(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] ManagementQualifications Specified
[.2] ManagementManagement Plan Required
[.3] CapitalMaintain Tier 1 Capital
[.4] DividendsDividends Restricted
[.5] Loan Loss ReserveEstablishment of or Increase Required
[.6] AssetsCharge-off or Collection
[.7] LoansRisk PositionWritten Plan Required
[.8] LoansRisk PositionReduction of Adversely Classified Lines of Credit
Required
[.9] LoansSpecial Mention
[.10] Loan CommitteeMembership, Duties
[.11] Loan PolicyPreparation or Revision of Policy Required
[.12] Technical ExceptionsCorrection of Technical Exceptions Required
[.13] Profit PlanPreparation of Plan Required
[.14] AuditProgram Required
[.15] ShareholdersDisclosure of Cease and Desist Order Required
{{3-31-02 p.C-5322}}
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,
{{3-31-02 p.C-5323}}
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
{{3-31-02 p.C-5324}}
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.
{{3-31-02 p.C-5325}}
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
{{3-31-02 p.C-5326}}
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
{{3-31-02 p.C-5327}}
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.