "Loss." The policy shall provide for a review of the allowance for loan and lease losses at least once each calendar quarter. The review should focus on the results of the Bank's internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure of significant credits, concentrations of credit, and present and prospective economic conditions. A deficiency in the allowance for loan and lease losses shall be remedied in the calendar quarter it is discovered, prior to submitting the Report of Condition and Income, by a charge to current operating earnings. The minutes of the Board of Directors meeting at which such review is undertaken shall indicate the results of the review. Upon completion of the review, the Bank shall increase and maintain its allowance for loan and lease losses consistent with the allowance for loan and lease loss policy established. Such policy and its implementation shall be satisfactory to the Regional Director and Director of Banks as determined at subsequent examinations and/or visitations.

   [.5]5. (a) Within 10 days from the effective date of this ORDER, the Bank shall
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   eliminate from its books, by charge-off or collection, all assets classified "Loss."

   (b) No later than November 30, 2003 the Bank shall reduce the amount of all classified assets in the Report of Examination dated November 4, 2002, that have not been previously collected or charged off to no more than 50% of Tier 1 capital plus the allowance for loan and lease losses and, no later than December 31, 2004, the Bank shall further reduce classified assets to no more than 25% of Tier 1 capital plus the allowance for loan and lease losses.

   (c) The requirements of Paragraph 5(a) of this ORDER are not to be construed as standards for future operations. Reduction of these assets through proceeds of other loans made by the Bank is not considered collection for the purpose of this paragraph. As used in Paragraph 5(a) the word "reduce" means:

       (i) to collect;

       (ii) to charge-off; or

       (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC and the State of Washington Department of Financial Institutions.

   [.6]6. Within 10 days after eliminating from its books any asset in compliance with Paragraph 5(a) of this ORDER, the Bank shall file with the FDIC amended Consolidated Reports of Condition and Income that accurately reflect the financial condition of the Bank. Thereafter, during the life of this ORDER, the Bank shall file with the FDIC Consolidated Reports of Condition and Income that accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any adjustment in the Bank's books made necessary or appropriate as a consequence of any FDIC or State of Washington examination of the Bank during that reporting period.

   [.7]7. (a) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified by the FDIC or Washington State Department of Financial Institutions, in whole or in part, "Loss" and is uncollected. Notwithstanding the above, the Bank may make advances upon the classified credit accommodations extended to Business Finance Corporation, more fully described on pages 36–38 of the Report of Examination dated November 4, 2002, that are consistent with or improved from the current structure of the notes.

   (b) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been classified Substandard or Doubtful, in whole or part, in excess of one million dollars without the prior approval of a majority of the Board of Directors or the loan committee of the Bank.

   (c) Paragraph 7(a) of this ORDER shall not prohibit the Bank from renewing or extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 ("FASB 15").

   [.8]8. Within 60 days from the effective date of this ORDER, the Board of Directors shall revise the Bank's strategic plan to take into consideration the Board's decision to retain the Bay Mortgage subsidiary. The revised plan shall be in a form and manner acceptable to the Regional Director and the Director of Banks as determined at subsequent examinations and/or visitations.

   [.9]9. Within 60 days from the effective date of this ORDER, the Board of Directors shall revise and implement the Bank's written profit plan taking into consideration the Board's decision to retain the Bay Mortgage subsidiary. The revised plan shall be in a form and manner acceptable to the Regional Director and the Director of Banks as determined at subsequent examinations and/or visitations.

   [.10]10. Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, which are more fully set out on pages 17–21 in the FDIC's Report of Examination November 4, 2002. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   [.11]11. Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written liquidity and funds management policy. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director
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   and the Director of Banks as determined at subsequent examinations and/or visitations.

   [.12]12. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Director of Banks.

   [.13]13. Within 60 days from the effective date of this Order, the Bank shall conduct a full scope internal audit of the Bay Mortgage Division and provide the results of that audit to the Regional Director and the Director of Banks.

   [.14]14. Within 120 days from the effective date of this Order the Board of Directors shall formulate and implement an effective internal audit policy. The policy shall incorporate the recommendations noted on page 4 of the November 4, 2002, Report of Examination and shall ensure that the Bank's internal audit department is adequately staffed commensurate with the size and complexity of the institution. Such policy and its implementation shall be in a form and manner acceptable to the Regional Director and the Director of Banks as determined at subsequent examinations and/or visitations.

   [.15]15. 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 also 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, Accounting and Securities Section, Washington, D.C. 20429, at least 15 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]16. Within 30 days after the end of each calendar quarter, the Bank shall furnish written progress reports to the Regional Director and the Director of Banks detailing the form and manner of any actions taken to achieve and maintain compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's Report of Condition and the Bank's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Director of Banks have released the Bank in writing from making further reports.

   This ORDER shall become effective 10 days from the date of its issuance.

   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 at San Francisco, California, this 15th day of May, 2003.

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