Each depositor insured to at least $250,000 per insured bank


Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders





FDIC Enforcement Decisions and Orders



ED&O Home | Search Form | Text Search | ED&O Help


{{8-9-05 p.C-5979}}

   [12,143] In the Matter of State Bank of Hamburg, Hamburg, Minnesota, Docket No. 03-203b (1-22-04).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 8-9-05; see ¶16,434.)

   [.1] Management—Qualifications Specified

   [.2] Capital—Tier 1 Capital Increase/Maintain

   [.3] Dividends—Dividends Restricted

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

   [.5] Assets—Charge-off or Collection

   [.6] Cease and Desist Orders—Assets—Adversely Classified Assets, Reduction Required

   [.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
{{3-31-04 p.C-5980}}

   [.8] Assets—Adversely Classified Assets—Reduction Required

   [.9] Assets—Special Mention—Eliminate Deficiencies

   [.10] Loan Committee—Duties Specified

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

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

   [.13] Concentration of Credit—Reduce

   [.14] Profit Plan—Preparation of Plan Required

   [.15] Violations of Law—Corrections of Violations Required

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

   [.17] Compliance Committee—Establishment Required

   [.18] Progress Report—Written Report Required

In the Matter of
STATE BANK OF HAMBURG
HAMBURG, MINNESOTA
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-203b

   State Bank of Hamburg, Hamburg, Minnesota ("Bank"), having been advised of its right[s] 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, as well as of their 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 January 16, 2004, 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 and violations of law and regulation, 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 and violations of law and regulation. 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 and violations of law and regulation:

       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 that has failed to provide adequate supervision over and direction to the management of the Bank.

       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 allowance 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;

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


    {{3-31-04 p.C-5981}}

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

       G. Operating with inadequate internal routines and controls.

       H. Violating laws and/or regulations, including:

         1. the legal lending limit restrictions of the State of Minnesota as set forth in Section 48.24;

         2. the prior approval requirements for loans to bank insiders as set forth in section 215.4(b)(i) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(b)(i);

         3. the overdraft restrictions of section 215.4(e) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.4(e);

         4. the collateral requirements of section 23A of the Federal Reserve Act, 12 U.S.C. §371c(c)(1)(A)(B)(C) or (D); and

         5. the requirements of Part 103 of the Treasury Department's Financial Record-keeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. Part 103 §§18–38.

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

   [.1]1. 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). Each member of Bank management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank.

       (a) During the life of this ORDER, the Bank shall notify the Regional Director and the State Commissioner of the Department of Commerce, in writing, of the resignation or termination of any of the Bank's directors or senior executive officers.

       (b) 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.

       (c) Within 90 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 30 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. Any subsequent modification of the Management Plan shall require submission to the Regional Director for review and comment prior to approval by the Bank. Thereafter, the Bank, its directors,
    {{3-31-04 p.C-5982}}

       officers and employees shall implement and follow the approved Management Plan.

   [.2]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 this Order, but no later than 30 days from the effective date of this Order, the Bank shall have and maintain a Tier 1 capital ratio in excess of 7 percent.

       (b) Within 30 days from the last day of each calendar quarter following December 31, 2003, the Bank shall determine, from its Reports of Condition and Income, its Tier 1 capital ratio for that calendar quarter following. If it is less than 7 percent, within 60 days from said required determination, the Bank shall 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 7 percent.

       (c) Any increases in Tier 1 capital may be accomplished by the following:

         (i) the sale of common stock and non-cumulative perpetual preferred stock;

         (ii) the elimination of all or part of the assets classified "Loss" as of September 8, 2003, without incurring loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged-off pursuant to this ORDER;

         (iii) the collection in cash of assets previously charged off;

         (iv) the direct contribution of cash by the directors and/or the shareholders of the Bank;

         (v) any other means acceptable to the Regional Director;

         (vi) any combination of the above.

         (vii) If all or part of the increase in capital required by this paragraph is to be accomplished by the sale of new securities, the 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 said plan. Should the implementation of the plan involve public distribution of 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 other material disclosures necessary to comply with 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 the securities shall be submitted to the FDIC Registration and Disclosure Section, 550 17th Street, Room F-6043, N.W., Washington, D.C. 20429, for its review. Any changes to be made in the materials requested by the FDIC shall be made prior to their dissemination. If the Regional Director allows any part of the increase in Tier 1 capital to be provided by the sale of non-cumulative perpetual preferred stock, then all terms and conditions of the issue, including but not limited to, those terms and conditions relative to the interest rate and any convertibility factor, shall be presented to the Regional Director for prior approval.

         (viii) 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 of 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.

         (ix) 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.


{{3-31-04 p.C-5983}}

   [.3]3. RESTRICTION OF DIVIDENDS As of the effective date of this ORDER, the Bank shall pay no cash dividends, which would result in a Tier 1 capital ratio of less than 7 percent, without the prior written consent of the Regional Director and the Commissioner.

   [.4]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, the Interagency Statement of Policy on the Allowance for Loan and Lease Losses ("ALLL") and any analysis of the Bank's ALLL provided by the FDIC.

       (a) Within 30 days from the effective date of this ORDER, the Bank shall maintain a fully funded ALLL.

       (b) Prior to the submission 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 an 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 ALLL recommended, if any, and the basis for determination of the amount of ALLL provided.

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

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

   [.5]5. ASSET CHARGE-OFF Elimination or reduction of assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph. 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 September 8, 2003, that have not been previously collected or charged off.

   [.6]6. REDUCTION OF SUBSTANDARD AND DOUBTFUL ASSETS For purposes of this ORDER and as used in this paragraph, "reduce" means to collect, charge off, or improve the quality of "Doubtful" and "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 90 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 September 8, 2003. Within 30 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.

       (b) The plan mandated by this paragraph shall include, but not be limited to, the following:

         (i) the projected dollar levels to which risk in each classified asset will be reduced;

         (ii) a description of the risk reduction methodology to be followed;

         (iii) provisions for the Bank's submission of monthly written progress reports to its board of directors;

         (iv) provisions mandating board review of said progress reports; and

         (v) provisions for the mandated review to be recorded by notation in the minutes of the board of directors' meetings.

   [.7]7. PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS As of the effective date of this ORDER, the Bank shall not, directly or indirectly extend any additional credit to, or for the benefit of, any borrower who is already obligated in
{{3-31-04 p.C-5984}}

   any manner to the Bank on any extensions of credit (or portion thereof) that has been charged-off the books of the Bank or classified "Loss," so long as such credit remains uncollected. Additionally, the Bank shall not, directly or indirectly, extend any additional credit to, or for the benefit of, any borrower whose loan or other credit has been classified "Doubtful," "Substandard" or is listed for Special Mention, and remains uncollected, unless its board of directors adopts a detailed written statement giving the reasons why such potential action is in the best interest of the Bank. A copy of such statement shall be placed in the appropriate loan file and shall be incorporated in the minutes of the applicable board of directors' meeting.

   [.8]8. REDUCTION OF DELINQUENCIES Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan for the reduction and collection of delinquent loans. The plan shall include, but not be limited to, provisions which:

       (a) prohibit the extension of credit for the payment of interest;

       (b) delineate areas of responsibility;

       (c) establish acceptable guidelines for the collection of delinquent credits;

       (d) establish projected dollar levels to which the Bank shall reduce delinquencies within 3 and 6 months from the effective date of this ORDER; and

       (e) 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.

   [.9]9. SPECIAL MENTION Within 30 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 September 8, 2003.

   [.10]10. LOAN COMMITTEE Within 30 days from the effective date of this ORDER, the Bank shall reappoint a loan committee, which shall meet regularly on at least a monthly basis. The loan committee shall include at least two directors who are not officers of the Bank, or any bank subsidiary.

    (a) 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:

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

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

         (v) be maintained in the borrower's credit file.

         (vi) review and monitor the status of repayment and collection of overdue and maturing loans, of all loans classified "Substandard" in the FDIC's Report of Examination as of September 8, 2003 or subsequent regulatory examination, and of all loans included on the Bank's internal watch list;

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

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

   [.11]11. CREDIT ADMINISTRATION

       (a) Within 60 days from the effective date of this ORDER, the board of directors of the Bank shall review the Bank's current loan policy and procedures for adequacy, taking into consideration the criticism of the Bank's underwriting and loan administration practices found in the FDIC Report of Examination as of September 8, 2003. Based upon this review, the board of directors shall develop a written plan of corrective action to address the deficiencies outlined and described in the Report of Examination on pages 2 through 6, 7, 8, and 19;

       (b) The corrective action plan required by this paragraph shall also provide for a semi-annual independent assessment of the lending activities of each Bank loan officer and of the Bank's Loan Committee to determine compliance with the corrective action plan and the Bank's loan policy. The plan shall also provide that within 30 days after the findings of the assessment, the board of directors shall take appropriate corrective action to address any areas of reported noncompliance. Those findings and any corrective action shall be documented in the minutes of the Bank's board of directors; and

       (c) Upon completion of the corrective action plan, it shall be submitted to the Regional
    {{3-31-04 p.C-5985}}

       Director and the Commissioner for review and comment. Within 30 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 plan, and record the approval in its minutes for the meeting. Any subsequent modification of the plan shall require submission to the Regional Director for review and comment prior to approval by the Bank. Thereafter, the Bank, its directors, officers and employees shall implement and follow the approved plan and any proposed changes to the Bank's loan policy arising from or otherwise necessitated by the proposed corrective action.

   [.12]12. TECHNICAL EXCEPTIONS Within 60 days from the effective date of this ORDER, the Bank shall eliminate or correct the technical exceptions listed in the FDIC Report of Examination as of September 8, 2003. "Correct" shall encompass documented attempts to collect missing information if not obtained due to circumstances beyond the Bank's control. The Bank shall initiate and implement a program to ensure its credit files contain complete, adequate and current documentation.

   [.13]13. REDUCTION OF CONCENTRATIONS OF CREDIT Within 90 days from the effective date of this ORDER, management will review concentrations of credit in order to identify level of risk. The Bank shall formulate and adopt a written plan of action to manage the risk of each concentration. This will be accomplished, where appropriate, through strengthened administration or risk reduction.

   [.14]14. PROFIT PLAN AND BUDGET The plan and budget required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to improve the Bank's overall earnings and net interest margin, as well as a description of the operating assumptions that form the basis for major projected income and expense components.

       (a) Within 45 days from the effective date of this ORDER, the Bank shall adopt and implement a written profit plan and a realistic/comprehensive budget for all categories of income and expense for calendar year(s) 2004 and 2005. A copy of the plan and budget shall be submitted to the Regional Director and the Commissioner upon their completion. Thereafter, the Bank shall implement and follow the plan and budget.

       (b) Within 30 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. 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 30 days of the end of each year.

   [.15]15. VIOLATIONS OF LAW AND REGULATION Within 90 days from the effective date of this ORDER, the Bank shall eliminate or correct all violations of law and regulation listed on the FDIC's Report of Examination September 8, 2003 and implement procedures and/or policies to address future compliance with all applicable laws and regulations. "Correct" shall encompass unsuccessful attempts to correct due to circumstances beyond the Bank's control which shall be documented in detail and presented to the board of directors for review and made part of the board's minutes.

   [.16]16. 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 20 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.

   [.17]17. COMPLIANCE WITH ORDER Within 60 days from the effective date of
{{3-31-04 p.C-5986}}

   this ORDER, the Bank's board of directors shall have in place a program that will provide for monitoring of the Bank's compliance with this ORDER. Following the adoption of said program, the Bank's board of directors shall review the Bank's compliance with this ORDER and record its review in the minutes of each regularly scheduled board of directors' meeting.

   [.18]18. PROGRESS REPORTS No later than March 10, 2004, the Bank shall furnish a written progress report prepared as of February 29, 2004, to the Regional Director and the Commissioner detailing the form and manner of any actions taken to secure compliance with this ORDER. Thereafter, within 60 days from the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish additional written progress reports to the Regional Director and the Commissioner, detailing the form and manner of the actions taken to secure compliance with this ORDER. All progress reports submitted pursuant to this paragraph shall be signed by each member of the Bank's board of directors. 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 10 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 22, 2004.



ED&O Home | Search Form | Text Search | ED&O Help






Last Updated 11/14/2005 legal@fdic.gov